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So You Want To Invest In Real Estate? A Tale Of How One Average Guy Got Started

20 April 2011 20 Comments

The following post is submitted by Arthur Garcia – a regular 20smoney contributor – He is the founder of thebusinessofu.com, a website that focuses on personal finance, business and self-development.  Arthur interviews everyone from real estate investors to precious metals experts to everyday people with extraordinary stories.

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:

Four Ways To Become Financially Independent

  1. Inherited Wealth: These are people who’ve pretty much done nothing and were born into the right family – think Paris Hilton…
  2. 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, buy this guy still made a killing)
  3. High Paid Executives:  People at the top of big companies.  Steve Jobs is one of the bigger examples.
  4. Real Estate Moguls: 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.

Get Started In Real Estate

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…


20 Comments »

  • Romeo said:

    Good for you, Arthur. I always said that I'd go with the 15 year fixed over the 30 year conventional if I were to purchase a rental unit. Looking long term, I don't see the excess rent being passive income if it doesn't add to the total that I would be paying in interest over the life of the loan. Thanks for sharing, Romeo.

  • Jon said:

    Alotta people talk about how they have done something like this on the side, but not many can show proof that they've done it. This article is very well laid out and detailed. I am assuming starting a small business is included in entrepreneurial endeavors? Great article.

  • shakeel said:

    http://real-estate-help-center.info/

    Have a look at the site above, it might help out alot

  • @piratecents said:

    Very interesting article. I was doing the landlord gig for a while and ended up taking a bath on repairs for my first property. Wiped me out and decided to sell and get out of the business. First tenant had two dogs and i made her pay a premium. Didn't cover the cost of replacing the carpets because the smell would NOT come out! Next tenant had one dog that the tenants didn't bother to tell me about (and didn't have, supposedly, when they moved in) destroyed two doors, two floors (had to rip them out and reinstall a carpet and a vinyl floor). I didn't charge them extra because when they moved in, they didn't have the dog. When they moved out, I talked options with a lawyer who patently said I'd lose more pursuing compensation than possibly get out of them.

  • @piratecents said:

    Interview your tenants. Do not allow pets (dogs or cats). Be prepared to add in costs for new floors for part of the house, doors and a fresh coat of paint REGULARLY. If i hadn't been carrying a 95% financed, 30 year mortgage, I'd have done better. However, jumping in with both feet was… educational. I might do it again if I could pay cash for the property (or only carry a minimal mortgage) and find a property manager. As I was frequently out of town, I couldn't keep an eye on the property, which no doubt allowed more avoidable damage to happen.

    I would recommend a monthly inspection of your rental property. One of my friends who is more successful than me has a monthly inspection plan based upon an excuse of pest control. Comes in, sprays a few spots, checks out the house and leaves. He's almost never had roaches in any of his properties, so this is mostly to keep tabs. It's a brilliant idea and I wish i'd done it.

  • 20smoney said:

    Arthur:

    What type of tenants do you get in a home like this? How many of them are unemployed?

    Have you ever had a tenant stop paying rent based on a hardship or whatever?

  • Arthur Garcia said:

    Hey Kevin:____I make sure I only buy in areas that I classify as "b" quality areas (not pride of ownership areas, but not warzones either). This usually brings me middle of the road blue collar types – truck drivers, construction workers, cable repairmen, etc. I don't have any tenants on unemployment. I have 5 months of mortgages payments on reserve per property, in this case $2,700 just in case I have to kick someone out or carry the property – usually their security deposit will cover the mortgage for at least a month or two..

  • Arthur Garcia said:

    Just a side note, my properties have rarely exceeded 3 weeks on the market before getting filled. I think if you estimate this into your number on the front end, you're not taken back unforeseen events. Another nice thing about single family homes is that the tenants tend to stay longer – I've had the same family in the above example for 18 months. If the idea of dealing with the tenants turns you off, you can always hire a property manager while you focus on your main source of income – your job.

  • Danielhendr said:

    What do you think of this website Arthur, http://www.econohomes.com/, is this legit or probably not. just wondering

  • kaeka said:

    This is also a very good case study for a successful people.

  • Arthur Garcia said:

    Hey Daniel,

    I just did a quick search on Google and typed in "scams" and a whole bunch of websites came up. In short, I would definately not reccomend that site. If you are just starting off, find a "target" area and focus on acquiring a single family home in a good rental area. After you get more experience and education under belt, then consider buying outside your target market. You definately want to visit and "kick the tires" of your first rental.

  • Arthur Garcia said:

    thanks Kaeka!

  • John said:

    Arthur,
    You wrote that you read 30+ books on the subject before your first buy.
    Can you recommend a few?
    Thanks for the article.

  • NoDebtMBA.com said:

    This case study is pretty inspiring. I've been thinking about getting into investment properties for a while but we move around a lot and being an absentee landlord or having a management company is another hassle and barrier to entry.

    Arthur – Do you do your own maintenance and land lording or do you have a management company?

  • Arthur said:

    Hey no debt mba,

    Thanks for the kind words. I used to manage all my properties, but about 2 months ago I decided to move over all my properties expect one to a management company. We were selling our primary residence, planning a wedding, etc, and once I acquired 6 units, I just felt overwhelmed considering I still have a 50+ a week job. It isn't that it takes a lot of time per se, but I just wanted to focus on looking for deals and networking. Honestly, I've been very happy with the setup. The nice thing is that I found a smaller property mgmt company which gave me more leverage – since all my properties are in the same area. I get better than average pricing and service. I think in about 3-4 years I'll probably take back the mgmt of the houses, but not at this moment. It isn't as hard or crazy as people make it out to be. If you manage your tenants expectations in the beginning and have systems in place you don't get phone calls in the middle of the night. I am going to be going over more of my experiences here on 20smoney.com and my blog – thebusinessofu.com, please stop by and let me know your thoughts.

    all the best,

    AG

  • Arthur Garcia said:

    Aaron, I just put a post on my blog about books in Real Estate I would reccomend. hopefully they will help your understanding – here is the link: http://thebusinessofu.com/2011/05/getting-educate

  • Bermingham said:

    Engaging into investment is as good as saving your money in the bank. But the only difference is that, everyday, you'll see your property. You will be inspired to work hard for it because the success is always visible. Engaging into investment is a great chance to own such beautiful and luxurious assets in the future. If you continue on seeking for more investments, you'll surely gain so much.

  • click here said:

    I am in agreement with you on many points. You have made me think.Stunning..!!! it made me stop and to look into it deeply, its so wonderful i wana appreciate you from the bottom of my feelings,

  • Bariel Mancinni said:

    This is a very interesting story!While the housing market collapse there are many people who still have success in the real estate field.It is not only about having money but the most important is to know how and when to invest it.

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