632: Confessions of a Former Active Real Estate Investor

SHOW NOTES FOR EPISODE 632: CONFESSIONS OF A FORMER ACTIVE REAL ESTATE INVESTOR

Many new investors think the only way to become a real estate investor is by investing in rental properties.  In today’s podcast, Bill shares how he believed the same thing, learned some hard lessons along the way and, to help others, provides key warnings for investors seeking the rental property route.

Introduction

If you have listened to this podcast for any amount of time, you probably know that when I started out, I set a goal to reach 1,000 units in 6 years.  I knew that, in order to achieve that goal, I was going to have to work hard — very hard.  So, I rolled up my sleeves and moved into entrepreneur mode – willing to work as hard as I had to reach that goal – even if it meant working 12 to 14 hour days – which became the norm!  And add to that a weekly blog, 2 podcast broadcasts a week and continual study to keep learning the trade!  It was grueling and exhaustive at times but I made it!

And, to reach that goal, I had to invest in both properties that I solely owned and, eventually, properties owned by multiple investors, through syndication.

When, I started out, I initially planned to hold on to all my properties to continue a steady stream of cash flow.  But, once I had reached my goal, I stopped, looked back, and assessed where I was at and what it took to get there.  One fact became clear: I realized that I was getting as good as or even better returns through the syndication investments I had made – and with no way near the effort my personal properties required. The properties I owned exclusively were rarely passive.

Don’t get me wrong… With the right properties (primarily A & B class properties) it can be much less effort.  But, when I started out, I bought mostly C class properties. And some of those properties required very little effort but for others were a total drain – a lot of work and major issues on a regular basis.

Taking that all into consideration, I decided to focus primarily on syndications in a variety of asset classes from apartments to mobile home parks to self-storage and even car washes!

Yes, real estate is a great way that the average person can become wealthy – especially for seniors or people over 50. But don’t be deceived… real estate is not the no-brainer passive-income maker the way so many people think it is.

While real estate is a great investment, that statement comes with a laundry list of caveats.  All the “ifs” and “buts” that surround it mean that investing in real estate (especially with the goal of generating passive income) is a lot of hard work.

Before you join the ranks of rookie real estate “investors” who have yet to realize how much skill and research is required, sometimes just to break even —consider the following realities associated with real estate investing first.

Here are some things to consider before getting into real estate investing:

1. Managing Rental Properties Takes a Lot of Hard Work

When people tell me they want to invest in real estate, here’s the scenario they typically envision: They receive a rent check on the first of the month, every month, which is much bigger than the mortgage payment on the property. They then use the check to pay the mortgage, cover all costs of homeownership, expenses and then pocket the profits.

Now, is possible to locate, buy and manage a rental property that allows this dream scenario to come true?  Of course it is!  But it is not for everyone, and it is not nearly so passive an endeavor as many people imagine – especially, if you manage the properties yourself!

If you manage your own properties, you better be prepared to:

• Advertise to find tenants and avoid vacancies.
• Show the property to interested parties when seeking new renters, and help maintain it for current occupants.
• Vet tenant applicants carefully to ensure you have qualified, reliable tenants.
• Consistently update and improve the property so you can continue attracting high-paying renters and increase rents.
• Promptly respond to maintenance requests and coordinate repairs (or do them yourself) in a timely manner.
• Manage all the financial obligations, from paying bills to handling security deposits, paying property taxes, insurance and more.

Playing landlord might not be the ideal role for you. 

All of this takes serious time and effort!  Ask any seasoned real estate investor who manages properties with tenants about their unexpected list of duties, and they will tell you about repairs going massively over budget, evictions and entanglements with the court system, or other rentals-gone-wrong horror stories.

Of course, you could just outsource the headache and use a licensed property management company. That’s a viable option but, keep in mind, it is not a guaranteed fix!  Not all property managers are reliable and trustworthy!  And you may find (like I did) that you have to go through many property managers before you can find even a passable one!   And don’t forget, that cuts into your profit, considering that standard property management fees usually run 10% of your monthly rent.

If you have a 100 plus unit apartment building it’s certainly easier to find good dependable property management but with a hand full of single family homes and/or duplexes, triplexes and quads, it’s much more of a challenge.

2. Just Because it’s a House Doesn’t Mean It Will Make a Good Rental

Again, don’t get me wrong, none of this is to say you can’t make money by purchasing real estate and then renting out the property to earn rental income. That’s not a myth. The myth is that anyone can do this with any property they buy put up for rent.

Learning to properly evaluate a potential rental property in a potentially good market and good neighborhood is far more involved than most people who simply want to buy a single-family tend to think.

