How did you make your first profitable real estate investment(s)?

[redstar1324]

I am currently using the only strategy that is available to me, and that is to take out commercial real estate loans and personal loans to fund the down payments.

I am having a hard time finding properties that will rent out for more than the combined loan payments. The only thing that even comes close is to buy cheap houses with a lot of bedrooms. For example, I found a $40,000 house with 7 bedrooms that barely breaks even. I don't have time to save up a down payment. That would take years.

How did you make your first profitable real estate investment. The only real estate investments I am interested in are: houses, RV parks, mobile home parks, apartment complexes, and hotels. But for now, I think only the first three would be within my reach.

[Freelancier]

and that is to take out commercial real estate loans and personal loans to fund the down payments.
Bad idea. You don't take on debt to obligate yourself to even more debt. You save for your down payment and then save even more to make sure that you have enough to fix up the place you buy. Then you let cash flow pay off the mortgage.

If you can't save for it, then you're looking at the wrong investment for you.

We have a few break-even RE investments, the profit will come when the mortgages are paid off in 2028, until then we're using the cash flow to keep us break-even. There's little "profit" in real estate except from property valuation increases (which requires cash to update the property) and from having someone else pay off the mortgage.

[Harold Mansfield]

I agree.

Don't listen to those no money down hacks on TV and in seminars. Half of them end up indicted for fraud anyway. If you don't have the money to invest in your ventures, get it, make it or save it. Maybe start slow and build...like buying tax liens and work your way up to properties.

The way you're doing it now, one stoke of bad luck and you're ruined because your business model is based n everything going exactly right while carrying a lot of debt. If you were creating the next Google I'd say go for it. But on real estate deals and flipping? Nope.

[redstar1324]

Define "stroke of bad luck." What could happen? All the numbers plugged in. I don't foresee a problem finding tenants.

I don't ever plan to flip.

Plus take into account the fact that the personal loan will be paid off in a relatively short period of time.

[turboguy]

I have read 3 or 4 books on real estate investing. The first one detailed how he had turned a small amount of money to a million. He then wrote a sequel on how he turned it into 2 million and a third one how he turned it into 5 million. Then of course he went bankrupt a few years later in 1987.

Here is a really interesting link about the making a million in real estate topic.

Please check this out. Best-selling real estate authors: where are they now? by John T. Reed (http://www.johntreed.com/bestseller.html)

I will agree with you that finding tenants is easy. That isn't the problem with being a landlord. I have been a landlord a few times and could tell you lots of horror stories. I never want to be a landlord again but I think if someone wasn't as easy going as I am they might be happier in that field.

[Freelancier]

What could happen?
What could possibly go wrong? If nothing can go wrong, 2007-2009 didn't happen and could never happen again. 1987 didn't happen and could never happen again. You need me to go on? Of course you do.

I have a cousin who has 10+ houses for rent. When the economy gets bad, his tenants stop paying and he has to take legal steps to evict or just put up with it until the economy gets better. If he evicts, he has to find another tenant and hope they can pay. His mortgage company still wants payment, regardless. Coming up with the shortfall takes lots of cash. He almost lost everything including his own home.

But the spreadsheet doesn't lie. You're positive that'll never happen to you.

When starting a new business, always start with this assumption: everything bad will happen, usually all at once. How will you handle that? Do you have enough cash to weather the storm? Sounds like you don't.

[Fulcrum]

Spreadsheets are great tool but they must be used with respect. They won't show you the what if.

What do you do if all you get are bad tenants that destroy the property? You could take them to court for damages, but the best you could probably get is a judgement that probably isn't worth the paper it is written on. If you're located in Ontario, Canada and your tenant knows and understands the system, there is a good chance you will get 2 months worth of rent for 6-8 months of occupancy.

@Turboguy, that was an interesting list. I didn't realize that both Allen and Kiyosaki filed for bankruptcy.

[turboguy]

The people who live next to me are renters. They are really trashy and the police have been there late at night a number of times. When I think about being a landlord I can recall the time she was out in her backyard screaming at the owner of the house at 2 AM calling him a MFer etc because he would not come right then and fix her stopped up toilet.

