How a Novice Like Me Made Millions in Real Estate
Story 1: A perfect timing I could never dream of
Charlie Munger had a famous quote saying "You make most of your money in a bear market, you just don't realize it at the time". When I first read about this quote, I thought that’s an interesting way to think about it, but I didn’t really understand what it means.
When I look back my investment in real estate in the last 8 years, now I know exactly what he meant. It’s in adown market, in the darkest moment, where you can find great properties at great price. When there is a lot of uncertainty, a lot of fear, if you can think objectively and still have dry powders (cash is really king at these moments), you will make tons of money, and you will realize how profitable your decision could be years later, just like me.
I’m not a handy person, I also had a full time job then, I didn’t want to deal with houses or tenants either, so I could be the last type of people who will be investing in real estate. But in 2010 I was really intrigued by the opportunity. In Seattle area, I saw properties in the sought-after Eastside Bellevue areas, which used to sell for $800k, now they’re selling for $500k. I have always liked Bellevue as a modern, clean, convenient place, which is close to all major employers and amenities, but also give you plenty space, great neighborhood, and great schools to raise a family. It’s no surprise some of the world’s richest people all live in Medina which is essentially in Bellevue, including Bill Gates, Jeff Bezos, Steve Ballmer. I was very fortunate to have a stable job during the financial crisis, so I started looking at some properties which I think are just too good to pass by.
I looked at a bunch of them, even made a couple of offers, but no deals in 2010. It’s funny when people are presented with too many good deals, we often worry about not getting the best deal and would question more. I had a great friend who worked as my agent, she wanted to get me the best deal possible, she wanted to get me the best location, best price, best layout etc, we looked at a lot of them and not surprisingly, not many would pass all the criteria. I remember I saw a short sale in the north of Bellevue downtown area, it’s small house built in 1950s and was on sale for $375k, the same property would have sold for at least $600k in 2007. I went there to check it out in a raining day during Seattle winter, the house is in pretty bad shape, I thought it maybe require $30k to fix it up, it should be able to get $1500-2000 rent per month, for $375k I can’t think how it can lose money. So I wanted to go ahead and gave an offer, but there were several other more experienced investors who got hold of it before me.
So I looked for more than 6 months in 2010 but didn’t get anything. I kept looking in 2011, I also told my agent friend that as much as I appreciate her efforts, I thought it’s important for me to get a good deal at that time, rather than keep searching for the best deal. That turned out to be the most important decision, because I had many folks later talking about how they had many opportunities during the same time frame, but they kept looking and picking but never pulled trigger. I was determined to buy a property in the sought-after Bellevue downtown area in 2011.
In 2011, my agent friend found a property which has been listed for a while, off the market, and then listed again, back and forth multiple times. It’s in a great location, half a mile to Medina where the super-rich live, walking distance to downtown Bellevue, great schools etc. It’s a house built in 1950s with some remodels, pretty good shape. I really liked the location and the house, so I urged my agent to check it out. I was traveling extensively during that time and couldn’t see the house myself, so I also asked another friend of mine to take a look. Both of them told me the location is great, house is old but in good livable condition.
I did quite a bit research while I was traveling, the house was listed for $550k, the same house had an assessed value of $850k by King County in 2008, the land itself was valued at $550k at that time. I can probably rent the house out immediately for $1500-1800 per month. This is the PRIME location in Eastside/Bellevue area, where housing has appreciated pretty nicely in the last 5 decades, doubling almost every 10 years. Nowadays you can get most of these information easily from sources on the web like https://www.zipinsight.com/, at that time I did a lot of legwork myself which took a lot more time. I didn’t know when the housing price will come back, but with the rent I’ve got the staying power, looking out 5 years I was pretty certain it’s going to be a great investment, maybe even double in 5-7 years, I thought to myself at that time.
So I urged my agent friend to move forward with an offer. It turned out the owners were going through some rough times and they really need to sell the house, my agent friend was even able to get the price down by $10,000 without much negotiation. I didn’t want to squeeze further given the situation, and I would rather get a good deal than keep hunting the best deal. At the end I put 20% down and got a loan for the rest of the cost. Later I also spent $30,000 remodeling the house, it was rented out quickly for $2200 per month, with mortgage rate at 3%, the monthly rent was enough to pay for mortgage, taxes and insurance.
So I bought and closed my first rental property by the end of 2011. My total investment in the house is $570k, the total amount of money out of my pocket was $150k. I felt pretty certain the property will be worth than $1M by 2021, given the history trend, I also thought it’ll very likely get there earlier, but I didn’t know it could get there so quickly.
The property is valued at more than $1.4M in 2018, according to Zillow estimate, and based on multiple similar properties sold in the area. It looks like I bought at the absolute bottom of the housing cycle, the property has appreciated 145% in the last 7 years, my initial $150k investment has turned to be >$1M, while everything is paid for by rent during the last 7 years.
This is definitely better than I expected, buying the right property at the absolutely the rock bottom was mostly luck. I start to appreciate what Charlie Munger was referring to a lot more now, and I also learned not to wait for the best deal, not to wait until you’re perfectly ready. Often time the most important decision is to just get started and do it.
More of a novice real estate investor’s story to be continued.