Fear in Real Estate Investing – Costs and Benefits
While investing in real estate is the most common path for regular middle class people to build wealth reliably, investing in real estate can be scary. Let’s face it, most things we buy in life would be considered outrageously absurdly expensive at $100,000. Real estate at $100,000 is cheap!
Real estate is so expensive that few of us ever have enough money to buy it for cash like we buy a loaf of bread and even if we did, it’s rarely the best way to buy real estate.
So, it’s natural that new investors find it scary to borrow huge amounts of money, more than they actually have, to buy one piece of real estate.
As will be explained in this article, the fear of buying real estate is actually healthy. But before we talk about the benefits of fear when investing in real estate, let’s talk about the enormous cost of NOT investing in real estate.
The Cost of Fear of Smart Investing in Real Estate
If you don’t want to read the detail described in the next few paragraphs, I’ll summarize the content in two sentences to make it easy. If you are afraid to invest smartly in real estate, you will probably not achieve $10,000 or more of passive income every month for the rest of your life and you probably won’t achieve a net worth of $2 million dollars…unless you win the lottery. If you are NOT afraid to invest smartly in real estate and take the actions required, you probably WILL achieve $10,000 or more of passive income every month for the rest of your life and you probably WILL achieve a net worth of $2 million dollars, even as a part-time investor.
First let’s put things into perspective. Get a piece of paper and write down the answers to four questions. Every time you write down one of these answers, pause for a moment and ask yourself if that answer is where you thought you would be or hoped you would be at this stage of your life.
How much is your active income right now? (for example from a job)
How much is your passive income right now?
How much is your net worth right now?
Are you right now living the life of simultaneous happiness and prosperity that you now want and now deserve?
I can tell you that in my case, I am actually extremely satisfied with my answers to all four questions. Yes, it IS possible! You can get there too but you have to want it enough to actually do what it takes to get there (as long as it is legal and ethical of course).
OK, now let’s calculate.
For the purpose of these calculations, I will intentionally set the bar very low. That way, most of you will have no excuses. Just remember that you can always be a lot more active than the low level of activity that will be described so, you can GREATLY exceed any and all of these numbers and the pace at which you hit your numbers.
Calculating the Cost of Fear
We will start the hypothetical scenario with a head of household who is 35 years old with an income of 6,000 per month, that is close to the US median household income of 75,938 (2017 data). With an income like that and a bit of savings for a down payment (which they can also get from a flip if they don’t have it), this household can buy a single family home rental. In my area in South Jersey, one can buy, fix and rent a single family home rental that has an after repair value of about $130k for an all-in cost of less than $100k, that generates cash flow of about $300 per month after all expenses including a mortgage loan with 20-year amortization, taxes, insurance, vacancy, repairs and administration.
Please invest another minute to review the numbers in the previous paragraph. Understanding the numbers is crucial to understanding not only how much money you will make, but it will also help you understand how many years it will take you to achieve your goals. This is a business and the numbers really are important.
By the way, in case you are skeptical about these numbers, the details of such a single family home rental are shown in my training video “How to Choose Houses for Rentals” in the Smarter Investing home study course.
The numbers for such a rental (including the DSCR…described in the that training video), bought and fixed with a construction loan, are good enough that if the investor goes back to the bank that financed this buy-fix-rent home with a construction loan a year later, the bank will very likely finance another house just like the first one.
Then rinse and repeat. Many part-time investors with a steady income of $6,000 per month can build a portfolio of 10 single family home rentals like the first one if they are knowledgeable and disciplined to choose the right houses and choose the right tenants.
Along the way, these single family home rentals will have enough equity to refinance, pull out cash and use that cash as the down payment for more rentals. Then rinse and repeat.
If this investor buys ONLY ONE SINGLE FAMILY HOME RENTAL PER YEAR, the numbers will be impressive. In fact, the math is so simple, it is actually arithmetic (too simple to be called mathematics).
By the time this investor is 45 years old, he/she owns 10 rentals. This is with the lowest effort level which is adding just one rental every year while still holding down a full-time job in an occupation that hopefully he/she enjoys. If not, the investor can change jobs or even change career.
For the purpose of this low effort scenario, we will assume that the investor does not buy any more rentals above 10, in order to not have to manage a lot of tenants. Of course, the investor can continue to buy more rentals and increase passive income and net worth. But for this current simple scenario, we are trying to establish that with minimum effort, the investor can build impressive numbers.
By the time the investor is 55 years old, the first rental becomes free and clear if he/she did not refinance. Every free and clear rental will start to generate at least $1,000 per month positive cash flow. That’s $1,000 per month for one tenant. That’s not rent, that’s positive cash flow.
By age 65, the investor owns all 10 rentals free and clear and has at least $10,000 per month of passive income and a lot of net worth. How much net worth? Well, the original value 20 years ago was $130,000 each. After 20 years, the value of the 10 rentals will exceed $1.7 million at 1% appreciation per year and $2 million at 2% appreciation. These are ultraconservative low appreciation numbers. To give you an idea, the past 10 years of appreciation in the national US real estate market, that includes the real estate market crash of 2008-2011, averaged 1.7% appreciation per year. If you look at the market in the last 20 years (1998-2018), the average appreciation was 2.4% per year and prices today are 61% higher on average over these 20 years.
