You're about to discover the WORST Way to invest in real estate. Rather than focus on what to do, you'll going to learn what NOT to do. Oftentimes, bad real estate deals turn into fabulous learning lessons. For example, if you bought properties the traditional way in the mid 2000s, you may have discovered that real property doesn't always go up in value. But even better is when you don't have to go through the heartache and trouble yourself. Instead, by observing the mistakes of others, you can drew valuable lessons from others experiences with investing in real estate.
Before the worst way to invest is revealed, perhaps its helpful to point out why I am uniquely qualified to share this message. Three reasons. One, I am a full time real estate mentor, coach and trainer, having worked with thousands of real estate investors on thousands of deals. From videos, blog posts, podcasts and even my book, you can probably recognize that this ain't my first rodeo. Two, I field hundreds of questions from people with real estate problems weekly. I'm a huge magnet for helping people with their sticky real estate investing deals. Three, I buy real estate from distressed real estate owners. People who really want to get rid of their property usually have a story to tell. So when you combine all this, it becomes clear that I have been exposed to a TON of real world real estate situations. And oh, the stories I have heard.... I have been very fortunate to have been exposed to what works and what doesn't at a level most people will never have the opportunity to experience in an entire lifetime.
The WORST Way to invest in real estate is....
To Get Involved in Deals You Don't Fully Understand
Real estate is unlike many other common investments. For example, stocks. If you invest in stocks, what's the worst case scenario? You lose all your money, right? What is the worst case scenario with certain real estate deals? With real estate, not only can you lose all the money you put into the deal, but you can also sustain additional loses if you borrowed money and some of that borrowed money was lost. Plus, real estate is more hands on and requires more ongoing effort on your part. With stocks, once you buy it, your management role is done. Sure, you may want to keep tabs on the company to make sure you should hold on to the stock, but with real estate, you have to manage the property (or manage the property manager). So a bad real estate investment can cost you more than just your original investment. It can take up a ton of your time too.
NOTE: This training is not meant to scare you, but to better inform you how to invest in real estate wisely.
Getting Involved in a Deal
My definition of getting involved in a deal is when you put your own money or credit, or both, into a deal. If you creatively invest, and avoid putting cash or your credit into the deal, technically, if the deal goes sour, you have little downside risk (time being the only thing lost). For beginners (and even seasoned professionals), creative, low risk investing is a great way to avoid getting too involved in any one deal. Most people are not educated on how to creatively invest so they put their own money, their own credit, or both, on the line when they invest in real estate. And that is what it means "To Get Involved in Deals".
Deals You Don't Fully Understand
If you don't know the absolute worst case scenario, if you can't answer with certainty "What's the worse that can happen?", you don't fully understand a deal. The list of investors who have fallen victim to this, is long and distinguished. Developers who have strayed from their normal development projects in search of greener pastures or simply out of greed, have learned this lesson the hard way, some having lost their entire fortune, going from the penthouse straight to the poorhouse. Turn key property buyers who have purchased pre-rented, already managed rental properties half way across the country sometimes come to regret buying "already cashflowing" property. Landlords who are barely hanging on financially who get a bad tenant who lives for free for several months become fully aware of the worse case scenario. Rehab projects that end up half way done because a contractor walked out on them, or a building inspector required work be ripped down and done over, are a dime a dozen. Tax lien investors who discovered that getting the property back at tax deed sale was not all that it was cracked up to be and now they are stuck with a basically unsellable property that they now have to pay property taxes on. And that is just the beginning of such a list of situations where the investor didn't truly understand what the worst case scenario was when they got involved in the deal.
The Danger of Getting Lucky
Some investors jump in with both feet, get involved in deals that they don't fully understand, and they still manage to end up on top. Have you ever experienced that yourself or know someone who did? That's called "getting lucky". And it can be quite dangerous because it gives the investor a false sense of reality. Chances are, they will go bigger on the next deal and that's when things can come crashing down. Many investors in the mid 2000s ran into this situation. They may not have been aware that they were in the midst of the biggest real estate bubble in history. Like musical chairs, they dance around, buying properties then re-selling them for much more money, and real estate investing seemed almost too easy. Then, they re-invested their earnings and wham, the market collapsed and they not only lost their original investment, but their properties either went to foreclosure or short sale and may have created deficiency judgments. If you are one of those people, my heart goes out to you and I hope that it doesn't scar you for life because that is a great experience to grow from. There is a right way to invest in real estate too.
