Epic Real Estate Investing - 3 Real Estate Investing Myths | 957

Episode Date: March 14, 2020

In today’s episode, Matt and Mercedes share their insights on an article about 3 real estate investing myths. Stay tuned and find out more about them and why you should choose your mentors wisely! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Success in real estate has nothing to do with shiny objects. It has everything to do with mastering the basics. The three pillars of real estate investing. Attract, convert, exit. Matt Terrio has been helping real estate investors do just that for more than a decade now. If you want to make money in real estate, keep listening. If you want it faster, visit R.

E-I-A-A-Ase.com. Here's Matt. Hello, and welcome to the epic real estate investing show coming to you live from Las Vegas, Nevada. I am sequestered in a private secret location conducting a business planning session with my business partner, Miss Mercedes, and she's here with me. Say hello. Hello, my friends. How are you? They can't hear you

They're not going to answer I was just hoping that someone would respond in their car And say Mercedes I'm hearing you and Matt together It is actually a pleasure to be here As many listeners know Matt and I have I don't think

Have done a podcast episode in about I just have to make a note of this Look at the sound waves on the computer Five years Look at when I'm talking And then look at when you're talking You see how big much bigger The sound waves are

on you for your voice when my voice. That's the Puerto Rican in me, my friend. So our listeners are used to the difference between Ternickee Tuesdays and every other day of the week that you do the episodes. Yes, I've been seeing some of your responses. People are digging Tuesdays better than the other six days of the week. You know, a girl's got to do what a girl's got to do. All right.

So, yeah, we're here in Las Vegas. We're in the hotel and probably wasn't the smartest decision for a business retreat as we've been looking out the window. this guy the marshmallow man. I don't know who this guy is, but everyone else seems to know who he is, so I feel very old right now. And he's a DJ here at the hotel,

and then he had a special guest, Miss Cardi B. yesterday. And it was an absolute zoo outside, and while we're inside, being very productive and mild-mannered, or well-mannered, and watching the shenanigans gone outside was really tough.

But we had to be. have pulled through because here we are on day two and we've got quite the plan for the next 12 months and we're like oh no we have to record a podcast so here we are the day before us usually we're a couple days in advance and uh we actually were during our planning we stumbled across a article and this article is on uh the website fool.com by the motley fools there's some financial guru guys and they have an article called Don't Fall Victim to These Three Real Estate Investing Myths. I was like, ooh, that sounds so serious.

None of us want to be a victim, right? And I was like, what are the three real estate investing myths? It's the way the lists. They always capture the reader, and I guess that's why they do them. So I was really curious, okay, what are these myths? I don't want to be a victim to it either. So we started reading it. And we'll go ahead and we'll read it to you

and these three myths, and then we'll kind of share our thoughts on that. Does that sound good? I think that sounds fantastic. And I think our listeners are going to be able to get two different perspectives, although we work together and we have a business together. Although we share many of the same thoughts, I am a really big fan of buying and holding as you are. And then we'll dive into the article and share what.

different people think about buying and holding and just generally real estate investing. So why don't you dive right into it? All righty. So the article is a short article, so I'll just go ahead and read it, and then we'll pause in between the sections, between each myth. So it starts, rising home prices and historically low lending rates can mean only one thing. The real estate investor is back in full swing, according to John Burns' real estate consulting. The number of single family homes being rented out has changed.

jump 35% since 2006. This article was actually written in 2015, but it's still got a lot of traction. It's very highly engaged in being passed around. So that's like for four years. So this was 35%, what, four years ago, it was up 35% much more than now. Largely as a result of real estate investors taking advantage of what appeared to be ideal buying conditions. However, buying real estate and counting on it to fuel your retirement or provide your

substantial monthly income may not be a wise move. We asked three of our foolish contributors. What they believe are the biggest real estate investing myths perspective, real estate investors and homebuyers should be wary of. Still don't know what that says. But okay. So here's what they say. And when I say the foolish, what they say, the foolish contributors, that's the brand name. They're called the Motley Fools.

