I see this misconception happen all of the time. “Well my realtor says ____________ about the market.” That blank is always something like “Buy now or you’ll miss out” or “The market won’t go down anytime soon” or my favorite “This isn’t 2008.” Yet, guess what? Realtor’s were saying that in 2008 as well ha.
Now, before I go any further there area small percentage of realtors that go out of their way to learn from people like me and they do understand the market, but I would say that is less than 5% of realtors. These realtor’s are amazing assets to you and you should cherish them. I would assume most of you think this is your realtor, so I am going to show you a test I recommend people do with any realtor before you work with them any further later in this article.
I want you to understand 2 key items
Realtors have no formal real estate training
I know what you’re thinking… “What do you mean Ken they go to Real Estate School and they sell property all day long. How can you say they have no experience in real estate.” I will sit here and tell you they have no experience in real estate. In school, they are taught about contracts, rules, and regulations. They are never formally educated about the actual markets. They are taught to price units, obtain customers, and commission splits. This is the exact thing they do in their daily job. They don’t forecast market cycles, follow economic trends, and most don’t even own rentals themselves.
They work on commission
If you went into a car dealership would you ask the car salesperson “Is this a good time to buy a car?” or how about “With the increase in unemployment, do you think the price of this car I am considering may go down this time next year?” Of course you wouldn’t ask them that because you know that they don’t have a clue on how the economy will relate to car pricing and also they are going to tell you “Yes, it’s a great time to buy a car.” every time. Why? Well of course Ken they get a COMMISSION on the sale, so they will never tell you not to buy it! Well I am here to tell you realtor’s are the same way. I can’t say I blame them. This is their livelihood, but all too many times people believe their realtor’s perspective on whether or not now is a good time to buy and their perspective has a big motive to be skewed. Or frankly, they don’t follow real estate cycles and just don’t know. The same reason a car salesperson doesn’t follow car pricing trends based on the future of the economy.
So where does that leave you?
Well to start, you need to be educated and do your own research and not blindly trust people when they tell you it is or is not a good time to buy. If you don’t know how to run your own numbers I discuss this in my book “The ABC’s of Buying Rental Property.”
Secondly, an educated and honest realtor can be a great asset. This person will only send you true “deals” they come across and will really be educated on the market. Now I always say “Trust, but verify.” So you will still always want to run the math on the deals they send, however you need someone like this on your team.
How to Know What Kind of Realtor You are working with…
This is a test I recommend you put your realtor through upon hiring or continuing to work with them. I want you to find a property where the numbers obviously don’t work. It’s clearly overpriced or it needs too much work and you know it. It’s so obvious. Now, I want you to send this property to your realtor. Email them stating you really feel like the numbers could work at this property and say how excited you are. Tell them you are ready to make an offer on it, but first want their opinion on if it’s a good deal, since they are the expert. See what they say. If they tell you they don’t think it’s a good deal and you should walk away then you have someone on your team. If they confirm to you it’s a great deal and can send an offer letter over, you know they only care about their commission and you need to move on. 95% of you will be disappointed.
Primary markets as most of you know are suffering. What we are seeing is a lot of secondary markets by the big cities are heating up as the cities cool down. For example, as Washington DC cools, Virginia Beach heats up. Same with San Francisco -> Sacramento and Los Angelis -> Riverside. The truth is, these more expensive cities were already at their tipping point prepandemic. The pandemic only accelerated it.
The cities experiencing the biggest drop off in rent prices generally fall into two categories: -Markets where the local economy is heavily dependent on tourism (Miami, Orlando) -Expensive markets (San Francisco, Seattle, New York, San Jose)
Year-Over-Year Rent Growth: San Francisco & Bay Area Continue Downward Spiral
Rents decreased 0.3% in August on a year-over-year basis, unchanged from July. Of the top 30 markets, year-over-year rent growth is negative in 16 markets, a slight improvement from the 17 negative markets in July, with Raleigh (0.4%) flipping positive in August.
The three markets with the largest year-over-year rent declines remained unchanged from July: San Jose (-5.5%), San Francisco (-5.1%) and Boston (-2.5%). Rents in San Jose and San Francisco have continued to deteriorate rapidly since March, while rents in Boston have remained steady. Since March, overall rents have declined by $143 in San Jose and $97 in San Francisco.