How to Invest in Real Estate the Right Way
Get involved in deals that you fully understand. That requires education. Or, don't get fully involved in deals by avoiding using your own cash or credit, even if you don't fully understand the deal. That requires education too. No matter how you slice it, if you truly want to succeed as a real estate investor, you have to educate yourself. For those who have absolutely no desire to learn anything new, you can still invest in real estate by buying shares of a publicly traded Real Estate Investment Trust (REIT), but don't expect gigantic returns either. If you've read this far though, you probably don't fit into that category because obviously you want to educate yourself. And the best way to learn anything is with a mentor. You can't learn to ride a bike by reading the manual. The short cut to truly educating yourself in real estate investing is to work with a mentor, or team of mentors. To learn more about how you may qualify to work with my team, apply to be my next apprentice.
And I have a small favor to ask you as well. Could you share with me any examples of real estate deals that have gone really bad? We can all gain from hearing the war stories, the horror stories, the how NOT to invest in real estate.
Hello, I am just getting started. I know very little. Now I am scared to death! LOL I study all I can, by reading books and hanging out with other investors, but I am a little freaked out here…….
How in the world do you ”know what to learn so you aren’t caught in the ‘what you don’t understand’ bracket?
I like that you wrote that you ONLY ‘Rent to own’ on Res. homes. That was a great ‘heads up’!
~ Gun shy in Arizona
Read this book, Real Estate Investing Gone Bad
In an as yet unfamiliar market, to where I am moving, where I’d like to focus on purchasing and revitalizing a 5-20 unit apartment building….how should I find motivated sellers? The same way as I would SFR’s – Listsource, drive-for-dollars, agent inquiries, etc?? Talking about St.Pete beach areas. Thanks in advance!
Exactly the same. Did the work of finding leads on your own and dealing direct with the motivated owners of properties is gold.
Happy Thanksgiving, Phil. My ‘horror’ story not so bad because my involvement was limited to time, mostly. A homeowner contacted me about a yellow letter I had sent asking if he wanted to sell. He said he wanted to sell, so I entered into contract to buy from him, knowing I would be looking for a buyer (I would be the wholesaler). I gave the seller ten dollars to secure the contract but that was it. Long story short, the deal eventually fell through because the title report I ordered revealed a fraudulent transfer of title to the ‘owner’. Never found out what happened regarding that title transfer – maybe there was a clerical error with the owners’ attorney at the time? I think not, however, as the owner because evasive and nasty when confronted. Anyway, I would have made a lot of money if the seller had been on the level, as I had followed your advise (presented in one of your videos) and marketed the property through an agent. There was an offer on the table, before the problem came up, from a buyer through which I would have earned over 30k as a wholesaler. I should have known it was ‘too good to be true’ especially as it was my first wholesale deal. Luckily, I only lost ten dollars and many hours of research, legwork, and hoping/dreaming of a better life. I am still picking up the pieces, as meanwhile I had to relocate to be with my ailing parent, and now refuse to return to NYC and winter. Enter a new marketplace – west coast Florida – next month.
Hey Phil,
Glad I stumbled onto your videos. Great info!
This one may be a “I have never ever heard that before deal”.
The very first real estate deal (with an experienced partner) – the absolute first after being trained how to find a house in pre-foreclosure, find the owner, find an investor buying to wholesale to went like this at the closing.
Did a double closing – closed with the homeowner first completing all the paperwork. Then 30 minutes later closed with the investor buyer who brought cash to the closing. Everything “closes fine” and checks cut for homeowner, my partner and me – (Except the attorney’s printer broke and the investor didn’t get his warranty deed).
1 week later ALL CHECKS BOUNCE. To make it short – the attorney STOLE the money from the closing. Found out we were not the only ones and were one of many victims. Lots more details to the story but an insane time. Wound up doing two more wholesale deals (partner and I) so we could pay the homeowner what we promised her – even though it was stolen from the attorney.
I’ve seen that happen SEVERAL times. Happens alot. Thanks for sharing
I’m wanting to get real estate license but want to know what is a great online course to take without wasting my money? There are a lot of online courses that say their the best but we all know that isn’t completely true. Thanks.
I vote you go with the least expensive.