The house I am living in I used as a rental property when I first bought it. I fixed it all up and rented it to a young couple we bowled with in a league. They had a cat at the time. I was ok with a cat and didn't say anything about pets. After they moved in they got two big boxer dogs. One of the things that was funny was the side door had a big glass panel in the top half of the door and a mail slot just below that. One day the mailman was putting mail in the slot and one of the boxer dogs came flying through the upper glass section. I have a feeling his pants didn't smell too good after that. Those dogs basically destroyed the new wall to wall carpet I put in when I remodeled and I had to have it replaced after they moved out.

I have a small house that my mother had as a rental property and rented that to my son at one point in time. He got a Black Lab and was never home so the dog was neglected. The dog ripped up his army boots his couch, his pool table and the smell was so bad that even after replacing the flooring you could not stand to go into that house for 5 years after.

I had one tenant in another apartment that I virtually could not get out. I had one lady that all the neighbors were complaining that there were men coming and going all hours of the night and they thought she was running a house. My next tenant there was gay and there were more men running in and out all hours of the night when he was there which was only for two months. I did have one pretty good tenant except for the fact they were slow paying their rent. I rented out some garages and people would use it as a repair shop and leave a ton of broken car and bike parts.

Brad, glad you enjoyed the list. I thought people might enjoy that.

[redstar1324]

Yes, the economy could go down. But there's really nothing I can do about that. I have to at least try. And in the future, I will be able to take out loans for lower rates because I am currently having to use private mortgage lenders because I don't have 2 years of tax returns to show a bank/credit union.

Trump went bankrupt a couple times, too. Now he's running for president. If you can do it once, you can rebuild after a crash.

What's my option? Sit here and do nothing?

[turboguy]

I think for most of us we are not trying to discourage you or to dampen your enthusiasm but rather to make sure you know what can happen so you go into this with your eyes open.

My experience was that the most difficult part was getting good tenants. I think if I were going to get back into being a landlord I would avoid owning property in areas that are not at least above average. Being a slum lord is asking for problems.

I don't know where you are but another option you could look at would be ways to buy properties cheap. I am talking about tax sales and sheriff's sales. That might be tough if you are in San Francisco but in some areas it isn't that hard. I actually bought the house I am living in at a tax sale for $ 3,100.00. It had a tax value of 65 K. I have put a lot of work into it but will likely be putting it up for sale in the next year or so for just under 100 K. I am in an area where you can buy a decent house for 50K however. You can actually buy a livable house here for 10K.

[Freelancier]

I am talking about tax sales and sheriff's sales.The problem is that those types of sales want cash and need even more cash to fix up... and the OP admits he can't raise enough for a down payment without borrowing money. He can't get normal-rate loans because he has no credit or work history... and I'll bet he won't be able to get a loan at all without putting 30% down of his own money.

And he thinks Trump is a good model to follow, not knowing that Trump started out with a $400 million bankroll from his Daddy and the bankruptcies he references were for Trump businesses and not Trump personally.

There's an strong odor of denial here.

[redstar1324]

You are right. I won't be able to get anything without putting 30% down, which I plan to finance with a 4.5% personal loan over 5 years.

So do you think Donald Trump would have been successful without his startup capital from his dad?

What did he do or what does he know that I don't?

What would you buy in my situation? I am currently looking at houses that have at least 6 bedrooms that cost $40,000 or less that need some repairs. If I can find a formula that works, then I can repeat it.

I just read about how Donald Trump got started. He initially bought hotels that weren't profiting and renovated them.

[Harold Mansfield]

So do you think Donald Trump would have been successful without his startup capital from his dad?
Who knows. But the fact that he was born into wealth, had a front row seat to learn from his dad, didn't have to pay for his own education or struggle from birth is a hell of an advantage that most people don't have.


What did he do or what does he know that I don't?
He was born on 3rd base and handed all the tools. It's pretty easy to get to home when you're 3/4's of the way there.



I just read about how Donald Trump got started. He initially bought hotels that weren't profiting and renovated them.

No, initially his father gave him a building. After that he benefited from access to investment capitol from his dad and the connections his dad already made with banks and investors.

I'm not discounting Donald Trump, but you can't compare yourself to someone like him. You can learn a few things, but his situation is nothing like yours. You will never be able to benefit from the things that he's been able to. You need to find your own path and access the tools and education that are available to you.

[Freelancier]

which I plan to finance with a 4.5% personal loan over 5 years.
Unfortunately, it doesn't work this way any more.

