Ten Rules for Getting Started in Real Estate

Thanks to the Wall Street Playboys for allowing to shed a little more light on the real estate game. I’ve gained quite a bit from their articles and am grateful for the chance to give a little back. Before we begin, I want to clarify that this is written from the perspective of an individual who started out in real estate the “old fashioned” way: working a job and saving up their first down payment. Some of these rules won’t apply to institutional investors and those with billion dollar trust funds. If anyone reading is involved in RE investing on an institutional level I’d love to hear their perspective as well.

I’ve decided to put together a list of rules that you should follow when contemplating getting into RE to begin with and then a few guidelines for looking at your first investment. I don’t delve much into actually doing deals and building an RE Investment biz in this post because it would take up too much room. If the WSPs ask me, I could potentially do a second post covering this.

Should You Invest In Real Estate?

1) You Must be a Jack of All Trades

Real estate investing requires a broad base of knowledge, so plan on spending quite a bit of time learning the following skill-sets: 1) Managerial: You should be able to manage tenants, contractors, employees and create effective business systems. 2) Legal: Most areas of RE investment require a good understanding of the following: property law, landlord-tenant law, contract law, tax law, zoning, codes compliance Etc. 3) Technical: Real estate investment generally involves purchasing and maintaining some sort of structure, you should be able to understand, evaluate and to at least some extent repair the different components and systems that compromise a building. 4) Sales/Marketing: As the WSPs say, *you don’t want to sell? Too bad*. RE investment involves quite a bit of selling, from convincing people to lend you money or sell their property, to knowing how to effectively market properties for sale or rent.

A lot of the bad advice you’ll read online says something to the effect of “If you don’t like something, you can just hire somebody to do it!”… Yeah, ok Skippy… In addition to this being wrong in many cases, the people who say this are missing the point. You don’t learn how to fix a leaky faucet, write an effective ad or draft an eviction notice so that you’re stuck doing it the rest of your life. You learn it so when you do reach the point that you can afford to hire someone, you can train them to do it or at least evaluate their work. If you think you can make real money in this business without having to acquire any skills you might as well stop reading now because clearly you’ve already got it all figured out.

2) Choose Areas of Real Estate That Cater to Your Strengths

Though real estate requires a broad base of knowledge, we all have a *certain type of intelligence*. To increase your odds of succeeding, figure out which areas of the RE game best utilize yours. Are you “the guy” people call when their popcorn popper stops working? There’s plenty of opportunity in fixer-uppers. Do you always read the “terms and conditions” in their entirety when purchasing a new product or service? After getting your head checked, you should consider some of the more legal oriented opportunities like judgement investing or buying properties with title issues.

3) Go Big or Go Home

Learning the skills listed above takes time. A lot of time. It also takes experience and while some skills are transferable from other professions, you inevitably have to learn many things by actually doing them over and over again. With that in mind, though certain areas of real estate can be tackled as a side hustle (some of the more legal oriented strategies come to mind), the more commonly known strategies like flipping, managing income property or RE development are generally full time gigs.

This isn’t to say you can’t do them part time to start as you certainly can maintain a couple of small income properties while working a full-time job. It’s just that there is so much learning and network building required to become a legit RE investor that it doesn’t really make sense to put in all that effort just to cap your progress at a few apartment buildings or the occasional flip. Do people go to school for 8 years to become part-time doctors? If you want to get into one of the more time consuming aspects of the RE game, plan on dedicating a lot of time and scaling up to a point where you become financially independent from it.

4) Everybody Has Advice When it Comes to Real Estate. Ignore it.

I have worked in a few fields, but none compare to real estate when it comes to regular people telling you how it’s done. Every knucklehead either knows someone that has “made bank” in real estate, or has done so themselves. These stories take on a few variations from “this house was the best investment I’ve ever made” (Oh yeah? So you’ve compared your home’s % increase in value to investments in other asset classes during the time you’ve owned it, making sure to subtract expenses…) to “I just bought a duplex and the rent pays my mortgage” (Don’t Get Me Started). The truth is, the vast majority of the money made in real estate isn’t due to shrewd investing, it’s from boring old market appreciation. The buy high, sell higher crowd that make their money in these situations are the same sheep who get slaughtered as soon as the market turns south. Intelligent investors can hold their own in almost any market.

In short, the only people you should take advice from on RE investing should meet the following criteria: 1) They are financially independent from investing in real estate; 2) They did not inherit it; If you question the second point: There’s a guy in my area who inherited hundreds of residential and commercial units from his father. The last time one of my friends saw him he was wearing a backwards, flat brimmed “Monster Energy” hat. Need I say more?..

