Am I a future real estate mogul? This seems too easy...

[Kris R.]

Hello,

My name is Kristopher. I’m 22 and live in Miami beach, FL with my parents and girlfriend. I am a college student studying Finance, and I also have a part time job at Bank of America. My parents have owned their own business for 25 years and have become successful. My dad is aprocaching the age of retirement now, and has about 1million in savings. He also profits about $15,000 a week from his business. He plans to either sell his business soon or rent out the property that its on, which he also owns. It is a 2 acre industrial land.

About a year ago, I began speaking to my father about investing in real estate. Rather than just buying and selling for a quick profit, I wanted to get into rental income properites in order to create an income for us. I had always read about these millionaire land lords that started off young and are now extremely successful, all from rental properties, and this business always intrigued me. With the amount of cash my Dad had put away, I knew we would be able to get very good deals in certain areas of Miami that are known for high rental rates. Plus, there are always tons of foreclosures and REO's on the market in Miami. After heavily researching a particular up & coming area that I really liked, we purchased our first property in January of this year. I was very patient and made sure I only pulled the trigger on too-good-to-be-true deals, and I have found them. Today, we own 3 properties in total and plan to keep buying. All properties are within 2 miles of eachother. I've placed each property under an LLC that I formed with my father. We both own 50% of it. I have managed to find tenants for each property quicker than I thought. All 3 properties have been bank owned REO's. Here is a summary of each propery:

Property 1

2 story Duplex

Price - $160,000

Purchased: February 2013

Monthly rental income - $2600 ($1,300 per unit)

Property 2

1 story triplex

Purchased: March 2013

Price $155,000. (115k purchase price with $40,000 in renovations)

Monthly rental income $3000 ($1100 each for 2 units, and $800 for 3rd unit)

Property 3 (incredible deal)

2 story triplex

Purchased May 2013

Price $172,000

Monthly rental income: $3450. ($1250 each for 2 larger units and $950 for smaller unit)

To sum everything up, we have invested $487,000 and we are making $9,050/month in rental income. That is $108,600/year, creating a 22.2% annual return on investment. We bought all the properties cash, and each one took less than 3 weeks to find tenants for. These homes are in a very up & coming area, and are currently worth about 25% more than what we paid for them (there are smaller properties in the same neighborhood selling for much more than what we paid). We were able to get these deals because we paid all cash and because they were bank owned properties. In total I will be paying about $10,000 a year in property taxes.

My father is not really involved in the business (except for paying for everything lol) but I am the one who finds the properties, closes the deals, communicates with listing agents, manages properties, finds tenants, hires contractors for renovation/repairs, etc.

Are numbers like this typical in the real estate market? To be honest, this seems too easy. I plan to purchase a property once a year for as long as I can, and just sit on them and rent them out. I wrote this to get some feedback and maybe some tips on how to stay successful in this business and what I can do to maximize profits. Even though I am only 22, I already own 3 properties and I consider myself very skilled at finding a good deal and knowing when to pull the trigger on something.

Thanks

-Kris

[Aaron Mazzrillo]

Originally posted by Kris R.:

Hello,

My name is Kristopher. I’m 22 and live in Miami beach, FL with my parents and girlfriend. I am a college student studying Finance, and I also have a part time job at Bank of America.

To sum everything up, we have invested $487,000 and we are making $9,050/month in rental income. That is $108,600/year, creating a 22.2% annual return on investment.

At first I was like "he is a student of finance, how can he not understand that money lost to expenses does NOT count toward the return on investment?" Then I saw that you work at Bank of America and it all made perfect sense.

[Ali Boone]

I'd say you are rocking it out!

[Ellis San Jose]

@Kris R.

Congratulations on a great start. You will find that there is always more to learn if you choose to become an even better investor.

[Richard Mann]

As those before me have said, that's a great start.

However, that being said, as a young man in college, living with his parents, and only a part time job I would assume that you don't have any money in the game yourself because you said, "We were able to get these deals because we paid all cash and because they were bank owned properties."

Having the means to pay all cash make his makes the game a LOT easier, but as you continue to read and learn this may or may not be the best use of cash.

Most people on this board were not in such an enviable position when they started and had to learn how to find or save the money themselves to begin. They had to learn the ropes through much hard work and education. They had to balance, family, friends, budgets, and jobs, to even begin thinking about REI.

Please don't think that I am bashing you because you have advantages that many do not but please don't think that everything is easy because you do have advantages.

Many men and women have lost fortunes in their lifetimes and had to start over with nothing. Anyone who started with nothing and became successful will tell you that becoming successful is NOT easy.

Just 2 cents worth from a guy who doesn't have a lot of money but has no debt and understands that money is not the be all, end all of what is "success" in life.

[Pat L.]

Originally posted by Richard Mann:

As those before me have said, that's a great start.

Many men and women have lost fortunes in their lifetimes and had to start over with nothing. Anyone who started with nothing and became successful will tell you that becoming successful is NOT easy.

