It sounds incredibly cliché, I know, but I really do wish I had a nickel for every wannabe real estate investor who thought they were going to be an instant success as a real estate investor. In my experience—very extensive as an investor and in real estate investment groups—far more than 90% of them not only don’t do it instantly, they don’t do it at all. Some of the other 10% actually do try it and make a lot of mistakes before they finally give up, but most of them never even make it out of the starting gate.
Why is there this notion that “anybody can do it” and yet so very few actually do? Well, anybody can make hamburgers too, but there’s only one company that does it like McDonald’s, and that’s McDonald’s.
What gives? Why is that thing which is so popularized in shows such as “Flip That House” and on real estate infomercials and in seminars in reality more elusive than BigFoot or UFOs?
As one of the few who has beat those odds, I’ve pondered those questions for years, and I’ve distilled my answers down to the following list of things that I believe prevents most wannabe investors from ever being successful:
SELLING (“FLIPPING”) VS. HOLDING – Contrary to popular belief, very little of all real estate profits are made from buy low-sell high in short periods of time. Wannabe investors think you make money when you sell, but true investors know that you make it when you buy. And if you bought something that produces income on a regular basis, passively, why would you want to sell it? Unfortunately, talking about long-term hold isn’t as sexy as the flipping myth (you know, the one where they say “who needs tenants, toilets, and trash? You don’t need credit, partners, money, etc.—just flip it for quick cash…”) It may sell books and seminars, but it’s dead wrong. You’ve been lied to. Show me a person who claims to “flip” properties on a regular basis, and I’ll show you someone who’s either lying or doing something illegal. Wholesaling, as it is also known, is one small tool in a vast real estate toolbox, and the one which has the narrowest of applications. Almost always a solution looking for a problem; almost never a deal that closes.
VALUING PROPERTY BASED ON APPRAISED VALUE RATHER THAN ON INCOME – The bank’s, realtor’s, and appraiser’s model which says that a house is worth what other comparable houses have recently sold for is garbage. Why do you think the banking industry is on its knees right now? Because rather than looking at the income it produces (or what the borrower earns), they were focused on some other agenda, perpetuating the myth that house prices will go up forever. You’re NOT gonna sell the house whenever you want to anyway, no matter what you think, so what meaning does that appraised value have? It’s irrelevant! So is taxable value and assessed value. If the house doesn’t produce income, it’s because you paid too much for it and your payment is too high—it’s that simple. If the appraiser thinks it’s worth more, tell him to buy it. The house’s value is determined by rental income—period!!!
POOR CASH FLOW – This is more of a symptom than a problem. Usually it’s a function of bad location, paying too much, not understanding your true costs, or simply being naïve about the importance of cash flow in the first place. Cash flow is the fuel that keeps the engine running; if you want to be around long enough to be successful, you better have positive cash flow.
LOCATION – Most of the problems I hear associated with rental property are directly associated with a bad location. It’s very simple: we want to keep buildings full with people who actually aspire to live there. People don’t want to live in the ghetto. Get good people, and you’ll have minimal damage, problems, and vacancy. Conversely, if we buy only palatial estates on the golf course, we have a product that doesn’t appeal to the masses and will sit vacant too often.
MORE COMFORTABLE WITH CONCRETE DATA THAN WITH MORE SUBJECTIVE THINGS INVOLVING PEOPLE SKILLS – I’ve never borrowed money from a private lender or seller, leased a house to a tenant, or sold a house to a buyer except in a face to face personal relationship. People do business with other people. Wannabe investors seem to think there’s a cause-effect relationship or other mathematical ways to shorten the process or take away the unknowns. Math and data may be more predictable and less intimidating than meeting and building relationships with strangers, but you’re simply not going to succeed without quality people relationships.
MISINFORMATION BY AUTHORS AND SPEAKERS WITH AN AGENDA TO SELL YOU THEIR “EDUCATION” – Unfortunately, the authors and speakers in this industry have done a real disservice to individuals who might otherwise have become real investors, had they been told the truth: that this is a people business and a long-term proposition, not a data-crunching exercise and not an instant lottery ticket. Of course they do this primarily because it is easier to sell something to gullible “investors” by telling them what they want to hear than it is to tell the whole truth. The other unfortunate truth is most authors and speakers are not investors and are simply unqualified to know the truth.
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