No Money Down Real Estate Investing

No Money Down Real Estate Investing: Why Flipping Homes in Today’s Market Can Be Dangerous To Your Financial Health
by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club
Monday, May 21, 2007: Issue #676

I received a note from a reader asking whether now is a good time to take a free class on no money down real estate investing. Presumably, he wasn’t asking about the class itself, but whether the timing was right to take advantage of the soft housing market and buy investment properties.

However, let me share some thoughts on both.

I’ve written about the real estate bubble several times over the past few years. My take is that nobody forecast it and nothing explains it. Not inflation, not building costs, not population growth, not gains in personal income, nothing (with the possible exception of low interest rates and easy credit).

An Expert’s View on Real Estate Investing

According to Yale Economist Robert Shiller, for the 100 years between 1890 and 1990, the average return on residential real estate was zero after inflation. However, things have changed dramatically over the last 15 years - and especially the last 7. Things overheated, to put it mildly.

In a recent interview Shiller predicted that the return on real estate will be “negative, substantially negative over the next 10 years because all booms reverse in the end.”

Since Robert Shiller doesn’t have a direct pipeline to the Divine, we can take his forecast with a grain of salt. But it was certainly true when gold surpassed $800 an ounce in 1980, when Japan’s Nikkei 225 hit 40,000 in 1989, and when the Nasdaq flew past 5,000 in March 2000.

All were manias. All ended badly. And there’s no good reason to think the housing boom will be any different.

So anyone buying residential real estate today for “investment purposes only” might be just a tad wary.

The Road to Bankruptcy: No Money Down Real Estate Investing

Yes, there are some good deals to be had in many parts of the country right now. But housing is so weak in most areas you’d have to steal a home right now - or buy it on the courthouse steps - to have a good chance of turning it over quickly. And if Shiller’s forecast is even halfway right, you may still be looking at years of property taxes, insurance, repairs and other maintenance costs before you can sell at a profit.

So caveat emptor.

Let’s also take a moment to consider whether these “free” courses that offer to teach you all you need to know about “no money down” real estate investing - a staple of late-night TV - are worth your time.

My answer is no.

Most people who attend these seminars are generally given a pie-in-the-sky presentation and then offered the opportunity to buy outlandishly expensive books and tapes. They’re also given the chance to sign up for costly seminars where they learn from the experts “how it’s really done.” At these conferences, they are sold more books and tapes, personal coaching, and still more expensive seminars. And so on.

I’m not saying that no one who has tried these techniques has succeeded. I bought my first two houses myself with no money down. But you don’t need a course to do it. All you need is a seller who wants to unload like there’s no tomorrow and is willing to hold the paper.

Of course, these “no money down” gigs have been going on for decades. And the results are generally not what anyone would call enviable.

Forget about the outcome for the students. Take a look at what’s happened to the authors who sold the books and promoted the seminars. According to author John T. Reed:

Albert Lowry, author of “How You Can Become Financially Independent by Investing in Real Estate,” declared Chapter 7 bankruptcy in 1987.
Craig Hall, author of “Craig Hall’s Book of Real Estate Investing,” declared bankruptcy in 1992.
Bill “Tycoon” Greene, author of “Two Years for Freedom,” was convicted, fined and sentenced to prison. (He later escaped from a minimum security prison and is believed to be living in England.)
Tony Hoffman, author of “How to Negotiate Successfully in Real Estate,” filed Chapter 11 bankruptcy for his company in 1986.
Wade Cook, author of “How to Build a Real Estate Money Machine,” declared Chapter 7 bankruptcy in 1987 and 2003.
Dave Glubeitch, author of “The Money Game,” declared Chapter 7 bankruptcy in 1987.
Dave Del Dotto, author of “Cash Flow System,” was charged by the FTC with misrepresenting products in 1993. He filed Chapter 7 bankruptcy in 1995.
Charles Givens, author of “Wealth Without Risk,” was successfully sued by a former customer for giving bad financial advice. He filed for Chapter 7 bankruptcy in 1995. He died pending trial.
Sonny Block, author of “Inside Real Estate,” was indicted in May 1995 by a federal grand jury for fraud and fled to the Dominican Republic to avoid prosecution. He was eventually deported to the U.S., but died pending trial.
Ed Beckley, author of “Million Dollar Secrets,” declared bankruptcy in 1987 and was sentenced to federal prison for wire fraud.
Robert Allen, the author of “Nothing Down” and “Creating Wealth,” declared Chapter 7 bankruptcy in May 1996.

In short, I don’t recommend trying to flip houses right now. But I really don’t recommend the “no money down” seminars. And I’m not just talking to potential attendees…

Clearly, putting them on can be even more injurious to your financial health.

Good Investing,

Alex

Today’s Investment U Crib Sheet

Homebuilders checked in with dismal year-over-year results in the first quarter. D.R. Horton’s profit tumbled 85%. Lennar Corp. posted a 73% drop. And KB Home’s profit slid 84%.

Real estate investment trusts have taken the most recent hit. The Dow Jones Composite REIT Index (^RCI) has dropped 9% over the last month. Take a look…

But while REITs slump, the defense sector marches on…

Boeing, Lockheed Martin and General Dynamics have outpaced the S&P by double digits over the past two years - business as usual for three of the biggest defense contractors…

Over the last 27 years, you would have made more than 5,000%, 10,000% and 15,000% in each, respectively. Now, these stodgy growth machines have a new competitor, contracted to build a “New Internet” for the U.S. Department of Defense.

Earnings are accelerating. And its CEO just filed an important document with the SEC, signaling another significant jump in shares could be just weeks away. Here’s why, and how to get in while no one’s paying attention. Full report.