Personal Development

How I Made $575k From One Deal In Five Months — And How You Can, Too

Expertise: Personal Development, Real Estate News & Commentary, Real Estate Investing Basics
45 Articles Written

It almost sounds like a cheesy tagline for a get-rich-quick real estate book from Eban Pagen. But it's true.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

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.)

Related: At Age 26, I’m on the Brink of Financial Freedom: Here’s How I Did It

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?”

“Of course.”

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.

The Deal!

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.)

Related: We Just Made 6 Figures in One Month — But That Means Nothing Unless…

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.


Other Benefits

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!

Philip Michael is an entrepreneur, real estate developer, media personality, and bestselling author. He's the chairman of NYCE Cos., a real estate development and tech holding company. Philip recen...
Read more
    Tyler Wade from Thousand Oaks, California
    Replied almost 4 years ago
    Where did you find the initial property? MLS or other means?
    Allen felker
    Replied almost 4 years ago
    You were here for 24 months and got your credit good enough to qualify for the loan?
    Dave Steadman from Fort Lauderdale, Florida
    Replied almost 4 years ago
    Interesting read for sure! How much was your cost to close your triplex? What was the rentroll? Thanks in advance.
    David R
    Replied almost 4 years ago
    Nice article. I’m a bit confused though… as I understand it, the maximum FHA loan is 645k. You’re saying that you purchased a triplex using FHA for 645k (or less) that needed no work/rehab, yielded 100k/year in rents and appreciated at 575k in 5 months? That sounds like a pretty good deal to me. I congratulate you, but you’re using a lot of numbers without explaining them very well… “Say you paid $900k for this, vacant, fully renovated. Because of your ability to generate that income, you have just made $325k.” If you paid 900k for your property and the FHA limit in high-density areas is 645k, where did you get the other 255k? Thanks!
    Matt Geerts Investor from St. Thomas, Ontario
    Replied almost 4 years ago
    Allen and Steve, the explanation is right in the article: “I had a partner with a U.S. passport” Philip, fantastic story. In my market a triplex is not measured by cap rate, only market comps and some adjustment for condition and income. Cap rate starts at about 6-unit buildings and for those you need thirty, possibly as low as twenty, percent down payment. There’s no way to pick up a 900k property on cap rate for a newbie unless that newbie already had 300k in cash laying around to play with (ie, not a newbie). In your experience have you gained any insight that would help in this situation?
    Stacy G. Investor from Spring, Texas
    Replied almost 4 years ago
    Interesting there are some decent comments and questions (all legit) to this fantastic story, but no response from the author. Don’t know the purpose in writing it, but as an educational piece it is unfortunately lacking. Please clarify the above if you will so we can better understand the story. Thanks!
    Kari Piecuch Property Manager from Mobile, AL
    Replied almost 4 years ago
    Agreed. The numbers do not make sense. What was the purchase price? As a previously licensed mortgage loan originator, If he financed via an FHA loan, there’s no way it would be appraised using a cap rate (it’s owner occupied, residential real estate….NOT commercial). The headline is to grab your attention. The story doesn’t make sense. The author doesn’t even have a photo.
    John Bauer Professional from Columbus, Ohio
    Replied almost 4 years ago
    “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.” So you’re saying that if the cap rate was 5%, the property would be worth $2M?
    John Bauer Professional from Columbus, Ohio
    Replied almost 4 years ago
    I guess I’m confused about why a lower cap rate would mean higher property value.
    Beau Garrett Rental Property Investor from Chicago, IL
    Replied almost 4 years ago
    John, if the typical cap rate for the area were 5% and your building’s NOI is $100,000, it is more valuable than a building netting $100,000 where 8% cap rate is typical.
    Jared Wicker Real Estate Professional from Sharpsburg, GA
    Replied almost 4 years ago
    @ John Bauer Think of the cap rate as your return for the total value of the property, so the formulas would be cap rate = NOI divided by property value. So if you solve for property value, Property Value = NOI divided by cap rate. Therefore, the lower the cap rate, the higher the property value at a fixed NOI.
    Clifford Kearns Investor from Culpeper, VA
    Replied almost 4 years ago
    Yes for sure I agree Stacy G.
    Bao Nguyen Investor from Lansing, Michigan
    Replied almost 4 years ago
    Econ 101: Assets = Liability + Equity. The name of the game is to have a lot of assets via a lot of equity, not a via a lot of liability. Although many people do tend to brag about how much liability (aka “profits”) they’ve amassed . It’s not true equity until it’s sold and the money is in the bank. Anyone who’s done any real selling will tell you 100 ways a real estate deal can fall through during closing.
    Jeremy Tompkins Real Estate Agent from Anchorage, Alaska
    Replied almost 4 years ago
    Great read! Thanks for sharing.
    Terrence Evans Investor from Lomita, CA