So they're not actually foolish. Well, I guess we'll wait and see. So the first contributor, Mr. Sean Williams, he says arguably the most pervasive myth when it comes to investing in real estate is the belief that buying a home is a great investment. To be clear, buying multiple homes and relying on rental income from those homes can actually be a good investment. However, purchasing your primary home and relying on it to fuel your retirement is rarely ever a good idea. I know what you're probably thinking, but how home prices are always go up. So why is this a bad idea? Most homeowners likely remember the doubling in home prices between 97 and 2007, but this was an anomaly.

based on data from Robert Schiller's irrational exuberance between 1890 and 1990, so that's a hundred year span. Home prices did go up at a rate that outpaced inflation, but only by an average of 0.21 percent per year. So not even a full percent. Between 1950 and 97, home prices rose by an even more depressing only 0.08 percent. In other words, while a house is likely to deliver nominal monetary gains over time, those gains will more or less, match the rate of inflation, giving you no more buying power in 10, 20 or 30 years than you have today. Your house isn't an investment. It's a place to live in. Don't forget that. You know, I cannot agree with that more. You know, we talk about a lot on Turnkey Tuesdays

about how buying your personal residence isn't an investment. It is a liability. An investment is known as something that puts money into your pocket, and I believe that your primary residence takes money out of your pocket, different from an investment property that you purchase to rent. Your renter, your tenant, will pay you the rent in which that contributes to paying your mortgage, where when you purchase your own residence and you're living in it, guess what? you have to pay the mortgage. So I happen to agree with Mr. Sean Williams here. I don't think it's a great idea to buy your primary residence. In fact, Matt and I, you and I have done episodes on we don't own our own primary residence for the same exact reason. And something else to say about

what Sean said is he talks about, you know, inflation, how inflation outnumbers you or what is outpaces you. Outpaces you. Yeah. Infation outplaces you. I, I, I, I, agree with that. I think many people buy properties and just pray and hope that the property appreciates. And unfortunately, praying and hoping is really not a good investment strategy. No, definitely not. And it's funny because I can always tell when I read an article or hearing somebody talk about real estate and when they're focused on appreciation and whether their opinion, whether I agree with their opinion or not. And in this case, I happen to agree with Sean about the home not being a good investment.

But where he gets his logic from, I think is flawed. Because anyone that is focused on appreciation for real estate really doesn't understand real estate, because it is a hedge against inflation. They go neck and neck with each other if you look historically. And the home will typically outpace inflation just slightly, as he pointed out. So he's right on the money there.

But with the, it being a bad investment, and why a rental is a good investment is basically what you just said Mercedes is when it's your home, you are making that mortgage payment. When it's a rental, your tenant is making the mortgage payment. So that's the big distinction there. And so the other caveat there is, depending on where you live, right? So we live on the West Coast where to own a property is much more expensive than it is to rent a property. property. But there's a lot of places in the Midwest and the South and other parts of the country where it's actually cheaper to own the house than it is to rent. So based on your month, you're going to have to live somewhere. So you're going to have to pay somebody, something for your shelter. So whether that's the bank or whether that's a landlord, you should probably choose the one that cost you the least amount because that's money out of your pocket. And then use your rentals to help pay for that payment.

Amen. Yeah. I hear that. So it's good. But it's, I like how he pulls out the facts there, or the historical numbers. But appreciation, it's an icing on the cake. And it's the thing that everybody focuses on, like, it is the cake. And it's the one part of real estate, like, you just have very little control over.

And it's, you know, if you time it right, for example, he pointed out between 1997 and 2007. like that was an anomaly. Yeah. But that's people that are walking in this earth right now, that's a lot of people's reference point. And that's what they think real estate is. So the reality is no one has a crystal ball.

And, you know, history does repeat itself. There are trends, you know, by no means are, do I ever say that, you know, we're professional at reading the trends. But writing is on the wall. And unfortunately, a crystal ball is just not a good barometer for what the future is going to do in real estate.