When You’re Ready to Buy

5) Cash is King

The get rich quick gurus that dominate the RE advice biz love to talk about “nothing down” deals. You know why? They know there are a lot of broke clowns out there who are willing to swipe their credit card because they think they can get something for nothing. In the real world, nothing down deals do exist, but they are rare and often aren’t a bargain to begin with. Which gets me to my next point: Cash is king.

Though different investment techniques require differing amounts of cash, the general rule is: the more cash you have on hand, the easier your life will be. If you have a significant down payment, it will not only be easier to get a loan (lower LTV), the seller will take you more seriously. I know this first hand as I’ve lost a deal where a cash buyer paid significantly less than what I was offering with bank financing. Also, bargain purchases often require quick closings. Applying for a loan, waiting for an appraisal etc is rarely a speedy process… And don’t forget to have some of those greenbacks left over after the closing as well, because bills need to be paid and stuff breaks.

6) Cut Out the Middle Man

I’d be lying if I said real estate agents haven’t brought some good deals to my attention. They have. Also, since I’m on good terms with a couple of them (IE: referred them clients that made them $$$) if they are selling a property that they think I’ll be interested in, they’ll reach out to me before listing it publicly, which is nice (this benefits them as well, since if I buy they can now work both sides of the deal).

Those benefits aside, I think it’s usually a good idea for buyers and sellers to deal with each other directly. This is due to: 1) Better communication between parties; 2) Lower transaction costs (don’t have to pay agent commission); I can’t stress enough how important #1 is. As I’ve mentioned in my comments on prior posts, real estate can be a very emotional arena and the less direct communication the two parties have the more potential there is for misunderstanding, which can kill deals. Having agents involved turns a real estate sale into a game of telephone which benefits no one (well no one except the agents!)

My actionable advice is: 1) Learn to sell: This will help you convince the other party to like you and ideally swing the deal more in your favor (“Aww shucks, he’s a nice guy, I guess I can hold a $500k note for him”). 2) Direct Contact: Regardless of whether there’s an agent involved in the deal, get in direct contact with the other party and get on good terms with them. 3) Be Nice to Agents:  Don’t totally ignore or piss off RE agents as they can be useful, especially in the beginning when you’re still learning how RE transactions work.

7) The Real Money Often Lies in “The Borderlands”

Yeah, you might impress your date if you’re walking down 5th Avenue, point out a building and say “Check dat out girl. Alllll mine.” But the fact of the matter is, prime properties rarely offer the best returns and though many owners wouldn’t admit it, are often bought for status rather than pure profit. Ego is a powerful thing… The inverse is true as well. You could buy some beat-to-hell 20 cap on the corner of Skid Row and Mug Street, but then not only are you going to have to earn every cent of that rent money (and then some) managing your property, your prospects for adding value are limited as regardless of how nice you make your building you won’t be able to increase rents or attract decent tenants.

So with that in mind, often the easiest places to realize a decent return (Double digit cap or close to it) without dodging bullets are The Borderlands. I’d describe these as areas that are generally run down, but show some signs of turnaround. They are usually located near the real bad neighborhoods, but within a reasonable commute to the more desirable areas of town.

Credit to commenter RE Guy for “The Borderlands” term, it articulates perfectly the type of area I’m trying to describe. See his excellent discussion of this concept in the previous real estate post for more details.

8) Real Bargains Are Tough to Find and Are Rarely Pretty

When you hear words like “foreclosure,” “OREO” or “short sale” do you automatically think “bargain?” If you answered “yes” then get your credit card out, because I have a bridge to sell you… What I’m getting at is: properties priced significantly below market value are rare. Just because a property for sale is owned by a bank doesn’t mean it’s a good deal. Oftentimes it just means it’s a POS and this is already reflected in its price being lower than nicer properties for sale in the same area.

For a deal to truly be a bargain it usually has to meet one of the following criteria: 1) Nobody knows about it; 2) There is no market for it (in its current form) 3) There is something about it that scares most buyers away, which can be corrected for a significant amount less than the discount that it’s currently selling at… Where do you find these types of properties? All I’ll say is: don’t bother asking me in the comments section. (Why give away a business, no one would!)

