The Best Indicator For Buying A Bargain

How do I know it’s a deal?

In today’s real estate market most new investors have the hardest time trying to determine if a specific property is really a good opportunity.  In essence, they have paralysis of analysis and lack the courage to pull the trigger and buy something.  It’s no wonder.  With all the conflicting media reports on the real estate market, gold, stocks, inflation and deflation – it’s tough!  Unless you shut out the noise! If you believe everything you read and see on the television, then you are over-trusting of journalists and the government.  You have to use common sense and logic to decipher what is really going on.  But don’t try to understand it – shut it off!

Every politician has their own point of view and will do everything they can to persuade you to believe what they believe.  The government controls much of what you read and watch on TV.  Just today in an Atlanta newspaper I read how the Federal Government lied about the serious impact of the oil spill in the Gulf of Mexico.  Should we be surprised?  Heck no, they lie about employment statistics and manipulate financial markets.  Ignore it. Ignore the news and curl up in your world of common sense and make a decision to do something – anything – just make a decision.

Here’s what I’m talking about:

I’ve been around the monopoly game of real estate for over 30 years.  We have cycles in real estate just like we have cycles in all aspects of business and the economy.  At this point in time, we have the greatest buying opportunity of a lifetime, but if you sit on the sidelines much longer you will miss it!

But how can I tell if a property is a good deal or if the price will continue to fall?  First, let me state that real estate is local in nature.  That is, each real estate market is different as there are many variables that impact price in states, cities, and towns right down to the neighborhoods.  You really want to buy where prices have the greatest chance of going back up in the not so distant future.  You make your money where you buy based on cash-on-cash rate of return and anticipated future sales price.  Here is the best indicator that I use in today’s market.  It’s not the only one, but it sure give me a warm and fuzzy feeling with the confidence to sign on the dotted line.

Here it is:

Look at what the house sold prior real estate bubble and again what it sold for during the real estate bubble.  For example, recently I was evaluating a house that sold for $160,000 in 2007.  To remind you, 2005-2007 were the prime bubble years in most markets across the United States.  This same property sold for $120,000 in 2003 – that was pre-bubble.  I believe that we will get back to pre-bubble prices in approximately 5-7 years, maybe sooner.  So, when I can acquire this property for $55,000, I feel confident I made a great purchase.  The same property will rent for $900 – $1,150 per month.  I will have a lease/option buyer in place for $120,000 – $140,000.  The reason for the range of rent and lease/option purchase price is because these are negotiable items with a perspective applicant.  You can afford to be fussy over who you let into your houses and who you let into your life for that matter.  That same house with the land and impact fees would cost over $100,000 to build in today’s market.

So who cares about the price of gold or what President Obama ate for dinner.  You can’t solve the tragedies of the world, and reading about them won’t make you a dime.  Turn off the TV and throw out the newspaper.  It’s a waste of time, a drag on your mind, and prevents you from taking action to take care of your financial future.  Get your financial world in shape and let the rest of the world take care of itself.  This is the greatest buying opportunity of a lifetime and you could be setting yourself up to retire on rentals, if and only if you take action.

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Don’t Just Save For the Future – Invest!

In America, we tend to want the best of everything. But when it comes to 401(k) plans and IRA’s, we often settle for much less.

Case in point: MetLife recently published a report that 401(k) plan sponsors are struggling to help workers translate the balance in their retirement accounts to income. As a result, they are “missing opportunities to help their workers manage their ‘nest eggs’ long term.”

According to MetLife’s “Qualified Plan Barometer”, which is a study of Fortune 1000 defined benefit and defined contributions plan sponsors, 1/3 of plan sponsors described their retirement benefits philosophy as supporting employees’ efforts to “create retirement income for the future” and 2/3 say that retirement income is an important objective of their retirement plan(s).  Yet, many continue to skew their plan goals toward savings, rather than income.

The entire concept of retirement plans such as IRAs and 401(k)s is to provide a stronger income stream for you upon retirement.

It is imperative for you to determine as early as possible how much income you’ll need to maintain your lifestyle.  Most people never take the time to do this for a variety of reasons. “I don’t know what I’ll need” or “I know I need more. What else is there?”  Some retirees take their social security they get and withdraw from personal savings/retirement accounts any ‘shortfall’ they want to cover…without understanding what the income number is for them to be able to maintain lifestyle long term.