I own a couple of rental homes that I got in the past three years. What the loan's salesperson and the underwriting team tell you are two different things. The underwriting team rules the roost, but won't make any demands until you start the application process.

Underwriting will want to be sure that your debt servicing to personal income does not exceed 42% (+/-). That includes credit card bills, any revolving accounts that are open and unused, pretty much anything that shows up on your credit report AND any loans you get for this home. They will want to understand where the down payment is coming from and what the terms of that will be and then count it against your debt-to-income ratio. For me, they wanted me to explain why one of my income years was much higher than the others in the window they were looking at; didn't matter that I was willing to exclude that year and told them it was an aberration that the other years were more in line with my income potential, they wanted to know not why my income went up in that one year, but why it went DOWN after that, even though it really reverted to the norm. If you tell them the truth that you will not be living there, they charge a higher interest rate (anywhere from 0.75% to 2% higher than you'd normally pay), because it's an "investment" instead of an owner-occupied home... and that additional interest counts against your debt-to-income ratio.

Finally, they will want to see 3 years of making enough money to service the loan with only about half the rental income you think you'll make from it.

As for Trump... good grief... you're not Trump. So let's say you buy a 6 bedroom home for $40K... it could need another $30-40K in renovations (which you don't get to have more loans to cover). Ever try to replace an A/C unit? $3-8K per unit. What about eliminate a mold problem? $10K-50K. And then, what... rent it? If it's a crappy neighborhood and low rent, what kind of renters do you think you're getting and how nicely do you think they'll treat your home?

Feel free to make your own mistakes, I'm just telling you reality from my perspective and based on the mistakes and misconceptions I ran into on the path I took. Your path will certainly be different and VERY different from Trump's.

[redstar1324]

Unfortunately, it doesn't work this way any more.

I own a couple of rental homes that I got in the past three years. What the loan's salesperson and the underwriting team tell you are two different things. The underwriting team rules the roost, but won't make any demands until you start the application process.

Underwriting will want to be sure that your debt servicing to personal income does not exceed 42% (+/-). That includes credit card bills, any revolving accounts that are open and unused, pretty much anything that shows up on your credit report AND any loans you get for this home. They will want to understand where the down payment is coming from and what the terms of that will be and then count it against your debt-to-income ratio. For me, they wanted me to explain why one of my income years was much higher than the others in the window they were looking at; didn't matter that I was willing to exclude that year and told them it was an aberration that the other years were more in line with my income potential, they wanted to know not why my income went up in that one year, but why it went DOWN after that, even though it really reverted to the norm. If you tell them the truth that you will not be living there, they charge a higher interest rate (anywhere from 0.75% to 2% higher than you'd normally pay), because it's an "investment" instead of an owner-occupied home... and that additional interest counts against your debt-to-income ratio.

Finally, they will want to see 3 years of making enough money to service the loan with only about half the rental income you think you'll make from it.

As for Trump... good grief... you're not Trump. So let's say you buy a 6 bedroom home for $40K... it could need another $30-40K in renovations (which you don't get to have more loans to cover). Ever try to replace an A/C unit? $3-8K per unit. What about eliminate a mold problem? $10K-50K. And then, what... rent it? If it's a crappy neighborhood and low rent, what kind of renters do you think you're getting and how nicely do you think they'll treat your home?

Feel free to make your own mistakes, I'm just telling you reality from my perspective and based on the mistakes and misconceptions I ran into on the path I took. Your path will certainly be different and VERY different from Trump's.

I use private lenders that work on stated income so I don't need tax returns. They charge around 11%.

All maintenance costs would be factored in before buying it. I wouldn't buy it if the numbers didn't work.

Once I find something that works once, I can get it to work again. And once my situation improves, I will have access to better loan terms and more expensive investments.

Right now, I only plan to buy buildings that need renovation.

[redstar1324]

Who knows. But the fact that he was born into wealth, had a front row seat to learn from his dad, didn't have to pay for his own education or struggle from birth is a hell of an advantage that most people don't have.


He was born on 3rd base and handed all the tools. It's pretty easy to get to home when you're 3/4's of the way there.




No, initially his father gave him a building. After that he benefited from access to investment capitol from his dad and the connections his dad already made with banks and investors.