9) The Numbers Don’t Lie

In the RE game it’s easy to get irrational, you may have just walked through a beautiful property that you would love to own or you could have heard a trendy new bar or coffee shop is opening up in a particular neighborhood. Maybe you just met a seller and he’s willing to give you some sweet financing terms… Regardless of any of this, it’s imperative that you run the numbers on a deal. And I don’t mean “what the rents might look like once all the nanobrew swilling hipsters with their trust funds move in to live near that bar with the chalkboard drink list that may or may not open up down the street.”

I mean what you can rent the place for currently. This doesn’t mean you can’t factor in increased return (along with the associated costs) due to improvements you plan to make in your hypothetical numbers, you certainly can and should. It’s just that you need to stick with known variables, not bank on an uncertain future event to increase your property’s value to a point where the numbers make sense. If you do that you’re just a speculator, not an investor.

You may ask “how do I know what a property will rent for or what the utilities cost?”… Well, if you’re a fool you could take the seller’s word for it. But I’d recommend doing the research and learning independently (finding out what utilities cost in your area, how much energy it takes to heat/cool a given amount of sq ft, Etc). Again, these are hypothetical numbers, so you’re just trying to get in the ballpark. This becomes far easier once you’ve done a few deals as you will have access to data from your existing properties.

10) What’s the Best Way to Learn RE? Doing Your First Deal.

Commenter Nixon brought this up when discussing Real Estate in a previous post and it couldn’t be more true: The best education you can get is doing your first deal.

I’ve noticed that there is a loose pattern that most first time investors follow when searching for their first property:

-They figure out the geographic area they want to work with
-They establish their ideal criteria for what they want to purchase
-They look at a bunch of properties, making a few offers, none of which are accepted
-They get frustrated “Why aren’t any of these jokers signing on the dotted line?..”
-The become fired up and look at a few more properties and make some more aggressive offers, oftentimes bending their initial criteria a bit
-Someone finally bites and the have a property under contract
-They haggle about small stuff “I need $1000 cash back to fix this AC condenser because the building inspector that I just paid $500 said so.”
-They may or may not have trouble getting financing “Whaddya mean I can’t only put 5% down?”
-They close.

Welcome to the Jungle.

Anyway, there is quite a bit to be learned during all of the above steps. So if you’re interested in getting started this is generally what I would recommend: 1) Work at your current job until you have enough for a decent down payment all the while studying different RE related topics in your downtime (Law, finance, building trades Etc); 2) Figure out where you want to invest and the logistics surrounding it (if you have to move or not); 3) Do your first deal

Good luck, you’ll need it.

-OwnMyHood

Note: The outline above has had formatting edits made by us (Wall Street Playboys) with 99.99% of the content unchanged. We have confirmed OwnMyHood’s background and he is financially independent off of real estate investments (well over the multi-millionaire level). We thank him for his contributions and hope to grow a community full of people similar to his caliber.

Comments

  1. Wall Street Playboys says

    We want to be first for a comment for ownmyhood, you were wondering about a different type of business model and we’ll have a guest that will likely shine some light on your interests.

    Stay tuned and thank you again, the post was terrific!!! Both funny and informative!

  2. Mike says

    You should definitely keep posting. Very informative and entertaining.

    What’s your opinion on getting your RE license as an investor? Do certain disclosure requirements as an agent slow you down as an investor?

    What about making commissions on your own investment properties? Is that just penny wise, pound foolish at the higher level?

    I’ve been working on my license requirements the past few months. Figured its a good way to broaden my knowledge which it definitely has. Hits on a lot of different legal aspects that the real estate investment books seem to miss. Planning to start working as an agent in addition to my full time job to save cash faster for investment, but I’m interested to here what it’s like at your level.

    • OwnMyHood says

      Having not had any interest in becoming an agent, I’ve never looked into what all of their disclosure requirements are. All I know is from forms that I’ve had to sign as part of deals (like when they disclose they are working both sides of a deal).

      I’m guessing the RE exam is real easy as In my observation many agents (residential and commercial) are not the brightest bulbs, so you likely wouldn’t have to spend a lot of time studying…

      I think being an agent would be handy if you were using an approach that involved a high volume of transactions. If you’re more of a buy and hold type, you may make a little in commissions, but other agents will be less keen on you being party to their deals as you’ll be taking half the commission.

      • Mike says

        Thanks for the insight. From my little bit of experience so far I definitely see what you’re talking about with the brightest bulbs comment. Competition is non existent, particularly in my current location. I’ve actually been very surprised at just how much they seem to lack/disregard professional customs. In the middle of trying to close my first deal the seller’s agent just went on vacation or something and stopped answering calls. And some of these listing agents are harder to find than the WSPs 😉 I’m over here basically working to get you your commision and it’s as if you don’t even want it. SMH.

