My Real Estate Journey (part 9)

I haven't written about this in two years and actually just this morning discovered that I had jotted down my thoughts over a period of several blog posts. Since that last post, Dawn and I have invested in six other properties. We currently have a total of ten single-family homes, one of which is our primary residence. Of the ten, six are owned outright and four have low percentage 30-year fixed-rate mortgages.

So, how on earth does one come to own even more than one home? Let alone TEN!

I've recounted some of my journey in the past posts and want to continue that story here. I have made some big blunders along the way, but I've also discovered that blunders are a part of the learning process.

What blunders did you make, Mike?

One of my first mistakes was that I didn't insist on raising rent on the house we rented while in Brazil. It is customary for a landlord to raise rent on a regular basis, especially over a period of 25 years. In my inexperience, I felt like I was doing a favor for the friends who rented. After all, they were helping us out by occupying our otherwise vacant house. And I was doing them a favor. However, in real estate, like in any other business effort, you need to remember that renting a property is a business, not a charity. I heard one investor recently say, "If you want a friend, get a puppy!" He was hilarious. But his saying rings true. Your friendship shouldn't affect your bottom line. If your friends can't afford the rent you charge, they can look for another place. It sounds cold, but that's how rent works.

You can't be soft on your rents, or you will go out of business. My property manager takes the emotion out of the rent collection process. She's great.

Another blunder I committed was the time I put down a $5,000 earnest money deposit on a triplex. I thought I really wanted the place until I actually saw it. Wow. I should have backed out of the deal but didn't until it was too late.

Paying off our house when my dad died and left us some money probably wouldn't seem like a blunder, but it was.

How so? Well, here is the scoop. I would imagine, if you are paying on a mortgage, you probably can't wait until you can pay it off. Right? Right.

But what then? After paying on a mortgage for thirty years, you will be free of that debt—to a certain extent. The other part of the story that left me scratching my head was: after I pay off the house in my retirement, how will I be able to afford the taxes and insurance? That is a crucial question for consideration.

Taxes and insurance can eat up needed funds each month, and if not paid, they can be the cause of tax repossession. Did you know that if you default on your taxes, the county doesn't need to tell you that they are putting your house on the auction block? They don't, and they can. It's a sad ending to house ownership that many people don't know about until it's too late.

So why was it a bad idea to pay off our house with my inheritance money? Because I could have used that money to purchase assets. Wait, what? Isn't my house an asset? Not really.

Here's what I learned from Robert Kiyosaki's book "Rich Dad Poor Dad." An asset puts money in your pocket each month. A liability takes money out of your pocket. That is an important thing to remember when investing.

So, how is my house not an asset? Well, here are some questions for you to answer:

1. When your house needs a roof, who pays for it?

2. When it needs plumbing work, who pays for it?

3. Who pays the taxes?

4. Who pays the insurance?

5. Who pays the utilities?

Can you see a trend? A liability takes money out of your pocket. An asset puts money in your pocket.

But, you might ask, what about rising property values? It is true, as I have mentioned in the past, that property values have risen historically. But in order to realize that rise in value, you have to sell your home. And if you sell, you will need a place to live. And if you want to buy a bigger place, you will need to spend more than what you just made in the sale of your house. And, oh by the way, you will take about a six percent hit in closing costs on the sale. So for a $150,000 home, that would be $9,000 in closing costs.

It's a seemingly hopeless situation. So how can real estate be a money-making possibility? Let's think about it.

To get into real estate, you will definitely need a chunk of change. Depending on what you want, you will need about 25% for a down payment plus closing costs. It cost me almost $35,000 to get into our place. Wow!

But God has helped me to have that money as part of the 100% equity we had in our stateside house. For you, it might take some time to save those funds. It might require overtime, a second job, or some type of creative financing. But in the end, it will be worth your time and effort.

You might want to consider house hacking. But we'll talk about that next time.