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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
The lamestream media is fond of writing about real estate and real estate investors, in particular. You can usually find them trotting out case after case where someone made some bonehead mistake and lost their shirt, all in a misguided effort to scare people away from investing.
But occasionally, they hit the mark and post something that’s worthwhile. Hey, even a blind squirrel finds a nut once in a while.
I read an article recently that did just that. Now they did talk about bonehead mistakes, and they did trot out case studies, but they did it in an instructional, rather than accusatory manner.
The piece discussed 2 huge mistakes that new investors often make when jumping into the deep end of real estate investing.
The author struck a balance by starting his article by stating 2 things:
“Many promising real estate investing careers start with great promise and intentions, and end in disaster. I know many ex-investors who lost tens of thousands of dollars on poor real estate investments in the last crash.”
And…
“I also know several investors who have always done very well with their properties. Those experienced investors have wisely avoided the disasters that befall so many rookie investors.”
While there are a ton of “train wreck” moves that can doom a new investor, he recommends that new people avoid these two train wrecks to maximize your success and profits…
#1 Flying Solo
The majority of new real estate investors jump into the business in a careless fashion, lacking both a plan and expert guidance.
The author stated that he knows a former investor – whom he calls Ralph – who got into the field like this:
Ralph discovered he had $100,000 of equity in his primary residence and decided to ‘put that money to work.’ He took out a line of credit back in 2006 at 4%. Ralph took that money and bought distressed properties in his town. He bought them at full market value with no discount. Then he overpaid on rehab, took longer to rent it out than he thought, and then had to do evictions.
At the end of year 1, Ralph’s dream of earning passive cash flow for retirement was gone. Instead, he was paying out of his savings to keep his ‘investments’ afloat.
This is what happens to rookies jumping into real estate haphazardly. Instead, you should invest with an exact plan and execute that plan with an expert guiding you.
The author’s recommendation: Find an expert investor in your market at local real estate meetings. He or she should have a successful investing record for at least 10 years, with several hundred deals under their belt. Ask if they did well in the last crash. You can ask this expert to assist you in getting started – in return for helping them do some ‘grunt’ work, such as posting signs and making calls.
#2 Overpaying
His second suggestion should be tattooed on the forehead of every real estate investor. He states:
“I had to give just one warning to all aspiring investors, it would be this: Your real estate profit/loss is SEALED the moment you ink the contract.”
If you pay too much, congratulations! You just signed on to a losing real estate investment. It’s a common error that drives new investors out of business as fast as they get started.
He goes on to say that so many real estate investing careers go off the rails at the start because they pay too much. Remember Ralph in the above example? When Ralph had the inevitable cost overruns on the rehab, as well as more vacancies and evictions than he thought, he had no wiggle room. His mortgage was so high that the only time he could make money was with full occupancy.
There are two lessons here:
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Buy houses under market value. If you cannot find one that is at least 15% under market value, move on.
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You MUST do a full financial analysis of your potential rental property.
You need to determine:
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Mortgage payment (if any)
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Down payment
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Ratio of price to income
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Ratio of price to rent
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Investment yield
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Cap rate
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Your monthly cash flow after ALL possible expenses, including vacancies
Be certain that your property is going to produce positive cash flow after expenses. He also advises seller financing your houses to qualified buyers, instead of renting. This allows you to off load property maintenance costs to your occupant.
I hope that by avoiding these real estate investing train wrecks that your efforts pay off with plenty of long-term, passive cash flow.
Care to Share?
Do you have any thoughts for newbies about which train wrecks to avoid? Share below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.