I’ll be the fist to admit that it is very possible that my words here will fall on deaf ears. Most people, when looking for a new income source, will latch onto one concept and be reluctant to change their course regardless of what anyone else may show them. If you are interested in buying/fixing/selling FL foreclosures for big paydays, then any advice that anyone gives you outlining how you can make a killing in the stock market is probably not going to change what you intend to do.
Regarless of this fact, I’m going to try and put a little bee in your bonnet and give you some alternative options to real estate investing, and here are a few reasons why…
1) Property Values Will Continue to Fall – if you did not read my last post about the coming double-dip recession, then you need to do so in order to get a proper perspective on what is headed our way in 2010-2011 and why.
2) Flipping Is Out – most people jump on the real estate bandwagon because they hitched their cart to some guy hocking a course telling you that you can get rich buying FL foreclosures, fixing them up, and selling for a profit. Only problem is that most of these courses have no base in reality anymore.
They typically gloss over the part about where to get the money to make the purchase, and where to get the money to make the repairs even though it’s a “no money down” real estate investing course. The fast and simple answer they have for just about everything is to simply “find a hard money lender”. This should solve the whole issue with finding the funds to buy that killer FL foreclosure deal you’ve got your heart set on, right?
I don’t’ want to be the one to burst your bubble, but the “hard money lender” concept poses a big problem because the typical hard money lender as outlined in these courses no longer exists. They DO want money down, they do NOT just care about the value of the property, they make it HARD to get the funds to perform the repairs. Using hard money lenders to fund deals (especially in areas where values average more than $50,000) is a thing of the past based on a paradigm that doesn’t exist anymore.
The biggest problem with flipping though is that it’s very, very difficult to make money when the tidal wave of FL foreclosures is beating prices down faster than you can fix yours and resell it. By the time you are able to sell yours, the market has already passed below the level at which you can make a profit.
3) Being a Landlord is NOT for the Faint of Heart – if you are looking to get into this real estate investing thing by becoming a landlord, have no previous landlording experience, little cash, and less than stellar credit then I have to advice you to reconsider your path.
Being a landlord is not easy and many struggle for years before they develop the proper mental toughness that is required to keep renters in line and keep the checks coming in on time. Do NOT deceive yourself! Renters have a certain mental attitude and “kindness” is not a character quality that will help you in this business. Sternness balanced with fairness will. If you do not feel that you can be stern almost to the point of being a dick then you are NOT ready to be a landlord.
Remember, we are in a recession now right now and we will soon be in a double-dip recession that will continue the financial hardship of millions for years to come. (Oh, and remember that you heard it here first)
If you do not approach being a landlord with the proper attitude, the many financial problems of your tenants will become YOUR financial problems and after a while your rental properties will be additional fodder for the newscasters who like to prattle on about the nuances of the number of FL foreclosures that are stockpiled in our state.
Now before you give me the finger and drop some comments about how I’m a dream killer, how YOU will be the one to make it happen and that anyone can overcome all obstacles to achieve their goals if they can only hold on to their vision long enough…before you start prattling your positive affirmations you learned from the movie The Secret to keep my negative words at bay, make sure you ask yourself and important question…
Most of us, if we are honest with ourselves, will admit that the reason this whole real estate investing thing appeals to us is because we feel that we can “get rich in real estate” like others that we know. Or maybe we don’t even know anyone that DID get rich in real estate, but we know some stories of people that have…right? SOMEONE, SOMEWHERE has taken home a truckload of cash while investing in FL foreclosures.
So people like the idea of using real estate as an investment vehicle to help us achieve our money goals, our get-out-of-debt-free goals, and our “better life” goals. Now we’ve already outlined some of the reasons why the hopes which many people today have been sold on may not be based in reality anymore because of the complete and total overhaul the real estate and mortgage industry have gone through in the last 36 months. But let’s put that aside for the minute and dig a bit deeper with some more specific questions.
We all have tunnel vision and tend to focus on whatever shinny bauble is in front of us, but really, why is it that investing in FL foreclosures really gets people’s blood pumping and the stock market does not? What’s the appeal? After all, if we cut out the rhetoric that is heaped on us by the people selling the get-rich-in-real-estate courses which leads us to believe that real estate is the last bastion for the “little guy” to be able to break out of the rat race and “make it”, then we have to realize that the super-rich people don’t really seem to be known for making the big bucks in real estate. Don’t believe me?
Alright, without doing a Google search or looking through Wikipedia, go ahead and name for me 10 well known “rich people” that are making their money right now in real estate. Most people can’t name anyone other than Donald Trump and considering the track record of The Donald, we have to be skeptical if he’s even making money in real estate right now.
But maybe that’s a bit unfair. Remembering names is difficult. I can hardly remember my grandmother’s name. So let’s forget their names, just tell me what companies they work for. Still can’t do it?
