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3 Real Estate Deals That Will Lose Your Money – Don’t Do These Things
This video is 3 Real Estate Deals That Will Lose You Money. Don’t do these things. The first one is don’t borrow money without understanding the costs. So many people will go out and get hard money loans, they’ll go out and conventional investor loans and the interest rates on those are not good. And the points on those are often not very good. Make sure you understand that you need enough equity in your property, if you’re buying a property for cash and you’re going to flip that property and you’re buying it under market value, make sure you’ve got enough equity in that property when you buy it to cover those costs.
Joe: There’s also going to be carrying costs, you know, and figure in, you say, hey, look, I can get this thing fixed in a week, you know, but maybe it ends up taking you a month. Or maybe it takes you two months to get it done because you have contractor problems. Maybe then you get it on the market, but the market’s slow. Or you mispriced it and it takes you time to get it sold. So, maybe it takes you six months to get the thing sold, or maybe it’s nine months or a year. And you’ve still got this property and you haven’t got it sold yet. Make sure you’ve got enough equity so you can drop our price when that happens so you can just move that property and move on to the next one.
Joe: Because you’re making payments on it ever month and it’s going to eat up your profit margin. You know, if you have a property for five months, it’s costing you $1,000 a month in payments, there’s $5,000 profit that’s gone. And not including the points that you paid on the loan and the costs of the loan itself, which often run anywhere from 2% to 5%. So if you go out and get $150K property and you get a 90% loan to value loan, if you can find one, and you have perfect credit, then you’ve got probably 4 or 5 points of expenses on that loan even though it may only show 1 point or 1.5 points for the loan itself, you’ve also got closing costs and you’ve got all the other expenses within that property, whether it’s the rehab expenses, the inspection expenses, everything that you need, plus your agent cost to get it sold – all those things you have to figure in here.
Joe: Thinking that you’re going to sell it for sale by owner is a big mistake as well. So that’s another big expense. So, if you’re going to take out a loan on a property, make sure that you understand all your costs in a deal and not just the ones that are obvious on the surface.
Joe: The second thing that can lose you money is buying a subject to property without looking at the future expenses of that property. When you buy a subject to one of the best strategies is buy a property subject to the existing loan. Let’s say you find a property, it’s $150K, they owe $130K on it. The payments on it are $1,000 a month, it brings in $1,300 a month in rental, or on a lease option. So, you’ve got $300 a month cash flow, that sounds great, you’ve got, you know, a good property that’s in good condition that has 20 years left on the mortgage and you know, if you make payments on it and you take the cash flow that you’ve got on it you can pay that thing off in probably 12-15 years and you own that property free and clear and you build your portfolio plus you get your tax benefits and your buy down on the note and your appreciation on the property over the years. All that stuff comes along.
Joe: So, you’re going to take this property subject to. You’re probably going to sell it on a lease with an option to buy at maybe $15K to $20K above what you paid for it. They’re going to come up, the buyer’s going to come up with $5K, $10K, $15K as a down payment that you can take that money and you can use that money. But you want to make sure you keep a reserve on that money so that you can cover your expenses. So, if you’re going to sell it on a lease option, let’s say you get $5K, keep that entire $5K in an escrow account so when that property goes vacant again, and those people don’t exercise their option, you’ve got enough money to make the payments on that subject to so you don’t screw up the credit of the seller you bought it from and you keep your integrity and you keep the property intact. And, if it needs some repairs or clean ups between times, you can go in there, you can spend a little bit of money and get it fixed up. Get another person to buy it and hopefully get another $5K or $10K and you know, you can put some of that money aside and keep some of it, you know, and spend some of it as well. So you always want to have those reserves.
Joe: You also have to think about taxes. Taxes are going to go up. Property taxes are going to go up over the years. So, if your property tax, and especially if you’re buying an owner-occupied property. In Indiana, if I buy an owner-occupied property, the taxes are 1%. And they have, you know, deductions like, mortgage exemptions and Homestead exemptions that can reduce that almost .5%. But when I buy it as an investor, and the deed comes into my company name, now it’s an investor property and it’s going to have a 2% tax bill on it. So I’ve just doubled my taxes, sometimes quadrupled my taxes. So if I had a $300K cash flow, sometimes it can completely wipe out that cash flow just in that initial jump right there. And if taxes go up, you know, five years later, or ten years later as taxes start to increase on that property and the values go up on that property, I’m going to have to be able to continue to make payments. Hopefully the rents will go up, too, and cover those expenses. But you want to make sure that you’ve got some cushion and you’ve got some reserves to cover you.
Joe: And the third one is leveraging your money and not keeping enough cash flow. This is the biggest mistake that most investors make. They’ll say, okay, I’ve got this $10K. If I go out and buy a $10K house I’ve got a $10K investment and, you know, if I make X amount of dollars on that, I’ll make this much money. But if I bought a $100K I could make money on a $100K house instead. So, you leverage this money. And there’s logic to it, but it doesn’t make sense. Use your money and buy properties almost all cash so you don’t have the risk of losing that money. If you only put $10K down and suddenly your cash flow on a property that you borrowed money on goes away, taxes go up, income goes down, you know, whatever problem happens, you have a crash in the market and suddenly you’ve got 3, 6 months without any income in that property at all, you want to make sure you’ve got some reserves and you want to make sure that you protect your cash.
Joe: So the goal for my students, or at least for me and my students, what I try to encourage them, is build your business based on zero down deals where you don’t have any cash in the deal. You don’t have any credit in the deal. Take the cash that you make, you know, live on what you need, and once you get to the point where you’re making a great income, then you can take the rest of that money and you start buying some little properties with it, you know, get your first $20K or your first $40K, buy a little house with it. Doesn’t have to be in your own neighborhood. Doesn’t have to be in your own state. Find a place where you’ve got a good property manager, buy a little house and keep that property. Put it in it’s own LLC, protect it by itself, and let it start making its, you know, its $800, $900 a month of income. That’s a great return and you know, within just a few years, you’ll have all your money back on that property and you’ll be able to buy another property with that same money. And you’ll also, you know, with the rest of your business, you’re going to be earning more money and hopefully you can keep buying more of these little properties and eventually you’ll start making enough money where you can buy bigger properties, where you’re buying $80K, $100K, $150K properties and you’re keeping those as well.
Joe: And in the meantime you’ve got your subject to properties that you bought with no cash, no credit, no risk. They’re also paying themselves off over, you know, a 15-year period. And, on top of that, you’re buying maybe some little properties in some rural areas, or some urban areas that you buy for you know, $30K, $40K, $50K and you put tenants in them but you’ve bought those on terms as well and all you’re doing is making payments. And you can actually do a zero interest loans on a lot of these deals and you can actually pay them off in 5-7 years and you can buy properties that way.
Joe: So now you’ve got a portfolio that’s buying all cash properties which you are 100% protected and you’re not going to have to, you know, not 100%, but 99% protected where you’re not going to have very many worries about losing that money. You’ve got your zero down deals where you might lose the property but you’re not going to hurt your credit, you’re not going to lose any money during the deal, and if you do it right, you’re not going to lose the property either. And you’ve got some other properties that you’re building lots of equity in very quickly and you’ve got seller financing on those and those things pay themselves off in just a few years. So, that way you’re income keeps popping up. So the first year, you’ve got income coming in, the second year, or the seventh year, you’ve got properties paying off and then you know, within that period of time you’re going to have properties that are completely paid off.
Joe: So those are the things that you can do to avoid those big mistakes and also build a business very quickly. All right. Hope that helps.