Investing

How to avoid 2 ugly real estate train wrecks

Stay above the fray by following this advice

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Takeaways:

  • There are approximately 28 million real estate investors in the U.S.
  • Trying to invest on your own is a surefire way to overpay and lose your profits.
  • Your real estate profit or loss is locked in the second you sign the contract, so you must make sure you have the best deal possible.

My first real estate investing career in 2005 ended in smoldering ruins. I lost money on every property and eventually sold them off at a $150,000 loss.

My second foray in real estate, however, has been highly successful. The difference: I have avoided two ugly real estate investing train wrecks that derail many aspiring investors:

Train wreck 1: Going it alone

Many real estate investors — there are approximately 28 million in the U.S. today — enter the business in haphazard fashion. They lack both a plan and guidance.

The sad story goes something like this:

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  • The investor earns $100,000 in home equity and wants to make money with it. So they take out a line of credit.
  • They think real estate investing sounds like a good idea.
  • With no experience or idea what to do with the house, they buy a house that costs too much. Then they pay $10,000 more than they should for rehab, take four months to rent it out, and then they have to evict the tenant, which takes three months.
  • By the end of year one, they lost money and think real estate investing is a terrible idea.

Real estate investing on your own without a plan is an awful idea, and it will cost you your profits.

I avoid this train wreck now. In my current investing, my plan is to buy under-market-value properties in San Antonio, Texas, from $40,000 to $80,000, do $5,000 in rehab, and resell them with owner financing.

I earn 12 percent return on investment (ROI) typically with zero property maintenance costs.

That’s a plan. To execute it, I work with an expert real estate investor who finds me deals that match my model. If I can’t get the house at the right price, I move on to the next deal.

Action plan

  • What to do: Scout local real estate investing meetings for an expert real estate investor.
  • What to look for: He or she should have done at least 500 deals and been in the industry for 10 years.
  • What else to look for: A long track record of success through real estate crashes.
  • The pitch: Offer to help the investor with their business (answering phone calls, posting bandit signs, gofer work) in return for mentoring you.
file404 / Shutterstock.com

file404 / Shutterstock.com

Train wreck 2: Paying too much

Most rookie investors lose money because they pay too much for the property.

Remember that your real estate profit or loss is locked in the second you sign the contract. If you overpay, you are probably going to lose money.

The worst-case scenario is that you pay out of your savings account to keep the property afloat and to keep you out of bankruptcy court.

Lesson

You must perform a thorough analysis of any property you might buy. If you are renting property, you need to know:

  • Mortgage payment
  • Down payment requirements
  • Rental income for you to qualify for a loan
  • Price-to-income ratio
  • Price-to-rent ratio
  • Rental yield
  • Capitalization rate
  • Total monthly cash flow after all expenses

Action plan

  • What to do: Work with your expert real estate investor to ensure that the property will generate cash flow after all expenses are considered.
  • Consideration: Owner finance the property to a qualified buyer, instead of renting. This strategy saves you rehab costs, maintenance costs and eliminates cash flow worries.
  • Another consideration: About 24 percent of U.S. real estate investors buy properties in cash. Owning investment properties without mortgages provides peace of mind and more cash flow. You can buy investment properties with IRA or 401(k) funds, as do about 4 percent of U.S. investors.

Hopefully, sharing the train wrecks that I incurred and the strategies to overcome those wrecks will keep you on track with your investments.

John Majalca financially retired in real estate investing in 2006 with more than $35,000 per month in cash flow; he also is a licensed agent. Visit his website, and follow him on LinkedIn.

Email John Majalca.