If we switch our focus out of real estate most people know of Bill Gates and Steve Jobs by name, not a big improvement. But, just about everyone knows that the CEOs for Exxon/Mobile, BP, Bank of America, AIG, Wacovia, New York Life, Charles Schwab, and other big name companies are raking in tens of millions of dollars each year.
But John! I’m not looking to make tens of millions of dollars each year. Half a million each year would be fine for me and real estate looks like it’s something I can get into and achieve a goal like that.
I’ll give you that one. Of course, before we plow ahead just yet, let’s take a look at WHY we’ve been told that the game of flipping FL foreclosures is an ideal investment course to chart.
1) Consumer Need – everyone needs a place to live, right? Bottom line is that either they are going to rent a place or they are going to buy a place, one or the other. The US is unique in its cultural imperative of extending home ownership to all citizens. Heck, people in America pretty much feel like second-class citizens if they are renting and those who say otherwise are often lying as they speak the words. So real estate will always have a market and buying/fixing/selling FL foreclosures seems to match up to that need pretty nicely.
2) Tax Benefits – it’s very true that the government has decided to create a number of tax benefits that go hand-in-hand with owning real estate. Whether this is used as an incentive to buy homes or is really another method the rich have conjured up to shelter their money from taxes is a matter of debate. Either way, owning real estate usually does have significant tax benefits.
Only downside to this is that you really DO need to have some level of income for these benefits to actually take effect. While there are plenty of people in good jobs who are looking at investing in FL foreclosures as an escape mechanism to help them stick it to their boss and eject from their day-job, these people are in the minority. More people that are one step ahead of broke are sucked into the no-money-down real estate investing whirlpool and are looking for that one “big thing” they can use to jump start their life. If you have little to no income then the tax benefits are not really going to be there for you in the short term.
3) The Investment You Can Live In – I like this one. I’ve read numerous times about how real estate has an added benefit in that you can LIVE in your investment if need be while the same can’t be said of stocks or bonds. After all, you can’t LIVE in your stock certificates.
I’m going to say right now that this is dirty logic. Sure you can’t live in your stock market investments…but you can’t live in your 20 houses either! Most people “live” in only one house. The richer they are they might have more than one house and more than one vacation house, but they don’t look at these additional residences as “investments” the way you and I look at real estate as an investment. No my friends, when you have a tenant in a property and things go hard for you, the choice is not usually there for you to boot them out and take up residence in your rental property. Furthermore, people don’t usually do that. They’ll let the rentals go down in the flames of foreclosure before they’ll choose to lose their own home. Don’t get caught up in this nonsense argument.
4) Cashflow – one of the major benefits of owning investment property is that, if you bought right, you can generate a stream of cashflow. After all, your mortgage payment is only so much and anything over and above that is yours to keep as profit, right?
Wrong! Most people don’t count the costs associated with being a landlord. John T. Reed is pretty good at bringing the cold, hard facts to light. Today, with prices at all-time lows and going lower while rents will continue to rise, it is possible to make this work. Real estate is a good mechanism if you can figure out how to buy low enough and have a system to control your tenants so that their actions don’t work against you resulting in the evaporation of all the profits you worked so hard to realize…but it’s not easy.
5) Leverage – this is probably the single largest benefit people associate with investing in FL foreclosures. They truly believe that they can get a great deal on a house, fix it up, and sell it for a profit.
If you can buy a house for $100,000 and then put $20,000 into it and then sell it for $200,000 in 8 weeks with buying/selling costs of only $10,000 (yeah right) then you’ve managed to make a profit of $70,000, right?
Better yet, if you got a mortgage to purchase the home and that mortgage only required you to invest $10,000 up front then you would only need to have a total of $30,000 in cash to make the hypothetical FL foreclosure investment work. In the end you’d end up getting your entire $30,000 back plus an additional $70,000. That’s a profit of 233 percent!
And that’s not all…it gets better, doesn’t it? That 233% profit was only over 8 weeks which means that adjusted out for the year you’d be tracking a 1,515% return on your money!
We look at those kinds of figures and ask ourselves why anyone would bother begging and scraping for a sad, weak return in the stock market when they could be investing in real estate, right? And it’s all done through the power of leverage.
So we have five reasons to consider choosing investing in real estate (and FL foreclosures in particular) as a prime alternative to the stock market with Leverage being the biggest one of them all.
Just writing about it sounds so exciting that I just want to go out there and buy up a vacant block of houses myself. But before we do, let’s consider the very stark contrasts that the gurus just don’t seem to be addressing.
1) Liquidity – one thing that traditional markets have that real estate lacks is liquidity. Whether it’s stocks, bonds, futures or what have you…you can pretty much find a buyer instantly these days whenever a market is open (and sometimes even when they are closed). The same cannot be said for real estate which is why we have so many stories of people that can’t sell these houses in a short time frame.
