I Want to Invest in Real Estate #1: Here’s How I’m Getting Started
Welcome to the brand-new I Want to Invest in Real Estate series! I have always wanted to invest in real estate and own mutliple properties. I’ve always been interested in building, design and land development, but I never knew how to take the next step and my financial missteps also stood in my way. So this series will cover all of my baby steps towards buying my first place. I have no idea how this will turn out. It may develop slowly or gain steam quickly. I may be approved for a loan on the first application or the 10th application (or 100th?). I really don’t know! I hope you will take the time to comment on this series as your insight will be extremely valuable to me.
Before we get into the serious part, let me tell you that growing up in Southern California is hazardous to your health. I have an unnatural love of pre-packaged plastic experiences, women whose body parts and bleached hair look ridiculously fake and model homes. Most of all the model homes! I grew up in San Diego in the 1990s, which means that there was a new subdevelopment popping up every three months and you can bet that me and my mom were there to check it out. Later this pattern would be repeated with friends (my last visit to a model home was in March). Model homes are the best aspirational marketing tool ever, because you can pretend you live a perfect life in this perfect little house with the plastic fruit and the Homefill computer and flat-screen TV. The bedding in each room is elaborate and immense, only in model homes and movies have I ever seen beds with 14 different pillows. Which is all to say that I grew up wanting to live in a model home. Eventually, I started looking beyond the interior furnishings and began to appreciate homes for what they are: an intrinsic value. No matter what the housing market or the economy says, homes, land and all real estate have an intrinsic value that will never be zero. People need housing. People are interested in land based on its location and may repurpose it from its original use as a single family home into multifamily housing, office space or retail space. Owning real estate is an important way to build wealth and a monthly cash flow.
I want to buy real estate and rent these properties out to create a monthly cash flow. Based on my brief introduction to this topic, I believe that smart decisions made in choosing and acquiring properties can set you up to have a positive monthly cash flow on investment properties. It is not an easy game, nor do all of the pieces take care of themselves (property inspections, sale terms and conditions, financing). I believe if you can be patient and play it right, real estate can be a tool to build wealth even in the labyrinth of Southern California. It can also be as passive or as active as you make it to be, as an absentee landlord with a property management team, or as a landlord/property manager in one.
Why do I want to buy a place now? Well, that’s pretty easy. There are properties in Southern California that are in decent, respectable neighborhoods (all condominiums, single family homes are still mostly at $300,000 and up) that are at prices which I believe could translate into cash flow properties. I rent now, so I could buy my first property and start living in it while we do minor renovations (my boyfriend, along with many other close friends and associates have general contracting and construction backgrounds) and save money to buy our second property. The first property then becomes a rental unit, which, because we bought it at a good value, is able to provide a very small positive cash flow. The tenants continue to pay the mortgage down on the first unit, we live in and pay for the second unit. Then this plan can be repeated. If there is an opportunity to sell the first unit at a profit, I would try that as well. But the overall plan is to start buying units to hold as rentals.
I’ve been reading about real estate investing for the past few months, but not nearly as much as I could be. I admit I’ve only dipped my toe in the water, but here are the books I’ve read so far on the subject:
1) The Weekend Millionaire’s Secrets to Investing in Real Estate by Mike Sumney and Roger Dawson
2) Investing in Real Estate by Gary W. Eldred
3) The 106 Common Mistakes Homebuyers Make (and How to Avoid Them) by Gary W. Eldred
They were all very insightful. No one promised me I would get rich quick. All have warned me of the dangers of over-leveraging (that’s being in debt over your head with not enough cash coming in, or completely screwed, for laymen). But it can be done. If you can be patient and thorough, you can find values and good deals in any market. I have learned that price and terms are the most important when it comes to completing a real estate purchase, but many, many other factors need to be taken into account. I will do separate posts on financing a real estate purchase, choosing a location (neighborhood analysis), and different ways to profit from real estate.
I’ll be continuing my reading on the topic daily (let me know if you have any must read blogs or books), but more importantly I want to start speaking with people who know their stuff in the local real estate market, which includes real estate agents, property managers and local real estate investors.
A Reasonable Amount of (Zero) Experience
Who the heck do I know who knows anything about real estate investing? Real estate is a favorite topic of practically everyone I know in real life, and yet I was not able to think of anyone who owns more than their own home and one investment property. But then my friend told me her mom has a few rental properties and is an active real estate investor, so I plan to talk to her once this gets more serious. My favorite blogger, GeniusTypes, also has a wealth of real estate information, so I will start there. The authors of Weekend Millionaire are also available by email. I have another friend of a friend who owns over 20 properties and has made money in real estate by fixing/flipping, renting, as well as buying and selling commercial real estate. I am trying to get a chance to sit down and talk with him. He’s been doing this for over 30 years and now is able to make all of his purchases with cash. But at some point, he started with his very first purchase, which was an apartment unit in Los Angeles, so I know that you can start, even if it seems daunting (very! incredibly!) at first.
I am going to reach out to all of these people and more. Let me know if you want to lend your wealth of real estate knowledge over here so I can feature you in the next post.
The Matter of Money
We all know that I have some debt. I also lost a chunk of my retirement savings. So where is this 20% down payment coming from? Well, I can come up with a 10% down payment if I pull every penny out of my savings and retirement accounts. However, having spoken with a few friends who have purchased their homes and having read the 30/30/3 rule, I think that is not going to cut it. The wise ones all put down 20% or more. And there are closing costs to consider, which can be up to 11% in California. I want to buy something under $200,000. To come up with $40,000, it’s time to start getting serious about building up savings. More side work. More projects. More advertisements? There is potential in all of these. But I have to be serious. I want to buy a place in 2012. No more coming home to watch 5 episodes of Breaking Bad in a row. MUST FOCUS.
On the plus side, I have been at my job for two years and my salary is decent. We have been able to handle rent of $1,230/month for the past year, and before that our rent was actually more expensive at $1,445/month. My boyfriend would also be able to help with the down payment and monthly mortgage. Our credit scores are decent. Actually I don’t know what his is, I’ll have to find out. Mine was at 719, but has dropped because of my high debt utilization. That’s going down monthly though and I signed up for CreditKarma and told my boyfriend to sign up today as well. I will be watching it to see if it improves. Our credit scores and employment record are going to decide what interest rate we get, so I am working to make us look as awesome as possible. In each I Want to Invest in Real Estate post, I’ll do an update of money matters so you guys know I am ready to do this and not just dreaming while I read the Sunday real estate listings!
Next Post: Choosing an Area to Invest In
The next post should be really interesting. Every city, country or neighborhood I’ve so much as passed by I have considered buying real estate in. Not that I was ready or able to buy real estate, but because I can’t stop thinking about it. When I had a stopover in Riga, Latvia, I was asking around about housing prices. I’m that obsessed. So the next post is going to look at three potential real estate markets I’ve considered and the one I am now considering for this first real purchase (since I’ve bought thousands of homes mentally).
What do you guys think? Am I taking the right steps or am I completely naive? Do you think anyone can invest in real estate? Well, maybe not anyone, but anyone who is willing to work really hard, give up all forms of Cheetos snacks and run the numbers and calculations herself and understand the deal, market, and financing inside and out? Let me know! I can’t wait to get your input.