We all have real estate millionaires stories. Did your friend get 10 houses from tax-lien investing and miraculously took over these properties for pennies? Did you hear a real estate millionaires podcast from one of the best marketers, Grant Cardone? I am sure you have seen titles on how to be a real estate millionaire all the time.
“Get rich buying real estate”
“How to become a real estate mogul with only $10,000”
“How to become a millionaire in two years buying one house per month”
“How to get rich with Airbnb”
These “how-to” guides attempt to sell a lifestyle to everyday people striving for more. It is indeed a fact that there are many real estate millionaires stories that are true. I own real estate myself and I am a positive advocate of real estate as an investment. However, I want my readers to proceed with caution when going ALL IN on some of these strategies that we read about.
Leverage. Using borrowed capital for investment, expecting profits made to be greater than the interest payable. The keyword here is “expecting”. When used properly, leverage can FastTrack your accumulation years and put you on the path towards great wealth. The issue with using leverage is the uncertainty of your staying power. If circumstances change, inhibiting your ability to pay your obligation, you can create major setbacks to your financial life. Be sure that any leverage you employ can be supported by your income independent of expected cash flows of your investment.
Vacancies. Inputs used in real estate modeling are extremely bullish in strong economic times. Yes, people will always need a place to live providing you some insulation to economic activity, but rents CAN decline. Purchasing a rental with the use of leverage is completely dependent on your percentage occupancy and rent assumptions. Most rentals can be functional if you get the exact rent you need with zero vacancies. Times get tough however when your home goes unrented. If the home “cash flows” based on only 100% vacancy, or even just 90% Vacancy, it starts to get risky.
Expenses/Costs. In traditional stock market investing, fund fees and paying financial advisors have become a very hot topic. Robo Advisors and do it yourself investors have been popping up everywhere attempting to save 1% per year on their liquid assets. Let’s review the expenses of owning real estate and equate it to the drag of investment fees. If you use Airbnb, you get charged 3% of your booking. Property Managers take anywhere between 6-12% of your monthly rent. They also have zero incentive to keep maintenance costs down as they just want to fix the issues quickly, so they aren’t bogged down. Even if you found a flat monthly fee manager, $100 per month on a $2000/month rent is still 5%. Cleaning fees, HOA, Landscaping, Pool Maintenance, one-off HVACs or water heaters, should all be viewed as investment expenses that reduce your return. If you are not listing the property yourself (opportunity cost of your time here), you also are paying the property manager a leasing fee. The way I see this, before interest expenses and property taxes, you could be paying up to 15% of your revenue per year through your real estate investment.
Regulations. There is a major pushback in HOA’s or sections of cities against AirBnB. If you are purchasing a condo/home relying on big nightly rents, beware of regulatory changes that could drastically impact your investment return. Many cities or subdivisions have imposed minimum 25-day rentals. Underwriting a deal at $500 per night for your vacation rental and now only getting $300/night after the regulatory change can wipe you out.
Real estate can absolutely be a powerful tool to grow your wealth and create long term passive income. If you aspire to dip your toes and add real estate to your investment portfolio, please seek professional help outside of your real estate broker and property manager to confirm your purchase aligns with your long term goals. Follow us @lifemanaged_ for more information.