Ours is still in the shop. You know? They just can't seem to get it fixed. So we've just left it there and forgot all of that. All right. So next one. This is Selena Marangian. I think that's they pronounce it.

Okay, so she writes, this is the second myth. So the first myth was, your home isn't a good investment, right? Or your home is a good investment. That's the myth. And he kind of debunked that. So I agree with them. The reasoning and the logic is. is a little bit off, I think, or not. It's incomplete. I'm not off. It's incomplete. But he's right on the money. All right. So let's go and see what Selena's got to say. She says, it can be easy to convince yourself that you can get rich by buying and renting out properties. Simple math can certainly seem to suggest that. Buy a home with a $1,200 mortgage payment, collect $1,600 in rent, and boom, profits and growing equity in the property. Not so fast, though. There are about a zillion other things to consider. For starters, not all properties will appreciate in value.

while you own them, so you might end up selling a home for less than you paid for it. That has happened to many, many people. Meanwhile, while you own the home, you might be collecting rent payments, but you'll also be making property tax payments and paying for insurance, maintenance, and repairs. Many homeowners across America enjoy tax breaks on the homes they live in, but those discounts disappear when it comes to investment properties. I can't wait to jump all over there. Me either. I'm fighting my lips.

We're going to hear her out. Being a landlord is also trickier than it can seem. You might have been a model tenant in your own renting days, but many renters don't or can't make payments on time. It can take a forceful personality to deal with troublesome tenants, and it's not always easy to evict them. Many states have strong laws protecting tenants. You'll also have to deal with calls at inopportune times

to fix a leaky roof or replace a refrigerator that stopped working. Even good tenants aren't perfect. They won't necessarily take as good care of your property as you, would, and when they leave, you may face unexpected necessary repairs. Even without that, you'll likely need to freshen up the place with new paint, et cetera. It can take a while to find a new tenant, too. It can be costly if the property is empty for a few months between tenants. Wow. So there's somebody that hasn't owned a lot of rental property, and there's somebody that's, maybe they've owned one, and they've culminated all of their experiences into that, and that's their opinion on all real

estate now. But anyway, go ahead, Mercedes. There's 10 things in here I could jump on. You know, Selena, where do I start with you? Selina was the one that wrote this section of this article. So first and foremost, there's a huge difference when you're buying a property to live in it and when you're buying a property to invest in it for cash flow. The one thing that you always have to know, and I harp on this every week, is you have to know your numbers, whether it's the number that you're trying to achieve for, you know, your monthly passive income that you're trying to acquire, or however many properties that you want to purchase a year or, you know, in a 10-year span, you've got to know your numbers. And furthermore, you have to specifically

know the numbers of the property that you're buying. So when you are buying a property, you already are going to factor taxes, insurance, maintenance, vacancy, and, and, you're see everything so that although your mortgage payment is $1,200 a month and you're collecting $1,600 in rent, if you don't do the numbers from the beginning, you can't say that that's going to be a solid investment for you without knowing what everything else is going to be. This is why, my friends, when you analyze a property, you need to know all your numbers from the beginning, and that's why there are pro formas out there. So you can actually do the numbers before you jump into an investment property.

So that's my number one pet peeve with Ms. Selena. And my second most important thing is when you are a landlord or an investor, you may not be the best property manager for your property. Hence, there are property management companies that do this for a living. This is why Matt and I do not manage our own properties. because there are experts out there that not only look for that perfect tenant that's going to qualify to live into your property and that does all of the screening, but they also do a really good job at maintaining the property so that your tenant is going to want to pay their rent so that you don't run into the problems of, oh my goodness, this is a negative cash flowing property for me at the end of the month.

You do all this beforehand, before you jump into your first investment so that you avoid all of this. This is called due diligence and this is called knowing your numbers before you jump into your investment. Very good. I agree with all of that. Let's see. So she says there's about a zillion other things to consider. For starters, not all properties will appreciate and value. Again, when I hear someone use the word appreciation,

I automatically, they're just not a real estate expert, in my opinion, because if that's what they're focused on, and that's what they're going to base their decisions on, first of all, you can't control it, like we just talked about. You don't know what if it's coming or not. And second, that's not the main reason you buy real estate, okay? But that's what I want to focus on. So you, and then she says, so you might end up selling the home for less than you paid for. Then she writes, that has happened to many, many, many people. Well, that has not happened to many, many, many more people.

