Real Estate Investing Basics

Sorry, Newbies, But Any Real Estate Strategy Requires Significant Money—Here’s Why

Expertise: Real Estate Investing Basics, Personal Development, Landlording & Rental Properties, Real Estate News & Commentary, Business Management, Flipping Houses, Real Estate Deal Analysis & Advice, Personal Finance, Real Estate Marketing
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One thing is for certain and that is this: If you want to play, you have to pay. And unless you have the money, forget about anything that I’m about to say.

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Go out there and hustle. Work two jobs if you have to, and save $50,000. Then consider getting started in real estate.

Until you have $50,000 in your account, forget about it. Immerse yourself in anything and everything real estate. Learn every day about how to invest. But don’t actually pull the trigger.

Now, you can argue with me later (by all means, comment below), but in my opinion, it takes money to make money. If you do not have any money, I don’t believe in any other strategy out there.

Buying & Holding

Let’s talk about buying and holding. I personally don’t believe in financing. If you are going to be buying and holding, you’re going to need a lot of cash.

Now, if you're going to be buying and holding, you need to be making a lot of money in your 9-5, you need to have a ton of equity built up in your personal residence, you need to have an inheritance, you need to have a ton of cash savings, and you need to have money in your retirement account.

I’m a little bit biased here because I do run a turnkey company, and we only sell properties to cash investors. But let’s forget about me right now.

The number one reason why investors declared bankruptcy during the last global financial crisis was that they were over-leveraged. They didn't control their destiny. The financial institutions controlled them. They requested the funds to be paid back, and they called the loan on them.

On the other hand, when you are using cash and cash only, you are the master of your fate. So work hard, at your 9-5 or whatever it may be, save the cash, and then start buying and holding.

Related: 7 Sharing Economy Side Hustles Real Estate Investors Can Use to Earn Extra Cash

Buying, Fixing & Flipping

young woman sanding planks of wood with an orbital sander in an unfinished room during DIY renovations

Now, the second strategy is buying to fix and flip. For all of you folks out there who may not make a lot of money in your 9-5 and want to jump in, once again, please remember that you can’t do fix and flips without any cash.

Please, I’m begging you—do not borrow money, do not take on any hard money loans. Don’t go to the financial institutions; just do it the slow and the hard way. Work your butt off, save the cash, and buy, fix, and flip with your own money until you know what you’re doing. Then you can supercharge your efforts by going out and using someone else’s money.

So buying, fixing, and flipping is perfectly suited for those folks who have saved the cash. They might not have a 9-5 where they're making a lot of income, but they may want to put their real estate efforts on steroids and get dirty every single day. Buy, fix, and flip as many properties as you possibly can.

My word of advice to all of the incoming buy, fix, and flippers is this: Start out small. Don’t go out there and buy a ridiculously expensive property. Use whatever cash you can scrape together after working hard to buy a rundown distressed property. Just remember to keep it simple and don’t get into a full-blown structural rehab.

Buy a property that needs a cosmetic touch-up—maybe requiring paint, new carpet, re-lamination of countertops, tile in the bathroom, a new vanity, a new mirror, new light fittings, etc. Invest the least amount of money that you possibly can, and list the finished product on the MLS, on Craigslist, and on Facebook.

I mean, you have to absolutely hustle to get this property sold and then use that one property as an example of what you’ve done so you can potentially go out into the market and raise more funds to supercharge your efforts.

Personally, I would use your own cash for as long as you possibly can. Buy something for cheap, renovate it, sell it, and do it again. And if I were you, I would do between five and 10 buy, fix, and flips myself before I would actually buy, fix, and hold. So buy, fix, and flip for as long as you can, generate those cash profits, and use them to supercharge your efforts.

Related: Why You Should ONLY Invest Based on the Cash Flow

Wholesaling

young man placing sale sign in front of his house

And last but not least is the strategy of wholesaling. Remember, when I started this vlog, I said that it takes money to make money. Yes, hypothetically you do not need to have cash in your account to wholesale a property, but let me ask you this: What’s going to happen if you put a property under contract and you’ve got 30 days to close on it, but you don’t have the cash in your account to close?

At this point, you may not be competent enough to find a buyer who is going to buy that property for more than you’ve got the seller under contract for. Not only will you throw dirt on your reputation, but you’ll have to deal with a very sticky situation. That’s a situation I’d never want to put myself in.

Have I bought awful properties in the past? Yes, I have. Some I didn’t inspect properly, and others I pulled the trigger on too soon. Still, I sold the properties even if I lost money on them because my inner peace was at stake.

I cannot look a seller in the eye who needs that money. You shake that person’s hand, and when they need you to perform, you have to perform. Everyone out there looking to wholesale without any money in your account is going to be letting a lot of sellers down. You’re going to lose your reputation.

Is that what you really want?

