I just finished reading one of the rich dad/poor dad books and I can say that I am sold on RK's ideas. I realized that working for someone else will never get me to the point I want to be at in life. I know that I have to make my money work for me and not vice versa. I've been looking around and I've come to the conclusion that real estate is where I want to be due to the massive potential for passive income.
Now, a little bit about myself: I am 22 years old living in Hoboken, NJ and I will be graduating with a BS in Comp Sci this may. I got lucky and lined up a very high paying job in my field (75k per year + bonuses) and I will start working there this summer. I have a little bit of money saved up, but it is nowhere near enough to make meaningful investments in real estate.
My question is... how do I get started? I've been reading a lot as part of the 'education' process. I know that I have to be familiar with the terms used in RE and the general flow of things before I get started. When do I switch gears from learning how RE works to applying that knowledge to make money? What is the best way to get started? Dive right in and buy a property and hope it makes money? Should I wait and see how things are in the market? I think that trying to find a mentor would be the best way to start, but I have no idea where to look for someone that would be willing to do that. Another thing to note is that property values in my area are quite high, which means a high down payment and more consequences should things go sour if I dive right into it.
And my final question, on a slightly unrelated note, my company offers 50% matching up to 15% of my salary on a 401k. Is it possible / worth it to max out my contributions and then withdraw from my 401k? I'm trying to find a way to get at that 'free money' so I can use it in other investments.
No, I certainly would not dive right in and hope it makes money. That's a recipe for disaster!
I would study the basics of the business until you understand the realities, especially the expenses. It is a fact that the majority of new businesses (including real estate businesses) fail in a short period of time. The number one reason they fail is lack of cash flow. Unfortunately, many of the "guru" books and courses don't cover this vital information. The reality of the business is MUCH different than the hype!
So, I would keep studying; join your local REIA (real estste investors association); meet and make friends with the successful investors in your area; and get out there and look at 100 or more houses in your target investment area (inside and out). Then, you might be ready to buy something and have a reasonable chance of success.
I just finished reading one of the rich dad/poor dad books and I can say that I am sold on RK's ideas. I realized that working for someone else will never get me to the point I want to be at in life. I know that I have to make my money work for me and not vice versa. I've been looking around and I've come to the conclusion that real estate is where I want to be due to the massive potential for passive income.
Now, a little bit about myself: I am 22 years old living in Hoboken, NJ and I will be graduating with a BS in Comp Sci this may. I got lucky and lined up a very high paying job in my field (75k per year + bonuses) and I will start working there this summer. I have a little bit of money saved up, but it is nowhere near enough to make meaningful investments in real estate.
My question is... how do I get started? I've been reading a lot as part of the 'education' process. I know that I have to be familiar with the terms used in RE and the general flow of things before I get started. When do I switch gears from learning how RE works to applying that knowledge to make money? What is the best way to get started? Dive right in and buy a property and hope it makes money? Should I wait and see how things are in the market? I think that trying to find a mentor would be the best way to start, but I have no idea where to look for someone that would be willing to do that. Another thing to note is that property values in my area are quite high, which means a high down payment and more consequences should things go sour if I dive right into it.
And my final question, on a slightly unrelated note, my company offers 50% matching up to 15% of my salary on a 401k. Is it possible / worth it to max out my contributions and then withdraw from my 401k? I'm trying to find a way to get at that 'free money' so I can use it in other investments.
Thank you,
Alex
Hi Alex,
22 and going to be making 75k to start??? Wow congratulations, you got to be excited about that!
Well as for RK his books as kinda all across the board. But there's 2 inparticular that you absolutely have to read. The one I'm about to mention is absolutely essecial reading which is "Cash Flow Quadrant".
Trust me, read that book. Also pick up RK "Retire Young, Retire Rich". That one is also a great book. Also pick up Carlton Sheets "No Money Down" and start listening to is too and from work every day. That will teach you all the basics of REI.
As for getting started, you're on the right track. Continue to educate yourself using the books I mentioned. Get yourself out of the "E" quadrant is soon as you possibly can and into the "I" quadrant, which will gradually happen as you get more and more into REI.