    • RE Guy says

      I used to worry about disclosure requirements before I learned sales.

      If you don’t have it, spin it as you and them keeping out those greedy, fake, manipulative agents, and you’re their real friend making sure they get a fair deal

      If you do have it, spin it as you’re the expert, there to make sure they get a fair deal, which you are happy to explain to them, because you’re an expert.

      I’m sure you can read the slight facetiousness there.

      The point is you can work either angle with sellers, the question is can you work angles.

    • Rudeman says

      I’ve invested in real estate, had my real estate license and worked as an agent. The state I’m in the RE exam is easy, but you have to take a 40 class beforehand and keep up with continuing education. Small hurdles.

      As an agent you are just an agent of a Real Estate Broker. So you have to work (as an independent contractor) for a Broker who makes their living off of making a cut of your commissions.They like to have their agents working very plain deals – deals that are creative such a seller financing or even an agent working both sides of the deal, Brokers can get unhappy. For Brokers, they want agents where they can take a slice of the commission with as little risk as possible, such as legal, coming back against them.

      If you are sourcing your own deals that aren’t already listed it’s in your best interest to get a better price and cut out the commision – but that’s not in your broker’s best interest because the commission is where the Broker takes their cut from. This is especially true if you are trying to get the seller to offer financing. It’s one thing for the seller to get a big payout and have real estate commissions taken from it, and quite another for them to hold a big note and still have to pay a bunch of commissions.

      Your broker will have to review and sign off on (because they carry legal risk) every real estate deal you do. If there is any legal mess up as far as contracts go, or a deal goes sour, it’s your broker who is on the line and who has to pay for lawyers to get it settled. An agent who brings low commissions deal with high risk may not fit their business model.

      Same goes for rental properties. If you own rental properties as an agent your broker has to review every lease and carries legal liability for every lease and may have to do things such as verify escrow accounts for lease deposits. But oftentimes they don’t take a cut of rental fees. So the Broker may not be too happy about you having lots of rental properties. For the Broker it’s all work and risk with no reward.

      Check with local Brokers and tell them what type of real estate investing you are interested in and see what they have to say. In large markets there will be some Brokers who are more Real Estate Agent/Investor friendly – likely the smaller shops.Bonus if you find a Broker who has hustled a lot of their own real estate deals – they can be a fountain of knowledge and have have your back.

      The downside of having to disclose having your real estate licence is non-existent. You just have to mention it in the contract and offer (and beforehand too – it’s no big deal – no reason to hide it).

      Bonus sides of being a real estate agent:
      You get better access to the Multiple Listing Service for your area
      You will learn some stuff (although lots of what they teach you for your RE license is worthless)
      You will have a network or people to ask real estate related questions to
      You get direct access to the legal forms and contracts used by agents for your area
      You can easily build a network of agents to feed you deals for the type of properties you are looking for
      Your will also be able to build a network of closing attorneys, mortgage people and contratos much faster than otherwise
      You have the ability to make money as an agent or to make money from referral fees (it’s illegal in most locations to give referral fees to people who aren’t agents. But hey, your friend is looking for a new condo – you have just the agent for them! And you can pocket a nice 25% referral fee)

      • RE Guy says

        “Same goes for rental properties. If you own rental properties as an agent your broker has to review every lease and carries legal liability for every lease and may have to do things such as verify escrow accounts for lease deposits. But oftentimes they don’t take a cut of rental fees. So the Broker may not be too happy about you having lots of rental properties. For the Broker it’s all work and risk with no reward.”

        This seems odd to me. If you own a rental property, in whatever structure, why would that be affected by the contract you have with your employer?

        Why would he be responsible or at all liable for your actions on a property you own and solely benefit from yourself?

        And you mentioned “oftentimes” them not getting a cut of rental fees. If the management is done by the agent on his own, then why would there be a cut? Or, conversely the owner/agent is using the in-house property management, and thus giving a cut (or maybe waving it?). I think there are two distinct circumstances here.

        You’re right in your ending (the circumstance of the agent managing himself), the broker has no reward in the transaction. He has no stake. So unless you are suggesting it is due to the agent using the broker’s office, or listing it on the MLS under his banner, there is no reason for this. Also, I’m not even sure of that; sometimes brokerages basically rent a desk to an agent, and I’m not certain if there are different of MLS arrangements. And of course you don’t need to use office resources or branding for your personal business.

