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Beware Of Real Estate Investment Scams

Updated on November 15, 2013

You’ve seen the advertisements with the man on his yacht, bikini-clad women on each arm and a martini in hand. The commercial tells you that you too can be a rich real estate investor with these simple tips. Just pick up the phone and call…

If it were that easy we’d all be on boats drinking cocktails but the truth is it’s not easy. I’ve been a real estate investor for quite a few years now and can tell you how to do it the safe way.

Do not get yourself deep in debt.

This is the worst thing you can do. Trying to achieve the dream overnight is not only a bad idea but financial suicide. It just doesn’t work that way.

I bought a set of tapes and have read some of these guy’s books looking for tips thinking maybe I was doing it wrong since they are living the good life. The material I read and listened to scared the daylights out of me knowing there are gullible people believing these fairy tales.

They tell you to get a loan and buy a house, then you use that house as collateral to purchase another and you keep doing this until you have a collection of debt… I mean investments.

They will tell you that the deposit money is extra income and that the rent checks will just start to come in like magic. They also tell you that every year you raise the rent so you get raises.

Here’s the real story.

First of all, they don’t address the problems that come up. If it sounds too good to be true it usually is.

You have to keep liquid assets for emergencies and repairs. Not taking care of your properties is like throwing money in the fire.

The safe way to invest in real estate:

I’m going to tell you how to do this the safest way so you don’t lose everything.

Don’t get me wrong, real estate investing is a great way to make money and in my opinion one of the safest ways to invest; companies fold, but land will always be there.

Having a good size lump of money to begin with is the best. If you inherited some money, or have some built up in savings or a 401k account you can use, that is great. The best time to buy is when the market is low. It is like any other investment it fluctuates over time. In the early 90’s housing was at a low point. You can still find good deals when the market is higher but it will be harder to make a profit.

During the high times is when you sell property you want to liquidate.

Educate yourself of the rental laws.

Pick up a copy of the Landlord Tenant Act from your government office. Each state has different laws and regulations concerning leasing agreements. You need to learn these laws and abide by them. Know the proper way to evict a renter just in case the situation arises.

Study the market.

Do your research. You need to know what houses are selling for as well as renting for in a given area. Find a patient real estate sales person and have them show you many, many houses. Don’t make any hasty decisions. If the market is slow and housing cost is down, realtors are more likely to spend the extra time you need. Don’t let them pressure you. If they are too pushy find someone else.

Usually, rent is one percent of the value of the home but this isn’t a hard fast rule.

Hire an inspector.

Before you buy make sure you have checked out the structure, electrical and plumbing of the house. If the bones are good the rest can be repaired.

You don't want to buy a home that is infested with termites, has dry rot or foundation issues that can cost you more than the house is worth.

Know basic home repairs.

It helps if you have some skills in fixing things even if you don't do the work yourself it helps keep you from being ripped off by disreputable service guys.

If you only have to call a professional for the bigger problems that arise you will save money. There are books that will help you. Even after you have made a good income from your properties you may choose to do some of these.

Taxes and Insurance

You have to remember cost such as property tax, insurance and the taxes that you have to pay on your profits comes out of any rent you collect. Save back a percentage of your income and all of the deposit your tenants pay you. You never know when the hot water heater will decide to go out or the heating and air conditioning will need service.

Late rent, empty units and gaps between renters happen.

The yacht boys will tell you that first deposit is free money and that the deposit you get from your second tenant will pay back the first one. That would be lovely if that always happened but often there is a gap between renters. If the guy moving out has kept the place in good shape, cleaned up and gave you proper notice he deserves his deposit back. That wasn’t a bonus, it was money he paid you to insure he kept up his end of the bargain while using your house.

If Joe moves out but there are repairs that need to be made that weren't his fault it might be a while before you are ready for the next tenant.

Not everything is tax deductible upfront.

The big guys will tell you it’s okay to take everything off on your taxes. Talk to a certified public accountant and find out what you can deduct and what is depreciated. Not all tools and equipment can be taken off at once. You don’t want the IRS to audit your books and charge you back taxes with interest.

Keep good records.

Document everything. Keep copies of receipts, log books of mileage going to and from your rentals and repair records. If you ever sell your house you will need these receipts to take off of the profit you make at closing. It's different than personal records, this is a business.

Lost rent.

Don’t expect to get money every month. Things happen. Tenants lose their jobs, co-renters split up and people get sick. Plan for these events so you won’t be left in a bind. If you have a mortgage to pay and you depend on that rent check to pay it, you could be in trouble.

Keep on good terms with your tenants.

Keep up a good rapport with your renters. If they think highly of you they are more likely to take care of your house. Yes it is your house, but while they are living there it is their home; treat it as such. Call before showing up, make appointments when it’s convenient for them and make yearly walk throughs to check on little repairs that could turn into bigger cost down the road. It’s amazing how much damage a slow plumbing leak can do.


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