Maybe you’ve been thinking about starting a side hustle. Maybe you have always wanted to move to a new, lower-cost apartment to save money. Maybe you want to move in with roommates, or jump into stock market investing.
Of course, there is always a “good” reason not to jump into these activities, not to pursue these changes that could turn out to be life-changing. Work might get in the way. Your family duties might leave you with not enough time, etc. Maybe you don’t have the money to invest at this moment.
Now, those may all be legitimate reasons, but for me, when I was interested in investing in turnkey real estate and I was making those excuses, the first step was to realize that the REAL reason I wasn’t investing was because I was scared. Investing in real estate (even turnkey) for someone who hasn’t done it already is TERRIFYING. I am putting tens of thousands of dollars into one investment and taking on a huge loan in the process? It’s a REALLY big deal. Once I admitted I was stalling because I was afraid, I couldn’t make those excuses any more. I had to look at my fear and make a decision with a cool, logical head. The first step, was to analyze the opportunity of buying my first single family home to rent out.
Now that I knew I was simply battling my own fear, I decided the best course of action was to look at some possible outcomes from investing in turnkey real estate. The analysis went something like this:
Event: Some crazy disaster that isn’t covered by my insurance (like a Godzilla attack) comes and destroys the house I bought
Result: I lose my initial investment and am saddled with a 30 year mortgage that I have to pay off
Change in Lifestyle: My early retirement goals would be crushed! In the end, I would be ok and just maybe work into my 40’s, still retiring well before most people. It would still be an absolutely crushing blow psychologically, though.
Likelihood: Almost 0% chance
As humans, our minds immediately think of worst-case scenarios. But we need to just take two extra steps. How bad IS the worst case scenario when brought to its logical conclusion, and more importantly what is the likelihood that the worst case scenario will happen? Are you more likely to get into a fatal car/train/bus/plane/bike accident? If so, then you should either be giving up all forms of travel, or this scenario should not factor in a whole lot to your decision.
Realistic Worst-Case Scenario
Event: I did my calculations completely wrong. I end up losing a little money every month because my expenses are higher than the rent I am collecting and the house was overvalued, so I have to sell it for $10,000 less than I bought it.
Result: With closing costs, negative cash flow, and selling for a loss, I lose $20,000.
Change in Lifestyle: I have to work 1 extra year before I retire. On the positive side, I learned from my mistakes in real estate investing and go back to see if there are other approaches I can take.
Likelihood: Unlikely – I had some good people encouraging me and confirming that my numbers were solid, but this is definitely more likely than the scenario above.
So this is my ACTUAL worst case scenario. I lose $20,000. That definitely hurts. But there are some people that spend close to that amount on coaching and products just to LEARN about real estate investing from real estate gurus. It’s an unlikely scenario, but if it did happen, I would be ok and move on. This is a risk that is hard to get past, but for me, is well worth it given the following scenarios.
Probable Scenario #1
Event: My calculations had some flaws, but I left enough buffer that I am making a little bit of money every month. Or maybe my calculations work out, but I have problems with vacancies and maintenance issues.
Result: The return is not nearly what I could have gotten in an index fund, but I am still net positive. After a few years, I have made back more than my closing costs and have built equity in the house
Change in Lifestyle: Not much change in my day-to-day lifestyle. Perhaps I am able to retire a month or two earlier or later than before (depending on how the index funds I WOULD have purchased are doing at that specific time). The big gain here is knowledge. I have learned a ton about real estate investing, basically for free.
Likelihood: This scenario is much more likely, but not as likely as Probable Scenario #2
Even as the LESS likely of the two probable scenarios, I am still coming out on top just by virtue of the lessons I am learning!
Probable Scenario #2
Event: My calculations were mostly correct! Some expenses were higher than I expected, but some were lower.
Result: I am cash flowing a couple hundred dollars a month and have leftover cash flow to save up in case of vacancy issues or maintenance problems.
Change in Lifestyle: The first passive income stepping stone! With this, I can retire earlier and have the confidence to build my real estate portfolio further! Plus, I basically got paid to get an education in real estate!
Likelihood: This is the most likely scenario and guess what? It’s the one that, so far, is actually happening! Funny how that works out.
Even now, I am probably giving too much credit to Probable Scenario #1. I should have named it Possible Scenario. In hindsight, I was being too cautious and not allowing myself to accept that Probable Scenario #2 was significantly more probable than any other scenario, given the amount of research, networking, and travel I did in preparation.
Event: Indianapolis explodes as THE place to live
Result: Not only do market rents go way up in 10 years and my cash flow gets better, but the value of my investment appreciates and in 15 years, I can sell for much more than I bought it (even accounting for inflation).
Change in Lifestyle: Woo hoo! Bonus! This doesn’t allow me to retire any earlier, but maybe I get to go on an amazing trip or write a big, fat check to my favorite charity!
Likelihood: Pretty unlikely. Indianapolis has a lot of great things going for it, but it is definitely not a market that is expected to appreciate. This is pie-in-the-sky thinking.
While the ideal scenario would be magical, you can see that it actually wouldn’t change my lifestyle all that much. I don’t NEED to hit a home run with turnkey real estate investing.
In the end, I decided to take the plunge and invest with a turnkey company in Indianapolis. I currently have a single family home that is performing exactly as I calculated it would. I am getting cashflow and I learned valuable lessons about the process (especially from FI Fighter, who I have to shout out in this post). However, I got something much MORE valuable out of the entire process: Courage. As of this month, I am starting the process again and looking for another investment property in Indianapolis. I am absolutely AMAZED at how much less terrifying the process is this time around. A year ago, I would have told you that real estate investing was way too risky for me. Today, I am confident in my particular strategy and I am ready to tackle house #2! I can’t express here what a great feeling that confidence really is. It was worth every bit of the risk I took.
So whether you have a financial goal or you are putting off a personal goal such as traveling to strange destinations or getting in shape and you are afraid of the unknown. Take a moment to assess the possible outcomes and be honest about how likely they are. Then, even if there is risk, if you have done your due diligence, jump right in! I can’t guarantee that you will succeed, but if you do, you will understand that the risk is worth it. And if, for whatever reason you don’t succeed, don’t stop trying. The confidence you gain by succeeding in the end is well worth failing several times.
For those of you specifically interested in my turnkey real estate investing, I am taking this moment to let you know that I will be trying to help ease the uncertainty of the process a bit. As I go through the process of looking for investment property #2, I will be writing about my journey and process along the way, so you can see exactly what I am doing. I have no idea how the process will turn out, but I hope no matter what, it will be helpful. So be on the lookout for the new Turnkey REI series that will be appearing on this blog. I never thought real estate investing from a big city like NYC was possible until recently. Now, I can’t get enough of it!
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