Getting the first deal is a hurdle that the vast majority of people interested in real estate investing never get past. In a previous blog blog, Rich Dad Poor Dad/Wealth Intelligence Academy Bootcamp Review, I described how I spent close to $10,000 before I got my first real estate investing deal. Although I do not believe the guru hype that you can “do deals without any money”, I also don’t think you need to spend $10,000 before you do your first deal like I did. The following is a breakdown of my first real estate deal. It is longer than most of my regular posts, but starts before I was ever even interested in real estate investing and ends with the purchase of my first investment property.
Phase 1 – Graduating College, Personal Finance & the Stock Market
I was close to graduating with a 4 year degree in computer science. I was busy applying for jobs when one of my classmates recommended that I read The Automatic Millionaire. After reading it, I started to understand a little more about personal finance. This was really the first time I realized that I was getting into the “real world” and the college refund checks would soon end.
After we graduated, my wife (then girlfriend) and I moved into a 2 bedroom apartment in Rochester, NY. I decided, before I even found a “real” job, that my goal would be to retire from that job within 15 years (I guess being labeled as a millennial is accurate). I could not find a software development job initially, so I went back to my previous summer job of painting houses. During this time I continued learning more about personal finance and investing. I had socked some money away each week and opened an account with TradeKing to invest in stocks. I logged in daily to check if my balances had gone up or down. I continued to read about the stock market, mutual funds and IRAs. I watch financial shows and created several play stock accounts for additional practice. When I finally found a software development job, I immediately began to contribute 10% of my paycheck to my 401k plan.
During this time, I also started learning about real estate and stumbled upon the book The Automatic Millionaire Homeowner: A Lifetime Plan to Finish Rich in Real Estate. Since I was a big fan of The Automatic Millionaire, I decided to pick it up. This new book described many of the same concepts (invest long term, use power of compounding, etc) but this time applied it to real estate. I had never really thought about real estate investing, but there seemed to be a lot of positives to it. Real estate investing seemed to be more stable than the stock market, and had several additional benefits:
Real estate investing allows you to invest 20% and borrow 80%. So if you had $20,000 to invest, you could either purchase $20,000 worth of stocks, or you could put that $20,000 as a down payment and purchase a $100,000 house by borrowing the other $80,000 from the bank.
Real estate prices tend to go up over time, so purchasing real estate seemed to make long term investing sense.
With that 80% you borrowed from the bank, if you have a tenant paying rent, your tenant is actually paying down the mortgage. So you gain equity with each monthly rent payment.
Hopefully after all expenses are paid, there is money left over each month, which means profit on a monthly basis.
There are several deductions which can lower your taxes, meaning you keep more money you make.
So I picked up several real estate investing books and started to learn all that I could. One of the books was Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not. That booked changed how I looked at money, assets and liabilities.
Phase 2 – Diving Into Real Estate Investing
After reading several books and learning more about real estate investing, I knew that was how I would accomplish my 15 year retirement goal. My wife and I were living in an apartment and paying rent every month, but I realized that my landlord was getting all of the benefits that I mentioned above. Additionally, I realized that even with all of my research, I was not very good at investing in the stock market. I saw it as more of a gamble, as I had little control over it and it seemed to shift with people’s emotion. So when we decided to purchase a house, I thought it was the perfect opportunity to start my career in real estate investing by purchasing a duplex. We could live in one half and rent out the other half, which would cover a good portion of our mortgage. We would get started investing in real estate and also save money each month. My wife was not as sold on real estate investing as I was, and in the end we ended up purchasing a single family home instead.
Although I was very happy with our home, I was disappointed with not being able to get started with real estate investing like I had planned. I continued learning more, hoping I would still be able to invest. I searched online and learned that there was a local Real Estate Investors Association (REIA) in Rochester. Even though I was new to real estate investing and was somewhat introverted, I decided that if I wanted to retire in 15 years, I needed to start meeting others who were involved in real estate investing and learn from them. I attended my first session, avoided talking to anyone, but was amazed at all of the people and how so many of them seemed to be investing in real estate. I left the meeting and was determined to learn more, hoping to gain enough courage to talk to people when I returned the next month.
