I owned six homes and misplaced all of it with actual property investments
Investing in real estate can be the road to wealth or it can get you into the poor house. Learn from a man who lost everything to real estate investment.
Today’s classic is being republished by Doctor on fire. You can see the original Here.
Today’s guest post was kindly provided by Joseph Hogue, a man who once dreamed of becoming a real estate mogul and fell flat on his face. He lost everything investing in real estate and had to climb out of a large hole.
Joseph previously worked as a stock analyst and economist before realizing that being rich is no substitute for happiness. He now runs My Stock Market Basics and four other sites in the personal finance and crowdfunding niche, makes more money than ever on a 9-for-5 job, and loves to build his work from home.
Let’s hear what he did and how we did it and let’s try our best not to follow in his footsteps!
I owned six houses and lost it all with real estate investments
Avoid making mistakes when investing in real estate to build your own portfolio of rental properties for long term returns
I started my professional real estate career and dreamed of one day being the next Sam Zell or Donald Trump. https://www.physicianonfire.com/real-estate-crowdfunding/ I managed my own portfolio of rental properties and worked as an analyst for Real Estate Investment Trusts (REITs).
So real estate has always had a special place in my portfolio, but not always in a good way.
Therefore, reading the four rules WCI followed to get rich brought back some painful memories.
Real estate is the perfect example of how to own things. It’s one of those tough assets that holds its value well against inflation, and there is a limited supply. They don’t make a lot of land these days.
But real estate investments aren’t all that matter. My 4 Current and 4 Future Passive Income Streams It’s not the passive income miracle you hear about in 3am commercials, and it’s not the get-rich-quick strategy that many thought before the housing bubble burst.
My experience with real estate investing includes some of the biggest mistakes you can make, but also many of the lessons you’ve learned.
Getting started with real estate investments
During my third year of studies, I did an internship as a commercial real estate agent. I worked 15 hours a week preparing a real estate investment prospectus and finding investors for a new business park the company was developing.
I liked the idea of turning a raw piece of land or an underutilized building into a moneymaker. Real estate seemed like an ATM, the perfect mix of short-term cash flow and long-term wealth from real estate appreciation.
It was 2003 and the housing market was just starting to warm up, so after my internship I switched to the rental market. I started with less than $ 30,000 saved in the Marine Corps and while studying, so the lower price of real estate in the single-family market was a huge draw.
I was able to buy two houses almost immediately. I bought a couple of foreclosures cheaply in a neighborhood most investors avoided. It would be one of my many mistakes, but I was just thinking about how quickly I could build my portfolio.
It took less than six months to remodel and refinance the homes, cash out, and buy another property. Within a few years I built up my portfolio with up to five rental properties and my own house.
House prices were booming and nothing, nothing could go wrong with my real estate strategy.
My biggest real estate mistake
My biggest real estate mistake is a trap that many fall into and that was created by the abundant books and promoters. These books portray real estate as a passive source of income, where you just fund a portfolio of rental properties and wait for tenants to pay back their mortgage.
The truth is that renting single family homes is as far from passive income as it gets.
I had five properties at the height of my real estate empire, four single-family homes and a maisonette. From finding tenants to maintenance and management, I worked at least 20 hours a week in addition to my full-time job.
The problem is that finding a property manager for small single family portfolios is difficult if you don’t live in a larger city. Most professional managers don’t want the hassle of single-family rentals, but they do make concessions when you have a larger portfolio. I found a couple of managers considering my rents but only paying a 15% charge on gross rents, well above what I could afford given the property’s cash flow.
I spent so much time between managing my real estate and my day job that it didn’t take long to burn out. I’ve started avoiding tenants and haven’t started an eviction procedure once I should have done so after non-payment. Even after a tenant moved out, it took me a month or two to get the week I needed cleaning up the house and getting it back on the market.
When planning your real estate empire, it’s a good idea to estimate a vacancy rate of at least 10% or more, depending on your region. This gives you financial flexibility and helps you understand if there is enough cash flow to cover the expenses.
When I started neglecting my rents, my vacancy rate went way beyond what I estimated. With six rentals, I almost always had at least one vacancy in any given month. That meant getting money out of savings and other investments to keep the mortgage going.
I started selling my property in 2006, but the damage was already done. I had spent most of my savings and had few properties to sell for mortgage value when the real estate bubble burst.
i was broken and my dream of being the next real estate mogul has been foreclosed.
How to invest in real estate without going broke
I still own rental properties and love real estate as a long-term investment, but there are many pitfalls to avoid in making real estate work for you.
Some of these pitfalls can be avoided with a little planning; others require more care. All of these will help you achieve consistent and largely hassle-free returns for decades.
- Consider joining or forming a real estate investment group made up of investors, contractors, real estate managers, and real estate attorneys. It is important to get people from different backgrounds to gain this breadth of experience. Some groups formally pool their money, but the easiest way is to share ideas and help each other with services.
- Start slowly with your real estate empire. Don’t buy more than a few homes in the early years to take the time it takes to manage rents. Consider buying a tri-plex or four-plex instead of single-family homes.
- Be extremely conservative in estimating your costs before buying a property. Research vacancies and rental rates for the neighborhood. Talk to other investors about the cost of hiring maintenance and management. It’s okay to manage your own property and do the maintenance yourself. However, consider estimating these costs in your original plan in case you need to pay them off.
- Only buy houses and in neighborhoods where you want to live. If things don’t go as planned, you may need to live in one of your rental apartments.
- Funding can be your friend on real estate investments and help increase returns, but it also increases your monthly expenses and leaves you bothered to make payments. Try to pay at least 20% of the purchase price in cash for financial flexibility and lower your mortgage payments.
These aren’t the only rules you need to follow in order to be successful in real estate investments, but they are the biggest pitfalls investors have seen. Understand that you don’t need a huge portfolio of homes to get good long-term returns. Buy some rentals, enjoy the tax benefits of depreciation, and count on long-term equity as the largest part of your returns.
I hope that learning from my mistakes in real estate investing can help you be a better investor. Real estate can be an excellent diversifier for a reverse convertible portfolio and one of the best wealth creators, but it can also be a constant headache. Following a few simple rules and avoiding the biggest pitfalls will help you enjoy the long term returns on appreciation and protect you from short term risks. Few assets have created as much intergenerational wealth as real estate, and this can be a key component of your portfolio.
[PoF: To me, the lesson here is not that real estate investing is a mistake, although Joseph’s haphazard approach and poor timing made it difficult for him. Rather, the lesson is to do your homework before making any investment or beginning any type of side gig that requires your money and time.
I don’t have that kind of time, so my real estate investments have been in an REIT fund and Crowdfunded Real Estate.]