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Updated about 8 years ago, 10/11/2016
Increase income or start small
Hi All-
I recently heard a podcast by Brandon/Josh & Grant Cardone about real estate investing. Probably one of the better shows with an interesting guest. I did a bit of digging into Grant Cardone and listened to a couple of his thoughts on real estate investing. It appears Grant is focused on taking massive action to increase your income & savings (100K) first before touching real estate. While I do understand the concept behind his thinking, I am wondering how many people would actually take on another career (sales oriented) to increase income first, or continue to plug away at a W2 and save money to start smaller.
I'd love to hear your thoughts.
The same number of people that do not listen to most great advice that they are given throughout their lives.
Today's generations want immediate gratification and return for little, if any, personal effort or financial stake. The number of gurus promoting the prospect that you don't need any money, experience, credit, etc. to be a real estate investor grows every day. Grant's advice is just that, advice. It will resonate with some and for others it will not. At the end of the day, what works for you and how you accomplish what you set out to do is going to come down to (in my opinion) 1. Why you want to do it, 2. What are you willing to do to get there, 3. What are your resources on hand for beginning the journey, 4. What sacrifices are you willing and able to make to reach your goals, and 5. Who are you going to have guide you along the way.
Hope this helps
Hello and welcome to BP! I really like want Grant does say, I think he is more than most can handle because he is a great salesman and knows what he is doing. I would probably start off smaller, unless you are more like him (and most people are not). Start off a little more sensible and work your way up. I think the rental business is the way to go and having enough units to make your debt payment. Just do what is average for the neighberhood and get in a place that is surrounded by good looking houses.
Get your financing in place before you start making offers. Depending how wealthy you are you might want to have some form of a corporation or a LLC. You might need an attorney and/or a CPA (or tax accountant) to give you advise once you decide what to do and where you are going to do that. I think that aTeam members are important and can help you get where you are going. Do not try to do everything yourself.
Using debt to own what you are looking for is OK as long as your property is worth more and provides you with cash flow up front. Do not try anything unusual. Good luck to you!
@Solomon Oh In my opinion, the primary concept behind Grant Cardine's advise is fiscal responsibility. Too many people try living above their means using their Credit Cards, when in actuality, they have a beer budget. People should have 6-12 months, of income saved, in an Emergency Fund, in the event they loose their job, an accident happens and they are unable to work, etc. This way if such an event occurs, they are able to meet their financial obligations.
I completely agree, with @Charlie Fitzgerald thoughts. If you are head strong about jumping into Real Estate Investing, consider Joint Ventures and other forms of partnerships where you utilize Other People's Money (OPM), but remember that you will have to bring some form of value, to the table, to create a Win-Win Situation. Do not be surprised, if most people will want you to have "skin in the game" (cash).
Hi @Thomas Franklin & @Charlie Fitzgerald. Instant gratification is the name of the game for the Millenials haha.
I appreciate your sound advice on this inquiry. In this case I will continue to building upon my career in Commercial Building management and begin to look for JV in real estate investing group. One more question. How do you begin to building credibility with potential partners in order to access OPM? Would I show them a portfolio of buildings that I've worked on with accompanying numbers?
@Solomon Oh Be careful, when you solicit people, to invest in your projects. If you are "pitching people" that you do not know, you are potentially opening up a can of worms, with the Security and Exchange Commission (SEC). If you do not have what the SEC terms "a relationship" with these people you are technically creating a Security that requires you generating a Private Placement Memorandum (PPM). There are ways to create these relationships and be SEC Compliant. If you desire to feed your "instant gratification mentality," hire a SEC Attorney. There is a limit, to my FREE INFORMATION. As you put it, "haha."
@Solomon Oh what do you do for the PM company you work for? How long have you worked for them?
I think it all depends on your approach and your market. If you're starting to invest in CA then ya, 100k makes sense to save up for because the market can demand it. If you're going to do mobile home in Fargo, ND (like myself) then 100k is not necessary. Also, what is your approach? Are you wholesaling and what is your comfort level? If you're marketing $500-1000 a month and plan to have the cash to close on a deal then you need X amount. If you're willing to use a weasel out clause then $500-1000/month is fine. Personally, I'm not a fan of the second option but some make it work.
I would suggest to find a way to transition out of your w2 job. I've found a company that I can do minimal property management for while still working a full time job and it works out well. It also leaves me time to do some flipping on my mobile homes as well.
@Thomas Franklin Thanks again!
Hi @Com M. I am looking to House Hack and reposition a fourplex/multiplex to begin with. I shot myself in the foot by buying a house first before thinking about house hacking. I haven't had the best experience with wholesaling so I've since stopped for the time being. The multiplex investing is the way I am going.
Makes sense. House hack those homes to get started. That requires not as much down and get you in a position to learn a lot off the bat. Best of luck!
@Solomon Oh I am not a fan of purchasing a Residential Multifamily Property known as "House Hacking." If you are looking to owner occupy, you may want to consider starting out, with buying a Duplex, TriPlex, or a Four Plex. Many Realtors will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. If the property requires rehab, the Realtor and/ or Mortgage Broker will suggest applying, for a 203k Loan. A 203k Loan is where the purchase price and rehab costs are rolled into a single loan.
Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). You live in one unit and let your tenants pay the mortgage and other property expenses. This will give you experience as both a Landlord and Property Manager. The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.
If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.
If you think you will go FHA, Conventional, 203k, etc. and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.
Many Realtors and/ or Mortgage Brokers will not tell you this information. Many, but not ALL are only focused on the commissions he/ she will earn and not focused, on your best interests. You may be asking yourself what can I do? Locate a Motivated Seller that will consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.
@Solomon Oh... I'm curious what the price of an entry level SFH is and what the rent you could get on it would be.
In our market there are folks buying homes as an owner occupant, living there for a year, then converting them to rentals and repeating the process to acquire properties that way.
I'm wondering what the numbers might look like for you there doing that.
Thanks!
I was asking what you do with the PM company because if it involved the PM management, rehab management, etc it would give you a lot of experience that new investors that have cash but not the experience would find valuable in a JV deal and allow you to come in with less money but 50/50 profit splits based on your experience running the rehab.
I have personally seen multiple deals where investors came in with little of their own capital but because they were running the entire deal from finding, rehabbing, and managing they received a great partnership deal. I have heard a lot about no money down, but if I had the answer to that I would have 10,000 doors. :) The hardest part will be to find that deal that is so good they are willing to take this investment with a newer investor partner it has to be worth their time and money.
@Thomas Franklin Your advice is invaluable. I have not heard of such a thorough step by step breakdown of the what if's on multifamily investing.
@James Orr In the Seattle metro area homes are priced right around 500K. If If I look further South I could find homes for about 250K-300K. Still very difficult to cashflow on with a 20% DP. I did buy a condo with the plans to move out next year & rent, but I don't believe I'll have the required debt to income ratio for a lender to consider me for property #2. Looks like owner financing will be key for the next property.
@Solomon Oh... OK. I was going to run it through a calculator I use to see how it might look with putting 5% down, moving in as an owner occupant for a year then converting it to a rental. What might the $300K properties rent for?
@James Orr Here are the numbers on a house very close to where I currently live:
Price Point (250K) with 10% down
3 bed/1 Bath - Rents $1,500.00 (Median Rent Range)
Vacancy rate - (8%) ($120.00)
Maintenance (10%) ($150.00)
Effective Gross Rents $1,230.00
Debt Service on 10% down (1,412)
Cashflow= ($182.00) * 12 = ($2,184)/year
I play a very conservative game as I do not want to lose my shirt.
Thanks @Solomon Oh.
I assumed:
- Interest rate of 4.5%
- Property taxes were .75% of the property value each year
- Property insurance was .5% of the property value each year
Vacancy there is MUCH higher than we have here, but we start looking for tenants 60 days prior to the property being vacant, so that might be a difference too. At 3% vacancy, here's the breakdown of expenses.
And, here is the appreciation, depreciation, cash flow and debt paydown benefit each year if you live in it the first year.
It looks pretty good if you repeat the process and buy a new one like that each year, live in it for a year then convert it to rental and repeat until you have 10 rental properties. I made some assumptions on appreciation (I used 3% which is what I believe inflation will be). I have some charts on that too if you'd like to see them.
@James Orr I like the numbers & charts you used to calculate the amount. I used the vacancy rate of 8% as I am very conservative about having 1 month as a buffer to find a tenant.
I know I really can't say too much in the way of rentals, but doesn't 10 units/houses seem like a small number for 10 years worth of work? How do we accelerate this process so we can do 100+ units?
Thanks @Solomon Oh!
> I like the numbers & charts you used to calculate the amount. I used the vacancy rate of 8% as I am very conservative about having 1 month as a buffer to find a tenant.
Ahhh... if I were running numbers on that, I'd use a "rent ready" cost for that rather than have it be a "vacancy".
> I know I really can't say too much in the way of rentals, but doesn't 10 units/houses seem like a small number for 10 years worth of work?
This is the Nomad model where we are moving into each one and only putting 5% down on each, so the total amount invested is very small. You can do additional deals beyond this as well, but you need to live in each one for a year to get owner occupant financing with the smaller down payment and slightly improved interest rate.
> How do we accelerate this process so we can do 100+ units?
You can do additional investing beyond the Nomad model too to increase the number of units.
Thanks @Solomon Oh!
> I like the numbers & charts you used to calculate the amount. I used the vacancy rate of 8% as I am very conservative about having 1 month as a buffer to find a tenant.
Ahhh... if I were running numbers on that, I'd use a "rent ready" cost for that rather than have it be a "vacancy".
> I know I really can't say too much in the way of rentals, but doesn't 10 units/houses seem like a small number for 10 years worth of work?
This is the Nomad model where we are moving into each one and only putting 5% down on each, so the total amount invested is very small. You can do additional deals beyond this as well, but you need to live in each one for a year to get owner occupant financing with the smaller down payment and slightly improved interest rate.
> How do we accelerate this process so we can do 100+ units?
You can do additional investing beyond the Nomad model.
@James Orr Thanks for the information. I think there is a good play starting nomadic and moving into multiplexes when the equity builds.
Thanks again for your insight!