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Seven Real Estate Myths Busted Wide Open

This is a guest post by Julie Broad.  Julie is a young real estate investor who achieved a million dollars in net worth by the age of 30.  This article shares some of her experiences in real estate investing with more information about Julie at the end of the article.

Think you should always buy the worst house on a street? Are you waiting to get your corporation set up before you buy your first property because you were told that is the only way to shelter yourself from the risks? Or maybe you just don’t think now is the right time to buy, and you are trying to time the market to get in? You’re not alone in believing any of these things… they are said so often they sound like facts. But, they are just a few of the commonly told real estate myths.

If you want to make money in real estate, you have to separate the myth from fact. We’ve taken seven of the most common myths and busted them open to help you get started.

Myth 1: You don’t need money to invest in real estate

Reality: You DO need money to invest in real estate, but it doesn’t have to be your money. There are plenty of places to find funds… partners, parents, friends, extended family, your house, your retirement savings and other private money sources. We’ve borrowed money from a real estate agent, parents, grandparents, and the vendors of several different properties.

At the end of the day, every real estate deal requires some cash. Even if you do a no money down deal that doesn’t require a cent for a down payment you will still need cash for things like appraisals, inspections and lawyers.

And, almost every property needs a bit of love when you buy it. Even a simple coat of paint requires some cash.

Myth 2: You need a corporation to buy property without risk

Reality: Maybe this works more effectively in the U.S., but in Canada, if you wish to get conventional financing from a bank, you will not be able to buy property in a corporation without personally guaranteeing it. There are exceptions, but even business owners that buy it for their business (example, a Dr. buying a property for his business), will usually be required to personally guarantee the mortgage on their property.

A corporation is just another hurdle that will slow you down to the point of stopping… when you are first starting out don’t worry about complicated things like corporations, just find a good property and buy it. Worry about things like corporations later.

Myth 3: Cash flow is the most important thing

Reality: Setting your real estate investing goals and then finding properties that help you achieve your goals is the most important thing.

Never buy in the hope of appreciation – you should always find properties that more or less pay for themselves. But, cash flow may not be the most important thing to you – focus on YOUR objectives. Someone that is making $150,000 at their current job is probably very short on time, but not as short on money. This person may be looking for a real estate investment that will grow their net worth over time without them having to worry about it.

In this case, buying a property that costs $200/month out of their own pocket but attracts a high quality tenant and requires no maintenance is going to be a better purchase than a property that cash flows positively $200/month but requires 5 to 10 hours of their time every month to deal with problem tenants or maintenance issues.

Myth 4: Buy the Ugly House on a Good Street

Reality: Sometimes the seller of that ugly house thinks their house is worth more than it is just because the comparable properties around it are of higher value. You also might find yourself with a money pit.

If you’ve got a good contractor and you have the money, and you know you can make the ugly house pretty, go for it. But if you are buying the ugly house on the street, just expecting it to be worth more later because it is surrounded by good houses, remember it’s still the ugly house.

And, ugly houses do not attract good tenants, even if they are in good locations. If you aren’t planning to fix it up, you will have a hard time getting and keeping good quality tenants in that property.

Myth 5: All real estate is a good investment

Reality: Over the long term, properties purchased in good locations will usually be good investments. We rarely hear long time investors say “I never should have bought that place” but we often hear them say “I never should have sold that place” or “I wish I’d bought that when I had the chance”.

Over the years, real estate has gone up in value nearly everywhere. However, if you buy in an area that is in decline or dependent on one industry that is struggling (timber, fishing, etc,) you’re taking some big risks.

And buying property at a super inflated price is not a good idea. It will take a long time for you to make your money out of that investment, if you ever do, and in the meantime you will be in a risky situation if the market goes down.

It’s about the deals you make, not the vehicles you use to make them. You can make poor investment decisions in real estate just like you can with stocks. Not all real estate is a good investment, just like not every blue chip company stock is a good investment.

Myth 6: You need to time the market

Reality: Unless you have a crystal ball, you’ll never know what is going to happen in the market. The reality is that you just have to find a good deal. You don’t have to wait for the right time. In fact, waiting is the worst thing you can do in real estate. The sooner you buy, the better for your wealth growth. Just make sure you buy a good deal.