I'm not discounting Donald Trump, but you can't compare yourself to someone like him. You can learn a few things, but his situation is nothing like yours. You will never be able to benefit from the things that he's been able to. You need to find your own path and access the tools and education that are available to you.

I have access to investment capital from banks (or private lenders, etc.).

How does having "connections" help you? I have access to all the information everyone else does, don't I?

I have always thought that "connections" were overrated. But maybe there's something I don't know. Can you inform me? How would this help anyone? I can see how having MONEY would help you, but "connections?"

[billbenson]

A kid in college bought a duplex after graduation. He grew that into a business over time. That was in a farm town about a 2 hour drive from Silicon Valley. Back then and probably now, people were willing to do the 2 hour commute each way.

It was a right place right time situation though. Over time property values have gone way up there.

[Fulcrum]

How does having "connections" help you? I have access to all the information everyone else does, don't I?

I have always thought that "connections" were overrated. But maybe there's something I don't know. Can you inform me? How would this help anyone? I can see how having MONEY would help you, but "connections?"

We all have access to information.

Connections come in many shapes and sizes. We lean on the experience of some and others will put us into contact with those whom they think will be a fit for our business. My brother and his wife just bought a new home, a week before it was going to be listed, where the sellers were moving into a seniors residence and the manager of said residence knew my brother was in the market for a new house.

[redstar1324]

Okay.

There is a quote... "it's not what you know, it's who you know."

I disagree with that. But maybe there's something I don't know.

There was a guy who said that often, now he's a real estate agent, while I'm a real estate investor who does his own taxes, accounting, etc....

[redstar1324]

As an added note.... I just found a house listed at $20,000 (appraised at $43,000) that has fire damage and will need about $10,000 of repairs.

I got a loan at 4.5% over 10 years.

On paper, it will net me over $11,000/year. And if this works..... I hope to do it 1000's of times.

Then eventually apartment complexes and hotels.

[Fulcrum]

Okay.

There is a quote... "it's not what you know, it's who you know."

I disagree with that. But maybe there's something I don't know.

There was a guy who said that often, now he's a real estate agent, while I'm a real estate investor who does his own taxes, accounting, etc....

That's only 2/3 of what that quote should say. It's more like:

"It's not what you know. It's who knows that you know what you know."

Hmm, sounds like some marketing may be needed with this statement.

What exactly do you disagree with about connections? This forum alone can, and will, generate connections. From getting a website built to looking for snow removal equipment, the connections are here to either help you out or point you in the right direction.

Good on you for finding a place. If you go for it, I hope it works out well.

[redstar1324]

Why would that be different for shopping for snow removal equipment myself? There is google these days and aren't all companies listen on yellow pages, etc.?

[turboguy]

I hope it turns out well for you and I hope you keep us posted on your progress. Just out of curiosity do you plan to do the work yourself or hire it done? There are lots of people who have done what you want to do and had some measure of success with it. Finding good tenants is the hard part so screen well and set up strict rules about what you expect and allow and check their credit.

Working on older homes can be a pain. I have done a lot of it. Don't be too surprised it things end up costing a bit more than you expected. Most things end up that way but you never know. It is still fun to watch a project come together and to see the changes you make affect the way the house looks. Well, congratulations on finding a house and I hope it is the first step in your being the next Donald Trump.

[Fulcrum]

Why would that be different for shopping for snow removal equipment myself? There is google these days and aren't all companies listen on yellow pages, etc.?

I think you missed what I was trying to say. Maybe I wasn't overly clear.

The amount of knowledge in this forum is unbeatable in almost any forum I've seen. The range of expertise goes from web design (Harold Mansfield) and marketing (David Hunter) to manufacturing (Turboguy) to industrial service (myself). When you run into problems, and you will, you can ask a question and get answers from people who have been there and done that. Contacts and connections don't have to be well known public figures.

With the house you described, if a comparable showed up in my market I would chase after buying it, do a quick but quality rehab, and sell it as quick as I can (the right property at the right price will sell fast with minimal exposure). The only way I'd hold it would be if the capital gain is high enough to justify for primary residence exemption. I don't know what your real estate market is but if the numbers hold up than you may have something worth pursuing.

If you do pursue this, I don't think anyone here would be opposed to seeing some before, during and after pictures.

[turboguy]

If you do pursue this, I don't think anyone here would be opposed to seeing some before, during and after pictures.

