4 Reasons Why You Shouldn’t Buy Real Estate (Yes, I’m Serious!)

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I buy real estate.

I actually buy quite a bit of real estate. Should you?

Probably not.

I’m not telling you to rent for the rest of your life; owning your home has its advantages. However, before you start investing in real estate, sanity check yourself. Below are four statements—if you find yourself agreeing with any of them, alarm bells should be going off in your head.

1.) You’ve Listened to a Guru in the Last Three Months

Real estate gurus are full of it. They are paid to sell. The more they can get you excited about making an investment using their “system,” the more money they make. How do they get you amped up? By making every aspect of investing sound easy and lucrative. In other words, by convincing you that you live in an imaginary world where any novice can make millions overnight.

It’s never that easy. Investing in real estate is a job. Expect years of hard work and learning before you start making much headway.

How do you know if you should tread lightly? Well, ask yourself the following: Do you feel excited about investing in real estate and want to get started as soon as possible? Are you putting together a plan for when you’ll retire? Do you have visions of yachts and Ferraris in your near future?

If you answered yes to these questions, stop. Don’t rush into things—take time to learn the business, and temper your expectations.

2.) You Don’t Have Much Money

Don’t buy a property with little or no money down. Sure, you could “win” and make some money. You could also win on the slot machines at the casino.

Let’s take an example: You buy a $100,000 house with no money down and it could yield $100 per month in cash flow.

Upside

There aren’t many ways this situation can get better. Rent rates plod along; it’s rare you see a large increase in any given year. However, once you find yourself relying on future price increases to justify an investment, you cease being an investor and become a speculator.

You know who else is a speculator? Yep, Grandma on the slot machine.

Downside

Catastrophic risks are huge: The local economy changes. The state goes bankrupt. The mafia makes you an offer you can’t refuse. The point is, there are innumerable things outside of your control that could happen to your property.

So… limited upside and significant downside risk? Doesn’t sound like a great model, does it?

Sure, people have made money using this approach, but how many? Was it a result of luck? Probably. If you want to read more about this, check out the book Fooled by Randomness by Nassim Nicholas Taleb.

3.) You Want to Leverage the Money You Do Have

I’ve heard the argument that real estate is a great way to get leverage. For a small up-front cost, you can own a lot of real estate.

This is crap. Real estate is one of the worst ways to get leverage.

Some reasons why:

  • The transaction costs are higher. Loan origination fees on a stock margin account? I think not.
  • Interest rates on real estate loans are much higher. Last time I checked, 30 year mortgage rates are 4.1%. The highest rate on Interactive Brokers is 1.58%.
  • You can get more leverage in other ways. Take a glance at derivatives. Trading futures and options can garner you over 100:1 leverage. You should never do this, but if you really want to “get rich or die trying,” that’s the way to do it.

4.) You Have a Full-Time Job

This is controversial, but it comes down to time commitment.

A guideline I like to use for first-time investors is the rule of 10s. For every 1 home you buy (20 hour commitment), you’ll make an offer on 10 (5 hours each); for every 10 offers you look at, you’ll visit 100 (1 hour each); and for every 100, you’ll check out 1000 online (10 minutes each).

In total that is 336 hours for your first property, or about two months of full time work at 40 hours per week.

Be brutally honest with yourself. Do you have that kind of time?

Wrap It Up: Why You Shouldn’t Buy Real Estate

Real estate makes sense when you’re big. Thanks to economies of scale, everything starts to get cheaper: labor, materials, property management, closing costs, lawyer costs, accountant costs, etc. Plus, you can afford to delegate many of your lower-value tasks.

What can you do in the interim? If you’re passionate about real estate and view it as a hobby, by all means get cracking.

If you’re only interested in real estate as a way of making money, then you have two options:

  1. Learn everything you can whilst saving up, so that when you enter the market you can start with economies of scale.
  2. Find someone who has economies of scale and invest along with them. Notice I said along with them—make sure they have skin in the game and a strong track record.

What do you think?

Photo: gak

About Author

Kenneth Estes

During Kenny's decade in finance he bought many single family rentals in rural areas, as a hobby. Along the way, he talked some brave souls into joining him as investors and recently retired from finance to take his hobby to the next level. Find more by and about Kenny on his personal blog and his recently created twitter account!

69 Comments

  1. Nice post Kenny, you make some good poits about having enough money and gurus. I would disagree about leverage. With a stock account you can only borrow 50% of the purchase price where you can borrow much more with Real Estate. On margins the stock broker can also require you to put in additional money or even sell your stock without your permission to cover losses.

    Options are an option, my an actual stock or property. I dont think it is the same as buying a house. Yes a house can decrease in value, but it you wont lose your entire investment after six months if the house doesn’t increase enough in value.

    • Kenneth Estes

      Thanks for the comment Mark!

      I’m going to have to respectfully disagree with your take on leverage.

      Stocks you can easily get higher than 50% leverage. By law you can go up to 75% LTV on a long position and 70% on a short. In today’s market I’m finding most banks not super excited about going over 70% on investment properties.

      You’re correct that options can expire worthless, but the leverage whilst they’re still active is huge.

      If you are looking for a highly leveraged position long term, buy and hold, position, you’ll want to look into futures, which you can roll every three months.

