Real Estate is Forgiving

One of the reasons I laugh at all the crowdfunding regulations is that most of the people seeking crowdfunding are looking to fund an idea not a hard asset. These people want you to fund their pipe dream concept with millions of dollars. Money that will be spent on salaries and marketing and a bunch of other things that aren’t tangible and cannot be sold to recover principal if the deal blows up.

Real estate is not like this. An investment in real estate gives you cashflow and a return but its not actually destruction of your principal. This is why so many people prefer real estate to stocks. Stocks, venture capital and many other things can go to zero, real estate does not go to zero. Any money spent on a real estate deal can be recovered.

This is why the crowdfunding regulations in my opinion are overbroad and are meant to regulate the issue of securities of a pipe dream not a tangible hard asset.

I love real estate because it is solid, tangible and it has a strong salvage value even if you have to firesafe it to a wholesaler. I also like it because it is forgiving.

What do I mean when I say forgiving? Well lets say you buy a wholesale deal with the goal of fixing and flipping it. You go over budget and now are at break even. The beauty of this is that since the property will cashflow from rental income you can gradually make your money back WHILE the property also appreciates in value. Here is an example with real numbers.

You find a property with an ARV of $100k. You buy it for $65k with a $20k rehab budget. Potential profit less fees is $10k. Unfortunately your contractor runs over budget $10k and now you are at break even. This sucks. What you are then forced to do is refinance the property and rent it for $1200/mo with a mortgage payment of $600. Over the course of that year you make $7200 in gross profit (since this is a new rehab any repairs or maintenance should be minimal, since it has a mortgage the property tax and insurance are included in the PITI payment). Over two years you made $14,400. After three years you have made $21,600 gross, but the property is now worth $125k. This is a $50k profit. What looked like a loss or break even STILL made money. Just remember this is worst case scenario. Best case you profit $15k and move on to the next deal OR profit 15k via refinance and continue to collect rental income while the property appreciates, WIN WIN WIN (word to Jay Rock).

It blows my mind how forgiving real estate is. You can make mistakes, you can boggle the deal, you can miss fire on the budget and still turn out ok.

On an earlier episode of my podcast with Asia Denson she talked about a flip she did where she bought the property and then rehabbed it with money she found from a private investor. When she finished the property and put it on the market she had a buyer but the buyer walked out. She was stuck trying to find a new buyer which ultimately took several months. All while this was happening she didn’t have the money to pay the lender so she wasn’t making the monthly interest payments. Ultimately she was able to find a buyer and she made good on all the missed interest payments.

This is important because a lot of people don’t do deals because they are afraid of things like not being able to make payments. They are afraid of things like not finding a buyer immediately. Well like Hood Estates says, if you rehab it they will rent or buy it. Because real estate is forgiving and the lender knew he would eventually get paid he wasn’t pressed for the interest payments which gave her time to find a buyer while not making the money. This flawed deal ended up netting her big money.

Family, you are going to make mistakes. Especially if you are new, especially if you don’t come from a family of developers. Your job isn’t to execute a mistake free deal, your job is to do deals and make mistakes. The beauty of business ownership is that mistakes aren’t fatal. You can make money WHILE making mistakes and getting the learning that comes from making mistakes.

This completely flips the employee and student thinking on its head. In those environments they reward perfection (which doesn’t exist so you spend a bunch of time being berated for inevitable flaws). Real life, business ownership and real estate investing reward the bold risk taker who is willing to make mistakes while moving forward.

The beauty of real estate is that even though you are making mistakes, real estate will save you. This isn’t a crowdfunding where it is money that is gone, this is a tangible asset that if worst comes to worst can be sold for a slight loss but never a total loss.

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Thanks for reading!

Be great, invest well,

Todd Millionaire


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