Avoiding going bankrupt

[Elizabeth Richter]

So I’m 21 and brand new to the whole idea of real estate investing and I’m really just trying to learn all I can and maybe start investing in about a year once I’ve saved up a chunk of change.

Anyways, I’d like to work my way to where I can make my living off real estate investing (rental properties specifically).

So here’s my worry. I know that there are risks involved, especially when you’re essentially borrowing all this money.

I’ve heard lots of success stories and how they got there, but I’ve also heard horror stories of people going bankrupt. But I really don’t know how they got to the point of bankruptcy. People (who aren’t involved in real estate investing) make it sound like one day a bubble is going to pop and there will be nothing you can do about it and everyone who relies on rental properties is going to go bankrupt and become homeless.

I would hate to dedicate a bunch of time and money into this venture and end up bankrupt in 10-15 years. So, tell me, those who end up bankrupt, is it because of something they did incorrectly or is it really just a huge stroke of bad luck? And how can I prevent it besides avoiding investing completely?

[Caleb Heimsoth]

The short answer of how you go bankrupt is this. You buy a bunch of property using a lot of debt and leverage and have very little equity. The market now tanks and the house you bought for 100k with 90k in debt is now only worth 70k.

This is what’s called being underwater and if you have many properties like this it’s very difficult to stay afloat and often ends in foreclosure and maybe bankruptcy