A Bridge to Nowhere

Real estate investments can be like building a bridge.  They take both time and money.  They require proper planning, knowledge, dedication, and good management.  The purpose of building a bridge is to go from one place to another, a place you normally couldn’t get to without having the bridge in the first place.  It’s not like building a road, because before there’s a road, you can probably walk to wherever it is that you want to go; it’s not the same with an investment.  A bridge crosses a gap that you can’t cross on your own.  Building wealth through real estate investments is like building a bridge.  You’ve got to put in the time and money, build the bridge entirely, and ultimately reach the place where you make a return on your investment

Where Do You Want Your Bridge To Take You?

For most people, investing is about earning money.  It’s about building wealth for a future purpose, whether it’s for retirement, other investments such as a precious metals IRA, or simply leaving a legacy for your family and children to inherit.  People invest in real estate because we all know that real estate investing is the single greatest wealth building tool there is.  But before you invest, you’ve got to be confident you can reach your goal.  Just like building a bridge.  There’s no point in building a bridge if it doesn’t take you to the other side.

Half A Bridge

As a long-time investment advisor and property manager, I’ve seen countless families lose money on real estate investments.  The recent “Great Recession” not only caused millions of families to lose their homes and jobs, it also forced many homeowners into becoming “involuntary landlords”.  Many people who bought homes at the top of the market felt the financial pain when the economy crashed.  Millions more homes lost half or more of their value seemingly overnight.  For any person or family who had a necessity to relocate,  if their home had lost enough value that it no longer had equity (positive value) and it went “upside-down” or “under water”, their only options were to let the home foreclose, or to convert it into a rental property.  If the home’s mortgage payment was higher than fair market rent prices, the owner would be forced into a decision whether or not to carry the negative cash flow balance until such time that the home recovered its equity and became profitable again.  This is where I came up with my bridge example.  If the owner was planning on carrying a negative cash-flow investment, he or she had to be prepared to do so for an uncertain period of time.  For some homeowners, the negative cash-flow might have only been a couple hundred dollars a month and that might have been reasonable for them.  For other homeowners, if their mortgage payment was significantly more than their rent price… well, it can be a challenge and burden to carry negative cash-flow for an undetermined number of years.  So then I would use my bridge example.  “What you’re trying to do is build a bridge.  You’re in a place now where you’re losing money and you want to get to a place where you’re earning money; but to get there, you’ve got to carry the home.  If you don’t think you can afford to carry it for an indefinite number of years, don’t even try.  Because, just like building a bridge, if you don’t get to the other side, it’s all just a waste of money.  The only thing you can do with half a bridge is to abandon it, or to jump off it.”  And I none of those options are good outcomes for an investment.

What Is Your Credit Worth?

If you know you’re forced into a position to rent out a home you’d actually prefer not to, there are a few important things to consider.  First, how far “negative” is your cash flow?  If it’s just a small amount, and you feel confident the home is earning value, or if you already have equity, then it might not be a bad decision.  If you’ve lost a lot of equity, have a long way to go to break even, and if your mortgage is reasonably higher than the market rent price, give it deep and serious consideration before making it a rental.  These days, banks are far more negotiable than they were after the real estate crash.  Refinancing, loan modifications, short sales, and voluntary repossession (deed in lieu of foreclosure) are all reasonable options.  If you go with an option where you lose or give up the home, it might harm your credit.  But what price would you put on your own good credit?  If you are forced with possibly losing thousands of dollars a year for several years, there comes a point where you have to self-identify the value of your credit.  It may be a lot easier to rebuild your credit in one or two years than to carry a hefty negative cash flow rental property that could take many years to break even.

Choose Wisely

In any event, no matter which decision you make, realize you’ll have to stick it out.  If you can afford to lose money on an investment for long enough to earn a profitable return on it, go for it.  It’s not unheard of, and many people do.  If not, it’s probably not a wise idea to try.  In any case, once you start building your bridge, realize that if you don’t make it to the other side, it’s all a loss.  There’s no good use for half a bridge, except to abandon it, or to jump off it.  If you have questions about your real estate investment goals, contact us for a free consultation.  You have my word, Management 1 Tri-Cities Realty & Property Management will never advise anyone to take a path that results in being the unfortunate owner of half a bridge.