Complete newbie from Gilbert, AZ

[Kurt Granroth]

Hey y'all.  I'm Kurt and boy do I understand the phrase "you don't know what you don't know" because, well, I know so vanishingly little about real estate investing that pretty much everything is a recursive "don't know".  Gotta start somewhere, though!

I've lived in Gilbert, AZ (suburb of Phoenix, in its East Valley) for about 20 years and while I've owned a few homes as primary residences (and truly own my current mortgage-free home), I've never really considered investing in real estate in any real way until very recently.

My wife and I are both software engineers and have been blessed with notably high income as a result.  We got enamored by the FI/RE philosophy (Financial Independence / Retire Early) a few years ago and have committed to investing some 75% of our net income into the stock market.  The goal was to get to roughly $1.5M and then retire, since all of the math says that we could safely withdraw (the SWR) 4% of our investment pot every year ($60k a year) and be able to sustain that indefinitely.  We're about 75% of the way there, with $1M already working for us.

But even though the math all works out and all of the simulations I run seem solidly in my favor, I'm still very concerned about having all of my money in a single basket.  Yes, the stocks are thoroughly diversified... but the stock and bond markets still feel like one entity to me.  That's why I (very) recently started eying the possibility of diversifying even more dramatically by also investing in real estate!

I am a pretty handy guy.  I've built an addition to my home (everything but plumbing and concrete-work); a garage (sans concrete); and a home theater (everything).  Plus, I have a DIY YouTube channel ("granworks").  All that to say that it may seem like the Flipping option would be a good fit, since I'm confident I could remodel any part of a house.  But... there are a lot of people flipping homes in the Phoenix area and I'm just not sure I'm aggressive enough to compete in a market like that.

So what I'm mostly eying to start is the Buy-and-Hold model.  Maybe get some mildly distressed properties and then rent them out?

I don't have dreams of riches or anything resembling that.  My tentative goal is to be able to sustainably earn $2k-$5k net a month from whatever real estate investments I have.  So what will it take to do that?  I have no idea.  See above for the "vanishingly little" that I know.  Could I get there by investing just $250k of capital?  Would it take a lot more than that?  I guess I'll find out.

That's where I'm at.  Just starting my real estate journey and learning something literally every day.  Glad to be here to learn from y'all!

[James C.]

Kurt,

Since you are already into S&B, you can very easily think of the value of real estate as the sum of the discounted cash flows at your reinvestment rate (IRR/MIRR). Buy and Hold real estate works out akin to the bond market.

How you want to do this depends on if you are levering, or paying all cash.  Your best Cash on Cash returns come when your levered to the hilt, but that comes at the cost of cashflow and increased risk. Paying all cash reduces your cash on cash return, but provides excellent cashflow and minimal risk of loss. Insurance offloads natural risk to 3rd parties.

For investment properties banks usually require 20 to 30% down. which protects their risk of loss. Hard money lenders, whose only recourse is the properties typically work in the 30 to 50+% down range.

The hard part will be deciding where you are comfortable with the risk vs. return curve. If I am personally signing on a note, I am comfortable in the 50% to 80% levered position, and make sure that I have enough positive cash flow (cash on cash return) to make it worth my effort, depending on property type/location etc. I don't ever envision running non-levered properties, unless it becomes an advantage to do so. 

Today, cap rates (Return on 100% investment equivalent rates) are being compressed to below 6% (I've seen some negative cap rates), and at that level, good corporate paper is getting to be a better deal. If I were to diversify, I would look at figuring a 6% return on my invested cash, and make my cash investment decisions from there. Again, it's always a levered vs. un-levered decision. If you are levered, it's an arbitrage play between your income from the asset and the payout on the leverage plus expenses of running the asset. 

If you are looking for more of a passive income stream, purchasing underlying performing mortgages is easier (not so hands on, albeit tougher to find good ones), and if purchased correctly, they produce better returns. I'd stay away from NPN's for passive income, as they can be management intensive, and really good portfolios are hard to find. Another avenue might be becoming a hard money lender, but again, that space is fairly crowded, and the availability of Fix/Flip deals that make sense is being reduced. Private lending is another avenue, but you have to know your underlying assets, and borrower, and there is an increased risk of loss, since many of those deals are pure equity plays, and you are completely passive in the deal. Other options include JV/Syndication or partnerships, but again, that is similar to a REIT, so you are back in the S&B space.

Some good (but older, with some outdated information, mostly on taxes and secondary market stuff) books on the subject include (all available on Open Library for FREE!):

Real Estate Finance Theory and Practice (I have the 3rd edition) Clauretie, Terrence M.

Real estate investment strategy - Seldin, Maury

Real estate investor's deskbook - Arnold, Alvin L (one of my favorites, very technical)

Sensible finance techniques for Real Estate - Reed, John T

Successful real estate investing in a Boom or Bust Market - Loftis, Larry B

The Complete Guide to Real Estate Finance for Investment Properties - Burges, Steve

Hope that helps. Let me know if you have questions, or need more information.

Good Luck!

Jim