How I Built a $1.3M Real Estate Portfolio for the Cost of a 1-Bedroom in NYC

by | BiggerPockets.com

Is this crazy? I sat there with my 23-year-old head spinning — looking at the first $400,000 multifamily rehab project that I had just put under contract.

You’ve probably asked yourself (at least) a couple times if it’s crazy to get into real estate, too.

If you asked your friends and family instead, they probably immediately answered “Yes!” followed by a spiel about whatever aspect of managing a real estate business that scares them most: the risk of a market crash, the challenge of dealing with tenants, or the pitfalls of negotiating with contractors.

It’s only human. We fear risk. We fear risk even when our fears are irrational.

Even if you drink the real estate Kool-Aid and know that real estate can be an amazing way to build wealth, the fear probably hits you each time you’re about to write an offer on a building. Do I really know what I’m getting myself into?

How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties

This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!

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Right Before the Plunge

On that night in May 2017, I was on the verge of taking what — to many people — would look like the biggest risk of my young life. I was 23 years old, had recently graduated from college, and had barely six months of real estate experience. This project would pit me and my business partner against countless situations we were not prepared for, faced with countless questions we didn’t know the answers to.

Drilling through foot-deep concrete subfloors was definitely not something college prepared us for.

Luckily, as real estate investors, it’s not our job to know the answers. It’s our job to know the numbers.

The numbers on our first rehab deal told us that even in our worst-case scenario — even if everything that people warned us about went wrong — taking the plunge would get us closer to financial freedom than sitting “safely” on the sidelines ever could.

Why are we comfortable losing money, as long as we know how much we’re going to lose?

As a recent grad, most of my college friends ended up in big cities on the coasts.

Related: Mastering Turnkey Real Estate: How to Build a Passive Portfolio

In 2017, the median rent in Manhattan was $3,150 a month. According to Rent Jungle, the average rent for a one-bedroom apartment in San Francisco was even higher: $3,334 a month. Over the course of a year, that adds up to $40,000 in rent for a one bedroom apartment. For reference, the median family income in the city of Saint Louis is $52,000 a year.

In Saint Louis, that money can buy buildings. On the coasts, it buys you the right to spend to 39 percent more than the national average on basic necessities like groceries.

The costs are pretty crazy, but the craziest part is that spending a family’s annual salary on rent is somehow considered a perfectly normal financial decision for a young person to make.

Young people spend that money with no expectation of getting a return. Rent, groceries, and transportation are costs — no investments.

What is the risk of embarking on a rehab project, compared to the 100 percent certainty of spending $40,000 a year on rent?

How We Measure Risk

Risk is exposure to uncertainty.

Because of this, renting doesn’t feel like a risk. Neither does spending a lot to live in a big coastal city. The costs are large, but they’re constant. We know them up front: $40,000, paid in tidy, predictable monthly increments.

Or do we?

What is the real risk of renting away your twenties — and how do you compare it to the risk of a rehab project? Does renting in a big city make your financial future — not in 10 months, but in 10 years — more certain, or less so?

When you’re embarking on a rehab project, uncertainty stares you in the face. The risks are all right ahead of you, a landmine of knowns unknowns: Do we have our contractors lined up in the right order? Have we done everything we need to pass inspection? Will we hit our rent targets once all the work is done? Is it cheaper to fix this or replace it?

Those seem like hard questions to answer. Small wonder that most people warn you away from real estate.

Except when you’re following a safe, “normal” path, uncertainty isn’t gone, it’s just waiting for you out of sight.

Five years from now, will I be working at a job I don’t like? Or will I be free and doing the things that matter to me most in life? Ten years from now, will I have the resources to protect what I love? To support my family, friends, and community?

Those are hard questions to answer.

For me, those questions would have been impossible to answer if I lived in a big city on the coast, took a fancy job where I was well-paid but spent most of my salary on rent and groceries, and had to spend most of my time working for someone else.

We are conditioned to deal with long-term uncertainty the same way we’re taught to deal with short-term risk: by avoiding it.

But avoiding risks doesn’t make them go away. It doesn’t teach us anything. It doesn’t get us any closer to answering life’s hardest questions.

The numbers on our first rehab deal told me two things.

