Everybody has their reasons for investing. Some folks invest because they just want a little bit of side income. Others are investing to attain financial freedom early in life. Still others invest simply because they love it.
And then there are those folks who invest because they have to.
There’s a guy who writes for this blog named Ben Leybovich. He got started in real estate because he had to. He was unable to pursue his former trade (violinist) due to a medical condition and was forced to find another way to provide for his family in a hurry.
There’s a guy who writes for this blog named Brandon Turner. He got started in real estate because he had no money, a job in a retail bank, and way too much ambition to allow himself to stagnate in that set of circumstances.
There’s a guy that writes for this blog named Jered Sturm. He got started working on properties when he was a teenager and has never really known another way of earning income or building wealth.
These guys are really impressive. They are very smart. They are guys whose writing you should read. They are, unequivocally, entrepreneurs. Their stories are exciting. They are cool. They’ve made it.
These guys I just mentioned started with nothing — and in some cases, less than nothing. They have built incredible businesses for which they fought and scratched and clawed their way through to success. They found incredible deals, added value to their properties in creative new ways, and systematized their businesses to the point where they have all three become millionaires through real estate investing with tremendous monthly free cash flow.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
I’m No Entrepreneur
I, on the other hand, am not an entrepreneur. I have no desire to be an entrepreneur. In fact, I believe that I would be fairly foolish to want to become a real estate entrepreneur. I am a white-collared income earner sitting solidly in the upper-middle-class range. I work a job that I enjoy very much and am investing because I would like to steadily move towards financial freedom consistently and sustainably over a 5-7 year period.
While I have the utmost respect for the successes that the folks I mentioned above have achieved, their path makes no sense for me and millions of others like me. And the reason is simple:
We already have good jobs.
Now, let me caveat this by stating a major assumption here. I assume that most people reading this have the goal of trying to accumulate enough real estate to cover their lifestyle expenses through their real estate cash flow alone so as to achieve financial freedom. Notice that I am not saying that folks need to necessarily “buy” real estate or “acquire” it for free. There are many viable ways to “accumulate” real estate. I am merely going to state the path that I think is highly efficient for full-time workers earning good wages.
If you can save a significant percentage of a high five-figure, low six-figure household income, then there is no reason that you shouldn’t be a financially independent millionaire or very close to one in about (or under) a decade. Of course, that’s assuming that you invest around half your income in real estate and other appreciable investments like stocks in index funds.
Yes, I understand that W2 income is, dollar for dollar, a relatively inefficient way to accumulate wealth. But if you can make $100,000 per year and bring home $70,000 of that after tax, that is still more efficient than bringing home $35,000 after tax if you are putting in huge hours to get your business off the ground. Make no mistake about it — if you are going to pursue real estate with the extreme leverage of no money down investing or are going to otherwise bring very little cash to the table, you are going to need to be willing put in immense efforts — like the folks above were willing to do.
And my question for you is, why on earth would you, as a high wage earner, want to throw out a well-paying job for entrepreneurship when financial freedom is going to be so nearly automatic for you to attain? Even if you kind of wanted to become an entrepreneur, you could do so with much lower risk AFTER achieving financial freedom. The only way that full-time real estate entrepreneurship would make sense for you is:
- If you hated your job so desperately that quitting was your only option,
- If you passionately wanted to pursue real estate, or
- If you had no other choice because your ability to earn was eliminated.
If one has a good job, then no (and low) money down investing, wholesaling, and other “creative” financing approaches make little (and no) sense! Sure, there are exceptions — there are always exceptions — but as a rule, most middle and upper-middle class readers of this blog will NOT become overnight, wildly successful real estate entrepreneurs, and most won’t want to.
An Argument for Buying Rentals the “Old Fashioned” Way
But, the flip side of that is that most of the readers of this blog WILL be able to purchase a decent cash flowing rental property within 100 miles of where they live the good, old fashioned way — by buying a first home that will make a ton of sense as a rental property when they upgrade or move on in a few years or by simply saving up 15-25% of the median American home price ($188,000) — that’s $28,000-$47,000 — in cash. They’ll be able to produce reasonable cash flow, which accelerates their savings and allows them to purchase another one a few years later. They’ll be able to repeat the process faster and faster over time, and within a decade, they’ll be sitting on close to a million dollars in real estate. Will it happen for everyone? Probably not, but for most people who would like to get into real estate without a crazy commitment, I believe that this isn’t an unrealistic result.
