“Find a mentor” is common advice. Or “surround yourself with people who have found success in what you are trying to do”. Then we think “ya ya good idea, but in the meantime I’ll just keep doing what I’m doing.”
It is easy to stay in our own little world. It is uncomfortable to put yourself out there and expose how much of a beginner you really are. Yet often what is uncomfortable is the most valuable thing you could be doing.
Last week I went to my first meet up – San Francisco Real Estate Investing Out-of-State. Here is what I learned.
People Want to be Active, Hands-On Investors in Order to Replace Their Job
This is something I already knew, but I expected the out-of-state investor meetup to have more passive investors. Wrong. It was still mainly people who want to be extremely hands-on, just do it out-of-state because there are much better deals.
By hands-on, I mean going out and finding off-market deals (which the presentation was about this month), negotiating, wholesaling, and managing repairs.
This is essentially a part-time job where they are their own boss. They want to get good enough at it so that they can replace their day job.
Real Estate Can Be Applied Creativity
I was really impressed by the creativity of some of the experienced investors. There are so many different ways to find and close a real estate deal. Here are some examples from the meeting last week:
- Finding leads by going to the courthouse and getting a list
- Finding leads with newspaper adds in small towns as part of a wider real estate marketing strategy
- Finding leads with targeted Google ads
- Finding expired listing leads through software systems
- Finding leads through contractors who find a house with expensive repairs necessary the owner isn’t likely to want to pay for
- Investigating leads by hiring someone on Craigslist to take photos
- Investigating leads with a local wholesaler like Abound, sharing the deal
- Seller financing – “I can offer $50k now or $60k paying $1k per month for 60 months”, basically a 0% loan for 5 years
- And much more…
But My Goals Are Different
I want to put my money to work to earn a passive income. I don’t want a part-time job on the side*, nor want to do it full-time one day.
Meeting other investors was a great way to learn about wider trends from the world of real estate investing though. For example, it seems that more people are getting involved with mortgage note investing than ever before.
In case you were not aware, investing in notes and mortgages is a wealth-generating strategy that can provide consistent returns with predictable monthly payments to the investor.
When you purchase mortgage notes, you are not buying a property outright, but instead, you are securing the rights to the mortgage and note and, therefore, the mortgage payments.
Ultimately, it is amazing to think about just how much variety is out there for real estate investors nowadays.
As for me though, ideally, I spend as little time as possible on my investments. Yet I realize in real estate there is a function between time spent and investment gains. My goal is to find the sweet spot – how can I get 80% of the benefit for 20% of the work?
The goal of passive income points me to owning rental properties. Not flipping, not wholesaling.
This narrows it down, but there are still a lot of ways to invest in rental properties. At one end of the spectrum are REITs – basically stocks representing companies who invest in rentals. This is maybe 1% of the effort for 10% of the benefit.
At the other end is doing everything yourself – finding a deal, repairing the house, renting it out, and handling the on-going management. This is 100% of the effort for 100% of the benefit (but there are some big risks while you are still learning).
In between is everything else. This includes participating in pooled investments (which really varies in terms of time and returns) and notes (maybe 5% time and 30% benefit).
What is my current approach to get 80% of the benefit for 20% of the effort? Purchase turnkey properties where someone else finds the deal and does the rehab. Pay for a property manager to deal with the tenants.
Sure, it still requires time on my part, but not a whole lot. Even with conservative projections, I believe I can return 20-25% per year when you consider all the components of return. The fact that I’m ahead of projections, at 29% per year after 5 years, is great. I’m happy with that, I don’t need to chase greater returns with greater effort or risk.
What is your goal? To replace your job by being an active investor or to put your money to work and be passive?
*I do think it is really important to create a situation where your effort directly controls how much you make. Most people have no ability to change their income through their day-job, so the only way they can save more is spend less. They forget about the other side of the equation of increasing your income. This could be as simple as driving for Uber part-time or running your own business (whether real estate or otherwise).
It’s always a good calibration to meet up with other investors. We are much more on the hands-on 100% control of the process type investors for now. There is a fine line of profitability with smaller portfolios. We are still in the building phase and plan to hand off some of the more mundane tasks associated with property management once we reach our target number of units. Until then, we are super involved in our rentals.