If you want to do it the right way, this is how you do it: Find an absolutely amazing, undervalued, bargain property. Have the cash in your account as a backup to close on it if you have to. Then start marketing that property for whatever your margin is.

Of course, leave enough meat on the bone so whoever wants to buy it can fix it and flip it. Then, if for whatever reason you do not find a buyer to purchase the property from you, but still it’s a spectacular deal, close on the transaction yourself. Buy the property with cash, then either fix it and sell it yourself or continue marketing it. If the deal is that good, someone will buy it from you.

I'm not going to get into the legal side of wholesaling. A lot of people say it's legal, and a lot of other people disagree. I'm just saying this: Have the cash in your account as a backup so you can perform on the transaction. Depending on what state it's in, you might even have to buy the property with cash and double close on it.

I strongly believe the first thing you have to do is go out there and work hard to save enough money to start your real estate investment endeavor. Any one of these three strategies can work really well. I’ve used all three in my real estate business, and I’ve done very well implementing all of them.

What do you think? Does starting out in real estate require significant cash reserves?

Share your thoughts in a comment below.

Engelo Rumora, a.k.a."the Real Estate Dingo," quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate al...
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    Engelo Rumora Specialist from Toledo, OH
    Replied almost 3 years ago
    Hi Catherine, Internet Troll In Internet slang, a troll (/?tro?l/, /?tr?l/) is a person who sows discord on the Internet by starting quarrels or upsetting people, by posting inflammatory,[1] extraneous, or off-topic messages in an online community (such as a newsgroup, forum, chat room, or blog) with the intent of provoking readers into an emotional response[2] or of otherwise disrupting normal, on-topic discussion,[3] often for the troll’s amusement. I’m not sure what your obsession is with me (I know I’m a good looking guy but I’m already taken. Sorry) or this blog that you keep coming back, but it is evident that you are not here to assist others but rather personally attack me with your numerous comments (as can be seen above) and counter to every comment I make. Would you mind sharing what are your intentions here and what are you looking for? Thanks
    Catherine Coy from Huntington Beach, California
    Replied almost 3 years ago
    You’re just mad that I haven’t slathered praise all over you. I’m not the only one in this thread who doesn’t agree that your methodology is the only–or even the best–way to create wealth in real estate. I don’t believe that, by age 29, you’ve flipped 400 properties and “made millions.” I just don’t believe your claim. So cut and paste accusations of “troll” all you want. I’m not buyin’ your story.
    Engelo Rumora Specialist from Toledo, OH
    Replied almost 3 years ago
    Thanks for your comment Catherine, Yet again, you are not helping anyone looking for guidance. You are, once again personally attacking me and thus “trolling” as a quick Google search revealed above. I’m not here to sell my story to you or anyone and am happy just offering my perceptions, opinions and experiences. I’ll repeat the same questions as I did in my comment above to you: Would you mind sharing what are your intentions here and what are you looking for? Thanks
    Kevin Sapp Lender from Cary, North Carolina
    Replied almost 3 years ago
    Folks, Really? Catherine, if ya don’t believe him, look him up. Part of being a real estate investor is understand how to research property. Research property and determine if he has done it or not. He has a fairly unique name and you know where invests.. Some healthy scepticism is good, I will say, however, I fund transactions for a 29ish year old that is in the ballpark range that is mentioned here. So it is not impossible. In my real estate transactions I run into posers all the time, I’m a lender, everybody wants money and has a story. When I hear one that is, unbelievable, I tell them no, why and that’s it. Ask @Ben Leybovich, it’s pretty sad that I’m the voice of reason. Kevin
    Catherine Coy from Huntington Beach, California
    Replied almost 3 years ago
    I have no intentions whatsoever. I just don’t believe your story. So sue me.
    Adam D. Investor from Castle Rock, Colorado
    Replied over 2 years ago
    TOTAL GARBAGE! Engelo, normally I’m with you on your vlogs but this is absolute trash! The best way to start is with a low money down loan on a 2, 3, or 4 plex where you live in one unit and rent the others out. My wife and I did it. My parents did the same thing. My Paternal and Maternal grandparents did the same thing. If we can make it happen in 3 generations of landlords, this is the best way to go hands down.
    Vivian Kim from Orange County (CA)
    Replied 27 days ago
    Hmm.. The "best" way really differs for each person depending on each person's level of risk tolerance, capital, location and local economy, connections/resources, skill sets, and goals... among others. Both his and your ways are somewhere on the conservative end of the spectrum (I like what you suggest but it's hard to do in southern California - in my particular situation). I'm looking and preparing for the next best investment step - best for me, of course, whether in-state or out-of-state. It's good to see both your points as there is also plenty of tempting advice flaunting quick growth/wealth with more risky over-leveraged strategies.
    John Crowley
    Replied 7 months ago
    How many transactions have you done
    Engelo Rumora Specialist from Toledo, OH
    Replied about 1 month ago
    Stopped counting at 1,000 :)
    Rose Jones
    Replied 6 months ago