Of course, there’s always the option of knocking off your spouse and collecting the life insurance, but that’s not really a good plan.  Unless you don’t mind the idea of the state providing you bologna sandwiches, a mattress and rather confined lodging.

Here’s the point: You never want to outlive your money! If we do, the responsibility falls on our children and friends to meet our needs and no one wants that.  So we come up with the best plan we can and act on it.

Let me tell you a tale of two brothers.  My two brothers…

First, there is Jim, a soon-to-be retired teacher/coach with a wife who is employed by the town they live in.  They have had a plan since they got married 35 years ago. They are on target to have $1,000,000 in their retirement accounts at the time of retirement with a plan to live on $100,000 per year.  This is a workable plan for them as they have calculated pensions, social security and withdrawals from their retirement accounts. They are, and always have been, very conservative with their investments and have never strayed off path with a clear focus on $100,000 per year until death.

My brother, Anthony, is a different story.  He is a retired school principal and receives approximately $75,000 per year in his pension.  He will start collecting about $1,700 per month in social security shortly as well.  But…there is a striking different between my brothers.

Anthony has a self-directed IRA which allows him to invest in real estate, mortgages, and basically everything except collectables or life insurance as long as he is not dealing with prohibited people like his accountant and/or self-dealing.  He recently bought a 50% interest in 13 free and clear homes around Atlanta, GA.  This will provide him with additional income of approximately $4,000 per month.  He is in a very intelligent position because instead of saving his retirement money or investing in conservative low-yield CDs or the stock market, he invested in cash flow properties.

These homes will provide him an additional income stream to live comfortably.  With more money than he spends each month coming in, he can allow it to accumulate so he can buy more houses and obtain more cash flow.  In addition to cash flow, he also has a huge upside in these properties upon the decision to sell.  He is able to take rides on his Harley while his money is working for him.

While Anthony’s money is piling up in his recent retirement account, Jim’s is being depleted because he will be withdrawing from his savings each year.  All the while, Anthony’s investments that produce cash flow can be saved or accumulated to buy more cash flow when the opportunity arises.

Which program is better for you?

Clearly, having a self-directed retirement account affords you opportunities to buy investments that produce monthly cash flow.  Take advantage of unique situations that are happening right now. Opportunities that you can see and touch and know have what it takes to work long term…unlike stocks, mutual funds, gold, CDs, or even bonds which pay returns that rarely let you maintain lifestyle – let alone outpace inflation.

Retirement is about not having to work.  Have the money that you worked for all of your life provide for you.  If you have millions of dollars in your retirement account, you might be set simply withdrawing a certain amount calculated upon when you hope to die.  That’s not the best choice though.  All of us should be good stewards of our money and that means the money should be invested.  It’s not just about you, it’s about your family.

If you can see your money on an account balance each month, it’s not invested.

The hard part for most people is they don’t know what to invest in.  To have a self-directed retirement account and direct it to buy stock in Microsoft is obviously something you can do in a traditional retirement account at your local bank or Merrill Lynch.

Self-directed retirement accounts, whether IRAs or 401(k)s, are for people who want above average returns, and safety.  You need to know how to find these opportunities and what to do next if you want to invest more like Anthony than Jim.

 

 

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How the Rich Prepare for Retirement

Let’s face it.  Most problems are money related and one of the biggest problems for people today is to retire with enough income to support them.

As I think about it, my dad’s father died at 72 and my dad is a healthy 88 years old who rides a bike at least 10 miles a day.

Nothing is less dignified than to outlive your money and most people don’t do enough to prepare for the inevitable.

When I was young I thought 70 years of age was old.  I look at pictures of my grandparents and I’m telling you, they were old at 70.  My dad looks younger than they did when they passed away.

So it’s critical that we think in terms of how we budget and save to take care of ourselves until the end.  While saving money is critical and there are many ways to do this, retirement is really about replacing income. In our working lives, most of us are used to receiving a pay check.  Out of this income we support our lifestyle and hopefully invest funds for our nest egg of retirement.

