I have always thought that investing in real estate was a great way to build wealth. It just didn’t seem possible for me because I live in New York City where housing is so expensive. When I hear about people buying houses for $100,000 or $200,000, I’m a
little very envious. That amount of money would be a down payment on a house in my neighborhood and I don’t live in Manhattan or some hip part of Brooklyn where real estate prices are even more insane.
I was content investing in index funds which I’m a big proponent of, however, as I started reading about attaining FIRE (Financial Independence Retire Early), I wanted something to accelerate my path there. This is not a investing in the stock market versus real estate debate. I am a fan of both, but investing in real estate in my opinion can accelerate your path because of a thing called leverage. Leverage, can of course be risky, but when used wisely and with a little bit of luck, I think it can be a positive.
After reading posts from a few bloggers, who also live in high cost areas, invest in real estate out-of-state, I was intrigued. Initially, I thought it was crazy and very risky to buy a property so far away, but realized that it can work if you have a good team that you trust. Also, I’m not a handy person nor do I have any experience being a landlord. Ultimately, I probably would have relied on a property manager whether I invested in my backyard or out-of-state, so having a trusted person was the most important factor in my investment.
I went through the forums on Biggerpockets and contacted the forum members there as well as bloggers who had invested in rental properties out of state to get referrals. There was one company that kept on coming up as having a sterling reputation which was something that I wanted for my first investment. I contacted them and their customer service and reviews were excellent, but I felt the return on investment in my opinion was…just okay. Investing in real estate was my opportunity to accelerate my path to FIRE, I didn’t want “just okay.” Now I didn’t want to take excessive risk either when purchasing my first rental property but I wouldn’t mind taking a smart calculated risk.
After asking more people for referrals and reading the forums daily, I found a company which also seemed to have great references. They sold turnkey properties but they also had a hybrid approach. With their hybrid approach, I’d buy a distressed property, it would be renovated and then rented out. The company I worked with would act as the realtor, then the project manager and then the property manager. Money is made at the purchase and I wanted to buy low and “force appreciation” by renovating the property. It is similar to those who make money flipping houses, but rather than selling the house, I’d be renting it out. I felt that this approach was superior to buying a turnkey property where you would be paying market prices, whereas I’d have much more equity in the deal.
With my investment, I purchased a single family house in Kansas City, Missouri. I bought it at foreclosure for $60,000 and put another $11,000 for renovations. The property appraised for $83,000 and is currently being rented for $850. Hopefully, with some appreciation and principal pay down, I will do a cash-out refinance to take money out and buy more properties.
One lesson that I learned as a new real estate investor is that things don’t always go as planned. When I tell people that the rent is $850 and my mortgage payment each month is $485 with another $76 going to the property manager, they assume I’m making close to $300 each month. That has not been the case. Repairs are inevitable and while they were including in my calculations when I made the investment, there have been more repairs than expected. I also know that eventually there will be bigger expenses needed to maintain the house such as a new roof and hot water heater. There is also the possibility of a vacancy if the current tenant leaves. Obviously, these expenses have to be taken into account when you make the investment. While I’ve had more repairs that I expected, I still feel like the investment is going well. The fact that the property already appreciated $12,000 due to the renovations definitely helps.