Don’t think that you’ll be the exception and go off believing that you’ll somehow dodge this very real fact because you’re an “investor” and have a read a course or two with smooth sounding tricks that you feel will enable you to sell faster and at a higher price than the neighbors that live in the area where you bought your FL foreclosure property.
This market is unusually harsh and properties that are top-notch and seem to be priced lower than the competition might still be priced too high to sell quickly. Just because your house looks better than the competition which are all priced at $185,000 and your house is priced at $180,000 doesn’t guarantee a sale. The market may be at $160,000 and you’d just end up being another overpriced house…one among many.
While you are waiting to sell, you are not able to move your “pretend” profits into another house which means your money is sitting there idle. At the same time, with every passing day, the value of your investment property is dropping out beneath you.
2) One Way Profits – investing in FL foreclosures is a one-way profit system. You MUST buy low and sell high, and in that order. Utilizing leverage (which is why you want to get involved in this whole real estate investing thing anyway) thus only works when the value of houses INCREASES, not the other way around.
People play mind games on themselves saying that they’ll be able to outrun a race horse by buying so far below market that once it’s fixed and put back on the market it will catch the market as it comes down, a sale will be made, and they’ll reap their rewards.
I’ll admit that this DOES happen. It happens often enough that it inspires beginners to thinking that they can easily do this…and do it consistently. In truth, just doing it once usually means you have connections with REO Realtors and others who can give you ‘tips’ as to what houses are coming on the market in your target areas, how much the bank will accept, and how you can get your offer in before the rest of the world even knows the property is available. Most newbies don’t have the resources or contacts to make this happen even once much less consistently enough to enable them to create a steady income from these types of deals.
So the pros with connections make money playing Real Estate Russian Roulette very skillfully while newer investors who just bought a course or attended a seminar end up getting their brains blown out. Trying to make money flipping FL foreclosures in a declining market is a very dangerous thing to attempt to do!
3) Financing – the single biggest obstacle to investing in real estate today, the one thing that makes all the rest look as complicated as folding a paper airplane, is the problem of gaining access to the funds needed to make your real estate investing business a reality.
You could stomp through hundreds of FL foreclosures, know your target market like the back of your hand, but if you don’t have the ability to secure the money to buy a property…then you’re dead in the water.
Look at our previous example. In that case you would need just $30,000 in liquid cash in order to make that deal happen. In the end it reaps a reward of $70,000 plus you get your original $30,000 back. Totally makes sense right?
Of course we have to realize that while $30,000 is a drop in the bucket in the world of real estate, it’s NOT a small sum to gather together all at one time for most people. Furthermore, those who HAVE that kind of money sitting around in a savings account usually are NOT the types that are interested in “no money down” real estate investing which means that those who haven’t got it happen to need it, and those who HAVE got it won’t use it. Nice.
Another more pressing problem is that even if you DO have a boatload of cash sitting around, it’s very difficult to SCALE this business up once you have perfected it. After all, most mortgage companies are hostile to lending to investors in the current real estate environment. Most people looking to get started investing in FL foreclosures will only be able to qualify for 4 mortgages at any one time (including the one on your own home) and this applies across the board regardless of credit or income levels.
I don’t know about you, but owning three single family houses in addition to my own home does not really constitute building a “real estate empire” in my book. Sadly, this is the unknown reality that many face before they ever walk out of the seminar halls.
At this point, investing in real estate doesn’t really seem all that inspiring. Mayhap you are even cursing me under your breath from across the nation for “killing” your dreams. Before I offer some alternatives to buying and flipping FL foreclosures, let me offer a ray of hope. It’s called:
…also known as “private mortagages”. This is the idea that instead of going to a bank, you just go to people that have lots of money and ask them to “become” your bank. After all, many of them are not making a good return in the market (this will be doubly applicable in few short months) and don’t know where to turn. If they give YOU the money to buy these houses, you can give them a 10% – 12% return on their investment and still walk away with the lion’s share of the profits when your property is sold at a later date. Sweet.
Truly, I can confidently say that it is still possible (though not entirely probable) to make a good amount of money investing in FL foreclosures as long as you have access to Private Money lenders. Without it, most people are dead in the water in the new world of real estate investing that we now find ourselves swimming in.
But let’s put aside real estate investing entirely for a while and see if there are any other options that are available which give us many of the same benefits of investing in real estate but don’t have some of the negative implications. Let’s start with…
Futures – if you are a more experienced investor who “dabbles” in the stock market, then you probably know what futures are. That leaves out about 90% of the American population.
In short, Futures is another name for commodities investing. Commodities are the “stuff” that is required to make the world turn. Food stuffs like corn, soybeans, and cattle. Precious metals like gold, silver, and platinum. Also fuel like crude oil, refined gasoline, etc. That kinda stuff.
