As I was perusing through this awesome BiggerPockets blog, I read an article by Mindy Jensen called “12 Reasons You’re Poor.” I was particularly moved by an observation of hers that really struck a chord in me. In the article, Mindy mentions how she sees a lot of questions in the BP Forums asking:
“How can I invest in real estate with no money and bad credit?”
I’ve got to say, I’ve noticed this too, and it always makes me cringe.
Whenever I feel this way, I ask myself why I feel this way. Usually I can come up with an answer. In this case, I realized pretty quickly why questions like this bother me so much.
You see, it’s not the fact that people want to succeed in real estate. That is an awesome thing. I want to see as many people succeed as possible. This is why I’m on the blogs, in the forums, and answering questions sent to my inbox. The question I ask myself is, why are there so many people asking that same question? Having no money and no credit is basically being at an extreme disadvantage and trying to win the game anyway. It’s possible, but why on earth would you choose to do it that way? And if you are held back by things like no money or bad credit, why isn’t your goal to fix that before you start looking into investing?
Now, I want to make clear my goal is not to dissuade anyone from investing in real estate. There will never be the “perfect” time start, and I’m a huge proponent for taking advantage of whatever opportunities life brings your way. I’m here writing on this blog because I got an opportunity and chose to make the most of it. I hope everyone who reads this is encouraged to do the same.
My goal is to propose a way of doing things that will make it easier for you to invest in real estate successfully.
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
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The Ultimate Fighter
Since I’m often told I’m the king of analogies, I’ve got a good one relating to this topic. If you decided you wanted to get in an MMA cage match and knew you could set the fight for whenever you wanted, would you choose to fight next week before you had time to get in shape, train, build up your stamina, or actually learn how to fight?
That seems foolish, right? Wouldn’t you start training, learning, and working out right away to prepare for the day of your fight? Don’t you think you might hire a coach? Or at the very least find someone who knows how to fight to teach it to you? I mean, you have a lot to lose, right? You could get seriously hurt.
Plus, this first chance might be your only chance for a long time. If it doesn’t go well, you might be done for a while. Would you squander your opportunity because you were impatient, over-confident, and looking for the “secret” to winning? Or would you commit yourself to learning a new craft and make sure you even had an aptitude for it before jumping in the cage and taking the risk?
When an Investment Ends With a Punch to the Gut
Obviously, real estate investing is not fighting. But I’ll tell you, it feels like it sometimes. And losing your money can feel a lot like getting punched square in the gut. Losing ALL your money can have the same effect as getting knocked out. You’re out of the fight, out of the game, and forced to take your time recovering before you can get back in there again.
When I hear someone say, “How can I invest in real estate with no money and bad credit?” what I’m really hearing them say is, “How can I win a cage match with no training, no preparation, and not being in shape?”
I’m sure it’s possible. Anything is possible. The other guy might slip and fall right into your lap (like a good deal does once a blue moon), you might get away with an eye gouge or groin shot that the referee misses (like an unethical move that nobody sees to land a good deal), or you might just catch an opponent who is equally unprepared (like a seller who doesn’t know what his/her property is worth). It can happen. But it’s not likely to keep happening. And odds are, you’re likely to get knocked out long before you build any kind of a career this way.
The Importance of the Right Approach
Like Josh Dorkin always says, the people who do things unethically never have a sustained business. They get exposed, and no one will work with them. The same could be said for someone who gets in a fight at a severe disadvantage. They aren’t going to last very long that way.
So, what’s a boy or girl to do? Well, I’ll tell you — you don’t have to be in shape to start learning about combat, but you DO need to be in shape before you actually get in that ring. So, my advice for being successful in this game is to stop asking, “How can I invest in real estate with no money and bad credit?” and start asking, “How can I save more money and fix my credit?”
Now, doesn’t that make sense? Imagine you approach a trainer and say you want to prepare for a cage match. Imagine telling him you want to learn how to win without being prepared, without putting in work, and without needing to discipline yourself. What kind of trainer would ever tell you that he would take you on?
Any person worth a darn would tell you to stay far, far away from cage fighting. You are going to get hurt. You know who would agree to those terms or even advertise that they could teach people to win fights without the proper training? Rip-off artists. “Gurus.” People who want your money and don’t care if you get hurt. That’s who. These are not the people you want to be trusting, even if what they tell you is so appealing that you just want to believe it with every fiber in your being.
Have you noticed how many bitter people are wandering these forums, trolling around in the shadows and casting their pixie dust of negativity wherever they go? It’s horrible. They are like little evil Tinkerbells. They try to take those who want to fly and push them back to the ground.
How many people’s first response is to tear someone else down or call them a fool before they even understand their position? So many! Do you want to know how they become that way? They got hurt. They stepped in a fight they likely didn’t understand, and they took some abuse. They walked in that cage like a conquering lion, with all the confidence of a champion because they had made some money when the market was going up, and they believed they knew all about real estate investing.
When the market turned on them, they had no way to defend themselves, and they got knocked out. Badly. It left them bitter, angry, negative, and wounded. They recovered and ended up blaming a lot of different things for their loss. Most of them don’t blame the thing most responsible for it — their own ignorance. Had they understood how to evaluate properties, what the necessary reserves were, how their loans worked, or shoot, what cash flow actually means, they likely would have had a different result.
