Real Estate Investing & Social Media
Why Investors Should Take The Advice Of Real Estate Investing Influencers With A Grain Of Salt
Liberate yourself from The Man.
Reach financial freedom by 30.
Retire to a beach in Belize & live off of passive income.
If any of these commands sound familiar to you, you may have stumbled on a video, article, or social media post from the “Landlord’s Internet” or “Real Estate Investing Social Media”.
Hundreds of figures can be found online offering their guidance to would be real estate investors. Followers of these influencers gather in sub-communities on Youtube, Facebook, Instagram, Twitter, TikTok, Reddit and message boards to listen to the gospel of owning property. What do these preachers want? Although I joke, I believe most real estate social media figures genuinely want to help those interested in learning more about the asset class. When you’re passionate about something, you want to share that passion with others. The joke is a necessary qualifier, though, as there are no shortage of stories about real estate gurus selling several thousand dollar courses only to leave their students grasping for phantom support burdened with a mountain of debt they have no way of paying off.
It’s a common refrain that real estate is a smart place to invest money. Equally as common, most people don’t know where to turn to learn more. Naturally, as with much else today, social media platforms & message boards are the first place one would look to learn more. I don’t have a problem with this. In fact, I think it’s a good thing that information is becoming more widely available online. For an industry that has historically been opaque with high barriers to entry, more transparency and access is needed. However, there are two big problems with real estate investing influencers on social media.
First, the real & inherent risks of investing in real estate are of little consideration, downplayed or not mentioned at all. The benefits of the asset class come with the responsibilities of managing the asset. Owning property is the opposite of owning a stock, which does not require any active management. In the age of Robinhood and zero commission trading, investors can become dissociated from the inherent risks of their investments due to the gamified nature of the platforms. One cannot become dissociated with their property as the investment is home to people, whose needs must be managed on a day to day basis (more on that below). While those who are buying their own investment properties are not doing so on a trading app, the social media ecosystem surrounding real estate & stocks evoke the same emotional response: don’t miss out, get in early, and get ready for the ride of your life.
There is no incentive for real estate influencers to comb through their P&L’s line by line to give a true picture of what managing their properties is like. Their viewers click to see how much money they can make, the intimacies of how well their preferred influencer lives, and more than anything, how to take charge of their own life. I call this Aspirational Escapism. There is nothing aspirational in watching someone read an electrical meter or hear about how they had to drive to their property at 2 in the morning on a blustery February night to figure out why the heat was conspicuously absent. Though there may be an odd form of escapism about this, I imagine there are other places on the Internet one can go to and find something more interesting to escape to.
Among the more prominent figures in the space, there is at least an effort to convey to their audience that they are building wealth for the long term. While this doesn’t sufficiently prepare one for the bumps along the road, if an investor is willing to take a long term view, they are committing to the the property, it’s tenants, and the uncertainties that will arise.
Long term wealth building is the antithesis to a most dangerous strain of real estate investing influencers: Fix and Flippers. Flippers operate under a simple remit: to acquire a building, renovate it and sell it off as fast as possible. There is no flexibility in this proposition. There can’t be. To understand why, let’s look at a quick example of what a flip looks like:
- A Flipper acquires a home for $300,000 with the assumption it will need an extra $50,000 in closing and renovation costs. In order to finance the flip, the Investor takes out a loan for 80% of the total cost of the project at a 12% interest rate, for monthly payments of $2,800. The lender requires $10,000 in reserves to be set aside that will count towards the construction cost. This high amount of debt allows the Flipper to only have to put down 20% of the total costs as a down payment, or $80,000. The Investor plans for the project to take 6 months, and to sell the property for $500,000. If all goes to plan, the Flipper stands to nearly double their investment.
- One month into renovations, the lead contractor tells the Flipper that the roof needs to be replaced, and the carpets and existing floors need to be ripped up due to water damage. The quotes come in at $40,000. The improvements need to be made, the contractor insists. This stops the Flipper momentarily, but they perk up quickly when they decide they’ll opt for cheap vinyl flooring and to not landscape the backyard as they had intended. Thanks to this quick thinking, the Flipper only needs to invest an extra $20,000 into the project. After 4 months, the Flipper completes the renovation, and lists the property for $500,000. Because of some of the cosmetic value engineering done at the property, and a slow down in the market, the listing gets little traction. It sits on the market, and sits, and sits. Finally, 10 months after the Flipper first bought the home, a seller approaches with an offer of $400,000. 5 months ago, the Flipper would never have considered this offer. That was barely more than what they had put into the project! By now however, the 12% interest rate payments are really piling up, costing $11,000 more than anticipated. If the Flipper doesn’t accept this offer now, who knows when they’ll be able to sell the home, and for how much. Will the house still be worth $400,000? Every 4 months on the market will cost another $11,000 in interest payments. The clock is ticking. The Flipper decides to take the offer. Instead of making $95,000, the Flipper loses $30,000.