In the worst-case scenario, I would come out of the deal not losing any more money than someone who chose to rent in a big city. In the worst-case scenario, I would come out of the deal with an education that would allow me to take control of my financial future. I could live with that.

The Numbers Tell The Story

My business partner, Ben Mizes, and I started our real estate portfolio with an FHA loan. We were only required to put a small down payment on a relatively stress-free, low-maintenance four-plex.

Five months later, we were planning to borrow $315,000 from the bank and $105,000 from private family investors, and spend as much of our own time, sweat, and money as it took to come out the other side of our first four-unit rehab.

The project would be our first BRRRR, or buy, rehab, rent, refinance, repeat.

We were upgrading kitchens, bathrooms, and AC units to bring the rents up from $825 per door to $1400 per door — a 70 percent increase.

With renovations complete, Ben and I would try to appraise the building for $700,000. Depending on the lender, you can borrow between 70 – 85 percent of a building’s appraised value. In this range, as long as we hit our numbers, we could completely repay our investors, recoup our costs, and walk away owning a cash-flowing castle.

Out first four-family renovation in Saint Louis.

The potential upside was clear.

Just as important, we looked at our downside.

Ben and I modeled a worst-case, “do-nothing” scenario, trying to understand what would happen to us if we got stuck and couldn’t complete the rehab at all.

What Could Go Wrong? 

Well, Plenty.

Ben and I had a contract to buy the building for $420,000. At the closing table, the seller would credit us for the $20,000 worth of repairs that had to be done immediately: fixing a collapsed sewer, repainting and sealing damaged windows, and replacing falling fascia boards.

Note: we always, always, ALWAYS make our buildings watertight before doing anything else. If they aren’t watertight when we buy them, we negotiate for repair credits to fix problems on the seller’s dime — immediately upon closing.

The $20,000 repair credit provided by the seller brought our effective purchase price to $400,000.

Combined, our mortgage payments, taxes, and insurance came out to $2,277 per month.

The numbers told us we could make our mortgage payments comfortably, even in its current (read: very rough) condition, the building was generating income of $3,350 per month, or about $825 per door.

Assuming we got completely stuck and had to keep renting the units out for their present value of $825, we would have $1,073 per month with which to pay all of our fixed and variable expenses.

Utilities and HOA fees (the building is in a private subdivision with an annual assessment) came out to $380 per month, leaving $693 a month to deal with variable expenses.

In a worst-case scenario, we would be self-managing to save on property management fees. That would still leave us with vacancy, repairs, and maintenance costs, and the need to set aside money each month for a capital expense escrow.

Was $693 really enough?

Under our most-conservative model, we planned to put aside $10,000 each year for repairs and escrow. After five years, that equals $50,000 put into proactive maintenance — enough to deal with a roof, a complete tuck-pointing redo, and major structural repairs.

Then we figured 10 percent vacancy cost — high for the area, but not impossible if we had hard luck.

What was the worst that could happen?

deal analysis

Under our worst-case model, we would be losing $600 every month.

Losing $600 a month is a losing deal.

That’s not a deal that gets you on a podcast. It’s not a deal that successful investors show off in a blog post.

Luckily, it’s not what the deal we ended up with, either.

(Spoiler Alert: we came out of this rehab with a lot more paint on our shoes, but a lot more cash in the bank, too.)

But when we talk about “risk,” here’s the curveball question: Would this “worst-case” deal be a step away from, or a step toward, financial freedom?

Let’s look at those numbers again.

The Difference Between Costs and Investments

An investment is any place where you can put your money, such that it creates more wealth over time.

In the model above, a lot of the expenses that look like “costs” — that is, look like places where Ben and I would have lost money — are actually investments, places where our money helps us build wealth.

Related: Why Turnkey Rentals Might Just Be an Ideal Investment for Real Estate Newbies

1. Loan Pay-Down

In our worst-case scenario, we would pay $600 a month (on average) to cover the costs of repairs and build a sizeable rainy-day fund.

However, our $1,600-per-month mortgage would be completely paid for by our tenants. In the first year alone, our tenants would pay for our ~$14,000 interest payments, and help us build $5,000 worth of equity in the building.

Break even on rent: you pay thousands. Break even on mortgage payments: you make $300,000.