Yes beware of renovating in Italy , although there are many opportunities there are many dodgy/mafiosi subcontractors that will rip you off in a second . I was rehabing a property on my own near Milan and adding a 2nd bedroom and consequently had to re do all the plumbing (as well as adding and taking down walls…). I asked for a recommendation for a plumber from a male work colleague of mine. I needed a new boiler and all the plumbing works done. He turned up sold me an expensive boiler all packed perfectly in the box and then did a runner and didn’t do any of the work. I had to pay someone else to install it and do all the work and then of course that boiler was a faulty one …And that was just the beginning . I did end up making alot of money on that property when i finally managed to sell it.
Another slightly scarey thing that I wanted to mention is , for all you guys over the pond there (I am in the U.K): I have just seen a documentary on sink holes in Florida – which was quite frightening as alot of people (English to)are buying new /properties and then later discovering that there are a load of sink holes in the area, and possibly in their back yard (esp. the Tampa area which is sink hole captial ) . I guess you already know about that but it’s good to be aware…
Last year i had a family approach me about renting or buying a house i just fully rehabbed 47K in cash into the house. When i listened to their story about their child fighting for its life it tugged at my heart to say the least they had the neo-natal unit staff contact me the following day to prove their story. So i took the house off the market after all they had several charities backing them a huge hospital and so much other stuff we were going to do fund raisers to so they could own the house ETC. Guess what really happened they moved in the baby was brought in the life support equipment and ALL promises and funding STOPPED dead in its tracks nine months of courts and fights they wouldn’t even let us inside the house to inspect they knew the laws and how to abuse them beyond measure. I lost nine months of rent at 800 a months thousands and thousands in legal fee’s and to top it off the Judge says here is a $2500 judgement for your trouble all the while i am making $535.00 a month mortgage payments and other holding costs etc and i am experienced and got burned hard. While i was lucky as far as property damage i had to spend about $2500 in cleaning and new painting but all in all not nearly what i expected the house to be. After it was cleaned up i sold the house in four days. Yes, i lost around 23K in lost earning and other expenses but i did buy the property right so worst case the house absorbed most of the loss
I did a private loan(2nd position) in a far away town (2.5 hours away) . I didnt inspect the property. I was told it was an apartment complex and a commercial building (rented by a pizza resturant). I had to foreclose on the property. Assume the underlining 1st loan with was at 15% (pay all the back payments, default interest, etc). The pizza place never rented the property it was a vacant shell commercial building which was a former auto related garage. I never did a Phase 1 environment and risk the possibly of environmental contamination. Property actually had a underground storage tank but thank heavens it was just an oil separator. I was no newbee before this deal. I had actually bought 100+ homes/apartments and had done over 50+ private loans. At that time (2005-2006) I had more money then brains and could’nt be bothered with driving 2-3 hours to look at the deal. Dumb, dumb, dumb. I did later sell the buildings and lost about $40k+ but I am glad it happened. Now I know on any future commercial deals get a Phase 1 and always do look at the investment before I buy/fund the deal. Live and learn. Dave (Gilbert, AZ)
Excellent content. And yes, it “makes sense”. I think we got it after the fifth “Does it make sense”, Phil 😉
Risk assessment is always a part of the equation. Ask questions. If you don’t get a straight answer, or do not understand the deal, then back out.
I also “made a long story short” three times (which makes absolutely no sense!)
True Great Advice
I enjoy videos lot of good learning and plus you can my self feel at home not like being talk down to or being preached to, the question I have is I have 2 rental properties that are located in Indianapolis, in I just put on the market for sale could not sale at the price I wanted so I put for rent I had 62 hits 24hrs 21 people view it and 15 wanted to rent with money in hand.
I compelled a list of what everybody wanted to rent or buy on contract. What I am asking how can I purchase more property to rent and flip with out using my debit ratio and credit which is about 640 to buy more property, I served 21yrs Army and I just want to buy and rehab property the rental market and the properties are going for below property value can u advise me in the right direction and if you recommend any lenders to help or assist me for a rate and fee with out counting my debit ratio. Thank You so much and I am Blessed to have found your videos and web site U rock.
Great question. And thank you for serving our country and protecting the freedoms we enjoy in this great country.
You’ll need to educate yourself on Creative Real Estate. Do this by going to these two trainings:
1. Creative Real Estate vs Traditional Investing
2. How to Buy Real Estate without Cash or Credit: This is a lecture I gave to the University of Central Florida’s real estate department. It will be a huge eye-opener for you.