As this analysis shows, if the Flipper doesn’t hit all of their assumptions, and the property doesn’t sell in the short time period it needs to, they stand to lose considerable sums of money. These losses can mount if more than just the roof and floor need to be replaced, which can often be the case with cheap rehab properties.
The myth of making money on flips has been perpetuated by an uptick of shows on channels like HGTV and A&E, mainstreaming this risky investment strategy. One can’t very well call the hosts of “Fix or Flop”, so they turn to excitable influencers online who have an incentive to produce sensational content to get viewers hooked and coming back. Only those with extensive renovation experience, a strong understanding of their local market, and the ability to withstand potential losses should take on the wild world of flipping homes. Unfortunately, because real estate investing influencers frame flipping as a get rich quick strategy that anyone can do (which they must do in order to make money off of their content and/or brand), they instill a confidence in uniquely unqualified investors that they can go forth and take on a project, which in reality requires an incredible amount of skill, knowledge, resources and no small amount of luck to do properly.
The second problem stretches far beyond the reach of Youtube Landlords, but as they are a visible manifestation of the issue, and the topic of this article, they’re a useful scapegoat. Housing is not a commodity. Disastrously, it has evolved to be acquired, managed and traded more like a commodity than as a home where someone lives. Our housing is where we spend the majority of our lives. This has never been truer than today in the middle of the Coronavirus Pandemic. Our homes provide an intimate space where we can retreat from the world into the comfort of our families, or at the very least, the comfort that the solace of being alone provides. Whether this is a single family home on two acres, a townhouse near the train stop, or an apartment in the heart of the city, where we live shapes who we are and who we will become.
When a pipe bursts, or the hot water is not working, or the fourth stair is missing part of its’ top, a sense of security and an ease of existence are temporarily suspended. The longer these problems last, the lower sense of security and comfort one has. More broadly speaking, when housing units become overcrowded due to un-affordability, or are sited next to highways that prohibit proper sleep patterns from developing and force residents to inhale pollutants, there is little hope for stability out in the world. Shelter is a core need. When it is insufficient for the most basic elements of life, it is immensely difficult for anyone to fully find their footing. It is imperative that any prospective investor thinks about these considerations.
To treat owning a property as anything less than the place where one’s entire life is based around is a profound breach of the social contract.
Why then, in post after post, and video after video, is the subject of a tenant’s experience never talked about in more than an abstract and superficial way? Sure, some imagined tenant may “love” stainless steel appliances, or value a new coat of paint, but these fixes are little more than justifications for deriving as much value as possible from an apartment. Each “value-add improvement” might add a bit of aesthetic comfort, but experientially its not clear what utility is actually provided. I hardly expect a landlord to walk through an apartment and envision a tenant’s daughter working on math homework in the nook, or how well one’s grandfather would be able to move about the rental property, but I do expect some consideration given to the actual person’s lived experience in an apartment, not just a name on a spreadsheet whose rent is manipulated in order to find out how much profit can be squeezed out of them.
When an owner of a property has to carry out routine maintenance, their first thought should be how to improve the tenant’s experience, not to seek cheap fixes on a forum like Bigger Pockets (whose name fits a bit too well for our purposes here, I’d say). Not only do these myopic decisions harm a resident’s experience, but they’re economically unwise choices, for those unsympathetic to the case for the morality of human-to-human decency. It’s far better to spend more today on a quality repair than have to make several cheap fixes in the long term. With enough cheap fixes, one can rest assured knowing their current tenants will soon be former tenants.
So, if you’re a real estate social media influencer, or a devout follower of one, listen closely: for stronger communities economically and socially, we must undergo a paradigm shift. The question is not how one can charge the highest price possible, but how we can profit (do well) while still helping our communities (doing good). In the long run, seeking to invest in places for people which yield positive community outcomes will result in the types of places others want to be a part of, driving the value of one’s property upwards. Regardless of what the influencers may tell you, don’t take the shortcut to profit, as that road will never lead to true wealth.
