Bite Off What You Can Chew

June 24th, 2006 Living Off Dividends Posted in Uncategorized |

One of the more popular real estate clubs in San Diego is the SDCIA. It attracts a lot of newbie investors and is quite large. It has a really good message board which has posters from all across the nation.

One unfortunate investor turned to the message board to see if he could salvage his bad investment in Tucson. He basically bought a house through Chris Szabo in Tucson and was losing his shirt on it.

Chris Szabo is an “investors realtor” and was promoting preconstruction investment opportunities in Tucson. I spoke to him in the fall of last year and he seemed pretty smart. However nothing he said about Tucson seemed to attractive to me. Tucson just didn’t have the things I like when it comes to investing. Its too small population-wise, not enough job/population growth, there’s ample land and its full of spill-over speculators from Phoenix and California. Chris was just trying to pump it up to drum up some business for himself. Can’t blame him for that, thats what agents do!

Anyway, back to the investor. He probably didn’t know how to analyse the deal and made the fatal mistake on relying on his realtor for advice. Real estate agents work for you. You tell them what to do and you dictate what they are to look for. Never the other way around!

Next mistake, he put down a $27,000 deposit. You never put down a deposit that is so big that you can’t walk away from it! [I put down several $2,000 deposits in Boise and ended up walking away from half of them.]

After that, even though the market sucked and he knew he couldn’t close and make a profit, he still bought it! You always take your losses early. If you think its going to be a dog, you just walk away from it. Better to lose $27,000 early on and be done with it! Rather than face the prospect of losing even more and go through a ton of heartburn. If he had a smaller deposit he could’ve easily walked away from it.

Now he’s stuck with $2500/mo in payments that he can’t afford! Why would you buy a house with payments that you can’t afford? Always stick to entry-level houses because they’re easier to sell, easier to rent out[without being too negative] and they’re easier to hold if vacant! Don’t go for the fancy homes in the fancy neighborhoods. You’re better off buying 2-3 starter homes instead of 1 luxury home.

I’ve made mistakes too in the past. But you mitigate your risk by keeping your deals as big as you can afford, having 6 months mortgage in the bank [over and above 6 months living expenses for yourself], sharing the risk [and reward] with partners, doing your own due diligence and not relying on information from people who have a conflict of interest.

Any one deal shouldn’t be big enough to bankrupt you. You keep your losses small enough to invest another day. After all, FAILURE IS PART OF WINNING! You can’t try something and not have failure now and then. How you deal with them determines how far you succeed.

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