Are you thinking about purchasing a rental property? In this two-part article, I will explain why this might not be a good idea AND provide an alternative way to diversify some of your investment dollars into real estate.

When There’s Nothing Real about Real Estate:

Real Estate is a misnomer in most conversations these days. Real, meaning actual and Estate, implying money or value are the two parts of this compound word. However, these days many people are involved in Real Estate as a means to make money. I’m talking about the flippers and the would-be landlords out there.

Rich Dad talks big about investing in real estate. In fact, it is clear that Robert Kiyosaki is all about real estate investing when you read his book. He has done well at it and therefore made decent money. Most people that I’ve heard about lately though, are not so lucky.

Instead of being lucky and doubling their money or tripling their money in real estate, many people are getting hammered by expiring AR mortgages (many of which have negative amortization anyway, but that is a whole separate issue) and the fact that housing prices are actually deflating in value.

Why is this happening? It is simple supply and demand economics. There are more houses that are expensive than there are people to buy them. The result is that people that have more expensive homes are discounting them (if they can afford to). This pushes the lower end people out of the next bracket down, so on and on it goes until the people at the bottom have a difficult time selling at all and end up losing their homes in foreclosure when they cannot sell.

Getting Back To Real Reality:

Common sense tells you that if you don’t know a business or what a business really costs, you have no business being in business. This is basic. You will end up with a pile of debt and no help repaying it. Somehow, though, this common sense goes out the window when it comes to real estate. People who have existing mortgages, credit card debt, and even HELOCs are getting into the business of real estate.

Rental Income Fantasyland:

Unfortunately, for many of these people they are using the technique called leverage to make money on money that is not really theirs to begin with: that is, a mortgage on the property that they bought as a source of rental income. The problem with leverage is that it leaves you extremely vulnerable during bad times. Instead of one mortgage payment, you have to pay two. So you go down the drain twice as fast. And the rental income you dreamed about is nowhere to be found. But don’t worry, the second house or property will still have heating, plumbing and repairs that are needed along the way.
Look for part two where I will provide an alternative for real estate investing.