Ask Bill! How do I get started in real estate investing if I have very little money to invest? Should I become a real estate agent first before I become a real estate investor? How much money do I need to keep in reserves personally and for each property as a real estate investor? How should I invest $500,000 for the best return? In this Fun Fact Friday “Ask Bill!” episode, Bill Manassero answers some of the real estate investing questions received during the month from emails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.
But, before I start, I just have a few brief update comments:
Let’s get on with our questions…
I am starting out, and have VERY limited funds, so hope to ‘multiply them’ wisely. I am a Believer and feel it’s my responsibility to be careful and grow up and grow money to use for God’s Kingdom. So… do you have any suggestions for a newbie. Bigger Pockets has a lot of training, I just want to be smart with any money spent.
Thank you very much for visiting our website.
As a fellow believer, I too recognize the importance of being a wise steward of the funds the Lord provides us. That’s why I emphasize the importance of prayerfully “doing” your homework first (reading, listening to podcasts, watching webinars, getting a mentor, etc.) before purchasing your first property.
I recorded a podcast episode on getting started that might be helpful here: http://olddawgsreinetwork.com/006-how-to-get-started-in-real-estate-investing/. Also, another approach to preserving your investment capital is to partner with others or do creative deals where you do not have to put in so much of your own funds. Brandon Turner from BP was on my show and talked about these techniques. Here is his podcast interview: http://olddawgsreinetwork.com/021-buying-properties-with-little-or-no-money-down-with-brandon-turner/.
If I were you, I would do all the research, try to find properties of interest, work the numbers like you are going to buy. Do this on a bunch of “practice deals” (maybe 50) and act like you are really going to buy so you can see what’s required. We have a free 3-minute deal analyzer on our website at olddawgsreinetwork.com. BP also has some great free online deal. If you need to get investors, get them on board. Look for a “starter” property — perhaps a duplex. Look for a property either near where you live or in an emerging market. If you have limited money, I would recommend, if you can that you buy a property with an FHA loan where you only have to pay .5 to 3% down. For example, if you could buy a duplex for $200,000, you could buy it for as little as $1,000. The only hook is that you would have to move into one of the units for at least a year. But, after the year is up, you could find another, rent out the unit you were living in and move into that duplex and keep repeating every year until you have multiple properties generating you significant cash flow. Always buy “under-market” so you have built-in equity and always be conservative in your numbers. The real education starts AFTER the first purchase.
You also might want to take a look at some of my favorite real estate investing books: http://olddawgsreinetwork.com/books/. I’ve also attached two infographix files (below) that have “at a glance” tips on getting started and being successful in your real estate investing endeavors.
It’s not necessary for me to be a real estate agent to be a real estate investor. There are both pros and cons to being both an agent and investor at the same time. Here are a few:
There may be other pros or cons but at least that gives you an overview. On my podcast, I have interviewed many successful real estate investors, some of which are agents but most of which are not. Here are a couple of podcasts you can listen to from both points of views. Episode #087 – Mark Ferguson is a successful real estate investor who has his brokers license and sees it as a benefit. In episode #107, Brain Murray who was a teacher with no previous real estate experience who jumped right into buying commercial real estate – in fact, he bought an office building — and is very successful.
I’m not as old a dawg as you (56) but have been wondering about this topic, and maybe you will find it worthy to cover on your podcast. I’m sure that you’re like me, just a layman on this topic, but you may have resources or contacts that can talk more authoritatively on the topic:
Real estate is not liquid, it may take a couple years to sell a property. How much should one keep in liquid form like cash or in the bank or stocks in order to cover unanticipated expenses in life events? These unanticipated expenses could be a few thousand for a roof repair, or to help a relative, or if one has a health crisis.
Dave Ramsey recommends people set aside 6 months of expenses in savings for when an emergency happens, or if you lose your job, to give you time to find another job. In retiree’s cases though, a portion of our retirement income may be a pension that is a surer source of income than holding onto a job. Is real estate income a surer income source than a job also? Then maybe a smaller set-aside is warranted. On the other hand, we may be more susceptible to a large medical event.
