Is there risk investing in real estate?
Of course there is. There is risk in any business venture. You are going to invest xx dollars in your business, and you look for good returns. And the returns for real estate are incredible.
It is ironic how many people think that there is no financial risk with their job. Their proof is that they receive a paycheck every 2 weeks. The truth is that your company could have a layoff; close; or replace your job with automation at any time. I worked for a Fortune 500 company that had a 150 year tradition of never laying off an employee. A new CEO came into power and suddenly there were layoffs every 6 months.
Nothing is guaranteed.
The risk that does exist investing in real estate (visit https://exprealty.com/us/tn/ to see which property is the best) can absolutely be mitigated with a little effort on the part of the investor. The first thing to recognize is that it is not about “luck”. It is about skill. It is understanding the value of the property in the market and understanding your costs. And there are tools to help with all of that.
So let’s examine some exit strategies and see if real estate is worth the risk. We’ll start with rehabbing which is how my wife, Margie, and I started. With a little creativity and know-how you can borrow 100% of the purchase price, the rehab costs, and the miscellaneous costs of the project without ever using a bank. Can you do it with bad credit, no cash and no experience? I’m not going to mislead you here. That makes it tougher, but not impossible. When we started we had no cash reserves and no experience. Our credit was OK, but it was never reviewed by the lenders. It may be more challenging than someone who has many resources, but it is possible – and over time, easier and easier.
Let’s assume you buy a simple cosmetic fixer/upper in a typical first-time home buyer market. If you do your research and handle the project correctly, you should be in and out of that project within 4-5 months; have used none of your own money, and made 15-20% of the selling price as net profit before taxes. For example, a house that you sell for $175,000 should yield you between $25-$35,000. Not a bad return for having no money in the deal right? And obviously, more expensive homes and/or those with more extensive repairs should yield significantly more.
Wholesaling is a fantastic exit strategy. These are houses that you have under contract and you sell the contract to other investors for a minimum $10,000 assignment fee. You never purchase the house yourself, so you have minimal risk. You do have to invest in your marketing to find these deals. The statistics show that you’ll spend $1500-$2000 per deal per month you want to close (this is a statistic over time after your marketing has been in place for a while). Again, not a bad return: at least $10,000 for every $2,000 spent.
Finally, let’s examine the wealth building strategy: rentals. A good rental should have a decent cash flow after expenses and have significant equity built in. Your goal should be to pay down the debt on rentals within 10 years using the income from the property. Just 6 rentals at a value of $150,000 with rents of $1400 a month assuming a 2% year on year appreciation (which is extremely low) on both value and rents will result in a portfolio at the end of 10 years of equity in excess of $1 Million and annual rents of over $110,000. Again, not bad returns especially since the tenants have been making the payments.
Is real estate investing worth the risk? Absolutely! As long as you approach this as a business, and understand the dynamics to mitigate the risks, you’ll reap large profits the rest of your life. Consider this: there has never been a decade in American history since WWII where real estate did not appreciate. Seems like a sound investment to me.
Expect abundance,
Lou Castillo
