Monday, July 07, 2014
With the end of the Houston apartment investment, I think it’s time to bring this blog to a close. I’m still going to be investing in real estate, but it will most likely continue to be via hard money lending and, quite frankly, blog posts along the lines of “I made another loan” and “Another loan got paid off” don’t really make for the most exciting reading. I am going to leave this blog up though, because I think it provides some good reference material. I also am starting a new project that puts into practice the lessons I’ve learned in REI. More details on that at the end of this post.
I started this blog almost exactly ten years ago, in the midst of the big real estate bubble. In those ten years, I’ve flipped a couple properties, owned a couple rental properties, made dozens of hard money loans, invested in a commercial property, and invested in an apartment complex. So what did I learn from my ten year real estate adventure?
Of all the real estate investing methods I’ve tried, flipping provided some of the biggest returns. And truthfully, I actually enjoyed it the most. I really liked taking a property that was beat to hell and fixing it up so someone could live in it again. However, rehabbing requires a lot of work, even if you aren’t the one doing the actual rehab. You need strong planning and organizational skills. You need a good handyman / contractor (or more than one). You need knowledge of the area to make sure you buy in neighborhoods where you can make money. It helps to have a good Realtor you can work with for all your deals and who will give you a discount on commissions. It’s difficult, but not impossible, to flip properties on the side while you hold another job. (That’s what I did.) It helps if your job is flexible and you have the ability to take off at a moment’s notice when emergencies arise. Flipping is a cash-intensive business and you need to have enough money available to cover those unforeseen problems that always come up.
Owning rental property was also fun. It’s nice having checks mailed to you each month, especially when you have good tenants. The problem is finding tenants that will mail you a check every month! Tenants that don’t pay really suck the fun out of the process :-) Evictions are also no fun. I was lucky to find a company that handled the process with minimal input from me (and I never had to actually evict anyone – just threaten some tenants with eviction), but even so, it’s one more thing you have keep track of and worry about. Then there’s the property repair and clean up after each tenant moves out. It’s normal and you plan for it, but it’s still work. Property management companies can help with some of the details, but they cost money and never do things the way you would, nor do they seem to be as concerned about expenses as you are. They can also be quite unresponsive if you only have 1 or 2 properties listed with them. On the other hand, as a rental property owner, you get some nice tax breaks - you can lower your taxes via depreciation write-offs and even delay taxes indefinitely using 1031 exchanges. Still, being a landlord requires a good amount of work, not the least of which is paperwork. It’s nowhere near as easy as people like Robert Kiyosaki would have you believe. You’ll likely need to hire an accountant if you own rental property, or at the very least, use one to prepare your taxes to get the full benefits of the tax breaks.
This is my preferred method of real estate investing – I’ve made over 30 hard money loans. It is perhaps the most passive way to invest in real estate. If you are doing it on your own, the risk is inversely proportional to your knowledge: You will need to become familiar with the real estate values in the areas you are lending in. You’ll need to become proficient at estimating not just the current value of a property, but what it will be worth after it has been fixed up. You’ll also need to be good at estimating what it will cost to fix up, so you can determine the maximum amount you will be willing to loan. You’ll need to develop a network of reliable borrowers. If you can partner with others, as I have, you can mitigate some of this risk by relying on their knowledge and experience. My partner and his assistants do all the tedious work of property and loan analysis and he has his own network of borrowers. He just presents me with the loan deals and asks if I want to invest in them. (In return for his work, he gets an extra 3% of the returns.) Hard money loans are typically short term, so your exposure on any one property is brief, which is nice in a volatile market. But you have to be willing and able to foreclose, finish the repairs, and sell the property yourself, should the borrower fail to pay. With hard money lending, you give up pretty much all of the tax benefits associated with owning rental property. On the other hand, you still get the joy of receiving monthly checks in the mail. I'm continuing to invest in hard money loans and will likely continue to do so for years.
I’ve only had one experience in owning commercial property (not counting apartment complexes) and it wasn’t a good one. I did not lose money, but I did experience what it was like to deal with partners whose investing objectives were not the same as mine. The property I was invested in was being rehabbed and I was out of the investment before it ever was completed, so I don’t know how things turned out. An advantage commercial renting has over residential renting is that many commercial leases are “triple net”, meaning the renter pays for all property taxes, maintenance, and insurance. Commercial renters also tend to stay longer and sign longer leases than residential renters.
Investing in apartments is probably my second favorite method of real estate investing. To get into this, you will most likely need to partner with other investors, so it’s important to find ones that share your goals for the investment. Location, as in all real estate investing, is the key here. The economy plays a huge role as well. If the economy tanks, as happened during my period of apartment investing, your apartment can go into the red real fast. Depending on the length of the economic downturn, it can take years for things to turn around and you may have to inject more money into the property to keep it afloat until the economy recovers. You will also need a management company that knows how to run and market apartment complexes - handling all the details of a large apartment building is a full time task for several people. And, of course, they will need to get paid as well, reducing your profits. Buying and selling apartment complexes is also not as easy or quick as selling single family homes, so it can be harder to bail out of an apartment investment if you need to. Really, investing in apartments is more like investing in a business than in real estate. You’ll quickly learn how to read financial statements, if you don’t already know how.
All in all though, I am convinced of the benefits of investing in real estate. Besides the tax benefits to owning rentals, real estate is a unique investment in that you can make improvements to a property to help you sell it or rent it at a higher price and increase your ROI. That’s something you can’t do with stocks or savings accounts. Real estate also provides more opportunities to invest money in under-priced assets than investments such as stocks do. In real estate, your money is made when you buy, not when you sell and lots of people have lots of reasons for selling properties below market value. Real estate is also one of the best vehicles for generating cash flow and ...
The importance of cash flow is the biggest lesson I have learned from all my real estate investing. You need positive cash flow when renting property and you want positive cash flow when you invest your money. Ten years ago, my idea of investing was to either put money in bank and watch it accumulate pennies in interest or invest in stocks and hope the price per share went up over time. Now days, I look for two things in an investment: the amount and sustainability of the cash flow it gives me and the safety of my original investment amount. Real estate investing, done properly and with careful analysis, is one of the best options for maximizing both those criteria.
My journey into real estate investing started when I picked up a book by Robert Kiyosaki a decade ago. I now see the flaws and gross simplifications in his arguments and have, in some respects, outgrown him. However, he did instill in me one important lesson on how to think like the rich – I no longer look to buy things outright. I look for investments that will give me cash flow that I can, in turn, use to buy things. I want my money to work for me. If I buy some doodad outright, my money is gone. If I invest and use the cash flow from that investment to buy something, I not only get that doodad, but I still have the original principle for use later and can buy more things with the cash flow it will continue to generate. That’s how to get rich – by buying assets with your money instead of buying doodads.
Ten years is an eternity for a blog. Almost all of the other real estate bloggers I used to read have disappeared. They either got flushed out during the real estate crash or discovered that real estate investing was harder than they thought and it is not a means to get rich quick. I often wonder what they are doing now. Did they learn anything from their experiments in REI? If they did, what was the lesson they learned? Was it the same one I learned?
My next project is one that will likely take several years to come to fruition: I plan on buying a Tesla Model S using only passive income. Well, I’m planning on paying a 20% down payment but the overall goal is to have a large enough passive income stream to cover my car payment. I’ll be blogging about that, as well as general financial topics, at my new blog – RoadTo A Tesla. See you there!
Posted by Shaun Stuart at 6:00 AM