If Price Was The Be All End All Then East Mama’s Basement, Ohio Would Be King
Posted @ 12:45 am - Filed under Real Estate Investing, Purposeful Planning, Real Estate Markets, Cash Flow, Retirement Income, Buying Income Property, Leverage, Capital Growth, Communication
I hate infomercials hard. Then there are the cattle call seminars promising their spellbound audience great riches and early retirement through investing in real estate for cash flow. It’s not that the idea isn’t way cool, it is. But seriously people, the stuff they’re puttin’ out will make your lawn grow faster, but not your capital. And cash flow? Give me a break.
It’s the old ‘on paper’ vs real life thing. On paper, a house bought at the Dollar Store with stoopid high rent, makes real estate mogul type cash flow. Let’s look at this video frame by lyin’ frame, OK?
First Frame
Pulling the common sense card from the deck right off the bat, one’s gotta wonder — if they’re such great properties, why are the so dime-a-dozen cheap? Duh. ‘Cuz nobody wants ‘em, that’s why. Was the first clue a Glock is required to get in and out of the neighborhood? Real estate is a slave to the law of supply & demand. There’s nothing special exempting income property from that law.
I have clients who’d buy them literally by the dozen — for cash — if they were really what they say they are. I’d own a hundred of them by now. No, two hundred. Why not? They’re that cheap, right? And the rents are as high as properties selling elsewhere for five times the price. Pullleeeze. You know the guys on TV are actors. Real folks couldn’t keep a straight face.
So we’ve already figured out why the place is so cheap. Now the argument switches to low down payment. You can have the best of both worlds they promise — great leverage and incredible cash flow. Yeah, and I coulda been a contenda. Geez. On paper it gets treated like a well located income property which will naturally attract high quality, long term tenants. In real life? The investor finds out quickly their tenant seems to be on the pay-if-I-feel-like-it plan. The only management ‘company’ in town who’ll agree to manage the place, is a guy working part time for Billy Bubba’s Lawndry & Propity Manigmint. His fees are high ‘cuz he knows, ‘ya ain’t got anywheres else ta go’. And he’s right.
It gets better worse.
Third Frame
Since you readers are smarter than average, (Just like our kids, right? 
) I’ll bet you’re already way ahead of me. The place is gettin’ trashed. The poor guy’s maintenance costs are off the chart. He’s on the phone five times a week asking the manager if they’re rebuilding the place. He’s particularly unhappy when looking at the next monthly statement showing a charge of $37.50 for ‘replacing washer’ in bathroom.
He’s now owned this goldmine for six months and has discovered incredible cash flow means it’s incredible if there’s any cash flow. It’s at this point he begins in earnest to search his lip for the hook that must surely still be embedded.
Fourth Frame
He drops another pile of cash evicting the bloodsucker, uh, tenant who not only rarely paid rent on time, when he actually paid it, but left the place in no condition to rent. So now the poor investor is spending more money to make this gold mine rentable, hoping this time he’ll attract a tenant whose FICO score begins with a high number — like, ‘Oh please Lord’, a six. It’s about that time he learns what a leasing fee is. Oh, and ads. Of course there’s the ever popular ’set-up’ fee for new tenants, one of my all time personal favs.
Fifth Frame
This one shows the poor guy as his spirit slowly leaves his defeated body. Stop! Don’t go to the light! But he sure got a great deal on price. At least that’s what he tells the guys at the BBQ Saturday afternoon. Everyone’s impressed by the low price he paid. Of course, when asked if they can get any, he finds a way to quickly change the subject — ‘Hey, how ’bout those Chargers, eh?!’
BawldFrame
Please keep in mind what Grandma told us when we were little. I know she told ya, ‘cuz it’s in the ‘Bein’ an American Grandma’ manual. She said, “‘Fill in first and middle name here’, if it sounds too good to be true, it probably is.”
Gentle Readers — Don’t ya think I’d tell ya if you could buy income property in solid areas with great cash flow, normal operating expenses, quality tenants, good management, and a decent expectation of capital growth? Don’t ya?
So many of my clients come from depressed areas where these very properties are as cheap as pancakes at a Boy Scout breakfast. But they know what they are — and more importantly they now what they are not. One of my newest, and fast becoming one of my favorite clients is a pretty smart guy from Indiana. He’s owned income property there. He doesn’t wanna any more. For once he’d like to see paper numbers match real life numbers.
What a concept. We should write that one down.
Know what a good deal really is? It’s when you get what you paid for. If you pay a little less, good for you. But yer just not gonna pay swap meet prices for name brand quality goods. And yer surely not gonna get the real estate investment dude who got you into it, to watch over you for the duration. Of course, sticking with our clients from Day 1 ’till their retirement party is what sets us apart.
At Brown and Brown we do our own boots on the ground research so none of the foregoing happens. Do we get BSed? You bet, all the time. Do we get fooled? No — and not ‘cuz were so dang brilliant. It’s ‘cuz we go there ourselves and check out every single detail our own little Bawld selves. We make use of all five senses. Walk the properties inside and out. Visit management. Lunch with lenders. Negotiate with builders — up close and personal. And the usual result is — nothing.
That’s right. Josh and I walk away from far more projects than we recommend. It’s the nature of the beast. But when we do recommend a project, it’s ‘cuz we know exactly what we’re talkin’ about. Been there, done that, lived that — ’till we’re absolutely, without reservation, satisfied.
Last Frame
That’s the phone conversation they’re having with me. I’m tellin’ them to list and sell the dang things as fast as they can, and take whatever they can get. I’ve become bone weary of that conversation. It hurts my heart to tell a guy he’s not only lost money, but it ain’t comin’ back if he doesn’t sell and learn from his mistake. A very expensive mistake.
Those kinds of conversations are part of the reason why you’ll find me each afternoon readin’ a book at my satellite office (Starbucks), havin’ a cookie and some coffee. Sure, I’ll help most of these folks recover. But when they’re closer to 60, some even 70 — time? It ain’t their friend.
So the next time someone takes a shot at convincing you it’s easy to buy property at swap meet prices in great areas, with superb tenants paying stoopid high rents, remember what Grandma said. Then ask them what part of East Mama’s Basement, Ohio they’re talkin’ about.
Let’s have a much better conversation. Let’s talk about your retirement, and how a Purposeful Plan will get you their faster, more safely, and with higher, more reliable income than you thought possible. Of course we won’t be able to make that happen by next month, but we can make it happen. Gettin’ rich slowly but surely is the way to go. The discovery most investors make is that ’slowly but surely’ doesn’t mean it takes forever.
Grandma was right. And for the record? East Mama’s Basement, Ohio’s real estate market is terrible.
This entry was posted on Friday, June 6th, 2008 at 12:45 am and is filed under Real Estate Investing, Purposeful Planning, Real Estate Markets, Cash Flow, Retirement Income, Buying Income Property, Leverage, Capital Growth, Communication. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.