  2. I think leverage is more of a strategy than a reason.

    If you want to leverage to make more later, I think that real estate is a good option ONLY if you get some personal fulfillment out of it. I think you’re taking a purely economic view in this article. If you look at it more broadly, there’s a real value if you’re interested in leverage AND you really love offering people a decent place to live.

    • Kenneth Estes

      BW, couldn’t agree more. Like I say in this article, and quite often elsewhere, “If you’re passionate about real estate and view it as a hobby, by all means get cracking.” Just don’t think about it as this investment opportunity light years ahead of any other avenue.

  3. this has to be one of the worst articles ever written…it’s a fact – more millionaires have been created from real estate than any other investment.

    the whole leverage is crap is only crap by the author. where else can you get triple digit returns yearly? and that doesn’t even include the equity capture and principal pay down.

    $1800 out of pocket and make $640 before expenses and $39k in instant equity capture…is that a bad deal?

    • Kenneth Estes

      S,

      Thanks for your comments.

      Unfortunately, they’re quite off base.

      I don’t doubt that more millionaires have been created in real estate than any other investment. But that’s a selection bias. There is just MORE REAL ESTATE. Think about the sheer value of the world’s real estate compared to any other industry. If this wasn’t true that would be very strange indeed. Successful people in any industry will get rich. Your argument has nothing to do with leverage.

      A simple fact, you cannot make consistently make triple digit returns in real estate. Or any industry. The top 25 richest people in the world are not real estate investors. If it was such a great investment, there would be many more.

      In fact the second richest person, Warren Buffet, has only been able to consistently deliver 20%.

      • You may be right about the top 20 richest people not getting there by real estate, but they didn’t get there investing in te stock marke either. Warren buffet didn’t get rich investing in the stock market, he got rich buying companies cheap and making them worth more money. In general I don’t think you can be one of the richest people in the world by investing in anything unless you count investing In Your own company or another and personally (either by yor actions or people you hire) building a huge corporation as investing.

        • Kenneth Estes

          I see your point, but Warren Buffett is not a good example. He is a passive value investor.

          Most people on that list are NOT passive investors and have built a business or company themselves, so I cede the point.

          That works against your main argument though. If there was such a huge upside to investing in real estate and putting in the hours yourself then you would expect the list of upper echelons to be filled with real estate investors. The fact that that’s not the case screams to me that keeping real estate on this pedestal we have it on isn’t great.

          It’s another investment opportunity. We can’t get so locked onto one approach that we ignore everything else. Really figure out if this is the best return on your time and money investment.

        • I think the best way to get really rich is to start your own business. Reinvest everything you make and have into that business.

          I am comparing investing in real estate to the stock market. I never said real estate was the best way to get rich. For the average person, I think they have a lot better chance of getting rich in real estate than they do in the stock market. The biggest advantages of real estate are you can buy properties below market if you know how. You can’t do that with stocks. When I buy houses and put 20% down, I usually double my money as soon as I buy the house. Then you factor in cash flow every month, equity pay down and possible appreciation and it is a no brainer for me.

      • I think you’re both right, but there are a couple of limiting factors that are being ignored. Real estate can be a great investment for “normal” people, as it’s not that complicated (I’m not saying it doesn’t take work to understand and make good investments, but it’s not as complicated as trying to figure out when a company is undervalued). However, I think there are limits as to how big/rich you can get. I suspect that’s the reason the people at the very top aren’t in real estate.

        • Kenneth Estes

          Hey Adrian,

          That’s a valid point. I would argue that the time and energy you have to invest to find a truly undervalued property isn’t a great dollar per hour return on your time…unless you’re already big.

          Cheers,

          Kenny

  4. Kenny, good article. You are spot on about # 1. We work with a lot of people who have spent money on Guru’s. While I think spending money on real estate investing is worthwhile, to take everything what these guru’s say as the guidelines for your business is not realistic. I always advise our clients to take one or two concepts from the guru and develop it into what they are trying to accomplish. Plus every market is different. What works in one market will not always work in other markets due to local laws, expectation of tenants, market conditions, etc. You are spot on with # 2. If you don’t have reserves, you are a ticking time bomb in Real Estate if you own property. I disagree with # 3 and #4. Leverage is great in my opinion. Leveraging allows you to buy property at today value that should be worth more in the future with today’s value of money which will be less down the road. Also, if you buy right, you can create enough cash flow from each loan to create a nice income (and if you have a job a nice additional income). Each individual can get up to 10 loans, if married, 20 loans. 20 loans x 450 a month cash flow is a nice gross income of $9,000 a month. Also, the interest is tax deductible and by leveraging more tax breaks through depreciation are created. Leveraging that many loans sets up the business model that I like where one can take the cash flows and pay down the properties. If disciplined, one can have all properties paid off in 10 to 15 years. Without leverage, there is no way I would own the amount of properties that I do. Leveraging created good cash flow on my 30 year mortgages, which has allowed me to put my recent and future acquisitions on 10 and 15 year mortgages. The reason I disagree with # 4 is because I had a job the first couple of years after I maxed out my Fannie Mae loans. It was not hard, but then again, I was in sales and did not always have to be in the office. Almost all of our clients have a job, they simply hire us to manage the property for them. By having a job it makes it easier to get loans from the bank which is important when trying to build a real estate portfolio. Personally, having a job while acquiring real estate has put me where I am today. Plus when I had that job and owned real estate, not only did I create additional income (which I use to pay down property), I also created additional income by reducing my tax bill to $0. That first year I left my CPA with a $12,000 refund was such a great feeling about owning real estate. After that, I never let my employer take a penny out of my check for taxes.

