How one teenager build a real estate investment portfolio
Growing up with 3 older brothers proved to be an envious time for me. I watched my dad buy a number of investment rental properties, in which I was always asked to assist in renovations and repair task. I was referred to as the little “go-fer boy.” I then watched each one of my brother’s do the same and they each proceeded to buy an investment rental house when they were just 17 years old. I thought how cool is was, my brothers living at home with mom and dad, but they each owned a house with a tenant who call them “landlord.”
Then one day my oldest brother sold his house, just 2 years after purchasing it, and bought a property that had both a single-family home—and a duplex on it. It was the coolest parcel as it was in the middle of a large city block. He literally owned the interior of this block. What a very cool, private property it was. He bought the property with the gains he made on selling his first house. Now that he was a young adult he moved into the house and rented the duplex out. The rental income from the duplex actually made is entire mortgage payment. I was so intrigued by this and I wanted to learn more
I was fascinated. Some would say obsessed. I too wanted to buy some investment property. The challenge was, I was only a kid. Besides not having any money to invest, I really had no knowledge of how to be a landlord either. As the little brother, I was always asked to come to help with the fix up and repair of the properties. I did not take long before I picked up that all these repairs were helping to increase the value of the property. I started to realize my hard work was their sweat equity, and that’s when the envy of my brothers motivated me get into the action.
I was 15 years old and mowing the lawn for a local developer when my investment aspirations sprang into action. On the north end of our small town in rural Minnesota was a new home development. The developer, Jim, who was also my boss, called and asked me to mow these newly divided parcels of land that were being sold as individual building lots. It was a whole day mowing project and I was hired to take care of them for the summer to keep them looking good.
While mowing these lots, I had my first investment epiphany.
These were lots that were being sold to homebuyers that would build a home on it. I thought this would be a great way for me to start investing in real estate. I could buy a city lot, sit on it, and as the lots sold out my lot would surely be in high demand. I did not need to know how to be a landlord and it would help me save money. I was fortunate to raking in a whole $100 a month at the time with all my lawn mowing jobs. I thought if I invested it I would not be compelled to blow it on stupid stuff. After all, I was a kid who knew I was a kid.
Armed with my epiphany, while driving back home with my garden tractor, I made a quick detour into the Jim’s office. He must have thought it was hilarious. But he humored me. I sat down with Jim and shared my objectives with him. From the conversation, I learned the price of the lots were $6,700. Jim agreed to take the $250 I had for a down payment and finance the rest on monthly payments of $70 per month. Wow, I thought this was perfect.
I still had $30 a month for spending and this was going to be a great savings plan for me. Of course I had to get my dad to sign all the paperwork with me, which he was thrilled to do as he was so impressed I arranged this on my own.
Adding a value play
Taking dad’s advice, I instantly went and planted some fast maturing trees strategically placed in the yard which would further enhance the desirability of the property.
I was now the proud owner of my first investment property. I enjoyed watching houses spring up around my property and was saving money at the same time.
The pay day
Fast forward 3 years. As a result of my earlier investment I was out looking to buy my first income producing property, merely an eager18 year old. I had learned a lot watching my dad and brothers running their properties and felt I was now ready to become a landlord. To my surprise I got a call from a real estate agent stating he had a client looking to build a new house and wanted to know if I would consider selling my lot. I was shocked. While I was looking for money to invest in my first duplex, I get this call right out of the blue to buy my land that was not even on the market for sale. “Could it really be that easy?” I thought.
I sold the land for a net profit after expenses of $3,500. It was enough for me to buy my first duplex, and my investment career was underway.
My first cash flowing duplex
With down payment money in hand and at age I took the profits and bought a duplex. A year later I added a double garage to it to increase the value and desirability of the property. I paid $500 for a 1 year old double garage that needed to be moved off a property. For another $500 I had it moved across town and set it on a newly poured slab which required another $500. So for $1500 I now had a new garage.
I was living in one unit while letting the tenant in the other unit pay the mortgage payment. It was not until years later I learned this investing strategy was known as 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 felt like I had reached the big time. I found a 4-plex with great cash flow and 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, surely, I will learn the easy way, or I will learn the hard way. But I would learn. My number one 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 persevered. I learned that what my friends had called “war zones” are not for the faint at heart, not for the absentee landlord, and certainly not for the person who needs to hire a property manager. What they are, however, is 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. These properties produced very good cash flow.
The so called “war zone” is indeed an interesting and challenging real state investment to manage. Tenants are often ungrateful and will try every trick in the book to challenge you. What I learned, hard and fast, was to create a managing system. I quickly learned to set boundaries and teach the tenants, especially the new incoming ones, that we have certain rules that need to be adhered to. These rules had 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 and bought a single-family home. Then another. And another.
Now onto the big value play
Next, using the equity from one 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 even 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. The big reason I loved this property is it was not managed properly, with rents about $100 a month lower than they should be for each unit. While I raised the rents on the property, the additional income 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 converted the property into 4 individual condos. Total cost of this was $7,800. Why? Well, I had learned that the 4-plex had a combined value of $455,000, but as individual condos they were worth $175,000 each for a total building value of $700,000. Well, the only thing between me and the increase in value was this nominal investment.
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, I was able to 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 previous bad management. I actually come out of the deal with a small cash flow increase, granted it was only $20 per month, but I had better than $90,000 in my pocket as well. In addition, 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.
I bet you can now guess what I did with the $90,000 in my pocket. You guessed it! This kid continued to reinvest in real estate. What I had 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, continued 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.
My Investment Lessons
As thrilling of a ride as this first investment was, it wasn’t until years later that I truly realized the education I had received from this investment endeavor. I discovered this first investment was purely a speculative investment. It allowed me to save money and provided nice profit over time, but did not actually provide a monthly income stream. Years later, I learned the difference between a speculative land investment versus the monthly returns, and cash flow that renting property would provide to me.
It is funny how when you are young and fearless you can do anything you put your mind to. Over the years I continued to invest in rental property and learned different lessons from each one of them.
Passion and education is the key to building a real estate portfolio. 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. Think outside the box because when deals are great there is cash flow to be had. When it is hard to find good deals, there are opportunities available for the creatives in the business.
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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