-Among the markets that flipped negative on a month-over-month basis in August were Austin (-0.3%), Tampa (-0.2%) and Seattle (-0.1%). Tampa fared the worst, declining 100 basis points in August on a MoM (Month over Month) basis.
-Tampa is one of 12 markets where Lifestyle rent growth is out
performing Renter-by-Necessity rent growth. The Lifestyle asset class in Tampa is likely benefiting from an exodus out of New York, where renters are used to extremely expensive rental prices, causing them to be unfazed by the price of a Lifestyle rental unit in Tampa.
-The downward pressure on rents in Austin could be from the large amount of completions in the last few months. As of August, roughly 4% of total stock had been delivered in the past year. Another factor that could be affecting the declining rents in Austin and Tampa is the increasing homeownership rate.
-While job growth in Nashville and Raleigh was significantly affected by the COVID-19 pandemic, these two markets fall in the top half of our Matrix top 30 markets for YoY job growth as of June 2020. Job growth in Nashville as of June 2020 was -3.2%, while job growth in Raleigh was -4.8%.
Long Term Impact
As far as longer-term impacts, the pandemic’s effect on rent prices will depend heavily on how quickly the economy is able to recover specific to each area. There are indications that the recovery will be more drawn out than many had initially hoped, making it likely that we’ll see a stagnation in rent growth or even a downward trend because due to large unemployment numbers, families will begin looking for more affordable housing. We may also see a significant slowdown in new household formation, as more Americans move in with family or friends to save on housing costs.That being said, we will see many homeowners become renter’s as well.
These trends could mean that competition will remain tight for rental units at the middle and lower ends of the market, while luxury vacancies get harder to fill. As long-term remote work gains traction, we may also be seeing the beginning of a shift away from expensive downtown markets and toward more affordable suburbs.
In the current atmosphere everyone is a real estate investor. A simple search on Instagram will land you with everyone from realtors to marketing gurus pretending they know how to invest in real estate. The truth is, the last ten years in real estate have been easy. Basically anything you bought increased in value and it was really hard to make a bad deal. Yet, here we are in 2020. Real estate investing is going to get a bit trickier and take it from me you want to have a true “expert” leading you in your journey. I wanted to share with you some common mistakes I see investors making when they first start out in real estate.
1. Ignoring the Numbers
The numbers are the MOST IMPORTANT part of any deal. So many times I hear of investors trusting their realtor or a friend who knows real estate. When you purchase any property it is a big investment and there is risk involved. That risk decreases significantly with the more education in real estate you have. Any deal you make you should personally crunch the numbers on to ensure it is cashflowing. I go over this step by step in my book “The ABC’s of Buying Rental Property.”
The truth is Many people miss the costs associated with real estate and are overly optimistic on their numbers. I’ve seen first-time investors run the numbers on a new deal and miss critical costs like Cap X or property taxes on their spreadsheets. You need to know all of the costs associated with a property and the actual rent you can collect from capturing other similar properties in your area.
2. Not Properly Screening Tenants
Having a tenant is having a business relationship with someone and is not just putting someone in a unit. I see first time landlord’s rush on this critical piece, but here are the standards you must check before moving someone in. I listed them below, but go in more detail on this here.
1 HEALTHY CREDIT HISTORY
2 CLEAN BACKGROUND CHECK
3 CLEAN EVICTION HISTORY
4 STABLE EMPLOYMENT HISTORY
5 SUFFICIENT INCOME
6 POSITIVE LANDLORD REFERENCE CHECKS
3. Repairs and Maintenance
No matter how nice the property is there will be maintenance issues that arise. Most new investors don’t calculate this. An experienced investor will know to put aside at least 2% of the value of the property every year to account for any of these potential costs. This can at times kill a deals profitability, but it has to be considered. Finding a good, affordable, and reliable handyman is someone you need to have on call in these situations to mitigate the cost.
4. Getting Too Attached
Do not let your heart rule on any of the decisions when it comes to buying or selling a property. If you let your emotions get involved you could end up making the wrong choice. I never get attached to any property I am looking at. I buy based on the numbers, it’s as simple as that.