Just 2 cents worth from a guy who doesn't have a lot of money but has no debt and understands that money is not the be all, end all of what is "success" in life.

Amen ...

from (another) Old guy who was dumb enough to do it the Hard way :)

[Brandon Hicks]

My advice is always the same for someone starting out....

Learn to do deals with as little of your own money as possible.

So Id be looking to refi these 3 deals with a local bank once you have 12 months or so operating data. Take the refi proceeds and rinse and repeat keeping as little of your own (your dad's) money tied up.

[Jeff S.]

Everything is good right now but times are always changing. Sometimes easy success is its own undoing. Be careful. Many people with your kind of benefits fail (majority of family money gone in 3 generations) so it takes talent to maintain and prosper regardless of where you start. Good luck.

[Patrick L.]

Here's what you're missing.....you've ignored almost every expense that you will encounter in this business except for property taxes which is the most common thing people do when starting out. Here is what you need to account for

• Property Taxes
• Insurance
• Vacancy
• Property Management (it sounds like you are managing them right now but there are expenses involved even in self management and if you plan to be a "mogul" this expense will have to be covered by the property at some point)
• Repairs
• Capital Expenses (roof, water heater, hvac, and everything expensive that only has so many years of useful life needs to be accounted for)

If you aren't paying any utilities you need to figure that on average over the life of the property 50% of your gross expected rent will go to cover these items. It may be higher and it may be lower but without a track record on them it's a good place to start. When you factor in the rest of the expenses you're making an 11.1% return which is still very good in this business so I'd say you're on the right track.

If you don't believe the 50% rule then just wait until you have to evict a tenant and you have legal bills, 2-3 months of lost rent, and $5k in repairs to get it rent ready again and then you have to replace a roof on one of your buildings in the same month and then you'll understand it.

[Nicole A.]

Congrats on your success so far!

Definitely be sure to pay special attention to Patrick's post about all the other expenses you need to factor in and the 50% rule.

And even though you're the property manager, you should still factor the cost in (and maybe actually pay yourself)!

Also, consider getting some properties with a mortgage. By taking all that cash you have and only paying down payments, you could acquire so many more properties. The trick with those is calculating will it have positive cash flow even with the mortgage.

Keep us posted!

[Zac P.]

Most things in life become much easier when you have an almost unlimited source of $$$. Be careful, real estate has its challenges.

[Bill Briscoe]

I couldn't get past your first paragraph. Your dad makes $720k in profit per year but has only saved $1mm for retirement yet is considering retiring already?

If I had a gig like that I'd keep working it until I had a much large sum saved up.

[Sean Kuhn]

I agree with Zac. However on a side note I would not be posting your dad's financial information online, or even discussing it with anyone else. I don't think he would be happy about that and frankly it can be dangerous.

[Pat L.]

maybe he has to keep working to pay his estimated taxes:)

[Aaron Mazzrillo]

Originally posted by Kris R.:

Hello,

My name is Kristopher. I’m 22 and live in Miami beach, FL with my parents and girlfriend. I am a college student studying Finance, and I also have a part time job at Bank of America.

To sum everything up, we have invested $487,000 and we are making $9,050/month in rental income. That is $108,600/year, creating a 22.2% annual return on investment.

At first I was like "he is a student of finance, how can he not understand that money lost to expenses does NOT count toward the return on investment?" Then I saw that you work at Bank of America and it all made perfect sense.

[Elizabeth Colegrove]

@Kris R.

Congratulations on your foray into real estate. I think it is great the progress that you have made so far. Partnering up with your Dad was a great idea. His cash for your "energy".

Unfortunately most people do not have that options. In this economy the hardest part of "investing" is not finding the deals it is finding the financing. As you read through the forms, articles, blogs and listen to the podcasts you will find that often financing is your restraint.

If you decide to no longer partner with your parents or continue after that money is tied up. You will probably experience a constraint due directly to your ability to "borrow" money.

[Ben Hughes]

I guess I would think is was easy too if someone gave me 1 million dollars to start off with.

[Seth B.]

[edited]

I am not going to hate though... I wish I had family as well to do as you. I feel investing wisely and keeping money in the family through inheritance is a must now days.

Very well done, keep it up!!

[Account Closed]

It is good to have family members to bank roll your deals, but one day you will be left to do it on your own and then you will decide if you are real estate mogul. Providing your father's financing part was not to smart and after seeing where you work case closed.

Joe Gore

[Dawn Anastasi]

Originally posted by Kris R.:

To be honest, this seems too easy.

Of course it's extremely easy when someone else is giving you the money to do it! Not everyone has rich parents to fund their deals so finding money is one of the harder aspects of the job.

[Wayne Brooks]

@Kris R.

It's a good start, but realize that your true Net will be about 1/2 of your projected rent. Roofs, A/C's, carpet, etc. all have to be replaced at some point, along with taxes, insurance, vacancies, costs to rerent/repair, etc.

