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3 Stupid Things Newbie Real Estate Investors Say And Do
Joe: Hey, it’s Joe. “Three Stupid Things Newbie Real Estate Investors Say and Do.” First one. “I’m going to use loans to build my portfolio.” Now, you’re talking to one of those stupid – I have used loans. I have bought properties with loans. But if I had it to do over again, I would never use a conventional loan to buy real estate. I believe it’s a mistake. Now, I’m going to end up making money doing it, because I know what I’m doing and I, the times that I got hurt with it I was able to protect myself with it because I had income coming in from other sources. But, you can avoid it. You can use Subject To. You can use Land Contracts. You can use multi-mortgage. You can use assignable cash deals. You can do a lot of different things other than using conventional loans. So don’t use conventional loans. Throw that aside until you really know what you’re doing and then do it. Because the reason people use loans is because it’s easier. At least it appears to be easier. It’s easier to put a deal together. But it’s not any easier to make money on that deal. You still have to know what you’re doing to make money. So you might as well make your mistakes on properties that don’t use your credit and don’t use your down payments on it as well.
Joe: The second mistake that people make is not keeping some of the cash that they get at closing when they buy a Subject To property in order to keep some reserves and keep that property afloat if it ever goes vacant. I see this happen to a lot of people who buy Subject To properties. A lot of my students who buy Subject to, they’ll get the property Subject To, they’ll go find a lease option buyer, get $5,000 as a down payment, you know, a lease option fee for that property. Then they’ll take that $5,000 and they’ll go spend it on their rent and they won’t keep any of that money as a reserve.
Joe: Now, when that property, the likelihood that those lease option buyers are going to exercise their option is less than 30%. If that happens, then it’s going to go vacant after their three years or whenever they decide to move out. You’re going to need to go back into that property, clean it up and sell it to another lease option buyer. That’s going to cost you some money. Usually you can get it done within a month, period. And, the work that needs to be done is usually less than $1,000 or $2,000. So, if you keep $2,000 or $3,000 on you know, a property that’s $150K range you’re probably going to be okay. But, you want to have a cushion there so I would, on my first Subject To property, I would strongly suggest you take that whole $5,000 and put it into an escrow account and don’t touch it and then you’ll have that money for that property and then when those people move out, maybe you spend $1,000 of it, maybe you don’t spend much at all. Maybe you get somebody in there immediately and you make another $5,000.
Joe: Well, this time you’ve still got money in that escrow and you can take that $5,000 and you can put it in your pocket and you go spend it. And that’s kind of the goal for this process. But you always have that cushion. The second property, maybe you don’t need to keep the whole $5,000. Maybe you keep $2,500 of that. Third property, maybe you only need to keep $2,500 of that. Fourth property, maybe you only keep $1,000 of that. You know, fourth and fifth property, you know, maybe $1,000 of that. After that, maybe you don’t need more than $10,000 in an escrow account for, you know, 10 or 20 Subject To’s. The likelihood that you’re gong to have a 20% vacancy rate at any particular time, that only happens when things really crash.
Joe: In 2007 my vacancy rate on my Subject To’s went from a 3% which was normal for me up to 20% because so many people lost their job and they had to stop making their payments on their house. They had to move out. So, I got a lot of properties back at that time. And that continued for about, you know, about a year. We got it solved pretty quickly, but a year, it lasted for about a year. And it was painful because I had to make those payments. But, fortunately, I had kept a reserve on those properties and we had enough money to make those payments on those properties. And you know, we still had money coming in from the other properties and cash flow from the other properties, plus I had, since the market was crashing, we were making all kinds of money you know, buying properties under market value.
Joe: When that market crashes it’s a horrible thing for the country, but I’m smiling, right? Because we make a lot of money when that stuff happens. But, you know, the beauty of doing these systems the way that I’m teaching is you can work in any market, you know, the For Rent Method works in every market and then when a market declines the wholesaling, the cash deals, those types of deals, they become, you know, working with REOs, you know, working with bank-owned properties, that gets really exciting because nobody wants to buy property at that time. So if you know what you’re doing at that time you can really make a lot of money and, you can solve a lot of problems for people that are losing their houses. People that are losing their houses that want to protect their credit. You can go in and you can solve their problems for them, take over, make money for yourself, and keep their credit clean. They can go find you know, another property, and it’s a win/win for everybody instead of them just crashing and sending that property back to the bank. So that’s number two.
Joe: The third stupid thing that people do is buying properties at the beginning especially, with their own money and before they know how to do it without money. You know, they say you need money to make money. But I say if you can’t make money with no money, you probably can’t make money with money. Learn how to do it with the Zero Down techniques that I teach first. Before you start spending your money, before you start using your credit. Don’t use your cash until you know what you’re doing. And then when you use your cash, put it in the safest possible place you can possibly put it in. You know, listen to some of the other videos I’ve talked about on how to protect those assets once you have them and how to buy properties for 100% cash rather than leveraging those properties with the only cash you’ve got.
Joe: If you’re gong to leverage your properties, use somebody else’s loan. Use somebody else’s cash, you know, use seller financing, do Subject To. Use the equity that’s built into those Subject To properties. You don’t need to come up with 10% down on that. Use the money and have a good return on that money so that you’re making 15%, 20%, 30% return or more on the properties that you’re buying but they’re 100% properties.
Joe: All right. That’s enough stupid things for today. Good luck.