The key to a successful retirement isn’t so much to have a huge savings account that we deplete each month, but to replace the monthly income we obtained when we were in the workforce.

I’ve considered this for years and have taken the steps to replace my “day job” with an income stream derived from rents I obtain on cash flow houses.  When you compare single family houses to every other kind of investment you’ll understand my position.

Cash flow houses provide income, growth, have tax advantages and are potentially much less volatile (RISK) than stocks, gold, mutual funds, bonds, certificates of deposits and oil and gas.

They are easy to understand and now, the barriers of entry into this new asset class as described by Wall Street has been overcome by equity funds, real estate investment trusts “REITS” and turnkey operators that provide “hands free” cash flow houses to people who don’t have the skill or time to do this for themselves.

As a young adult, I never counted the cost of future healthcare, property taxes, income taxes and the possibility of ending up in an assisted living facility.  My Aunt is 90 years old (my dad’s sister) and pays $12,000 per month to be taken care of.  She has depleted her nest egg of over $400,000 to a measly $120,000 in just a few years, depriving her children and grandchildren of an inheritance because she wouldn’t take action to shield her assets from Medicaid.  She has blown through her savings like Hurricane Katrina blew through New Orleans.

Don’t let this happen to you!

If you’re approaching retirement, get with a financial planner and consider making choices that allow your estate to remain as intact as possible to pass down to future generations.

Consider investments that allow for monthly income to replace the money you made while in business or in the workforce.

According to a Merrill Lynch report (Merrill Lynch Edge Report, Fall 2013), the “affluent use a variety of vehicles for their retirement investments,” primarily:

  • 401(k) – 32%
  • Personal Investments – 22%
  • IRA – 17%
  • Checkings/savings – 12%
  • Home Equity – 6%
  • Other – 4%
  • None – 2%
  • N/A – 2%

The above statistics should really grab your attention when you look at the top 3 places the rich are putting their money.  71% of the rich are using 401(k)s, personal investments and individual retirement accounts to prepare for retirement.

Retirement accounts are a necessity as they allow your investments to compound without income taxes until you withdraw the money at retirement.  The Roth IRA and Roth 401k have greater tax advantages as your assets in these accounts compound tax free and there is no income tax upon distribution.

But…did you know this? Retirement accounts can hold cash flow houses and other income producing assets like mortgages.  Personally, I think using these accounts to continually produce income and growth through cash flow houses while working and after retirement is the ticket to the “golden years.”  Gold is definitely a pun in that last sentence as we sure don’t want the “golden years” to turn into the “copper years.”

If you’re one of those people that think the government is going to take care of you, well…hope that works out for you. I’m counting on myself to take care of my family and linear descents by making the most of my earnings while working and investing as I’ve stated above.

-RJ Palano

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Should You Diversify Your Investments?

Business men and women like myself are constantly badgered about diversification of their investments.  This kind of talk usually involves someone trying to sell us something.

C’mon, we’ve all heard the “time share” sales pitch which by the way are not investments.  How about the never ending emails and solicitations to buy stocks, bonds, gold, futures and ETFS? What about the local bank that wants you to buy safe certificates of deposits (CD’s) that are now almost paying a full one percent of interest?

Let me clue you in on a little secret that took me about 30 years to figure out. It’s personal but I’ll share it with you in the hopes that you will avoid some of my mistakes.

You see, I really have crow like tendencies.  If I see something shining, I investigate it.

So as I was growing up in the business world, every time my friends were making money doing something different, I wanted to be involved.

Did you ever hear the saying “The grass is greener on the other side?”  I’m here to tell you it’s the same everywhere, it just depends how you fertilize it and take care of it.

Here are just a few illustrations on all the ways I lost money:

When we have the tech boom, a few of my friends made over 1,000 percent on their money.  So naturally, being the crow that I am, I refinanced some houses and jumped into the tech boom and bought as much stock as I could.  I financed the stocks so I could buy as much as possible.  I still remember that stock salesman from Paine Weber called me to say I had a margin call.

My brilliant response was “What’s that?”  Of course you all know that my stocks dropped in value and I had to cover the loss.

I got out and have never returned to the stock market because it’s out of my control.

