Debunking Myths: The Truth Behind Real Estate Investment Advice
Thursday, February 29, 2024
Debunking Myths: The Truth Behind Real Estate Investment Advice
Exposing the misconceptions spread by online forums.
Keyboard Warrioritis….a rapidly spreading disease.
It gets into people’s brains, taking root and growing slowly over months, even years, undetected. The symptoms affect victims internally at first. They begin to feel aggression toward people having real estate investment successes. This aggression turns into a need to respond in the forums, to share what they know to be true after months and months of learning how to invest in real estate - ideas that make them feel as though they have real experience. It’s at this point the disease fully takes over and wants to spread itself.
The victim writes a forum response, and a keyboard warrior is born.
Thankfully, experts have finally found the cure to stop the spread ...ACTUAL EXPERIENCE.
- In this business, I come across a lot of new investors, so I get to hear first-hand about the effects that these forums can have on folks. All joking aside, the misinformation in this industry is pretty damaging. I think it prevents people from being successful. As an avid researcher myself, I too was almost caught by unrealistic expectations early in my career.
To be clear, I’m not singling out Bigger Pockets, and I’m not talking about content curated by Pros. I’m talking about the potential of all forums to spread ideas that have been recycled over and over by those who don’t have real experience with the advice they give to others.
I’m talking about ideas that get developed like this:
- A pro, someone with actual experience, presents an idea that fits his or her SPECIFIC investment strategy.
- A person with no experience hears that idea, and understands neither the idea itself nor the context in which it fits into that pro’s bigger-picture strategy.
- This person again, with no experience (and a mild case of Keyboard Warrioritis), wanting to sound smart to other people on the internet, sees his or her opportunity and tries to regurgitate the pro’s idea onto various forums.
- Unfortunately, this person is skilled at writing, so the idea sounds good to others online.
- Another person, also with no experience, reads this regurgitated idea as one coming from a pro, so he or she uses the information the same way, spreading it onto another forum.
- Finally, the idea is tried out in real life, and it fails miserably.
As I mentioned above, I’m an avid researcher myself, and I’ve seen this pattern repeated over and over on the internet. There seems to be at least 9 real estate investing strategies presented online that are suggested in all scenarios.
Let’s review these lies one-by-one:
#1: The Freebie
- Strategy: You can get away with having zero money invested on every deal. Aka - the BRRR
- Issue: People end up prioritizing getting a deal done for $0.00 over the true priority: acquiring property. When they do this, they miss out on some great deals.
- Reality: Oddly enough, when you become more experienced, this strategy becomes much easier. When you’re first starting out, these deals are much harder to come by. I hate to even call it a strategy because it’s more like a tool that serves the meta-strategy of acquiring property. Don’t forget that you’re an investor. Investors invest money. You need to be prepared to leave money in a deal.
#2: The Syndicator
- Strategy: I was talking to a guy who has done a couple of flips and now wants to raise money in a fund to go big on flipping (or really to BRRR).
- Issue: Handling a couple of flips doesn’t mean you’re ready to get into syndication. I had already done dozens of flips and held dozens of rentals before I first stepped into the arena of raising money.
- Reality: On your first deals, I suggest that you use your own cash, bank money, money from a professional hard money lender, or money from a private lender (like a friend or family member) who knows that you’re a rookie and is OK with that risk.
#3: The Rapid Rehabber
- Strategy: I remember dealing with one of these forum-trained investors who asked me if we follow the $1000/day rule on rehabs. Basically, if a rehab was budgeted at $30K, it would be done in 30 days.
- Issue: This could work if you have no permits or inspections to deal with and have access to an internal crew, which means you won’t have to deal with subcontracting. However, that’s not going to be the case for most houses you buy, and most contractors are not going to have an internal crew.
- Reality: I suggest adopting a strategy that emphasizes the initial deal, contingency in your rehab budget, and consistency over speed. Make sure your deal allows for monthly interest payments that cover a realistic rehab time frame rather than trying to make deals fit into a rushed (and unrealistic) timeline.
#4: The El Diablo
- Strategy: When I first started out, I would buy all my deals from the MLS. They were always thin deals, and I would make them work either by doing the renovation myself or by doing large value-added items, like an addition, on the project.
