In case you didn’t notice—yesterday was the first day in which I did not publish a blog post. I’m thinking I need to scale back just a bit. Don’t worry, this blog will still be the hip happenin’ place it has always been. Right?…
I think I’m going to publish a video soon. As dig deeper in my research, I’m discovering some unsettling truths about the numbers in NYC real estate. It’ll be easier (and more fun) to explain everything via video rather than in writing.
More to come soon. Stay tuned!
In yesterday’s post I shared an incredible article called “How to Make a Million Dollars from Real Estate.”
Well, I actually found the more detailed ebook. I read it on the subway this morning and it is incredible. Seriously. I just wanted to share it with you.
It’s a free PDF—I promise, I don’t know the guy. I just wanted to share it for its intrinsic value.
Last month, I discussed my long term goal for the next 5 years. As I do more research and as this becomes more of reality and less of a theory, I’m learning that my goal needs some tweaking—I just don’t think it’s very realistic.
I’ve recently learned a few things:
1. Real estate investing is extremely difficult.
2. It’s not a “get rick quick” scheme. It takes time.
3. Flipping properties is a lot of work.
4. Wholesaling (read about that here) is also a lot of work.
Was I naive in thinking, “Hey. I’ll just buy a house every year. If I need the capital for the down payments, I’ll just do a few fix and flips and I’ll do some wholesaling. And I’ll do all of this on the side. No problem.”? Yes, I was. But that’s completely okay.
My misconceptions were very common for a newbie.
With that said, there is a lot of money to be made in real estate. You’re probably not going to be able to quit your day job and become a full time investor overnight…but you can make over a million dollars in real estate. According to this strategy, you can do so in 7 years. However, the writer is honest enough to say:
- This is not a “get rich quick” plan. It takes place over seven to ten years. It might take longer, it might take less.
- This is not the only way to make money in real estate. Just one path that I like.
- This is not a guaranteed plan. This works based on ideal numbers. You might find things better or worse, depending on your location.
- This is not legal advice.
So check out Brandon Turner’s blog post. It’s a fascinating read.
How to Make a Million Dollars from Real Estate: A Step By Step Path
We’re on the hunt today! Mollie and I are going to familiarize ourselves with neighborhoods on weekends (not sure why I’ve never disclosed my wife’s name on this blog, by the way). Today, we’ll be exploring Bed-Stuy, Brooklyn.
Originally, we were going to explore Sunnyside, Queens but we changed our minds at the last minute.
We’re looking for something that is nice, safe, gentrifying, and affordable.
Bed-Stuy seems to meets that criteria (certain parts of it, at least). I’ll be doing some more research on Brooklyn.
As far as neighborhoods in Queens that meet that criteria:
- Richmond Hill
- South Richmond Hill
- Ozone Park
- Kew Gardens
- Rego Park
However, these neighborhoods in Queens are pretty far from Manhattan and they aren’t near the subway.
As I’ve said before, perception is often more important that reality. If a neighborhood has perceived value, the numbers soon follow suit. It seems to me that living deeper in Queens carries a negative connotation for young professionals (the demographic I want to target) whereas living deep in Brooklyn is “cool”.
I don’t have to explain it. All I have to do is realize that Brooklynites are “cooler” than Queensians (I think I made up a word) and monetize on the perceived value.
That’s a good question. If you were to ask 100 different investors, you would get 100 different answers.
Dave Ramsey says not to put all of your eggs in one basket. Warren Buffett says to focus on your “circle of competence”. Mark Cuban says diversifying is for idiots. Kevin O’Leary says diversifying is the only way to ensure any ROI. Simon Black says you are putting all of your eggs in one basket (that basket being the US government) unless you’re investing in global real estate and foreign currencies.
I say investing is an art as well as a science. It’s different for everyone. The most important thing is an education in financial literacy. The way I see it, diversifying your portfolio is an incredibly vague notion for an incredibly complex subject.
To one investor, diversifying might mean investing in raw land and small apartment complexes in addition to single family homes. To another investor, diversifying might mean investing in mutual funds in addition to real estate.
It’s all quite subjective.
There are so, so, so many reasons as to why I love real estate. But I want to clarify one thing:
If someone says “real estate is always a good investment” they are wrong. Real estate is like anything else—there’s good and bad. It’s up to you, the investor, to look at the numbers and ascertain whether or not it’s a good investment.
Of course, there’s plenty of room for creativity but (as the saying goes) “putting lipstick on a pig” is never a good investment strategy.
If you want to flip a property for a quick profit, make sure the numbers add up.
If you want to hold on to a property for cashflow from tenants, make sure the numbers add up.
Your investment strategy should never be as simplistic as “real estate always goes up in value”. That’s false…just look at Detroit.