    • Kenneth Estes

      Thanks Alex!

      Glad we see eye to eye on 1 and 2.

      To your point about 3. I’m not saying leverage is bad. It’s a tool that can be used. I’m saying there are better ways to get leverage than real estate if that’s what you’re after.

      On #4. How many hours did you spend on real estate, whilst you had a full time job, prior to being “independent.” How many years and how many hours per year? Were you managing the properties yourself during this time?

      • I’m not sure what point you’re trying to make about leverage. Of course there are other ways to leverage your money to a greater extent. But I would argue that NO ONE just wants to leverage their money. The point is to increase returns. In that respect, leverage is one factor that makes REI a great prospect.

  5. #1. You’ve listened to a guru in the last 3 months. Listening to a guru is what got me started in real estate investing. Yes, people need to read and get more knowledge than what they learn from 1 guru, but everyone’s got to get excited and started somehow.
    #2. You don’t have much money. It doesn’t take a whole lot of money to get started in real estate. If you are strapped, and have absolutely no way to fix a heater in the middle of winter, then yes…you better wait a while. But you can buy a mobile home on land, owner finance, for just a couple thousand, and if you have a couple thousand in the bank for emergency repairs and vacancies, you can get started. I STRONGLY disagree with saving till you can buy a multi-family. Get started. That’s the most important thing.
    #3.Leverage. I too think the leverage in real estate is great! I think the posts before me cover this one well.
    #4. You work full time. This is baloney. It doesn’t take that long to buy one property. We have worked full time the whole time we have been investing in real estate, and now, because we have been investing in real estate, we can retire in our middle ages, with plenty of years of youth to enjoy our retirement.

    • Kenneth Estes

      Thanks for the comments Carole!

      #1 What does this guru preach? Does he invest along with you? I’m not saying you shouldn’t talk to experienced people: I strongly recommend finding a mentor. However, be wary. Does this individual solely make money by selling you a “system” and not putting any skin in the game? Does he have a vested interest in your success or can he just take the money while he can?
      #2 I’m glad you have had good success! In my experience, that’s not the norm and there is a healthy dose of luck involved in that. I know more people who have washed out in real estate because of bad investments than who are not financially independent.
      #3 Leverage in real estate isn’t bad. It’s just there are instruments that much better.
      #4 Crunch some numbers on this one. How much would you have if you had invested in the stock market instead of real estate, at the same leverage? How much is the difference? Did you make more or less than minimum wage?

      Cheers,

      Kenny

  6. Like Mark Ferguson above, I don’t fully agree with #3.

    Sure, I can borrow to buy a stock, and that stock may have a dividend (cash flow). However, there is absolutely nothing I can do to influence the amount of the dividend. I have no opportunity to be an active investor; only a passive one.

    Whether you have thousands of dollars or millions, leverage in real estate affords you more control. That’s why talented landlords are often able to beat the year-over-year returns of talented fund managers. If you’re astute and you’re looking for leverage, real estate is a great choice.

    • Kenneth Estes

      Thanks Jon!

      That’s a great point about having control over the investment.

      The counter point I would make, which is talked about it some detail in my Real Estate vs. Stocks article, is how much extra does your active time buy you? If you have $100,000 invested and can increase your return 2%, that’s only $2,000 a year. Let’s say you’re spending 2.5 hours a week on it. That’s 130 hours a year, which equates to ~$15/hour.

      Being active is a great way to increase returns, but what you’re really doing is taking on the role of “fund manager.” How much is that guys time and experience worth to you?

  7. Kenny, I agree with you all the way. The ratio of success in real estate is pretty much like any start-up business, the way I see it. Very low. Success doesn’t mean necessarily owning a bunch of properties with high leverage. I like the way you refer to those counting on appreciation as speculators. I can’t argue with your thinking. You sound like a guy with year of experience in real estate. Thanks for a great article.

    • Kenny has weathered storms that I haven’t, so I have to respect his viewpoints. However, counting on appreciation isn’t evil. In essence, relying on appreciation is nothing more than hedging against inflation. I know with certainty that my buildings will go up in value because it’s equally certain that my dollars will go down in value.

      • Kenneth Estes

        Hey Jon,

        I see where you’re coming from, but it’s not quite the same as betting on inflation.

        Inflation is the entire money supply. The real estate you own is very localized and is going to be subject to local effects.

        If you owned said property in Detroit 20 years ago, you can bet your bippy it didn’t go up in value to keep up with inflation. We can’t confuse localized and aggregated effects.

  8. Yes, #3 is very much an apple to oranges comparison.

    1) 1.58% IB lending rate? That’s overnight, not 30 years. There’s nothing stopping that from going to 8% as rates rise or capital becomes scarce. The beauty of real estate is locking in your loan cost long term.