As a first project what I suggest is one of two things:
1) FLIPPING PAPER: Learn the process of buying a property. To learn the steps you can read that anywhere online or by simply chatting with a realtor. Next find out where the big real estate investor meetings are held in your area each month. You want to become a member of those REI clubs anyway. It's super important. Then once you know where they happen and you start to become more aquainted with the people there, then you're ready to flip some paper. Check your local real estate laws in your area before doing this. But you go out and find a good rental property which could be anything from a duplex, rooming house, or small apartment building. Then you put in an offer to buy it. Where you write your name on the contract you write "Your name and or Nominee". Then you ask for a lengthly condition removal date. Even 1 month for condition removal will work. Then you take that contract (paper) to the meeting. There you mention that you have x property under contract and that you'll sell the paper to anyone for 1 to 4% of the purchase price. So on a $1m dollar property you'd make between $10 to $40k. You could say to the group that you normally sell contracts for 4% but as a special to this REI Club you're selling it for just 2%. That's a quick way to make money in REI without actually buying anything. All you need is a few thousand to tie up a property under contract. At that point you flip the paper and get your deposit money and your commission back. The the person who you sold the paper too will go on to purchase it. It's a easy way to get started.
2) Another way is to flip homes for profit. Download Limewire. Using that download old epesodes of "Flip this house" and also "property Ladder" which appear on TLC. Start watching those shows. Listen to the host when she gives the flipper advice on how to do it. Learn from the mistakes of the flipper. Generally what they do is they find new flippers who don't know what they're doing so that lots of mistakes are made and so that it ads drama to the show. so learn from those mistakes. Once you got the just of it you're ready to go out and do it on your own. By this time you have been networking at the meeting and you've exchanged lots of cards with people there. You've kept in touch with them and they're now comfortable with doing business with you. So you approach them all and you hit them up for $5k as an investment in your flip, or whatever they can spare. Tell them that if they put up $5k in the form of a note that you'll repay them plus 50% or 100% as soon as you flip the house. You combine that with whatever money you can put together. Then you go out and buy a dumpy house in a great neighborhood. The key is to find a home that's selling cheaper than what it normall could sell for. This is sometimes due to a death, job change, moving, divorce, bankrupcy etc...where they have to sell out fast and for cheap. Try to find a discounted home because you'll hear this saying a lot in realestate which goes: "you make your money when you buy, not when you sell". That's because you're buying that equity at a discount and your reselling the equity at the going market rate for that particular neighborhood. You can't expect to relist a house terribly higher than others are selling for in the same neighborhood. So try to find a deal when buying. Make tons of lowball offers until somone bites. You put 5% down and that should be enough to get a mortgage for the rest, assuming that you've worked at your job for a bit and that you're credit is good. If not get someone to cosign for you, and tell them you'll pay them a few grand after you flip the house. When buying the home you tell them it's to be your personal residence. In essence it will be as you'll classify it as flipping your personal residence. You can even live there while you're flipping it. The trick here is that the very same day you buy the house, you also "relist it" back on the market at the new inflated price. So if you buy it for $200,000 then relist for $250,000. Try to make like $50k at least net net after all expenses, if not more. $50k should be your minimum. Then you go to Home Depot. Get a home depot card and buy the paint, carpet and lino you need. That way you don't pay for six months. You go in and with the help of a few friends (not the original investors) paint up the whole house but have a pro install the carpet and lino. You should be able to do the paint and carpet in 1 week. Do not do anything else. The home does not have to be perfect and you don't have the luxury of the time or money to do anything other than paint and carpet. So after 1 week you'll have what looks like a freshened up home for sale. Keep track of what else is selling near by before you buy the home (flip) and after you relist it. That way you'll have a feel for what houses go for in that neighborhood and you'll know how much to list it ad. Consult a realtor as well. Explain to them that you're trying to flip it, to come up with the right price point. Then hopefully it will sell within a few months of being on the mls. Also you have to relist it on the mls. Do not try to sell it yourself. Rather let the 10,000 realtors in your area compete to try to sell it for you for the small commission. it's always worth it. Once you sell it and hopefully you make $50k net net. You pay out your investors plus interest of like 50% or whatever and then you tell them that you're working on your next flip and that you want them to now reinvest all their funds into the next flip. Repeat that process every few months for another $50k profit. Each time try to flip bigger and more expensive properties. You'll find that the bigger the property the more likely hood you'll have to make six figures on a flip. ie: I just flipped a nice big home last year and made $140k net net after all expenses, and it only took six months to do. So start small and work into bigger and bigger flips. In no time you'll have your 10% down payment for your first apartment building. That you don't flip, that you try and buy for cash flow which you can retire off. good luck.
