Dispel these myths about real estate investing. In this episode, we are going
to address the question what mistakes do most people make when investing in real
estate? I'm Doug Andrew. Put your seat belt on,
you're going to be blown away. So, I'm in my radio studio and I've been blessed to
have a radio show that's been broadcast nationally now for 12 years. And I've
written several books. My very first book I titled Missed Fortune because of the
fortunes people miss out on when they simply don't know what they don't know.
And the subtitle is "Dispel the money misconceptions" and "Isn't it time you
became wealthy?" And so, in this series of episodes I am referring to an article
that I wrote called 31 Flavors Of Missed Fortune. 31 reasons why people miss out
on fortunes. Because it's sort of coincides with Baskin Robbins having 31
flavors. Well, folks, this episode is going to talk about the real estate mistakes that
most people make. And I'm going to go through these 5 major mistakes
one by one and help you sort of get a glimpse of why people make these
mistakes. And then at the end, I'll show you how you can learn more by reading
articles or watching other episodes or reading some of the books that I've
written about these topics. So, this is a big one. Most people try to own their
home or buy a home and that's smart. And that's that's actually one of the
mistakes many people make is they rent their entire life instead of owning.
So, I would encourage you that you take ownership in a home as soon as you
possibly can. And one of the myths is that you have to have this huge
downpayment to put down. Can I just share a secret with you? I'm a 67, level 67, I
don't say that's my age. I'm a level 67. And I have bought numerous properties. I
have bought homes, I have built homes. I have never ever paid a down payment out
of my pocket for any piece of real estate I've been
require. Did you hear that? I've satisfied down payments but not with any of my
money. I'm going to keep my money liquid and say I learned that lesson the hard way.
And I'll share that story with you. But it's myth that you have to have a big
cash down payment. No, you have to satisfy a down payment if you're going to go
conventional. If you go FHI or whatever or veteran, you don't even need a down
payment. You can qualify without that. But even at that I do not use my money to
satisfy the down payment. I keep it liquid and safe. Also, a lot of people
think you have to have a good credit score. Well, that helps but sometimes, I
have bought properties or help people buy properties with no money down and no
credit checks. No credit checks. And people go, "Really? How do you do that?" That
is disclosed in several of the books that we've written Missed Fortune and
Millionaire by 30 that was co-authored with my 2 sons. Their first
2 homes they bought in a recession,, no money down no credit checks. And those
stories are in there and how to do that. But that is a mistake right off the bat
is not owning a home at least and maybe other properties if you can obtain them
with no money down no credit that those are not the roadblocks. So, those are
myths. Let's talk about the lazy idle equity that begins to accumulate in the
house. Now people, "What you say?" Yeah, I call it lazy
idle equity that's accumulated in your house. And I learned this lesson the hard
way. So, let me tell you a story. So, clear back in 1978,
my wife and I had been married 4 years at that point and we were building our
third home. It was a beautiful 6,400 square foot home with cathedral beam
wood deck ceilings. And it was up on a mountain hillside and we could watch the
deer and elk bed down in the scrub below us. We bought or built that home rather
with no money down out of our pocket. Okay? Back then in 1978, it cost about a
150 bucks to build the home. And when we were done, it
appraised for 305,000. We thought we have the world by
the tail. We're on the end of this house with the mortgage of 150,
it's worth 305. Whoa! People say,
"You doubled your money." Well, about 4 years later, it was because of the
condition in American 1980 at the oil crisis, energy crisis Houston Texas and
16,000 homeowners lost their homes in foreclosure during that oil energy
crisis. Well that recession rippled throughout
America. And actually what happened is there were 3 supervisors in the firm
that I was working for that were greedy and they were dishonest and when that
was discovered, while they were investigating these 3 A, who's they
froze all of our income. I didn't have any income for 9 months. It was just
accumulating in this account in an escrow account. So, I ended up not having
that money to make my mortgage payments on that house. My wife and I, we sold a
timeshare at a ski resort for triple what we paid for it. And we brought our
delinquent mortgage current. And then we got behind again. We sold a duplex
that we owned and and we took that equity and brought the delinquent
mortgage current. But not seen in the other liquid assets, we put the house on
the market. We'll build another house. So, we listed that house for
295,000. It had a bonafide appraisal of 300. Hey, when
there's more supply of homes than there is demand, what happens? Values plummet. We
lowered the price down to two eighty five, two seventy five, two sixty five, two twenty five.
I'll never forget the day my wife and I walked into the County Courthouse and
watch that beautiful home get auctioned off in foreclosure proceedings. I went
out in 2 days about another home with no money down and no credit. But what did
I learn? That 150,000 of equity in my house was worthless if I
couldn't get to it. When you need the money the worst is the hardest to get. So,
I learned that real estate equity. Home equity is not liquid.
