Real estate has been extremely kind to me. In fact, the majority of my overall portfolio’s long-term “Buy and Hold” investments are comprised of rental properties. And although I’ve only been playing the game since 2012, a lot has happened since!
At this time, I would like to welcome JP for a guest post today on his own real estate experience!
I have been marching to the beat of a different drum since I was a kid. All the while listening to what the most financially successful people in my life have to say.
I had three people tell me about retirement savings and compounding interest from age 18 to 21. Two too many. When you see the numbers add up like that using a future value calculator it shouldn’t take much convincing. When I was 22, I graduated college and started working as a personal trainer. Making a small salary during the crash of 2008 only allowed me to save a hundred or so a month into a Roth. However small, it was enough to make me feel better about my future. The money would come out automatically every month and I didn’t give myself the option of questioning it. I may have been struggling to make rent, or saving more by cooking at home. I may have even been a little bit uncomfortable, but I was moving forward financially. When I did a little better and was offered a position to manage a training studio, I was offered a salary of $40k. This was huge to me as it allowed me to max out my Roth somewhat easily, which I did for the next 5 years. Couple that with a recovering market, and I ended up with $35k in there by 27. Then I depleted the whole thing.
See, the idea of retiring at the age of 65 is sickening to me. What’s even more sickening is that most people can’t even do that. That’s right, 73 is the new retirement age for someone graduating college today with a future of above average investing.
Real estate wins for me!
When I was 25, I heard about this thing called an FHA mortgage. I always thought that you needed to put down 25 or 35% to buy a place, not 3.5%. Yes, 3.5%!!!!! That’s $17k on a $500k property. As a single dude with a measly salary, this meant getting an offer accepted on a $180k beaten up short sale condo in the sought after neighborhood of Davis Square in Somerville, MA. Unfortunately, a short sale meant a year of back and forth between me, the seller, who was singing with dolphins in Hawaii… not a joke, and the guy at the bank with a stack of papers on his desk a mile high. Fed up at the end of this brutal year, I said screw this and signed a lease with my girlfriend in the north end of Boston. 2 days after we signed the lease for this apartment, I got a call from the short sale seller informing me that I could buy it at auction and I would be the only one there. Her dad ended up purchasing the condo for $170k. It has recently been appraised for over $500k. I’m not upset about it and you will see why.
As my lease in the north end was coming to an end, we started looking at the safe and normal option of buying a condo. I talked about options with everyone. But then, I talked to lady I was training who had better plans for me. She asked why don’t you buy a multi-family in an up and coming area, live there for a year and then move back to your desired neighborhood and have that multi-family pay your eventual condo mortgage?
Light. Bulb. Turned. On. Bright.
The first step was getting my gf involved. As she typically reacts to most new ideas, it was a definitive NO and then a shortly thereafter opportunity for discussion. After a few long walks and her eventually agreeing, we started to look at places in areas we were happy to live. I don’t know why this was our criteria, but we wanted to be no more than $600/month out of pocket, while living in one unit. So, we looked at properties with big rental units and a smaller unit for us to live in. This was toward the end of 2012, so things hadn’t fully recovered, but we started seeing more and more people at open houses and a general feeling of excitement and competition. We must have evaluated 50 properties and looked at 15, making offers on at least 8.
With no success, we branched out of our desired neighborhood, Davis Square, and focused on up and coming areas. This is where my visionary side comes into play. There was a proposed green line extension(train stop) that would eventually end up in Union Square Somerville. Because nothing was ever confirmed, property values stayed low. Union square was an otherwise run-down neighborhood with a few good ethnic restaurants. We went to an open house in Union Square for a 2 family(2 bed and 5bed units) listed at $585k. The 5 bed unit barely had a kitchen and was in bad shape, but had potential. The unit we would live in, had recently been redone, although by a band of ecuadorians. We made an offer of $555k at the open house. After some delay, it was accepted.
My inspection mindset – not recommended.
When we had the inspection, things got a bit shaky. The house was apparently leaning to the right, the foundation was crumbling, there were powder post beetles, and there was no heat going to the top floor. Raise your hand if you would run in the opposite direction. I just couldn’t walk away knowing the potential of this neighborhood. In order to get the appraisal square footage to a qualifying range, we had to install baseboard electric heat, pre closing, without any concession from the seller. That was how badly I wanted this property. After the appraisal still came in low, we came to a final price of $552k. The day of the closing, there was news that the green line extension was confirmed. Crazy.