FastHomeAuction.com was a start-up that I was involved in and I lost more money than I can summon up the courage to write down.

The coin store, the texting company, lobster businesses, Salvador Dali art, and on and on…

The truth is, every time I bet on someone else, I lost.  The grass is not greener on the other side.

I invest only in single family houses.  This is my area of expertise.  Unlike everything I wrote about above, it pays a dividend every month in the form of rent and when bought in the right areas, it goes up in value and there are tax benefits to owning real estate in the U.S. called depreciation.  There is nothing better for me out there and this is my comfort zone.

The lessons for me and the lesson for you is that if you are good at what you do, invest in your business.  You’re in charge and you make the decisions and most successful people need to just stick with what they are good at.

I’ve dealt with hundreds of international buyers on 6 different continents and we’ve discussed their business ideas and so on. Eventually the conversation comes around to diversification and they ask me what else I invest in.  When I tell them that I only buy houses the conversation usually turns to gold or silver investments and they’ll tell me I’m not diversified.  That’s when I tell them the following: “I am diversified, I buy houses on different streets.”

You see, for me, and you might not feel this way but it’s not all about being diversified, it’s all about focus. I’m focused on what I do and when I invest in what I know, I win.

And that’s the point for you. You may be a lot better off just investing in your business. If you don’t have a business, invest in what you know and everyone knows something about houses.  Most people live in houses and know how to take care of them.

Save yourself a lot of time and money and always count the cost before you invest outside of what you know.

The last point I want to make, and it’s a painful one, is this: When you lose money, you didn’t just lose the money you invested.  You lost the future value of what that money could have made for you – forever.

Try this exercise, at age 38 I lost $180,000 in a maintenance company I ended up owning as a result of factoring their accounts receivables.  Simply take $180,000 and compound it at only 8% for 33 years to age 70.  That’s over $4,000,000 I lost at retirement…but it gets worse.  I can make 12% in my sleep and that’s over $7,500,000 that I would have had at retirement.

That’s the price I paid for being a crow on just this one mistake.

-RJ Palano

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Self-Directed IRAs

self_directed_ira_653189094Providing for your needs in retirement is a responsibility you cannot ignore.  These accounts are protected from creditors and allow you to compound the dollars within these accounts, tax-free.

In our fast paced society it’s important to visualize the retirement you want and the assets you require to have the lifestyle you desire.

It’s important to realize that assets need to convert to a monthly cash flow to provide for your expenses.

That’s why we like self-directed IRAs that allow you to make investments in assets like free and clear houses that can provide a predictable cash flow.

An exercise that I’ve used over and over is how many houses do I need to provide for my retirement?  Here’s what I did and what you can do:  If a house for $75,000 provides a net of $700 per month and you desire $10,000 a month, how many houses do you need?

It’s simple:

$10,000 / $700 = 14.29 houses

So round it up to 15 houses x $75,000 = $1,125,000

So if you could buy 15 well located houses for $1,125,000 than you will receive approximately $10,000 net each month.

Does that work for you?

Look at what your monthly income goals are and do the math for yourself.

If you would like more information on where and how to set up a self-directed IRA or 401k, or for more information on how to get the assets in these accounts, contact me today for a free consultation!  RJP@BuyCashFlowProperties.com

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Buy Houses for Cash and Safety

We are now living in a “cash economy” especially in regards to the real estate market.  A few years back real estate investors fueled the escalation of home values as credit was available to anyone who could fog a mirror.

Not anymore.  Think about this:

Financial leverage allows buyers to magnify their returns by using credit to borrow on house acquisitions.  Leverage also magnifies the risk as many well intended investors found out.

It’s simple: Leverage magnifies risk and there is no reason to do it in today’s plethora of real estate opportunities.

If you want safety – pay cash for well located houses that can be bought, rehabbed and managed by a professional company.

Our country has turned into a debtor country and our society is a debtor society.  Most people outspend their income through the use of credit cards, equity lines and mortgages.  We are slowly seeing some of this slip away as credit is no longer available like it used to be.  For most people, that’s about the only way they could control frivolous spending.

