Getting Started in Real Estate Investing
Passive income. Mailbox money. Rental income real estate investing. I remember hearing these terms and figuring they were either far-fetched or out of reach. It either seems too good to be true, or just too many unknowns to really grow a personal rental income real estate portfolio. Did you know that 90% of millionaires own real estate? Coincidence?
I knew I had to get started in real estate investing. What follows are some top resources that have helped me along the way plus some personal, concrete examples of how I began building my own real estate portfolio.
First, it began by reading Rich Dad, Poor Dad many years ago (buy it HERE). This is a foundational real estate book for anyone wanting to get out of the rat race. If you're solely depending on your income from your job - then rush to read this book. Rich Dad, Poor Dad planted the seeds in my mind to get into the game of real estate as soon as possible. It also emphasized the point of truly owning a business that can operate without you. Did you know most entrepreneurs and small business owners actually have a job and not a business?
We want our money to work for us. Speaking of, there's a brilliant board game you should play as adults and with your older children called Cash Flow. This game is created by the Rich Dad, Poor Dad company. It's all about making your money work for you in order to get out of the rat race of life. A very entertaining and educational game! The bottom line is, we need to stop trading our time for dollars and instead, learn how to use those dollars to multiply themselves.
A definite top - and inexpensive resource - is to read several key books on real estate like Rich Dad, Poor Dad. Others I recommend are Rental Property Investing, Buy, Rehab, Rent, Refinance, Repeat (the popular BRRRR method which I've adopted) and Long-Distance Real Estate Investing. Get familiar with various types of real estate investing opportunities. Get a breadth of knowledge and discern which is best for your personality, time availability, risk/reward scenarios, strengths, the area you live, finances and more.
Another top resource I recommend is Bigger Pockets. Bigger Pockets initially started out as a podcast on real estate investing (and it's still one of the best in the world). You can find them anywhere you listen to podcasts like Apple iTunes. They're a couple of ordinary guys who have grown very impressive real estate portfolios using a variety of methods. They bring on guests who are very much normal, average Joe's who also began a real estate investing journey. Each show is about an hour and goes through many details of the story, including the numbers, financing, managing properties, etc.
Bigger Pockets has since grown to serve their vast community through online discussion groups, calculators, resources and so much more. If you are interested in real estate investing this should be your number one real estate podcast to listen to and online resource. There are membership levels to get access to a wealth of information and collaborate with like-minded real estate investors - from beginners to pros. Here are a few of my favorite - and their top - podcast episodes:
Another top resource for real estate investing is: everyone around you. Your friends, family, colleagues, parents on the sidelines, service workers, etc I'll have something in common - they live somewhere and came from somewhere.
I've heard some fascinating stories over the years of how connections were made and people started investing in real estate far away from where they lived, because of someone they knew in an attractive market. I know a story from the guy in San Diego who started there, in a much higher-priced market. He met a work colleague whose parents were doing property management in a very low priced market in the Midwest and decided to go all-in there. He now owns over 100+ doors with a collection of single-family and multi-family properties. They are in a low priced, high return on cash market. All because he talked about real estate with those he knew and made an interesting connection. This is a little like my story.
A common misperception in real estate is that you must invest where you live. Nothing could be further from the truth. That's a relic of the 1900s. :) I've discovered there are amazing real estate markets out there for passive income - and I've embraced some when I lived thousands of miles away from the properties. We've owned just one property that was within about 5 miles of where we lived. All others have been - and are currently - in states far from our primary residence.
We've purchased a foreclosure, a short sale, distressed properties, all-cash deals, single-family homes, condos, townhomes, and duplexes. I just recently completed a 1031 exchange - a powerful tool for building a bigger and longer-term real estate portfolio and legally deferring (potentially forever) all the taxes. Let me break down a few of these.
A Deeper Dive On Our Details on Getting Started in Real Estate Investing
Our first dabble in real estate was fortunate on timing. We bought a condo in San Diego in 2004, sold in 2006, then rented while the nation rode out the housing crisis. Sometimes it pays to rent. We then moved to Oregon in 2009. After buying our primary residence in Oregon in 2011, we decided to save up and acquire our first rental income property. Over the course of the next year, we saved up for 20% down on a single-family home in a specific neighborhood near us within the most desirable school district. It was a short-sale so we put in a low-ball offer, waited for a couple of months and the bank finally approved. We were in the game! It was exciting and a little terrifying at first. Would we rent it out? What problems would we experience? We were ready.
Again, it was in a great neighborhood, so we had absolutely no problem renting it. In fact, we listed the property for rent on Facebook and Craigslist during our escrow. The first tenant moved in the following day that we received keys! Over the next 7 years - even between the various tenants moving - the house was only vacant for a total of 18 days (and that was due to some small repairs in transitions)! This was a longer-term appreciation play. The rent only netted us about $300-400/mo in positive cash flow. Yet, we bought the property for $170k and sold 7 years later for $310k - after tenants paid down tens of thousands in the initial mortgage. More below on what we did once we sold - and deferred a ton of taxes on this gain!