A few months later, we started seeing comp sales in the $650k range. Having a close friend as a loan guy, I asked questions constantly. One was when can we get rid of the FHA and do another one? He said, when your property reaches 85% loan-to-value (LTV). In my mind we were there, he didn’t think so. I convinced him to try a refi and we got a value of $730k. 6 months after our $552k purchase price. Yes, we had to do a little work to get the second unit rentable, but not THAT much. So we refinanced out of the FHA, got rid of mortgage insurance and now yet again, had an FHA loan in our back pocket.
After a run in with the law in college – trying to create a different form of passive income, through plant sales – I felt like I had to prove something to a lot of people. It wasn’t a conscious thought, but it was there somewhere. I lucked out with this property, although planned luck you could argue. But, how could I take my success and turn it into greater success?
Enter early financial freedom. I would buy as many multi-families as needed to create enough passive income to let working be an option. And I enjoy what I do. In the time since working as a trainer and waiting for a short sale condo, I had purchased my training studio from my boss for $15k. I would now be 50/50 partners with the silent partner/investor. I made incredible strides so that a year later, we would double the size of the gym and open a separate, volume based massage business. I currently train sessions all day with awesome clients, have consistent business challenges, but get a massage once a week. Not a bad life right? Tomorrow, I will workout in the morning and hangout with my pug until I head in to work around 11. I work my ass off, but I have flexibility. Any stress is eustress. The fact that someone like me is seeking financial freedom so strongly should probably scare you.
Back to the multi-families. We would then take out a HELOC for $45k from Somerville and buy a 4 family in another up and coming area using creative FHA financing. This area would have the chance of winning the bid for a Steve Wynn casino. Up and coming means to me… An area so great that it always appreciates or a subpar place where the government or a “home run” private company is doing work. We lived in the 4 family’s only vacant unit for 6 months until we decided we really didn’t want to slow down with acquisitions when we still had so much equity in Somerville.
So, 6 months after moving out of Somerville, we moved straight back to our original unit. We moved the couch back to its old spot and took out a bigger HELOC. This time for $114k after a low appraisal of $850k. After rolling in the other HELOC and putting in some new hardwood in the unit we moved out of, we were left with about $50k and a necessary 25% down payment for the next place. You mean we couldn’t finagle another FHA?
Sadly, it was true. With a shortage in cash to buy another, I went for a devastated walk to pick up bananas from my fruit guy. I told him my issue and he told me to step outside of the safety circle that society places us in. He told me to deplete the roth and put it into another property. I’m not hard to convince, so I withdrew that same day. I paid $3k in fees for withdrawing early, but that number would be comical compared to the appreciation I would surely find.
To stay diverse, we looked in new areas where property values were low, but rentals were average or better… especially East Boston. Here, the government was putting in work to the waterfront and other areas and young professionals were starting to look at it as a rental option. If you asked anyone about an up and coming area, they might say East Boston… although all this popularity of thought hadn’t really raised values. So, for prop 3, we showed up at the open house and made an offer of $321k, $1,000 over asking. Rents were below market, it was priced reasonably and would profit $1,500/month. Why wait for bidding wars when you can make a strong offer with a quick expiration?
This sums up what we have created by the age of 29. Our combined net worth excluding my businesses is teetering on $800,000… in properties, retirement accounts and cash. Our current monthly profit is $2,500, while living for free in one of our units. Our current plan is to pay off all credit card, car and equity debt and cut our expenses as low as we can without sacrificing a strong quality of life. Then, when things start to cool off we will have some cash ready to buy low yet again, whether it’s RE or stocks.
The girl will retire in 2017 and I will follow a year or 2 later. If you told me I would be in this position 10 years ago, I would have thought you were crazy. But looking back at the risks we took and the “must do more quickly” mindset, it’s not surprising at all. I remember when my friend called out our $500k mortgage for being too risky and debt laden. He just didn’t get it. I see some of my friends and colleagues with comparable income to me, with a negative net worth caused by overspending and fear of investing.
The mindset us fifighters share is beyond rare!
Maybe our friends and weary colleagues will start asking more questions in a few years when we are traveling the world and living the life we were meant to live where we contribute to society but aren’t controlled by it?