[Matt Mason]

@Kris R. ,

As you can see, you are not going to make too many friends here by working at B of A and saying it is so easy by using essentially a giant trust fund to purchase all cash. All you are missing is hedge fund experience :)

Most people on BP struggle with working full time jobs and investing on the side or have had made the plunge and work hard full time on their real estate investing/business.

Having worked in the commercial real estate field, I can say that nepotism and a big bank account funded by family is unfortunately, a part of the culture in many instances. That isn't really the case in small building rentals though. However, your big bank account certainly makes for a good easy start.

[Kyle Hipp]

I can get a great deal of buying futniture or appliances or vehicle or any big ticket item when I use cash. To know if you are really good is when you can get the same deals without using any cash (which I guess you personally are ;)). But you also gave up 50% ownership for the priviledge.

At the end of the day nothing the majority of us do is "hard" but it also far from easy. You seem like you have a lot to learn as far as the details on you deals and there returns. If I were you I would be looking to control over $5 million in real estate with that original $1 million to deploy. It might take 2-3 years to get it all settled but that should set a solid base. I would also recommend you continue your education in one form or another, it is a never ending process. I would also be looking for ways to branch out on your own. You did not describe the ownership with your father in too much detail but I would much rather have a couple of deals on my own if I were in your shoes. Good luck and now is the time to really get to work in order to take off.

[Ramon Jenkins]

“Take the refi proceeds and rinse and repeat “

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Consider multi-family investing after you have

a strong handle on sfr / duplexes.

I’m not going to hate on your situation as others,

but congrat you own taking action.

[James Murphy]

I wouldn't say its easy to be a mogul.

I think you just have a case of being born on 3rd base and thinking you hit a triple.

[Jad Allen]

Originally posted by Patrick L.:

Here's what you're missing.....you've ignored almost every expense that you will encounter in this business except for property taxes which is the most common thing people do when starting out. Here is what you need to account for

• Property Taxes
• Insurance
• Vacancy
• Property Management (it sounds like you are managing them right now but there are expenses involved even in self management and if you plan to be a "mogul" this expense will have to be covered by the property at some point)
• Repairs
• Capital Expenses (roof, water heater, hvac, and everything expensive that only has so many years of useful life needs to be accounted for)

If you aren't paying any utilities you need to figure that on average over the life of the property 50% of your gross expected rent will go to cover these items. It may be higher and it may be lower but without a track record on them it's a good place to start. When you factor in the rest of the expenses you're making an 11.1% return which is still very good in this business so I'd say you're on the right track.

If you don't believe the 50% rule then just wait until you have to evict a tenant and you have legal bills, 2-3 months of lost rent, and $5k in repairs to get it rent ready again and then you have to replace a roof on one of your buildings in the same month and then you'll understand it.

I was not going to post it but I had the same exact thoughts when reading the original post. In this case it is apparent that the Dad is paying for the inexperience of his kid.

[Daniel Dietz]

Kris,

You are getting some great feedback here. Some may seem a bit critical, but I think that is mostly others speaking from experieince. I am VERY much a newbie to this game having just bought my first duplex a few months ago. BUT, I have been reading here and other places too for a couple of years AND I have an employee who has 10+ rentals and does a GREAT job screening and dealing with tenants.....it is like having a built in mentor :). I also put a LOT of stock into what those more experienced than me on here have to say.

What I see that you HAVE done right is getting some properties that have a good rate of return on the purchase price: in my own case I bought a 78K duplex that bring in $1350 month. First glance would say I am making a 20.75% return, or that I am getting 1.73% a month income (close to the 2% Rule you will see on here). We both bought well priced properties I feel.

The first thing it sounds like you are NOT taking into account is all of the expenses. You will see others here mention the 50% Rule for expenses, which seems high until you start penciling it out. I use this calculator at dinkytown.net

http://www.dinkytown.net/java/InvestmentProperty.html

to help evaluate properties I am looking at. For expenses, I use these figures; Taxes $2800, Utilities (water, sewer, and vacancy heat) $770, Insurance $900, Maintenance Fund $2400 (15% of income) Advertising $100, Accounting $100, Supplies $100, Misc $100. That ads up to 48.96% of income, pretty darn close to the 50% Rule. The only one that is really a 'estimate' is the maintainence, but I would rather be high than low in my estimates.

The other thing that is does NOT seem like you are figuring is a 'Return on Capital'. I assume that your Dad needs or wants to get SOME kind of return on his equity Even if you only figure 4%, that can really change things. I know some people say "I dont really need to count that" but to me, I could put my dollar in a guaranteed investment at 4% that takes NO work. I am only 'making money' in my mind when I earn over and above that rate.

Taking into account those figures, and looking at the LONG term profit potential, I would say plan on this formula

• 487K Investment
• 108K Income (22% Return)
• - 50% Expenses
• = 54K Operating Income (11% Return)
• - 20K Return on Investment (@4%)
• = 34K Net Income (7%)

I know those do not look as good, but I think a bit more realistic too.

Dan Dietz