First of all, thank you both for your comments. I really appreciate them!
Mike: Thank you for your advice. I have looked at some REIAs in my area, but there are a *lot* (I am in NJ, across the Hudson from NYC). Do you know anyone from this area that can recommend a good REIA?
r2: Thank you for the book recommendations, I'll pick them up at the store tomorrow.
In regards to flipping, I'll look into it. From what I gather, going for foreclosed homes is the easiest way to buy cheap. Is re-doing the carpet and painting the walls really all that needs to be done? You seem to recommend that to everyone here, so I am inclined to think that it worked for you. Has anyone else had any experience with just doing carpet/paint?
Also, when should I start switching over to purchasing rental properties? I recall reading about someone who used to flip houses and regrets selling them as holding on to them would have made him a multi millionaire. Is it worth it to buy a house cheap, carpet/paint, and rent that out? Worst case scenario, if you can't get enough rent for positive cash flow, you can always sell.
Can you break down what the expenses are that comprise the 50% of rent figure that you use? I'm totally new and someone else might be wondering the same. thanks. I'm referring to apts of course. Also, does that hold true for 4-plex, 30-plexs, etc. How bout duplexes?
ncskier, if you dig around a bit, you'll find numerous posts my MikeOH where he uses the expenses = 50% of gross factor. In another recent thread, he argues against breaking this down because (to paraphrase) its impossible to know all the specific expenses you'll incur. Some, like evictions or a tenant wrecking the place are very sproadic (hopefully), so knowing the past doesn't predict the future. Just using 50% prepares you for the unknown.
I've looked at a bunch of property data sheets over the last few months, and the list seems endless. But, any particular sheet lists half a dozen items, or maybe a few more. Most of the sheets from brokers lead you to think expenses are 20-30% of gross. After looking at a bunch, you get some feeling for what's being omitted, and don't believe the broker info any longer. So, I've given up on trying to detail it out, and just use Mike's 50% number for a starting point.
Just one data point, though. One small aptartment building I looked at had expenses that totaled 67% of gross rents. It was about 100 years old and filled with college students, all utilities paid. Maintenance was over 25%.
The operating expenses include taxes, insurance, management, maintenance, vacancy allowance, advertising, entity maintenance, legal fees, utilities paid by the owner, damage done by tenants (beyond the security deposit), evictions, court costs, lawsuits, office supplies, phone expenses, etc, etc, etc. (all expenses that result from operations). I also include capital expenses as part of the 45% to 50%, although they are not technically operating expenses. The mortgage payment (P & I) is not included in the operating expenses.
Ya, it's true that if you could just buy, rent out and hold for profit you'd overtime be extremely wealthy. But all that could take at least a decade. And once you've used up your downpayment on your first place, if you hold, then where is the downpayment for the next house going to come from when you're just starting out and you have not much savings?
If you want to go from no where you are now to the point where you can quite your job you can do it a lot faster. Just put your money into a house flip it, then take the profits and leverage that into a more expensive flip repeat, repeat, repeat ... Then rather quickly you'll have six figures to work with. It's possible to do that in 1 year. If you don't believe me there's a guy who did 52 flips in 1 year starting with very very little. He has a book out where he talks about how he did it.
So anyway once you have say $100k that will buy you a 1m dollar apartment building. The income from which you should be able to afford to quite your job off if you wanted to. From there the sky's the limit.
As for paint and carpet, the reason I say that is because paint, carpet, and lino would cover like 95% of the whole house. You can even paint the baseboards, and the door and door frames white. I've seen this on some houses that before looked absolutely dreadful. But by just doing that they looked like newly renovated houses. The key is not to do too much. I've seen it happen all the time where a person buys the home with the intention of flipping it for profit. But instead they get into this mindset where the reno job has to be good enough to the point where it would be up to their own standards to live in. That's the completely wrong mind set to get into. So be careful of that. Because then you end up doing more and more and more, to the point where you've blown your budget and your time schedule and you'll most likely end up with a loss. So be very careful. Or what you could do is just set an iron clad rule for yourself that you're allowed to do as much as you want, as long as it's done in 1 week. Which again comes down to paint, carpet, lino, and maybe change out the appliances for nice updated ones. Go to these scratch and dent appliances stores for those discounted new appliances. I say all this because you're getting the most amount of home reno's for the least price.
