Lately I have been thinking about the real estate business, and how it has changed over the past 10 to 15 years. Many of the techniques taught today were around 15 years ago. There were people doing assumptions, lease options, wholesaling, retailing, rehabs, etc.. What is different today is the increase in the number of courses, infomercials and clubs that encourage people to become real estate investors. Those efforts are obviously working. The ranks of those who call themselves real estate investors have swollen dramatically during the past 10 years.
Most are attracted to the promise of quick profits from wholesaling or rehabbing. It is exciting to think about having the opportunity to make a 20K profit in just a few days time on a flip deal. I have seen it done. I personally participated in a deal that netted $25K in profit in only 3 days. On a number of occasions I have seen 10K profit deals put together in just a few days. It does happen. Guess what else happens? You get to pay a significant portion of those profits in taxes. Oh, and people forget to tell you that they can’t get the money together to buy your flip, so you show up at closing with a seller expecting to sell, and no buyer there to cash you out. Or, you luck out and get seller financing on that older house that has those hardwood floors everybody wants, lots of attic space for a new bedroom, a great lot, good location, everything you could ask for in a deal, except one thing – an interested buyer.
It can get very scary when you can’t find a buyer for your wholesale deal or worse, no buyer for a retail property you just spent $30K fixing up. When your buyer fails to show for closing and you are on the hook to buy a house you don’t really want to keep, it can make for some very anxious moments. The older I get, the more I like the idea of sleeping at night. Losing $20K on a deal is VERY scary, just like making $25K is fun. And you have to keep in mind that it can go both ways. You win some and you lose some. I have lost money on real estate deals and I have seen investors lose more than $25K on one deal. I would be willing to bet that there is not a full time investor that has never lost money on a deal at one time or another. That is OK when you are well financed and can weather such a set back. But the average investor who is just getting started cannot afford such loses. That’s why my thoughts and interest have returned to the old fashioned rental property business.
Let’s not be blind here, you can lose money on rental property too, but in my opinion the odds are much more in your favor when you are planning to buy and hold. You will still need operating capital. There will always be expenses you need to be able to cover, but by and large, over the years you hold a property, it will likely increase in market value and rental income, thereby yielding asset growth and increasing net cash flow.
If you can make it through the lean start up years, you will likely find yourself "sitting pretty" 10 years down the road, if you apply a diligent program of buy and hold over a 10 year span.
Rental property has been around since the second house was built. It is a tried and true business model. But is has to be run like a business in order to avoid the burnout common to so many rental property owners. Most landlords are mom and pop operations, with no real business organization when it comes to managing properties and tenants. This lack of management skill causes many a landlord to eventually grow tired of the business, thereby becoming motivated sellers.
The key is still to buy right" in the beginning. If you keep your financing at or below 80% of the market value of the property, you will generally be assured of a decent positive cash flow. Of course buying property at prices below 80% of market value is even better. My workshop and home study course on Wholesaling discuss how to do this.
Managing and owning rental property is not the exciting, "get rich quick" or "make fast cash" strategy that many real estate "gurus" promote. But when managed professionally, it can be a more or less worry-free way to accumulate real estate wealth. There is risk in all of real estate investing. But the risks with some techniques are much higher and potentially much more difficult to deal with than rental property. Rental property doesn’t have the "James-Bond-like" excitement of quick cash deals, but you will probably sleep better at night than ole’ James does.