The year 2019 is off to a busy start for us. The first 3 days of work are behind us. However, the weekend we took some time to talk more about our future plans and what we need to do to properly exit the rat race. I was out for a long training run yesterday and had time to listen to listen some real estate investment related podcasts. I am currently training for a 100 mile trail endurance run and spent almost 5 hours trail running yesterday. Plenty of time to listen to podcasts. The different podcasts were very interesting and while helpful, of course they left me with more questions and the desire to find the answers.
As I had some downtime last night I jumped onto realtor.com, Zillow.com, and Craigslist.com. I ended up looking at real estate offers in Houston, Tx.. I live in San Diego and Southern California is just crazy expensive for real estate. Existing funds would take us much further in a cheaper market and so I tried to get a feel for what we are looking at to build to up secondary, passive income via real estate. Granted I have not done any research into the Houston market, I was able to find a condo for sale that seemed to be a good fit. Now I know that is not how I can enter the market, for me it was more about getting a high-level feel for the market in Houston and if it would make more sense to further investigate. Here is what I found:
1) Found condo on realtor.com.
2) Checked neighborhood on Zilllow.com for comparison
3) Removed the condo number and googled the address for “rentals”
4) Found a matching condo in the same complex being available for rent
5) Ran the numbers based on average 30-year mortgage interest rates and using the info from realtor
The condo cost a little bit under $200,000 and (high-level) seemed to be in the Woodlands area – which I think is a good area north of Houston. I am calculating the deal with a $40,000 down payment and about $5,000 rehab budget. Based on the pictures I found for the other condo that was for rent, “mine” looked very much comparable. Now knowing the HOA fees and the realtor.com suggested other fees and interest the deal was already cash-flow positive.
So, of course I know that this would require much more research and a visit onsite to further vet the object and the location. And “cash-flow positive” in this case does not mean much if I do not look at what that ROI would look like. Again, this was just a very high-level calculation and I wanted to investigate if it would make sense to look at the market in Houston. Let’s assume I would be able to reduce the purchase price by $5,000 and keep the rehab budget at or below $4,000 my numbers would look much more interesting.
And that is what I learned from one of the podcasts yesterday. Spend some time to analyze deals and see if they make financially sense. You do not want to force yourself into a real estate transaction and then wake up one morning with major regrets and deep hole in your pocket. I think it is a good start to analyze potential deals and get a feel for the appropriate numbers. The podcast I had listened to talked about goal setting and how to reduce the chances for making big mistakes. Starting with deal analysis and analyzing one deal a day would already make such a big difference. Do this for 90 days and I am sure I will walk away with a much better understanding of how to look at real estate deals.
My research has already brought some good stuff my way. A subject matter expert called J. Scott is not only a successful real estate investor, he also published two books about real estate investing and how to properly budget for a rehab of an object. Having good numbers ready can make a deal successful or have you shy away. Both of his books are just being updated and re-released. I pre-ordered both and I am totally excited to get those into my hands. Unfortunately I will be traveling when the pre-ordered books will arrive. Anyway, here are links to Amazon for these books.
Please note that these 2 links are affiliate links and I would earn a small commission if you order through my links. Ordering through my links will not affect your pricing, but it would help me a bit to further maintain this website. Thank you.
PS: Be careful when you search for J Scott on Amazon. Apparently there is another author called JS Scott on Amazon and she writes steamy novels. I was quite surprised when searching for the first time and instead of seeing real estate investing related books, I saw these honks 😉
Another good take-away from the podcast was the recommendation to learn and to spend time studying. Educating yourself is critical to success. However, the piece of advice I liked most was the recommendation to study a topic with the idea to be able to teach the topic to others. The thinking is that if you know you would have to teach others about that specific topic later on, that you will approach the self-education/learning with much more dedication and focus. If you approach learning with that attitude you will walk away with much more depth of knowledge and have increased your chances of success when utilizing that knowledge.
Why consider real estate?