Over time, that equity build-up only accelerates. In our thirties, Ben and I will build up $85,000 through principal pay-down alone (pun intended).

The amazing part is that would be the case even if the rehab project was a complete failure. Breaking even on mortgage and utilities and scraping out of pocket to cover unexpected repairs, Ben and I would still be positioning ourselves to accumulate passive wealth in the future.

2. Proactive Maintenance

If you spend $50,000 on a building in five years, it becomes a lot cheaper to maintain.

Under our worst-case model, we would have $10,000 a year to deal with maintenance issues before they became more serious.

When you budget to deal with problems up front, it makes for a less-impressive pro forma — but it also means that maintenance costs get significantly lower over time.

If you plow $10,000 every year into it, even a problem-ridden property will get easier and easier to take care of. It might be a painful cost to swallow in the short-term, but you haven’t lost the money that you spend on a property you own. You’ve just re-invested it.

By contrast, if you spend $40,000 in one year on rent, the money is out of your hands for good.

3. Hands-On Education

When you buy your first rehab, the most important investment you make isn’t in the building.

It’s in yourself. You’re taking out (quite possibly) the only student loan in the world that can pay itself off in less than a year.

Our first kitchen didn’t turn out like this. But our second, third, and fourth did.

The most daunting part of diving into a real estate deal — the part that makes people say it’s too risky — is that you don’t just stand to lose money, but time, too.

The time costs on this project would have made this a losing deal for a veteran investor. We spent untold hours painting, fixing plumbing, and (like you saw above) drilling holes through concrete when a contractor dropped the ball on us.

But we weren’t veteran investors (yet!). As Ben and I looked at the numbers together, we realized we were buying ourselves both a building, and an education, too. Even if we broke even, we would come out of the project with an education that in itself was worth hundreds of thousands of dollars.

So — What Happened?

One year ago, I sat looking at the numbers on a $400,000 real estate deal that could either set me on the fast-track for financial freedom or go completely off the rails.

In the end, both things happened.

My business partner and I got screwed over by not one, but four different contractors before we finished the project. One caused thousands of dollars of water damage to the floors, embroiled us in a months-long insurance claim, and tried to take us to court after he lost.

We dealt with an irascible tenant who threatened us and damaged his apartment.

Time and again, things took more time, sweat, and money than we had expected.

But the age-old mantra of real estate investing held true: you make money when you buy. The numbers of the deal were strong.

And now that we’re done dealing with contractors, tenants, and renovations (at this property), we have a building that rents for $1,400 a door, water-tight with low maintenance costs, and a fair market valuation between $650,000 and $700,000.

The final numbers on the deal

Now we are on pace to refinance the building, fully repay our investors in the first year, and walk away with the funds to do it all over again.

Taking the Plunge (Again)

Is this crazy?

I’m sitting here with my 24-year-old head spinning, looking at the numbers of a 20-unit deal in Saint Louis.

Since starting our renovation project one year ago, we’ve used the education and cashflow we gained from it to build a 22-unit portfolio — and a high-growth startup.

Now, with a refinance underway, I am looking at a deal that could double the size of our portfolio overnight, all while working full time.

A new project brings new unknowns.

More questions we don’t know how to answer, and lots more numbers to keep me and Ben busy.

Would you have taken this risk? What has your experience taught you?

Share below!

About Author

Luke Babich

Luke Babich is the Chief Strategy Officer for Clever Real Estate, a nationwide brokerage that helps you sell or buy a home and save on real estate fees. Luke lost a campaign for City Council as a 22-year-old because people told him “You’ve never even paid property taxes!” Now at 24 years old, he owns 22 apartments in St. Louis. That’ll show ’em.

43 Comments

  1. Cindy Larsen

    I love your positive attitude and entrepreural spirit. Congrats on your investing suvccess. One thought for including a good guess at rehab costs in your future deals, and not getting screwed over by contractors: I use homewyse.com which gives cost breakdown estimates for most remodeling projects, by zipcode, so you know what it costs in the area you are doing the remodel in.

    I take those cost breakdowns and write a list of the labor and materials that are needed for each job, but do not include the homewyse.com cost estimates. With the list in my back pocket, I discuss the job with multiple contractors, asking them what is needed to do,the job and how they would approach it. i find that if you know enough to ask good questions you get lower estimates than if they think you have no idea. If they miss something in the list, I ask them whether that will be included in their estimate. I then give that list to at least 3 contractors and ask them to bid on each line item in the list.

