The Worst Way to Invest in Real Estate

Hey, everyone. Welcome to Investing
in Real Estate. I am your host Clayton Morris. This is the show where we focus
on buy and hold real estate. That is to buy real estate
for the purpose of holding it till we die and handing
it down to our children, to create real passive
income, true legacy wealth for our families. That’s the show. That’s what we talk about. And today, we are going to
talk about the worst way to invest in real estate. I get this question
a lot from investors that I speak to on the
phone or through email after they book a call
with our team, et cetera. I always hear the stories about
how individuals first bought their first rental property. And I want to talk
about it today. So the worst way to
invest in real estate. There are a lot of great
ways, which we cover here on the show, but
this is the worst way to invest in real estate. And honestly, the worst way
to invest in real estate is to do it emotionally, to be
tied to a property emotionally. Let me give you an example. I want to give you
two examples actually. First one was a husband and wife
out of the Philadelphia area, who I spoke to. They were interested in
buying rental properties. And I asked them how many
rental properties they currently own, what is their
situation right now? And they said well, we have
our own rental property. We own it, but and we
moved, and we just kept it. It’s in the Manayunk
area of Philadelphia– which is a beautiful little
area, but very expensive. So they kept this little house. They’re paying
very high mortgage. And the rent after we
broke down the numbers– Because the first
question I asked them is what return
on investment are you getting
with that property? And we went through the numbers. Their first response though
to me was well, we love it, and we think it’s doing
really well for us. And we’re paying it down. And so we pretty much
break even on it. But in a few years,
about 10 years, we think we’ll start to
actually make some money on it. Well, right away,
that’s a red flag to me. Right away something’s
not right with that. If you’re not going
to make any money, and you’re actually
negative right now, that’s not a good investment. But the problem is that
they kept the house. And I said so why are
you keeping this house? And they just said, well,
it was our first place, and we just kind of love it. So bing, bing, bing,
bing, right there, the emotional connection
to real estate. That is the worst way to
invest in real estate– having some sort of emotional
connection to a house. Now, that might be fine. You might really love this
little charming place, this little charming cottage
in the woods that you love. Well, then that’s fine. Keep that as a hobby. Keep that as something
that you take your family to visit once a year for a
week, or maybe you rent it out. But you realize
that you don’t put that in your investing bucket. You put that in
your hobby bucket, or your sort of
passion project bucket. Like somebody who wants to work
on an old car in their garage for five years, right? That’s just a hobby. That’s a passion project. This family, though, had tied
their emotional well-being to this house in Philadelphia. So we went through the numbers. And I explain that their
return on investment was basically negative, and
that even with the taxes, they were paying more out
than they were bringing in for this property. And I said, so let me
let me get this straight. You bought the
house at $200,000. And you still owe
like $190,000 on it. And it’s cash flowing below what
you’re paying on the mortgage, and your taxes, you’re
in the negative. But I said, so why haven’t
you sold this property? And they just paused
for like two minutes. And they said because
we love the house. And I said, well, OK. If that were my property,
I would immediately sell that property. That would be something
I would sell immediately from my portfolio, because
it’s one of the underperforming properties. And I said to them, let’s
walk through the numbers. Let’s dive into why this is
an under performing property, and why this is not
a smart investment. And once they could see that
they were running negative, that it made no sense, I
asked them the key question. They bought it for
$200,000 but it was worth now like $225,000 or
something like that. I said, why wouldn’t
you sell that house? And again, they just
sat for a little while. And it finally I
think dawned on them. And they decided
to call a realtor, or they were going to list
listed for sale in a few days. And I was proud of them
for taking action on that, because now, they could
sell that property, just be done with that. Because really, they’re
paying out money anyway. Just start from scratch and go
buy another investment property that is actually
performing at a high level. So the worst way to invest in
real estate is emotionally. And most people
do it because they have a house that they
lived in, and they moved, and they kept it as their
first rental property. If I talked to 10
investors, I guarantee three of those
investors probably have a house that they use
as an investment property that they lived in first,
