The First Thing You Need to Know About Real Estate Investing
I love real estate investing. It’s like a drug for me. The deal is all mine. Success or failure is completely up to me and I own the repercussions of every decision, good or bad. The possibilities are limitless from start to finish there are choices to be made and nearly infinite options and paths.
I can make a lot of money; sometimes I can use other people’s money and go into a deal with no money down and no money out of pocket. I really love finding solutions where other people could not.
But here’s the but: REAL ESTATE INVESTING IS RISKY AND HARD WORK! The market is heating up and the real estate guru’s are out in full force peddling their courses, books and seminars. I hear their adds on the radio talking about making money with very little work, risk and investment.
I wouldn’t discourage anyone from investing in real estate but if you’re going to spend a lot of money on education then please do it with your eyes wide open. Education is vital to this business and it’s going to cost you time and money. Don’t skimp on your education but when you attend the seminars disregard the part where they tell you it’s easy and risk free.
It takes a near army of experts in various fields to build a home. Carpenters, plumbers, HVAC specialists, electricians, engineers, architects, excavators, masons, roofers, and more all have to come together to build a home.
Home sales require lawyers, realtors (or real estate sales experts), appraisers, inspectors, lenders, and more to properly facilitate.
The real estate investor has to know at least enough to manage all of these experts. Do you think all of this is simple? It’s not. And any choice you make, any advice you take, has major repercussions on the outcome of your deal.
It doesn’t matter if you’re flipping, wholesaling, land lording, or trading notes, you have to know enough about all of these fields to know if a deal is a go or a no-go. These factors also help you determine the best exit strategy.
Your job as a real estate investor primarily is one of a marketer and a financial manager. You’ll spend most of your time marketing for deals and networking for money. You have to be prepared to do a lot of work for free. Most tasks you undertake will have no guaranteed payoff but they must be done. Most leads you get will be dead ends. Most contacts will be a waste of time. But everyone must be pursued in the search for that one in a hundred that pays. Taking a bad deal is much worse than passing on a good deal.
It doesn’t matter how good you think a deal is. It doesn’t matter how much margin you think you have. Bad management, the wrong team member, or one poor decision can wipe out the biggest of margins.
The best manager and team cannot save a bad deal. But, a bad manager or team can wipe out the largest of margins.
If real estate investing is your dream then go for it with all of your might. But, be ready to work hard and know that you are risking a lot. You’re not just risking your money, possibly your life saving, you’re also risking your time and relationships. If you make $5,000 on a project that takes you six months and 400 hours of your time then you’ve essentially bought yourself a job that pays $12.50 an hour. Is that a good deal to you? Since most people don’t account for their gas and overhead on projects it’s probably a real good chance that in actuality you made much less.
Markets turn on a dime. Contractors, who performed well on the last job can totally go south on the next job. Events that are totally out of your control can completely change the dynamics of your deal.
You will almost certainly lose money on some deals. While the Guru’s tell you that real estate investing is risk free, the SEC and professional lenders know that it is a very risky business. Lenders lend on real estate because they can secure their money with a solid asset that ensures they’ll get something back. The real estate investor has no such assurance. Lenders can take your property if you don’t perform and leave you with nothing.
In real estate, your downside potential is much greater than that of you investment. Real estate investing is essentially like trading stocks on margin. You’re putting up $20,000 and borrowing $200,000. You’re ultimately responsible for $220,000 dollars and on top of that there’s the risk of legal or civil troubles if you do something wrong, even if it’s unintentional or someone else’s fault. The buck always stops with the homeowner.
If a contractor cuts corners on construction, someone can get hurt. The contractor can disappear into the weeds and leave you standing alone. If a contractor is not properly insured and someone gets hurt on your site (even an employee of the contractor) then the injured party can come after you. The first question every lawyer askes: is this person worth suing? No matter how good a case is a lawyer probably won’t pursue the case if there is a small chance of collecting on a judgement. A lawyers might pursue the weakest of cases if the person their suing has assets.
The worst thing of all, in my opinion, is that I am constantly made out to be the bad guy. No matter how hard you try to do right. No matter how many breaks you give a tenant or how many extras you put into a flip you’re still portrayed as the greedy underhanded real estate investor.
I want to be the good guy. I take pride in my work. I love taking a rundown house and making it a home again. I see in my mind’s eye the previous families who lived and loved in the home. I see children running into the living room on Christmas morning. I take those visions and devise a plan. I work with the goal to make a structure into a stage for the next family to write their story. I improve neighborhoods. I solve problems. But, I’m about the only one who believes that. Most everyone else looks at me like an underhanded used car salesman. For me that’s the very worst thing about real estate investing.
Guru’s don’t talk about this but I believe it’s the single biggest factor that discourages real estate investors. It takes one bad tenant experience to make an investor throw up their hands and walk away from the industry. Even if they made money on the deal, many investors will say it’s not worth the aggravation.
Now go forth and do great things but don’t let anyone tell you you’re in for easy money. If you want passive income then put your money in a CD and make your 2% interest. If you want to make big money then strap on your boots and be prepared to go to work.