Real Estate (especially STR) is not a get-rich-quick scheme

[Lisa Marie]

I am by no means an expert or even a veteran in real estate, but I have been on BP for a while and can’t help noticing that more and more people are coming on the board with a question like “I have decided to get into this business. I have $20k to spend, and no experience or skill otherwise. Please tell me where to buy the houses so that I can make the most money/ do the least amount of work.” If this is a forum for medical doctors, I don’t think there would be somebody announcing “I have never gone to medical school, but I have decided to open my own practice. Should I be an anesthesiologist or a surgeon? Which one makes more money?”

Real estate business is just like any other business. If you want to be good at, it takes passion and hard work. It is not a get-rich-quick scheme. Malcolm Gladwell famously said that it would take 10,000 hours for somebody to become truly good at something. We can debate whether it takes 10,000 hours for real estate business, but I think everybody gets the point.

However, in my opinion, real estate is also different from other business in the sense that it has a special status, due to the fact that the government wants to encourage home ownership, and consequently sets up all kinds of programs (Fannie and Freddie, tax deduction, etc.) to make it easier and cheaper to buy houses. Those of us who run real estate as a business are unintended beneficiary of this government policy. In my mind, that’s the biggest advantage of the real estate business vs other small business like a food truck or a barber shop. 

The real estate business really has 3 components to it: rehabbing/flipping, passive landlord, and property management. Real estate investors often do all 3 components without being fully aware what role you are in at any given time. The problem is that people tend to mix these components when they talk about their financial results. When you buy a fixer-upper, renovate it, furnish it, and set it up as an STR, then manage it yourself, your return on investment will certainly be a lot higher than somebody who buys a turn-key property and hires a PM to run it. That doesn't make you a better investor. That just means the money you make is a combination of the passive income from being a landlord, plus the profit from flipping (effectively you sold the newly renovated house to yourself), and plus the fees you would have paid to a PM but now you are paying yourself. I cannot count the number of times when a person comes on the forum and asks "how to find property managers in area X" and be greeted with a chorus of "don't use property manager, do it yourself". The OP just wants to be a passive landlord, but the others are trying to convince him/her to get into the PM business. It is the equivalent of your neighbor paying somebody $40 to mow his lawn vs you cutting the grass yourself and claiming that you made $38 more than your neighbor because it only cost you $2 of gas.

So if you are a new investor, you really have to ask yourself – what value am I bringing to the table? What role do I want to play? Rehabber/flipper? Passive landlord? Or Property Manager? If you have no skill in #1 and #3, or if you have a busy career earning a good W2, then you should stay within your lane and just be a passive landlord, but accordingly, you need to adjust your expectation. A passive landlord is basically the money man who came up with a 20% down payment and used his personal credit history to borrow the rest. If the professional money man (bank) is lending out money at 3% or maybe 5% (for a hard money loan), then you really should not expect much more than 3~5% on your return on investment. Don’t get distracted by all the other posters on BP talking about how much they are making. They are earning the money as a flipper and/or property manager. On the other hand, if you want to do this as a career (or if you have an easy W2 job which gives you a lot of free time), then you can invest your time and energy to become either a flipper or a PM, which of course will bring you more income, but then you are taking on a second job. At that point, you should ask yourself “am I good at being a flipper or a PM?” If you are honest with yourself, you may realize that you would be better off driving for Uber in your spare time instead of trying to renovate a house; or you may be better off working harder at your day job and trying to get a promotion and bigger paycheck.

Sorry if I sound grouchy. I am just feeling that we have so many people getting into the business without fully thinking through the ins and outs. Ultimately, this is a business and we are in a capitalist society. You can make money if you have something valuable to offer. If it's your skills in renovating a house, great; if it's your skills in marketing and hospitality, fine; if it's your vast amount of money, that's good too if you can leverage it into multiple loans, but different skills have different values and they bring in different amount of ROI. Just be realistic in what you can offer and what you expect to receive.