Caution New Investors

[Austin Neal]

I see a lot of rookies asking how to start investing with only a little cash and/or a lot of debt. This is a word of caution for those people:

I read a lot of advice resolving your cash shortage by urging you to pursue FHA loans that require 3.5% down. Putting 96% debt on a market-priced real estate deal is extremely risky. Using maximum leverage is not smart just because it's possible. That is gambling. You will be stuck hoping for appreciation or that you can earn your way out of the slim margin. There is no margin of safety. One misstep or market turn can wipe you out.

Real estate investing is NOT about gaming lenders and requiring stupid debt to squeeze out a return. This business is still about the principle of buying assets for less than they are worth.

This is how to begin:

1) Learn how to value investments;

2) Choose a neighborhood or niche that you know well;

3) Dig for an investment that’s priced well below what it’s worth;

4) Be patient and work hard while you wait for an obvious deal to appear;

5) Find a deal and contract it. Then use sensible debt, equity, or buyers to monetize your deal.

In my opinion, understanding how to place a value on assets is a principle-based skill that will enable you to invest wisely and outperform shortsighted gambling.