How I got into real estate investing

A few people have asked me how I got over the fear of making the first step in investing in real estate.

When you do anything the first time, it can be a cause of fear. Think back to when you went on a first date with someone -- you wanted to impress them, but not appear too desperate, and didn't want them to reject you. Or when you started a new job, you wanted to make sure you were a valuable player but not seen as a kiss up.

I related a bit of my story on my podcast, but here it is in text form. So, my story starts with me investing 2 hours away from where I lived. How did I get involved with that? My cousin, who was near to my age and I grew up with, married a guy who owned a home remodeling business. They approached me to get into the business of flipping homes as they did two projects themselves and claimed to be successful.

The big mistake I made is that since I grew up with this cousin, I trusted her word (and her husband's) regarding the business. What I found out during the course of the venture is that they had very different ideas of what "good business sense" means than I do.

It came to the point that I would either be out $35,000 ($30,000 of what I stuck into the venture, plus $5,000 in attorney's fees) or I would be out $10,000 ($5,000 in attorney's fees and $5,000 to pay him off to go away). I chose the second option.

I didn't have $10,000, so I borrowed the $5,000 to pay off my cousin's husband and worked out a deal with the attorney's office to pay off the $5,000 in monthly installments.

At this point I was stuck with two houses, two hours north of where I lived. Both had mortgages on them and one also had a renovation loan. I took over everything as part of the deal.

One of the houses was almost completed. I went up there on the weekend and finished up the house and advertised it for rent. (It had been sitting vacant for months because said cousin's husband refused to rent it out when it didn't sell.) I found a nice couple from NC who had relatives in the area who visited the house on their behalf. After they moved in, I used a little money I had to replace the garage roof (which had been left undone after 10 months of renovation).

Now onto the second house which was torn down to the studs. Long story short is that I spent 10 months putting that house back together, driving up on the weekends and driving back. Every time I got a vacation day from my regular job, I went to the house and worked the whole day. So I was essentially working 7 days a week for 10 months.

How did I get the money to work on the house when I started off essentially in the hole?

To get additional money, I moved from the apartment I was renting for $895/month to one that was $645/month and sold off some things I had. I was originally going to buy a house for myself, but I put that off. I was also going to get married, but put that off as well.

The bank was holding a few thousand dollars in a CD as collateral for the loan. I spoke with them and negotiated to release these funds directly to the contractors so I could get some of the major items completed (plumbing, carpeting, etc.) I also took a small loan from an acquaintance.

Finally, the house was ready and I advertised it for rent and got tenants.

Whew!

So there you have it. I could have simply walked away, and lost a ton of money, or stayed in and lost quite a bit less. I didn't just lose $10,000 of course because I lost all my time in the venture.

I decided in 2011 that if I could survive what I went through, and be a long-distance landlord 2 hours away, that I should be able to "make it" in the local market of Milwaukee where I lived. Certainly I couldn't do any worse!

So what can you take away from this?

I think the best thing to determine is if you want to invest, but are afraid, what exactly are you afraid of? If you're afraid of losing money, then you can keep your money in a savings account and earn 0.5% interest. You will likely not lose any money.

If you're willing to take a little more risk, the window of what you can do opens up. The more risk you're willing to take, the more return you'll get. (ANY investment has risk, and anyone who tells you otherwise is lying to you.)

For example ("Breaking Bad" reference here), if you're willing to be a meth cook/distributor, you can wind up with a TON of money. But you risk losing all your money to the D.E.A. or having it stolen by rivals, and generally getting beat up or killed. Okay, TONS of risk there. Most people aren't going to be drug dealers. (Good thing!)

Read/research on Bigger Pockets the number of different ways you can invest.

Maybe you are thinking of investing out of state. Can you tolerate the risk of owning real estate out of state? What happens if your personal financial situation changes and you need that money back? Property is not liquid; you generally cannot sell quickly unless you either break even or lose money.

What about private lending? You can earn a pretty good return, but generally not as good as actually being an owner. If you do this, you have to vet the person you're lending to carefully. How confident are you that they are going to pay you back? Do they pay other creditors back? Have they taken out loans in the past that they've paid back?

I think you get the point, and I've written quite a bit here! That's my story!