How To Not Lose Money In Real Estate
A number of my clients are real estate investors. They come to me typically as real estate investors looking to purchase more real estate. Ironically, though, I can count on one hand the amount of real estate investors who came to me and were actually cash flowing with their properties. It’s ironic because the reason someone gets into real estate as an investment is for passive income and the dream of having freedom of their time. But for some reason, it isn’t working. They instead become underpaid and overworked landlords. I want to show you the mistakes I help my clients avoid so that they can create wealth instead of another part time job.
Invest as a business buying another business. If you were a business, you wouldn’t purchase another business if it wasn’t making money right? Precisely! Why would real estate be any different? Any property that you’re going to invest in should have 3 years worth of income and 12 months of expenses. 3 years of income will help you see how much the gross rents have been for the past 36 months. You will know who’s been paying and who hasn’t. You’ll know what the average rents actually are. You’ll know what the best months are (usually the realtor represents best case scenario as the “average” on their spreadsheet). You’ll also know what the worst months are. You want to be able to see that a property still produces cash flow even if it does the worst it’s done in the past 3 years. This is done by subtracting the monthly expenses from the worst month for rents. This is a lot of important info right? However, most people NEVER look at these numbers. They instead buy because of how the property looks, what the market comps say, and what the list price is. You will lose money if you invest without these numbers.
Buying for reasons other than cash flow. The only reason you buy real estate is for the cash flow. It’s the only thing you can rely on. Do not buy real estate because it will appreciate, because it will provide tax benefits, and certainly not because you want “free rent”. A property should produce a monthly profit after the expenses, taxes, insurance, and debt payments are subtracted from the gross rents. If it does not, do not purchase it. Cash flow is king and anything else is just icing on the cake. Cash flow, btw, is not what an investor collects in rents. That is called gross income, or a “rent roll”. Buy for cash flow and do no purchase something if it does not cash flow. This goes back to the importance of having 3 years worth of income and 12 months of expenses.
Overleveraging. This is a killer of cash flow. Good real estate is bought with a 20-25% down payment. If you aren’t willing to put money into it, then it probably isn’t a good investment. Government subsidized loans and “no money down’ real estate deals have always been a craze. The reality is, real investing doesn’t work that way. You must pay to play. Either you’re broke or the investment is no good and you know that and don’t want to put money into it. Both of those are circumstances where you wouldn’t want to invest. An overleveraged property contains significant risk and low cash flow.
Playing with residential investments. Real money in real estate is made with commercial investments. This means more than 4 units. Anything at 4 units or less is considered residential and is not scalable. Would you start a business that would cap out in 5 years? I wouldn’t. At best, you can do 1-2 FHA loans on residential properties and probably 1 conventional before you have used all of your loan options. This will happen over the course of about 5 years. Then you will be a landlord, self managing your properties for $2-$3,000/mo. waiting for them to get paid off so you have more cash flow. This is why people start real estate and instantly get a bad taste in their mouths. They didn’t go big enough fast enough.
My opinion is that most people should not even look at real estate until they have $100,000 or more saved. I actually believe until you’re accredited ($1,000,000 net worth) real estate shouldn’t really be a concern. The cash flow is too small and not worth your time and attention. If you own a business or work a job that allows you to earn and save the kind of money that would put you in the position to invest in real estate properties, you shouldn’t be getting distracted by baby money from tiny real estate deals. It will actually slow you down in the long run. Most people aren’t going to tell you this because most people who are talking to you about real estate are real estate agents, mortgage brokers, and people who already bought real estate and need to justify it by having you join them. If you would like to create wealth the right way without losing money in real estate by making mistakes click here.
Own Your Potential,
Jerry Fetta
Grant Cardone Certified Coach
Jerry Fetta helps his clients build wealth so that they can eradicate poverty in their own lives and own their potential.
He believes scarcity and abundance cannot co-exist and that the way to end poverty is to help you build wealth.
You were not created to spend 40+ hours per week serving the 40-year-to-life sentence trading your precious time for money just to live in mediocrity.
However, the truth is that time and money must be exchanged. It just doesn’t need to be you making the exchange.
Jerry helps his clients create wealth that exchanges time and money on their behalf. The only way to do this is to make more money, keep it, and then multiply it.
His clients see a 30% increase in income, a guaranteed increase in savings rate, and 8-12% fixed annual returns on their assets in the 1st 90 days of working with him.
To get started, go to www.WealthDynamX.com/potential
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