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Does "Investor" = "Sucker"

March 29, 2007


I was chatting with an acquaintance this morning. She didn’t realize I was a Broker and she didn’t realize I understood income property. It turns out she really could have used my expertise a couple years ago.

She had bought this property in Fort Worth because it was “cheap” and it was brand new. Sounded great.

It was sold to them based on an anticipated rental income of $850/mo – which seemed like a good return because she’d be able to cover all the expenses and have a little cash left over. She also made the assumption that the property value would increase over time.

After they purchased the property they worked to rent it. They didn’t hire a professional manager because they “forgot” to figure that cost in and that would erode their cash flow. It turned out to be very difficult to find renters. My friend had not researched the local market and expected renters to line up to rent her property, just like they did here in Silicon Valley.

The property went unrented for one year. It was broken into and vandalized, which cost money to repair on top of her monthly payments. She did finally find renters when she dropped the rent low enough, it’s rented at $700/mo. Which just covers her payment.

It sounds like she is one of the lucky ones because, some of her neighbor investors still have vacant units. Many are looking for any way to bail out of their units. So, her expected appreciation doesn’t look promising.

If she pays it off over the next 30 years she will eventually get a little cash flow and she does get to depreciate the property – which may offset her current income.

It seems like the stories in the media have all been about investors making 300% profits with little or no risk but, the reality is, investing is risky. People lose their life savings every day. Investor property has two HUGE differences from owning a home. 1.)An income property without income is a liability NOT an asset. 2.) Investor loans are all recourse – meaning the bank comes after you for any losses – so, it’s really hard to “walk away”. My friend is one of the lucky ones, she found a way to hold on for now.

My clients continue to do well, even in a down market. We’ve structured their purchases so that their properties cash flow, we calculated expenses based on “worst case scenarios”, and even accounted for the rents adjusting a little. We did the research, we knew the risks. We bought strategically and intelligently.

Find a broker that’s been around, one you can trust, one that knows the ins and outs of investing and one that is an investor themselves. Your friends brother’s cousin that just got their license is probably not a good referral for income property. The wrong broker can lose your hard earned money but the right broker can make you millions!

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