It almost sounds like a cheesy tagline for a get-rich-quick real estate book from Eban Pagen. But it’s true.
I’ll keep the cliches and platitudes to a minimum and get to the real reason you clicked the article in a second.
But this is the gist of the story.
Twenty-four months ago, I was an undocumented immigrant with an expired student visa, stuck in green card processing hell. Today, my company owns about $5M of assets, with the first deal we did making us $575,000 in less than a year.
What’s so crazy is this: My story’s not that special. It’s not even uncommon. That’s just the beauty of income-producing real estate.
Why I Did it
Basically, I was working 12-14 hour days, grossly underpaid (of course), at a digital media startup on Wall Street, churning out articles on real estate.
Now, I come from a real estate family, so investing in properties wasn’t foreign to me. But doing it in America was.
And I know you’re probably thinking, “You got lucky!” Or, “You found a great deal!”
No, not really.
I had a partner with a U.S. passport, equally excited the prospects of real estate investing. With a journalism background — amongst other things — I knew how to put together an article.
The First Move
So I started writing about real estate in order to get to know the players. Then I went to an event, where I met a developer by the name of Michael Stern.
(He’s 36 and is building what will, momentarily, be the tallest building in the Western Hemisphere. He’s pretty freakin’ dope.)
We did a sit-down in his office about the state of the market and all the money flowing into U.S. real estate, the state of the market, blah blah blah…
Directly in front of the window in his conference room was one of the other high rises he had built.
After the interview, I cut off the phone recorder and asked him straight up, “How can I get one of those?”
Mortgage and Leverage
He then proceeded to tell me how he got started. “Mortgage and leverage,” he said to me. “Get a multifamily property, leverage it, repeat the process.”
So I said, “If I find a deal, can I run them by you?”
So I did.
I suggested a single-family, a condo, I think it was.
He cringed. “No, no good.”
He suggested a three-family. So I set my sights on that.
Of course, I’m not saying everyone needs a billionaire skyscraper building advisor; that’s crazy. But there was nothing fancy about the advice — real estate investing 101.
FHA is the newbie investor’s best friend.
Now, most of you, of course, know about FHA loans. Put down 3.5%, buy your first property.
And with a three-family property, here’s where you get to M&L like a motherlover; mortgage and leverage the heck out of the asset and start the foundation of wealth building.
Buy a place with three units, rent out two to cover your mortgage payments, live in one rent-free.
Being new to New York, both my partner and me, we decided it play it ultra-safe. Get a property in good shape, no rehab, no getting to know contractors — I know from personal experience how much of a nightmare that can be, even when the contractor is a family member! — no hassles.
We were just looking for a nice vacant property that we could put up for rent immediately after closing.
So we looked around, found a decent one not too far from Manhattan. (I’ve written about the neighborhood here and why you can find nice deals in this area.)
It wasn’t particularly cheap at the time. But it would be a nice, safe long play that would get us in the game.
Income-Producing = Wealth
Now, in real estate, there are three different ways to appraise a property:
- Sales Comps: compare to similar properties of similar size in similar area
- Replacement Cost Method: mostly used for insurance purposes under the hypothetical scenario that a typhoon comes and wipes the property off the face of the earth (not too likely)
- Income Capitalization (Cap Rate): the preferred method for commercial and income-producing properties — i.e. a triplex, as in this case
If you have a single-family residence, like a condo, for instance, you’re pretty much stuck with the sales comps method and you’re banking on the market.
If it goes up, so does your net worth. But if it goes down, you’re under water. Not the place you want to be. (Hence, why Stern cringed.)
HOWEVER! With a triplex, your property’s value is derived by calculating its income relative to the cap rate of the area.
In more simple terms, if your asset generates $100k a year (after expenses) and the cap rate for the area is 8%, your property is worth $1.25M.
It’s really that simple.
Say you paid $900k for this, vacant, fully renovated. Because of your ability to generate that income, you have just made $325k.
(As for how you can boost your NOI, there are plenty of articles on this topic, including this one I just wrote.)
All this leads us to the fun part — and why I assume you clicked and read this far. The how…
…All This Made Me $575k
After we found this property, we quickly leased it out. I then went to a banker to refinance and showed him the numbers. (Those PMI numbers will gouge you if you let them.)
According to Cushman & Wakefield, a recognized authority on commercial real estate, metro New York — New York City and Northern Jersey — cap rates range from 3.75% (brutal, I know) to 5.5% for Class A real estate.
We went with 5%, a fairly conservative number, putting the value at $1.3M and netting us $575,000 in just under five months.
Aside from the value appreciation, the rental income from the property allowed me to cover bills, leave the 14-hour grind behind and invest in other deals, leveraging the newfound equity.
We went upstate to Rochester, looked South in Atlanta and Florida, and mainly went on the prowl for high-yield, income-producing properties — of which there are many in the so-called “secondary markets.”
Less than a year later, we’re at $5M in total assets.
Mortgage and leverage, baby.
The $21 Million
So about a week after resigning from the grind, I asked a family office manager — a guy who oversees about $6B and does big real estate deals — to grant me a $50,000 loan to pick up two turnkey properties.
“No,” he said.
“Why not? They’re good deals!”
“They’re too small.”
He went on to explain to me that endowments of that size tend to favor deals in the million dollar ranges and up.
“What if I can get these caps [cap rates] for bigger deals?”
“Hmm, sure. Shoot it over to me.”
And we struck a deal.
A week later, I started a limited partnership — a private equity fund — enlisted him as an investor, and he put up $21M for commercial property investments.
Overnight, I went from writer to private equity fund manager and full-time investor.
It sounds crazy, but it’s true.
But the old adage holds true — if you have the deal, the money will come. And sometimes the best deals come from real estate 101 and basic common sense.
Where are you on your investing journey?
If any of you have stories on your first deal and how you got started, comment below!