    2) Unlike a real estate investment, your portfolio is marked to market. So let’s say you have both a house and a bond portfolio levered 10/1. If your bond portfolio drops 10%, Interactive Brokers will liquidate your portfolio and you’ll be left with nothing. If your house drops 10%, it doesn’t matter. You’re not getting a call from the bank forcing you to liquidate. As long as you’re solvent, you can ride out the storm.

    • Kenneth Estes

      Thanks John!

      You’re correct that it’s worth discussing short term versus long term risk (that’s the crux of your two arguments).

      I don’t buy your argument that because you can hold your position longer that it’s somehow safer. That relies on the assumption that your real estate will continually increase in value, which isn’t valid. It ignores catastrophic events. At least if you get stopped out of a stock position your downside is limited.

      As an aside, you’re not going to lock in a 30 year loan on an investment property, especially if you have a decent size portfolio.

      • “I don’t buy your argument that because you can hold your position longer that it’s somehow safer. That relies on the assumption that your real estate will continually increase in value, which isn’t valid.”

        i in no way assumes that real estate needs to continually rise in value. As long as your property is cash flowing, and the loan is amortizing, the short term market fluctuations don’t matter. Yeah, it’s a nice bonus if the property rises in value, but even if the property is worth 20% at the end of the loan term, it’s not necessarily a catastrophe. With a traditional, levered, investment portfolio, you live and die by the mark to market. The long term loan is safer because you can ride out fluctuations without getting stopped out a 0.

        “At least if you get stopped out of a stock position your downside is limited.”

        I guess, but your downside is limited to ALL YOUR MONEY. Not exactly a sleep-well-at-night situation.

        “As an aside, you’re not going to lock in a 30 year loan on an investment property, especially if you have a decent size portfolio.”

        OK, but you’ll certainly get better than overnight. Call up your broker and ask them to give you a quote for 10 year term borrow and see how that works out for you.

        None of this is to say that leverage in real estate isn’t risky, and that using it excessively isn’t a great way to go bankrupt, but I’ll sleep far, far better with a 10x levered real estate investment than a 10x levered financial investment.

        • Kenneth Estes

          Hey John,

          I think we’re talking past each other. The first statement “As long as your property is cash flowing, and the loan is amortizing, the short term market fluctuations don’t matter” makes a HUGE assumption which completely ignores any catastrophic risk.

          This is one of the larger risks you have to worry about, and many real estate investors gloss over.

          Cheers,

          Kenny

  9. I have been in the lending biz for decades and from where I stand I see a small percentage of investors being successful and many who are not. Reality is that no successful man had reached that level of success without failures. And many folks do not have the financial capability to whether the storms. I see it all too often. Most of you who have opposite views (some even using not very decent words to express themselves) are taking it personal. The few of you who have different views may really be very successful and making a very good living at it. Congrats to you, you really are in the minority.

    Kenny, keep on writing your thoughts, I don’t see anything wrong with writing on controversial topics. Makes good debates:-)

    • I’m rich, and I’ve made the majority of my money in real estate. I like when people say I’m in the minority, or that my success can’t be duplicated, because that means I’m some sort of special wizard with unique powers.

      In reality, I’m just a detail oriented person with a strong work ethic; I never give up and I always crunch the numbers. Success is much more boring and forecastable than most people think.

      • Kenneth Estes

        Hey Jon,

        I’m glad you’ve been successful. However, just because someone says you’re in the minority doesn’t mean you’re a special wizard.

        It could just mean you’re lucky.

        Check out the book “Fooled by Randomness.”

  10. I got into real estate investing when I realized that I simply was not smart enough to make money on stocks. Real estate I can understand. Go look at the house, look at the neighborhood, run the numbers… it’s all right there.

    • Kenneth Estes

      Early in my finance days one of my bosses told me: “The only difference between an amateur and a professional investor is the fees” True for both real estate and stocks. This myth that Wall Street is full of super bright people doing really sophisticated things isn’t valid. In many ways the group think aspect of it all works against them and gets them in precarious situations.

  11. This may not be completely relevant, but a few months ago I read that people borrow from margin accounts to fund home purchases. I’m not a novice, but had never heard of this strategy. I would only do this if I have enough extra cash to handle a margin call and for short-term investments (flips). Do you have any insight into this strategy and can you point me to more information? My search on BP didn’t yield much.

  12. On the good side, you’ve shown there are more than one approach and outlook on handling real estate. While I may not agree with all your statements, it’s ok, I don’t have too. Everyone has different reasons for wanting to do it, different methods of accomplishing it, and different ways of looking at it. I think the best part about this article is it makes people think about why they want to or are doing real estate. It’s good to evaluate and question why your doing something because it may have become habit without you really thinking about it and you do it because inherently most people don’t like change. So thank you for poking the metaphorical bull in the butt!

    • Kenneth Estes

      Lol, couldn’t agree more. My main interest is building long term wealth for myself and my investors. At the moment we’re large enough that I feel the biggest bang for the buck is in real estate. A sudden shit in the market could easily invalidate that.

