Buyer Beware

Debunking Real Estate Gurus

As a young entrepreneur it is so easy to get sucked into the world of Real Estate.

Everywhere you look on Twitter, Instagram, TikTok, and Reddit people are claiming that buying real estate is passive income and will help you quit your 9 to 5 so you can travel the world and so on. There are so many “gurus” out there claiming they have the key to getting rich quickly.

Here at The Steel Road we may talk about a lot of business ideas and claim that they can make you rich, but we never underestimate the work that it takes to get there.

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We don’t believe that pursuing passive income is a good idea unless you have about $1,000,000 sitting around. Let’s debunk a couple real estate guru claims:

Short Term Rental Arbitrage

You often see these guys buying ads on YouTube or Instagram Reels, and they are trying to get you to sign up for a free guide to start your Airbnb business. Here’s what they will teach you.

1. Go to your local classifieds and find an apartment for rent.

2. Contact the property owner and ask them if they are comfortable signing a lease allowing short term rentals.

3. Get an AirDNA report to find out what your cash flow will be in that area.

4. Close the deal, manage the listing, print money, etc.

Now on the surface this seems like a great idea. It’s a low cost way to get into managing short term rentals. If you want to get into this business then that’s great! Perhaps you are a real estate agent and you are looking for another income stream. This could be a great option.

There are lots of cons that these gurus won’t mention, and it will take some really hard lessons to learn them.

• Airbnb is all about review generation. What happens when your landlord shuts down your operation after 6 months just as you are finally getting traction and breaking even. You could be left holding the bag. Lack of control is a huge con.

• Be very careful with your underwriting. What is the first thing you do when you go on vacation? Crank up the air conditioning. Utilities are expensive and if there isn’t wiggle room you are not going to make any money.

• No appreciation. Because you don’t own the property you don’t get any of the tax benefits and none of the appreciation of the value of the property.

Again, we aren’t trying to discourage you from getting into short term rentals. There is a lot of money to be made, but buyer beware.

The House Hack

House hacking is another idea that is constantly floated out there. Here’s the general idea.

1. Buy a multifamily property like a duplex, triplex, or fourplex using an FHA loan so you can put the minimum down payment.

   

2. Live in one of the units and rent out the others.

3. Use the rents to pay your mortgage.

Again, the idea sounds great! Put as little of your own money into it as possible and print off money.

This might have worked in the pre covid years, but in the current economic climate it is tough to swing. Let’s do some math.

If you can find a duplex available for $500,000 in a high rent area, say near a college or university, that would be a great deal. Your monthly payment would look like this:

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Generally investors use a “cap rate” to calculate income potential from a property. For a duplex, you could probably expect a 6% cap rate. This means that a property worth $400,000 would generate $2,000 per month, or $24,000 per year.

But remember, you are living in one of the units, so you can’t rent it out. Your property is only generating $1,000 per month leaving you to pay the other $2,279.

Then you have to worry about when the sewer backs up, the furnace needs replaced, the kitchen sink gets clogged, etc.

Again, we are not trying to discourage you from buying a multifamily property, but it is not the holy grail that people make it out to be. If you can find the right deal at the right time, and in the right area, a house hack could be a perfect fit.

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Investing in real estate is a great way for the wealthy to stay wealthy. If you already have a net worth of $200,000 + then exploring real estate is a great option!

If you are looking to grow your wealth and get your first wins in business, start and grow a business with one of these ideas!

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