176: Ask Bill! Newbie & Limited Funds, RE License, Reserves, and Investing $500K

SHOW NOTES FOR EPISODE 176: ASK BILL! NEWBIE WITH LIMITED FUNDS, REAL ESTATE AGENT 1ST, RESERVES, AND INVESTING $500K

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:

• We have implemented our 2018 Strategic Plan and are moving full speed ahead
• Not only tackling real estate goals but also personal goals (diet, exercise schedule and reading a lot of good books)
• Hiring a person here to assist with systemizing out operations and facilitating our property search
• In our quest for 100 plus units, we are gearing our strategy to “direct to seller” activities and looking closely at secondary and tertiary markets more closely. Why?
  • Competitive nature of the market
  • To meet our criteria of finding undervalued properties
• Also talking a lot with those who are interested in investing through our syndication. It’s been great meeting many of you who are very interested in real estate investing – especially multifamily
• If you are interested in being a passive investor on our next 100 plus property, sign-up for our investor newsletter at manasseroproperties.com.

Let’s get on with our questions…

Question #1 – Suggestions for Newbies With Limited Funds

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.
Simply His,

Tracey

Bill’s Answer to Question #1

Hi Tracey!

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.

Question # 2 – Should I Become a Real Estate Agent First Before Investing in Real Estate?

Should I become a real estate agent first if my goal is to become an investor?

Bill’s Answer to Question #2

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:

The Pros:

• You’ll get excellent training and education on local real estate laws and regulations that will benefit you as an investor
• You’ll have access to the MLS (only in the state you are licensed) – find properties faster
• You can see homes faster. Don’t need to wait for the agent to let you into a property
• You can generate commission income to help you buy investment properties
• You can generate commissions from sales on properties you buy and sell
• You can save money on the purchase price because you don’t have to pay another agent’s commission
• When you find off-market properties, you can both buy and/or list the property
• If you know how to work it, you can make more on a deal than a non-agent investor

The Cons:

• You must always disclose to sellers that you are an agent and that might hinder your opportunity for the sale, seller financing or another creative financing opportunities. You also must have them sign a disclosure that states I may be buying the home below market value and making a profit on the home.
• If you buy a property you have to follow specific disclosure requirements
• You cannot get commissions if you buy out-of-state properties
• If you are marketing to find off-market properties, your letters, postcards and all marketing materials must disclose you are an agent, which could discourage prospects from responding
• As an agent, you must be part of a brokerage and your responsibilities there may limit the amount of time you have for investing
• Real estate agents may have a conflict of interest: If you sell many homes as an agent, you may be competing with your own clients when you buy investment properties. This could be a conflict of interest if you want to buy the same home one of your clients wants to buy.
• You may have to host Open Houses on properties, killing your weekends

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.

Question #3 – What do I need in Reserves?

Hi Bill,

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.

Regards,

Ray

Bill’s Answer to Question #3

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:

Why have reserves?

• Cover mortgage payments PITI
• Handle vacancies
• Replacing appliances
• Insurance Deductibles
• Maintenance
  • Minor repairs
  • Major repairs (roofs -$5,000 and more, windows, A/C, foundation issues, plumbing)
  • Make-overs between tenants
• Bank requirement
  • Before they give you the loan:
    • 6 months of your personal mortgage
    • 6 months of the properties mortgage (if low cash flow – more)
    • 6 months of ALL your properties mortgages
  • Evictions

The money you have in reserves should not be used for other things

Example:

Personal expanenses: $5,000

Rental: $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?

• You still need reserves:
  • Property taxes
  • Insurance
  • Major repairs

Question #4 – How Should we Invest $500,000?

My husband and I have 500k to invest. We are both in our 40s. We want to retire in our 50s. What is a safe investment with a good return, like 5% or more with limited risk?

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

Answered Jan 11

Bill’s Answer to Question #4

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

INFOGRAPHICS

IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher or GooglePlay and Subscribe, Rate & Review our podcast.  This will greatly help in sharing this podcast with others seeking to learn real estate investing as a means to achieve a successful retirement.

Check out our other podcasts at olddawgsreinetwork.com.

Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.

Episode Sponsor: Meno Studio – menostudio777@gmail.com