        In other words, unless you are using office resources and representing yourself as an agent of his office in the transaction in lieu of or in addition to representing yourself as the owner/manager, I don’t see why the broker would need to get involved at all.

        Please clarify Rudeman. Thank you.

      • says

        I own investment properties, manage properties for third parties and act as an agent under a broker.

        My business is separate and has no affiliation to the broker/agent relationship. In my management contracts I clarify any brokerage is done through a third party and will be governed by a separate agreement.

        I must disclose that I am an agent if I am selling or conducting any re transaction. However, I do not have to conduct any re business under the brokers name if I am not getting paid a commission.

        Every broker/agent contract has different clauses one of which may be that an agent must conduct all re transactions using the broker or the agent can not represent themselves in any re transactions.

        In addition to the other benefits mentioned you can calculate how much you would get on half the commission and use that angle for better terms.

        If you are licensed then your identity is public knowledge and you might be required to put a stupid picture on a business card.

      • RE Guy says

        This was a great answer.

        Brokers may put an overly (in the case of personal investments) restrictive clause on their agreements saying that ANY real estate transaction conducted by the agent should be considered under the broker’s domain in an attempt to monopolize the agent who is acting somewhat as an independent contractor.

        Of course knowing how things get done, I could see an agent getting a lead from a private channel and wanting to handle it himself or in some other way, cutting out the broker, so it makes sense that a broker would push that.

        However signing a clause like that as you stated would interfere with a side business like the management one you have or the personal rental business you have and was being discussed before.

        So for someone who is considering working as a real estate agent and investing for themselves, this clause is likely to be something pushed by a broker and should be negotiated in some way similar to how you did, to retain a level of autonomy.

        Thanks HomeScapit, that was exactly what I was looking for.

        Although it was a bit tangential to the discussion, I think it’s good to have this potential issue fleshed out for people considering this path, as well as how it ties in to the negotiations in general.

        And I’m glad you clarified it because I learned something new about how brokerages work from the inside.

  3. SoundSoundSound says

    As usual, more incredible content.

    Ownmyhood, what are your thoughts on CRE to earn your stripes/raise enough capital to become an RE investor?

    Currently working in retail leasing at a decent sized firm.

    (Didn’t see the usual *no questions* tag, sorry if this violates)

    Keep on doing your thing, WSPs.

    • OwnMyHood says

      That job will likely put you in contact with some people who are good to know (make a good impression) and could give you a good overview of your local market, which helps.

      After that it really depends on the pay.

      Don’t take this personally, but commercial brokers (in my area at least) as a group are kind of a mystery to me. They come across as high finance wannabes who were too dumb to pass the 7, so they got a job leasing office space and selling buildings they know nothing about.

      That said you’ll see some of these 24 year old knuckleheads pull up to a showing in a new Range Rover wearing a custom suit that likely cost a couple large.

      I have no doubt they’ve got nothing in the bank, but why are these guys even getting paid enough to lease that Rover to begin with?…

      • OwnMyHood says

        And just to clarify, I’m talking about Jr brokers, not the cats pulling in the big clients.

      • Wall Street Playboys says

        “They come across as high finance wannabes who were too dumb to pass the 7”

        *leans back in chair*
        “We don’t believe you”
        *insert cigar in mouth”

        No one can possibly fail that thing!

      • OwnMyHood says

        Honestly man that’s what I thought. Personally, I think I studied for 3 days and passed it. But some of these guys have to be seen to be believed.

  4. vc wannabe says

    Awesome post, thanks for this. My parents own an apartment building and have been managing properties for many years so I’m planning on learning what I can from them.

    I’m in school right now but this summer I could most likely obtain a job renovating apartment units to pick up some of the trade skills as well as learn the soft-skills.

    Anything else you’d recommend someone in my position? (ie. access to people in the business)

    Thanks, and hope to see more from you!

    • OwnMyHood says

      That seems like a good start. Just work your ass off, study RE related stuff in your spare time and stack them chips.

  5. RE Guy says

    Overall great post, thanks for putting this together!

    Of course you already know we’re in agreement for a lot of things, and I decided to just add a few extra points.

    1) Had this happen with evictions. I did over half a dozen on my own, going back and amending my lease several times. And. Reading the relevant landlord tenant law several times over. So a few years ago I decide to have the local eviction firm handle it, it was several hundred dollars but with the time I spent on multiple trips to city hall plus parking, I decided it was worth it. Low and behold they take some standard action on my lease not going after what I normally go after, and when I call them out on it they tell me that you can’t get it (even though I had several times before). They also were pushing for me to settle unnecessarily.