When you buy a well located house for cash a few things happen:

  1. You have safety
  2. You have cash flow – usually double digits
  3. You still have depreciation to increase your returns
  4. If you bought right, you have equity

There is no substitute for SAFETY as it gives every investor peace of mind.  A steady program for investing with this mind set will help keep you safe and your overall returns will be significantly better than other investments available to you that don’t allow leverage.

-RJ Palano

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The Art of the Deal

How long would it take you to recognize a good purchase opportunity?  How long would it take for you to make a decision to take action?

In the business of flipping houses, you must size up a transaction quickly and get the property under contract before someone else does.

This new series of articles I write are going to be real deals that I’m doing currently in the Atlanta Metropolitan area.

The real estate market is local in nature and in my position, we take what the market gives us.  Over the last six years we’ve operated only in the Atlanta area.  Initially, we acquired homes in REO packages, and then individually from banks and foreclosure auctions.  Those opportunities are 10% of what they were 6 years ago.

The supply of houses has drastically reduced, thus most of the hedge funds have packed their bags and left.  That leaves me and all the other hopeful investors scrambling for the crumbs of houses in a real estate market that has heated up.  These cycles of supply and demand have caused me to change my approach to the market.

My highest and greatest skill is negotiating profitable opportunities from home owners.  Thus, we’ve modified our marketing to attract home sellers and we are back to doing what we do best.

In this series of articles I’ve now prepared, I’ve targeted my marketing to attract sellers to buy their houses directly from them.  These are houses that are not listed on the Multiple Listing Service (MLS), and the only competition I have is usually other house buyers like myself.  Thus, I must recognize an opportunity quickly and I must decide my exit plan.

Never go into a negotiation to buy a house unless you know exactly what your strategy is.  I immediately determine my exit plan based on the location, age of the house, quality of the house and neighborhood from the following exit strategies:

1. Wholesale house to another investor in “as is” condition. When I use this strategy, I either assign my interest in my sales contract with the owner or I close on the transaction and then I market to other investors.

2. Buy – Rehab – Retail. In this strategy, we close on the home from the seller, remodel it and place it on the market.  There have been times when I leave the title in the name of the seller I buy from so that they sell directly to my buyer.  This could be important to avoid seasoning requirements with my sale to and “end user” (homeowner).  I can protect myself with a recorded option to purchase from the seller I buy from, or I can record a security deed to protect my option.

3. Buy – Rehab – Sell to Investor and We Manage. If the property is a quality house in a quality neighborhood, we might sell to one of our current investors at a profit and place into management.

4. Buy and Hold. Simply put, we keep some houses in our own portfolio of rentals.

They key to buying direct from owners is to only buy from motivated sellers.  If they’re not motivated, you’re wasting your time.  Depending on the circumstances, you can offer to get the owner to hold a note at no interest.  I’ve done this dozens of times and have done so again recently on a fantastic opportunity that we will sell retail.

Feel free to send me emails or call me to ask questions about specific transactions and my hope is that you could also put together profitable transactions like I do.

Keep an eye out for upcoming articles…there will be real deal structuring and negotiations shared with you!

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One of the Biggest Mistakes I’ve Made in Real Estate

neighborsMeet the neighbors!

Prior to buying a house for investment you should knock on the neighbor’s door. At least the doors on either side of you and across the street.

A few years back I purchased a home in New Port Richey, FL just north of Clearwater. I didn’t knock on doors at that time and if I would have, I would not have bought that house. The neighbors across the street made it very difficult for us to sell the house as they all had motorcycles and hung a rebel flag on their house every weekend. Worse than that, every time we had a prospective buyer they made a point to visit my house and tell the potential buyer that the street had major flooding issues.

We finally sold the house, but only after losing three buyers.

Never underestimate the damage bad neighbors can cause when renting or selling homes next door to them. We won’t buy houses when we notice certain things such as: junk cars, unkempt houses or seeding looking characters in the immediate area.

