Hello! Mrs. Adventure Rich here. I recently chatted over email with Joseph Hogue regarding a few guest post ideas and as soon as he proposed a post covering his lessons learned in real estate investing, I was hooked. Real estate investing is an area of investment that Mr. Adventure Rich and I are currently considering. I found Joseph’s article helpful for us… I hope you enjoy as well!
3 Lessons I Learned from Real Estate Investing
Avoiding some of the common mistakes in real estate investing will set you up for success and a lifetime of cash flow
I enjoyed reading the Adventure Rich family’s investment strategy, a great plan of investing through 401k and 403b plans as well as a 529 account for junior’s college costs.
These kind of special investing accounts are some of the best returns you’ll ever get. With an average annual return under 10% on stocks and around 5% on bonds, that extra boost you get from tax-deferred saving makes a huge difference.
That’s not even mentioning the free money that comes with employer contributions.
But there was one investment missing, one that has had a big effect on my life. While my experience with real estate investing hasn’t always been good, it’s a core piece of my overall wealth and could be your opportunity to smooth out the ups-and-downs of stocks.
My Real Estate Investing Catastrophe
I don’t want you to think real estate investing is easy or a passive income miracle that will make you rich overnight. Yeah, sorry 3am infomercials. Just like investing in the stock market, there’s a right way and a wrong way to invest in real estate.
I fell for the wrong way first and it cost me my savings.
My real estate experience starts in college with an internship as a commercial property analyst. I loved the idea of taking a raw piece of land or underused building and turning it into a cash machine. I had saved up some money while in the Marine Corps and working part-time through college and was ready to start building my real estate empire.
The year was 2002 and all the money was in residential properties. The housing bubble was just starting to inflate and people were making fortunes flipping, renting and selling houses.
I had always liked the idea of long-term cash flow, holding an asset that would produce income for decades, so I bought my first two single-family houses. They both needed a lot of work but the idea was that I could remodel them, then get immediate cash out from a refinance of the higher assessed value to buy more properties.
All I had to do was keep doing this; buying houses, fixing them up and then using debt to buy more, and I would be the next real estate mogul.
Just after buying my sixth rental in 2005, I started to see how it wasn’t going to be so simple.
Cash flow wasn’t high enough to afford property management, which wasn’t really available for small, single-family portfolios anyway, so I had to manage my own rentals while working a 9-to-5 as a financial analyst. That might not be a problem with two or three rentals but the time required jumps with each property.
I started burning out on the workload and my real estate business started to suffer. I wasn’t as quick to remind tenants when rent was late and when someone moved out, I wasn’t there fixing the property up to get it back on the market. An average vacancy of maybe one month a year for each property turned into two or three months.
That meant dipping into my savings to pay the mortgages, something that couldn’t go on forever. I started selling the houses in 2006 but the bubble was already coming out of prices. By 2008, I was broke and had lost almost all my savings.
My Real Estate Investing Mistakes
I’ve since gotten back into real estate and made the money back, and then some. I realize now that much of my nightmare was due to a few real estate investing mistakes that so many commit.
First, I bought into the myth that real estate is a source of passive income. The promise of making money with no work involved is a great way to sell courses and get-rich books but it isn’t the reality when it comes to real estate rentals.
Unless you can hire property management, something that might not be available or affordable with a new rental business, expect to spend at least five or ten hours a week even on a couple of properties. Some weeks might be less but others will certainly be more.
I also rushed too fast into building my portfolio of properties. A lot of get-rich seminars will preach a pyramid idea of buying properties as fast as you can. You use the cash flow from each property to buy more rentals so the faster you buy houses, the faster your cash flow and portfolio grow.
That rush to buy as many houses as possible, with as much debt as is offered, runs smack into the work involved. You might not realize it at first, but it doesn’t take long to find out you’re overextended on our time and over your head in debt.
How to Invest in Real Estate…the Right Way
So now that I’ve thoroughly scared you away from even looking at a ‘For Sale’ sign on that potential rental property, there is a ‘right’ way to invest in real estate. No other asset class has created as much family wealth and real estate can still be a great investment.
1) Don’t It Go Alone
Don’t go it alone building your real estate empire. Not having a property manager doesn’t mean you can’t delegate some of the responsibilities to other people. Consider joining a group of real estate investors or starting your own group. It doesn’t have to be a formal organization, just a group of people to exchange ideas and help each other out.
I’ve been a part of a small group for a few years now and it’s made all the difference. We have contractors, real estate agents and members in real estate law. We help each other out with ideas and discounted services.
2) Build Slowly
Build your real estate portfolio slowly, buying just one or two properties at first. Buying a duplex or triplex is best because you get multiple units but only have to manage one property. Give your first two properties a year to help you understand exactly how much time goes into management before even thinking about buying any more houses.
Just as with stocks, diversification is a critical concept in real estate investing. It’s nearly impossible for individual investors to diversify their real estate portfolio across property types and regions. The down payment on one property can be in the tens of thousands. Only owning rental properties in one region leaves you exposed to all kinds of economic risks.
Diversify your property portfolio with investment in real estate investment trusts (REITs). These are companies that hold commercial real estate property throughout the country and the world. REITs trade just like stocks and you can buy a fund that holds multiple REITs for immediate diversification.
Real estate investing can be a great diversifier from a portfolio of stocks or bonds and the cash flow from rentals does build over the years. I still love real estate investing, the pride of owning a physical property and receiving that monthly cash flow. Avoiding just a few common mistakes in rental investments can set you up for success.
About the Author: Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business. He can also be found over on YouTube in videos like this one!
How about you? Any seasoned real estate investors with similar lessons learned? Any to add?
Always an Adventure,
Mrs. Adventure Rich