- Issue: I thought (like a lot of people) that wholesalers were dirty and out to screw you. This was a problem.
- Reality: After I learned more about the truths of real estate investing, I decided to give a wholesaler a chance - WHAT A DIFFERENCE in deal quality! Of course, I’m not saying you shouldn’t buy off the MLS, but I AM saying that the MLS should be one of multiple strategies for deal acquisition (and probably not the primary one).
#5: The Corporate Contractor
- Strategy: I came from a corporate background - I know, hard to believe! When I started investing in real estate, I held contractors to the same expectations I had for those I worked with in the corporate environment. I see this a lot with other investors.
- Issue: Most of the contractors you’re going to meet are as far as one can be from the corporate environment. They are small business owners working their butts off to provide for themselves, their family, and, for some, their crew. They are burning the candle at both ends and trying to hold it all together.
- Reality: Most of your “bids” are going to come in the form of a text message (at best). That’s OK. Lean into it. Don’t fight it. Help them stay out on job sites working. If you can do that, it will likely be your project they choose to work on.
#6: The Ms. Cleo
- Strategy: Everyone wants to try to predict the next market crash. A lot of times, people do this to project a higher level of experience to others than they actually have.
- Issue: Nobody can predict the next market crash.
- Reality: You need to have a strategy that works in every market. It basically comes down to this: always acquire property. If you’re going to rent it, make sure your rent will cover expenses so you can afford to hold onto the property. If you’re a beginner, find a way to cover the mortgage while waiting for a renter to cover the expenses. If you’re flipping, there are two things to consider: (1) don’t buy based on speculation and (2) have the ability to hold the property long enough to get your money back.
#7: The Right Formula
- Strategy: Do you think that you can simply fill out a spreadsheet and predict how the project will go well in advance?
- Issue: Projects that require any sort of rehab construction will always start out with a blurry vision and then get honed in as time goes on. A formula simply can’t tell you everything you need to know about a project.
- Reality: You can be systematic in your approach to rehab construction and have fail-safes in place for inevitable surprises. Projects that don’t require renovations can be more formulaic. However, you still need to account for the “human factor.” Make sure you always leave contingency in your plans, regardless of the scope of the project.
#8: The Icing Without The Cake
- Strategy: This mostly relates to Short Term Rentals or Airbnbs. I cannot believe the amount of people who buy deals based solely on how they will perform as a short term rental.
- Issue: Investing in short term vacation rentals is an unproven method that is subject to current and always-changing regulations. This is out of your control and therefore, excessively risky.
- Reality: I do have some short term vacation rentals. When the City changed its opinion on them and revoked our ability to rent them as such, we put long-term tenants into each unit. Despite the changes from the city, we can still cover our expenses (and make extra). You need to be able to underwrite a deal in a way that works for a standard long-term rental or flip (whether or not you end up using it as a short term rental). This means finding a deal that brings you equity TODAY.
#9: The Self-Manager, Financier, Contractor, Agent
- Strategy: Buy a property with your own cash, do the construction with your own two hands, then manage it yourself or sell it for sale by own. You would save all kinds of money!
- Issue: Saving money is only one point to consider with this strategy.
- Reality: You have two other things to consider: (1) this strategy is a bandwidth thief that will stunt your growth and (2) you are not accounting for opportunity cost (AKA the cost of your time). If you’re buying in cash, you should account for the 5% - 10% (at least) of your return you’re missing out on. Do you want to self-manage, self-contract, or list the property for sale by owner? Track your time spent on these things, then decide for yourself if you think it’s worth it.
Conclusion
The key thing I want you to understand is that these ideas must be considered within their separate and unique contexts.
They all apply to different scenarios and big picture plans. Don’t take anybody’s recommendations as gospel, including mine. The idea here is to collect knowledge, and then, through ACTUAL EXPERIENCE, begin to understand how they all work together.
Good luck out there investors.
Hi, I'm Ross Paller
CEO Of Larossa
After flipping over 300 houses, holding a portfolio of 150 properties, and creating a successful construction company for over a decade, I felt compelled to pay it forward by sharing the wealth of knowledge and experience I’ve accumulated on my journey.
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