    Them: “Do you want them to leave or want to collect?”

    Me: “I want to be granted possession and to retain the right to collect at a later date, if at least to justify holding their security.”

    More or less they were doing bulk evictions and processing mine with the right stipulations and then negotiating aggressively wasn’t part of their plan. Fair enough. I get that they priced aggressively and did 10-20 evictions all at once. But I knew what could be expected since I had run through the process enough times before.

    Luckily (or more likely, because I’ve gotten better at attracting and selecting quality tenants), I haven’t had any evictions to do since then. However I wouldn’t have known that it was the Mcdonald’s approach had I not done the initial legwork myself.

    6) Deals they have that aren’t yet listed a.k.a. “Pocket listings” one’s they have in their pocket.

    7) Thanks for the citation. Good mutual discussion we had going there.

    “Check dat out girl. Alllll mine.” – Using this on a random building I’m walking by when picking up a girl this weekend.

    8) Short sales crack me up. People ask me about this and then I’ll explain it’s “short” because it was listed on the market for X amount and wouldn’t sell (typically for 6 months+, to my knowledge). So the seller has “proved” via market testing that a property is definitely NOT worth that amount… and now will sell it for just slightly below it. How is that a deal?

    Don’t get me wrong, I remember a fellow investor showing me a short he was negotiating, some commercial property he wanted to convert on some highway somewhere, and from what he believed (I really couldn’t verify it), it would be a good deal. This property also had suffered a water loss that would need to be remediated (definitely not a “pretty” property) and I think that was part of why the bank was willing to bend so much. But in general, I’d say stay away.

    9) Hipster. Revolution. These sometimes happen in The Borderlands or thereabouts.

    Hipster Migration would also be acceptable.

    Also in closing, re: landlord tenant law, there may be a main governing law on the books, say for your state (“Landlord and Tenant act”), some local ordinances, like a property maintenance code, and some common law precedents like a “warranty of habitability” (as in it doesn’t have to say in the lease that you’ll have running water, protection from the elements, some way to heat the property etc., but it is assumed). Signing up for the local landlord’s association and getting their handbook may be a good start to get you an overview. Not a lawyer by the way, so excuse any inaccuracies in that.

    • OwnMyHood says

      Since I live within a few blocks of the courthouse, I had no issue with doing my own evictions. Once I deeded my properties over to entities I hired a lawyer to do them and had a similar experience to the one you describe. Having read the statutes I’m not entirely convinced I can’t represent my entities and will be doing more research before going to court again (I’ve seen the judge shut people down trying to do this, but their situations were slightly different)….

      Anyway, as is the case in any business, you’ve got to keep an eye on everybody:

      Accountants: Being too conservative with repairs vs improvements or when setting up improvement ratios with new buildings. Getting lazy by not breaking out appliances, paving and other pieces of property with shorter depreciation schedules.

      Contractors and employees: Half-ass work

      The list goes on.

      Yeah as far as short sales go, you’re spot on. I will say that I have purchased a few OREO properties and one was one of the better deals I’ve gotten (over 200% ROE in year one).

      Haha, I’ve never personally used the line “check dat out girl” but I may have “accidentally” walked by a nicer property I own with a girl after a date (wasn’t aware what I do for work) and brought her up on a roof with a nice view and a bottle of bub. This maneuver was well received…

      Since it seems your biz model is similar to mine (though I’ve seen you use the word “house” not sure if this is a colloquialism in your area for building, or if you’re talking single family dwellings, I only deal in multis), I was wondering if you’d agree with #3 Go big or Go home?

      My primary reasoning behind including this is: many of the owners I’ve bought buildings off of in my area are mom and pop types who own one or two buildings and almost without exception run their buildings terribly: lousy tenants, rents way too low, schedule Es always show huge losses (though I take these with a grain of salt).

      The only properties I’ve bought that I’d describe as turn key were owned by bigger players and the only reason they were selling is these were “Odd buildings out” that they’d bought in their earlier days and were distracting their workers from their primary tasks of maintaining their larger complexes.

      Have you had a similar experience?

      • RE Guy says

        I certainly can’t give a qualified legal opinion, and especially so not knowing where you are, but my understanding about representation is that if you have an “interest” in the property you can act as the agent in court. So probably deriving an income from the entities serves that purpose, but again take it with a grain of salt.

        I like REO’s and deals certainly come up there… and in addition something tells me you’ve seen your fair share of auctions.

        I like that bub maneuver. Smooth. I’m sure you sold it’s serendipity well.

