Joseph previously worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs My Stock Market Basics and four additional websites in the personal finance and crowdfunding niche, making more money than he ever did at a 9-to-5 job, and loves building his work from home business.
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 Homes and Lost It All With Real Estate Investing
Avoid my real estate investing mistakes to build your own portfolio of rental properties for long-term returns
I started my professional career in real estate and dreamed of one day being the next Sam Zell or Donald Trump. I’ve managed my own portfolio of rental properties and have worked as an analyst on real estate investment trusts (REITs).
So real estate has always held a special place in my portfolio, but not always in a good way.
That’s why reading the four rules WCI followed to get wealthy brought back some painful memories.
Real estate is the perfect example of ‘owning stuff’. It’s one of those hard assets that keeps its value well against inflation and there is a limited supply. They’re not making much more land these days.
But real estate investing isn’t all it’s cracked up to be. It’s not the passive income miracle you hear about on 3 am infomercials and it’s not the get-rich-quick strategy many thought it to be before the housing bubble burst.
My experience with real estate investing includes some of the biggest mistakes you can make but also a lot of lessons learned.
Getting Started in Real Estate Investing
I landed an internship as a commercial real estate agent during my third year of college. I worked 15 hours a week writing up investment prospectus for properties and finding investors for a new business park the company was developing.
I loved the idea of developing a raw piece of land or an under-used building into a money-making asset. Real estate seemed like a cash machine, the perfect mix of near-term cash flow and long-term wealth through property appreciation.
It was 2003 and the residential market was just starting to heat up so I switched to the rental market after my internship. I was starting on less than $30,000 I had saved while in the Marine Corps and through college so the lower price of properties in the single-family market was a big attraction.
It took less than six months to remodel the houses and refinance them to cash out and buy another property. Within a couple of years, I built my portfolio up to five rental properties plus my own home.
Property prices were booming and nothing, nothing could go wrong with my real estate strategy.
My Biggest Real Estate Mistakes
My biggest real estate mistake is a trap many fall into and one created by the get-rich books and promoters. These books present real estate as a passive income source where all you do is finance a portfolio of rental properties and wait for the tenants to pay off your mortgage.
The truth is that renting single-family houses is about as far from passive income as you can get.
I had five properties at the peak of my real estate empire, four single-family houses and one duplex. From finding tenants to maintenance and management, I was working at least 20 hours a week on top of my full-time job.
The problem is that unless you live in a larger city, it’s difficult finding property management for small, single-family portfolios. Most professional managers don’t want the hassle of single-family rentals but will make a concession if you’ve got a larger portfolio. I found a couple of managers that would consider my rentals but only at a fee of 15% on gross rents, well over what I could afford given the properties’ cash flow.
When you plan your real estate empire, it’s a good idea to estimate a vacancy rate of at least 10% or more depending on your region. That gives you some financial flexibility and helps you understand if the cash flow will be enough to cover expenses.
As I started neglecting my rentals, my vacancy rate increased well beyond what I had estimated. With six rentals, I almost always had at least one vacant in any given month. That meant pulling money out of savings and other investments to keep up the mortgages.
I started selling my properties in 2006 but the damage was already done. I had spent through most of my savings and could only sell a few properties for the mortgage value when the housing bubble burst.
I was broke and my dream of being the next real estate mogul was being 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 a lot of traps you have to avoid if you’re going to make real estate work for you.
Some of these traps can be avoided with a little planning, others will take more diligence. All will help you produce a consistent and mostly hassle-free return for decades.
- Consider joining or starting a real estate investment group of investors, contractors, property managers and real estate lawyers. It’s important to get people from different fields to get that breadth of experience. Some groups pool their money formally, but the easiest route is just to exchange ideas and help each other out with services.
- Start slow with your real estate empire. Buy no more than a couple of properties your first couple of years to ease yourself into the time required to manage rentals. Consider buying a tri-plex or four-plex instead of single-family properties.
- Be extremely conservative when estimating your costs before you buy a property. Research vacancy and rental rates for the neighborhood. Talk to other investors about costs for hiring out maintenance and management. It’s ok to manage your own properties and do the maintenance yourself but consider estimating these costs into your initial plan just in case you need to pay them out.
- Only buy houses and in neighborhoods in which you would want to live. If things don’t go as planned, you may need to live in one of your rentals.
- Financing can be your friend in real estate investing and help boost returns but it will also increase your monthly expenses and leave you scrambling to make payments. Try paying at least 20% of the purchase in cash to give yourself some financial flexibility and lower your mortgage payments.
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These aren’t the only rules you’ll need to follow to be successful in real estate investing but they’re the biggest traps I’ve seen investors make. Understand that you don’t need a massive portfolio of houses to enjoy great long-term returns. Buy a couple of rentals, enjoy the tax benefits of depreciation, and count on long-term equity as the biggest chunk of your return.
I hope learning from my real estate investing mistakes can help you be a better investor. Real estate can be an excellent diversifier for a stock-bond portfolio and one of the best wealth creators around but it can also be a constant headache. Following a few simple rules and avoiding the biggest traps will help you enjoy the long-term returns from appreciation and protect you from short-term risks. Few assets have created as much generational wealth as real estate and it 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.]
Have you had success or failure with real estate? How did you learn what you needed to know before you got started? Any additional tips to add?