3 Ways to Fix Real Estate Investing


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I bet you didn’t know real estate investing
was broken, did you? Then why is the default rate on investment
properties 65% higher than on owner-occupied? In this video, I’m detailing the three biggest
risks in real estate investments and how to fix all three. It’s a must-watch for all real estate investors
today on Let’s Talk Money! Beat debt. Make money. Make your money work for you. Creating the financial future you deserve. Let’s Talk Money. Hey Bowtie Nation, Joseph Hogue with the Let’s
Talk Money channel. A special shout-out to all you in the nation,
thank you for spending a part of your day here. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. We love real estate investing here in the
nation. No other asset has created as much family
wealth as property and I truly believe all investors should have real estate in their
portfolio. BUT… there are a lot of pitfalls in property
investing that you just don’t see starting out. You get roped into rentals or some other strategy
after hearing some get rich scheme and it’s only after putting down tens of thousands
do you realize those common mistakes. I’ve been there. I left a job as a commercial property analyst
in 2003 to start in residential real estate. The housing boom was just picking up and that’s
where the money was being made. Then I made all the mistakes we’ll talk
about in this video. Three mistakes that bankrupt tens of thousands
of real estate investors every year. In fact, research by the Housing Finance Policy
Center on residential investment properties found the default rate of loans by investors
was 29% higher than owner-occupied loans. These biggest three risks in real estate investing
go beyond the problem of property as a passive income investment. We covered that last week in another video
and I shared three ways to make your real estate strategy as passive as possible. No these three mistakes are ones almost every
beginner real estate investor makes and you might not even realize they’re leading you
to bankruptcy…not until it’s too late. So let’s look at the three problems, then
I’m going to show you how to fix them all with one investment. The first problem new investors get into is
putting on too much debt when they buy property. That same study found the average debt-to-income
for investors was 35% and a loan-to-value average of 80% for investment properties. Worse was that more than a third, 35% of the
properties had loans above 80% of the property value. This was a huge influence in the fact that
investors were 29% more likely to default on their property loans. Not only are investors over-extended on their
investment properties but they’re also likely to be over-leveraged on their own home mortgage
as well, making any hiccup in cash flow a one-way ticket to bankruptcy. Now when we talk about how to fix these problems,
I’ll show you how to estimate cash flow on a property so you know exactly how much
debt you can afford. Another big mistake beginner real estate investors
make is the property type they buy and I’m not talking about buying residential or commercial
property, I’m talking about only buying that one property type. It’s estimated that just over 11% of the
U.S. adult population invests in real estate or about 26 million people. Of that, more than 18 million investors own
only residential rental houses. Almost seven-in-ten investors are completely
invested in just one property type. That’s a huge problem when something happens
to decrease prices in that property type. This graphic is a bit jumbled but it shows
the index level prices for five property types; apartments, core commercial, retail, industrial,
office and then the all-property level from 2000 through 2016. And if you follow that red line for apartments,
that property type was one of the most volatile after the housing bubble burst. Even though home prices have rebounded faster
than other property types, it was a rough ride there for a while. Instead if you were investing in a mix of
property types, you would have seen a much smoother ride with lower vacancy and more
stable cash flows. The third mistake here before we get to how
to fix these is the region or location investors buy and again, we’re talking about only
buying into one region. Now this one is more easily understood. Most real estate investors manage their own
properties so it obviously makes sense to have them grouped in the local market. Again though, that opens investors up to a
huge amount of risk when that market is hit harder than others. Data from Standard & Poor’s here shows the
housing price change in select cities after the crash. With a nationwide average of 33% loss, some
of these markets were absolutely destroyed. Phoenix saw prices crash 54%, San Diego and
LA were both down 40%. New York saw prices fall only 24% but then
only saw an 8% rebound against a nationwide average of 28% from 2012 through 2014. Another chart here shows the price of commercial
property in four regions of the U.S. and this should make it immediately clear that you
need to diversify your portfolio. The Northeast didn’t do too badly in the
bust but what if you lived in the Midwest and had all your property there? What if things are different next time and
the Northeast gets hit the hardest? Now I want to show you how to fix these problems,
how to invest in real estate without the three most common mistakes. First though, I want to get your experience. What problems have you seen in real estate
investing? Which are the most common and how did you
solve them? Just scroll down and tell us in the comments
below. First I’m going to tackle that problem of
debt and defaults by showing you how to calculate your cash flow on a property. We’ll look at how to estimate expenses before
you take out the loan to make sure you have a cash cushion to save your ass when you need
it. I’ll then show you how to fix the other
two problems with a single investment, how to get those property types and a portfolio
of investments in different regions with one investment. And on estimating those cash flows, you really
have to write it all out. I know there are all kinds of rules like estimating
50% of the rent to go to expenses but they do absolutely nothing for you. It’s so general that it can’t possibly
tell you anything useful about your investment. So take the time here and work through these
numbers because this will save you a ton of heartache. Here I’ve put together some estimates from
experience and we’ll talk about how to find the actual numbers for properties in your
area. Basically you’re working down from how much