    When I have the estimates back, I know who is trying to over charge me. i make them break down labor and materials costs seperately. I then get cost estimates for materials from homedepot or lowes, with my discounts (icluding the store’s pro discount, the 2% from the local REIA I belong to, and the 2% from buying myself using a cashback credit card). If I can buy the materials more cheaply than the contractor’s estimate, then I have them write a new estimate for just the labor.

    This approach also lets me expense capex items that are under $2500 on a single receipt, in the year I spend the money. The sweet spot is when you spend over $2000, but under $2500: this will get you additional discount (10% on some items) at homedepot and lowes. i also check local plumbing supply stores building material stores other than HD and Lowes for better prices. For example I recently bought a bunch of cedar fence boards from a direct supplier for $2.19 each when HD and lowes were charging around $2.50 each. Controling materials costs myself save me quite a bot iver contractors who estimate time for them to select and trqnsport materials, and also mark upmthe materials. if a contrqctor do s need to buy materials, I require receipts showing the materials costs. When I can, I also work electronically from the jobsite, so I can go-fer needed materials. i’d rahter drive to pickup,whatever they need than pay contractor prices for an hour spent driving to HD and back. The job gets finished faster, and I spend less on both labor and materials. In fact, I’m sitting at a jobsiite now: just gor back after picking up something the electrician needed :-). i don’t do electrical work, but I just saved myself 3/4 of an hour of high priced labor: at $160/hour = that’s $120

    • Luke Babich

      Hey Cindy — this is great! Love the way you’re approaching managing your rehab. I’m sure that if Ben and I had approached ours with this much rigor and system, the numbers on the deal would have been even better 🙂

      I will say, as one addendum, that building a relationship with our contractors matters a lot, too. It’s not all about cost — we learned the hard way the “high cost of cheap labor.” I would rather pay more for a contractor who is able to educate me about their trade and make me better-prepared when I’m trying to evaluate a deal. Contractors who are deeply knowledgeable about their trade aren’t the cheapest, but they can answer your questions — know which questions NOT to answer! — and make you a better investor.

      That said, getting people to estimate their costs is a great way to learn, too! Especially starting out, negotiating with contractors is one of the scariest parts of the business — I had plumbers quote me $400 and $44,000 for the exact same job!

  2. Roschelle McCoy

    Well done! I’m trying to find the right first deal for me as well. Curious as to how you managed the rehabs when all the units were full. Did you wait until tenants moved out to rehab their unit? Or offer them temporary housing? I’m looking at a place that has several tenants that have been there 15+ years and I know they couldn’t take a massive rent increase if their units were fully remodeled.

    • Luke Babich

      Hi Roschelle! Great question — sounds like you’re definitely approaching things the right way! We made a lot of mistakes managing tenant turnover during the project, so I hope you can get it better.

      When we purchased the building, 3 of the units were on month-to-month leases, and the last one had *just* been leased for a year (actually, we got into the deal by calling the same For Rent sign that the tenants did, and asking if the owner was interested in selling).

      We offered to let the tenants to move back into their units after the renovations for below-market rent ($1,200 – $1,250 instead of $1,400 – $1,500). However, given where their rents were starting ($850) it was too big an increase and no one took us up on it.

      So we had to match up our rehab timeline with everyone’s timeline for moving out and finding a new place to live.

      There was one family with kids living in the building. We had to give them as much time as possible in their search for a new place to live, since they had the narrowest area to look in: they wanted to keep their kids in the same school district.

      We worked out timelines with the other two month-to-month tenants. One pair, single guy and his roommate (the most flexible about moving), moved out after just one month. The other, a couple who were engaged to get married, were planning to move out anyway, and just wanted a few months to finish their search for a single family home.

      So we had it lined up with one pair of tenants moving out after 1 month, another after the second month, and then the family moving whenever they could find a good place in the same school district.

      Things ended up working okay for the tenants, but we lost quite a bit of money to unnecessary vacancy. The first rehab got delayed (that’s a whole ‘nother story, involving a claim we filed against a really bad contractor). Then we had to rush to start on the second when that tenant moved out. Then, before the second unit was done let alone leased, the family found a good place and moved out — leaving us with three empty and un-rented units!