and they moved from it. But I want you to get really
serious about your numbers. Sit down and be
honest with yourself, and make sure that
you’re not just holding onto this
property because of an emotional connection
to this property. Really go through the numbers,
and be true to yourself on your return on investment. OK. In an upcoming
episode, we’re going to really be diving
deep into ROI, and what is return
on investment. That’ll be in the
next few weeks here. So we’re going to give
you some really great tips and strategies on how to figure
out your return on investment and what you should
be looking for when you’re purchasing a property. So that was example one. That was the Philadelphia
couple who had that property. Another is my father-in-law
whom I my love. But the other night,
we were having dinner. And he said, did I tell
you about the Hacienda we’re buying? And I said, what? He said, we’re
buying a hacienda. I said, where? And now they live in California. So I thought, OK, maybe there’s
something in California. No, they’re buying
this property in Mexico that has no electricity. It was built in the 1700s. They fell in love
with this building when they were down
there 10 years ago. Well, they went back. And now the town
basically wants somebody to care for the property
and take it over, because it’s kind of
falling into disrepair. But it’s a gorgeous
place near an airstrip, so all these rich families
fly in and stay at this place. You can’t use electricity,
but it’s just gorgeous. It’s up in the Sierra Madre. And so they don’t
need air conditioning. It’s cool. It’s beautiful. You have fireplaces
in each room. I want to give you the
point that my father-in-law, he understands real estate. He’s bought
properties through me. He owns properties
all over the country. He said, look, this
is not an investment. This is a passion project. And I was proud because that’s
exactly what I’m talking about. He knew that this was
an emotional purchase, that this was something that
he wanted to do just not really as an investment because
it’s not a good investment actually at all. He may even lose money on it. But it was a passion
project for him. He’s going to oversee the
renovation of this property. He’ll probably go down
there for 20 to 30 days a year with his wife. They’ll rent out some
of the other rooms. It’s on a coffee plantation. So they’re going to have bring
in some different purveyors, and do some neat things
with coffee growers. So that is a passion project. That is not an investment. So he understood that and
he was very clear about it. And he even understands
the numbers, so that he’s not going to look
to add that to his investment portfolio of properties. That really is his hobby,
his passion project, the working on the old car
in the garage syndrome. So once again, the worst
way to invest in real estate is emotional. And that can run
the gamut, right? You could be emotionally
tied to your cute little town that houses cost $300,000. Well, you need to drop
that emotional connection to real estate because that
is not a good investment. You need to go where the
return on investment is, and you need to
remove emotionality from the transaction. If we send a potential
investor a property, and it might look like
a cute little bungalow from the pictures, and then
we send them an equally great house, but the pictures
might not be as good, I guarantee you most
people are going to have an emotional reaction
to the cute little bungalow pictures– even if I tell them that
the other property will have higher rent,
lower taxes, and it’s in a better neighborhood. You’ve got to drop your
emotional connection to four walls and a roof. It’s all just
building materials. Don’t fall in love with real
estate, fall in love with ROI. That’s my little monologue
for today on emotional, because I had a
lot of phone calls this week where I
talked to investors, and many, many, many of them
had these emotional connections to real estate. You’ve got to drop it and
just be real with yourself. We published this show
every Monday, Wednesday, and Thursday. We’ve got some great
episodes coming up this week. Part two of our episode
with Robert Shemin, one of my mentors in
real estate investing, we’re going to deep
dive his strategies for acquiring properties with
no money, none of his own money. He owns 500 properties. The guy is a rock
star in real estate. Don’t miss that on
Wednesday of this week. And then we have a
great case study episode with a brand new investor
who just has a few properties and is just getting started. That will be on Thursday,
so check that out. My name is Clayton Morris. If you would like to book
a call with our team, we would love to talk with
you about rental real estate and getting started. If you’re ready to
take action, just head on over to our website. Just go to, and
click on the Book a Call tab. And we will be happy to
jump on the phone with you. I look forward to it, folks. And I can’t wait to see
you back here on Wednesday. I’m Clayton. Have a great week, everyone
much love to you all. [MUSIC PLAYING]

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