Newbie: “Real estate investing sounds so cool! How many rental properties do you own?”
Me: I own 22 toilets.
Newbie: “Huh? I was asking about your rental houses.”
Me: I know. Let me tell you. Somewhere in Texas, there are 22 toilets that I own. Right now, and throughout the day, people are shitting in them, flushing them, clogging them, abusing them, peeing all over them, breaking them… and I’m the lucky landlord that gets to fix them and pay maintenance.
Newbie: “Wow, I guess owning rentals isn’t so glamorous, after all. Maybe real estate isn’t for me?”
I‘ve had this conversation many times. When young people hear that I own a few rental properties, their eyes light up! From the outside, real estate investing can sound so sexy and cool.
But the truth is that the term “rental property” is covered with glitter. Owning a rental property comes along with a whole lot of shit. Literally.
Rental Property a.k.a Toilet:
I’m referring to rental properties as “toilets” for a few reasons:
- To expose rental properties for what they truly are. They’re just assets.
- To extinguish any romantic attachment to real estate. Investing is about numbers – not feelings.
- Because I think potty humor is funny. And I’m cracking myself up while writing this.
Don’t get me wrong, I’m certainly proud of my investments. The toilets I own are making me money and slowly growing my wealth. But make no mistake – there is hard work involved and my toilets will only perform well if I keep plunging them regularly.
Here are a few other related conversations I have with new and young investors…
The Rent Collection Process:
Newbie: I can’t wait until I’m a landlord, sitting back and collecting rent checks! Rental income – mortgage = profits!
Me: Actually, it doesn’t really work that way. First, my property manager goes around and collects all the rent. Next, she puts all the money into a big bag at her office. Then she invites everyone from the neighborhood to come over and stick their hand in that bag. One by one, they each grab a handful of money, and my property manager also grabs a large chunk herself. If there is anything left over at the end, I get to keep that amount.
Newbie: Hmm, so how much do property owners actually make in the end?
Me: Well, out of the 6-figure income that my toilets generate each year, about 75-80% of that money is flushed away with expenses. I pay approx $1.07 to bank interest, 60 cents for taxes, 18 cents for insurance, and about $1.14 in misc maintenance every time someone flushes one of my toilets. Yep, a total of $2.99 per flush!
Newbie: Wow, I never thought about all the expenses involved.
It’s common for new investors to misunderstand the cash-flow process of a rental business. (I was clueless when I first started out). The biggest realization that I learned is that landlords actually get paid last, not first.
Before buying any new investment property, it’s imperative that all ongoing maintenance, repairs, and any potential disasters are accounted for. If you underestimate expenses, there will be no money left in the bag for you at the end of each rent cycle.
More Toilets = More Profits?:
Newbie: Properties are too expensive in my area… Instead of buying 1 rental property for $200k, I’m going to buy 4 x rental properties in the midwest for $50k each. Houses are cheaper over there, so I can own more of them.
Me: Why not buy 20 x houses all worth $10k each!
Newbie: Great idea!
Me: I’m kidding. “Cheap” is a relative term. 4 small toilets are not better than 1 big toilet. Quality will always trump quantity!
I fell into this line of thinking when I first started out. My initial goal was to own 100 rental properties. Why 100? I just picked that goal out of thin air because I thought owning more would be better than owning less.
But over time I learned that a couple good quality investments will outperform many average ones. I now carefully take the time to evaluate and select rental properties, instead of looking at what’s cheap and easy. Just remember, cheap and easy toilets come with more skidmarks.
As Seen on TV:
Newbie: I’m saving up to buy a run-down house in Florida. Plan is to fix it up, redo the kitchen, paint it and shit like that, and then sell it for twice what I bought it for. Booya!
Me: Nice. How many kitchens have you remodeled before?
Newbie: Ah, none.
Me: Ever painted a house before?
Me: Do you have any construction, handy-man, electrical, appliance installation, design, painting, or concrete pouring experience whatsoever?
Newbie: I guess not. Ah, crap… They made it look so easy on TV!
There’s a perception that fix & flip investments are quick, easy, and always profitable. Some people even think fixing ugly houses is a fun couples activity that magically improves the relationship with their spouse.
Unfortunately, all that smiling, laughing, and picking out paint colors you see on TV is just Hollywood trickery. Behind the scenes it’s a much different story. TV is for entertainment, not investment advice.
Instead, if you want to learn about rehabbing a house, start by reading this book, going through this flipping website, and listening to this podcast. 92% of people lose money on their first flip. (I made this statistic up, but trust me it’s a very high number)
Everyone Begins Somewhere:
By now you’re probably thinking I’m being a Negative Nancy who is trying to deter people from real estate investing. That’s not the case at all! In fact, it’s the opposite. I want MORE new investors to be successful in real estate.
Everybody starts out as a beginner (in many respects, I’m still a newbie). Writing harsh truths is just my way of helping people get their head out of the clouds. I’m hoping to shorten the learning curve and save folks from making rookie mistakes.
From now on I promise to start writing about more positive real estate experiences. I’ll share all the downsides and crappy stories at my new blog I just created: 5amToilet.com.