This article appeared originally in the September 2011 Levitt Letter.
Get-rich-quick hucksters routinely hype an alternative universe of streets paved with gold. “All that stands between you and a procession of pushovers eager to fill your billfold,” they tout, “is our seminar’s secrets.”
As Einstein agreed, “A little knowledge is a dangerous thing.” So allow me to shed some light on a pipe dream that too often is oversold and overpriced. You already know that if a business proposition sounds too good to be true, it probably is. By the same token, if the time and talent of the general public is worth more than they realize, a legitimate entrepreneur is going to harness that opportunity for his own benefit—not mobilize an army of competitors.
Hawking training materials to wannabes in the market of blue-sky sales pitches involves romanticizing positives and sidestepping negatives, not to mention tapping into the wealth of human nature’s fear and greed. That said, here’s the inside skinny from a veteran who has managed rent-houses for 22 years—plus, as a periodic hobby, attended many hypester seminars.
Please refer to earlier Serpent installments entitled “Buying a Home” and “Home Ownership vs. Renting” at http://www.levitt.com/essays. They offer fundamental considerations that apply doubly to landlords. Why? Because…
Landlords pay higher interest on mortgages than owner-occupants. Homestead exemptions result in discounted property taxes for owner-occupants but not investors. Many landlords pay more for less insurance coverage than owner-occupants. A state that exempts your homestead from seizure in a legal judgment typically considers your investment property to be fair game.
Nugget #1: Many rent-house investors wish they had simply paid down their homestead’s mortgage rather than becoming landlords. Nugget #2: The theme of most get-rich-quick real estate schemes is buying properties for substantially less than they’re worth. AND doing so is much trickier and more competitive and fraught with peril than most anyone will tell you.
You don’t want the heartache of trying to talk Mr. and Mrs. Jones out of their hard-earned equity before a herd of hustlers beats you to the punch. Most distressed properties are not diamonds in the rough; they’re distressed fora reason. Latent repair issues (and con men contractors) have eaten the lunches of many yesteryear optimists. Even if you own a rent-house free and clear, you can be sure there’s as much vacancy and maintenance at the end of the rainbow as any pot of gold.
If you “buy right,” rental property can offer an alternative to putting all of your eggs in the stock market. However, developing a long-term outlook is only the beginning. You must be willing to endure risk and face the reality that tenants don’t always pay rent or care about others’ property. As you’ve read before, often the best investment is eradicating debt.