While many investors use simplified formulas, such as the 1% rule — which suggests the rent you could collect from a rental property needs to equal 1% of the purchase price of that property for it to be a good deal — they are too generalized to always be hard-and-fast rules for success.

That’s especially true in unusual real estate markets like we’ve seen over the past two years. Bloomberg recently reported that in the third quarter of 2021, the median price of real estate investment properties was $438,770. Using that 1% rule means you’d need to charge $4,400 per month in rent on that property. Most markets won’t support that kind of rent for a midsize, single-family home.

And that’s just a simplified calculation. It doesn’t take into account any of the other factors you need to properly evaluate before you can determine whether a specific property is a good candidate for investment. So yes, you could buy a $400,000+ home and rent it out. But if the whole idea of real estate investing is that you earn a return, you might face an uphill battle to make that happen. Personally, if I bought that $400,000 house today, I wouldn’t rent it out as a single family rental, I would furnish it and turn it into a short-term rental that could generate enough income to far surpass a 1% rule return.  If you did it right, you could get a 5 or 10X return!

3. Your Plans Don’t Always Turn Out the Way You Would Have Hoped!

Basically, “Things can and will happen that you never expected.”   We can do our best to strategically plan for all kinds of outcomes, but sometimes things will happen that were never part of your Plan B… or C,D,E or F.

• Keep in mind, there are always variables that you can’t control
• There are factors sometimes that you just can’t control. Things like:
  • Interest rates
  • Natural disasters (floods, tornados, hurricanes, and earthquakes)
  • A pandemic!
  • The national and global economy
  • Inflation
  • A market crash or correction
  • Lawsuits
  • Just to name a few

• But that’s also why you learn to still have your plans B, C, D, etc.

4. Buying Real Estate Could Distract You From Your Actual Goals

Many people say they want to invest in real estate as a way to become financially independent, grow their wealth, build their retirement nest egg or generate additional cash flow.  But before you do, you must ask themselves a very simple question: Is managing a portfolio of rental properties something I actually want to do?

With demanding careers and growing families, the last thing many people have is an abundance of time, energy and hundreds of thousands of dollars floating around begging to be used to buy another house.

Managing a property as the landlord or handling it off to a property management company is typically not what most people want to take on, because that has nothing to do with their stated values, priorities and goals.

In fact, because buying real estate requires significant capital, it often detracts from the other goals you have (i.e. If you’ve been waiting to retire to play golf any time you want, the responsibilities of being a landlord or seek new properties may cut into that dream). Remember, you can invest in real estate without owning properties like through syndications, crowdfunding sites, hard money lending, etc.

Only you can answer if committing to a real estate portfolio is a good use of your time and money, and if it’s worth taking money away from other goals in order to fund this endeavor.

5. Real Estate Investing Requires a Power Team of Good Professionals

Unfortunately, bloggers and podcasters tend to make real estate investing sound deceptively simple, so it’s easy to think you can handle it all on your own.  But the reality is that real estate investing is complicated. There are legal and financial dynamics at play that will likely require a team of trusted professionals to help you protect yourself and your investment.

We live in a lawsuit-happy society, which makes it critical to protect yourself and your assets from potential liability. A knowledgeable insurance broker and trusted real estate attorney are non-negotiables for real estate investors. If something goes wrong with your tenants or your property, you want these folks in your corner.

The financial landscape in real estate investing is not the same as in your personal finances. So having a good accountant that understands real estate investing, or other tax professionals and financial adviser who are skilled in the terrain are also critical components of a well-oiled real estate investing machine.  It’s important to the success of a new real estate investor to build and nurture these kinds of relationships.

I would also add to that list a good experienced real estate investing mentor who can help you avoid some of the mistakes that can cost you both time and money.

If You’re Looking for Passive Income…

Yes, real estate investing in rental properties can be profitable, and after putting a lot of hard work in on the front end, it can provide a steady stream of passive income, with added bonuses that include tax deductions, expense write-offs and, with the cherry at the top of significant equity build-up that can be part of the legacy that you can one day pass down to your children.  But don’t be deceived.  It requires a significant amount of education, hard work and skill to achieve that outcome.

What real estate investing is not is a quick, surefire, easy and foolproof method to earning huge returns on your initial purchase.

By all means, I am not trying to discourage you.  Afterall, it helped me to go from a missionary who lived strictly on faith (and still do by the way) to now having the funds to carry me through the rest of my life and to pass on to my children and grandchildren.  But, like all financial undertakings, it’s best to be fully informed.  Maybe the trade-offs are worth it to you or maybe you will start with a more passive strategy than what I did with rental properties.  That’s great — as long as those trade-offs fit into your big picture.  Either way, when you know the truth that not all real estate investing is passive, you’ll at least know what you’re getting into.

References:

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