So if it had, if everyone sold their house for a loss, I mean, I'm almost feeling like this article is trying to steer us somewhere, at least in hers, because real estate wouldn't have produced more wealth than anything else on the planet if everyone sold their house at a loss. There has to be the far majority are selling for a profit if it has that moniker of being this wealth producer that it is. Second thing is, you're not supposed to sell it. Damn it? I know. You know, if you go and you talk to the old real estate investors, and I guess I'm not going to say we're old yet, but we've been doing it long enough where I can totally relate. And I can't imagine my opinion changing in the next 10 years, 20 years. But the more seasoned, experienced investors that I've ever talked to, you ask them the question, if you could do it all over again, what would you do differently?

And they all say, I would have sold less and held more, bought more. And then you look at Warren Buffett, who many consider him the greatest investor ever, or at least of our modern time, give or take, I guess it's arguable. There's probably some other investors that do pretty well. But he has a quote saying his favorite holding time is forever, right? And so if you know how to manage your real estate, then you don't really want to sell it because that's not where all the benefit is in the sale, right? Because now you've got that cash and I've got to put it somewhere else.

Where are you going to do with it? So there's that. Then what was the other part? Let me interrupt you. Go ahead. One thing that is clear with, you know, when this contributor said many, many people have lost, she probably didn't consider that when people buy properties, so many people are not crystal clear as why they're buying real estate.

You know, you can be buying your property to live in it forever, or you can be buying the property because you need tax shelter. or you could be buying the property because you need cash flow. And I feel that the people that she's talking about that many, many, many, many had to sell because, you know, they ultimately ended up losing money. Well, did they stop to think before they sold how they got into this property or what was their motivating, what was their motivation to get into the property that they had to sell at a loss? And that just goes back to my point is you have to be crystal clear as to why you're

you're buying an investment property or why you're buying a property, period. And so this goes back to knowing your numbers. Know why you're getting into it and make darn sure that you're doing your due diligence so that this doesn't happen to you. Right. Here's something else that's absolutely incorrect. She writes, meanwhile, while you own the home, you might be collecting rent payments. But you'll also be making property tax payments and paying for insurance, maintenance, and repairs.

Many homeowners across America enjoy tax. on the homes they live in, but those discounts disappear when it comes to investment properties, which is 100% false. That is a false statement. And everything she said, your property taxes are tax deductible, your insurance, your maintenance and your repairs, that's all tax deductible. So how could those disappear when, no, so that was the one. I was just like, that's just a false statement. So that's not true. Then being a landlord is also trickier than it can seem. You might have been a model tenant in your own renting days, but many renters don't or can't make payments on time. You're right. Many can't. But many, many more can. Many, many more do. Or else, real estate

wouldn't have produced the type of wealth and the financial freedom that it has. It can take forceful personality to deal with troublesome tenants, and it's not always easy to evict them. Many states, have we ever evicted a tenant? Maybe one in the last 20 years. We've evicted. 15 years or so. Yeah, we've evicted very few. I can count the number of tenants that we've evicted with the numbers, with the fingers in one hand and still have fingers left over. Yeah, yeah, it doesn't happen. It's just everyone always remembers the bad stories. No one remembers the good stories. No one ever talks about the person that keeps making their payments. Well, this even goes back to Matt as to why you want to hire a property management

company to like oversee your property, not only to oversee the property and maintain it, but to screen your tenants. It is critical that the screening process is, is on point to that particular market. For example, most of our property management companies, not only do they do a background check and do we do verification of employment, but we will not even consider renting to a tenant that doesn't make three times the amount of the rent. So if the rent is $1,000 a month, a tenant has to make at least $3,000 a month, just one person in the household, for me to even consider them, and this is why we have property management in place. And we have a screening process in place.