rent you can collect through all your expenses to see what kind of cash flow a property produces
after paying the mortgage. You need to be building up a cash cushion
from that money so if something goes wrong, you can keep up with the mortgage without
going broke. You should know about how much you can get
for a property in rent. If not, look at similar properties in the
area. For vacancies, I usually estimated about one
month a year or 8% of the rent lost. This is going to depend on whether you’re
in a nice neighborhood with low vacancy rates or investin’ in the hood where you might
have two or three tenants come and go inside a year. Next you’re going to estimate all the expenses
to keep the property up. Again, you want to find the exact amount you
can expect but I’ve included estimates as well. For utilities, even if you have tenants pay
these, you’re going to be on the hook for when the place is vacant and when tenants
just run out and don’t pay the bill so I’d estimate at least 10% of your rent. Repairs and maintenance will differ depending
on age of the property and your region as well as if you’re including appliances. A good rule is between 10% to 15% but you
might want to estimate on the high side if you don’t know. Remember, you might not spend this every year
but then a big expense like the roof or HVAC might come up and be thousands of dollars. Property management is generally 10% of the
rent but that’s if it’s even available in your market. Smaller cities might not have good managers
available or they’ll cost more. You can save this amount but you better be
ready to handle calls at 2am and a constant headache. Property taxes range from just a quarter of
a percent in Hawaii to as high as 2.4% of the home’s value in New Jersey. The average is around 1.2% but check with
your local assessor. These are usually paid twice a year so don’t
forget to plan for it. I used to estimate around 2% for tenant marketing
and again, that’s an average off every month so you have that cash reserve when tenants
leave and you have to find new ones. Insurance is going to vary depending on the
types you need but don’t get cheap here. I had a boss that let his homeowner’s policy
lapse because he was selling the house and thought it would sell fast. Fire ripped through and he was out tens of
thousands of dollars in a heartbeat. Mortgage insurance is around a percent of
the loan amount if you’re loan-to-value is 80% or above. That can easily be a couple grand and is just
another reason to not borrow too much on your property. Homeowners’ and flood insurance will run
you from half a percent to a full percent of the home’s value if you need them both. The nationwide average for home insurance
is just over $1,000 a year but that ranges as low as $590 in Delaware to over $2,000
a year for the average home in Florida. Legal and permitting is the last expense we’ll
estimate and this is going to include things like evicting tenants and getting a rental
certificate. Now on these estimates, and PLEASE find the
numbers specific to your target investment if you can, but on these numbers you’d have
50% of your monthly rent left over. This is why that 50% rule is so common because
it’s pretty close to reality but pretty close doesn’t cut it when the difference
is between profits and bankruptcy. After taking all these numbers out, then your
mortgage payment, you’ve got an estimate of cash flow left over each month. I would say, for safety’s sake, you want
this to be at least 20% to 25% of your rent. So that helps fix the problem of debt and
defaults for investors but what about the other two problems, only investing in one
property type or in one region? These two can have a huge effect on your ability
to pay the mortgage because when something drives up vacancies for that single property
type or in your local market, your estimates could be thrown out the window. The problem here is that most investors just
don’t have the bankroll to buy a diversified portfolio. You’d need at least 12 properties to diversify
into three property types in each of the four regions of the U.S. and even that’s going
to be highly risky on each property. For a truly diversified portfolio, I would
say you need closer to 24 properties or more. For this, there is no better solution than
investing part of your portfolio in funds of real estate investment trusts or on Fundrise. We’ve talked about REITs on the channel
before but I just got started last month on Fundrise. I’ve got over $26,000 in REITs in an IRA
account, ten grand in other property funds and another $300,000 in rental property equity. I took a thousand from the REIT portfolio
and invested on Fundrise for a little higher return. With that portfolio investment on Fundrise,
I get exposure to 35 properties in different markets and across property types. Returns on the platform have ranged from 8.5%
to over 12% since 2014 and cash flow is as high as 8% in the Supplemental Income portfolio. So if you’ve got that direct real estate
exposure to a specific property type or in a single market, for example local rental
properties, you can take maybe ten- to twenty-percent and invest in broad, diversified real estate
funds. That’s going to shift your risk away from
the single property type or market. What I like about Fundrise and why I finally
signed up is the complete transparency on all the investments. You can see how each property stacks up on
risk as well as how many are debt investments and how many are equity. You can click through to see individual properties
like this commercial renovation in California. The platform is going to show you the project
risk, what type of investment the portfolio has as well as a full market analysis. And again, that diversification of property
types is important here. You’ve got commercial properties like the
office space we just looked at and residential space like this apartment project. You’ve got those debt investments that provide
safety and income as well as the equity projects that help boost returns for the portfolios. One feature that really sets Fundrise apart
is this 90-day trial offer and low $500 minimum. Invest as little as $500 in the starter portfolio
and try it out for 90-days. If you’re not totally satisfied, you get
your entire investment returned. I’ll leave a link to that free trial offer
in the description below the video. Click on the video to the right for three
strategies that make real estate truly passive income. Don’t be fooled by the hype. These are the only strategies that will earn
you passive income with no work. Don’t forget to join the Let’s Talk Money
community by tapping that subscribe button and clicking the bell notification.