        I’m in real estate for life and always planned to be. I figured out early on that I could buy properties and get an income forever, after that I was all in.

        However I hesitate to speak on all people for all situations. There are plenty of people who buy real estate part time, are sophisticated about it, and still work their main careers. A particularly relevant example given what you said comes to mind; a doctor I know.

        He has three offices and he buys a piece of property occasionally and his wife does most of the management. His exact rationale “If I was going to put that much effort into a deal, I’d just open another (doctor’s) office”, which makes sense. So I wouldn’t dismiss a more passive approach out of hand; but it’s not for guys like you and me.

        You’re correct about property types and the main difference in our strategies although I’m not pure SFH. And I’m not opposed to a strategy of pure SFH, pure Multi’s (res), Commercial, or any mix. It all comes down to opportunities and knowledge base.

        I’d agree with your assessment of mom and pop vs. more professional investors and property characteristics. And I’d add that doing the work many professional investors do in order to maximize returns only makes sense to most people if there are returns of scale (many properties). So I think it comes from a larger strategy of people more or less accidentally getting a house or two and largely neglecting it and their education in real estate vs. a person or persons who set out with a clear goal to build a sustainable real estate business.

        Plus, since the mom and pops are often inherited, that’s where you’ll find the REAL antique interiors. Basically since there A) wasn’t an economically motivated exchange of hands unlike the pro’s buying it and B) because they pretty much won’t renovate unless they absolutely have to, unlike the professionals who will do it as soon as they think it will lead to a good return with rents vs. investment.

      • OwnMyHood says

        The point you make about the inherited properties is so true, you’ll find some ancient stuff in there.

        The mindset of some of the beneficiaries of RE portfolios I’ve met is an interesting one, you can tell they don’t really enjoy the work as they put in minimal effort and clearly regard it as a burden. But many hold on to the properties for years and run them in this half-assed fashion (since they have no mortgage the rents are ridiculously low, they rely on referrals for new tenants leaving apartments vacant for months in between etc). I’m not sure if they had it hammered into their brains by their landlord parent that “Real Estate is the best investment” so they don’t trust other investment options or if it’s “this is what pops would have wanted.”

        Either way it mystifies me. If I were them (and hated it) I’d sell that shizzle in a heartbeat. But then again, I ain’t that sentimental….

        I can see your husband and wife team being a viable example of the part time RE investor, where one is a high earner and the other is administratively inclined. Other exceptions to my rule would be those who own businesses that require many of the same skills, in these cases cross pollination on a part time basis would make sense. High earners socking it away in well priced NNN properties would be another exception.

        Those aside, I still would advise against the majority of people getting into many forms of RE investing as a “side gig.” As the real money is made by taking the time to “maximize returns” like you mention. Buying income property (that requires active management) and spending a few hrs a week on it is reminiscent of the layman actively managing his $150k Schwab account. Its not like they can’t make some money (if the market appreciates), it just seems like a waste of time.

        Yeah I’ve got no issue with SFHs or any other investment strategy that makes sense. I only got into multis because the first building I purchased was one and there has been enough opportunity in this niche that I haven’t really had to look elsewhere. I own a few commercial units as well, but wouldn’t consider myself an expert there as I purchased them already leased and haven’t done much other than collect rent. I have some more under contract and plan on becoming quite a bit more active in that side of the biz in the near future.

        I’d be interested to learn more about your progression in the biz, so if you’re comfortable sharing any of it, please do so.

        The level of sophistication in my market is low and the average owner is close to twice my age, so I am always thrilled to talk to someone who has a head on their shoulders and has accomplished something while relatively young.

  6. says

    I thought I’d shed some light on those looking to get into residential RE sales. As someone who is an RE agent myself(luxury SoCal town), my best advice if someone wants to get into residential sales is location. As the old saying goes, this applies for being a residential sales agent as you will have to sell *much* more volume in a lower end market than in a market where the average home is valued at $1mm, etc. You’ll work by far harder in a lower end city than where the prices are higher, thus devaluing the same work.
    It’s also an inertia based business, meaning it’s very hard to break in and get your first few deals done. But once you’re established it’s mostly smooth sailing from there out.

  7. duke says

    While there are very intelligent people in real estate who could transact on their own, Real Estate agents (especially on the sell side) certainly provide value in their ability to act as a neutral party. I’ve had several RE transactions where I am certainly glad I was dealing with a sellers agent rather than the irrational seller.

