Real Estate – Belief Not Required

August 19th, 2013 · Tell Me What You Really Think Here · Property Management, REIT

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Real Estate is not rocket science. The most valuable asset you have when figuring out real estate is a calculator. If the numbers and the premise do not add up, the business plan is finished. You’re not in this for your health, you’re in this to make some dough.

Belief = Scam

If the people putting together the project are not putting the focus on the numbers of the project but are telling you how great they are, walk away. It’s that simple. Real Estate is not that complicated, if you buy an asset that makes sense, you will make money. Belief is not essential – a solid business plan, knowledge of the market and a lot of fucking really hard work and persistence is.

Being Cheap Is Essential

Contrary to popular belief, owning and managing real estate is not as profitable as reported. Most people will have negative cash flow when  maintenance is concerned. You just can’t discount the fact that from day 1 you are using up roof and furnace and hot water tank. You might not be paying for it today but those costs are occurring. Your equity from paying down the mortgage is negligible for the first five years. The good news is that inflation is in your favor and as the house price and mortgage goes down in relative value, you look really smart to yourself and to others. Unfortunately, while this is a worthwhile reason to own real estate, it’s not exactly adding value.

All the landlords I know are driving old cars, and proud as hell of it. There’s no flashy cars or fancy offices. If they do drive a newer car, it’s probably a Volvo. You might want to keep that in mind when meeting your “investment adviser/helper”. If a lot of money is spent maintaining the illusion of money and trying to impress, this is money that can’t be spent fixing up the building and adding value. All these trappings cost money and if you’re the investor, you’ve paid for it.

Catching a Falling Knife

No one makes money in a falling real estate market. There’s no way of adding value that will increase faster than the value going down. Everyone gets burned. The only thing that will save your goddamn ass is income. The income makes the entire difference because that is what makes for a sustainable business. In a very real sense unless you are forced to sell, the income insulates you from taking a loss until the market changes direction, this can take 10 years or more.  Be very wary of any plan that involves loss of income. I’ve seen more than one investor in trouble after throwing out all the tenants to “renovate”.  It’s not a house, it’s an investment and so it’s only worth the income it generates. This is business, not rainbow unicorn land.

BEWARE OF FRAUD

Real estate is like any other business. No one is giving money away and monetary gains are based on real work. If anyone comes to you with a complicated hard to understand plan with multiple companies, changing terms and overstated returns, I can almost guarantee it’s complete bullshit. Time is money. There should be timelines. Vacancy and holding costs are money down the drain that investors will never get back. There is a shit ton of real estate fraud out there. Investors need to be extremely vigilant with their money. In the First Leaside case here in Ontario investors are going to get almost nothing back. First Leaside real estate fraud has a whole website devoted to it.

Blame The Victim

In most cases, the investor who has been victimized is actually blamed for the crime or for not knowing any better. This is too simple and convenient. Couldn’t you see it coming? Didn’t you know that 10% was an outrageous return? You should have known…

Except. It doesn’t work that way. Investors are fighting a system which is designed to create trust based on deception and inequity of information.

These people work full time and have staff devoted to producing the illusion that they are successful real estate moguls – VIP’s who manage millions of dollars worth of assets and pretend to be really smart and fantastic.  There are companies who do nothing but issue “news” that looks legitimate. It’s designed to trick investors and act a cloak of legitimacy . Meanwhile the regulators, educated people who are in the business of spotting fraud and fakery, stand by, unable to do anything because they can’t prove that anything illegal is going on.

So I ask, isn’t it a little unreasonable to expect a widow or senior or other vulnerable person to “know what is going on” when trained regulators can’t even tell? Isn’t it a little outrageous to expect the average retiree to understand complex financial documents and statements that number in the hundreds of pages when they have no knowledge of accounting and the issuing business?  Then, when these financial products go wrong, the very same principals are free to continue searching for investors? Over and over again?

Vulnerable people deserve better, and we’re all vulnerable people.

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