So you want to invest in Real Estate?

Here’s a tale of how one average guy got started …

After I graduated from college, I set out to discover a way to get ahead financially in my 20s.  I bought TONS of books on the topic of investing and personal finance.  After numerous hours of diligent reading, it seemed that all of the books pointed to essentially 4 ways to become financially independent (I didn’t include the Lotto).  I’ll save you hundreds of hours of reading and provide you with my findings below:

4 ways to become financially independent:

 Inherited wealth:

  1.  These are people who’ve pretty much done nothing and were born into the right family – think Paris Hilton, etc.

 

 

Entrepreneurial endeavors:

These are folks who’ve become wealthy through a company they built or a product they created – think Tom from Myspace.  (everyone forgets about him now that Facebook is the place to be, but this guy still made a killing).

  

High Paid Executives:

This isn’t a mystery to anyone.  The people at the top make significant sums – CEOs, senior management, etc.

 Real Estate Investor:

Average people who own multiple properties.

After examining all four categories, I instantly ruled out option one.  My family was rich in love, but poor in greenbacks.  I considered options two & three, but I wasn’t the sharpest knife in the drawer and to be honest, I didn’t think I was cut out for the 60-hour workweek.  So I concluded that the only real option for me was option four: Real Estate. 

My Rich Dad Moment

About two and a half years ago, I was discussing my burgeoning interest in real estate with a few friends.  As it turned out, my friend Amy had a family friend who owned a few rental properties.  I went out on a limb and asked if she would be willing to introduce me to this landlord acquaintance of hers.

 A few weeks later, the appointment was set.  I was going to meet Rick, the 62-year-old real estate investor.  According to Amy, Rick owned 17 properties, 10 of which were owned outright (i.e. no mortgage).  It also came to light that Rick was worth roughly $1.8 million and was living on his passive income. 

 I didn’t know what to expect the day we met.  I think part of me was expecting some sort of Gordon Gecko type.  This couldn’t have been further from the truth.  Rick was wearing tattered jeans covered in paint stains, stuffed running shoes, and a T-shirt that was probably a freebie from a walk-a-thon many years back.  He might as well have stepped out from the pages of the book, The Millionaire Next Door.

 I’d love to tell you that over the course of an hour we talked about all the “secrets” of real estate acquisition.  I’d love to tell you that Rick gave me a formula for success that would guarantee my financial freedom.  Unfortunately, that didn’t quite happen. 

Rick shared with me his story, divulging the ups and downs of being a real estate investor, but nothing was particularly “special” about his conquest.  He wasn’t Gordon Gecko or Donald Trump; he was just an average guy who owned a few rentals. 

Looking back now, the biggest lesson I learned was that Rick was average in the truest sense of the word.  To replicate his success, I didn’t need to be the smartest guy in the room.  I just needed to learn a market, buy the right kind of property and hold onto it – rinse and repeat.

My First Deal

A few months later, my parents’ friends disclosed that they were “underwater” and were going to be short-selling their home in the next few months.  I had been to this particular property a few times before and judged that it was in a prime rental location.  I decided to jump feet first into the real estate game.

Here’s what the deal looked like:

Single-family house: 2 bed / 1 bath, 1100 sq ft

Price: (short-sale) $75K

Current market value: (based on traditional sales, i.e. non-REO or short-sales) $105K

 **The property had $20-25K of built-in equity**

Market rent: $950-1200 per month

Estimated mortgage with tax/insurance: $540 per month

Estimated Monthly cash flow: $410-$660

Repairs: I got lucky – there was no deferred maintenance **this is not the norm**

Down payment: (20% down) $15K

Closing costs: $4K

Total investment: $19K

Yearly cash flow: $535 x 12 months = $6, 420 subtracted by the vacancy rate 6.4% ($410) = $6,010

ROI: $6,010 (actual yearly cash flow) DIVIDED BY $19,000 (down payment plus closing costs) = 31% cash-on-cash return

**When factoring in the mortgage tax deduction, depreciation and possible appreciation, the actually ROI might be closer to 35-38%**

Reserves: I keep 5 month’s worth of reserves for unforeseen expenses – $2,700

Closing thoughts:

Since my first real estate acquisition 2 years ago, I have purchased 5 more units.  I currently have a monthly passive cash flow of $2200-2500 per month (depending on repairs and vacancies).

I am employed full-time in an industry completely unrelated to real estate – living proof that if you have the drive and desire, you can forge a path to financial freedom through real estate while keeping your day job.

Side note: I did my due diligence before treading into real estate acquisition – I read 30 + books (seriously) on the topic of real estate investing.  I also talked to numerous property managers, local business owners and residents living near the property.  If you are going to invest in real estate, you definitely need to do your homework first.

I hope this story has helped demonstrate how it is still possible to make money in Real Estate.  Please let me know your thoughts…

 

  • Facebook
  • Twitter
  • RSS Feed

Comments

  1. Kate says:

    Great post! I really want to learn more about real estate investing. Can you recommend any books?

  2. avto.ru says:

    Nice topic – respect !

  3. Yahwe says:

    How much is a link to your site? My site http://yahwe.ru/

  4. Housebuyer says:

    Hi,
    Very good post and thanks for sharing this with us….I am really interested about real estate investing..but I don’t know where to start it? I think your post can help me to answer this topic and also help to sell my house…. house–buyer.co.uk

  5. AG,

    Another great post. Thanks for actually including pictures of the properties…makes it seem more real and down to earth.

    From the few REI books I’ve read, I’ve got the following stuck in my brain as far as budgeting:

    Plan for 1 month of Vacancy: About 8.5%
    Plan for 1 month’s rent worth of damages/repairs: About 8.5%
    Plan on spending 10% on property management (If you can’t do it on your own): 10%
    To make it nice & round, plan on 3% for paying the trash pick-up, garndener, whatever: 3%
    Making a grand total of 30%. This tells me that whatever the monthly rental income, my mortgage payment can be no higher than 70% of that, i.e. if my property brings in $1000/month, the most my mortgage payment could be is $700/month. Obviously, that would be worst case scenario, and we would want a property with a lower mortgage payment than that…

    Are these numbers conservative, aggressive, or on par for you? I’m not in the game yet…this is just from a few books…

  6. Itzik Rapaport says:

    Great story, I have personally had a similar experience. What do you do however when you have invested all of your money, but you would like to continue growing? How can an average man take his minimal successes as described above, and grow to a position where he can truly say he is making his way to financial freedom? Thanks keep up the good work.

  7. roger says:

    I assume you include professionals (doctors) with CEO’s here?
    Also I assume you had a well paying day job to be able to put down the down payments on all those homes? Just save and invest, there?
    Also could you summarize all those books please ? :)

  8. Chuck says:

    Arthur,

    Good post and blog. I like hearing about how people got started in Real Estate. Just found your site and going through all your posts, but I like the content. Especially how its shifting more and more to real estate.

    My wife and I are about where you are with just 6 properties. It really does start to snowball after that first one. I started a blog about a year ago and have about 2 people that follow it on occassion, but it is fun to track our progress. My blog kind of gets down into the weeds of the day to day landlording.

    Will enjoy following yours,
    Good luck.

Speak Your Mind

*