      We had to hustle to get them turned around as fast as possible. It was grueling trying to get the rehabs done while also trying to lease the new units as they were finished. The only upside — we had good luck with pre-leasing by using the complete unit as a “show unit” while the others were still under construction.

      In hindsight, we could have given the tenants a LOT more time and flexibility to move out. Not just for their sake — for ours too! We missed more deadlines than we hit on our first rehab — and ended up paying for it through several months of vacancy.

      It sounds like another part of your question is not just about business, but about business ethics. That’s something you can only work out on a case-by-case basis. We caused turbulence in the lives of people living in this apartment by buying it. I lost sleep over it. There is a toll to doing a renovation like this. As real estate investors, we weigh that against the hidden costs of doing nothing. This building was in rough shape — leaks, breaking systems. The cosmetic repairs that get higher rent also are what makes it possible to do structural repairs that ensure a building will stand for another century. Turnover is a natural process, too, and if you really care about the tenants and making it easy for them to relocate, you can make it a much less difficult process for them than a big institutional buyer would. We gave all the tenants storage space in the basement for as long as they needed it, helped them move things out — you’d be surprised by how much that makes a difference.

      Good luck 🙂

      • Katie Ritter

        I am impressed with your response and the acknowledgement you made regarding the lives of people you were impacting. It seems as though you are doing a great job treating others as you would want to be treated and helping them. It is a very difficult path to navigate with making necessary updates that improve the conditions for the tenants but also you need to fund those updates. Really quite incredible that you have this foresight with being young and just starting in real estate. I can only imagine with how wise you are how you are going to be successful in all aspects of your life. Thanks for sharing your experience with us all.

  3. Marc Roth

    There are several issues with your final numbers. In addition, since you now never have the opportunity to live in Manhattan have lost out forever why so many people do it. The loss of that lifelong experience and the opportunities that come with it is impossible to convince someone who never took the chance. You’ve also lost out on the network developed being in The City. There’s are many good reasons people come here from all over the world to struggle and make it or fail. Either way you stay or leave with a education you can’t buy.

    Renting is and can be a smarter move then buying. Just on the initial cash put up from plus all the money used could have very easily been invested in great stocks that will far outperform any Real Estate over time. It’s liquid and you lose all the compunded appreciation. That’s the most powerful wealth building tool anywhere. Even if you’re buying R.E. The values are far greater along with the compounding anywhere near New York then St. Louis.

    I rented for many, many years and invested the difference in cost between renting and buying into great stocks through all the ups and many downs of the markets. Just kept buying mostly the same great companies and dollar cost averaged. That enabled me to buy far more R.E. Then I could have and used my stock positions to leverage against without selling a share. Now i have a portfolio with huge coumpunded accumulation and the R.E. Anyone can do it.

    This cap rate you calculated is not 10%. Its far below it. By your own admissions you’ve had a mass of headaches between work, do it yourself projects, contractors and tenants. No headache involved with funding an investment account by hitting a buy button when you want to buy more Amazon. While you spend at probably most if not all the stocks anyone can buy we own it and collect the upside. Huge loss of capital appreciation doing what you’re doing. That’s financial freedom.

    You assume a fair market evaluation of $650-700k. You have to find a buyer, field offers, go to contract and hope to close. With just about any stock i can demand a price and if no one pays it can sell it market immediately. No such process so i always believe those values when someone has the check.

    The other Major factor somehow all of people on these shows and this example forget in factoring in cost and the end Cap rate. Your time. Time has a value. Even if you’re doing the work itself the only intelligent way to approach that is to pay yourself or factor it in on the price and real cap rate. You have as i see in almost all cases $0 for yourself and partner. That means these numbers are off. Way off.

    All this work, time and money spent for a grand total of

    • Luke Babich

      Hey Marc… did you finish reading the article?

      I address most of these points towards the end — particularly re: time investment and exit strategy.