Another good reason to knock on your neighbor’s door, besides initially determining if they will cause a negative impact on your investment, is to enlist their help. When we purchase houses to hold for rentals we always get the name and numbers of the surrounding neighbors. This enables us to call them if we can’t reach the tenant or they can call us if the tenant is behaving poorly. This can save us a trip to check on a property where we can’t reach the tenant while also keeping us informed if they are not taking care of the place. When you’ve been directly involved in property management as I have for 35 years, you want to save time and increase efficiency wherever possible. It’s a lot easier to call a neighbor and ask if they’ve seen a moving van in the driveway then to drive over to the house when the rent goes unpaid and the tenant ignores your calls. The neighbors love it when you tell them that you are putting the house in great condition to attract a nice family that can eventually buy the home. Give them your phone number and ask them to call you if the lawn goes uncut or the occupants are not behaving right because “we know this is a nice family-oriented neighborhood and if our tenants don’t act right, they will be evicted.” Then ask for their number in case you ever have an issue with the tenant.

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The Importance of Liquidity in Real Estate

banknote falling into water creating splash

Since the beginning of time the wise use of leverage has made people very rich throughout the world. Leverage has had two major components throughout my real estate career:

  1. Leverage of people
  2. Leverage of finance for real estate purchases

The use of leverage of people is really basic, this is how every business is operated. In real estate we hire realtors, bird dogs, contractors, property managers, handy-men, bookkeepers, marketers, social media promotors…the list continues with all these things we can’t or won’t do ourselves. The main idea here is to do what you do best and hire the rest of the people to help bring you closer to your goals.

It’s the unwise use of financial leverage that gets many well-intended investors in trouble and I’d like to take you a little deeper on why liquidity is so important with real estate.

Remember 2006?

People have short-term memory issues unless something really bad happened. In 2006, the real estate bubble in Florida was in full force, where I reside. At that time, the market was ignited by low interest rates and easy credit which was fueled by investors throughout the country especially buyers from California. At that time I was wholesaling properties primarily in Florida with an emphasis on the Tampa and Sarasota Bay areas. In an average month we would wholesale 8-22 houses, this would occur every single month. I remember so well that if we overpaid for a house in the morning, we would wait a day or two to sell it because prices were going up so fast. The buying frenzy was on and like today’s market, our biggest challenge was obtaining quality inventory.

The point here is that most of these buyers had no equity at the time of purchase which translate to no liquidity. Buyers from California would buy anything in Florida they could if they could get financing with zero concern for liquidity, and no thought of shortfalls or depressed values. Hey, I also was caught up in holding highly leveraged properties and it cost me dearly.

You know the rest of the story as this was a disaster for investors and most of them lost the properties at foreclosure.

Single Family Houses are the Most Liquid of All Real Estate Investments

The case for single family houses (SFH) is they are so easy for me to make because I’ve owned thousands, including apartments and condominiums.

I write this from my personal ownership experience with all these types of properties.

Let’s pretend: Let’s say you can buy a 10 unit apartment building for $1,000,000 or 10 houses at $100,000 each all cash without financing. What would be better for you?

Some people might say the apartment building would be better because all your tenants are centralized and under one roof. I’ve had both and I would have to say the SFH would be best for the following reason: Liquidity! If I ever needed say $150,000 I could raise the funds easily in a number of ways:

  1. I could sell a house or two.
  2. I could borrow on a house or two conventionally or with private funding.
  3. I could sell a partial interest in a few houses to another investor.
  4. I could sell an option to purchase to tenants.

You can’t do that with an apartment building or an office building!

It costs a lot more money to borrow on any type of commercial property and it’s more challenging to do so.

Another reason I would chose single family homes is: Different Locations.

More locations allow you to diversify your portfolio. The best way to explain this would be the 25,000 square foot office building I bought in New York for $975,000 in 1986. The area decreased in value and so did my investment, I sold it 3 years later for $840,000. Why, I was stuck with all my units in one location and that property lost $135,000 of value.

If you attempt to sell an apartment or office building, you will sell to sophisticated investors that buy property based on a cap rate. Thus, your sale price is determined by the cap rate. With SFHs, you can sell to an end user/homeowner and these types of buyers will pay more if you have a well-located house because end-users/homeowners buy for emotional reasons!

I paid full price for my last home in NY and my current home in Florida. Why? Because it fit my family’s needs and when it comes to buying a home for your family we buy for many reasons and most of them are emotional.

