Part 1 of 4 of the series on Residential Real Estate Investment Basics: Work Harder and Smarter
Since I was young child, I have always had a fascination with real estate and architecture. As a teen, I would sneak into construction sites (please don’t do this!) and walk the floor plans, imagining how the finished project would look. As I grew into adulthood, I got my hands on every book I could find regarding real estate investing. I read and studied, and most importantly, planned. I created numerous investment strategies, business plans, and spreadsheets. I finally set my goals on 4 different real estate investment trajectories: 1) my personal home; 2) rental properties; 3) new development; and 4) flips. There was only one problem, I was still young and saddled with a massive law school debt. But, that is the great thing about real estate investing. You can do it and be successful in pretty much any stage of life or personal situation. Of course, all the “experts” trying to sell you get rich quick schemes that insist you can make millions with no money down, might be stretching the truth, at least a bit. But the fact remains, although most investing is a marathon, not a sprint, real estate investing can in fact, be both.
So, back to my personal situation, I started my real estate investing career by investing in myself. There are three reasons for this: 1) I needed a place to live (If I have to pay living expenses, why not make it part of my investment strategy?); 2) the easiest way to create equity, is through real property (this equity can be used for further investments; and 3) when I decide to sell, my wife and I can deduct $500,000 from our gains on our personal home.
My wife and I purchased a small bungalow, after putting in over 20 offers on other homes. Actually, I was on my way to another showing, when I saw the “For Sale by Owner” sign in front of the house. I walked up, knocked on the door, looked around for 30 secs, and then presented an offer. 30 days later, I owned a dump! Within 2 months, we had architectural plans drawn to increase the home from 900 square feet, to over 2100. We would keep the basement foundation, as it was in great shape, and just build up and out over a new crawl space. We used what little savings we had to start paying contractors, then paid for the rest with private loans. We saved a lot of money by working directly with the subcontractors, rather than hiring a general contractor. It is also helpful that I am handy and can complete a lot of the finishes myself (with the help and guidance of my much more skilled father-in-law). That being said, you do not need to do any work yourself to be successful. However, you do need to be organized, and do your homework.
At the end of construction, we refinanced our mortgage to pay off the construction loans, and law school student loans. Even after paying back the construction costs and student loans, we had enough equity to open a home equity line of credit (HELOC) for $100,000. The $100,000 HELOC means that if we were to use the total 100 grand, we would only owe 80% of the appraised value of the home. I should mention that our original down payment for the property was $17,000. So our reward for the $17,000 investment, plus sweat equity, was as follows:
• $50,000 in student loans paid through cash-out refinance
• $100,000 HELOC available for investing
• 20% equity after all construction loans and student loan debt repaid
Now, when we decide to sell, we can capture that 20% equity (plus further appreciation, minus transaction costs) and not pay any taxes on the gains, as long as the gains are under $500,000 for us as a married couple, which will not be an issue. Let that sink in for a minute. We both work full time, but we were able to organize this home renovation, pay off student loans, have $100,000 to invest, and when we sell (assuming the market doesn’t crash) make over $200,000 profit, tax-free. All this is from an initial $17,000 investment. None of this was easy, but it is all an attainable goal for most. Everyone knows the saying, “work smarter, not harder.” However, my belief is that if you truly want to be successful in real estate you can, but you have to work both harder and smarter. Plan, organize, then execute.
Click Here for Part 2 of 4 on rental property investing
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