      I’d add a few points though:

      1. Here’s an article from my business partner for why we don’t like investing in the stock market: https://medium.com/@benmizes/investing-in-real-estate-has-changed-my-life-817d3514f2c2

      2. One of my best friends lives in NYC as a journalist for a major news outlet. Good luck finding that particular opportunity anywhere else! But by and large, I think that there is more and more-unrecognized value in the Midwest. FOMO is a big piece of what drives people to rent away their 20s on the coasts. I’d love to see more people making the choice to invest in a place they call home — helping their community AND preparing themselves for financial independence — than rushing off to “experience” the life you can’t get anywhere else. Believe me, there’s plenty you can experience in your 20s in the Midwest that you can’t in a bigger city… see article above ^^

  4. Jeff Parker

    Simple you come from money and you had over $100,000 in help from family. How about you tell everyone this wouldn’t have happened if it wasn’t for them. Most people do not have access to that kind of help. Your misleading people.

    • Luke Babich

      Hey Jeff! I included the line about “we raised $100K from private family investors” so as not to mislead people. Ben and I both come from upper-class backgrounds — his father sold a pharmacy business, mine is a doctor. We’ve had a huge head start in life in terms of money, stable family life, and access to education.

      I’m not a big fan of the “I built this big a real estate portfolio AND ANYONE ELSE CAN TOO” gurus online. Personal circumstance always plays a huge part in what you’re able to do.

      I’m very proud of what Ben and I have accomplished in a year — it took sacrificing all of our free time on weekends and evenings, learning relentlessly, skimping on groceries and personal spending, doing hard and unpleasant work without flinching. That said, we could STILL never have done it without the education and safety net provided by our families.

      I hope this article has something that everyone can learn from — regardless of your background, we all face risk, uncertainty, and fear.

  5. Christopher Freeman

    Great work guys! Out of curiosity, were there any problems using a private money loan towards the down payment on a bank financed deal? Did the private lender take a second lien position? Did the bank factor in that debt service into your DTI ratio?

    • Luke Babich

      Thanks Chris! Great question.

      We’ve raised private capital on two deals now. The one I write about in this article was the first, the second was a larger (18-unit) commercial deal.

      In the first deal, this one, we had a few factors that helped. Our mortgage broker for residential finance allowed us to count the expected rents from the building towards our income (look for a Fannie / Freddie lender who will let you do this!)

      Also, since we were raising money from family, they came on Title as personal guarantors for the loan. In exchange, my business partner and I put up our first 4plex (which we both bought right and got extremely lucky on — by this point we had about $70K in equity) up as collateral to secure their investment.

      On our next deal with private capital, we borrowed from a portfolio lender — so terms were much more flexible. Our private lender took second position. The lender didn’t care so much about our DTI — when working with portfolio lenders, Debt Service Coverage Ratio becomes the much more important number.

      In general, I’d recommend giving your investors better returns early on (your real cash-out in the beginning is the education anyway) in exchange for them offering a full or partial personal guarantee, and then transitioning to building a relationship with a great portfolio lender as soon as it’s feasible — someone who you can really grow your business with over time.

      Depends on if you are using a portfolio lender or a conventional mortgage broker.

    • Luke Babich

      We purchased our first 4plex (not the one described in the bulk of this article) with an FHA loan, and then my business partner moved into it.

      We purchased this 4plex conventional, using 30-year money but not an FHA 203b (the famous 3.5% down loan). That’s why we had to fundraise to borrow money for the down payment.

      We did ultimately end up moving into this apartment! It cashflows even with just three units rented, is an awesome place to live — and we’re living in the first apartment we rehabbed, so we can fix all our early mistakes over time rather than inflict them on a tenant 🙂

  6. Jodin Concepcion

    Hey Congrats!! Wish I was that focused at 23! I just bought my first investment duplex out of state a year ago and it’s going great. However, upon trying to purchase a second out of state multi, I was cornered for a 20% down payment as an investment property only. How did you guys get the FHA? Did you make this property your primary and if so that’s another monster for me being out of state, I am required to show employment income in that state.

    • Luke Babich

      Hey Jodin, great question! I talked about this in another comment on this thread.

      We started out conventionally financing this property — hence why we had to raise the $100K down payment as private capital. <– I think this is a great option for scaling your portfolio. It means smaller returns on each investment (you effectively have 2 mortgages to pay off!) but allows you to distribute risk and scale much more quickly. We raised from family for the first deal, and then from a friend / mentor / neighbor who I met during my political campaign (another story…) for the second.