So anyway once you have say $100k that will buy you a 1m dollar apartment building. The income from which you should be able to afford to quite your job off if you wanted to. From there the sky's the limit.
As for paint and carpet, the reason I say that is because paint, carpet, and lino would cover like 95% of the whole house. You can even paint the baseboards, and the door and door frames white. I've seen this on some houses that before looked absolutely dreadful. But by just doing that they looked like newly renovated houses. The key is not to do too much.
Do you cut & paste this into ever post or do you have a macro for it?
Just kidding. It inspires me every time I read it even though inside I realize it's not quite that easy.
Whatever you decide to do, I would suggest writing a short business plan detailing how you will get from where you are now to where you want to be. I would suggest setting a goal of 5 years. I think it's entirely possible to be out of your 9-5 job in 5 years with $1,000,000 in equity and $10,000 per month in cash if you're willing to work hard. Although this is still a fast pace, it will at least allow you to grow at a steady pace and learn the business.
So was driving a car or riding a bike until you did it. Think about it like this...you could go to university for years to learn complex studies like rocket science, astronomy, quantum physics, engineering, surgery. With that in perspective do you honestly think that buying and running an apartment building or flipping a house is as difficult as that? Like goss darnet this is not rocket science. This is as easy as learning to drive a car. This does not take brains. I didn't even graduate from high school and I've already made millions in realestate. If it was that difficult there's no way I'd be able to do it. In my opinion it's only the big numbers that scare people. But there's nothing to be afraid of. All you got to do is start to change your thinking. Just start telling yourself every day that you're a millionaire. Slowly that will grow on you. And in no time you'll start doing big deals.
I agree, but that's why most children learn to first ride a trycycle, then a bicycle with training wheels, then a parent runs along side a few times with the training wheels removed.
I bought my first motorcycle last year. Since I hadn't ridden a motorcycle before, I took a 5-day motorcycle safety course before getting my license. In that course, I learned how to ride properly and I also learned about the mistakes that will kill you. Instead of trying to learn everything the hard way, I took the easy and safe path.
Real estate is very similar. If you make poor choices, you can get hurt badly. However, if you spend a little time learning the basics and then take a little time to learn the business while growning at a steady pace, your chances of success are MUCH higher.
Again, there is a huge difference between the real estate market in the United States and where you are. I don't know of a single spot in the United States that now has appreciation of 50% or more a year. In an environment like that, you could throw a dart at the MLS sheet and pick a "winner". That's not true here and it won't be true there for long.
Just our of shire curiosity since you seem to know everything, why do you think the market is going to change here? And do you have any predictions as to when?
The way I see it it could take along time. At least 3 years or more. TD bank predicted that the economic indicators they use have us on course to do well for the next decade. So I'm not sure where you get your research. Do you know anything about Alberta, and what we do for North America?
I KNOW the market is going to change there because values can not continue to increase at that pace. Let's look at what would happen to a $100K house if prices increased at 50% per year for 10 years.
Year 1: $150,000
Year 2: $225,000
Year 3: $337,500
Year 4: $506,250
Year 5: $759,375
Year 6: $1,139,062
Year 7: $1,708,593
Year 8: $2,562,890
Year 9: $3,844,335
Year 10: $5,766,502
That's why! Average people might be able to afford a $100,000 house, but they can't afford a $5,766,502 house. In addition, markets are not unique to any one country. When prices rise at a very high rate, that is almost always followed by a significant correction. Again, it's not my theory, those are just the historical facts.
Powerful point, Mike. It's very similar to the stock market...the market can only withstand so much growth over a short time period before it breaks and makes a correction. That's not to say that the real estate market will take a tumble like the dot-bomb bust, but it does say that 50% growth in a real estate market is not sustainable.
for the record I didn't say it's going to appreciate by 50%. I said it would appreciate by 100% per year and I GUARANTEE THAT IT WILL. So here' how much my house for example will go up by each year over the next 10 years:
So as anyone can see as "clear as daylight" my house is going to be worth three hundred and twenty seven million dollars in 10 years from now. It's completely impossible for this not to happen.
Then only 2 more years after that my house will be worth over a billion dollars. So get is straight!