Potential investors across the country have heard from mentors and self-proclaimed gurus, who, for a rather large fee, will tell you their secrets, and famous icons, to do everything they can to acquire real estate to build a passive income producing machine. They are sold on the concept that residential real estate investing is the path to financial independence. Real Estate is a “real” asset. It can create and transfer real wealth. However, sometimes investing in residential real estate can become un-real, real fast.
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” - Andrew Carnegie
Never mind that Andrew Carnegie died in 1919. Never mind that the foundation of his wealth was founded in the burgeoning steel industry when he sold his company in 1870 for $480 million. Never mind that it was after he had this phenomenal base of wealth that Carnegie made a second fortune investing in New York City real estate – mostly commercial real estate.
Real Estate can be a solid investment. Done right, it can be a secure, safe and stable place to create and sustain wealth. It can also be a money pit wroth with risk. With experience in distressed residential, delinquent mortgage notes, as well as fix and flip, a realization occurred - success was based on the productivity of the next deal, closing the current deal, and hoping profits were made. The easiest and simplest way to do what Carnegie suggests, is to own commercial real estate.
Consider the following, prior to setting out to start your next real estate project.
FALLACY NO. 1: YOU CAN FLIP YOUR WAY TO FORTUNE
There are hundreds of infomercials, TV reality shows, seminars and books all proclaiming the easy path of flipping your way to financial independence. Have you ever wondered if these people could amass a Carnegie type fortune, flipping real estate? Why are they investing time into trying to sell others their secrets instead of implementing these strategies themselves?
Romance of the TV shows aside, flipping is hard work. It is stressful on your personal relationships. It is not the rose garden of opportunities portrayed on TV and in seminars.
This gig requires countless hours seeking the next rental opportunity, fix and flip, or distressed multi housing complex that meets your projected profit generating requirements. Months will be lost trying to find the next deal by knocking doors, driving for dollars, and spending time on the courthouse steps only to realize that deals fizzle out more often than not. Personal wealth is not created by obtaining the next great deal. Even when the perfect fix and flip deal is under your control, your potential profit is subject to market timing, cost overruns, and micro market issues. If the deals stopped flowing, what would your legacy look like?
FALLACY NO. 2: RESIDENTIAL RENTALS DELIVER PASSIVE INCOME
Investor landlords are in love with the theoretical passive income generated from their investments. While it is true that revenue is generated every second of every day, even while you sleep; being a landlord is real work and takes real time.
Being a good landlord requires a scary amount of time. A quality landlord must secure new tenants and prepare the property (paint, shampoo carpets, and repair damages) for new tenants. Aside from the grunt labor associated with re-tenanting a property, a successful rental property requires that the landlord provide the right amount of customer service to encourage lease renewals. This level of customer service is not limited to taking time off work to meet with plumbers, carpenters, handymen, and electricians. It also includes the middle of the night visit to your investment to fix a leaking toilet. How much time do we put into our investment compared to our returns?
FALLACY NO. 3: INVESTING IN WHAT YOU KNOW MINIMIZES YOUR RISK AND MAXIMIZES YOUR RETURN
We all know that investing in what you don’t know has significantly more risk than investing in what you do know. But, investing in what you do know does not guarantee a risk-less investment, either.
When I stepped back and evaluated how I could really build a real estate fortune I realized I needed to get out of my comfort zone and invest where real money is made. I needed to learn how to invest in the types of properties that the likes of Andrew Carnegie, Donald Trump, and Mitt Romney utilized to build their fortunes. I needed to learn how to get into high quality commercial real estate.
This information quest was not easy. It is not easy because the people that make real money in real estate don’t talk about how they do it. The quote Woody Allen made famous, “Those that can't do, teach. Those that can’t teach, teach gym.” comes to mind. Thus, there are not a lot of channels to learn about how to invest in commercial real estate.
The path to true passive income is found in these simple principles:
Invest in something that doesn’t require your time
Invest in something that resists market changes
Invest in something that has a lot of demand.
These three principles allow for the majority of us to invest our money smart, and continue to further our career that provides our primary source of income.