Cheaper is not always better!

Why Buying Cheaper May Come with a Hidden Price Tag
by KEN CORSINI on SEPTEMBER 7, 2012
 


I’ve been travelling and speaking for the last week and was reminded of a very important principle during my travels. I openly admit that when it comes to travelling, I like to find bargains on hotels, cars, etc. On this most recent trip I booked my rental car through one of the travel discount sites that allow you to select the provider based on comparative pricing across the different brands.  Never one to shy away from good pricing, I selected the lowest priced rental car provider in hopes of saving a few bucks. Of course, last Friday when I was dropped off by the shuttle to pick up the car, I immediately regretted my decision to rent from this company. Not only did the line take over an hour, the car I was given was scratched up and in less than stellar condition.

As I stood in line contemplating my decision to save an extra $3 dollars a day, it dawned on me how applicable this scenario is to real estate investing. In fact, when I finally got to the counter to sign paperwork and get the keys, I asked the attendant why they were so busy. He fittingly answered, “Aw man, it’s because we have the best prices!” Indeed, they did have the best prices, but I found myself wishing I had paid just a little more money for a better experience.

The same goes for investing. I’ve talked to a number of investors over the last few years who called my company specifically looking for the lowest priced property possible. They had heard that you could buy properties in Atlanta for $30,000 and wanted to know how they could get one.  While it is true that there are distressed properties in certain parts of Atlanta at this price point, the better question ought to be where  can I find the most profitable properties with a solid and consistent ROI?

The problem I’ve found with buying solely for the lower price point is there are too many negative characteristics to the investment that don’t initially pencil out on paper. Similar to my experience with the rental car, many of these nuances don’t show up until after a property is purchased.

Here are just a few of the concerns I personally have with buying at the lowest price points:

Super cheap properties often equal older housing stock. Old properties typically require more ongoing maintenance that can kill future cash flow.
Low end properties are typically harder  to lease.
Unfortunately, there is simply a difference in the caliber of tenants that rent in the lower rental amounts as compared to those that rent in the average and higher rent range. This typically means a higher rate of eviction and turnover.
Another highly correlated factor with lower priced properties is crime. Intuitively, the cheaper the properties, the worse the neighborhood and higher the crime rate. Most investors don’t factor cleaning graffiti off of their rental properties or replacing stolen A/C units when developing a pro-forma.
Another less tangible factor in lower end homes is the future resale of the property. Many of the lower priced properties today are located in neighborhoods that are mostly rentals and as such, may be difficult to sell at some point in the future …. At least not to a retail buyer and probably not in line with the appreciation rate in the market.
I realize I will probably get a lot of comments on this blog from investors who bought a deeply discounted property and have had tremendous success and cash flow ever since. It’s not impossible to have success with cheap properties. However, on the whole, investors have the opportunity to make just as good a return on a slightly higher priced property and avoid many of the pitfalls associated with low end properties.  In many cases, even just jumping from a neighborhood selling in the 60K range to a neighborhood selling in the 90K range can make a ton of difference on the overall experience.

The bottom line is that an investor who chooses to buy properties specifically for the rock bottom pricing will have a much better opportunity for success when going into the transaction with eyes wide open. If the initial pro-forma utilizes a very realistic and conservative approach (including additional costs and expenses associated with the factors I listed above), the possibility of being disappointed or overwhelmed by unexpected costs is reduced. Perhaps my experience with the rental car would not have been such an ordeal had I fully expected on spending an extra hour of my day in line in exchange for the discount I received.

7 Deadly Sins of Real Estate Investing

The Seven Deadly Sins of Real Estate Investing
by BRANDON TURNER on SEPTEMBER 9, 2012
 


Have you committed one of the seven deadly sins?

No, I’m not referring to gluttony, wrath, or sloth. I’m talking about the Seven Deadly Sins of Real Estate Investing. Ok, maybe they aren’t physically deadly – but they are possibly catastrophic to your business. If you are concerned about the health of your investments, make sure to steer clear from these seven sins:

Buying Based On Future Value
Also known as “pro forma” numbers, many investors buy property based on what it “could” be worth, not what it is worth. Real estate agents are especially known for emphasizing the future possible value (they are the eternal optimists) but neglecting the facts on the ground. Make sure you don’t fall victim to this sin and always know exactly what the current value is and don’t buy anything for what could be.
Blindly Following A Guru
Real estate investing is not a system. Anytime I see that phrase I cringe just a little bit. The typical real estate guru would have you believe that by simply following a step-by-step system you can make millions in real estate. Millions can be made, but its not by following a system – it’s from following your brain. Investing is about solving problems, and if your “system” is unable to account for flexibility or challenges – your dead in the water.
Being Unrealistic With the Math
The one deadly sin nearly every investor has made is not being realistic with the math. Whether overestimating future value, underestimating the repair costs on a project, or simply not taking the time to actually do the numbers- poor math will destroy an investment.
Relaxing on the Record Keeping
For many investors, “record keeping” is nothing more than an attic full of vintage Barry Manilow albums (get it? “record keeping”… no? Okay, easy – I’m an investor, not a stand up comedian!) If you don’t know the health of your investments – how can you make informed decisions for the future of your investments? By keeping adequate records and staying up-to-date with your finances, you position yourself to know exactly how well your investments are performing while also ensuring the long-term stability of your investment plan. Additionally, keeping good records makes tax time a breeze as well as simplifying the process when applying for a loan. For more information on record keeping for investors, check out Arthur’s post on record keeping.
Confusing Investing with Gambling
Do you invest or do you gamble? Do you even know the difference? Buying something with the hopes that it may someday bring a profit is gambling (or speculating). Flipping, building spec homes, and investing in raw land often resemble gambling much closer than investing. Notice I didn’t say that gambling was one of the Seven Deadly Sins of Real Estate Investing. The sin is not in gambling, but in confusing the two. Each strategy requires a different skill set and different financial resources. Be sure of what you are trying to accomplish and make sure you have the tools necessary.
Over Leveraging Yourself
Perhaps the most common real estate sin over the first decade of this century, over leveraging is the act of carrying too much debt than what the properties can maintain. If you are financing everything to the point that there is no cashflow, it is very difficult to weather the storms when they rise up. Just ask the thousands of bankrupt investors who learned this lesson the hard way.
Getting Bored and Getting Fancy
The path to wealth through real estate investing is not difficult, but it also isn’t super fast. In an earlier post on BiggerPockets, I mentioned how real estate investing was like playing a game of Super Mario Bros. The game is fairly simple and straightforward, thus easy to master. The difficulty, however, is that once the system has been mastered it is easy to get bored and decide to get fancy. Many investors know that wealth and retirement can be created using real estate, but get bored and try to hurry the process up by speculating and buying deals that don’t fit their plan. This is a sure-fire way to lose most or all of one’s wealth. Remember, it can take years to build up a solid retirement portfolio but only one stupid mistake to lose it all.
Have you committed any of these deadly sins? I know I have (you don’t want to see my organization system right now…)! Let’s talk about it! Add your comments below.