  13. Kenny,

    As an aspiring investor, I appreciate your article. We’ve all got exagerated dreams of wealth by simply buying into real estate and occasionally we overlook the small things that have a huge impact. I welcome the refreshing objective view you present, as it brings me back down to reality. I do agree with Point #1 as bright eyed people can get suckered in easier than they think. Point #2, I’m at this spot myself with very little liquid assets and am in the process of building that over the next year or two. Probably won’t get to the amount that I really should have on hand in order to get as strong a start as I’d like, but it’s a start. Point #3 Leverage; this is still something I’m working on educating myself on so I don’t have much input or comment. And point #4; I definitely maintain a full time job on Active Duty looking to build my real estate portfolio in the future to supplement more income. But I’m also contributing a large chunk of my paycheck into my investment portfolio, so I’m not fully relying on either to support me. I think the next step for me personally is to find a local mentor to further guide me along with my Financial Advisor. Military pay isn’t phenominal, but it supports me until I decide to separate and I don’t intend on separating without other means of income. Again, I appreciate the objective and realistic points of your articles. I look forward to your next blog

    Anthony

    • Kenneth Estes

      Brilliant Anthony!

      You’re doing it right. Saving money, building a nest egg, talking to someone who knows about investing and not just real estate. Good on ya. I have complete confidence if you continue in this way you’ll reach your financial dreams.

      I’ve an article about China and the old man and the mountain on my personal blog that talks about this approach a bit.

      Cheers,

      Kenny

  14. Brandon Turner

    Hey Kenny,

    You asked for it! So, I’m going to address this from a different perspective.

    I want to be an actor in Hollywood. I’m not saying I want to be the next Morgan Freeman, but I want to make a living as an actor. I read a bunch of books on acting in my spare time, I joined a local acting group to learn how to do it better, and now I’m ready to start working toward my acting. I even watched some famous actors on YouTube talk about tips for becoming an actor and it totally pumped me up and motivated me to follow my dream and make it work.

    But using your logic – I should give up. I’m not good enough.

    After all, most people who set out to be actors don’t make it. I’d wager that less than 10% ever actually make good money as an actor. Plus, I’ve never starred in a movie before, so I don’t really have the experience to succeed. And- I have a full time job working at a gas station, so I don’t have a lot of free time to make this work. So I won’t try. I’m not going to pursue my dream.

    I’m going to keep working at my gas station job and just watch my favorite actors on TV because chances are, it’s never going to be as easy as it was for Morgan Freeman. He’s got the time, the experience, and the money to be successful. I’ll just watch him do it. So why even try?

    • Kenneth Estes

      Hey Brandon,

      There’s a glaring hole in your argument. Most people who are considering getting into real estate don’t have a dream of being a real estate owner.

      They have a dream of being financially independent.

      Real estate is one way to go about that, but it’s a job. Don’t have this expectation that you’re going to have an incredible return on your time out of the gate. In many cases, especially if you have limited capital, the time you sink into real estate can be LESS THAN MINIMUM WAGE.

      Depending on your situation you might reach your wealth goals by taking up a part time job and sticking that money the S&P 500 and reinvesting the dividends.

      Real estate isn’t a magic bullet, or easy ride to money.

  15. Kenny – love ya man. But, I am confused:
    1. I listened to gurus – still do from time to time. We are not playing with widgets here. $1 worth of information could turn into 100k. You never know when and what…
    2.I didn’t have much money.
    3.God knows Leveraged
    4.OK – you got me. Never had a full-time job.

    Kenny – should I stop buying now? I seem to be doing it all wrong man 🙂

    Gonna be down this way any time soon – we didn’t spend enough time last time. I got kids – it’s easier for you 🙂

    • Kenneth Estes

      Hey stranger!

      We ended up going with a place in MS instead of Lima, so no immediate plans, but you’ll be the first to know if that changes.

      I think you should continue in real estate. Because you’re passionate about real estate. Is it the best return on your time? Given my somewhat limited knowledge of your operation, I would argue probably not, unless you include the proceeds from your program sales.

      Are you incurring an exorbitant amount of catastrophic risk with your investment approach? Absolutely. I’m worried for you mate. 🙂 If the economy in Lima turns sour you’re in very bad way.

      Cheers,

      Kenny

  16. Glenn Schworm

    Hey Kenny,

    I think I see the point you are trying to make but as a fellow BP writer, I must disagree with some of your points. We purchased a few “guru” seminars and trainings over the years before being really serious. Some were years before we actually started. I learned a nugget or two from each of them and when we were ready to start, I had a lot of knowledge to begin. We have found the teachings valuable. Also we started with nothing. We leveraged all we had on the first flip, and on the second my wife sold her car so we could fund the renovations. 5 years later we have done over 130 flips and have generated millions from them. So our perspective is quite different. It is NOT for everyone, but if you have heart, passion and are willing to work hard, I would encourage anyone to take the chance and start today. Just my 2c.

    Glenn Schworm

    • Kenneth Estes

      Thanks for the comment Glenn.

      I think we actually agree with one another.

      If you have passion for real estate for real estate’s sake, by all means jump in! If you have passion to make a bunch of money and retire in a comfortable spot, and only view real estate as a means to an end, proceed with caution.