I have seen this too when people already own a property and go to rent it. They are worried about the tenant staining the countertops, or scratching the wood floor. Once again, don’t be emotional. Get a nice sized security deposit to cover these incidents, because they will happen, and move on. Your rental properties are your business and you can’t get attached to them.
5. Not Knowing the Market
The worst deals are made when someone who isn’t a local comes in knowing nothing about the market and starts purchasing. I always advise small investors to stay in their local markets. You know that market better than anyone. You know what areas are good to be in and where you would run. If you are going to invest in a market you are not extremely familiar with then go there and get to know the area. Also, chat with people in the community to better understand the pros and cons of that area.
If you’re looking to get into real estate investing you should know it’s not easy. It’s going to be a whole lot of work and there are going to be a whole lot of things you need to watch out for.
Make sure you know the numbers and that you’re willing to walk away from the deal if it doesn’t work out for you based on those numbers. Rushing in could cost you a lot of money, but knowing what you’re doing could make you a lot of money.
Welcome to the real estate strategies podcast. I’m Ken McElroy, and I’m here to give you creative ideas on how you can get started or continue your journey in real estate. Each week, we will bring you inspiring and informative conversations with successful people and their path to obtaining or investing in real estate. Enjoy the episode.
Hey guys, welcome to the real estate strategies podcast with Ken McElroy. So the following questions are questions that we got through our social media channels. So every once in a while, you know, we have guests, but I think it’s always good to grab some questions from Facebook and LinkedIn and Instagram and all the different so and YouTube for sure. And we do look at those and we do like to use them on things like a podcast or even a video. So thank you and keep them coming. So this first question is from John, one of our premium members around mortgages and tennis dot Pang. So, John, thanks for this great question. How can you manage to stay afloat? If your tenants aren’t paying and you cannot evict them and you still own mortgage, this is the million dollar question. So here’s the thing guys. So as you guys know, we have about 10,000 tenants and the regulations have changed.
First. Trump said, Hey, you can’t evict anybody till October. And by the way, the courts were closed. Anyway, the second thing is now the CDC came out and extended that to the end of the year. And they made it for all tenants, not just ones that had government sponsored mortgages. And so as a landlord, it became very, very difficult for us because we had massive uncertainty on whether or not our tenants were going to pay or not. As you guys know, I did a few videos on Cassius King. So what we did in March, because we didn’t know who was going to pay in April. We didn’t know who’s going to pay in may, June, July. Now, as you guys know, with the unemployment benefits going away at the end of July, we were very concerned about August and September rents, but here’s the reality of it.
The majority of our tenants are paying the majority. We put our tenants into three buckets, bucket. Number one are the tenants that are paying rent. And that is the overwhelming majority. Well, over 80%, the second bucket are the tenants that are coming in and they’re actually communicating with us and we put them on a PTP program or a promise to pay program, an actual real agreement that we have between the tenant and us. It’s modified from the actual lease. That part has gone very, very, very well because the last thing we want to do is boot anyone out. That’s the last thing we don’t want to kick. We don’t want to boot anyone out of the home because if we do, then it’s vacant. We’d rather have these people in there because we’ve screened everyone. We know exactly who they are, where work, what they made before they even moved in.
So the last thing we want to do is displace anybody while we’re all going through this massive life correction. And so the third one category, however, is the most difficult. They believe that they don’t have to pay and they’re not communicating with us. And that’s a lot of people. So those are the folks that everyone’s concerned about. And unfortunately, they’re the ones that are making all the noise and all the media is talking about. But the reality is in our portfolio, it’s a really small percentage of people while we were concerned in April, may, June, July, and August, the rents have come in and we had enough to pair mortgages. And as I said before, Cassius King and we, he, as a company has put in gather massive reserves of cash in anticipation of renters, not paying so that if, and when they don’t, then we can pay the mortgage.
And we don’t go into technical default with the lender, even though there is an Avenue called forbearance that we could utilize with our lenders. We never wanted to get into that position. And we always wanted to pay our mortgages. So two things, one, we manage our tenants really tightly. We communicate with all of them, almost all of them are paying. And second, we had enough cash reserves where we never even got close to not paying a mortgage. So Cara asked this question and Carol is one of our premium members on Ken macra.com. And this is a question around Cassius King, and I did a video on this. So Kara, thanks for this question in your newsletter a few months ago, you said Cassius King, do you still feel that way? And why do you feel that way? Since so much of the cash is being printed, Cassius King, because you know, you need cash to be able to cover your expenses.