Your best bet is to focus on your objectives and find a good area with good prospects for the future, and buy there. If you hold onto it for 5 or more years, you will be able to weather any downward turns the market takes, and as long as someone else is paying down your mortgage and it costs you nothing, or very little, to hold each month, you don’t have to time the market.

Myth 7: Real Estate Investing is Easy

Real estate investing is simple, but it’s not easy. There are basic principles to follow which make it simple, but it takes work to learn the basics. It takes effort to find good properties. You have to take the time to research the market you are going to invest in, and then research the property before you buy it. Once you own the property, it becomes pretty easy over time.

Julie became a millionaire at 30 and semi retired at 31…all thanks to real estate investing. Julie Broad has realized financial freedom at a young age, but she’s not stopping. She and her husband Dave are having way too much fun investing in real estate and helping others achieve their early retirement or wealth creation dreams through property. But you should know, real estate investing wasn’t easy from day 1 for them…Julie and Dave went through the “school of hard knocks,” and made some ugly mistakes. They now publish a newsletter to help others avoid a lot of the mistakes they made. You can check out some of their articles and sign up for their free newsletter.

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

About the author: This is a guest post. You can read more about the author in the biography above.

{ 22 comments… add one }
  • Scott December 23, 2008, 8:50 am

    I never should have bought that place.

  • FT FrugalTrader December 23, 2008, 9:05 am

    Do you have a real estate story to share Scott?

  • Monty Loree December 23, 2008, 11:49 am

    I have bought and sold real estate… I made money on all of my properties.. the problem is.. I sold them all.
    To buy and hold is a better business and that’s what I’m working on right now.. studying up on real estate with Joint Venture partners.

    It’s not an easy business by any means. But it does have a solid long term prospects..

    Best wishes for the holidays

  • Sebastian December 23, 2008, 3:21 pm

    Thanks – subscribed to the newsletter

  • Dividend Growth Investor December 23, 2008, 8:50 pm

    I invest in real estate through Real Estate Investment Trusts such as Realty Income(O) and Triple Net (NNN), which provide a nice stream of dividend income for me.

  • Scott December 23, 2008, 10:32 pm

    Too long a story made short:

    My first house, in which I still live: an 87 year-old in Victoria.

    Lessons learned?

    You get what you pay for!

    Don’t buy a ‘fixer-uper’ if there are major repairs/reno’s to do.

    If you can see dodgy workmanship on the surface, there is probably a ton that you can’t see (and is way more expensive to fix!).

    Fixing up an old house does not make it a new house. If you want a new house, apply the reno money to the cost of a new house.

    Don’t be cheap with your house, you have to live with it every single day (refer to the post on “Quality”).

    Avoid dealing with “The City” at all costs, but if you must, push them every step of the way towards what YOU want/need. Do not accept what they tell you just because they don’t want to do any extra work (or any work at all).

    It’s YOUR very hard earned money. Get EXACTLY what you ask for. If the tradesperson gives you any bull about why or how they can’t — kick them off your property. Don’t pay for excuses. Remember, they work for you!

    Again, you get what you pay for!

    I’m still ahead in terms of ‘paper profits’ (bought as a foreclosure, approx. 20% below then-current market prices for similar houses) but the amount of work and aggravation and stress and stress and stress…well, you get the idea — I’m not so sure it was worth it. I am much more wise though.

  • Jordan December 24, 2008, 2:25 am

    @ Monty Loree

    What about ownership by investing in a Mortgage Investment Corporation? I just found out about this alternative investment which seem to have a recent history of strong returns from the blog Canadian Financial DIY:

    http://canadianfinancialdiy.blogspot.com/2008/05/ins-and-outs-of-mortgage-investment.html

    I’m curious what other invstor’s think of this investment? Would anyone use it instead of a REIT in their asset allocation?

  • Scott December 24, 2008, 9:02 am

    One of my friends wanted to put money into the same thing (MIC). I did some quick and dirty research and this is what I found out about that particular one (Fisgard):

    1 – they are NOT an insured lender; if the mortgages go into default your money is NOT protected (i.e. they/you LOOSE your money).

