When I bought my first home at the age of 18, I had recently read some investment books by real estate gurus and saw nothing but dollar signs and easy living.
It was only much later that I realized something that should have been obvious:
Real estate gurus are full of it.
Anyone pitching you about how you can “get rich in real estate” is getting paid to SELL. They don’t get paid to help you succeed.
The easier a real estate guru makes it look to earn money in real estate, the more excited you get. The more excited you get, the more people you tell. The more people you tell, the more books/tapes/programs/games they sell.
It’s a clear conflict of interest. Let’s take a look at a couple common real estate topics. I’ll present two options of what a real estate guru might say and we’ll try and figure out which they’re more likely to go with.
A real estate guru might say:
When you’re first starting out, manage your own property. You save a lot of money and really learn the ins and outs of real estate!
You should manage your own properties while working full time. Check out these compelling scenarios:
Residents lock themselves out at 2 AM? Righteo! You didn’t want to waste the whole night sleeping.
Furnace go out? What luck! You’ve been meaning to catch up with your HVAC buddy.
Resident not paying rent? Jolly good! You get to use a personal day to take them to court.
Tax assessment too high? Sounds like good craic! You’ve been looking for a chance to write a property tax appeal.
It’s income tax time? Bang on! You haven’t looked at a MACRS table in what feels like forever.
Even though I probably over did it on both Britishisms and sarcasm (itself a Britishism), I think we can agree a guru is more likely to go with option A. It just sells better.
Buying Your First Property
A real estate guru might say:
Buying a home is the first step in a process towards wealth and freedom. Start today so you can use the income from your first property to buy another, then another, then another, until you build enough passive cash flow to retire!
When you’re planning to buy your first house, a good guideline is the rule of 10’s: For every 1000 homes presented you analyze, you’ll visit 100. For every 100 homes you visit, you’ll make on offer on 10. For every 10 offers, you’ll close on one.
Any guru worth their salt isn’t going to emphasize the latter. If they did, you would be able to do a little back of the envelope math: Let’s say each homes takes 10 minutes to decide if you want to visit, 1 hour to visit, 5 hours to make an offer on/negotiate a price for, and 20 hours to find financing, do inspections, and close. All told, that’s 336 hours to buy one rental property. That’s over two months of full time work!
But the upside is worth it right? Negative Ghost Rider. Historically, our average property ($45,000 cost) has a monthly cash flow of $350, when bought without ANY financing. With conservative financing, you’ll be lucky to get $100 month. Putting “no money down” would net you a whopping $27 per month (aka, no room for error). This spreadsheet breaks it down.
If you’re buying with financing, you’re better off working one evening a week for $10 per hour. Less stress, less risk, and an immediate sense of accomplishment.
But Kenny, Why Are You Saying This?
This article seems to be warning me against investing in real estate…but…don’t you invest in real estate? Haven’t all your other blog posts been about why everyone else should as well?
Yes to all of the above.
I’m not saying you shouldn’t invest in real estate. I sincerely believe it’s one of the best ways to build true wealth.
What I am saying is that real estate gurus get paid to make investing sound easy. Real estate has a steep learning curve. Real estate is time consuming. Real estate is risky. If you enter the arena expecting to dabble and make a quick buck, YOU WILL ALMOST CERTAINLY BE DISAPPOINTED.
I started with one property and we’ve grown. Even though we’ve been successful over the last 11 years, we’ve made our fair share of mistakes and learned a lot. I can sum up my current views like this:
Investing in estate makes sense when you’re big.
- You can afford to keep your property managers in house (it’s cheaper and they’re focused on just your properties).
- You have enough work to keep dedicated contractors busy and get great rates. We currently keep at least 30 busy year round.
- You can buy materials wholesale for at least 30% less than the going rate at a hardware store.
- You can find deals a lot easier because:
- The solid network you will have built will start dropping deals into your lap. Especially in rural towns.
- Analyzing individual properties will take less time because you’ll know the area, know what you’re looking for, and visit fewer duds.
Wrap Up – Don’t listen to Real Estate Gurus
If you listen to a real estate guru, investing in real estate in a walk in the park. Money will just start flowing in and you’ll retire in no time.
If you’re just starting out, that’s silly. Once you’ve amassed a sizable portfolio, things start to make more economic sense. However, it takes a lot of blood, sweat, and tears to get from point A to point B.
My recommendation, if you want to start down the real estate road, find someone who has already walked a few miles and invest along with them. Learn what you can and consider striking out on your own once you’ve enough critical mass.
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