You need cash to be able to cover your payroll. You need cash to be able to cover your mortgage, all of those things. So yes, I still feel like cash is King. Now the real, the real question behind this question is when is inflation hitting? That’s actually what they’re really asking and is cash trash. Cause that’s what a lot of people are concerned about. Well, the answer is yes, I do believe in the longterm. We’re going to have massive inflation because the money that’s going out to fund businesses and people it’s definitely necessary. It’s definitely helping, but here’s something that’s happening. People are actually saving because there’s a lot of uncertainty in their futures. So a lot of that money that people have gotten they’re actually hoarding right now. So if you look at savings rates, you’re going to see that there are all time highs and so cash in circulation when it actually is used to buy things, that’s, what’s going to create inflation.
And so I do believe that there’s going to be a massive lag. So for us, we’re holding on to cash right now so that we can cover our bills, cover our mortgages and make sure we make our payrolls. But in the long haul, I think this is a great question because I do believe that we’re going to have massive impact [inaudible] and this is exactly why the federal reserve just change their policy on the inflation rate recently, just last week. So be looking for inflation over the longterm, but I don’t think that you’re going to see it in the short term. So my suggestion, you, you is just have cast too. Get through this. Let’s reopen the economy, let’s get things going again and lets everything settle out and then be very careful on how much cash that you have. So this question on the housing market crash came in from miles and miles as a premium member with kid MACRA, council miles.
Thanks for this great question. I really like it. Here we go. If the housing market is going to crash, why does my realtor keep telling me home prices are up and we’ll keep going up over the next few years. So I really like this question. I personally don’t think most realtors are that informed as to what is happening in the economy. And I think that they work largely for commissions and they’re trying to sell you a house. And of course, they’re not going to tell you that something that you’re going to buy is going to go down later. I don’t know if they even have that in vocabulary. They’re always going to tell you it’s going to be going up. So, but real estate always goes up and always goes down. We know this, just look at the cycles over the history right now we have houses have that have risen in most cities to all time highs in some cities it’s not, but in most cities it is.
And right now we’re at over a $304,000 average home price. Now we haven’t seen that since 2008. The reason that I believe that housing prices are up is because of what I’ve already talked about. Numerous times inventory is the lowest it’s ever been since it was ever recorded. Right now there’s only 1.5 million homes on the market. Then there’s barely over three months of inventory in all markets across the country. So this inventory issue or lack of supply is what’s driving prices up, but here’s the thing to watch. And this is why I disagree with your realtor. I believe that everyone, because of the uncertainty did not list their homes. They’re hunkering down. There’s a lot of uncertainty in a lot of households all over the place, both with people that own homes and that are renters. And they’re all trying to figure out what they’re going to do next.
They’re all trying to figure out where they’re going to work. Whether they can pay their rent, whether they can pay their mortgage. In fact, there’s almost 9% delinquent mortgages, almost 4 million people are delinquent right now in their mortgages. So I believe that you’re going to have a massive amount of inventory in the next 12 to 18 months as the eviction policy burns off. And you’re going to have a lot of people moving around and trying to figure out what are they going to want to move next? So that’s going to add a lot of inventory to the market and what that excess inventory is going to do. It’s going to drive prices down and the demand is going to be lower because there’s going to be a lot of financial uncertainty. As we start to see these businesses go out. As we start to see a lot of businesses fail, we’re already seeing it.
We’re already seeing businesses file bankruptcy, big, big names, file bankruptcy. I think when the dust settles, then housing prices are going to be significantly. Lower. Banks are going to own a lot of real estate and there’s going to be a lot of listings and there’s going to be very few people chasing a lot of inventory. That’s why I think over the long haul that prices are going to drop. So this question came in from Tom, one of our premium firstname.lastname@example.org about what is MC companies doing for this downturn? What are some of the operational things that we’re doing? So, Tom, thanks for this great question. What is the MC companies, which is the company that Ross and I own doing right now to prepare for the downturn? So a few things. One is we talked a lot about cash. And so we told all of our investors that we were going to hold one quarter distribution.