    2 – the mortgages they do invest in have 11 months remaining, on average. This means there isn’t too much money left owing on the mortgage so if the mortgage does default it’s not entirely catastrophic. I would also think with that short of time frame there would be less chance of default (would you stop paying your mortgage with only 11 months left?).

    3 – on average, they invest $560,000 per mortgage, 80% of which are 1st-time residential mortgages. This leads me to believe they are “investing” in rich people who, with 11 months left to pay off their mortgages, will have the means (financially and mentally) to do so.

    4 – but it is ALL about not LOOSING your money more than it is about making money. An average defaulted mortgage represents 0.26% of their capital; if even 10% of their investments went bad, they should be able to suck up a 2.6% loss in capital without any noticeable effect to your return (I would hope). BTW, the mortgage default rate in Canada is 0.27% (it’s 22% in the US) — it becomes even less when you factor in a weighted percentage (all their investments are BC/AB, smaller % of population here, statistically means lower default rate = 0.06% chance of default = 22 of their mortgages in the pool).

    It sounds like they have done, and continue to do, their math on what they are doing. I would say put a little bit of money in and wait a year. If you do get that favourable return and you are comfortable with their service, then put in more. A lot can happen in one year, especially these days.

    Like any thing, beware the lure of high yields!

  • Donny-Invesmint.com December 24, 2008, 2:45 pm

    Nice story Scott that was very informative. This definitely something that I can learn from.

  • Gates VP December 26, 2008, 3:59 pm

    Thanks for the post, but I do have some serious questions, especially about this:

    Over the years, real estate has gone up in value nearly everywhere.

    You’re 30, so you started RE investing in say 1996. The Bank of Canada stats seem to indicate that you caught a pretty awesome decade for investing in real estate. A quick look around the net will confirm that awesome decade.

    Barring the last 15 years or so, real estate has averaged inflation. Given the mass of 20-something renters and a generation of baby boomers that will want to retire and downsize, the Canadian RE investor should definitely be prepared to see slumping prices as well.

    Otherwise, I really like the article, thanks for the info. It’s good to hear a little less marketing noise.

  • Julie December 26, 2008, 9:38 pm

    Thanks to everyone for their great comments! @ Scott – good story and I agree with the lessons you’ve learned. We bought a property that had a few things wrong on the surface that flagged the fact that someone had been careless with the work and, you’re right – the workmanship under the surface was worse!! That was a costly lesson.

    @GatesVp – We absolutely hit on a great time to invest in real estate! And, if you buy real estate in well researched/well thought out locations you will do better than inflation over time. BUT – that is only one of 3 ways you make money from real estate. Renters paying off your mortgage and left over rent money after expenses are paid really make the money.

    We would not be millionaires right now had appreciation been slower BUT we’d still be on target to be millionaires by the age of 35… which was my original goal when we started just under 8 years ago.

    Thanks to Frugal Trader for sharing my article with the readers of the blog!! Happy Holidays to all.

  • Ruth-Anne December 27, 2008, 9:16 pm

    It’s really nice to read a real estate article that isn’t full of hype and get rich quick b.s. Found it through S.U. and gave you a thumbs up!

  • Aman December 28, 2008, 12:02 am

    About your first Myth…

    I just want to say that borrowing money is a bad idea for a real estate noob.

    Unless you have a viable business plan, borrowing money from a friend/family can add to stress if you have to pay that money back over a stipulated period of time while maintaining your mortgage payment and other associated bills.

    Personally, I went into my first condo alone with a strong down payment and took the onus upon myself and have paid off a full condo mortgage in 3 years and now own a few other properties in Canada and the US.

    Another good friend of mine tried to mirror my play and bought his own condo around the same time 3 years back in the same building. He also had a 25% down payment which was 10% his money, 5% line of credit and 10% from his parents.

    Down the road he lost his job (or contract to be precise as he was a contract worker in the IT sector), was unable to keep up with the payments and had to short sell the condo due to increasing debt.

    Its not easy when you have other people’s money in play on a big investment. Some might think its a help and source, but personally its more headache from what I experienced through my friends turmoil.

    Now 3 years later he is still back home living with this parents while this time saving for down payment himself.

