INVESTORS MUST AVOID GOLD FEVER
Learn the difference between "real gold" and "fool's gold"
In 1849, gold was discovered at Sutter’s Mill in Northern California on the bank of the American River. During the two years that followed, 2.5 million gold seekers would tromp through the wooded hillsides and muddy up every live stream searching for the precious metal. With little preparation and even less knowledge, many miners were unable to distinguish the difference between real gold and fool’s gold since they both look an awful lot alike. “Gold Fever” drove many intelligent people to do some really dumb things in their search for overnight riches.
Today, almost 170 years later, you see wanta-be real estate investors doing some really dumb things in their search for overnight riches. It seems the human attraction of getting rich overnight is as compelling today as it was for the early gold miners. As you might imagine, the results are pretty much the same.
Although record keeping was a bit sloppy during the wild and wooly gold rush era, historians agree that, less than half of one percent ended up any richer than before they left home. Meanwhile, the real “Gold Millionaires” of 1849, recognizing the powerful new marketing opportunity created by millions of “star-gazing” gold seekers, quickly produced picks, shovels and water bags needed by every miner. Naturally the price of these tools shot up 20 times higher while the stampede lasted.
The idea of making big money overnight is mostly fool’s gold thinking. Investors, much like the early miners, can’t tell the difference from real gold. I get several phone calls every week from distraught wanta-be investors
who have purchased $10,000 shovels (worthless study courses), but not one course tells them where to dig. TV personalities and self-appointed gurus masquerading as real estate “super stars” have studied the market very carefully and they understand the persuasive powers of a get rich quick promise – and like the early gold miners, thousands of “eager beaver” investors with little more than a dream can seldom muster up enough resistance when competing against plain ol’ greed.
TV shows like FLIPPING LAS VEGAS (OR DALLAS), and several other locations I can’t even recall, is like the 49’ers gold rush all over again. Just hearing about flipper profits excites the newbies like a million dollar lottery. But once again, we’re back to the early gold miner problems; the newbies can’t tell legitimate instructors from TV actors. Giant size profits on TV are much different than the ones I’m hearing about – even from contractors who possess the knowledge and skills.
On top of the questionable profits, house flippers are not real estate investors. They are salesmen who peddle inventory like Walmart! Walmart however, buys at super discounted prices from Korea and Hong Kong where there’s $3.00 an hour labor. My flipper acquaintances buy and sell inventory in San Jose and Los Angeles, California where profit margins are skinnier than a starving lizard.
Once again, I’m not knocking flipping – there’s money to be made, just not enough in my opinion. The biggest problem is that starry-eyed wanta-be investors working at the factory 9 to 5 believe they can earn a big chunk of dough if they can pull off flippin’ like they see on TV. Once again, they get sucked in on the promise of fast ‘n easy money.
The TV hucksters never mention the dangerous risk side of flipping. For example, when a non-licensed “fix ‘n flip” investor sells to a homeowner, there’s added risk and responsibilities associated with the transaction. Homeowners are like a protected class. There are multiple disclosure forms, whether sales are initiated through a licensed real estate agent or sold direct. This automatically makes any flipper investor responsible for every single defect in a house that he or she should have known about, whether they do or don’t. If the fireplace smokes, the floor creaks, the gutters don’t run downhill, there’s inadequate heat or perhaps some smelly fish odor in the heating ducts – it’s all your fault when you’re the flipper! Somewhere in that huge stack of “gobbled-gook” paperwork (disclosure forms) you signed at the sale, you’ve guaranteed the house will be in perfect living condition. Friends, this ain’t really investing – it’s almost like Russian roulette – or perhaps the early stages of a future suicide!
Licensed contractors have been in the flipping business for many years. They have all the skills to do the work and they always obtain proper permits when required. Their workers are all properly insured and in my state, they’re even willing to provide a full year warranty for workmanship or defects after the sale. Most amateur “fix ‘n flip” people I know can’t even spell warranty! One flipper friend of mine was sued over a fireplace that came loose from the wall and his $32,000 profit was quickly gobbled up by the $45,000 settlement. His fix-up crew hadn’t even touched the fireplace. The sale was handled through a local real estate office with all the paperwork done correctly; so the arbitration judge ruled they (the real estate office) had no responsibility. The job was mostly a cosmetic fix-up so no permits were obtained and that became a major factor at the settlement.
Buying and selling houses is tricky business and in my opinion, it’s not for greenhorns or beginners! When I ask my telephone mentoring students why they decided to flip houses to begin with – their answers are almost always the same! It’s like they all meet behind the outhouse to rehearse their answers before they call me! “We want to flip a few houses so we can build up our cash reserves – after that, we plan to start buying keeper properties like you recommend!” That’s what every caller tells me – plus they repeatedly insist; it’s only temporary until we earn enough money to start buying keeper properties. I’m sure some folks won’t agree with me on this – but the odds for inexperienced flippers having very much success, are not a whole lot better than jumping off the Golden Gate Bridge! I’m always honored to share my advice with newbies and even though they pay me via my Telephone Mentoring Service for my opinions, I will never “sugar coat” the hard work and dedication it takes to become a successful real estate investor! Most callers are already aware of the big money that can be made; but I feel it would be a total disservice to tell anyone it’s easy.
The truth is, it’s just the opposite! Still, it’s a wonderful life and you can build financial freedom for yourself and family if you don’t get “sucked in” by the glitter from the fool’s gold hustlers.
Leveraging small income-producing properties is the safest and often the quickest method to build a solid foundation. Rental units that will pay their own way and spin off a little cash flow every month is the plan I recommend to ever new investor. Most newbies are capable of accomplishing this task even with limited resources. Buying small rundown multiple unit properties is my all-time favorite because these properties are much easier to purchase. They’re cheaper and likely rented at below market rents, giving the new owner an opportunity to make quick improvements and increase the income to the current market rates. These properties are the quickest path to cash flow, which is always the number one goal for newbies whose “rainy day account” is always hovering near empty.
Nothing can take the place of sheltered cash flow earnings every month. This is even more important for the kind of students I’ve taught for over 30 years. Most have been dependent on a regular 9-5 job to earn their living. Owning real estate that might require financial assistance (subsidizing) from their regular paycheck could sink their investment boat rather quickly. The major forces of wealth accumulation are working at full strength when investors acquire cash-producing properties and learn to manage them properly. Money coming in every month is very powerful. The continuous ownership of cash-producing properties will grow from appreciation and provide ever increasing income over time. As the rents (tenant’s money) pay down the debt and operating expenses, the investor’s equity increases along with his or her cash flow.
When you study super wealthy folks, how they started and how they became rich! A common theme always pops up! They mostly started with small, but continuous profits. Ray Kroc, the founder of McDonalds, sold hamburgers for 17 cents each, but they added up quickly. Walt Disney drew cartoons for early movies and sold them for roughly 10 cents apiece. These small ticket profits made both men multi-millionaires.