The wise use of leverage is appropriate whereby there is equity in the property, thus liquidity. This means you either by the house significantly under value or put more money down. But before you do that, it’s important to remember that investors cannot be clumped together. We are in different seasons of life based on age, children, marital status and financial resources.

When you are young you have more recovery time if you screw up, and we all screw something up at some point in life. As we get older safety and preservation of wealth become more important than ROI. Remember, return of investment is more important than return on investment.

Liquidity is important as the “winds of change” are constantly blowing and we all need a backup plan when shit hits the fan.

That being said, if you’d be interested in learning more about the safest real estate investment ever offering immediate and above average equity (which is perfect for retirement accounts), call me direct at (813) 435.1551 ext. 1001 or email me at RJP@BuyCashFlowProperties.com

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What is the No.3 most common mistake investors make

RJ-80p-headshotBuying inexpensive, low-income houses looks excellent on paper until you count the cost in terms of time and money.

I’ve owned as many as 350 low-income houses at one time with 143 tenants on Section 8.  These are exactly the type of properties you want to avoid as they will never have predictable income long term and they are not the type of properties that appreciate in value.

Worse, who are you going to sell them to after you rehabbed them the third time?  The short answer is: not a would-be homeowner.

So the No. 3 most common mistake real estate investors make is buying the wrong type of property.

It wasn’t enough for me to screw up my personal portfolio once. I had to do it twice in  different parts of the country.  Both times it netted me the same result as I built a portfolio on sinking sand.  First in New York, then in Detroit Michigan, parts of Ohio and Indiana.  I cut my losses prior to the City of Detroit filing bankruptcy and have since built a new portfolio in Atlanta, Georgia.

When you are feeding off the bottom of the real estate barrel with low-income housing, it’s easy to become disillusioned with cash flow houses.  These types of houses always require more maintenance and more management.  The clientele you get for tenants are a “protected class” for liberal politicians that act like they are the “protectors of the poor.”

You can have the best intentions to help and serve people, but I found out the hard way that you can’t help people who won’t help themselves or people who think the world owes them a living.  When you have this type of mindset from a tenant, you are going up against the Al Sharptons and  Jesse Jacksons of the world.  Underneath my alligator skin is a sensitive, caring person who truly wants to help people and sometimes it seems like the people you try to help the most are the first ones to rain on your parade when they think they can get something for nothing.  There is NO free lunch out there and I suggest you avoid doing business in any area and/or neighborhood that relies on any type of government assistance.

The first question I ask myself when I by a house is, “Who will buy this house from me for more money than I paid?”

If you are in the ghetto, or a low-income area that is marginally better than the ghetto, then you will only sell to another investor.  Why?  Because people who want to be homeowners don’t want to buy in these areas either.  If they qualify for financing, they are getting out as fast as they can.  People buy for emotional reasons when it comes to buying a home for their family.  That’s why the houses I select for purchase have good curb appeal, are in good areas and the surrounding neighborhoods are well kept by primarily homeowners.  Buy houses where people want to live; in subdivisions, near schools, churches, jobs, and shopping.

Promoters sell these low-income houses based on a rate of return that is fictitious and never materialized to unsuspecting investors.  I get calls to find houses for $30,000 to $60,000 and I simply tell people that I won’t buy this garbage.

First, I don’t want to buy anything that I wouldn’t keep myself, so these types of houses are immediately ruled out. Second, my property manager won’t manage houses in these types of neighborhoods and, by the way, these types of neighborhoods are in Atlanta, too.  I initially purchased several houses that we would never touch in today’s market.  They are not good for your portfolio for long- term cash flow houses, for predictable cash flow and future appreciation.

I’ve seen people offering houses all over the Midwest and parts of the South with rates of return over 40% if you use financing and get a mortgage.  Financing your purchase always adds risk as your portfolio and is only as good as the tenants who reside in your homes.   A few months of vacancy or repairs will destroy your “hoped for” return and you will also dig into your pocket to pay the mortgage.  And, you will never sell these houses for what you paid for them.

Disagree with RJ’s point of view? Or, agree? Post your thoughts below in the Leave a Reply area.

You can visit RJ’s website at www.buycashflowproperties.com

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