I decided to invest in real estate because my wife and I were discussing how to fund our first baby’s college. She was only a few months old when we started a 529 Plan. However, I felt uncomfortable with that because it seems to me that the stock market is like a casino and values go up and down too much. Stock values seem to be manipulated by large investors, large companies, and the government. In fact, the dollar itself is very manipulated with “quantitative easing” and has been severed from its grounding ever since the US went off the gold standard in the 1970s. On the other hand, a few of my friends have profited from REI and received consistent monthly cash flow. So I spent the summer investing my time in learning about real estate investing (REI) as a more stable investment.
I used a Home Equity Line of Credit (HELOC) on my personal residence to fund the purchase. The HELOC has an introductory interest rate of 1.5% for 6 months. The regular interest rate will be around 5% but I have not seen that yet, so I may be slightly reducing my CAP Rate in the near future. The property has positive cash flow and I have entered a seasoning period that may open up more financing options. The house was fully rehabbed so I should not have to worry about capital expenditures for many years. I spent a lot of time researching and discussing REI with others.
My research process
My research process included reading books, blogs, listening to podcasts such as Bigger Pockets, and looking at my local market. I borrowed books on real estate investing from the public library. I searched online for blog posts. I signed up for membership on REI websites so I could read more content. I spent time daily on YouTube listening to REI podcasts. I drove around the neighborhoods where I was interested in investing. I attended open houses. I spoke to local landlords about their rental prices. Seeing actual numbers and how those numbers could produce cash flow for us led to our decision to enter REI, with our mission being to provide affordable quality rental housing.
Investing in real estate seemed to my wife and I, to be the best way to invest our resources. Real estate values are based on location and values always increase over long term horizons. Whereas our investments in 401k and IRA values go up and down and we have had two major crashes in the last 17 years. We wondered what would happen if we needed to withdraw our funds during an economic downturn like the people who wanted to retire in 2008?
With real estate, we can have monthly cash-flow, write-off depreciation on taxes, and the property value appreciates over time. So we began to research some markets.
I found different cities have significantly different market conditions based on the context of the location. I spent a lot of time analyzing deals in some of my local neighborhoods. However, my attorney recommended consulting a wholesaling company since I was inexperienced in the business. I found out a wholesaler finds deals and sells them to investors. They also rehab and manage properties. This made REI simpler for me because I had someone else who could find deals for me and do a lot of the work, which reduced the number of potential wrong decisions I could make. There is a markup on the price so the wholesaler makes money as well.
I contacted the wholesaler and met with one of their agents. He set me up with a tour to an out-of-state market. I liked the business I saw and how value was added to neighborhoods through the rehab process. So I began to build the foundations of our new business.
Starting my rental business
I met with my real-estate attorney to start this new business. He explained the process of starting a new business and how to protect myself from litigation. It is important to fund the business with a basis. There should be a separation between me “the person” and me “the business”. They should have separate bank accounts. Funds should not be commingled. The attorney also referred me to an accountant who is also a REI. We met with that accountant who helped us gain an understanding of the business and what we can and cannot do in regards to taxes. I continued to look at properties and analyze deals. My wife helped me create a spreadsheet that made analyzing deals easier. We followed Robert Kiyosaki’s advice to look at 100 deals before making an offer so you can understand the market and the prices you can expect to pay along with typical rental fees. Finally, we found our first deal.
Finding the investment property
Our first investment property was an out-of-state deal listed by the wholesaler that was working with me. I decided not to buy in my local neighborhood because the Return on Investment (ROI) was too low. The prices were high and rents were too low to make a good return. The deal we bought was one-third of the price of local properties but the rental income was two-thirds of the local rental income. We did not spend a lot of time analyzing the deal because we had a system for that. We quickly knew this deal met our criteria. In addition, amenities include three garage stalls and a fenced back yard.
I showed my wife several deals in the same city. The deals were comparable in returns but she liked this one the best because it had three garage stalls. We decided to pursue the deal so I called my agent and put in our offer (this was the same day he sent the deal to us). This began a period that I spent a lot of time on the REI business.
Fixing up the property
We closed the deal in about a week and rehab started within a couple weeks from closing. Closing the deal required a lot of phone calls, emails, signed documents, and time for due diligence. The deal was set to close within a few days of when we put in our offer. I had a lengthy phone conversation with my attorney who made some important observations and brought up some significant considerations. I got an addition to the contract to include the rehab and then signed the deal. I wired cash from our bank account and our HELOC. During those days I spent a lot of time on the computer using Docusign.
Later that weekend I traveled by car to look at the property. The local partner of the wholesale company met me and walked through the property. He agreed to replace the roof even though that was not in the contract! I was pleased at his intentions to provide a full rehab on this house.
We were on the way to soliciting renters and rental income.
The property looked fantastic after a seven week rehab. The roof was well done just as promised. The management company had its own employees work on the rehab and they have systems improved by high volume of properties done. I had no involvement in the rehab process. Since that was all taken care of, I could focus on my family and my full-time job.
We drove out to see it and received a showing from the property management company. The property looked retail grade and rent ready!
Renting the house
The property was rented out before it even hit the market. The renter liked the location and the amenities, with a lot of garage space. The house looked really nice inside and out with a thorough rehab and painting completed. I had paid extra money outside of our rehab contract to have a large dead tree trunk removed fro the front yard. That decision improved the appearance of the property dramatically.
We negotiated a rental price slightly higher than projected based on current Craigslist ads and my previous conversation with the owner of the management company regarding the amenities of the property. We go a signed lease and were on our way to our first cash flow.
Finally, a month later, the moment we had been waiting for arrived: we received our first cash flow payment! The first payment to us was smaller because the first month’s rent is discounted to the renter. Also, the management company takes 75% of the first payment. From now on, we expect to have a monthly cash flow after our Operating Expenses are deducted. Monthly expenses include taxes, insurance, vacancy, repairs, property management, and CapEx.
We expect our first property to give us a return comparable to the stock market and give us a monthly cash flow. Our total investment is less than the After Repair Value so we could sell it for profit if needed.
It took two months from closing to the first rent payment. This was a good experience for us. Getting our first deal under our belt will help us get more lenders to help us do future deals because we have started our seasoning period. Working with a wholesaler helped us find a great deal, get the rehab done, and manage the property. That took a great load off my shoulders. On the downside, it cost us in lower returns.
My next step is to learn about how to use depreciation to help with the tax burden. I am looking forward to finding my next deal but I am looking carefully at the current market conditions because profit is made when you buy.
Do you own investment property? Care to share any details or how that has gone for you?