      Sounds like if you want to keep scaling with your strategy, you'll need to start making relationships with investors who are looking for stable returns at a higher interest rate than they can get in the stock market, and finance your down payments on conventional loans.

  7. Chris K.

    Luke: completely ignoring how this deal worked out for you, thanks for sharing the perspective on risk. Weaving in the opportunity cost of (I) lighting $ on fire by renting and (I) lighting time on fire by working the 60-90 hour weeks it often requires to warrant those “high paying city jobs” is an absolutely essential factor that many people – especially young people- overlook. Wherever you got your perspectives (family, professors, mentors, etc.), shoot them a thank you note for setting you on your path. You’re going to do big things, notwithstanding the inevitable hiccups.

    Marc: I recently moved out of NYC and agree with much of your (unquantifiable) “it’s the experience” argument. But in the constant pursuit of “the experience”, most of us chase salary, title, Rolodex, etc. – none of which necessarily lead to wealth.

    Totally separately, while the liquidity benefits of your “buy stocks not real estate” suggestion are undeniable, one critical issue you are silent on is the lack of leverage available to the average joe taking the stock route. My (hypothetical) $100k has much more real estate buying power than it does Amazon equity buying power, simply bc Community Bank A is going to charge me a much lower rate to purchase the underlying than TD Ameritrade will. It sounded like the premise of your argument is capital appreciation. The other huge motive for RE investment is cash flow. Pretty tough to make NYC deals cash flow, especially for the “little guys” (like me).

    Jeff: misleading people would be not telling them he got $100k from family (and thereby not opening himself up to low hanging potshots). But he did. So it’s not misleading. We don’t all have that luxury, true. But that doesn’t mean the $100k isnt out there if its not coming from folks with your same last name. Just means it may come at a higher cost.

    Disclaimer: I don’t know Luke. Only defending the post because I don’t want readers getting lost in the quantitative minutia of good deal / bad deal when the real value of this awesome post is the way he approaches risk – contextualizing it not as specific to an investment but instead thinking “what’s the risk to our lives, long term, of making or not making Decision X”. You can always make $$ back of you lose it. But you’ll never be in the same life situation you’re in now. Those facts should not be ignored when evaluating timing component (just one of may) of risk taking.

    Great post Luke, and happy hunting everyone

  8. Brooke Rutherford

    Good on you, Luke. Great that you’ve figured all of this out at such a young age. I’m 33 and looking to start my journey now – I’m anticipating lots of sweat, hard-work and headaches, but lots of rewarding experience, too! As someone who has lived in a big city (London) for 10 years, I can tell you it doesn’t matter where in the world you live, there are valuable experiences everywhere. Besides, building wealthy through real estate in the Midwest will enable you to move to the big city with lots of capital and resources and experience it so much better than you would have being broke in your 20s! Well done you. (P.S. Really surprised to read such negative comments from people, you must be doing something right, stirring up jealousy and resentment 😉

    • Luke Babich

      Thanks for the comment Brooke 🙂 I’m sure your journey will take you exciting places.

      I’m sure real estate will open a lot of doors (including doors in bigger cities) but St. Louis will always be home for me. I love my slice of the Midwest — every big social problem that matters in the 21st Century is raw and real and can be tackled here…. if you can get to a position of financial freedom to be able to act fearlessly on your ideals.

      I’m glad you enjoyed the read! Really neat that you spent a decade in London, that does sound like an incredible learning experience in a totally different way.

  9. Eddie Lehwald

    Forget the haters, Luke- this is very impressive. I’m also curious to know how you got the FHA loan without planning to live in the property yourself, but overall this seems like a great first deal and-more importantly-your philosophy and positive attitude is going to take you very far. I had a worst-case scenario happen to me earlier this year and it most definitely sucked, but the lessons learned were well worth it and I’ve got no regrets. Good luck on everything you do in your future!

    • Luke Babich

      It’s amazing — everything changes when you see your defeats as lessons. Suddenly you become grateful for the hardships as well as the upside.