  • Gates VP December 28, 2008, 3:17 am

    @Aman: yours is a classic leverage story.

    Your friend leveraged higher pay with the higher risk of periods of unemployment (consulting). He also leveraged other people’s money both to cover his down payment and to cover the place that he was purchasing. And then he was leveraging his own money to cover rent shortfalls. I’d say that borrowing money was really just part of his problem.

    @Julie, I do take issue with this comment:
    And, if you buy real estate in well researched/well thought out locations you will do better than inflation over time.

    B/c it’s pretty meaningless.

    I mean, if I can do this research, why can’t 100 other people? Why can’t 1,000 people? If I can find well researched / well thought out location and get it for a good price, I’m really just taking advantage of what I perceive to be temporary inefficiencies in the housing market.

    You repeat something very similar on your web site.
    But, we do firmly believe that a good property purchased in an area with strong fundamentals that meets your real estate investing objectives is pretty darn close to a guaranteed way to make you very wealthy.

    I mean, if I can successfully find houses that generate positive cash flow, how is that significantly different from being able to select companies in which to invest? But really, me, you and everybody are almost guaranteed to be very wealthy if we can magically select the appropriate properties to purchase?

    Doesn’t that sound a little ridiculous?

    Now don’t get me wrong, I’m happy about this article, but it’s really important for people like Aman’s friend (and others) that they understand that real estate is really about leverage.

    From your article about real estate investing success:
    ..#2: Leverage: …If your stocks go up in value by 5%, you’ve made $800. But if your property goes up by 5% you’ve made $8,000! This is on the same $16,000 investment…
    #3: There are three ways to make money from real estate: appreciation…, rental income, and other people’s money
    #4: Control:…
    #5: Creative ways to make money:…
    #6: Access to the Equity without selling the asset
    #7: …real estate has a lot of tax advantages

    I mean, the inverse of #2 is also true. If I have 16k in equities, I can only lose 16k in equities. If your 160k house drops 20k in value, you’re on the hook for that money.

    #3: – Appreciation, as mentioned earlier, is generally equal to inflation, so I’m not really making money, just protecting it. And it’s really self-correcting, if appreciation is significantly greater than inflation for everybody, then nobody can afford the new housing.
    – Rental income = leveraging other people’s money
    – People paying down your mortgage = leveraging other people’s money and your ability to pay down that mortgage when renters are unavailable.
    #4: You can leverage your own time to improve the property
    #5: You can leverage your own time to improve the rental setup
    #6: You can leverage other people’s money via a HELOC
    #7: You can leverage the tax system (but you can also do this via RRSPs and TFSA)

    Really, the points everywhere in this post (and others) are the Real Estate owner’s equivalent to “value investing”. The only difference, is that you get to win (or lose) way more due to the wonders of all of these leverage points.

  • Austin Real Estate Broker December 29, 2008, 1:59 pm

    Hi Julie,
    Found yall from over on The Digerati Life. I’m a real estate broker and sometimes investor. All great tips. One additional thought I have is that you should start slowly. Get a property and hold it for a year to see what you could have done better in terms of buying, financing, selecting a tenant. Then you can pick up the pace and get over the learning curve a little more safely. I’ve had a few clients go and buy multiple properties right off the bat only to find out that landlording and owning properties long term is not their thing.

    Joe

  • kitty December 29, 2008, 8:46 pm

    ” In fact, waiting is the worst thing you can do in real estate. ”
    I don’t agree. There are times when waiting makees sense – like 2 years ago it made sense to wait. Waiting made a lot of sense for me when I transferred from Dutchess to Westchester county (NY) in 1989 and started looking to buy a condo in Westchester. I owned a similar condo in Dutchess, but the prices in Westchester were 2.5 times higher. I had a generous transfer package from my employer that would help me with resale of my old place, closing costs on the new place and commuting costs for up to 2 years. I had 3 years to use the package. I also knew that the market was declining, that the places I looked at were on the market for months, so rather than selling all my stocks and getting mortgaged up to my neck, I waited and commuted. I kept looking – both at properties sold by owner and at properties listed with real estate. After two years, I was able to buy a condo in a complex I liked for 20% less (125K instead of 157K). Yes, during the same period of time the value of the condo I owned in Dutchess fell as well, but because it was cheaper to begin with but dropped by a similar (or even smaller) percentage, waiting decreased the net difference in value between the value of the place I lived in and the one I was buying. In general, I noticed that when the prices go down the net difference in value between more expensive and less expensive properties decreases and vice-versa.

