Sub2 and out-of-state, am I just dreaming?

Question

I'm a second year dental student in Phoenix Arizona and I'm wondering if it's reasonable to pick up a few properties while I'm here (2 more years). Being a student I don't have a lot of capital, so I'd be looking for properties that I can do with 100% financing, potentially sub2 by marketing.

I just need to know if we'd be wasting my time picking up properties in Phoenix if I'm going to move out of state after my schooling.  My wife and I were property managers for a 4-plex with out-of-state owners.  They bought their property while in school and then left the property to one of their tenants. When those tenants moved out we moved in and became the property managers.  We were undertrained and underpaid, but since we were both in undergrad we were just grateful to get cheaper rent.  I learned from the owner's mistakes and I plan to create a system/business that I can teach to one of our tenants before we leave, based on the knowledge I've gained here in BP and elsewhere.

Is it reasonable to think I can find 100% financing, whether through sub2 or some other means?

Is it reasonable to think I can manage our properties personally and then train someone locally to take over when we leave?  Or should I just plan on finding a good property management company?

I'm looking forward to everyone's thoughts, esp. Ben Leybovich, since he's done many of his investments with 100% financing.

Ben Leybovich · Answer

Richard Low There are several issues involved with you question.  One is whether property ownership fits into your timeline and whether long-distance ownership works.  The other has to do with 100% financing.  Let’s deal with these individually:

NOBODY will manage your money and property better than you – period!  I believe you know this intuitively which is why you are gravitating toward RE.  When you buy a property, you essentially buy a self-contained business which requires systems be put in place in order to run smoothly.  Are you going to be able to control such a system from a location far away?  If yes, then go ahead.  Personally, the farthest property I own is a 50 minute drive (25miles) from my house, and this was a learning curve for me.  At this point I am beginning to consider deals 2-3 hours away.  But, this is still driving distance if need be, and the deals I look at are larger multi-family with larger CF to warrant the inconvenience.  Is it worth your time to establish and manage systems for a revenue stream of a 4-plex?

Now, 100% financing is a state of mind.  When you want something but you don’t have the money to get it, one of two things happen:

1.	You say – oh well, may be next one.
2.	You do not accept the reality that you don’t have the money, and you find a way.  This is a topic I could write a book about, in fact I did (CFFU).

It could happen within 2 years, but it’s unlikely, and here is why.  No money down does not necessarily mean that you buy the property with no cash – it’s just that the cash is not yours.  If it’s not yours, then the money has to come from somewhere. This can take one of two routes: owner-financing, or some type of 3rd party financing.

Learning how to find the type of seller to whom owner-financing will be attractive is a skill.  Learning how to attract money to you and your projects is part science and part art.  Are you in position to pick up the phone and ask for money?  Who would you call and why would they listen?  Are you in a position where realtors who don’t know how to structure a deal because it’s too involved bring it to you?  Do you know how to determine which project would attract what type of financing?  Do you know how to find potential sources of money?  Do you know how to speak to these people?  Do you know how they think and what their needs are?  Do you have the tools to address those needs?  Do you know what to wear, what to say and not say?  This is the highest level of negotiation we are talking about.  IT TAKES TIME to know these things!

You know Richard, I studied for about 7 years before I did my first deal which made me 20k.  And then I did my second deal and lost everything I’d made.  This was when I realized that if I will have longevity in this game, I need to be a pro!  We can’t afford to guess, we have to know…

In my humble opinion RE will absolutely need to be a part of your future.  Tax reform act of 1986 took away most of the shelters for high-earners – of which you will be one.  And things aren’t getting any better.  The tax code practically forces you to convert your earned income from dental practice, which will be highly taxed, to passive income from property, much less taxed for many reasons.  This is the formula that has made fortunes and you are inline!  But, for now I think you should study, study, study.

I am 37 years old with a 28 unit real estate portfolio throwing off $45,000/year.  The 10-plex that I am closing tomorrow is absolutely the first time I am having to bring money to closing ($5,000 or 2%).  The 18 units that came before were 100% financed.  People sometimes tell me that I was born under a lucky star.  They don’t realize the effort that went into and continues to go into my education.

