I haven’t seen it all, but I have quite a bit in our little wonderful world of Real Estate investing. Here is my collection of the top 10 dumbest Real Estate ideas.
Hey this is all in good fun, đ so don’t be blowing a fuse…
TOP 10 DUMBEST REAL ESTATE IDEAS
- 70% ARV – REHAB
Ever heard of this formula touted at over 80% REIAs? Well, write it on a piece of paper & flush it down the toilet. Jest aside, you can still use this formula if youâre trying to flip homes (though most seasoned flippers will tell you margins today have shrunk to 15% or less), but this formula leaves out the vast majority of awesome buy & hold cash flowing rental properties out of the picture. There are still tons of deals out there today that you can buy close to 100% ARV & have a very handsome cash on cash return.
- My flip will be setting Comps in this market
AKA “I am about to lose my butt on this flip“. I run into these Monday investors (just coming out of a weekend Real Estate boot camp), who are buying a flip where the only way they will make money is if they sell the home for OVER the current market sales comparables. Why – because they will do such a great rehab job! Sorry, but ainât gonna happen. For every investor who gets lucky with the market over-paying, there are 10 who lost their shirt because they over-estimated the sales price.
- I am investing in an Up & coming area
Thatâs a code word for âI am buying in the ghettoâ. Nothing beats the 5 fundamental rules of RE investing – location, location, location, location, location! Unless you have deep pockets and desire to hold onto that home for an extended period of time, stay away from areas that have an inventory of above 3 months. By the way, except in dense urban downtowns, the same goes for staying away from homes on busy streets/intersections, railway lines, major highways, and commercial developments.
- Buyers pay extra for superior material
They donât pay extra for super materials, they will pay for superior craftsmanship. Remember this, a good tile layer can make a .50c tile-work look a million bucks, while the tile-layer you just picked outside home-depot will make your Italian porcelain look like crap. Worker over material – any day.
- I am rolling my sale proceeds into a 1031 Exchange
1031 exchanges allow you to postpone your capital gains tax incurred at the time of the sale of real estate. Now think about this -as you are progressing in your investing career are you going to be in a lower or a higher tax bracket in the future? For the vast majority, their tax brackets will go up in the future, not to mention the historically low-income tax environment today. Then why defer paying taxes? Someone will tell you 1031 allows you to capture the âtime-valueâ of money, which in my opinion is non-applicable for the vast majority of mom-pop investors drinking the Kool-aid on 1031s. A better strategy for eliminating/minimizing capital gains is investing in opportunity-zones or Tax-increment investment zones (TIRZ). Investors who are upgrading Real Estate do very well with 1031s.
- I need to wholesale before buying rentals
From asset-based, portfolio, LOCs, private-money the lending options available for landlords today are amazing. There are even conventional loan products in the market today that are lenient on high credit, cash reserves, tax-returns. But as an investor, you should be wanting to do land-lording, which is definitely not as sexy compared to the fat wholesale checks you see posted on Facebook. Then again, Rockefellers, Gettys, Vanderbilts were keepers, not wholesalers.
- I am paying a Real Estate guru $100,000
Sorry, I just donât see it. Real Estate investments is so much more than a coach teaching you what to do, especially when most gurus are riding on a deal they did in 1980. Partnering with a seasoned investor where you lend & they show you the ropes is a much better way to learn this business. I am a big fan of old-school apprenticeship, where you get your hands dirty and learn by doing grunt work for another seasoned investor. If youâre still bent on hiring a high dollar coach – ask them to show their Tax-returns; my guess is you will discover a guru with more hat than cattle đ
- I will cash-flow on my Single Family rental
Many new landlords buy single-family rentals that fetch about $250 a month in cash flow; though in reality that will rarely be the case year-end. All it takes is a busted hot-water heater or an HVAC condenser that goes kaput in the hot Texas summer to eat your entire cash-flow. Truth is in single-family rentals you really make money when you hold over 10 SFRs & are willing to scale. Seasoned profitable landlords will tell you that the golden spot is running a rental operation with an expense ratio no higher than 40%, which is impossible to attain with a couple of homes.
- The market is up & I am selling my rental properties
Granted the market is hot and people may be offering you stupid California money to buy your rentals. In the vast majority of cases, you are just not going to make much money – why? Take out selling costs, closing costs, all the deferred maintenance, lost rent and the worst of all âre-capturingâ depreciation and your fat steak will look like a shriveled taco-bell nacho.
So what should be the play to exit from SRFs? Here is my rule – properties in âup & comingâ areas should be converted into seller-financed wrap notes; while homes in good locations should be kept as rentals & passed to your estate. The latter practically eliminates the need to return depreciation to Uncle Sam as your heirs will have a property with a stepped-up basis.
- Having your name in public record
Most new investors are taught about liability protection, but not about the more important – anonymity protection.
As a landlord, the question is not if you will be sued – it is when. Donât believe me? Look up stats on ambulance-chasing contingency lawyers. Just follow a simple rule – donât have your name in your county clerk’s public land registry. It is not too difficult to achieve. A little search on privacy laws in your state/county coupled with corporate shields such as Nevada corps will give you basic anonymity protection.
So there you have it. Next time you run into a wise guy touting any of these brilliant ideas, you would know better.
Author:
Abhinav ‘A.G’ Gupt
CEO, Real Acquisitions
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