There are many misconceptions about real estate investing that seem to have grown in the last 20 years. Potential investors are often swayed by “get rich quick” schemes. They are frequently told that they can “walk away from a closing with $5,000, $10,000 or even $20,000” or that “it’s easy to buy, fix and flip a house”. None of these claims are entirely true.
The key word here is “entirely”. Yes you can get rich as real estate investor if you have a good plan in place. In some cases, you can even walk away with $5,000, $10,000 or even $20,000 from a closing, if you are willing to accept that, down the line, someone is going to pay the price. You can fix and flip houses profitably if you go in with the understanding that the word “easy” doesn’t describe the process that will be required to make this happen.
So the claims that you hear, see and read are almost true.
Most recently, I have observed a growing wave “experts” advising investors to purchase “turn-key” properties. People will tell you this is the best way to own real estate without having to commit to the day to day responsibilities.
You will hear that if purchased in the right areas, turn-key properties can be a great way to increase the value of your retirement accounts. By moving your money from an IRA into self-directed holdings you can use the funds to invest in real estate and exponentially increase your return on investment. You will also hear that turn-key properties are fabulous for high-earners who could benefit from the tax advantages and who know that real estate investing is the best long term wealth building strategy.
However, there is one little thing that is missing from these marketing campaigns– and actually it is hidden in plain sight! Companies trying to sell “turn-key” properties will tell you that you don’t even have to see the property you are interested in buying. They will tell you it has a strong cash-flow, and has been recently renovated, and both of these things may be true.
What they don’t tell you is that the property is located in a deeply depressed, and in many cases, dangerous area. They don’t tell you that the “$50,000 strong cash-flowing property” isn’t worth much more than $20,000-$30,000 at best. They don’t tell you that the neighborhood the property is located in, is declining and that most likely you will never get your original investment back. But yes folks, it does have a strong cash-flow.
How is this possible? The bulk of these properties are rented to Section 8 tenants. The houses are typically 3-4 bedrooms and therefore qualify for more in rental assistance funds from government programs. The rental income allocated for properties of this size ranges from $900-$1,000 a month and typically the tenant pays all of the utilities. If you (the investor) paid $50K cash to purchase the house and you are netting $500-600 per month the return on your investment is 15-20%. This is a very impressive and strong return.
Many companies will even guarantee this kind of return for the first year. Again, very impressive.
What they don’t tell you is that the cost of tenant turnover and property damages is going to grow in the second year and third years. On top of that, so many of these companies will outsource management of the property to local folks, who are inexperienced and unsuccessful, leaving you to figure it out on your own.
This year, I worked with 2 clients who were both victims of unsuccessful “turn-key” property investments. They are not alone. Plenty of clients have come to me owning properties that they have never seen and didn’t know were in non-wealth generating areas. I’ve also seen people who decided to start investing without a plan in place, make some non-performing real estate investments or invest in what I call the “swampland” of turn-key properties that have diminished their net worth.
Turn-key real estate investments can be the best investments for anyone who doesn’t want to be the day-to-day business of real estate. They can also be the best way for busy business owners to build wealth that can, if done correctly, produce extraordinary results.
My suggestions to increase your success rate:
- Make sure to get references from existing clients of the company trying to sell you the property.
- Visit the area you are investing in or speak with local real estate agents who can validate information you have received on the area
- Trust your gut and only work with folks that have a strong reputation in the business of real estate investing and property management