      We ultimately moved into one of the units — the very first one we renovated, where we did almost all of the work ourselves and made a mess of most of it. Now we’re gradually fixing things that would drive a tenant nuts (just great low-stakes learning, from a landlord’s point of view!) while enjoying what I think is objectively an amazing apartment for a pair of twenty-somethings to share. It still cashflows with us living in the unit, and let us max out the FHA cash out refinance limits.

  10. Isaac Antoine

    Great story Luke, whats more remarkable is the fact that you never said “I can’t do it” you simply asked yourself “How can I do it”. All while working a full time job. Your future is might bright sir, Keep chugging and best of luck to you and your future endeavors!

  11. Ali Hashemi

    Nice work!

    I have to apologize in advance because by nature I’m a skeptic. I think many who invest are. But we leverage our skepticism as a strength. So don’t take it the wrong way when I share a couple thoughts –

    1. The success of this venture – and all the numbers detailed at great length – is contingent upon appraising at the after repair value. Without knowing what it appraised for, you’re telling your story too soon. It’s a successful story, however you mention being “pod cast worthy” and that’s dependent on whether you hit your mark or not. I could just as easily tell you my property appraises for $1M to make my story sound amazing.

    2. The title says $1.3M portfolio but I only see $700k (if it appraises). Maybe I missed something?

    3. This sounds more like a house hack if you got a FHA loan

    a few other minor points, but those are the things that jump out at me. An impressive start to REI. Congrats again.

    • Luke Babich

      Hey Ali – no offense taken, all good questions 🙂

      1. We have hit our appraised value (and the maximum allowed value for FHA cash-out refis in our area), just haven’t closed on our financing. We’re waiting to find a deal to put the cash into so we aren’t left paying a higher mortgage for months while we look for a new investment.

      2. This was our first rehab project, but our second real estate deal. Our first was an FHA 4plex that my business partner lived in. We bought right, sold it one year later for a $75K gain, and used a 1031 exchange to invest the profits in an 18 unit deal that is worth $650K. That deal + this one brings our portfolio out to a $1.3M value total (until we find a new deal and buy more!)

      3. This is kind of a house hack, yeah. Different in that we purchased a rehab property, raised short-term capital to finance the down payment, turned all of the units, and THEN moved in and hit the FHA refinance (as opposed to moving in from the get-go). But very similar idea! My business partner has actually written a great post on house hacking, and we think of that as being part of our overall growth strategy: https://medium.com/@benmizes/house-hacking-the-best-investment-you-can-make-21f6b889f1b2

      • Ali Hashemi

        Very cool! Was it very difficult to go through your first 1031 exchange? I’d be curious to hear more about how your refi negotiations/process went. I’m looking at a similar situation but just haven’t had the time yet to dedicate to better understanding the process.

        Cheers to you and your partner. May there be many more deals to come!

        • Luke Babich

          Thanks Ali, back at you! The 1031 was surprisingly easy for us. We were lucky enough to have some great (and still affordable) legal help, via a relationship I made during a run for City Council. But that was mostly to navigate the headaches of needing to 1031 into an LLC, in which a private investor had an equity stake (they require the same SSN or EIN to be associated with the entity buying as with the one selling). The 1031 Exchange itself was handled by an intermediary who handled almost everything smoothly behind the scenes. I’d definitely recommend this for other investors.

          If you want to chat more about the refi, please feel free to drop me another comment or a DM!

  12. Brian Barnhart

    Way to go Luke.

    Just by looking at that photo, before reading the article, I could tell you were here in St. Louis. When I finally read the author’s name, I realized who you were. We shook hands on election day across the street from COCA on my way into the polls. I am glad to see that your current pursuit is bringing you joy and hopefully fortune as well. I look forward to reading more about your investments and successes.

  13. Sara Kennedy

    Congratulations Luke! What an awesome story, I’m trying to get started, but we’re over on the East Coast and are already getting nervous about prices here. Your story definitely makes me wonder if moving is the best option for investing. Thanks for sharing your story, best of luck in your future endeavors.

    • Luke Babich

      Thanks Sara! Glad you enjoyed it. I think the Midwest (and for me, Saint Louis in particular) is an amazing place to take control of your own destiny. Whatever else the coasts can offer — the Midwest is about claiming your destiny. After that, it just comes down to what you’re really looking for! Whether you stay or move, hope to be reading a post from you some time soon 🙂

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