1.4 Million Dollar Opportunity

[John Settles]

For the last few weeks I have been listening to the "Bigger Pockets Podcast" when I'm working. Currently I'm 18 and I own a lawn care business. I have been looking at real estate investment properties that have been listed for sale every few days for the past month or so. I've heard the stories of young people starting and soon they are making big money, and I want to be one of those stories. 

I've come across a duplex complex that is for sale, it has 10 duplexes and a 3 bedroom house on the property. The property has 100% occupancy currently. It's a turn key operation listed at $1,400,000. The income each month would be $20,000 to $25,000. I'd still have to pay the mortgage but profit every month would be around $10,000. That would change my life. 

I have no real estate experience, but I've been running my lawn care business, so I have some business and management experience. I'm looking for advice on whether I should go for it or wait for something simpler like a small single family house to come available. I also would like to know how to put no money down on something like this. I have never bought a house before so I'm eligible for the FHA 3.5% down payment but the down payment would be $49,000. I do not have that much money at 18. What would be the best way for me to go about doing this?

[Alvin Sylvain]

You remind me of when I was young, and listening to all the RE Gurus on TV and the radio and books, hawking all manners of no-money-down paths to RE Riches. I went into a RE Agent's office and told the nice lady I wanted to buy this $200K house and I had $5K to put down. She very kindly and nicely threw me out of the place.

OK, lets go over some of the fine points, in no particular order of importance.

1. You're not going to do a 1.4 million dollar deal with no money down. Ain't gonna happen. Especially not a fully-rented turn-key place. A dump where the seller is desperate, maybe, but then you end up with a 21 unit dump that needs money to fix up.

2. You can partner with somebody, but what are you bringing to the deal? If it's a great deal and you find somebody to put up the down payment, what do they need you for? Your management experience? They can hire a manager off Craig's List. Best you can do is ask for a finder's fee.

3. You're not going to get an FHA loan for a 10 duplex complex with a house that amounts to 21 units. The FHA covers loans up to 4 units, tops. Anything more will be a conventional loan at 25 to 30% down.

4. Start with something simpler? Definitely. I would suggest "House Hacking". Look it up. There's tons of materials on it here on BP. What you do is find a 2-, 3- or 4-plex in your price range, and live in one of the units. Rent the other units out. Do it right, and you can live there essentially for free. For that you can get an FHA loan, and as your first home purchase, I believe there are other incentives available as well.

5. Are you handy? Find a fixer duplex, and fix it. It's a great way to force-build equity.

6. Save your money, hard-core. There's an old truism, and it's 100% true -- it takes money to make money. And you need the financial discipline. So put down that Caramel Latte with Half Foam and Extra Sugar that sets you back a day's wages. Drink tap water, it's free, and healthier anyway.

7. Am I discouraging you? I hope not. RE remains one of the better ways to build wealth (some say best, but I still think owning and running certain kinds of businesses can be superior). But the thing is, you don't start out with no money and right out the gate pick up a plum million dollar deal that cash flows three times the median W2 income. You haven't even got your feet wet, and you're talking about swimming the English Channel.

So keep watching the podcasts. Attend the webinars. Exercise your financial discipline. Educate yourself big-time (and BP is great for that).

Who knows, maybe in 10 years (20? 5?) you'll have enough experience and wherewithal to go buy one of those million dollar deals -- all cash. Then write a book about your immense financial success.

But don't go into a RE Agent's office today with this plan and get yourself nicely thrown out!!