Landlording Comes Last

Jumping into property ownership without building a base of other investment techniques can have dire consequences

Most new real estate investors have two things in common: a lack of investment capital, and a full time job. These two factors cause most new investors to shy away from investment activities such as property wholesaling, or rehabbing homes, which require time and money. Therefore, the most common form of real estate investing chosen by new investors is buying property to hold for cash flow. This form of real estate investing, more often than not, proves to be fatal for budding investors.

Issues are inevitable

The issues that come up within a landlord’s business can be more devastating that the issues associated with selling other people’s homes for a fee, like a middleman, bird dog or transaction coordinator does. It’s much easier to walk away from someone else’s deal you’re trying to sell that gets reclaimed by a bank or burns to the ground; those are the owner’s problems, not yours. Practicing investment techniques involving other people’s homes builds capital, the lifeblood of every real estate investor. Every landlord has to absorb a loss sooner or later, either in the form of a late paying tenant or a vacated house that a tenant left uninhabitable. New investors can rarely absorb losses such as these and have no choice but to walk away from their investment home. To recap, the main investment techniques real estate investors use are listed below:

Real Estate Investor’s Profit Channels:

1. Lease Options/Rent to Own Programs (short term hold with eventual sale to tenant)
2. Rehab Flips – wholesale or retail pricing
3. Owning Rentals/Landlording – short term and long term
4. Originating/Brokering real estate loans
5. Million Dollar Middleman (MDM) Quick Flips (wholesale and retail price points)
6. Providing real estate services (Construction, Prop. Mg’t, Advertising, Consulting, Realtor, Credit Repair, Information Marketing etc.)

People = support

Real estate is a people business much more so than it is a house business. Investment techniques that don’t involve holding property requires an investor to build a team of experts who can be used later on to simplify landlording issues, when they come up. For example, many individuals who sell ugly homes at wholesale pricing to rehab investors can find cheap and reliable contractors at moment’s notice simply by picking up the phone and talking to their network of buyers. Imagine being a new landlord who does not have this luxury after a tenant trashes a home you own. Property wholesaling introduces you to the right people before becoming a landlord.

Other forms of investing also teaches investors the skills required to become good landlords. Selling real estate successfully forces an investor to master real estate finance. Knowing who can actually pull the trigger on a home purchase by receiving bank financing and who can’t, is paramount in this business and is mastered by those that sell a lot of homes. It’s this mastery of finance which teaches a potential landlord to separate good tenants from those who are most likely to stop paying rent. Generally, an individual who does not pay their bills and/or cannot qualify for a home loan will cause problems for a landlord down the line. Experienced investors and loan officers can spot deadbeat tenants from a mile away.

It is other people that will also teach you what a good deal is; or isn’t. This can only be done through other forms of investing before buying property to hold. I have seen dozens of investors fail miserably by jumping in as landlords rather than methodically learning real estate before buying to hold. After walking away from their holdings, they became great successes using other investment approaches, such as property wholesaling or rehabbing. By selling so much real estate, they soon learned what geographic areas and related pricing constituted a good deal, and what numbers didn’t work. When they bought real estate to hold a second time around, they were ready. Once again, other people (in this case the customers they were selling homes to) provided the lessons they needed to then move on to a more challenging level of real estate.

All humans are habitual

New landlords don’t understand the habits of tenants, who, more often than not, leave a landlord’s house in less desirable condition than when they moved in. Most tenants are nomadic; which explains why they do not want to own a home. By renting, they can leave whenever they want. Some tenants simply don’t pay bills – including their rent. The habits of tenants affect the overall cash flow of a property, which new investors simply don’t know how to factor into their business model. Even if they did know how to factor the costly patterns of tenants into their business plan, they usually don’t have the cash or the support system to conquer common problems that tenants can cause.

In 2008, my investment partners were offered ten free single family homes and a rebate from the bank who owned these homes of $3,500 per property. That’s $35,000 in cold hard cash plus ten properties that needed very little work. My partners were some of the most talented investors in the area; and after careful evaluation, declined to take the deals – despite the cash rebate. They knew that the deals would lose money, despite showing such initial promise, because they knew the habits of the tenants that were most probable to live in these homes. Bad areas equate to bad tenants that move in, skip rent, move out and steal the home’s furnace and plumbing as they leave. If a landlord has to renovate a home every 180 days, then where’s the cash flow? Practicing other investment techniques and working with other investors in the field for numerous years provided them with the wisdom to walk away from this opportunity, which was really a wolf dressed in sheep’s skin.