And so while that was a tough decision, we have an entire quarter of distribution that we’re holding and we let everyone know this back in March. We said, we don’t know what we’re going to collect over the next four or five months. And so we held the first quarter, then we’re just now releasing the second quarter and we’re going to hold the third quarter while we see what the fourth is going to have in store for us. Cause we just don’t know. We don’t know whether or not our tenants are going to change their minds and not pay. And we don’t know if we’re going to have some mortgage issues or our bill paying issue. So that’s why we’re holding that money. And so again, cash is King, all of our investors, well over a thousand people, we’re all in favor of exactly that strategy because obviously none of them want us to default on the mortgage and for us to lose the property back to the lender.
So that’s the first thing. The second thing that we did is we, we rolled out a whole bunch of policies and procedures for our employees to make sure that they were all safe, obviously the PPE programs. And there’s a number of other things that we did for our staff. We want to make sure everyone’s safe around all of those things. The other, another thing that we did was I eliminated all marketing and all renovations and all cap backs or capital projects. So as an example, during all of this, the last thing we want to do is renovate an apartment and try to get $200 more per month. So each renovated apartment costs about 15 grand. And so we were doing hundreds of these all the time. For years, we’ve been doing a renovation value add type program. And so you could imagine it’s millions and millions and millions of dollars, but we felt like let’s, don’t do value ads.
Let’s, don’t be pushing rents right now during all this uncertainty. So we eliminated all the cap ex around renovations, but I also did it around everything else. So anything that was health and safety and anything at all, I said, we must do any capital work that was maybe optional, like painting a building or landscaping or a children’s player or a dog park or buying fitness equipment or buying new pool furniture, whatever it might be. All of those things had to go through me. And by the way, those that’s millions and millions of dollars that we spent every year to maintain these properties. So I stopped the renovations and I stopped all that cap ex instead of health and safety. In addition to that, because people weren’t moving around, we eliminated all our marketing costs and that saved us millions and millions of dollars because like every business we’re spending a bunch of money trying to attract new residents.
And so we’re always spending money on the internet and ads and things like that to try to get traffic to the properties so we could keep them full and lease. But during this pandemic people weren’t moving. And so we eliminated all our marketing and advertising and that saved millions of dollars. The last thing that we did is we tried to go virtual immediately and we did, by the end of April, we went virtual on rent collection on maintenance requests and on leasing. And we started to use chat bots and chatbots basically are the same kind of thing. When you call up, let’s say a Schwab or American express, they say, press this button for this, press, this button for that. And you basically could eliminate a lot of in person conversation and actually help the person on the other end align, get to where they need to go quicker.
And so we started doing all these chatbots and also virtual leasing. And we’re rolling that out right now and our occupancy, believe it or not is higher than when we started by 1% for when we started this in March, because of all these little programs that we’ve rolled out. However, our collections are lower, but our occupancy is higher than when the pandemic started, but our collections are lower because obviously people are going through a tough time and they can’t all pay. So those are just some of the things that we’re doing as a company. Great question. So keep those questions coming in. I hope these answers were helpful to you guys and thank you once again for full show notes, check out Ken mcelroy.com. If you enjoyed the episode, then jump on iTunes, subscribe and leave a five star review. Also, if you could check me out at Ken macaroni official on Instagram for daily real estate advice, see you next week.
People often times miss this very important question. They try and measure the cashflow of the future value, or they say they don’t mind feeding it some money each month. To be direct, it is only a good investment if it cashflows based on the rents and expenses of today, not the future rents you think you will get five years from now. Cashflow is the most important thing when deciding on a rental property.
2) Property Taxes
Property Taxes are an expense that varies widely in an area. Once again this goes back to cashflow. If the property taxes are high, but it’s a good area and you can charge high rent then it may be worth it. You always have to look at your profit minus your expenses to really see the cashflow potential.
Consider the quality of the local schools around you. Good tenants with kids normally want them in a quality school district.
No one wants to live in an unsafe place. Sure, most areas look safe during the day, but make sure to take a drive around on a Friday night. See if you feel safe in that environment. Also, talk to the neighbors and ask them about criminal activity in the area.