Correct. Right. Her last sentence here, which I failed to read because there was a big image in between the separated two, her closing sentence, many people do make money as landlords, but it's not nearly as easy as it might appear. Now, this is something I commonly hear, and lots of trolls on YouTube chime in with this all the time. So, no, Mercedes and I will never tell you that it's just, yes. Easy peasy, right? We've never said that. But what is easier to make the amount of money that you make in real estate? So it's the alternative. No one ever has the alternative. They'll say, yeah, but you got a tenant. And they're going to call you in the middle of the night for a leaky toilet, which has never happened to us, which has never happened to us, which has never happened to us. When they say it's not nearly as easy as it may, might appear, oh, you make it sound all easy. No, it's not easy. And I don't make it. sound easy because I don't think it is. But there's nothing easier to make the amount of money that

you make with real estate. Sure. I second that motion. Mr. Terry? It's like, okay, fine. You can crap all over real estate if you want, but now what? Now what are you going to suggest? Maybe we'll get to that in the article. Here's Dan Kaplinger. Number three, third myth. So there's a common misconception that the only way to invest in real estate is by directly owning properties. As a result, while many people are comfortable with the idea of buying residential properties like vacation homes or even duplexes or small apartment buildings, the prospect of venturing into the commercial real estate realm seems out of reach due to the greater complexity involved in working with business tenants to meet their needs. Yet real estate investment trusts make the commercial real estate world a lot easier to navigate. With various types of REITs, real estate investment trust, REIT is short for that.

You can concentrate on commercial investment in areas like retail space, office buildings, industrial facilities. or even niche areas like hospitals and health care facilities or rental storage units. REITs have management teams that will handle all the ins and outs of property ownership and why they will take a cut of the profits. The REIT structure typically also means that you'll have part ownership of a wide array of different properties, giving you diversification that's hard to achieve with your own personal real estate portfolio. For those who are intrigued by the opportunities that are available in the commercial real estate industry, taking a look at real estate investment trust can be the easy way to get access without making it a second

profession. Okay. Oh my goodness. All right. So I have a lot to say. Right. So investing in a REIT is not investing in real estate. I agree. You're investing in the company that owns the real estate. The company that they are using your money because they understand the benefits of owning the real estate and you are going to make money based off of how they perform. But it's a speculation play and it's a lack of control play. It's even though it has real estate in the name, it's really no different than a mutual fund, right? You're investing in the company that does the investing for you.

They're using your money so they can get all the benefits of the real estate. And then you get to sharing that with them. But you only get typically on the performance. So you're probably only going to benefit from the appreciation and the cash flow. But you're not going to get the tax benefits through a REIT. which are huge. They're monumental. Like it's like one of the last strongest or the last tax shelters available to the average person is just real estate. And people discount that or don't take it into account because they don't see it as money actually coming into their mailbox.

But if you didn't have your real estate, watch how much more would go out of your mailbox if you didn't have it. Then you'll really feel it. Yeah, that goes back to saying, Matt, you know, why are you getting involved in real estate investing? I mean, you know, what's the motive behind it? A reet is just like, you know, you park your money somewhere, and you just hope that there is a profit with this reed, because that's the only way you're going to make money, so to speak. You give up all control. Generally speaking on a reet, you don't get to choose the type of collateral that is being purchased. It could be office space.

It could be single families. It could be apartment, pomp, lots. You just invest into this, this reed, this program, so to speak, for a return. And you hope it's a preferred return because a preferred return, you're going to get paid no matter what if there's profit. Where you give up everything else. You give up the tax deductions. You give up control over your asset. You give up control over the tenant.

