It seems that I always tell you about the great things about buying and owning passive income real estate, especially the monthly cash flow that just keeps growing and getting bigger as the years drone on (due to increased cost of living).
But...what about the bad stuff that can happen? How come I never talk about that?
Well, good thing you brought that up because that's what I'm about to do now. I'm going to share with you a real life property horror story that actually happened to me a few short years ago and what I did to get out of the situation. Some things, of course, can't be circumvented at all and you can chalk that up to taking a risk in this big thing we're all participating in called "life." Most things, however, can be rectified if you think creatively enough.
Here's one such thing that couldn't be circumvented...at least for me. But I'll tell you what I ended up doing in order to distance myself from this "problem child" property as fast as I could.
Years ago I had a property in a seedy area of what I like to refer to as the ghetto because...well, that's where it was. Deep in the heart of the ghetto in a low D-class property.
By the way, not to stop the story midstream or anything but I should mention as progressive lesson here that there are "good" class D properties and "bad" class D properties. Here's my own personal invented scale as such:
Class D- = war zone, burned out buildings, and drive-by shootings every hour; this would be an area to avoid at all costs!
Class D = on the border of the war zone described above but "leaning" toward the "better" areas...still an area to avoid because the bad parts of the ghetto will bleed into this area, giving you more of a headache than it's worth.
Class D+ = obviously if you're going to do a class D property, this is what you're aiming for. These are considered high risk to other investors because they can switch to a regular (or D-) at any time but they can be incredibly profitable. These would be your "up and coming" areas where a lot of investors come in and, as a comrade effort, try to redevelop certain blocks or areas. They could, at some point, be reclassified as a class C which, of course, would greatly benefit you financially.
Class D, I should mention, is an unofficial class but any real estate broker or agent you talk to knows full well what "class D" means so...I guess it really is a "real" class if you think about it.
Anyway, this property we're speaking of was a small building of only 6 units. It was the second to the last building on a corner in a quint neighborhood fitting your "regular" class D description above but bordering on Class C which was literally one block over.
Unfortunately, after purchasing the property, doing minor rehab, and curing the vacancies in 2 of the 6 units, there was a shooting right on the corner next to where this building was situated. All 6 of the tenants in the building had vacated the property in less than 6 months after because, unfortunately, it wasn't just a shooting but someone involved in the shooting bled to death on that very corner right next to a stop sign situated there.
What an inexperienced investor would have done would have been to throw their hands up and walk away, crying in their beer at a local bar over how life is unfair (probably while the local residents were stripping out the building at the very same time).
However, being a little more experienced than that I realize that sometimes sh** happens and you have to keep moving forward, right?
I have no control over what happens and I'll be damned if I never take a risk doing anything otherwise I'd never get anywhere in life. I refused to lose on this deal.
So, I took quick, swift action to refill the building. I offered 2 fr*ee months to new tenants coming in, no credit check, income verification with 2 months worth of paycheck stubs, and a security deposit that reflected only half of one month's rent. I filled all 6 units in a week and a half.
Next, I put the property up for sale using proforma numbers (like everybody else does). I didn't throw it up for sale at some ridiculous low ball price otherwise investors get suspicious. Instead, I put it up for sale for just under double what it would normally sell for. (Take note, this is reverse psychology.) I didn't honestly think I'd sell it for that but I absolutely refused to lead anyone to ask the question, "This property is cheap so...what'swrong with it then?"
And nobody asked that question.
Within 2 months, the property was under contract. A man in Texas wanted to buy it. And holy sh**...he gave me my exact asking price. Go figure!
What was that price? $195,000! And the property (with rent-paying tenants at full occupancy) was maybe worth $100,000 tops! (By the way, I paid $73,500 for this same property. I put $20,000 into it. I actually made $101,500 in profits on this deal in a total period of 10 months. Not bad!)
What's the lesson here for you?
1) You can't not take a risk because of what may happen because you never know. This property was at a border C/D class area and these types of murders/shootings usually don't happen here. If you think about it, people can get killed in Beverly Hills or Malibu, too. Unless you have a crystal ball, you never know what can happen and where it can happen. After doing the best risk/reward ratio you can do, go for it otherwise you'll be exactly where you are now in 5 or 10 years from now. And we don't want that, do we?
2) Don't be an out-of-state investor without doing some type of due diligence on a property including (1) what did the seller pay for the property? (2) when did the seller buy the property? (3) what is the "seasoning" of the tenants (or how long have they lived on the property)? (4) what are the "comps" of recent sales in the area per unit/door? and (5) what does the recent crime report in the neighborhood look like by simply calling the local police department? It's okay to be an out-of-state investor but get to know your area really well (and you can do this by never leaving your house in your own area). Know what you should be paying per door and what you shouldn't be paying per door. Get to know how much rent is for each type of unit in a unit mix. Get to know how bad it is by getting a crime report. Find out how "gritty" of an area you can go and where it gets so bad that it becomes off limits.
3) Realize that sometimes your exit strategy may change midstream. And that's okay. You may have had plans to do the buy-and-hold plan with a property and then you realize sometime after you rehabbed it and filled up the units that, perhaps, it's gained a considerable enough equity that you'd rather resell it to get the money out for a larger property. And this is completely okay. Just don't sell the property and blow the money. Keep investing!
4) Understand that sometimes stuff will happen with a property. That's just how it goes with property ownership. But the better you do with due diligence before you purchase your property will determine how bad things will be post-escrow for you. For example, if you're too cheap to hire a property inspector for a thousand bucks or two, don't be surprised if your interior walls are ridden with black mold that has to be specially remediated, costing tens of thousands of dollars. (By the way, this would have been something you would have been able to have to seller pay for if you caught it in the due diligence period during escrow.)
As far as investments go, in comparison to everything else out there, you can't beat passive income real estate. You just can't. This is why your wealthiest of wealthy all own real estate. They're not doing it to keep up with the Jones' or to have something to talk about at cocktail parties. It's because, hands down, it's the best way to attain and retain wealth.
And if multi-millionaires are doing it, it simply means it's a viable kick-ass opportunity that is making a lot of people very wealthy. (Last time I checked, nobody was getting rich stuffing envelopes or signing up for a network marketing opportunity. I'm just saying...maybe you need to ask yourself if real multi-millionaires are getting rich doing whatever opportunity you're looking at to figure out if it's worth you doing or not!)
One thing I have to offer you is the opportunity to not only discover how to do all this (and directly from people who are successful doing it) but to offer you the opportunity to connect with the people who can fund your deals for you. Without OPM (other people's money), getting involved in real estate becomes impossible to do.
But I have those money connections for you...
Here's where: Detroit, Michigan
Here's when: November 14th & 15th
Here's more information on this event:
If you have any questions, give us a call at (661) 295-5050.
See you next month in Detroit!