Don’t Get Knocked Out!
So, how can you avoid ending up as one of these terrible Tinkerbells? The answer is ridiculously simple but not very popular to accept. Stop trying to fight before you’re in shape. If you’re out of shape, you’re at a decided disadvantage. There is no reason to rush the fight other than your inability to control your own eagerness to get started. Take some time to improve your own financial situation before you get started. Take some time to fix your credit before you start looking for loans. Prove to yourself and to everyone else that you’re ready for this by mastering your own self before trying to conquer the world.
Look, this sounds simple — but I swear, this is so profound. If you cannot manage your own money, how can you manage an investment property? If you can’t manage your own bills, why should a creditor trust you to lend money to? If you have no money and bad credit, don’t you think maybe you have bigger problems to deal with than finding and managing a flip or income property? The habits you’ve formed over the years that brought you to this place are going to ruin your attempts to invest as well. If you are honest with yourself, you’ll see this makes a lot of sense.
The Weight of Success
When you begin acquiring properties, you’re not just acquiring properties. You’re also acquiring debt, responsibility, payments, and future repairs. You’re hoping for rent to offset this, but that’s never a guarantee. What is a guarantee is things will break, the bank will expect a mortgage payment, you will have vacancy, and property taxes and insurance will need to be paid. There is a weight to the responsibility of owning these properties that starts to develop. The more you acquire, the heavier it becomes.
Now, you may think you have strong legs, but my guess is maybe they have never really been tested in this way. As you begin to acquire more and more properties, that foundation you are building on is going to start to crack if it’s not as strong as you think. If you can’t manage your money or your agreement to repay debt, your foundation is going to crack. When that happens, all those homes are going to fall down and crush you.
Don’t Start a Race if You Can’t Finish It
If you are resilient, you will bounce back smarter, stronger, and more prepared. If you are not, you will end up like evil Tinkerbell, lurking in the forums and casting doubt on everyone with a dream to fly.
Why do I say this? Because I don’t want to see you start a race before you know if you can finish it. I don’t want you to start building your skyscraper before you have the foundation laid like it needs to be. Because you need to have money saved away for when expenses come — and they are going to come. If you don’t, you will lose your property. It’s that simple. You know who’s gonna buy it then? The person who has the money and the good credit. The person who was prepared when you weren’t.
The LAST thing you want is to spend all this time acquiring property, taking out loans to fix them up, getting them in shape, and then losing them to someone else who walks in and benefits from all your hard work because you didn’t have enough money set aside for emergencies. Now, this may sound too general, but I’ll tell you that if you don’t have money saved up before you buy a property, it’s not very wise to think you’ll get money saved up after you buy a property.
Learn From the Mistakes of the Past
I’m sorry if I sound like a downer right now. It’s not my intention. But if you speak to people who lost their properties, one of the few things they all have in common is that they didn’t have enough in reserves. They believed they were richer and therefore safer than they really were. And when the market shifted or they had a run of bad luck, they couldn’t sustain. It can happen to anyone, even the best ones.
Now, if it can happen to the best, wouldn’t it be wise to assume it can happen to you?
If you are one of those “gurus” trolling BiggerPockets, looking for victims to sell your wares to, beware. Karma can be a sweet puppy or a horrific dragon. It’s going to catch up to you eventually.
Real Estate’s Not a Way to Get Rich Quick
If you are one of those who is always looking for the shortcut, always looking for the fast money, always looking for “secret” that is going to bring you all the perks of wise investing without any of the work, I strongly caution you to stop where you are. Think of all the time you will waste by doing the work of acquiring a property, only to sell it to someone like me in a short sale when you can’t afford the repairs, mortgage, or taxes. Be wise. Give yourself a chance to win this fight. Take some time to conquer your inner flaws before you start trying to conquer the outer world. You will be really glad you did.
Conversely, if you are someone who has saved up a significant sum of money and who has good, solid credit, have confidence that you should pull the trigger on a deal that makes sense. The perfect deal is a fallacy. Just make solid deals and let time do its thing. You’ve already put the work in. You’ve already proven you can handle this. You have already put yourself in the position to win the fight. It’s time to put those skills to the test and get in the ring. If you’ve been sitting on the edge waiting for that push, consider this it.
Finally, if you are someone who has seen the light after reading this and you realize you need to get serious about repairing some areas of your financial life, I strongly encourage you to be transparent, reach out, and find that help. You will never regret making the decision to get serious about managing your money. Wealthy people know — managing your money is managing yourself. The better you get at doing that, the more success you will have in anything, not just real estate.
Change Your Habits to Change Your Life
I hope I didn’t offend too many people by recommending that you fix your own house before trying to take over the world. I sincerely believe that the more success you have repairing your credit and saving up money, the more success you will have when it comes to investing and managing that money. It can literally be life changing when you start tackling this stuff and facing it head on.
And once you get in that ring and stuff gets real, you will never regret the time you spent preparing for that moment.
Investors: Did you get your finances in order before you jumped into investing? Do you believe that newbies should save up and correct credit issues before investing?
Let me know your thoughts with a comment!