A few days later, I was driving home after a long day or work. While stuck in traffic, I heard an ad on the radio:
“One day only! Learn from the author of Rich Dad Poor Dad how to make millions from real estate investing. Call now to receive free tickets.”
That was it! I loved the book and I just needed some training in real estate investing to connect the dots for me. I called my cousin and we took the training (see a more thorough description/review Rich Dad Poor Dad/Wealth Intelligence Academy Bootcamp Review). We took the 2 hour training, then a 3 day training and eventually signed up for 4 “Advanced” training sessions. During the 3 day training, I started putting together my plan for purchasing my first property. I felt like I had enough knowledge and I was describing to others in class how this all worked. I started driving around looking for run down properties. I also started scanning the local newspaper from my hometown. Two weeks later, I saw an ad for a duplex for sale. I called the number and scheduled to see it a few days later.
I felt like I understood the business side of real estate investing, but I didn’t know much about what I should actually be looking at in the property. So I asked my father, who worked in construction for 20+ years, to walk through the property with me. We walked through the property and although it seemed a little run down, the foundation, roof and furnace seemed to be in good condition. I submitted an offer to the owners of the property. After a few back and forth negotiation (you can read more about that in this forum post – My Real Estate Deal… Please Analyze) I ended up getting my offer of $26,000 accepted.
And now the fear set in! I realized that I had no idea what I was doing. Frantic, I called some people who I had met at REIA and asked what to do. One of them sent me a standard purchase contract. I called the seller and we agreed to meet. I put on the only suit I owned (hey, I was a big shot real estate investor now, right?) and drove to meet the seller. We signed the contract and I had 2 months to close.
All of the “gurus” said to find the deal and the money to fund it would follow. I believed them, but suddenly realized that I did not know where it would come from. After getting the deal signed, I realized that between the down payment ($5,200) and closing costs (~$3,000) I would not have enough money to purchase the house, even if the bank loaned 80%. My father was not really big in real estate investing, but he owned a few apartments, so I checked to see if he wanted to partner with me. I don’t think he thought I was serious (or really even knew what I was doing), so he declined. I tried to talk it over with my wife, and she was not very supportive either. Over a few days, we had some very tough discussions about the future, our goals and the life that we wanted to live. Reluctantly, she agreed that we should invest. With that, I still was short ~$4,000 to purchase the property. I called my cousin (who took the real estate training with me) and asked if he wanted to invest. Considering that we had both spent a combined $15,500 on real estate training a few weeks before, he decided he better start making it back.
With a partner now identified, we started seeking an investor to fund the deal. It was much harder than we expected. Even with a good deal, no one wanted to invest with someone brand new to real estate. I again asked some local REIA members what to do, and they recommended seeking a loan from a local bank. I had just purchased my house, so I knew I had a good credit score and we had enough money for the down payment and closing costs, so we went to the bank. The meeting with the loan agent went well and we expected to get approved within a few days.
A few days later, the loan agent called and said the application would be getting denied. He said even though we had good credit, we had too few liquid assets. Additionally, he said that $20,000 was car loan size, not mortgage size. Frantic that we would lose the deal, I posted on an online real estate forum (BiggerPockets.com – Help – Need advice on Funding Deal). I received some good advice and we ended up finding a mortgage broker who got us approved for a loan.
When the closing finally came, we met with our lawyer and the seller’s lawyer. The day before, our lawyer gave us the final amount that we owed, but when we got to the closing, we found out that we owed $1,000 more than he initially told us. My cousin put his portion on a credit card, but I was paying for my portion with the proceeds from selling my stocks and did not have an additional $500. I ended up writing our lawyer a check, which was the money that I had put aside for the mortgage payment for my house. My wife was not happy that I spent part of our mortgage, but we were now real estate investors!