Tuesday, January 14, 2014

You Too Can Make Fast Money In Real Estate - And Pigs Will Fly!

It's time for some tough love. Contrary to what you may have learned on TV shows such as 'Flip This House', you are in all likelihood never going to make fast and easy money by snapping up houses and spending 30 minutes renovating the kitchen (less 12 minutes for commercial breaks). While you may watch Donald Trump on The Apprentice, you are not Donald Trump. And in any case, Donald Trump doesn't make his money by flipping houses.

Here is your absolute best strategy for making money in house-flipping: write a book titled 'How To Make Money Flipping Houses', and sell it to others.

The promise of fast and easy money has always been the huckster's most effective lure. Don't fall prey to that siren call! If you are considering pursuing real estate investment, then make sure you aware of these typical novice investing mistakes...

Buying on a whim - "Gee, honey, that seems like a good deal. Let's buy it!" Bad move. You need to do your homework first, since you're embarking on a journey which may last for years. Better make sure you are really committed to all the work involved. You can't just take your investment property back to the store for a refund if you later decide it's too much work.

Assuming all the profits will come from growth in property value - TV shows and hucksters always dangle the capital gains carrot in front of starry-eyed beginners. In reality, the operational profit earned while you own a property is arguably more important that the capital gain you earn when you sell. Why? Because if your property is profitable for you every month, you will never be forced to sell. If the market tanks and you can't get as much for the property as you prefer? No problem... you can hold it for a few more years, collecting profitable rents the whole time.

Don't pay attention to the cash flow - This is an extension of the point above. There's a temptation to focus on the potential capital gain when deciding whether to buy or not. But it's really more important to focus on the property's cash flow. They say 'cash is king' for a reason. Maybe, for strategic reasons, you decide to buy a property which has negative cash flow. That's fine. But you have to be certain you will be able to handle putting out that amount of cash (or more!) for the time you own the property. Better to know about the commitment you are making up front, before you get yourself committed to a situation you can't endure. Just read the newspapers lately for some examples of why that is good advice.

Not prepared to manage renters - If you are going into the business of managing renters, it should go without saying that you need to be of the proper temperament for managing renters. Alas, many landlords find out too late that they are just not cut out for it. The timid and easily bullied should think twice about applying for this job. Landlording bulletin boards are filled with horror stories about collecting rent from tenants and dealing with damage. Read up on them before getting into the business, and ask yourself "Is this for me?".

Bad timing - Nothing like buying at the market peak to take the wind out of your sails. The news media is awash in stories of investments gone bad and miserably under water. Unfortunately, there's not a whole lot you can do about timing, regardless of what anyone tells you. That being said, if you do your homework, you are less likely to be hurt (or will at least limit the damage) if the market turns against you.

Lack an exit strategy - While we advise you against planning on quick flips, we do recommend that you spend some time thinking about the end game before you make the investment. Don't count your chickens, but do think about the scenario in which you would like to sell, and then evaluate it for whether it is realistic or not. For example, there is a Pennsylvania town called Centralia which is located directly over a coal mine. For decades, the coal mine has been on fire. Gradually, the town has withered, as the government tried to get all of the residents to move so that the town can be closed. You might be able to get a good deal on an investment property in Centralia... but that doesn't mean you should buy it, since who in their right mind would ever buy it from you?

Real estate is a 'buy-and-hold' game, not a 'quick flip' game. You should aim to buy low, make money while you own the property, and then, years later, sell high. In other words, Get Rich Slowly. It may not have quite the same allure as getting rich quick, but you have to admit, it still has a nice ring to it!

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