Attention: Rant Alert
There are times when a buddy, a reader, or family member sends me a link, or tells me about some real estate investment they read about online. Most of the time it’s a thoughtful gesture. They wanna know my take, or if I’d heard about this or that new ‘trend’. Then there’s the other day. There are some things so stoopid, you know the person tellin’ ya can’t possibly be makin’ it up. ‘Course this time it was a link, not a conversation, so I got to read it for myself. The sender, a local real estate agent for whom I have enormous respect, wasn’t disappointed in my response. I was staggered by what I’d read.
My response
I told my buddy, by now snortin’ at how he’d so easily set the hook in my lip, that he should print the post. Then he should put it a shredder, preferably one that crosscuts. Then take the resulting confetti and spread it evenly over his front and back lawns, watering moderately daily for a week or two. By that time he’d have the greenest lawns in his neighborhood.
The Advice
Buy 15 houses that generate $200 a month apiece in passive income. So far, so good, right? I’m there with ya. Sandwiched around the whole real estate income play is a comparison, pretty straightforward too, about having $1 million in your 401K. They quoted the well known Wall Street financial advice which says in retirement one should expect no more than about 4% return on retirement funds. OK, we’ll let that slide, though it isn’t terrible. Ask the retired couple across the street about the 4% they’re gettin’ on their nest egg. Then wait for the bitter laugh, followed by the predictable sneers. For Heaven’s sake, the 10 year Treasury closed at 1.897% today.
And that’s before tax.
But I digress.
This is when they take a left turn into the Twilight Zone.
They go on to explain how the typical person can buy 15 houses in the next 5 years — startin’ out with just $5,000 they saved.
• Buy the first house with $5K saved from job — using hard money.
• Save $5K and refinance first home for another $5K. Buy 2 more houses.
• Save $5K and refinance last 2 buys for $10K and buy 3 more houses.
• Save $5K and refinance last 3 buys for $15K and buy 4 more houses.
• Save $5K and refinance last 4 buys for $20K and buy 5 more houses.
And voilà! you’ve acquired 15 houses in just 5 years, simple as pie. Furthermore, they’re all dutifully providing you $200 a month in cash flow — $3,000 a month total.
But wait, it gets better.
You’re such a stellar real estate investor, you’re not only able to buy these 15 properties in five years, you’re also able to close escrow with $20,000 in built-in equity. Seriously dude, pat yourself on the back, cuz you’re freakin’ amazing. I can count on one hand the investors I know, around the country, who can do this. They’re slam dunk professionals, doin’ it 24/7/365. And when they’re lettin’ their hair down at Happy Hour, they’ll tell ya straight out, this plan ain’t doable.
Calm down, BawldGuy. OK, I’m cool.
The article goes on to tell you that in 20 years the homes will be worth twice what today’s value is, cuz, you know, that’s what real estate does. No, really, they said that, in black and white, no weaseling whatsoever. In hard and fast numbers, that means all 15 homes must appreciate 3.5% annually for 20 consecutive years. Go ahead, put this in perspective for yourself. Honestly figure what your current home is worth today. Start grinnin’, cuz when December of 2031 rolls around it’ll be worth twice that much. Congrats!
Oh, did I tell ya they want your refinanced loans to be 20 years? It gets worse, but let’s stop here before I blow a blood vessel somewhere.
Let’s list all the crappola in this plan.
1. Hard money charges 5-15 points per loan. If your favorite uncle, who loves you, is the lender, that’s 5 points. Um, that’s another $5,000 for each buy, which blows up the magic formula from the get-go.
2. Apparently there are never any closing costs when buying these 15 homes. In a gracious and magnanimous gesture, I hereby grant a closing cost holiday to this ‘strategy’. No closing costs of any kind, ever. (Almost threw up in my mouth a little on that one.)
3. Uncle or not, hard money loans, generally speaking, start at 10% interest and rise from there. They also demand a whole buncha equity, and a very experienced borrower. See a problem comin’ into focus here? Even if it was 10% interest only, the monthly payments would be around $834.
4. They wouldn’t get as far as the refinancing of their first home, but let’s humor them a bit. The appraisal would hafta be at least $120,000. The lender will insist on at least 20% equity, the Scrooge. They then would lend (Hey! You in the back row, stop gigglin’!) $100,000 at roughly 4.5%, a generous estimate of the interest rate. The payments would be roughly $633/mo. Anyone think there might be loan costs involved? Just askin’. Don’t wanna be a killjoy.
5. Let’s talk rent. These houses are already great deals, the script says they gotta be, right? Workin’ backwards with the $633 loan payment being the starting point, breaking even dictates the rent would hafta be around $900 or so. But that’s not nearly enough. Where’s the $200/mo cash flow? Oops. Now it’s gotta rent for at least $1,100 a month. That allows for minimum expenses, no big repairs, and 0% vacancy factor — always.
Can we all agree we’ve already entered the SillyZone with this crappola?
We’re not done though.
6. According to the script they’ve laid out, by the fourth year, the investor acquires their 10th house. Don’t wanna be Technical Tommy here, but assuming they own the home in which they’re living, Fannie Mae et al. says once the ninth home closed, you were done gettin’ loans they’d have anything to do with. Now, my experience is that most agents think that number is four, but in reality it’s 10.
Regardless, it ain’t 15. Oops.
7. Somebody, anybody, please, tell me where you’re gettin’ properties in solid neighborhoods, sellin’ for $100,000 — that rent for $1,100 or more. Yeah, I know, you do it all the time. Here’s something to ponder. Would you put Momma in that house to live alone? No? Surprise, surprise, surprise.
(Are there a few places where these houses can be found? Yep. They’re far away from where you live (98% chance). They’re extremely rare. And when we do find them, nobody will sell the dang things for 5% down, while giving away 20% of the freakin’ value.)
So what we’re faced with, is buyin’ 15 homes for $100,000 apiece, in areas that don’t suck like a turbo charged Dyson, while borrowing 95% of the purchase price — wait for it — from hard money lenders — at no cost whatsoever. We’re then gonna refi each of these houses a year after we bought ‘em, for what we freakin’ paid for ‘em?! And THOSE loans are gonna be cost free too.
Come on, let me do some flag wavin’ at this point.
Is America great, or what?!
To Review
You’re simply not gonna get a hard money loan for 95% of purchase price.
You’re not gonna get that loan cost free.
Ask yourself — How stable is your retirement income gonna be with 15 rickety houses bought for so low a price, in such relatively poor areas? What usually happens to substandard locations over time? Do they become more or less attractive to the buying public over time? Don’t answer. It’s a rhetorical question. 
People, this sort of ‘strategy’ is just short of criminal, and I’m being kind. If I wasn’t convinced Grandma was watchin’, I’d put it a lot plainer than that.
This kinda garbage ‘advice’ is what almost always surfaces when the economy falters, and folks are lookin’ for a way to generate a stable retirement income. Again, I’ll recall what most of our grandmas said to us at one time or another.
“If it sounds too good to be true, it probably is.”
I’ll add Dad’s editorial supplement to that.
“. . . and here’s one for the horse you rode in on!”
OK, rant finished. I feel better.
I’d be on top of the world though, if you called me. We’ll figure out what actually can be done for your retirement. You’ll reach me at 619 889-7100. Or click the Contact BawldGuy button at the top of the page. Have a good one.