    Did I predict the bottom? No, it wasn’t the bottom – the value of my property dropped all the way to the 90s before the market turned, but it was a whole lot better than if I’d bought it in late 80s. The real estate market in NY bottomed around mid-90s. By 1997 the prices are started to turn and were off their lows. At that time I “upgraded” from a one bedroom to a townhouse. But because I felt that the market was on the uptrend, instead of selling my old condo with a loss, I choose to rent it out. I sold it 5 years later for 215K. The difference between what I got and what I owed was enough to pay off the mortgage on my new place. Again, it wasn’t the top – my tenants moved out, and the real estate prices stopped making sense to me as I thought 215K for a one bedroom was ridiculous. In hindsight I should’ve waited a few more years. A friend of mine did a similar thing with her co-op, but her timing was better than mine: she sold at the top just as the bubble started to burst.

    It is indeed difficult to predict exact top or bottom, but your timing doesn’t need to be perfect to avoid buying at the top of the bubble. It is not difficult to say that the market is overvalued. It’s also not difficult to see a trend, much easier with real estate than stocks since real estate market moves pretty slowly. For example, right now you could probably say with some degree of certainty that in some places in the US like NY the real estate is still overvalued. I don’t know about other areas.

    One measure of overvalued market is the relationship between the cost of renting vs the cost of buying. Ideally the cost for equivalent (!) property when adjusted for taxes and with 20% down (in some cases even less) should be similar. If they are completely out of whack i.e. it is much cheaper to rent than to buy (equivalent!) property, then it makes sense to wait. It might take time, but eventually the prices would come down.

    Granted, with rental property it is easier to decide if you want to wait or not: if you can money on rental now, there is no real reason to wait. However when one is buying one’s own property it makes sense to look at the market conditions and trend.

  • poh heng December 30, 2008, 4:18 am

    While i invest regularly in the stock market, real estate investing is something i have not tried yet but will be my next focus. thanks alot for this informative post.

  • Chewy January 12, 2009, 4:31 pm

    I would not put anymore money into the stock market as I have no control over the decisions made. In real estate investing I at least have a say.

    Thank you for your informative article and it is interesting to read comments as well.

  • PennySeeds.com January 13, 2009, 8:35 am

    I’m very interested in real estate investment, but not totally sure what I want to end up purchasing.

    My landlord owns about five properties around me that she rents out, and makes a tidy income from that every month. I’d like to do something similar – perhaps buying an inexpensive rental property to start.

    I’d also considered buying a cheaper duplex living in one side, renting the other, and when that was paid off buying my own home. Then renting both sides of the duplex for income.

  • joseph chambers May 2, 2011, 9:41 am

    I think everyone can take lessons from this post..

    Thanks subscribed to the newsletter.

  • Heather Hadden September 16, 2011, 2:55 pm

    @Julie,

    Although this post is a little bit older, it’s a great post! Being a Realtor myself, I really admire your deliberate approach to the “retirement at 35 years” goal. You’re an inspiration to me and I hope that you’re investments did well even in 2011. They should have, as the market has been pretty healthy, depending upon your location. Thank you and Frugal Trader for the post!

  • Robin September 18, 2012, 7:54 pm

    Well, you are wrong on one count. Anyone who buys a property as a real estate investment that they have to pay into every month is an idiot. You said “In this case, buying a property that costs $200/month out of their own pocket but attracts a high quality tenant and requires no maintenance is going to be a better purchase than a property that cash flows positively $200/month but requires 5 to 10 hours of their time every month to deal with problem tenants or maintenance issues.” Wrong! That is dumb. $200 positive cash flow,even at 10 hours, is $20 bucks an hour in my pocket instead of me paying $200 for someone to live in my house. Sorry, but I wouldn’t take investment or money management advice from you.

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