How much should one set aside in liquid form for these possible events? How might one structure his/her real estate investments to liquidate if further funds are necessary? In my case, I own a couple duplexes (Indianapolis and near Pittsburgh) but am starting to move into the commercial size properties. I’ve thought that I could sell off a smaller property in order to meet needs beyond my cash emergency fund.
Just some thoughts for you. Again, I appreciate your thoughtful podcast.
Many real estate education programs are focused on the “no money down, no credit” niche. While this is completely achievable all real estate investing pros at some point or another are going to need to have a reserve fund regardless of their chosen real estate investing strategy. The question is how much is enough?
A generally accepted rule is to have between 3 to 6 months of operating capital in reserve. Unfortunately, many beginning, and often even experienced investors don’t have this kind of money put aside. It is vitally important to try to have a reserve before investing as part of your goal setting. There are some strategies you can use if you do run low and don’t have the cash readily available but that’s only as a last resort. The secret is to have the money lined up before you need it!
Let’s first talk about some factors to consider when trying to pinpoint a sufficient reserve fund to keep your business running smoothly:
The money you have in reserves should not be used for other things
Personal expanenses: $5,000
Needed – $10,000 X 6 = $60,000 Why? If you need a new roof, $5K would be gone right away
In addition, you should be setting aside 10% of income for capital expenditures (new roofs, major repairs – new A/C, boiler, plumbing, exterior painting, replace siding, etc.) and 8-10% for repairs, 7.5% for vacancies.
However, while it may not be covered in many real estate education programs this is certainly to be in addition to paying yourself first and taking a percentage off the top of every payday to set aside for personal emergencies and savings too. Some say you should have 10% of your net worth in liquidity.
My personal opinion is that if you have 1 property you need higher reserves because you can’t predict when those repairs or big expenses or just plain vacancy will hit. “The Old Dawg Principal” – whatever you never expected will happen.
What if you don’t have a mortgage?
This question previously had details. They are now in a comment.
Bill Manassero, Real Estate Investor and host of the Old Dawg’s REI Network Podcast
Real estate, by far, is your best investment. If I were you, I would do one of three things, either 1) buy a small apartment building for $500,000 ( 24 units), or 2) invest in 4–5 different apartment buildings (valued at $500,000 each), putting $100,000 down on each property and taking a mortgage, or 3) buy a larger apartment(over 100 units), valued at $2,500,000, by putting the $500,000 as a down payment. I am keeping the examples simple and excluding closing costs and rehab costs.
In option 1), I found a 24-unit apartment building in Pocatello, ID that recently sold for $400,000 and generates $108,000 a year in rental income, that’s a 27% return, plus in 10 years, if you buy right, you will also have the additional equity growth (currently 3% per year in average markets).
In option 2) let’s say you buy 4 20-unit buildings valued at $400,000 each by putting $100,000 down and taking out a mortgage on each. Your cash flow will go down to 15% or $61,200 annually because of the mortgage payments (P&I) but, if you apply the full cash flow to paying off the mortgages, you’ll own the properties free and clear in 10 years and generate $360,000 annually at retirement, plus the tax advantages and the 3% per year equity.
In option 3), let’s say you put the full $500,000 down to buy 124 units (I found a 125-unit apartment in Memphis, TN for $2,495,000). The apartment generates $749,000 annually, that’s a cash-on-cash return of 15o% and a 29% ROI. You’ll have the tax advantages and if you used the cash flow to pay off the loan, you’ll have the loan paid off in 5 years, plus you have the equity.
Granted, these examples are type C properties that would require and little extra work and perhaps additional investment but they are currently cash flowing.
And, no matter what, real estate will always hold value as a “tangible” asset, unlike stocks and bonds. Sure, real estate markets can fluctuate but, the reality is, even in the worst markets, people will still always need a place to live and apartments provide that basic need.
That is why people are crushing it all over the place by investing in real estate. Now, don’t get me wrong, real estate is NOT a “get rich quick” effort. It takes hard work, much research/education and smart moves. But it is possible to grow $500,000 considerably in just 10 years with the right real estate strategies,
Here is an interview I had with a young man who started off by buying a 168-unit apartment in Cincinnati. In just three years, he leveraged that purchase to generate over $28 million in real estate. If you want to listen, here is the link: 001: How I Grew My Real Estate Business to $28 Million in Three Years With Joe Fairless
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