Investing in commodities is similar to investing in the stock market in that the language is often the same and you can trade by using a traditional broker or a self-serve style online broker. But the similarities pretty much stop there.
While any “market” is based on the fundamental agreement between the buyer and seller as to what the item being traded is worth, the ESSENCE of what is being traded on the stock market and what is being traded in commodities is different.
Stocks are paper assets based on expectations as to what the current value and performance of the underlying company is and what it will be in the future. Commodities on the other hand, are “contracts” for the future delivery of whatever commodity is being traded. This is not just two sides of the same coin. The difference is profound.
Everyone can all at once on the same day “agree” that a particular company is worth nothing. This usually happens if it makes an announcement that it is heading in to bankruptcy. Not so with commodities. If you have a truckload of corn, news might come out that corn is worth less, but can it really ever be worth ZERO? At some point someone, somewhere will realize that they can get that truckload of corn at an awful good price. Even though it’s not worth much based on the current news, it could be dried out and used as cattle feed in the worst case scenario. If the price is less than what they are currently paying to feed their cattle a different type of grain, someone is going to buy. See the difference?
Next, unlike investing in FL foreclosures, commodities are liquid. The market runs on a consistent basis each week and the volume traded on these contracts is very high. Even as a small-time investor who buys one or two contracts at a time, you can be pretty sure that when you place an order to sell, it will be filled rather quickly.
The second biggest reason why people get involved in commodities trading is that the investments can easily be run in reverse. You could “sell” a commodities contract on Monday for $10,000 and “buy” it on Friday for $6,000. In the end you “bought low” and “sold high”…you just did it in reverse. That doesn’t matter though because you still would have made a $4,000 profit. Shorting the market is built into futures trading at its very core, while shorting the market in stocks is not as easy to do as there are fewer vehicles available that facilitate such transactions. Investing in FL foreclosures is even worse as you can NEVER make money when the market is going down by “selling” what you don’t own today and “buying” it tomorrow.
Now this is all well and good, but here’s the “Big Reason” why you should consider giving this type of investment a second looksy.
If we think back to the reasons why investing in FL foreclosures seems like such a good idea we remember that the single largest benefit is that you can create a huge amount of cash value by investing a “small” down payment and leveraging the rest of the property with debt in the form of a mortgage. Of course, this doesn’t work well if you can’t GET the mortgage because they are nearly impossible to come by for investors, or if you can’t get the mortgage because you have poor credit, or you can’t get the mortgage because you don’t have the down payment in the first place.
In commodities, every contract is leveraged. If you take the time to gain the knowledge and experience to be able to make wise investments in commodities then you can gain the same leverage as you would achieve by buying/fixing/selling FL foreclosures and funding the purchases with a sequence of mortgages.
Better yet, you don’t have to do ANY rehab, you don’t have to do ANY marketing, you don’t have ANY Realtors wanting to take a large percentage of the gross sales price of the property, you don’t have to drive anywhere. Power up the computer and you’re in. All without so much as a credit check. How do you like ‘dem apples?
Forex – Have you ever gone on a trip to a different country? Before you left, did you exchange some of your US currency for the currency of the country you were traveling to? Well when you did, your bank probably ended up running the transaction through the Forex market either that day, the next day, or sometime in the future.
Forex is another market similar to the stock market and futures markets, but it is designed to trade currencies. Don’t cower in fear at hearing this. It’s just another market. The basics remain the same, buy low, sell high. Not an issue.
Investing in the Forex markets has many of the same benefits as investing in futures. You can make money on a downswing by “selling” before you “buy” and the investments are leveraged without applying for credit.
Another, significant advantage to Forex investing is the fact that the market NEVER closes. It’s open 24 hours a day, 365 days a year. So if you are having a rough night and decide to “work” an extra three hour shift starting at 2 in the morning, all you need to do is go downstairs, power up your laptop, and log on to the market.
Again, let me stress that with both Futures and Forex investing, there are no credit score requirements necessary to invest in these markets, you need very little cash to get started, you achieve leverage of your investments, and you can make money going “short” when everything in the world seems to be going to hell and values across the board are dropping. (as would probably will happen in a double-dip recession)
Of course there is a fair share of risk involved in investing in these markets, just like there is a fair share of risk involved in flipping FL foreclosures for a profit. My guess is that with a little research and education, it might become very clear very fast which investment type is MORE of a risk considering the current state of affairs in our economy.
So let me conclude by saying that you may want to do some research on these types of alternative investment vehicles before securely hitching your horse to investing in FL foreclosures and nothing else. Real estate still has it’s appeal, but I’m thinking that the market is very hostile to the new rehabber or landlord that has no cash and little experience…regardless of what the gurus told you.