Your time will come, but for now STUDY so that you are able to throw “intelligent” punches at the right time.  This is my humble opinion and I am sorry if it’s not what you want to hear.  Feel free to look me up any time.

Ben Leybovich · Answer

Richard Low  Real estate agent license is a good thing to have for two reasons:

1.	To become familiar with the market place
2.	To make a little money selling property

Do not expect to learn much about the investing side of things in your training for the license.  Most agents sell pretty houses to pretty people, and know nothing of what we want and need as investors.  They couldn’t tell you what a CAP rate is if it hit them in the mouth.

This is where you have an opportunity to fill a niche through your education, because the same knowledge that you will later use to recognize a good investment opportunity for yourself, you will be able to use to find deals for clients.

I remember trying to explain to realtors what I want – this was not a winning strategy.  I have a license and this is exactly the niche I fill – working with investors.  I speak their language and you should too – education!

As to the opportunities you may think the MLS affords to find deal: do you know how many of the 28 units I own came from the MLS?  1 – that’s it.  I dance to a different beat with my version of real estate investing.  I hunt for deals differently from most.

Do I invest in courses?  Yes.  I’ve spent thousands over the years, and there are two ways to look at this.  Some would say that you get $15 worth of information out of $1,000 spent.  I agree with this, but there is a catch here; we don’t deal in widgets, we play with hundreds of thousands of dollars and at times a $15 bit of information can make you thousands...

Having said this, I do think that these courses and gurus are way overpriced.  The reason you, me, and so many others looks at RE is not because we have too much money that we don’t know what to do with, it is because we don’t have enough and we are looking for a way to get it done.  I think it’s ridiculous to charge what some of these guys charge.

I agree that you should get out there sooner rather than later.  But you’ve got to know who to talk to, what to say, and how.  You’ll have to develop your own perspective, but I feel that you have to establish the foundational basics before you go.  Remember:

RE has only 2 speeds: forward is slow, but reverse is usually very fast and painful!

Hope this helps.

Richard Low · Answer

Thank you for the detailed response, Ben Leybovich, it's good to get a dose of reality.  I've gotten similar responses before but it's easy to get excited when I hear about sub2s and using other people's money for 100% financing.

Right now I'm getting my Real Estate License in the evenings, and while I know it's material that I could find elsewhere, I'm really glad I'm doing it.  Getting my realtor's license is teaching me a lot of un-sexy details related to real estate transactions.  It's forcing me to learn the basics and terminology, even if some of it will never apply to me.  I'm looking forward to having access to the MLS, giving me the ability to accurately comp and find details on pre-foreclosures.

I'm also attempting to wholesale since it's 'low-risk' and 'low-startup.'  In reality I'm learning that wholesaling is still a 'pay-to-play' game where you have to invest some money in marketing and a significant amount of time dealing with all the un-motivated sellers to find the few motivated ones.

Looking back, what would you have done to accelerate your 7yr learning curve?  Obviously you've compiled your experiences and knowledge into your CFFU, and that looks like a great resource.  I just feel that getting out there and doing something sooner than latter can only accelerate my learning. In 6yrs I'll be done dental school (2yrs) and my Army payback (4yrs), but there's gotta be something I can do between now and then besides studying.  That being said, I don't mean "go out and buy something, even if it doesn't really cash flow."  If I set a goal to find 3-4 sub2 deals in the next 2 years but I don't find any that are a 'true deal,' I'm ok with that.  At least I'll have learned something from the attempt, whether it's how to (or how not to) market, talk with sellers, calculate comps, compare management companies, etc.

I would love to make some money in the process, but if I don't I'm willing to stick it out for the long haul.  Did you have any local mentors?  Did you invest in courses?  If you could go back and change your educational experience from those 7 yrs, what would do differently?

I realize that I've derailed my own post at this point, sorry!  I'd still love to hear more opinions on my original questions.