5) Job Market
Locations with growing employment opportunities attract more tenants. To find out how a specific area rates for job availability, check with the U.S. Bureau of Labor Statistics (BLS). Too many times investors don’t take this into account. There is inexpensive real estate in some areas, that would cashflow if you had a tenant. The important word there is “if”. Jobs create tenants, so make sure there are jobs in that area and that the employment rate is growing and not declining.
Tour the neighborhood and check out the parks, restaurants, gyms, movie theaters, public transportation links, and all the other perks that attract renters. The more amenities an area has the easier it will be to rent.
7) Is It Somewhere People want to Live?
Investors get very wrapped up in price and often forget about the demand in the area. You will have high vacancy if it’s not a desirable area for tenants to live. A desirable area typically has a lot of the amenities above.
8) Average Rents
Rental income will be your bread-and-butter, so you need to know the area’s average rent and what the comps to your property are charging for rent. Zillow is a good place to start to find this out.
9) Natural Disasters
This was a big lesson I had to learn, but you don’t want to invest where there are high rates of natural disasters. Hurricanes are an especially expensive disaster and take it from me, a hurricane will eventually hit your property if you’re in a hurricane area.
Investing in real estate is a great way to obtain financial freedom, that said you can’t just go into it blindly. You have to do it right. In my book, “The ABC’S of Buying Rental Property” I walk you through what you need to know, so you make the right investment choices and maximize your profits.
A correction is coming to the real estate market and I expect to see it early next year. Each downturn is very similar to the next. We have high unemployment, and housing prices that are extremely inflated. Yet, people keep asking me, “Ken how can you say it’s going to crash when prices are skyrocketing?! I am going to miss out on the buying opportunity if I keep waiting!” So let me put a few things into perspective for you. This is a supply and demand issue. That is what inflates and deflates prices. Inventory vs demand for housing.
First, let’s discuss supply. You have the supply of properties being lowered for a couple of reasons. Reason One, some people are afraid to move. Either because of COVID itself, or the lack of certainty around their job or income. A lot of people are staying put to wait and see what happens. Reason Two, Banks are providing one year of mortgage forbearance. This means the owner does not have to pay their mortgage for one year, and the balance goes on the back end of the loan. Think about it, If someone is out of work and the bank is now allowing them to live mortgage free for one year (ending in April 2021) that person is most likely going to take the forbearance and hope they return to work within that timeframe. These issues are creating very low supply.
Now let’s discuss demand. Demand is about the same and possibly a bit higher with people trying to get out of cash or relocating from a larger city now that they can work remotely, but these buyers are competing for a limited supply, which is what is elevating prices.
Next year I see this house of cards falling. Banks can’t keep giving forbearance on mortgages and I believe most people will still be out of work. When this happens a supply of homes will flood the market and that is when it will start to correct. To see this in more detail please watch the video below!
If you missed Monday’s email I am going to be going over 4 things you need to be doing now to be ready for the opportunities that will be created because of Coronavirus. I want to be clear I wish this wasn’t happening, but while this is very personal to a lot of people (including me and the employees in my company) this is another recession. Which many of us have been through before. There have been 4 global recessions since World War II and we will all get through this together. While it will create opportunity for some, it also has the potential to be devastating for others. I am just trying to help you prepare financially for this and to look at the past to prepare for the future.
Cash is king moving forward. Let me repeat cash is going to be king in the next 12 months. Here is why. Banks want to lend, it is in their nature. The problem is if people are out of work or just starting a new job, or are behind on bills the bank cannot lend to them. (Currently, if I am going by generally reported unemployment will be around 30% of people as of now) They can only lend to those who have a steady job, and have been paying their bills. This makes the demand on houses go down. Sure, people will still want houses, but they won’t be able to get a loan to get houses or may not have a downpayment. So when the demand goes down, so does the price of real estate.
Supply will also go up as demand goes down. People paying on a mortgage will either default or decide to sell to move into an apartment. Either way people may be selling their homes and moving to rentals. Just like in 2008. Supply going up and demand going down. More sellers and less qualified buyers.
This is where your CASH comes in. That downpayment will make the bank feel reassured you can take on a loan. You could even be an all CASH buyer if you have something to refinance. You won’t have to even try to attempt to get a loan from a bank for a new property.