So, stopping at just 10 single family rentals in “C-Class” neighborhoods in South Jersey and keeping them for 20 years is enough to generate $10,000 per month of passive income and $2 million in net worth.
To be sure, that is not being rich, but it’s enough to survive for most middle class people. I know you want to make a lot more money than that and you certainly can. For example, you can easily double these numbers if you buy-renovate-rent-refinance-repeat (the “BRRRR Strategy”).
But let’s face reality. Most of you reading this article are older than 35 and you have less than $10,000 per month in passive income and less than $2 million of net worth.
In fact, we already saw that the median household income is just $6,328 and that is NOT passive income, that is almost always ACTIVE income that comes from working! If you’re close to that number, you are far from $10,000 per month from your source of income and maybe you have little to no passive income.
That's the income part of this mental exercise. What about the net worth part of this exercise? The median household net worth in the United States in 2017 was $139,000.
Yup, if you bought just one single family home rental 20 years ago, you would be close to the median net worth of a middle of the road US household. Does building a portfolio of 10 single family home rentals seem that hard? It shouldn’t. If it does, you need to readjust your self-image. We have a video for that too that you can rent or buy.
Now, go back and take a look at the answers you wrote to the four questions. Seriously, look at your answers.
What is the cost of fear of Smart Investing in real estate? The answer is the difference between your answers and the numbers above. For most of you, that means that the cost of fear of Smart Investing in real estate is probably $10,000 per month of passive income and well over $1 million in net worth that you should have but don't!
Then again, it’s possible that it wasn’t fear of Smart Investing in real estate that held you back. It might be lack of knowledge, If so, that can be overcome in 22 hours by watching our 22-hour Smarter Investing home study course.
If you don’t think you can afford $997 for this course, do you really expect me to believe that you prefer to not generate $10,000 per month of passive income and not achieve $2 million in net worth? That would be absurd. Now buy the Smarter Investing home study course and start learning! Now, not tomorrow!
So Where Are You Today?
Let’s say that you started on your quest for financial freedom through real estate investing. Let’s you are already half way to your goal. Congratulations! Nevertheless, the chances are that you knew about real estate investing before you started actually investing. If so, then every year of procrastination due to fear, probably put you behind your goals by at least $100,000 in net worth and/or passive income FOR EVERY YEAR you delayed!
Take stock of your financial life right now. If you didn’t write down the answers to the four questions above, do it now. Seriously. You won’t be sorry. It won’t take long. Just do it. Now.
It is now obvious to you that you can actually calculate the cost of your fear of Smart Investing in real estate, whether you started late or haven’t yet started at all. You need to make REAL decisions and you need to take action now. You really don’t want me to remind you to read this article a year from now and see what irrational excuses you used to continue to procrastinate. It better not be that you didn’t have the time because in a year from now, you will have even less time to enjoy the fruits of your Smarter Investing. It better not be that you don’t have $997 because you will spend more than that on holiday gifts in the next month...that will most likely never be used.
No excuses! Now Take Action!
The Benefit of Fear as a Positive Component of Smarter Investing in Real Estate
Fear actually has a positive role in Smart Investing in real estate. What can that be?
The fear of losing money should be leveraged by each real estate investor to be the motivation to perform due diligence on each investment opportunity.
I am very analytical. I analyze every available detail for each investment opportunity that I seriously consider. Typically, it takes about 2-3 hours of “work” to collect the data on a specific property, whether for flip, rent, lease-option or wholesale. When you collect the numbers, the house characteristics, look at exit strategy and all the other data you can collect in 2-3 hours of research and due diligence, you can typically determine with a 95% confidence level that you have a good deal, a bad deal or a marginal deal.
I do not let the fear paralyze me. I let the fear motivate me to ensure that I collect as much data and perform as much due diligence as I need to reach the 95% confidence level, then I pull the trigger if, and only if, it makes economic sense. If it does not meet my strict investment criteria, I walk away. I am very disciplined in meeting my fiscally conservative investment criteria. Are you? Are yo afraid? The best way to overcome fear in real estate investing is to do in-depth due diligence then be disciplined in buying low enough to be confident that you will realize a significant profit.
In summary, fear is useful because it keeps us out of trouble. The way to overcome fear is to address the source of the fear to assess if the danger is real or if the fear of he unknown was based on ignorance of opportunity. If you use fear to perform due diligence and maintain discipline in investing only in opportunities that make sense after performing due diligence, then you will stop paying the cost of your fear of Smart Investing in real estate. Life is irreversible and the clock is ticking. Are you enjoying yourself now or waiting for some magic later on while you are wasting valuable time?
So, what are you going to do? Will you continue to bury your head in the sand with self-sabotage and with fear from engaging in Smart Investing in real estate? Or will you do the smart thing and learn what you need to learn, like I did, and achieve the simultaneous prosperity and happiness that you know you now want.
We even have a training video about achieving measurable goals for simultaneous happiness and prosperity. You can’t afford not to learn this valuable material.