      We could debate about your leverage everything for the first flip, but I have a suspicion we both know what the other would say. 🙂

  17. I like learning from other people (gurus like you.) However I filter what I learn through my experience, goals, and personality. One guru told us of a friend in his master mind group who owned 10 single family homes. Then when he got tired of mowing his own lawn he bought another rental home so he could use the cash flow to pay for a lawn service. His point was that you didn’t need to buy tons of real estate to live off. You just needed a certain number that would provide you a living at the level you want. This spoke to me. We are halfway to our goal of having enough properties to live off. I wished I started earlier. We only buy one property at a time and get it producing before we look for the next one. I do not like searching out properties but now I have a real estate agent who knows what I like so he only presents properties to me that I am likely to buy. I’m not into wholesaling or flipping. I find dealing with strangers on a daily basis tiring. I just want to buy and hold. Amazingly enough I like managing my own rental properties. I don’t know if I would like to manage other people’s properties because I only buy properties that meet our criteria or that I can bring up to our criteria. I also super screen the tenants and have other standard operating procedures in place.

    • Kenneth Estes

      Sounds like a perfectly reasonable investment approach Kathy.

      You’re starting slow, have moderate expectations, are investing conservatively, and love what you do. There is nothing I, or anyone else, could say against this approach.

      Kudos!

      P.S. Please don’t call me a guru, it gives me a rash. 🙂 I’m not selling any investment program and anyone who joins us invests in the same company I do. I only make money if everyone makes money, it’s the opposite of what I would class as the “guru” model.

  18. Kenny, I think a better title for this article would have been “4 Considerations Before Investing in Real Estate.” I don’t think any of your 4 listed items are reason enough for not investing in real estate – I just think they’re things for people to be aware of and contemplate before moving forward.

    I personally have listened and invested in guru courses, which have greatly helped me over the years. I just make sure said guru has more experience than me, experience in the area I’m trying to learn about, offers a money back guarantee, and doesn’t cost an unreasonable amount. If they can streamline my learning curve in any manner and stop me from making a costly mistake, that is reason enough to consider the investment.

    #2 & #3 are tied together for me, because when I wanted to buy my first property, I had a decent paying job but not a ton of money for a down payment, so I leveraged my 401K and got a 3% down loan. If I hadn’t been able to do that, the snowball effect of buying that first property and then leveraging the subsequent equity into other properties and businesses would never have been possible for me. I’m a huge fan of leverage, but would be willing to read other articles by you outlining specifically what other investments you feel are better uses of leverage, how those work, etc. Please, educate us versus simply just telling us one is better than the other.

    #4 is unrealistic for most. Most people need a job to save for their down payment, closing costs, etc. and in fact, cannot get a mortgage without a job. I don’t think RE investing takes as much time as you say it does, unless you are trying to do something like flipping, and even then, plenty of people on this site have started very successful flipping businesses while working a job first (Danny Johnson comes to mind). Most people watch 3-4 hours of tv a day while working full time jobs – I’m pretty sure people can find the time to invest in real estate – there’s time sucks in most people’s lives for sure.

    • Kenneth Estes

      Thanks for the comment Sharon!

      I agree with your first statement, these are things to think seriously about before going into real estate.

      On your specific points:

      #2&#3 – It might be worthwhile to check out my article: real estate vs stocks. It talks some about other avenues for leverage. I go into more details on specific items in the comments.

      #4 – My problem with this argument is that it presupposes you should invest in real estate. If you are looking to invest and build towards your retirement, I find people get tunnel vision and think real estate is the only way to go?

      What if you had taken that 3% put it in the S&P 500, pick up a part time job (with the same amount of time you put into RE) and invest that money. Would you be better or worse off?

      For many the answer is better. It depends on your situation though. Said “real estate vs stocks” article goes through the numbers in more detail..

      • You’re a very confusing person, Kenny. In one breath, you say do not invest in real estate if you have a full time job because investing in real estate takes too much time and will be too much to handle if you have said full time job. Of course my response assumes we’re talking about investing in real estate, because that’s what the topic of your article is about. But then you say as an argument in support of investing in stocks, which you say is historically better than real estate, what if I get a part time job and invest in stocks. So now I’m working 60 hours a week instead of 40 just to get a 6% annual return in the stock market (and where will I get the time to research the stocks I want to invest in??). Ummm, I definitely think I’d be worse off.

        Here’s how that 3% changed my life. The house I bought was $189K, so down payment of $5670. Over six years, it cash flowed $200/month, or $2400/annually, and I had my loan paid back in less than two years. Then, in six years, I sold it for $565K!! Over the six years I it was a rental, I spent maybe 1-2 hours/month managing it – not anywhere near as much time as you are trying to claim it takes to own investment property.

        I have no problem with diversification in order to reach one’s retirement goals, but stocks and REI do not have to be mutually exclusive, and frankly, I can analyze a rental deal ten times faster than I can a stock because it’s what I love to do and I understand the metrics much better. Sure, I could spend time getting knowledgeable at stock investing, or I could go stick some money in a Vanguard ETF and be done with it, but that doesn’t give me the peace of mind or the benefits that I feel real estate affords you. I like having control over my investment, getting the tax advantages of real estate, and doing something I love. Again I contend, your article has some good considerations, but they are not solid reasons for not investing.

        • Kenneth Estes

          Thanks for the comment Sharon.

          Your last sentence is the winner for me. You’re doing something you love.

          More power to you! If this gives you joy, then do it up, I would never and will never argue against that.