Here’s the thing — when I say this, people think that I’m suggesting something radical. Again, I’m suggesting that if you earn a middle to upper-middle class salary, that you should simply save enough of your salary such that you can purchase a median home every year or two. That, or move into an investment property with the intention of keeping it as a rental when you move in a few years if you want to put down less.
In fact, I’m telling you that this is the way that the vast majority of you will be purchasing your first or next rental property, assuming you have a solid job and no pressing need to quit it.
If you are in the $50,000-$100,000+ income range, employed W2 style, and not too keen on giving up the entirety of that income to go full-time into business on your own, then you had better start saving your pennies, or prepare to move into an investment property (or both). You likely aren’t getting started another way.
Creative finance and no (or low) money down is for people who NEED or WANT to succeed in real estate so badly that they are willing to take some big risks, borrow other people’s money to an extreme degree, and MAKE real estate investing work. This type of financing does not apply to me, and if your position is at all similar, it does not apply to you either. Creative financing is also NOT an appropriate strategy for the Johnny Spenders of the world. It’s not appropriate for guys like him who make $75,000+ but have less than $10,000 in lifetime savings outside of retirement accounts and home equity — and who kind of want to invest in real estate.
Creative finance is for Ben Leybovich. Ben had to make it work. He will put his entire week, his entire year, if needed, into finding an incredible deal, and if necessary, making the deal work. Nowadays, he’s experienced enough and well-networked enough to only select good deals that offer him a great shot at success, but in the beginning, he would make the deal work, if necessary.
Creative finance is for Brandon Turner, who began investing while working at a bank, and soon quit his job to pursue it full-time. Brandon Turner, even at 25 years old, working full-time on his own rental properties, is a guy that I would lend to and partner with.
Johnny Spender, at any age, is not someone I would lend to or partner with. Johnny Spender’s first priority is his job. He lacks the ambition and/or confidence to quit his job and pursue his venture full-time and lacks the discipline to accumulate savings so as to fund the project himself. If things don’t work out, Johnny Spender is not going to bust his hump, surviving on ramen noodles, and working from dawn ’til dusk to make sure that his investors don’t lose money. Why should he? He can continue plodding along at his real priority — his job — and there is almost no chance that his real estate project will surpass his W2 income in the next 2-3 years. Johnny Spender is a bad investment and is likely to lose money in real estate. Contrast that to Ben, Brandon, and Jered — those guys had to succeed. What else were they going to do?
For Whom Is Real Estate Investing Difficult?
But, Johnny Spender, Brandon Turner, Ben Leybovich, and Jered Sturm DO have something in common:
These fellows are all likely to tell you that real estate investing is very difficult.
Real estate investing IS hard when you have to manage huge rehab projects for the first time yourself. It IS tough when you have to educate yourself on tenant management on the fly after buying a 30+ unit apartment complex with money borrowed from investors who will foreclose on you the moment they feel that you can’t repay them, and it IS tough when you have five units go vacant and no cash in the bank to cover your next mortgage payment. Ben, Brandon, and Jered, I’m sure, did have a tough time building their portfolios. Johnny will run into trouble.
I, on the other hand, keep pinching myself. Real estate investing seems very easy for me. Too easy. After putting in an initial (less than planned for) $8,000, I haven’t had major repairs — or ANY repairs over about $250 — since. I haven’t had tenant problems. I haven’t had a major disaster. I haven’t been sued. I haven’t had to evict. I’m sure that I will have these problems one day — every landlord runs that risk, especially if they are committed (as I am) to long-term real estate investing as part of their portfolio. But I bet that these problems will come one by one, instead of all at once. I bet that I will be reasonably prepared to solve them, and even if I’m not, I bet that I will have the cash, self-education, and flexibility to meet those problems without becoming overwhelmed.
Maybe the reason that real estate investing has been easy for me is because I started with a simple “house-hack” duplex. Maybe it’s because I only have four units and occupy one of them myself. Maybe it’s because I spend several months learning about property management and investing per property, carefully and patiently analyze my deals, and buy only when my life and financial picture are in advantageous positions. Maybe it’s because I have tens of thousands of dollars in cash, set aside exclusively to deal with any problems as they come up. Maybe it’s because I have a great job and professional skill set and could cover my mortgage even if the tenants weren’t there to pay the rent. Maybe it’s because I’m dead wrong, and real estate investing IS really hard, and I’m missing something huge. Maybe I’m forgetting that I’m investing in Denver, and Denver might be in a huge bubble, and rents are about to plunge 50%, putting me into negative cash flow territory.
