35 YEARS OF REAL ESTATE INVESTMENT EXPERIENCE
That’s right, I have over 35 YEARS of real estate investment experience under my belt! As some of my readers may know from a previous post, my first real estate investment was when I was 15 years old. I bought a city lot. 3 years later I sold the lot for a three thousand dollar profit (later learning that this was known a speculative investment.)
Next, at age 18 I took the profits and bought a duplex and then a year later I added a double garage to it, living in it while letting the upstairs tenant pay the mortgage payment (later learning that this was considered a value play). I virtually lived in the property for 5 years for the cost of the utilities. After 5 years, I sold this property for a $13,000 profit and moved into the big city of Minneapolis where I was suddenly met with a completely different spin on real estate investing.
My First Lesson On Location
Moving to the city was huge learning lesson for me. I had reached the big time, alright. I found a 4 plex with great cash flow and I was able to assume the mortgage with no down payment. I was on cloud nine until I told my friends about my great find. They all laughed at me. I learned from them that in the city, life is different.
The property I bought was located in what they called “a drug infested war zone”. Coming from a small rural town, I did not know what this looked like at all. No worries I thought, I am a landlord and I am a 21 year old real estate tycoon and I will learn the easy way or I will learn the hard way. My Number 1 objective was to learn how to be the best real estate investor I could be.
I owned the property for 11 years. Yes, I learned a lot. Tenants were brutal to me, they made every excuse in the book for being late on rents. I had police calls frequently. I had many tenant caused break downs, but I learned the tricks of the deviate tenants and I persevered. (I learned that the war zones are NOT for the faint at heart, they are NOT for the absentee landlord, they are NOT for the person who needs to hire a property manager, they ARE however, ATM machines. What I mean by that is I could buy properties in the inner city very cheap and rent them out for top dollar – they produced very good cash flow.)
The so called “war zone” is indeed a interesting and challenging reale state investment to manage. Tenants are ungrateful and will try every trick in the book to challenge you. (What I learned here was to create a managing system. To set boundaries and teach the tenants and especially the new incoming tenants that we have certain rules and boundaries that need to be adhered to, there is no room for negotiations. Once I stopped letting the tenants create the rules and took control of this, things got much better).
As I mentioned the cash flow was incredible and after a few years the rents continued to climb. Because the value of the property is based off the income that the property generates, it did not take long for me to have a substantial amount of equity, so I pulled some equity out to buy a single family home and then another and then another.
The Value Play
Larry's 4 unit converted to Condo's
Next, using the equity from this four plex, I bought another four unit complex in the suburbs of Minneapolis. This was a much nicer complex in a B class neighborhood. Each unit had its’ own entrance door, garage, 3 bedrooms and 2 bathrooms. I paid $455,000 for this property. I got an 80% loan and convinced the seller to carry a note for the 20% down payment. I actually convinced him to give me a moratorium on the payment for one year (which simply stated, meant that I did not have to start making payments for 1 year on the 20% note) this allowed me to have a much stronger cash flow. While I raised the rents on the property, (you see the big reason I loved this property is it was not managed properly, rents were about $100 a month lower than they should be for each unit) raising rents by a total of $400 per month allowed me to execute my next strategy.
Now, with the property in my possession, I instantly hired a surveyor to survey the property, an architect to give an architects opinion and an attorney to draft the paperwork and I converted the property into 4 individual condos. Total cost of this was $7,800 (you see what I learned here is that the 4 plex had a combined value of $455,000, but as individual condos they were worth $175,000 each).
So my next step was to get 4 individual loans on the property and pay off the initial loan. As individual home loans, I received a better interest rate, I also was able to finance 80% of the appraised value, allowing me to finance a total of $560,000. With this money I paid off the first loan, the second loan that the seller held for me (that I had not made any payments on yet) and, after closing costs, put better than $90,000 into my pocket. I reduced my interest rate by about 1.5% and was able to raise the rents (as they were not rented to market rents based on bad management). I actually come out of the deal with a small cash flow increase, granted it was only $20 per month, but keep in mind I have better than $90,000 in my pocket as well. In addition to the cash in my pocket, I went from having a 100% leveraged property to having a 20% equity position in my property. That’s $90,000 in cash and $140,000 in equity. Now, in the lending world, I was considered a better credit risk as I had more equity in my assets.
(The lesson I learned from this is, if you put your mind to it you can be very creative. When you are creative you can do incredibly lucrative deals. When putting strategies in place, you can change a property’s value by converting it to what is called its highest and best use value.)
OK, I bet you can now guess what I did with the $90,000 in my pocket. You guessed it! I continued to reinvest in real estate. So what I learned was I was able to acquire a 4 plex with no money down, continue to reinvest the equity, which continued to build more cash flow and more equity. The portfolio, when properly managed will continue to grow almost by itself. Additionally, with the tax and depreciation benefits, the more properties I had, the more write offs I had – and the less taxes I paid. Also, the more properties I had, the easier it was to get loans as lenders like people with large amounts of assets.
I share this story not to impress you, but hopefully to impress upon you and inspire you of the importance of taking the first step by being very purposeful. When you are purposeful you can and will accomplish anything you want.
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