It's not safe. The house can go down in value and it does not earn a rate of
return in the house. It's going to do whatever does. If your house goes up in
value or down in value, it does that regardless of how much equity is in
there. But see, I learned to keep my equity separated from that point forward
to have liquidity. Be able to access the money if I got in trouble or laid off or
or blocked my income. A safety of principle so when real estate values go
down, I don't lose because my money's not in
the property and I earn predictable rates of return that are double or
triple what the mortgage is costing. A mortgage at 4.5% tax
deductible interest is only a net cost of 3. I earn 9% in my
favorite vehicle which I call The Laser Fund. And the laser fund, I've earned a
9-10 percent. How much more is 9 than 3? 300%. On a
million bucks, I make 90,000 tax-free the mortgage only cost me for a
million dollar mortgage a 30,000. Now, this is one of the biggest
mistakes people make. They don't understand how to manage their real
estate equity to have liquidity, safety and predictable rates of return. How to
leverage. But leverage without liquidity is stupidity. So, what are the other
mistakes people make a when they buy real estate or owned real estate especially
on their home? Well and the second bullet point here is sending extra principal
payments against your mortgage trying to get your house paid off. Or paying too
large of down payments based upon what I just said. See, if I had way more than the
required down payment that I'm going to satisfy one or another, I wouldn't do
that. See, people think, "Well, I need the equity out of my previous house and to
put in a huge downpayment so I'll have a lower mortgage. Because lower mortgages
mean lower costs." Nope. Because nobody was taught what opportunity cost meant, maybe.
The opportunity cost is when you tie it up into a house that's going to go up or
down in value regardless of how much equity is in there. You're giving up the
ability to have that equity or in a rate of return on top of whatever your house
does. Like I said, I keep my real estate equity separated. And it's over here in
this pocket so to speak earning 6, 7, 8, 9, 10, 11, 12
percent. Sometimes higher. But I usually average at least 9 or 10 percent. I'm
earning 10% rate of return on my real estate equity, the down payment I didn't
unnecessarily put into the property while I am paying interest at a lower
rate. Did you understand what I just said? You're earning compound interest
tax-free if you use the right vehicle. Over on the mortgage in this pocket, your
paying simple interest tax deductible. So, if the
tax deductible interest is at 4.5% on my mortgage in
33-percent tax bracket, it's only costing me 3%. On a million-
dollar mortgage, that's only 30,000. Over here on a million dollars
of real estate equity that's not in the property, if I'm only 9%, that's
90,000. 90,000 is 300% more than
30,000. I mean would you hire an employee for 30,000 that made
you an extra 90,000? Yeah. And so, this is how to become your own banker.
But in my very first book, I wrote a chapter called the 25-thousand-
dollar mistake being made by millions of Americans. Now, that was clear back in
when I wrote my first book and released it at the turn-of-the-century.
Now, that would be 100-thousand- dollar mistake. Here's why: Most people
think that the best way to get out of debt is sending extra principal payments
to the mortgage company. Or sometimes I remember one time talking to 3
finance professors at a major university and they said, "We teach all of our
students here in the 400 classes why they should take out a
15-year amortize mortgage instead of a 30-year amortized mortgage when
they buy a home." I said, "Really? Why do you do that?" And they looked at me like, "Duh?"
Maybe they've been Doug. I don't know. But they go, "If you just bite the
bullet, you pay a higher mortgage payment, you'll save a grundle of interest and
you'll have your house paid off in 15 years.
Then you sock away what you used to pay in mortgage payments, you'll end up with
this much money in 30 years in a tax-deferred IRA." I go, "Well that's good
but gentlemen, haven't you ever taken the differential between a 30-year amortized
mortgage which is less and the 15-year amortized mortgage which is higher? Take
that difference plus the tax savings. You will achieve during the first 12
15 years of a 30-year mortgage instead of a 15-year mortgage. Don't
spend that savings. Have a system where you put it over here in this pocket
compounding tax-free." "What's tax-free?" So, I explained it to them.
They said, "We've never done that." They were flabbergasted. There was enough
money over here in this pocket which is where I put my serious cash in The Laser
Fund where it's liquid and safe and earning 9% or more as what I've
averaged. There was enough money over here in this pocket to totally pay off
the 30-year mortgage in 12 and a half years. 2 and a half years faster
than the same money. They were telling their students to pay off a 15-year
mortgage. And by socking away the difference over into this at the end of
30 years, they ended up with a quarter of a million more money than the
way the finance professors were teaching their students. So, these are huge
mistakes so I'll summarize them. So, based on these 31 Flavors Of Missed Fortune,
there are 5 under your home or other real estate. Not employing the lazy idle
of dollars that accumulate in your property as that equity where it could
be earning a rate of return greater than even your house is appreciating. Number
2 is as sending extra principal payments against the more he's thinking
you're getting out of debt the fastest way. Nope. Paying larger than necessary
down payments or down payments out of your own pocket. I satisfy down payments
but i've never paid a down payment with my money that i want to keep liquid. Paying
unnecessary capital gains is another problem where people do not need to do
that if you do a 1031. Or maybe you can set up other tax strategies. And these
are some of the examples of people who have even downsized or been able to
increase the house but relocate and use that lazy idle equity to turn it into an
extra fifty, hundred or 200 thousand a year of income instead of
being trapped in the property. Not realizing that without down payment, you
can purchase properties without having to have a huge amount of cash or high
credit. And then not even owning a property renting instead. Don't make
those mistakes. Watch this episode here I want you to be able to get a free copy
of my book The Laser Fund so you avoid these mistakes.