    My response is to Gary Wyatt. I just got so nervous that all of your plans involved tying up your own home. Other options: renting out part of your home to bring in some extra dough - do you really need all that garage or would someone want part for storage? Or taking a loan out on the property you are buying - maybe from a new loan agent for investors, not hard money. Keep that house!
    Rob Gifford from Boston, MA
    Replied about 1 month ago
    It’s a good idea not to over leverage for sure but economically and practically it doesn’t make sense to pay all cash unless you’re OK with a very low rate of return. First of all, an average duplex in many decent areas is going to cost between 200-300k. Much more in a 1st or 2nd tier city. For the average person, even with a good six figure salary it’s going to take many many years to save up that kind of cash. In that amount of time the could have purchased 3-4 multies with 75% leverage, learned a lot and seen a ton of cash flow/appreciation in the process. Which means when you’re pure cash you will have very low IRR. Approaching stock market territory: 6-8% ish. There’s wisdom in being safe but real estate is a not passive like investing in the market is. If you are going to accept stock market level returns why not just invest in an index fund and be more diversified and completely hands off- enjoying more free time and just having a lower stress level in general.
    Engelo Rumora Specialist from Toledo, OH
    Replied about 1 month ago
    Thanks Rob, I've buying hundreds of deals for 7+ years now in Toledo, Ohio for $50,000 - $100,000 (Even less sometimes). Work harder and smarter and earn more income. There is no cheating success. It takes hard work and sacrifice. I feel sorry for all the folks that are over leveraged in the current market climate. And exactly why I always had the same stance on leverage. Protect the bottom line and you can do that in a slow/steady way and by using cash. Much success
    Allen Tackett
    Replied about 1 month ago
    I bought my first investment at 22 (which I lived in) with an FHA loan for $7,000 down. I made about $100,000 in appreciation plus got to live there and got a lot of money back through equity build up (rather than pay rent). I bought my second investment for $15,000 down; I couldn't afford the full $30,000 down (it was a duplex), so I went in 50:50 with someone. We made $150,000 in appreciation plus equity build up plus cash flow. I haven't even bothered to calculate the total return, and so forth. Neither were cash purchases, neither were "risky" in my view. If you want to make money in real estate, remember that your first investment should usually be the one you live in. The financing will be the best, you'll save money on rent in almost every situation. So how to make the numbers work? Before you buy it, make sure it will break even or cash flow. This meant that I moved to the suburbs of DC instead of the city. Perhaps not the cool thing to do as a 22 year old (but it looks a lot cooler when you make $$). Right now, you can buy a beautiful home or townhouse in some amazing cities for just over $200,000. If I worked in IT (or a lot of other industries) and was just getting started in my career, this would be a no brainer. Buy a home in the outskirts with a 25 minute commute for $230,000. You will make money (and live in a super fun place). There are at least 6 awesome cities I can think of where you can move to and buy y our first home in with livable communities, great jobs and reasonable housing. You don't need to save $50,000. You don't need to be an all cash buyer. You don't need turnkey. The best part is - this is passive. You don't need books or classes or weekends spent at home depot. There are duplexes for sale all over the country. Many of them are not in the part of town you probably want to live in, but if you can find one in an acceptable neighborhood, then I'd call that plan B. It's also pretty passive and living in one side and having your tenant pay your mortgage is about as low risk as you can get. You also get owner financing. If you can't get the FHA, and you can't find a friend or family member to go in 50:50, then yeah, it's going to be tough to get started. If you just can't buy with an FHA or with 10% down and live there, and you don't want a duplex, and you live in a market that's too expensive to find local deals as an investment, or if you don't want passive and you want to spend lots of time on an active investment (flipping etc.), then yeah, you'll need more cash. I don't think you should save $50,000 and then invest in a shitty property in the middle of nowhere with a declining population though just to say you hit 1% and to get some cash flow. It just takes one unexpected repair or one tenant eviction to wipe all your gains for the year. I'd take the $50k and go with one of the plans above, personally. But I don't totally disagree with this post. You do want to have a margin of safety in most things in life. Extra cash saved is just that. And you probably don't want to be over leveraged. But how much is too much? Well, most reputable banks will actually tell you these days. Even then, there are so many "it depends" that it's hard to give a blanket answer. Do you make $40,000 or $120,000? Are you married with kids and large "fixed" expenses that could make it difficult to weather a downturn? Do you have debt? And so forth. Any investment takes risk, and in real estate, leverage is a risk. But would you rather make 10% appreciation on a $50,000 investment or make it on a $250,000 investment? It's not about getting rich quickly (buy a small business or start one if you want to get rich quickly...forget stocks and real estate). But you can definitely take smart, low risks with less money and do just fine in real estate - even as a newbie.
    Jonathan Fletcher from Louisville, KY
    Replied about 1 month ago
    Who let Dave Ramsey into the land of BRRRR?