It would appear that Astoria is a lot more expensive than I had hoped—about 50% over my ballpark estimate. Yikes.
Needless to say, my wife and I are going to scope out some new neighborhoods. I’ll keep everyone posted on what I find. In fact, this blog is going to be pretty fun (not that it isn’t fun already. Right? RIGHT??) when I start hunting for deals.
On another note, I read a blog post about saving up your down payment. It said that renting out a spare room or a living room (we’d have to go with the latter because we’re in a one bedroom apartment) is a good way to raise some cash. I checked out Airbnb and we could list our living room for $85 a night. Renting out the living room a couple of nights a month (we would probably do it on the weekends) might be a good way to raise some extra cash.
However, I would want to do some more research on this and I would want to take every single precaution before opening up my home. All I’m going to say is…you can take a man out of the South but you can’t take the South out of a man. Your typical Southern man will do whatever it takes to ensure the safety of his family. Whatever it takes.
But with that said, what do you guys think about Airbnb? The only experience I’ve had was when my wife and I stayed in Montauk. From a guest’s perspective, it was wonderful.
Do you have any Airbnb experiences you’d like to share?
Today I found some additional information on FHA loans. I want to do some more research, but here it is in a nutshell: (a slightly disheartening nutshell…but I knew to expect the unexpected.)
Because you put so little down for an FHA loan, (3.5%) you have to make a PMI (private mortgage insurance) payment. Basically, it’s a little somethin’-somethin’ extra added to your mortgage payment.
I also learned that I will probably need an additional 5% of the price of the house for closing costs, taxes, prepaid insurance, etc. Ouch.
I can try to reduce these fees by taking on a slightly larger mortgage rate. Obviously, that will cost more in the long run due to interest. Perhaps there’s a way to take advantage of that by refinancing down the road.
Apparently I can try to negotiate a 3% “buyer concession” as long as the property appraisal supports it (I’m not sure what that means or what that is…but I like the sound of 3% over 5% when I’m the one who’s paying).
As you can see, there is a lot of due diligence involved in buying a house.
When I first learned about the FHA loan I thought to myself, “Investing in real estate is awesome! Why do so few people do it?” I’m beginning to see why.
It is a lot of hard work. It is a lot of research. And of course, there is risk involved.
However, I think those who take calculated risks are rewarded.
I mentioned wholesaling a few days back. I recently learned about this concept and I’ve ‘gotta say…I could see a lot of benefits in wholesaling.
So what is wholesaling property?
A wholesaler is basically a middle man. He’s the one who links the seller to the investor/buyer.
He creates a contract with the seller. During an agreed upon time (maybe 30 days) the seller can not sell the property to anyone else. The wholesaler finds a buyer/investor. The investor buys the property from the seller and the wholesaler collects a finder’s fee (a nice little commission). It’s a win-win-win situation. The seller sells the property, the investor gets a good deal, and the wholesaler makes a nice commission. Isn’t capitalism great?!
This is a good way for a newbie (like me) to get their feet wet. I would be able to learn my market and learn how to find good deals. Since the wholesaler is flipping contracts instead of flipping houses, he does not need financing.
This is also a good way to network organically. Who knows, if you’re connecting with investors and hooking them up with good deals, they may be interested in becoming equity partners down the road (we can talk about equity partners in another post).
Many real estate investors will tell you that wholesaling can be a great way to get started (plus you can make some extra cash, which would be great for saving up that down payment).
I need to do my homework and see how an FHA loan works with foreclosures and auctions but, assuming that can work, who knows…maybe I’d know enough to be able to get a good deal at an auction for my first home after I have a few wholesales under my belt.
I’ve been toying with this idea. What do you guys think?
First of all, happy Easter!
Today is part 2 of yesterday’s post:
I will not have a two year post college work history until October (read about it here). I’ve been doing some research and I found that a portfolio lender, as opposed to a traditional mortgage lender, could make an exception to the two year rule (especially when you pass every other requirement with flying colors).
Here’s the main difference between a traditional mortgage lender and a portfolio lender:
Traditional mortgage lender: They often sell their loan (your mortgage) to other investors. By doing this, they make a profit and minimize risk.
Portfolio lender: They hang on to the loan (your mortgage) and collect your payments month after month. I’m not sure specifically as to why, but this gives them more room for creativity and flexibility.
So let’s say someone has a down payment, excellent credit, a good, steady income, two lines of credit, and they are just a few months shy of having a two year (post college) work history…the portfolio lender can give them the loan anyway.
Traditional mortgage lenders just follow the rule book.
I’m not saying I’m in a rush to buy a house just for the sake of buying a house. Nor am I saying that I have the down payment. (I’m getting closer and closer though!)
I’m just saying, if I find a great deal/house at $500,000 and I have $17,500 saved up before October, I might seek financing from a portfolio lender.