Real estate is a great way to build up some additional, partially passive income. You could even invest into real estate and be a 100% passive investor. Using real estate to invest my money would open a couple of options. If the deal is structured appropriately I could create monthly, recurring income from rent. The tenant would also slowly pay-off my mortgage (score!). And last but not least the investment could go up in value if the real estate market in that region goes up. Of course there could be risks like having a tenant who is always late paying the rent or not paying rent at all. The real estate market could also go into a downturn and reduce the value of the investment. The latter really matters most if I would enter such a deal with a very short-term plan – meaning, flip the house/condo quickly. Going into a market that is landlord friendly, I might be able to evict the tenant within just a few weeks and reduce my risk of losing rent. Real estate markets in most of California are not necessarily known to be landlord-friendly, rather do the tenants have the upper hand and it can take up to 9 months before you can evict a non-paying tenant.
Using real estate as an investment vehicle and having a mid-term investment target I would make myself less dependent on market up and downs. I could lock-in interest rates and have a fairly solid foundation from a numbers perspective. Leaves it with the need to find quality tenants to further reduce the risk of a bad situation. Personally I am not a fan of squeezing the last cent out of a tenant, but rather pick the right person or family that provides value to the neighborhood maybe. Happy tenants use to stay a long time.
Let’s assume that all these things would come together it might allow me to build up a decent positive cash-flow from such an investment. With my current time-line of looking at 2024/2025 for an exit from the rat race it would help to accelerate paying down the mortgage on my primary residence as well or to increase my cash/savings. Of course it is also important to determine what ROI I would want to see from a real estate investment. Getting 10% interest in monthly payments would not be a bad thing. If the market goes up, I could also re-fi the house or condo and pull out my initial investment to use it on a second or 3rd object to invest.
What options am I considering?
I probably feel most comfortable to become a hands-on investor and directly buy real estate. I could invest passively (and try to learn at the same time) through real estate investment syndication, but at least at the moment I have no idea where to start. I do not know anyone who syndicates investments and then I would also be paranoid about being ripped off. There are simply too many shenanigans in real estate investing and not having the right network is a limiting factor at the moment. I could invest into something like “fundrise.com”, but companies like fundrise have not been around for very long. Technically fundrise is a so-called crowd-funding endeavor and it goes the same way regarding the risk. They have yet to prove that they can go through a recession without going out of business. If the real estate market crashes, a lot of investors might get cold feet and pull their money out from investments like fundrise. Can that company stomach the loss of a lot of cash investments? Is that crowd-funding methodology strong enough to make it through a major downturn or will it force somebody like fundrise to terminate many existing investments to pay back investors that got cold feet?
I definitely want to spread out my wings and see if I can get introduced to some real estate investors. A personal reference can go long ways and potentially open the door for good deals.
However, I feel the real estate prices are still very high in most markets. I am actually hoping to see some correction to allow a better entrance. My money would go further and maybe instead of investing into just one object, I could do two at the same time.
Investing with friends
I do have some friends that are very interested to invest into real estate as well. Just like us they have not pulled the trigger. We talked about investing together in the past and I want to revive those discussions again. They have the same investment mindset and seem to be considering the same time-frame for investing like we do. There are two main benefits that I see from investing with friends. Spread out the risk a little bit + by having more money available being able to use a larger level when investing. Maybe buy a duplex or larger type of property together. Of course all this needs to be done with proper contracts and legal structure in place. Which brings me to another important point. Once tax season is over I want to book an appointment with a tax accountant and discuss my tax situation as well as get the info from a pro about real estate investments, starting another company, and anything that goes with it.
Investing with friends for me means to be double-careful. I do care about my friends and friendships and so going into business together needs to be of value for both sides. I do not want to lose my friends, I rather make some less money before risking losing a good friend over a deal gone bad.
Real estate investing is a big financial investment vehicle. It is an investment vehicle I do not know enough about yet. I need to learn a lot more about it. I think a major advantage is that I can be ready for when the market shifts into a downturn and then be ready with cash and knowledge. Of course if a downturn takes 2-3 years to materialize I would be wasting a lot of time to build up extra money and it would affect my timeline for retirement because suddenly the timeline would be much shorter and I would no longer be in a mid-term investment scenario.
Anyway, I am spending time educating myself about investing into real estate and it feels good to be actively doing something that hopefully shifts the financial needle just a little bit from today.