Wade Graham of HGREI liked my Six Reasons No One Wants to Buy Your F**king Real Estate Investment post and felt inspired to write his own list on a slightly different topic.
Five Ways to Lose $50K (in no particular order)
1. You pay too much for the property. This one sounds obvious but 9 times out of 10 this is the one that catches most people. You get excited about the property and forget that this is a numbers game and not a paint colour game. Your agent is focused on making a deal happen so he forgets this is about dollars and not the carpet stain. All of your friends are making big cash (or so you think) and you want in! Who cares about the rent or who is going to pay it! Values go up and that is all you need to know……..right?!?
I am not one to negotiate hard for a rock bottom price as there are definitely other considerations in every transaction but unless your rent covers ALL of you costs and makes you money each month you have paid too much. Personally my cut off is $500. If I can’t make that much each month on the investment I don’t invest.
2. Inspections are for rookies! (or are they?) You have done a few renos and owned a couple of houses. You don’t need to pay someone $500 to tell you that this house is in great shape! I have looked at a lot of homes and many of them I thought were in good shape until the inspector came through. My last inspection saved me and my investor roughly $65,000! Was it worth the $500? Unless you have very large pockets (that you are willing to part with) or have extensive knowledge you need an inspection.
3. What is your exit strategy?….How do you get out of the investment? Unless you have two very good exit strategies don’t put a dime into Real Estate. Getting out isn’t as easy or cheap as you think! What are all of my costs on exit? Real Estate fees, legal, renos, lost rent, mortgage pay out penalties and the big one (hopefully) taxes! When can I exit? Do I need to wait five years or can I sell this contract to another investor tomorrow? Is refinancing an option? You need to have clear answers to all of these questions or your investment may not be everything you hoped
4. Who is going to rent my property? Most investments forecast a future value but the problem is that you need to get to the future to get that value. This is where the true asset comes in…..that is right….your tenant!
“A tenant is…a partner in business who will open up the shop each morning and lock it up at night. They will look after security and inform you of potential problems in the business. They will cut the grass, rake the leaves, shovel the snow, pay all the utilities. They will even pay all your mortgage payments and taxes. Then, in the end, they will relinquish all monetary interest in the business and walk away, leaving you with the profits.” ~Tim Johnson
So at the end of the day who is it that is willing to pay the rent you need to get to the future!
5. After I buy the property I don’t need to do anything, right? Well, as great as that sounds the fun part is now over and reality is about to set in. For those that think that you just collect a cheque at the end of each month, I have some news for you. Not a day goes by that I am not dealing with one of our investments. Most of the things are positive but not all of them. Even if you have just one investment property you had better have some expertise in the following: Property Management, Repairs and Maintenance, Accounting, and Legal. These are things that will come up regularly and they don’t care if you have a job or are sleeping or are on vacation.
And one bonus way… You bought a property in the United States of America! Again, your friends are making money, even their cats are making money on the foreclosure market. One day, when the time is right I too will be putting money into the US but that won’t happen until the numbers make sense. When the CND/US Dollar exchange rate has a predictable positive effect on my investment. When values start to rise or at least stabilize. When the job market picks up and people can pay a mortgage or rent again. When I have a solid team in place to manage my assets. This is when I will be placing my investment dollars into the US. If you are placing money in the US right now you had better have a very detailed plan and a great team behind you.
Photo Credit: https://www.flickr.com/photos/purpleslog/ / CC BY 2.0
Might I also add as a suggestion to avoid. Taking advice from unqualified people. This includes friends and relatives.
It seems like everyone has an opinion about Real Estate, but many are really uneducated about the proper way of investing, or can only remember the crash of “insert any recession year here”.
Long term investing in good markets with a solid education about the process can change your life, for the positive. Just ask any successful REIN member.
Good call Bill! There’s lots of people out there who are a little too willing to share their opinion. I had a question today about rent to own, which I know little about. I said “I don’t know much about it, but I know some people who do.” It’s simple to say ‘I don’t know’.
I agree with Bill’s point.
I think it makes absolute sense to not take any advice from unqualified people such as family or friends.
Further to this, I would also suggest to be carefully in taking any advice from people without a proven track record.
I have noticed that this group of people can expand to a circle outside of our friends and family. On a couple of occasions I have been told by certain investors what areas and types of investments are good to invest in, and what types of investments are bad to invest in. However, in my personal example, the investor was telling me that a certain investment that I was considering was a bad idea, however, he had no knowledge or experience with this type of investment at all. When I took a step back to see what his true motivation was, I realized that he was trying to discourage me from one investment, and sell me on his investment idea. Opinions are plentiful. Be careful who you listen to. Good point Bill.
Regards,
Neil.