New to BP and real estate investing

[Christopher Zmolik]

I'm so thankful to be here learning from this platform.  I grew up framing/building houses with my dad and family, so I have much experience in that area.  I now want to get into real estate investing.  I have a good W2 (fireman/paramedic) and am looking to build wealth so I can retire earlier.  I have money I'm ready to invest with.  My question is, what is a smart way to use this money?  Like I said, I'm new to this and just looking for advice on direction.

[Randall Alan]

@Christopher Zmolik

Welcome Christopher!

First off.. you are in a great place to learn a lot about real estate investing.  The forums alone on BP are a treasure trove of information.  Not only can you ask questions like you just have, but you can also search the forums with the magnifying glass in the upper right hand corner.  The advantage of searching the forums is that you get instant feedback... because almost every question has already been asked here by someone that came before you.

To your question... there are several paths... You sound like you are handy around houses with your background.  With that, you might consider doing flips... they are great for generating big chunks of money when you sell your renovated property... BUT... once sold, you are left with finding another one... so no steady form of income.  There are also some pretty hefty closing costs and tax burdens that come with those... but we have done 5-6 of those and have usually turned a 6 figure profit on most of them (before capital gains taxes).  The secret there is that you need a really good spread between your purchase price and your After Repair Value... factoring in all your expenses, of course... which are not only the repair costs, but also the carrying costs while you do the repair like insurance, utilities, possibly property taxes, etc. 

My wife and I mostly do rentals ourselves.  The nice part about that is that you buy it once, but it keeps giving you income every month.  So rentals are a way to build up your passive income and eventually stop doing your day job and just do a much more passive landlord job (if you want).  We have 37 doors that we manage across 25 properties and by the time we had 20 doors both my wife and I quit our corporate jobs.

The challenge, at the moment, is that the markets are all out of whack... properties shot up in price with inflation, and the the Fed jacked up the lending rates (so to say) and so now money is also expensive to borrow. So it isn't a 'great' time to be jumping in. Put another way: it's really hard to find good deals that cash flow the way things did 18 months ago. But from what I hear the expectation is that interest rates will drop towards the end of the year into the 5% range and that will at least be an improvement over where things are now. Right now, we have our money in a high yield (5%) savings account just biding our time until we find a deal we think makes sense. You can search the internet for the 10 or so bigger FDIC insured banks that are offering that right now if interested.

There are other paths... syndication is where you invest money in someone else's big project and get the benefits of being a landlord, and it is completely passive.  The downside there (in my opinion) is that you are just along for the ride.  Some may like that... but I like to have control over my investments, and you really don't have that with Syndication.  Plus, there are more moving parts (players) in syndication that sort of absorb part of the profits.  Put another way: there is more money in rentals than in syndication (if you buy right)... but it puts more work on you, but also all of the control.  So some of that is personal preference.

You will need to learn what a 'good deal' is to be able to judge properties.  When I started out, my 'line in the sand' was that I wanted a rental to make at least $300 (clear profit)  a month after principle, interest, taxes, insurance, and a $100 maintenance reserve.  There are other expenses to account for as well though.. like capital expenses (big repairs like roofs / ACs), as well as accounting for vacancy.  I haven't found vacancy to be much of a problem though because we can usually fill units really quickly at times when units turnover.  But just realize that there can be a gap in your income there.

So $300/month after all that, for me is still descent.  We have maneuvered a lot of things in the 5 years we have been doing this and we now have our profit per door at over $600/month.  How?  Rents have increased, we've done cash out refi's to pay down higher interest loans, and by selling units we bought that had high appreciation and using those proceeds to eliminate debt that increased our monthly profits.  But the bottom line in this topic is that you only want to invest where it makes sense to.  If you can earn 5% on your money in the bank, it doesn't make sense to risk it in real estate if a deal is only going to net you 3% a year unless you see a clear path to change that number.  So don't buy something just to be in the game.  Buy something SMART to be in the game AND make money.

All the best!

Randy