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Optimal Finance Daily - Financial Independence and Money Advice
3368: 7 Lessons I Learned From Failing at Real Estate Investing by Jeff Rose of Good Financial Cents on Investment Lessons
00:10:21
Jeff Rose shares the hard-earned wisdom that came from diving headfirst into real estate investing without the right knowledge, mindset, or passion
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This is Optimal Finance Daily. Seven Lessons I Learned from Failing at Real Estate Investing by Jeff Rose of good financialsense.com A lot of people make money investing in real estate, but there's the real version and the TV version. I fell for the TV version based on little more than a book from a self proclaimed real estate superstar. I blazed forward and bought my first real estate investment property. It was a complete failure. I learned seven lessons from that failure and now I'll share them with you. 1. If it sounds too good to be true, it probably is. And it was. Have you ever heard of a guy named Carlton Sheets? He was one of those how to get rich in real estate without really doing anything gurus from back in the 1980s and 90s. I wouldn't be surprised if you don't know anything about him. He hasn't been around much lately. He had a series of convincing TV infomercials as well as paid real estate investment courses and books and was quite successful for a number of years. My father in law bought me one of his books and after reading it I was hooked. I was going to be a real estate millionaire. Look out real estate moguls. Jeff Rose is on your tail and will be passing you in the fast lane in just a couple of years. At least that's what I convinced myself. 2. Stick with what you know and love other than the book by Carlton Sheets the the sum total of my accumulated real estate investment knowledge was zero. I had never actually invested in real estate, at least not apart from my own home. But if you've ever seen one of those glitzy TV infomercials about how to get rich, you have to admit that they're pretty convincing. I'm a positive, high energy guy, and I figured that if anyone could make this plan work, it'd be me. But there's one problem with my thinking. Real estate investing is not exactly my thing. And that means everything financial planning is, and I'm all over it. That may be the biggest lesson I learned from failing at real estate investing. Always stick with what you know and love and leave the other stuff to other people. Number three, True deals are harder to find than you ever imagined. My father in law decided that we'd go into this real estate investment venture together. I was a seasoned money guy and my father in law is an accomplished handyman. It was the perfect tandem for investing in real estate. I studied Carlton's book and knew the formula for buying a winning investment property. Buy a property from which you can reasonably expect to receive a monthly rental income equal to at least 1% of the purchase price. We found such a property. The asking price was $120,000, and market data indicated that it could be rented for 1,200 per month. Exactly 1%. We were on our way, but TV infomercial formulas and reality don't mix. We purchased the property with a $500 earnest money deposit. I then discussed the deal with my CPA himself, a real estate investor with more than a dozen properties. He quickly told me that we overpaid for the property. That was a direct blow to the stomach as well as my ego. Since we just closed on the property, he recommended that we get out of it any way that we can. With the cooperation of our real estate agent, we were in fact able to void the deal. But I learned something else from my CPA friend. Finding bargain real estate for investment is not at all easy. Since every other real estate investor is also looking for bargains. You'll never find them in the usual places. More on that in lesson six. Number four. Never overpay for a property. This one is huge. You need to pay much less for the property than its true market value. Not only will that provide the profit on the sale, but it will also afford you some protection in the event the property has costly and unexpected repairs. Cash flow is everything, and you better calculate it right the first time. Forget about the 1% rule, the monthly rental should actually be a lot higher. My CPA friend informed me of this after we closed on the property, which is when I bothered to actually ask him Cash flow is also critical to the success of any real estate investment. The rent has to be sufficient not only to cover the monthly cost of financing, property taxes, insurance and landlord paid utilities, but it also has to provide a profit as well as an allowance for some of those unexpected expenses. Expenses like a new roof or furnace. But who'd have thought? Definitely not me while I was still in my expert Phase six Looking for Deals in All the Wrong Places when you're looking to purchase investment real estate, you won't find truly good deals in the newspaper classifieds where I found my deal, or even on the local multiple listing service. It's more likely that you'll find a winning property through word of mouth and other backdoor channels. It's often a matter of locating distressed property sales before they hit the market. The problem is that real estate investment is very competitive. You're never the only person out there looking for the next big deal. For that reason, all of the usual places you might find property are quickly picked over. Few that there are successful real estate investing requires a lot of patience and investment of time. You have to do a lot of digging and get to know a lot of people in order to find the deals that will make it work. And number seven Never let greed control your actions. So many people have gotten wealthy by investing in real estate that it's hard to ignore the opportunity even if you know nothing about it. It's called greed, and the combination of big profits and slick TV infomercials can make it too good to be ignored. But that's never a decision that's based on financial reality or even a reasonable evaluation of your own skill set. It's based purely on greed. You see big money being made and you want in. But wanting in and being able to make it happen are two very different things. From now on, I'll stick to what I know and leave the promise of instant riches to the people who write books about it. You just listened to the post titled 7 Lessons I Learned From Failing at Real Estate Investing by Jeff Rose of GoodFinancialSense.com Imagine you're a business owner who.
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There are so many ways we can invest our money, but I think we need to pick the ways that best align with our unique skills, preferences and circumstances. This article reminded me of a breakout session that I participated in at a Camp Mustache event a few years ago. Four of the attendees, including me, opened up our books and showed the group our finances in the form of case studies. We outlined our income, expenses, investment strategies, and overall plan to reach financial independence. And then the audience was welcome to poke holes in our plan or offer suggestions for improvement. Two of the other case studies had real estate investing as the crux of their strategy, and despite the fact that their yearly salaries were half of what mine was at the time, the they were still projected to reach 5 faster than me due to their aggressive investment in real estate. It made me reflect on my own investment strategy and question if I should be investing in real estate like they were. So I grilled them on how they were doing it, how much time they were putting into it, what stressors they were experiencing that they didn't expect, how they were navigating the risks, etc. Etc. And I walked away from those conversations perfectly content with my decision to not invest in real estate. Reaching 5 faster isn't a good enough reason for me to add the additional stress of an investment style that doesn't align with my unique skills, preferences and circumstances. Remember, personal finance is personal and reaching financial freedom is not a race. And that will do it for today. Have a great day and start to your weekend. Thank you for listening and I'll be back here reading to you tomorrow where your optimal life awaits.