But, I don’t think so.
I think that real estate investing just might be a little easier than some people make it out to be. I expect that to be controversial. I expect to see folks get angry at me and tell me that I am a young fool who has no idea what a market crash is like. That may be true. Real estate investing is certainly no picnic, but I find it hard to believe that this is a business where only 5% of folks can succeed. There are millions of landlords out there. And believe me, I’ve met some dummies in this business. Not everyone making money in real estate is some genius that knows something you don’t.
Frankly, I think that the reason people are succeeding in this business, even with full-time jobs, even without incredible analytical skill sets, and even without incredible hustle that some of the mythical investors on this platform possess is because they consistently follow a few basic principles that anyone can copy:
- They run frugal lives and thrifty businesses relative to their incomes, with plenty of cash on hand.
- They buy typical properties that will obviously produce cash flow after financing costs and expenses, with inspections that do not indicate a likelihood of expensive problems.
- They buy in locations that a reasonable person would expect to become more desirable over time.
- They are reasonable and predictable people who treat their tenants and those they do business with fairly and honestly.
- They are consistent investors, buying regularly, with a long-term outlook.
I don’t love real estate investing because it’s rocket science or because my “proven formula” is the only one that works. I buy real estate because it’s a good “semi-passive” business that I can take care of almost entirely over the course of a few hours per month in my spare time. I buy real estate precisely because I do NOT have to be some sort of creative entrepreneurial genius to make it work!
Of course, I shop around for deals. Of course, I try to get a competitive advantage by studying the market and learning about areas that might produce outsized returns. But I buy properties with mortgages guaranteed by Scott Trench’s personal assets, and I buy properties that I would be willing to live in. As a result, I get incredible financing terms and am getting practice managing properties while staying very close to the tenants.
Unlike the guys above, I don’t necessarily get properties at $0.70 on the dollar, and I don’t have to. I have cash for the down payment, am willing to put in a modest amount of weekend and evening work to get them tenant-ready, and am willing to self-manage. In return, I simply expect a little cash flow (about 10-15% cash on cash, inflated because I manage my own properties) and hope for a little appreciation. Of course, I don’t get the same returns as someone that does this full-time! Again, I don’t have to. I am perfectly happy with about a 10% return on my cash invested, which I am willing to work for, the ability to pay down the mortgage using tenant rent, and the opportunity for appreciation.
Real estate entrepreneurs constantly talk about finding deals at significantly below market value. That’s because the strategies that they employ are highly risky if you are buying property at or around retail price.
As a long-term buy and hold investor with a good job, good credit, and limited free time, however, I much prefer buying property when I am in good position to do so. I am extremely choosy about exactly how much work I want to do, where my property is located specifically, and many other characteristics of my investments. I buy properties that I am totally comfortable with, that are synergistic with my lifestyle and career, and that I can pursue on my time, not when deals happen to present themselves. If I can get a great deal, that’s wonderful. But if I get a fair deal in a location that works for me and my lifestyle and financial position, that’s great too.
I am not a real estate entrepreneur. I am an Operations Professional at a small company, with some on-the-side real estate investing. And that is totally OK. I believe that I will build wealth just as fast, if not faster, as many full-time investors (after accounting for market cycles), that I will love my job, and that my real estate investments are likely to give me far less trouble than others that pursue this business with more aggressiveness. And I believe that I will be left with a stable, cash flowing real estate portfolio after about 7 years of investing capable of supporting indefinite financial freedom — a similar timeframe for many full-time real estate entrepreneurs.
If you’re like me, I have good news for you. Real estate investing doesn’t have to be so hard. Real estate investing can be a hobby, especially at first, with small maintenance requirements that can easily be taken care of in a few hours per month. Real estate investing does require you to be able to reasonably predict cash flow and manage your money, to reasonably manage your property and the tenant relationships that come with it, and to be a responsible, informed adult. But don’t think what is necessary for a full-time investor to succeed is necessary for you. If you are working full-time, your first deal likely will not be a property that you get at 30% off retail, so don’t be scared off by folks that tell you otherwise.
Am I the only one that thinks real estate investing isn’t so hard? Or am I missing something?
Share your thoughts in the comments below!