          I was a bit confused by your example. If you put $5670 as a downpayment and you reinvested the cash flow of $2400 for two years then you would have $178k left on your note. Are you saying you invested an additional $178k into the in your first two years of ownership? You stated it cash flowed at $2400 per annum for six years, so that means that was your cash flow after your addition $178k investment?

          The reason I ask is if my reading is correct then you were making $2400 on the investment for a $183.7k investment, that’s only a 1.3% return on your money.

          That’s awesome you made out like a bandit on the appreciation! However, I tend to aschew investing based on appreciation as that’s a bit close to gambling for my liking. I plan for the cash flow and any appreciation that comes along is a perk. On average it’s moderate anyways.

          The point I’m making is that if you don’t love real estate, and aren’t passionate about being “in the game,” look at other investing options.

          It’s not a magic bullet that will make you millions of dollars. It’s hard work. It’s consistent returns. However, it does get better with economies of scale kick in, and it’s not your time committed.

          Cheers,

          Kenny

        • Oh I’m sorry, Kenny, I see where I confused you. I meant I paid my 3% 401K loan back in 2 years. I never pre-paid any principal on the mortgage at all. I agree – I only invest for cash flow too, not appreciation (but it’s a heck of a nice bonus if you end up with it, and one of the upsides to real estate I enjoy),

          Thanks for understanding where I’m coming from.

    • Kenneth Estes

      Hey S,

      Thanks for the comment.

      Real estate isn’t a bad investment. Just recognize when you’re first starting out it’s not much, if any, better than a part time job and chucking your money in the stock market. Check out my other BP article on real estate vs. stocks.

      Real estate makes sense when you have a lot of it. Everything becomes relatively cheaper: property management, labor, materials. It also becomes a lot easier to find deals if you have a solid reputation.

      It’s this economies of scale and simplicity of investment that I bring to the table.

      Cheers,

      Kenny

  19. Its good that you were able to put REI into perspective while playing devil’s advocate. It’s a more realistic approcach as to what I can expect out REI when I start actively investing. Thanks

  20. I’d say I have a real problem with someone that posts something like this but really has their own agenda at heart when they’re doing it.

    To suggest that you have to be “big” to be profitable in real estate is the most ludicrous statement I’ve ever heard. The fact is that, until recently, there was never a business model that made sense for large corporations to come into the buy and hold investing landscape.

    And, now that some of them have, we’re seeing a ton of pullback on what they’re doing.

    The fact is the best returns for investing in real estate are typically for the mom and pop investors who have enough where they can manage the properties themselves.

    What you have clearly left off here and what I feel is incredibly disingenuous is the fact that you have a company that takes in investor funds and then you invest in real estate and manage it for them.

    Does anybody else see the conflict of interest here????

    So what you’re suggesting in your “article” or what I believe is simply a poorly framed advertisement for your company is that investing in real estate is only profitable for large companies that can achieve significant economies of scale. i.e. A company like you have.

    But individuals (i.e. your competition) should never invest in real estate or else they’ll get clobbered and will essentially be making minimum wage because of all the “time” its going to take to invest.

    Thats nonsense. I started out small. I now have 20 rentals (will be 23 at the end of the month). I’ve been on a pace of 3 a year so I’m by no means setting the world on fire. I’m as small time an investor as they get.

    But the bottom line is my rental business is as self sufficient as it gets. The rental income is going right back into the business to buy more properties and more cash flow. The little guy in this business has the advantage. I can save on management costs (i.e. your management costs) and other fees companies like yours tack on.

    And if you think I’m making minimum wage, you’re out of your mind.
    In 20 years, when all these houses are paid off, they should be worth roughly 5 to 6 million dollars that will be owned free and clear.

    Last I checked, there’s no way in heck that I could have a net worth of 5 or 6 million dollars by working a second job for minimum wage for the next 20 years.

    Even if you only bought 2 or 3 houses, the advantages in real estate as an investment vehicle are second to none. And the little bit of time you have to dedicate to managing them is well worth the type of returns you’re going to get over the long haul.

    Again. You closed your advertisement (I mean article) with two suggestions to people – 1) either save up a ton of money to start “BIG” or 2) Invest with someone else.

    And I would say to people that if they want to waste their time and give away a ton of their profits, take your advice. But if you really want to build some long term wealth, do the complete opposite of what you recommend.

    The logical advice: Start SMALL. Build your portfolio at a pace that suits you. Adding one house a year will add up fast. In 10 years, you’ll own 10 houses. In another 20, you’ll likely own 10 houses free and clear making 1k a month or more per house with a net worth of 2million or more.

    Real estate is incredibly profitable over the long haul. Show me an investor who doesn’t typically say their biggest regret is selling any one of the houses they ever bought. Why? Because they know what the value of that house is in terms of rental profits and appreciation could have been had they held it for the long term.

    But whatever you do, DO NOT listen to anything this guy has to say in terms of needing to go Big or give your money to someone else (i.e him). He is clearly just using the forum to pitch his company with this article. And pitching his success is one thing (his company seems to be solid). But pitching it by distorting the realities of investing are something completely different altogether.

    • Kenneth Estes

      Thanks for the comment Mike.

