Starting out rental property or lease options?

Question

As I started to develop a small business plan (<20 pages) I realized that there are many ways for me to be successful in this business: wholesaling, rehabs; owning rental properties; buying 2nd mortgages and medical liens; etc.

Initially, I want to focus on one and be able to quit my 9-to-5 within the next 18 months.  I have no family to support and make $56K a year.   I have about $29K in student debt at 2.5% and no CC debt.  I also have no mortgage or rent to pay.  I have just enough saved for closing costs (about $5K) and another $9K in retirement savings. Given this, should I skip the "no money down" investment methods and try to own rental property?  I figure once I can live off of rental income, my time is freed up to flip properties.

Again, my goal is be a full-time RE investor in the next 18 months.

Michael Rossi · Answer

R2D246,

I don't have a 9-5 job and haven't had one for over 15 years.  I'm all for helping newbies succeed, but not by making wild claims with bogus numbers.  Optimism and confidence are irrelevant if you don't understand the business.  The TRUTH is the majority of newbies fail.  They don't fail because they lacked confidence.  They failed because they didn't understand the business and therefore didn't have the cash flow to stay in business.

No, I don't think it's risky IF YOU UNDERSTAND THE BUSINESS AND FOLLOW A GOOD PLAN.  However, I do think taking every penny you have and buying a million dollar apartment building and HOPING that the numbers will take care of themselves is FINANCIAL SUICIDE.  You've repeatedly said that you can't lose, but that is NOT CORRECT.   The majority of newbies fail and go out of business in a short period of time.  You are simply ignoring the facts.

That's ridiculous.  Millions of newbies have tried real estate investing and stock market investing and have lost their life savings!  I don't call that a benefit.  I call that stupid.

That's just silly.  What normally happens is that people are forced out of business; lose their savings; ruin their credit; and are so beaten down that they work that 9-5 job the rest of their life.

It's hard to believe any of your claims since the numbers that you have posted have been so far off.  Also, you are apparently in an area of wild appreciation.  That CAN NOT AND WILL NOT continue.  In a market like that you can pick any property at random and make money.  I wonder how you'll do when the wild appreciation stops.  At some point, you'll actually have to learn how the business works and pay attention to the numbers.

Again, I am 100% behind helping newbies succeed.  I just don't think that wild claims with bogus numbers is giving them a realistic look at the business.

Mike

Matt H · Answer

Liquidate your retirement savings. Trust me, you might take a hit but you need that money asap. Combine it with what you have. So hopefully you have 10k at that point. That 10k should buy you a $200k house any day of the week. Look for a good flip. You could either live in it or continue to live in your parents basement while you flip it. After flipping it you could make anywhere between $25k to $50k. Just do paint and carpet on your home depot card. Complete that in a week relist on mls and flip within a month or two. Continue the process flipping like this ever two to 3 months. Worst case senario you do 4 flips in a year at just $25k net net profit each. So you have $100k saved at that point. Then you take that 100k and you look for a 1m dollar apartment building. Something with as many units as you can find. You should be able to find something with at least 30 units. That will give you approximately $5k per month liquid spendable cash. (plus about 5k pre month in asset appreication and about 2k per month in mortgage paydown so for a total of like 11k per month net net) Spendable cash will be about $60k per year. Hopefully that's enough for you to quit your job off. Then continue to flip and buy apartments with little to no money down. And yes, no money down is good not bad. Why spend money? The key to getting high, I mean rich is using OPM remember, not you own opium to get high. ha ha. To get rich you need lots of OPiuM, lots of good debt and as many income producing assets as you can muster. So that 10k should be enough to get you started my friend on your way to lots and lots of getting high on OPiuM.

Joshua Dorkin · Answer

I'm just trying to stop a battle before it breaks out.  We don't like that kind of stuff here.  Please continue the discussion, but try and keep emotions and judgements of other people out of it.

thanks!

Michael Rossi · Answer

Josh and R2D246,

I'm sorry if either of you thought any of this was insulting.  I was not offended by anything R2D246 said (except maybe the "Nahh Nahh Boo Boo") and I honestly think this is a very valid topic.  This is the kind of information that new investors need to understand and there is no better way than getting both sides of the argument.

