Most real estate gurus really tick me off. People looking to make a better life for themselves and their family decide that the gateway to make their dreams come true is real estate. They sign up for a “free” seminar at the Days Inn and the first thing that they are told to do is to call your credit card company during the break and up your limits. When you return they have you run to the back of the room to pay for “training” that will be the only way you can find out the secrets of real estate riches. The trouble is that the “training” and the trips to the back of the room never stop. You also never get any closer to learning how to be an investor, a note buyer, a wholesaler, or whatever you are wanting to be. One thing that they do drill into you is that “it’s all about the cash flow…don’t worry about the debt,” but is that right?
Many gurus will tell you that debt is a good thing. It’s all about cash flow. I might be one of the only real estate-related consultants that thinks that debt is something that you need to be careful with. When times are great and real estate prices are shooting to the moon, you can pretty much randomly buy a house and make money. Debt is no big deal. When things go South, however, debt becomes a major issue.
Let’s go out on a limb and say that some dude in China eats some bat-tar-tar and a plague spreads throughout the world. People have to stay home from work and businesses begin to fail leading to massive unemployment. Governors and Presidents sign executive orders stopping foreclosures and evictions. Real estate values begin to fall as landlords can’t collect on rents and lenders stop funding properties because people aren’t going to pay their mortgages anyway. I know, this is a stupid scenario that would never happen in the real world, but what happens if it does? “But Doug…real estate always appreciates!” Things are hunky-dory as long as real estate goes up, but I remember the great crash of 2007-2008, the dot.com bubble, and…dare I date myself…the S&L crisis of the late-80s/early-90s. Over extend with credit and you can easily outkick your coverage.
I’m not saying don’t borrow money. That’s not at all what I am telling you. The use of leverage in the right situation can be a smart thing to do, but overextending is like playing black on the roulette wheel. You could win, but at some point if you are overextended, the chickens will come home to roost.