      I don’t think I’ve done anything to hide the fact that I invest people’s money. I actually talk about it quite regularly on this site (indeed our dear moderator pulled my reference to it in this article as he felt it was a plug). There’s a whole lot of hostility in your comment directed towards a perceived maliciousness, which just isn’t there.

      On your other points, I’m not really sure how to else to say this, but I’m just going to throw it out there…. you have 3 years of history and are using that to extrapolate that you will make 5-6 million dollars in the next 20 years.

      The argument can be boiled down to “I’ve had a good track record in this historically favorable period, thus I will achieve the same results forever and anyone else can do it as well.”

      Maybe there is some element of luck, both in terms of timing and properties, that you’re avoiding?

      Maybe you’re assuming many things go right and are glossing over the many risks which are outside of your control?

      I sincerely wish you the best of luck that everything will go perfectly for the next 17 years. However, empirical evidence is not in your favor. It might be worth reading the above comment from Alex, a loan officer who has seen more investors starting out than either of us.

      In my experience of growing from 1 to 300 units, I can tell you economies of scale is a very real thing and having some distribution of risk smooths out the good and bad (of which it sounds like you’ve only experienced the good so far).

      Cheers,

      Kenny

  21. Hi Kenny,

    I can’t add much onto what’s already been discussed, but there may be one place where real estate leverage is easier to come by than in other investments – owner/occupied. Given the government-backed loans – HUD, for instance – and numerous other smaller loan programs that bridge the downpayment difference, it seems entirely possible for someone of relatively meager means to get into a house with very little down, live and rehab for a year before selling and moving on. Granted, this is very, very niche, but it is an opportunity!

    I think your broader point is true – real estate investing is often a full-time job, and if you’re not getting some measure of enjoyment out of it to compensate for the drawbacks, it’s time to find another arena.

    Finally, the one nice thing about opportunity costs when it comes to calculating how your time is worth is that you also have to factor in flexibility – most jobs that I might work in lieu of the time I’m sinking in R.E. won’t let me work extremely odd hours whenever I feel like it. 🙂

  22. Very sly, Kenny. Keep the newbies and amateurs out and there’s more for you, right? 🙂 In all seriousness, I work closely with several rental housing associations and see a lot of folks, small fries, who got into the game without thinking it through. Some folks make it out OK. Some folks build a successful business. But, a lot of these folks really struggle and end up losing. They could use this sort of advice.

    Let me know if I can reprint this in our publications.

    • Kenneth Estes

      Lol, not my intention.

      I’m just going to be the naysayer voice out here, after having done it myself, to say that it isn’t all sunshine and roses. It’s hard work and in many cases no in your economic interest.

      You’d have to talk to Josh or Brandon about reprinting.

      Cheers,

      Kenny

  23. Interesting stuff. My take on leverage is that it’s only bad when people start thinking hard rules: “leverage is great and real estate is great so let’s leverage real estate and make big money!”.

    The problem with leverage is that it increases risk (duh, right?). I think most folks on BP are doing better than average so we aren’t seeing the built-in survivor bias here. It’s pretty hard to go bankrupt buying properties in cash. It isn’t too hard for a “buy it before it goes up” mentality to dig the financial grave with high leverage. We just aren’t quantifying the value of that risk here. Higher risk = higher reward so of course leverage can make the returns better.

    I personally like to buy cheap little buildings with cash. I’m not getting rich quick, but I’d put my odds of getting to my 1st financial goals within a few years at 50%. I’d put it at 90% in 10 years. 2006-2010 showed the odds for folks that don’t play smart with leverage.

    Thanks,

    Chris

  24. I won’t go into any thoughts I have along the lines of what others have on some of these points.

    I’ll pick a different one to tear you a new one over. 🙂

    So I agree with the premise of point #2, but your example is horrible.
    If I could find deals like that consistently I’d do nothing else!

    If the property actually cash flowed $100/month and you had nothing in it that is a superb deal and you have no risk as you have no money in it.
    So if this $100 factors in vacancy, repairs/maintenance/reserves and management (even if you are doing it yourself) as well as the more obvious stuff like PITI payments then it is pretty solid.
    Even if something terrible and unforeseen happened the worst that happens is you lose the property and maybe some credit and credibility. That is the downside, the upside is unbounded if the rents increase and/or the appreciation takes off. The most likely is that there is a small increase in both over a LONG time.
    As long as the analysis is good this place just spits out $100 every month in perpetuity. Actually since you didn’t say anything about a balloon payment or being some kind of ARM loan (Which would actually be risk factors) it is amortized over some period and once it is paid off it will just kick out that much more money.

    As presented (i.e. with no stated risk factors) putting money into the deal for S&Gs only makes it riskier since if things do go bad you risk losing the invested capital as well.

    Again to be clear I am NOT arguing that investing with no money is safe or a good idea. I’m just saying that your example is the reason why someone WOULD do it not a reason not to.

  25. Thats why I am saving and want to buy a plot of land and start my own community…It will happen. I want to have a group of like minded individuals to build it up have our own sustainable food source, water source.

    None of that buying a house already made. I want to put my hard work sweat and tears into it. Then when its all done. I wont have to pay back as much, if I borrowed money in the first place.

    Which I won’t be.

    Thank you for this article.

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