A year later we saved a bit more, leveraged some assets, and bought a property down in the Palm Springs, CA area where we used to live. (We were getting tired of the long, cold Oregon winters already and wanted a sunny place to escape to!) This was another distressed-sell so we put in a lower bid and got it! It needed a bunch of updates, so we decided to go live down in the property for the winter while I worked on the rehab and hired some helpers. We gutted some areas, redesigned the kitchen and bathrooms, tore out some walls to create a larger floorplan, painted, new flooring, landscaping and more. It was a chore but worth the effort!
Ultimately, we decided to make that place a long-term rental and just visit and stay in between tenants. As the Palm Springs area is more seasonal, this place sat empty more than we wanted it to. We could make some great rental income during the peak season, but then it sat vacant much of the summer months. We held on for a few years, sold it and captured a small gain after deducting all the improvements.
Just after this time is when I began to really focus on educating myself and getting serious about real estate investing. Up to this point, I say I just dabbled. Now I was ready to make real estate investing a larger piece of our family income and assets. I read more books (refer to the ones above), started listening to Bigger Pockets consistently and asked friends and colleagues if they had experience in this subject.
A friend of mine in a mastermind lived in Ohio. He was starting out in real estate investing too. The Midwest is known for being a "boring" real estate market - but with amazing cash-on-cash returns. While you may not have massive appreciation like many US coastal cities (and epic crashes too), the low-entry price points and return on cash was impressive. He introduced me to a guy he knew who would work with out-of-state investor types like me. I jumped on a call to get acquainted, learn a bit more - then I was IN!
As a California boy, I was shocked by the pricing! I bought my first house in Ohio for cash - all of $36,000! (There are parking spaces in CA that go for more than this!) Many of these "C" properties are old, not able to finance upfront and so you need to come up with cash. I know of people who have tapped the equity in their primary residence, pull from a 401k or other investments just to get their first few properties this way. That $36k property was immediately rented on a one-year lease for $750/mo.
My trusted guy there handles everything - and I mean everything! All I do is check monthly to see the rental income hit my account. He handles the rental applications, background checks, ongoing management, repairs, insurance and more. I pay just 8% for this each month. Standard property management fees are in the 8-12% range in most markets. After paying the small management fee, insurance and taxes I calculated I was enjoying a 20% cash-on-cash return - WOW!
From there, I was hooked on this area. I wanted to go all-in here to get to a certain number of doors and monthly cash flow. I bought a few more including a duplex. Again, each of these was/is delivering 18-22% net COC return.
Earlier this year I decided to sell our first Oregon rental property. It had realize a substantial gain and we were sitting on way to much equity - that wasn't working effectively for us. I did a ton of research on 1031 exchanges. (I'll have another detailed post on this and the mechanics of this purchase.) In a nutshell, we sold the Oregon property for $310k, then identified at least $310k worth of combined properties in my Ohio market. When all was said and done we picked up another single-family home, 3 duplexes and 2 townhomes. These will all rent for at least 18% COC return. I'll refinance a few in early 2021 to go buy more. Using the BRRRR method is the way to go in these types of markets to grow a healthy portfolio. I'll share more details in a future post on this 1031 exchange as there are many details to note.
At the end of the day, passive real estate investing gets to the core of what we really want - more financial freedom. One of the key benefits is diversifying and building multiple income streams. Did you know that the average millionaire has at least seven streams of income? This ultimately gets to the heart of what we really want - time freedom. Combining time and financial freedom we're finally able to work less, make more, work in our sweet spot, and spend more quality time with loved ones. Those are the ultimate benefits I'm after. It's how I help and coach other small business owners and why I created the FREEDOM Business System™ course + coaching - just one of the ways you can work with me.
I enjoy helping people redesign their business around a lifestyle they desire and the people they love. Real estate investing has been a game-changer for our family's finances and getting us more of what we enjoy - time together and traveling. What is it for you? If you could get to the point where you didn't have to rely on your sole source of income any longer, what would you choose to do? I'm happy to connect about follow-up questions, details on anything in this post or other bigger-picture questions to get you closer to a greater lifestyle of freedom.
As they say when asked "When is the best time to plant a tree?" the answer is something like "Twenty years ago. But the next best time is today." Feel like you're behind in the real estate investing game? Perhaps the fear of the unknown holds you back? Wish you would have started earlier? Me too. Don't beat yourself up though. The next best time is to take action today. After reading this, what action will you begin to take to get started in real estate investing? Buy a book? Listen to a podcast? Talk with those around you to broaden your network? Have a quick call together?
Either way - you know what to do. Take action.
As Dale Carnegie famously said, "Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy.”