There are many ways to get cash. Refinancing, small business loans, etc.
Getting Cash ready is the first thing you should be doing…there will be massive opportunities for those with cash. So should you go get cash right now? Hold on….let’s discuss that tomorrow.
Down payments are a real dividing line when getting into real estate. It is almost like a four year degree. Everyone goes to high school, but not everyone has the endurance to make it through college. Similarly, everyone has a place to live, but not everyone buys a place to live. For most, this is due to having to save up for a downpayment.
I can’t tell you how many times people tell me they want to make passive income on real estate. They tell me that, but then they save no money for a downpayment. It’s too hard. They don’t want to make any kind of sacrifice. Instead, I hear excuses as to why they can’t save up enough to buy their first property. I want you to understand, making passive income on real estate isn’t hard, but you can’t be lazy. You have to save up for that down payment. Now I hear some of you saying. “Ken, I make just enough money to take care of myself and my family. There is just no way I can save money.” You know what I say to that? You’re not being creative enough.
Here are two stories I have for you of people making minimum wage that invested in real estate. The first was a young couple each working minimum wage jobs. They decided to rent a 2 bedroom condo and lease one room out for $500 a month. That helped them have a lower rent payment and they were able to save money each month. They also each cut back on their spending for two years. After two years time they bought a two bedroom condo in Austin. They kept that roommate which was cash flowing them $500 a month and now have purchased their second rental. All because they made the sacrifice of living with someone else. Is that something you could do? Could you rent a room in the place you are living to make extra money each month?
My second story was a 24 year old girl. She was barely making it between student loans and her low paying job. She posted dog sitting services on Rover and used the money to start saving for a rental. She became so busy that she didn’t even need an apartment. She was overnight dog sitting about 26 days a month. She then just paid her friend $100 a month to store her things and she would stay there on a night she was off. Within 2 years she had enough for a down payment on her first home. She now uses it as a dog daycare as well. Which covers her mortgage each month. She is now saving for a second rental.
In these two stories of people I personally know they didn’t have a lot. They had to work really hard to save the money for their first home and rental, but they weren’t lazy. They didn’t expect it to fall in their lap. But what it did is is allotted them the opportunity to get into real estate. Now, they have cashflow whether from a home based business or a roommate to then take that money and continue to invest. To begin is the hardest part, but remember don’t be lazy….but do be creative.
The average person doesn’t know how to get started investing in real estate, and therefore, gets their cash flow from a nine to five job. That scenario is the exact opposite of being financially free, because cash flow doesn’t come from depending on a job you have to go to everyday in order to get paid. Financial independence happens through investing in things that make money for you.
Now, real estate investing may look like risky business to some, and that’s true, because it definitely can be. But just about anyone who works smart enough, and hard enough, can use real estate investing as a way to increase their wealth. Many people ask why they should invest their money in real estate. I say because future retirement based on cash flow from a rental property isn’t a dream, it’s a real-life possibility.
So here are a few of the keys, from a much larger list, to investing in real estate:
• Pick Moderately Priced Properties. Keep in mind that expensive homes in sought after areas like the oceanfront usually have low cash flow returns. You’d be better off investing in a more moderately priced property with a higher cash return.
If you are a premium member of KenMcElroy.com you are invited to join my new Facebook group! I’ll be jumping in to answer questions from you about real estate, leadership, entrepreneurship and life. I’ll hope you’ll join me in this new forum. If you’re not a premium member sign-up here, and then send a request to join us on the inside.
Each week I’ll pull a question from the forum and present it here. Below is this week’s question.
Do you think we’re close to another market crash like in 2011?
“I don’t. That crash was excessive lending that led to poor buying decisions which was all unmanaged. Lenders are much more stringent right now which is good. Right now we might see crashes in Retail RE and possibly Malls and Office (mostly due to direct to consumer) purchasing. Multifamily and Industrial is VERY strong and shows no sign of weakness into 2020.”
A champion and advocate for entrepreneurs and real estate investors, Ken has spoken worldwide at top industry events. With media appearances on television and radio, Ken also host Entrepreneur Magazine’s Real Estate Radio program, where he helps listeners navigate the financial and legal arenas of real estate.