9 Replies to “3 Ways to Fix Real Estate Investing”

  1. Passive Income Tom says:

    I like my property managers. I could care less about losing $100 a month over the headaches from tenants. 😉

  2. Budget Girl says:

    Bow tie nation. love it

  3. Investing Education says:

    Good share

  4. GenExDividendInvestor says:

    I think a core problem is people (understandably) want to get rich quick, which almost never works. Get rich slowly does work, and if you change your mindset, it gets you started on that path to wealth. One of the biggest mistakes I made investing in real estate was unorthodox — I did a real estate deal with a relative without actually writing down our agreement in contract form, lol. Stupid me, but live and learn.

  5. Let's Talk Money! with Joseph Hogue, CFA says:

    Must Watch for Real Estate Investors 👉 3 Ways to Make Real Estate Investing Passive Income https://youtu.be/6a7_uAEvV3U

  6. Wolf of Dubai Stocks Investing Channel says:

    Landlords grow rich in their sleep without working, risking or economizing.

    That is the beauty of Real estate investing!

  7. Greg Kamei says:

    Thanks for another reminder of the importance of diversification in any asset class. From your experience, what most differentiates a platform like Fundrise from investing in exchange-traded REITs?

  8. Jeremy Davis says:

    Hey sir! I am an Army veteran and running a marathon next year in April and trying to raise money for military families and support in need. Any help would be greatly appreciated. I look forward to hearing back from you and your team.

  9. Alex Smith says:

    Is there any reason to buy REITs over Fundrise? Fundrise seems to have much higher yields. What's the catch?

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