Oh, yes, that would be something I would really enjoy. I have rehabbed a number of houses as well as building 3 or 4 and really enjoy seeing someones projects.

[redstar1324]

I will do whatever work I can without a license or know how to do. I'm not going to claim to know how to replace a whole plumbing system and I know people that do.

I don't plan on selling the place. I'm not a flipper. I plan to buy and hold everything I have.

[turboguy]

It is good that you can do some of the work. It saves a lot of money. I think you are smart not to be a flipper. That isn't as easy or profitable as they make it look on TV. If you are in an area with overpriced homes it can be good but for most of us we could get a better return on our time by flipping burgers at MickeyD's.

I have two houses that I have been rehabbing that I hope to put up for sale Monday. They are family houses and I grew up in the one. If my goal was to flip them I probably lost money. If I had it to do over I would have sold them as is dirt cheap. What they would have been worth as project houses would not have been much but if I add that to what I have paid in upkeep and what I put into the houses with new roofs, windows, siding etc I probably lost money and if not gave away lots of hours for no return.

Now if I wanted to do what you plan to do, I would probably have a nice return. I will probably get about 85K for both houses when I do sell them. If I rented them out I could probably get $ 1200.00 a month and clear 1K a month which would get my money back in 7 years and I would still own the houses. I would be far better off doing what you are planning. In my case I just really don't feel like fooling with being a landlord again. It wasn't that bad. Actually if I have any trouble selling the smaller house I would consider keeping it as a rental but not the larger house. Besides my wife has her eye on getting a new house and we need the cash to do that.

Being able to do a lot of the work yourself with save a lot of money. Sometimes that is a curse as well. I can do about anything myself including the complete plumbing system you mentioned. In my case it has saved me lots of money but I seem to end up working far too much. There is always something that needs done and when you can do it then you just grab your hammer and start in.

[redstar1324]

yea but it actually didn't work out. The loan I thought I found turned out to be a craigslist scam.

[billbenson]

I bought a house and had a home inspector do an inspection when I bought it in 2007. Investigate home inspections thoroughly and use them. He found I needed a new roof and AC. He missed all kinds of electrical and plumbing problems. In a rental, I would think you would need to be more careful about being up to code.

-------------------------------

On a different note, when I was young I was briefly relocated to Atlanta. I was young and had house fever. I bought a tri level house 45 min from Atlanta airport. It was on an acre plot. I had a traveling job. It was in the country. I'm a suburban boy. I lasted a year or two and moved to FL.

I decided to rent it, got a rental 'specialist' and she got tenants. So I had a long distance rental property.

Had one good renter. Then one with good credencials and a decent job. Two things happened at once. The renter lost his job, couldn't pay power so it was shut off, Built campfires in the living room to stay warm. Had a high vaulted ceiling covered with soot. It was a new house when I bought it.

The managent lady started floating payments. The renter was supposed to pay within 5 days of first of the month. Then she would mail me a check when it cleared. So I'd get paid about the15th of the month.But then it was the 20th and so on. I'm a lousy accountant but I eventually figured out she was 2 months behind in paying me. Started calling her and her kid was screening phone calls.

So I flew up there. I could arrange trips to see clients at that time. I forget exactly how this worked but I went to a judge out of court and filed a complaint. He put out a warrant for her arrest. I also sent a letter to the real estate board. I don't know if she lost her license or not, but I was certainly not the only one she was trying to scam.

I flew home and called her. Got the daughter who was screening the phone calls. I told the daughter there was a warrant out for her mothers arrest which was true. I said I better have a casheers check within two days or I'll eat the money and mommy goes off to jail. Got the check, sold the house.

------------------------------------------------------------------------------------

Like any industry, both **** happens (renter got fired), and you have fraud artists.

IMO, your first property is a pretty big risk. But then your first company of any type is a big risk. You can limit those risks through research.

When you have been at it a while, you should have a number of properties to spread the risk. You will also know the business much better.

Try to be as smart as you can on your first investment. But there are plenty of mistakes to be made and a lot to learn.

[redstar1324]

I wouldn't plan on hiring anyone to do anything. I would keep a closer watch and all my properties would be within distance that I can see them personally.

[Owen]

Simple. I invested $25 on Kickstarter, got what they told me I was going to get, then turned around and sold it on eBay for $60 :)