So You Want To Invest In Real Estate? A Tale Of How One Average Guy Got Started
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
- Inherited Wealth: These are people who’ve pretty much done nothing and were born into the right family – think Paris Hilton…
- 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)
- High Paid Executives: People at the top of big companies. Steve Jobs is one of the bigger examples.
- 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.
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
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…