My brothers story. My brother, who had no real estate investment experience, was talked into buying 5 small section 8 qualified, at the time, single family homes by a good friend of his (who I found out later was a banker selling the homes the bank owned). He told my brother “he had a can’t lose deal for him to invest in, the government subsidizes the rent payments so you will always get paid”. Well about that time section 8 changed their standards for rental homes. Since I was a banker at the time he asked me to take a look at the units. I visited the properties with him and will tell you these properties were in rough condition to put it nicely (not the best tenants had occupied them in the past). He sunk a small fortune in them to try and meet the section 8 guidelines. After many visits the inspector always found something new to repair or add. My brother being somewhat hot headed eventually told the inspector to get the h— off his property and don’t come back (not the smartest move). He then rented the units without section 8 assistance in paying the rent. My brother’s a state trooper in Jackson and he would commonly go by the properties to collect rent right after work in his uniform (I wouldn’t want to be late paying my rent to a law enforcement officer) but being late didn’t bother this bunch at all. I believe they were pros at not paying rent it and knew more about eviction law than the attorney. Finally the bank foreclosed on his properties as he had most of his money in the down payment and repairing the units. He learned a valuable lesson. 1. The house he lived in probably wouldn’t pass section 8 inspection. 2. He didn’t know a thing about buying and renting real estate. 3. When a friend or anyone for that matter tells you this is can’t lose deal run.
Thank you so much for sharing. This is EXACTLY what I was requesting. That is a hard lesson for him to learn but now he knows. And further, the lessons you pointed out to be drawn from his experiences hit the nail on the head.
KNew someone who purchased an expensive lot near the water in Florida, Took out a serious loan, went with a contractor who was supposedly really good that they knew through work as I recall. He basically got the home started & then hightailed it leaving much undone & they had a constrcution loan out on it, a lot of work that still required completion, & several suppliers that did not get paid as they trusted the contractor & did not get lien releases as I advised them. They got though it somehow, but I think they had to put a lot more into it than they ever imagined to finally clear things up. I know some others that have purchased renatl property or rented their homes out & had them severely torn up & did not get enough of a security deposit to cover the damage & they could rally not go after the bad tenants not just because it was expensive & difficult to say the least, but there was nothing to get from them,.
Two CLASSIC examples. “Trusted” contractors that split. And broke tenants that trash properties and suing them is fruitless. For single family properties, I only do Rent to Own arrangements with a big down payment. It’s the only way to avoid that unfortunate results. Although it’s different in other countries, in the United States, tenants have a propensity to not pay rent. You have to prepare for the worst anytime you own a rental property. What I also picked up on in your story was that the person didn’t take your advice of getting lien releases. If I had a dime for every time that happened to me, where people didn’t take my advice and then later learned the hard way (and that’s when they had their “ah-ha” moment as to why I gave them the advice I did). Good job in trying to tell them upfront what to watch out for. Thanks so much for sharing!
my co-worker past away 1 week ago who happens to be a contractor as well whose name is tony. tony wasn’t being paid for work he finished had an disagreement with owner, so when tony went back to claim money owed to him was severely beaten to death by associates of the owner because they couldn’t come to an agreement. i realize it wasn’t worth losing your life or freedom, all because there was no written contract on both parties to be reminded on the verbal agreement and now one person is dead and investor in prison
Oh my. Our thoughts and prayers go out to all those who knew this contractor. What a sad and unfortunate finale to what sounds like, amounts to a couple of bucks. In fact, the story sounds eerily similar to the Parable of Tenants Jesus shared, as recorded in the Book of Matthew, chapter 21, starting in verse 33. If you haven’t read that parable before, go check that out.
Although an ordeal as severe may be challenging to draw “lessons” from, I did see that you mentioned something about verbal agreements. When working with ANYONE, friends, family, partners, contractors, maids, ANYONE, always put it in writing. Even if you have to write it on a napkin. Human beings, even the most honest and of the highest level of integrity, have select memory. When in doubt, put it in writing.
Always use contracts always! However with this horribly violent act i doubt a contract would have made much difference people do not get overly violent over disagreements unless they are already dangerous people.
I am truly sorry to hear about this happening to that man and his family and friends suffering this loss of life! I have been a remodeling contractor for over 23 years and have not been paid many times but not willing to die over money use the COURT system to settle differences when things start getting heated up.
I am having trouble finding my first deal. Please help me succeed.
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I know real estate can be very profitable. I am ignorant about real estate but willing to learn.
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I would be interested in taking the free course. Thanks
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