The path to financial freedom is forged by decreasing expenses and increasing income. But when you don’t have the time or inclination to take on additional hands-on jobs, you might want to consider streams of passive income. Passive income is defined as money that continues to flow regularly with little effort to maintain. So, you may put in a ton of work in the beginning, but then the money starts to come in and there’s just some maintenance on the back end to keep it up. One popular passive income stream is real estate investing. Think it might interest you? Check out my interview with a real estate investor that I happen to know pretty, pretty, pretty well…because he’s my husband. Haha!
I began reading and learning towards the end of my college days. “Real estate investing” and “financial freedom” seemed to always merge, at some point (depending on the source). I knew early in life, that I didn’t want to work your typical 9-5, as I saw firsthand growing up the strain that could have on the family home life. From there, I started small with getting access to credit. I started my own Limited Liability Company (LLC) called New Life Properties and opened a credit card, which I used for small purchases like my cell phone, gas, and internet access. I didn’t do my first “deal” until two years later down the road, once I had a solid foundation to stand on.
I started looking and working with real estate (RE) agents around 2005 and quickly realized that trying to get my schedule and their schedule aligned before the good deals were sucked up by another investor, was near impossible. I invested in getting my RE license, so that I could control the entire process while earning commissions (def a must for anyone who is serious about investing in RE). From there, I started to make offers. I started within the neighborhoods I knew best—where I grew up—and where we were looking to live. For rentals, I was most interested in the single-family housing market for several reasons: they were easier to predict improvements costs; were more readily available; would provide long term tenants; and could sell easily if/when I chose to. In this business, it’s not uncommon to make 10-15 offers before you find a deal. I was fortunate enough to be able to use the credit I established to buy and rehab my first 3-bedroom (BR), 1-bath (BA) rental house out right for “cash”, which saved me a lot of time and money (two most important aspects of the business). From there, the rehab took around six weeks, and I rented the house out about two weeks later. The next step was to recoup my initial investment, rinse, and repeat by mortgaging the property on a 30-year-term loan. Ideally, you should go no higher than 15 years on investment properties, but that was a lesson I learned later in my career.
I like brick homes with good “bones” i.e. foundations, structures, with a minimum of 3 BR and 2 BA in your average, middle class neighborhoods. A lot of investors make the mistake of buying now with the hopes of making their money once the neighborhood appreciates down the road. This method can work, but when in a pinch, you need to be able to get your money out fast. Waiting for something to happen that may never, is not the best approach. Buy and plan to make money off today’s market values and rents, and if/when that appreciation does happen, it is just the icing on top of an already sweet deal.
For the past 11 years, I have done all rentals, simply because of the timing. I started investing in my mid-20’s before we started our family with the idea that this was going to be a long process to create wealth. There is no right or wrong way to invest in this business, if you crunch your numbers and plan accordingly. To establish long-term wealth, you need to accumulate assets. That’s why I prefer rentals, especially early in your investing career. With that said, the Pittsburgh market has exploded over the past several years in terms of the market to buy and flip houses. I definitely have thought about going down that path, especially now that I am later in the amortizations schedules with my rental portfolio. The rental vs flip strategy does have a lot of the same parallels, so it does make a lot of sense to consider both.
I bought, rehabbed, and rented 14 properties from 2006 through to 2009 when the markets were down. Another key to success in this business is timing. I know a lot of people out there may think that this strategy has some moral flaws, but I focused my offers on estate sales and bank foreclosures. Most of the deals that I secured were from estate sales. Typically, there were several family members responsible for managing theses estates, so cash offers with quick closes were very appealing to them. They wouldn’t have signed the deals had they not been satisfied, so it’s important for people to realize how this process works before they throw around derogatory terms for buying low, making improvements, forcing the appreciation, and either renting or selling the property. RE investors have been known to take some flack, but when you look behind the curtain, someone taking on the risk to invest in a dilapidated property to bring up its value, and the values of other homes in that community, should be able to make a profit.
I would definitely say my first deal. I learned so much and truly valued that process. From there on, my confidence really grew and took off to the point where I was doing three to four deals at a time in small window of less than three years.
Yes and no. The two properties that give me the most headaches are the same two that I profit from the most. There is very much a give and take in this business. A lot of people cannot separate the business side from the emotional side of real estate investing. It can be very hard to walk into a rental and see the way that some people live. In the end, they pay their rent, as well as a security deposit, so anything that is not returned in the same shape as when they moved in is financially their responsibility. Most of the time, things look worse that they are, so understanding a little elbow grease and fresh paint can go a long way is an important perspective to maintain.
Absolutely. As I mentioned earlier, this is when things really took off for me. In a down economy, Cash is King! So many investors in RE, as well as in the stock market, were able to make investments during this time that have paid off 10x and beyond. Both markets [can be] very predictable. We have been on a steady climb since 2010; however, history predicts that another dip in the markets should be coming soon. It is important for investors in both realms to be informed and patient when making transactions. I’m not talking about paralysis by analysis, but being strategic and wise with your hard-earned money is essential to your success. Small wins and small losses can both lead to bigger gains in the future, so don’t be afraid to pull the trigger once you have done your due diligence. Mistakes are going to happen, but never wager more than you are willing to lose. If you are focused, informed, and persistent, you will be successful in the end.
Very much so. While the markets have been climbing since 2010, I have not made a single purchase. My strategy since then has been to control costs, maximize my cash flow by finding quality, long-term tenants, maintain my current portfolio, and now build up my cash reserves for the next dip in the markets. I am also starting to consider selling off and buying up to get into bigger markets like mixed use and vacation rentals. Fortunately, the neighborhoods that I am invested in have all seen tremendous appreciation over the past 11 years. For the right price, I would very much consider selling off my entire portfolio to have the cash in hand to be prepared for the next market dip.
Find a mentor, someone who has the time and wisdom to invest in your future. These are not hard to find, but you must be prepared to offer them something in return. Most likely, this will be either your time or your money (or both). I invested both early on, and I am very thankful that I did. I’m not talking about going to one of those snake-oil salesmen pitches in Florida or California where they charge you tens of thousands of dollars to teach you their theory that may or may not work in your part of the country. I’m talking about finding someone local who is currently where you want to be in life, and forging a relationship that is mutually beneficial to you both. I would also recommend for you to get your RE license ASAP with a broker that understands real estate investing or is even an investor themselves. I would avoid the “Big Box Brokers” and look for a smaller outfit close to your home. Be prepared for the long haul and consult a qualified CPA so that you are not caught off-guard come April 15th.
So there you have it–he makes real estate investing sound easy, huh? If you have any questions I didn’t ask, drop them in the comments and I’ll get an answer for you. And do me favor please–give this a share. I promised him life-long infamy on the world wide web in exchange for this interview–I gotta deliver! 😉