Getting into real estate investing can be easy but there are a lot of mistakes to avoid.
Loan programs and investing strategies make it easy to get into real estate investing, almost too easy.
I’ve been investing in real estate since 2001 and have made about every mistake you can think of. Fortunately, I’ve learned from my mistakes and have been able to build a property portfolio that creates consistent cash flow every month.
I reached out to another real estate investor to get his secrets to a profitable property portfolio and how to get started.
I love the face-to-face interaction we’re getting in the Let’s Talk Money YouTube community and being able to bring you some of the biggest experts in beating debt, making money and making your money work for you.
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What are the Biggest Misconceptions in Real Estate Investing?
Joseph: I started my professional career as a commercial real estate analyst before managing my own rental properties and then investing in real estate crowdfunding. So property has always held a special place in my portfolio. But I feel like a lot of people are still a little gun-shy about real estate investing for after the housing bubble.
There are a lot of misconceptions about property and investing. That's why I wanted to get on the show one of the biggest names in real estate investing.
Today's interview is with Chad Carson or as he's known online, Coach Carson. Chad got the entrepreneurial bug in 2003 straight out of college but it wasn't until he learned how to create an income from real estate that he could slow down and start enjoying his life.
Over 15 years in real estate Chad has seen every strategy there is and his investments have allowed him to travel the world. He's turned his real estate experience into a nationwide coaching business and reached over 6,200 investors with his weekly newsletter.
Let's start out with what I think is really holding a lot of people back from real estate investing, that big crash of 2008. What are what are some of the misconceptions you still see among investors about real estate?
Chad: The biggest lesson that I try to get out to people is that real estate is mainly about income. It’s about getting a rental income coming in, getting that big consistent month-to-month income.
You know 2008-2009 was rough. It was challenging for people who were in the real estate business. But I think that if we focus on income the fact that you buy a property and you make sure it has a certain amount of income as a ratio of the price you pay for it. That's really a discipline that keeps you going in those ups and downs.
I know for me particularly that's that was very helpful on the downside but it's also when you think about your profits and you think about the reason to get into real estate.
The primary thing is how much income the property produces. If you stick to that with your analysis, with your formulas it really it kind of takes care of the rest in the end.
I think that's my that's a big number one. Number two I think is just location. Maybe somebody just starting doesn't realize how much you have to look both at the big picture of a location in real estate investing and analysis. You have to look at the individual neighborhoods, the crime rate and the school districts in your market analysis.
Joseph: I like that idea of the income being the important part of real estate investing. It's almost like a dividend stock. I love dividend stock investing but they can be volatile. You know stocks go up and down but you always get that cash flow.
You get that quarterly cash flow that's always a positive return and it's the same thing with real estate. You might have some vacancy every once in a while, but it smooths out over years.
It's a consistent income that doesn't really matter what the price of the house is selling for, the price of the real estate is selling for at that moment. Because you're still getting your income. You can pick and choose when you end up selling that property at the right price.
What are the Best Real Estate Investing Strategies
Joseph: You talk about four real estate investing strategies on your website and how they fit best with different life stages. I thought that was really interesting idea, to fit different investing strategies for different people.
Can you talk a little bit about each strategy or a few of them and the advantages and disadvantages?
Chad: I think that's particularly for new investors it gets a little overwhelming because you have all these strategies out there. It’s difficult to realize that not all real estate strategies are going to work for everyone and how to pick.
For example, if you have some money to start with then you might start with a rental investing strategy. If you don’t have much to start with, it’s easier to start with your own home. Renting out a room or buying a small duplex gets you in the rental property game but doesn’t involve lots of money for a down payment.
I call this strategy house hacking. You can get an owner-occupied loan from the FHA with less down and a lower rate and start making money on the property.
When I first started investing in real estate, I lived in a quadruplex. I lived in one unit, I rented out the other three units and I was actually living positive cash flow every month. That kind of general concept whether you live in a duplex or quadruplex a house where you rent out spare rooms.
Eventually, you can move out and keep the property as completely rental.
On the other end of this is someone with maybe a little more money but less time, they may want to invest in real estate as a private lender.
I know you're really big into real estate crowdfunding which is an interesting new kind of development for a way to loan money without having to go out find the borrowers yourself.
So, I think there's a lot of opportunities out there to be a passive investor where there's entrepreneurs out there that need the money. You're the person who supplies the capital and you receive a dividend and interest check in exchange for doing that.
Is House Flipping a Good Real Estate Strategy?
Joseph: How about a house flipping? I know a lot of people are hugely into it and love it. Where do you come down on that? It's obviously not a passive income source but it seems to seems people can make some very good returns on house flipping.
Chad: House flipping was my career basically when I was first starting out. When I got out of college I had a thousand bucks in the bank. I had to start getting creative and flipping houses just to make money.
The distinction I’d make is that real estate can be an investment or a business. Buying a property and renting it out is an investment. Buying houses to fix-and-flip is more like a business. You’re constantly working to flip that house so it’s not quite like any other investment.
House flipping can be a great business but it’s not an investment and it’s not for everyone.
