Exciting news this weekend. My brother and I are making a trip out East to look for more investment properties. As I alluded to in earlier posts, the market in the Bay Area (and California in general) is surging, so finding good deals has become extremely difficult, if not impossible.
Luckily for me, I was able to secure two properties in the Bay Area last year, before the madness really kicked in. For those who are wondering, each property has appreciated about $100k since I closed escrow. I know, hard to believe right?
Check out this property, which is currently an active listing. It’s asking price is ~$100k higher than what I paid for in February. This property has also not been fully renovated, and the location isn’t as good (Again, I got really, really lucky in winning Rental Property #2 at $290k:
In general, I’m not a believer in appreciation. It’s kind of like owning a stock and watching its price fluctuate on a daily basis. I’m trying to build a passive/semi-passive income stream here, so I need my investments to pay me! Since I’m planning on retiring at 32, I need them to pay me a lot… and soon. That’s why I love dividend investing… and that’s also why I love real estate investing.
The real beauty behind real estate investing (and my “secret” to retiring early), is to use something called the 1031 exchange. There’s a nifty little law in place that will allow me to cash in on my two Bay Area properties, and not have to pay a single penny on taxes (technically taxes are deferred, but there are ways around this)! That’s right, I’ll be able to capture 100% of the appreciation immediately, which is already over $100k/each at this point.
But there’s a catch. I won’t be able to take the funds and invest them in just anything I want (like dividend stocks). I’ll be forced to re-invest the gains back into real estate, and “upgrade” to something more expensive. But that suits me just fine, as I’ve just recently discovered that properties out in the Mid-West cash-flow quite nicely (20%+ cash-on-cash returns), which is also definitely much better than anything I can get in California.
So, I can take the $200k appreciation + built up equity/original downpayment and put down a downpayment for eight $100k single family properties (25% down for each would be $200k, excluding closing costs, etc.) that will cash flow about $250/each (after all expenses/mortgage/reserves). That’s potentially $2000 in semi-passive income each month! For these out-of-state properties, I will rely on hiring a property manager.
My original plan was to build an income stream of $1500/month to fund my early retirement. Since I haven’t done the 1031 exchange yet, I don’t want to jump to any conclusions… but it almost seems like I can already achieve the End Game… today. And just think, once the mortgage on each property is paid off… the sky’s the limit.
I’ve been doing a lot of research on out-of-state properties lately. I decided that I was tired of watching from the sidelines and wanted to take action. The only real way to learn about another market is to take a trip out there and immerse yourself in the surroundings. Talk to the locals, build connections, and see for yourself what’s really out there. I’ll be back on Tuesday with an update.
Happy Memorial Day Weekend everyone!