    Replied almost 4 years ago
    Soo…. I know people who reposition multifams (5+) using some of what was said here (cap rate/income/etc).. I don’t think it applies to 4 and unders. I’m highly confused by this piece. Also, there was no mention of seasoning or what was done to force appreciation.
    Douglas Larson Rental Property Investor from Salt Lake City, UT
    Replied almost 4 years ago
    People use the term “net” loosely these days. Some people use “net,” as in “net worth” to describe The estimated value of their total equity, minus their debt. That always looks good on paper but a true net has to account for sales costs, commissions and an actual sale of an asset property which may or may not be as high as a projected value or appraised value. My net worth was 1.5 M in early 2006 but when all the dust had settled in 2008 and I had sold most of my properties, the actual net was about half that! I love sensational stories, but I want real numbers and a bit more of a roadmap. Let’s keep the great stories coming but please include enough details to be useful!
    Pavel Sakurets Investor from Minneapolis, MN
    Replied almost 4 years ago
    This article is BS. 1. FHA would never appraise the property based on CAP rate. 2. To receive FHA, the property will need to be owner occupied. 3. To be considered ”commercial” for financing, it will need to be 5 residential units or more, not 3. 4. 575k that author made probably by refinancing a property, not the profit. You make a profit only when you sell. Grabbed my attention though.
    James W. from Jersey City, New Jersey
    Replied almost 4 years ago
    Very clumsy article – no explanation of numbers. But here’s what i think he’s saying. If the property makes $50,000 a year in rental income – and the cap rate in the “area” is 5% – the property is now appraised at $1 Million. That’s simple math – 50,000/0.05 = $1 Million. Now somehow if you pay $750K for it – you make $250K by selling it at a million. My question is – no matter how you arrive at the price of property – by cap rate or market comps – if the value is indeed correct – $1 million – why will a seller sell it to you for $750K? And if you bought it at $750K – why would another buyer buy from you at $1 Million? The Cap Rate he’s talking about it just a way to value a property – different than comps. But regardless of how the property value is appraised – why would anyone sell it to him for $250K lesser? And then why would anyone else buy it from him $250K higher? Author is either really stupid – or really forgot to explain the details.
    Luciano Luchen Investor from Pompano Beach, Florida
    Replied almost 4 years ago
    Your post is exactly what I had in mind! Seems like the author and many readers have either missed this or are simply confused by it.
    Replied almost 4 years ago
    Buying a property below market is nothing new it’s simply harder these days since the market is hot. If you sell a property for $1m your going to net around $950k after closing costs. Lots of people seem to be not calculating those lately. Same with commercial refi those commercial notes are not free, the costs are significant.
    Martin Elkins from Jensen Beach, Florida
    Replied almost 4 years ago
    Can you give more information about the specific deal you did? What was the purchase price? From the math (ignoring closing costs) it seems like all we know is that you refinanced at a $1.3M value and after netting $575K, that means you bought at $725K? The only scenario I can see is this: Being a vacant property there was no real NOI for a cap-rate valuation, so the valuation came from comps, traditionally. You looked at cap rate in the area and found out this property was undervalued,, bought and put tenants in, then went to a lender for a refi and convinced them to value it based on cap-rate. But there really is no information on how the value was generated.
    Anthony Frato from Cleveland , Ohio
    Replied almost 4 years ago
    Even though there are some holes in the explanation of this deal I think there are two real lessons here. The first being in the strategy “Mortgage and leverage” . The second, it all starts with the buy no matter what the investment. Both are great in theory because it can allow you to reinvest much faster and create instant equity. But keep in mind taking all the equity out of your property adds risk and WHEN the market declines again you can leave yourself over leveraged. With that, both are easier said than done. Know your risk tolerance. and James W. the real value of anything was explained to me like this “something is only worth as much as someone else is willing to pay.” I just saw a deal where someone was selling a commercial building but took half what they were asking because they wanted out and had already moved and the buyer had cash. A few months later the investor sold it for 5x the purchase price because the new buyer really needed the space to accommodate his existing business and it was still a great deal at the new sale price.
    Alice Lawrence Investor from Brooklyn, New York
    Replied almost 4 years ago
    Very motivational for newbies in NYC!
    Deondra Carter from New York, NY
    Replied over 3 years ago
    Sounds like the author bought with FHA, leased out and then refinanced with a standard mortgage and may have been a little creative with purchasing as an owner-occupied then refinancing as an investment property. There are FHA loans are with High Balance maximum loan amounts as follows. 2 family – $814,500 3 family – $984,525 4 family – $1,223,47