If you're an entrepreneur who wants to get into the business and do that part-time that's wonderful. If you’re an investor with a pile of cash but less time to spend then you might want to avoid house flipping and get into the more traditional forms of real estate investing.
Which are the Most Passive Real Estate Strategies?
Joseph: I think that was two of my biggest real estate mistakes was starting too quickly. I bought six rental properties within the span of maybe two years and then trying to manage them all myself.
I had some maintenance, some electrical and carpentry experience and could do a lot of that myself. It's still a huge management task especially when you get started so quickly. I like the idea of starting slow maybe with a duplex where you're living in one side.
Staying with that idea of how somebody can gradually move into real estate investing? Which is the most passive real estate investing strategy? Which strategies can someone use if they still have a nine-to-five and can't really manage their properties all the time?
Chad: I’ve bought lots of properties, many that I only realized how much work they would be after I bought them. Many real estate investing strategies are very active on the front end and the more passive later on. That means that even the best properties may take a lot of work at first before you can start collecting those passive rents.
I personally think you have to count on some time upfront. When I’m helping someone get started in real estate investing, I tell them to plan on the next three to six months putting in 20 hours a week. You’re going to work some weekends as well.
So I would warn investors into thinking real estate can be completely passive, especially from the start. It can be more passive income if you hire a property manager but that’s expensive and eats into your returns.
Even if you plan on hiring a property manager for your properties, I would spend some time managing them myself. This is going to give you a better idea of how the business is run and what to look for in a property manager.
Real Estate's kind of an interesting game with parts entrepreneurial and investing. If you never invested in real estate, my recommendation is to either get that one property to learn the ropes. You can also invest in REITs which are real estate funds to get more diversification and read those investor reports to understand the business.
How to Find Real Estate Rentals for Investing?
Joseph: It's an argument I go back and forth with a lot of my real estate friends a lot, how passive can real estate investing be. If it was completely passive and still very profitable then of course everybody would do it and it wouldn't be quite so profitable.
I think you make a good point. A lot of these strategies can be active or passive, it just depends on how much you want to outsource.
How do you find out potential investments? Let's move on into the practical side here. How do you find properties with some of these strategies?
Chad: There are a few ways to find good property investments. You can search the MLS or sites like realtor.com which is kind of the official for sale website. There are also sites like Zillow that will have real estate listings. You can also call real estate agents directly.
This is the expensive way to find rental properties though because you’re competing against the rest of the investors in the market.
I like to just get out there and walk. It’s not exactly passive investing but is a great way to find properties that aren’t necessarily on the market but might be for sale. Walking a neighborhood, you’ll see for sale signs that aren’t listed in the MLS. You’ll also see houses that look vacant and might mean a willing seller.
You might not find a lot for sale but you’ll talk to a lot of people and will get the word out. When houses do come up for sale, you’ll be the first to know.
Common Real Estate Investing Mistakes
Joseph: What are some of those common mistakes you see beginning real estate investors doing and how can they avoid those?
Chad: I guess it goes back to my original comments about income and location. The biggest mistakes I know I've made as a beginner investor and I've seen other people repeat are not doing the numbers correctly.
It's really easy to make a mistake in real estate. We kind of feel like we're familiar with it and can just rush through the numbers. You have to look at the numbers closely, work through the rental income and all the expenses. Just understanding how to figure out your cash flow from the rents will help get you started.
Another mistake is just getting too emotional about buying a property. You look at an investment and just must buy it. This is bad enough buying from a seller but can be even worse in an auction. I’ve seen investors pay twice as much for a property as what it’s worth in an auction.
So there’s a quantitative part of real estate investing, understanding the numbers, and an emotional part of investing.
Last, I would say just to buy investments in good locations and find good tenants. Too many investors rent out to just anyone that comes along and end up losing money. You don’t have to buy in the best neighborhoods but buy property in good areas where you’ll get good tenants.
Joseph: Another one of my mistakes was buying in bad neighborhoods. I figured I could get properties for half the cost and then rent them out for good rents to make higher returns. The problem was that the tenant problems destroyed most of my returns.
Buy in bad neighborhoods and you’ll get bad tenants. That means high vacancies, lost rent and lots of repairs when someone moves out or is evicted.
Three Things Every Real Estate Investor Needs to Know
Joseph: So to wrap it up, say someone is really excited to get started investing in real estate. What are two or three things they can do to get started?
Chad: First, I’d get out of the office and into the neighborhood. You can start looking for rental properties from your computer but you need to get out there and look at houses and at the neighborhood. That way you start getting to know the market.
You also need to start learning about real estate investing, how to value properties and some of the expenses. Do this before you buy a rental. Get to know how to run the business before you need to.
Last, I would say to just treat it like a business. Never get too emotional about buying a property or managing your real estate investments. Run it by the numbers. If a price doesn’t make sense then don’t buy the property. If a rental isn’t making a profit then fix it up and flip it.
Joseph: I want to thank our guest Chad Carson for his expertise on getting started real estate investing. Be sure to visit his blog coachcarson.com and sign up for his newsletter.
Whether you’re just getting started investing in property or you’ve been doing it for a few years, take some of these tips to make your portfolio more profitable. Check out some of the other real estate strategies on the blog and don’t forget to subscribe to the YouTube channel.