R2D246 is providing information that is tame by comparison to what many "gurus" say.  I am trying to provide the other side of the argument. so that new investors will have a balanced and real life view.

I have seen a LOT of very nasty posts (with name calling, etc) on internet forums, but certainly didn't perceive this to be one of them.

Mike

Joshua Dorkin · Answer

Gald we could work that out like adults.

Matt H · Answer

Okay I'm not going to comment on Mikes posts anymore, and I hope he doesn't comment on mine. If we both want to give someone advice based on our own experience so be it.

But I have to say just one last thing in light of all of this unrelenting bitter debate...."Nahh Nahh Nahh Boo Boo!!!!"

Joshua Dorkin · Answer

Guys - lets settle down here.  Please keep discussion to the facts.  I'm all for debate, but when insults start to fly, people get removed from the site.

Let this be the one and only warning . . .

Thanks for your understanding!

Matt H · Answer

Mike,

Life is short. Time passes us by so fast. We look back on things that happened a decade ago but yet it just feels like yesterday. So with the tiny amount of time you have hear on this earth, why not take a chance, why not step out of your comfort zone of working a dead end job 9 to 5, why not try get out on your own. That's what I'm trying to help these newbies to do. Is to have the optimism and confidence to do just that. Otherwise if they think there's that much of a risk they'll never step out and try a flip, or to try buying an apartment building. If they think it's risky they won't try it. And I know you think it's all risky but I don't. So we just have two different view points. If you think I'm wrong then take a look at my bank account my millions don't lie. And I'm working on buying 3 more apartments right now. If I thought it was that risky I wouldn't be doing it myself. So tell people it's risky all you want, that's up to you. But I don't think you're helping anyone by trying to protect them from trying new things. There's absolutely no way in life to try something and not benefit. The most successful people in the world also are often the people who went through the most failures along the way. Babe Ruth struck out more times than anyone in his era but also became world famous for his home runs. Worst case scenario if you somehow screwed up so bad that you lost money in buying a property to rent or flip, (which I don't see happening) at least you'd learn what not to do next time around. But at least you'd have gained the confidence and experience in knowing how to buy, and the process that's involved. Gaining that kind of ability is priceless.

P.S.: And you think my numbers are off right? Ya you are absolutely right Mike, because I made a net net profit of $140,000 on my last flip. So to just make $25k net on a flip is ridiculously off!!! So you're right. Also the house I just bought I paid $640k for and a smaller house a few doors down just sold for 1.3m, and two more down the street are selling for over a million so I'm assuming that in time I'll flip this one for at least half a million net profit. So again you're right Mike my numbers are way way way off!!!

Michael Rossi · Answer

r2d246,

I agree with you that owning apartment buildings is a great way to make money and build wealth.  However, your wild claims are nothing short of reckless and lack reality.  Once again, your numbers are way off!

That's not even close to being the worst case scenario or even the typical scenario.  Unlike the "Flipping" shows on TV, people can and do lose money flipping.  The majority of new business fail.  Simply buying a property and thinking that you are somehow guaranteed a profit is ridiculous.  If you do everything right, you could certainly make $25K.  After taxes, you will be left with a lot less.  Or, you could underestimate holding costs, carrying costs, repair costs, or the amount that the market will drop, etc and lose $25K.  There have been many posts lately about people who have lost money.  I guess a positive attitude just didn't do it for them.

Again, your numbers are WAY off.  If you bought a 30-unit building dirt cheap, you MIGHT be able to get a cash flow of $3,000 per month.  If you buy a 30 unit building at retail, you will lose money each and every month.  The property could appreciate, depreciate, or stay flat, so your appreciation number is simply fantasy.  Finally, the principal paydown is only $813 per month for a 30 year mortgage (you won't get that in the United States) or $1,527 for a 20 year loan that you might get in the United States.

BTW, in the United States, someone with no rental experience and no reserves is going to have a VERY DIFFICULT time borrowing $900,000 for a $1,000,000, 30-unit apartment building.

Mike

Michael Rossi · Answer

I would buy the rentals without using your money.  Save your money for a reserve.

Mike