Real Estate Investing – Part 1

When I started investing in real estate I moved to Detroit. I couldn’t wait to take advantage of the low prices in the city.  It was 2008 and I was ready to build my real estate empire.  Detroit at that time presented a lot of unique opportunities.

  • Prices were lower than anywhere else in the country (there was a significant supply of homes for less than $5k)
  • Skilled labor was cheap and readily available so we could keep rehab costs down
  • The volume of foreclosed properties (particularly from HUD) that needed to be sold quickly presented a ton of opportunities. It was easy to cherry pick the diamonds in the rough.

Of course there were also many unique challenges in Detroit. So like most newbies I made a ton of mistakes on my first few deals. Eventually I finally figured out a formula that was easily generating 50%+ annual returns on every deal.  Note that I was working in lower-income areas, which made these high returns achievable.  The tradeoff was having to personally chase down some of my tenants for rent payments, deal with a relatively high rate of evictions, and try to avoid the theft and vandalism that was common during any periods of vacancy.  But it was worth it and the 50% was net of all of those added expenses.

The Beginning of the End

I had mastered the Detroit inner-city market and even picked up few passive investors to work with.  It required a lot of my free-time to manage the operations. However, I was able to create enough systems and infrastructure to allow me to buy 4-6 properties a month while still working a full-time job.  Unfortunately when my day job took me to NY, all of the systems and infrastructure that I had created began to falter.  Finally when prices started to increase and my largest source of properties (HUD) started to dry up, it was clear that it was time to unwind this out-of-state operation.

I have done well in my career in the years since.  Today I’m able to invest more and more money into mutual funds. Yet, I can’t help thinking about how much quicker I would be able to retire if I was able to put that money in real estate instead of the stock market.  Heck I don’t even need the 50% returns anymore…I’ll settle for 15 or 20%.

So every few months I go on Zillow and look at what I can buy in NY and I’m astounded by the high prices and the low cash-flow returns.  That’s not for me.  Then I start looking back in Detroit, but quickly remember how tough it was to manage from 600 miles away.  And that was when I had two people working for me, no children, and was earning 50% to make it worthwhile.  Today I have much less time and the added stress isn’t worth it even to earn 20%.

But there has to be a solution.  By my rough calculation I can be financially free in 8 years or less if I can invest a significant amount of my annual savings in real estate at 15% or so.

Real Estate Rebirth – Here’s the Plan

  • I am going to find the best markets for cash flow investing with conservative equity returns of at least 15%
  • I’m going to rely on my Detroit experience to guide me, but this time I’m going for 100% passive investments
  • In order to minimize my day-to-day involvement, I am going to research and compile the best local partners I can find in all of the markets that look attractive. While the investments will be passive, I’ll be spending a lot of time interviewing potential partners including local visits to the most promising cities.
  • My guess is that there are a lot of other willing investors sitting in suboptimal investment markets with more money than time. So I’m going to compile and post all of my findings so others can follow my path.
  • Since I’ll be documenting all of this on my blog, I’m certainly hoping that I don’t crash and burn.  I would love to get any feedback from the BiggerPockets community.

Real Estate is clearly a market that requires local market insight and boots on the ground. However, I don’t think that has to be my local knowledge or My Boots!  Everyday people invest in Apple and have no idea how to make or market a cell phone or tablet.  Instead we rely on the Company’s management’s experience and operational capabilities to invest our capital for the best possible returns.  My theory is that this can also be done in real estate.  I just need to find the right management team.

I look forward to sharing this journey with all of you.  Here’s to the start of my 2nd life in Real Estate!