    • OwnMyHood says

      I agree with you in that even though there is a lot of regulation in the residential market meant to protect all parties, many non-investors would be totally lost were it not for the help of agents.

      Whether the value the agents are adding is worth 5 or 6% of the purchase price? I’m sure in some cases it is, in many it isn’t. But I ain’t losing any sleep over this.

      From an investors perspective: I’ve had a couple situations like you describe (irrational/emotional seller) where I felt the seller’s agent helped get the deal done and was grateful they were involved, though I wouldn’t go so far as to describe them as a “neutral party”. But in general I think real estate agents do convolute the process and we as investors are responsible for knowing the steps that need to be taken in order to buy or sell real estate.

  8. Brandon says

    I disagree that real estate needs to be a full-time job. My dad was a full-time lawyer earning pretty good money. He decided to invest all his earnings into real estate rental properties instead of the stock market. He managed his properties himself for decades until he decided to hire and train his own real estate team, including a property manager. When he got started, sometimes there were times he’d have to spend a couple hours fixing something after getting off work at midnight, but it was rare.

    He out-performed the stock market, so he’s not just some faux investor.

  9. SlimShady says

    I know no questions allowed, but Bed-Stuy, Brooklyn could be considered a Borderland neighborhood? Just trying to get a visual of how these neighborhoods might look.

    • wageslaver says

      I’d say that it used to be.

      Sale prices have gone up *exponentially* in the past few years, despite the neighborhood still being pretty scary. So you’re right that that’s how one “looks,” I think, but looks can be deceiving!

      We probably missed the boat on this hood already, though I’d be curious to hear what others think.

  10. ManagingMember says

    Have done acquisitions for 10+ years at three large pe shops, focusing mostly on value-add apartments, urban retail and office buildings. Currently NYC based.

    If you can build a track record, the key is to invest outside money; you put up 5% of the equity, and get investors to put up the rest. If the deal is successful, you take a massive “promote” or carried interest, equating to a 4x on your investment over a five year period. Use the management fees, leasing fees, acquisitions fees, and construction management fees in the meantime to keep the lights on.

    • OwnMyHood says

      Thanks for chiming in. I’d love to hear more about what goes on at that level of the biz.

      What size buildings did your shops work with? When you guys purchase buildings, what do you look for as far as opportunity for adding value? Also who are the end buyers for the properties you’re working with? REITS? Foreign money?

      • ManagingMember says

        here’s a few ways I think about deals. On one recent apartment deal, the property’s rents were ~$2,000 a month. This property hadn’t ever been renovated and its competitors were renting for $2,200+. I felt that I could get in there, spend ~$8k per unit on renovations (new kitchen appliances, cabinet resurfacing, counters, sinks, bathroom sinks, and replace the carpet for fake wood flooring) and pop the rents to market. So you’re getting a $2.4k (200*12) annual rent premium by spending $8k- pretty good unlevered return on cost. Pencils to a high teens IRR over a 3 year hold. Typically works if you can get a 20% ROIC- but I suspect you can get much more on smaller sized deals.

        A developer would look at the above and say, ok you’re going in at say a 5.5% cap on purchase price, getting to a 7.5% annual return on cost over 2 years fro the renos- that 2% spread or “value creation” is a good enough margin

        In a different market, we bought an apartment complex that was 84% occupied, thing had never been renovated, owned by a TIC group (these guys are terrible managers since the manager has no skin in the game and the owners are random doctors and lawyers who cannot direct the TIC manager since they know nothing about real estate and are typically 30 uncoordinated guys who don’t know each other). all the competitors were 95% leased, at much higher rents. same story, get in there, renovate the interiors, fix up the leasing office and some common area stuff, lease it to 95%, pop the income, etc. the “stabilized” and fully occupied comps were selling for $125k a unit. we bought at $100k a unit, “all-in” for $107k a unit including renovations, and when you slap some freddie 7 year ARM debt on it, pencils to a 16-17% IRR with no rent growth assumed. get some rent growth (like the past 5 years), and you’re hitting them out of the park

      • ManagingMember says

        Also, wanted to point out, that the real estate game is very similar at all levels; you’re basically doing the same thing that I’m doing, I’m just doing a deeper dive since I have more resources and staff.

      • OwnMyHood says

        Thanks for going into some more detail, great stuff.

        I have had limited interactions with TIC groups, but my observations were the same. After talking to one of the owners and a rep for the manager I was pretty shocked: the owner’s investments were worth pennies on the dollar compared to their buy in and they had no clue why. The management rep did nothing but make excuses.

        Now if only these situations presented some opportunity…

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