You give up being able to like sell it at any time because you're investing in, a and a trust, so to speak. So you give up a lot of control. And, you know, if you're okay making, you know, whatever that number is, maybe it's 4%, maybe it's 5%, maybe it's 6%, whatever it is. And you want no control, then, you know, a rate might be a good option for you. But if you want control over your money and you want to be able to say, I don't want that investment anymore, or I'm not going to renew that lease,

or I want more of a tax deduction, or I want to increase the rent because I'm, I'm going to add an extra bathroom, then you're limited to what you can do with the read. Yeah, you don't get the amortization so you don't have ownership in it. Right? You're really investing in the person. You're not investing in real estate. You're investing in a person that's investing in the real estate. And personally, as you could probably tell, I'm not big on the stock market just before the lack of control purposes for that and the speculation aspect of it.

but a lot of people have done very well with stocks. So just because it's not for me, I'm not going to crap all over it the way people crap all over real estate because they do. I'm sure we're kind of reading it right here. It's kind of swaying us towards this, towards where they think we should more aptly put our money. But the point being is if stocks are working good for you, if a real estate investment trust has worked for you,

if you found a good one and if you found an exception or you, You know a different way to do it. And it's working well for you. Then don't listen to us. Just keep doing it your way. That's fine. I'm okay with that. I'm just sharing with you what we're reading here and what our opinion, our experiences are.

So I like to always put that disclaimer there because we'll get one person say, I know this one guy that did this. And I was, okay, well, that's great. Let's all base our decisions off of the one person that you knew or the person that you knew. Or the person that you knew the person that did it. Right? So we just, you can, I hear it all the times, though. Forgive me if I sound a little bit jaded, but I just know what real estate is done for us,

and that's why we're big advocates of it. So the closing statement here, something big just happened. Oh, my goodness. I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder, David Gardner's brother and Motley Fool CEO, Tom Gardner, just revealed two brand new stock recommendations. Together, they've quadrupled the stock markets return over the last. last 17 years. And while timing isn't everything, the history of Tom and David's stock picks

shows that it pays to get in early on these ideas. Okay, so they just took this whole article, three myths of real estate investing, and progressively poo-poot on real estate the whole way through. And then they had their last little paragraph here is, hey, something big just happened. I got a hot stock tip for you. All right. So the point being is choose your mentors wisely. And look out for these slants in where they're trying to steer you. That's what I have to say about that. I kind of knew it was going there just because I just kind of know the nature of how the media works these days.

But I wanted to see if there are some real valid useful information or if we could turn it into some useful information for people that are interested in real estate or are on the fence thinking about it. I think we did share our insight enough to. where people could see both sides of the coin and determine what's going to be a better fit for them. You know, for some people, you know, if stocks are working for you, go for it. You know, I always rest assured knowing that, you know, if the stock market is to crash tomorrow, it's not going to affect us in the very least.

And if the rental market crashes tomorrow, it's still not going to affect us because what we did is we bought right. And even if we had to drop rents to the point where it was just going to break us even, we still have the asset at the end of the day. So you have to figure out, and I share this often, what your motives are, what your why is. And, you know, take our advice as a grain of salt. We've only been doing this for about, I don't know, what is it, 12, 15 years. Well, together is 12 years. Yeah. Separately, probably 15. Yeah.

Okay. So we've been doing this for a minute, and it's been working thus far. So what I kind of suggest to our listeners is, you know, do your due diligence, follow the people that are doing what you want to do in your life financially. And the writing is always on the wall. Just learn to read what's on the wall. Yeah. The last little comment that you made is actually right on as we can end it with that,

being that, yeah, the stock market can crash and a reet can crash just in the same way a stock market can. That's true. But your real estate, your asset will never be worth zero. Well said, Mr. Terrio. Thank you. I'm on that note. I saw that written on the bathroom wall, I think, downstairs. That's going to be a good one.

I'm going to use that. Let me squeeze that in however I can. Mr. Terrio was a pleasure joining you today on your episode this week. Maybe you can join me on my episode sometime soon. waiting for an invitation. Ah, note taken. All righty. So that's it for today on behalf of Mercedes and myself.

God bless to your success. We are Epic Real Estate, Living the Dream. Living the Dream. Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow. You didn't know Home World, we got the cash flow. This podcast is a part of the C-suite Radio Network.

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