Great food for thought as always!
I like the way you put that “we are still in the building phase”. As investors we should be constantly evolving – there isn’t one right way to go about it!
That’s awesome that SF has a meetup entirely dedicated to out of state investing. I haven’t come across a similar meetup in LA, though there is a BP meetup around here where many of the investors there do deals out of state. So it’s sort of like an out of state investors meetup. I believe the real estate summit just took place in SF…#FOMO.
As long as you’re matching your strategy to your goals, I think you’ll be in good shape. I’m seeking passive income, so holding rentals make sense as opposed to wholesaling and flipping. I may need to pursue some of those creative options you listed to acquire better off-market deals. Definitely more effort involved, but it will add tremendous value to your portfolio if you can pick them up far below market value.
The people I know who have created Meetup groups say it is pretty easy, so if you want an out-of-state REI meetup in LA – just start one! Really you just have to create the group and wait a few months as people join. No harm in that, even if you decide not to ever hold any meetings. This one met at a library meeting room – for an LA meetup having it close to your home is very important, so being in charge of the group would help!
I also agree that one day it might be wise to seek better off-market deals. Right now with the number of transactions and price points, saving ~10% (after factoring in all costs) for doing more work just isn’t worth it. But if I’m doing several transactions and can do the work once to get 3-4 deals, it is. Or if I’m at a higher price point like a 4-plex. Maybe one day!
Good point about the real estate groups. I may need to look into that. One of the groups I used to attend always met at a pizza place. I mean, I love pizza and all, but I hate making a habit of eating pizza every few weeks! I’m trying to stay healthy here 🙂
It’s funny how a small negative like that can justify a decision in our minds. With me it is drive time – I have to make sure I schedule something else nearby so I don’t back out when I think about how long it will take to get there.
I find it weird that people would WANT to be on the hook for a call at 3AM about some plumbing issue.
I presumed that most people considered that a necessarily evil to making the property profitable. We’re going with 15-year mortgages to reduce the interest we end up paying and get the properties REALLY profitable much faster. It doesn’t leave a ton of money left over for paying property managers.
As for the point about the part time job on the side, many people can’t fit them into their daily lives. I don’t think people forget about adding Uber as a way of increasing income, but after their day-job, they probably don’t want another job to make more money.
I would bet the vast majority of people don’t even seriously think about a side job. It’s just this little segment of the internet that thinks about money and lifestyle! They don’t evaluate it as a pro / con: add 3 hours of work and get to go out to dinner without complaining about money. They aren’t used to that option.
Luckily there are properties still that are profitable with a property manager! If there weren’t it would sure limit the scope of my portfolio. So would trying to pay off the mortgages soon – I am more on a couple decade plan.
I’m with you on this – I want the passivity as much as possible in rental investments. A lot of people are looking to make real estate a full-time gig – nothing wrong with that in the least, just not my plan.
I have a rental house and a duplex and want to buy a few more properties and then just work to pay them off. I use a property management company to handle all the day-to-day stuff and that’s worked out really well.
— Jim
Yes! On your Route to Retire, how big of an impact do rental properties have? Or put another way, how much longer would it take if you just put that money into the stock market for weak dividends?
Are you paying the minimum on your properties during the building of your portfolio? Or are the payments currently accelerated right now? In my mind I like to separate it into two distinct phases with different actions.
I really don’t trust the stock market at all, but right now I get a pretty sweet deal on my 401(k) match that a lot of people don’t so I’ve built that up quite a bit.
However, the rental properties will be a tremendous part of my plans when quitting the 9-5. Since I’ll be doing a Roth IRA Conversion Ladder on my 401, I won’t be able to touch the money for 5 years after I quit. That means that my savings and the rental income will need to carry us for at least that span of time. After that, it will help big time especially during times when the market tanks.
I am doing 30-year fixed loans on my properties for the flexibility, but I do pay slightly more than the minimum each month, which adds up to about an extra payment a year.
— Jim
Match is free money, so absolutely take advantage of that!
That is great to hear your rentals are a huge part of your early retirement plan. One thing you might consider for a cushion of safe accessible cash during your 5 year window – refinance a property before you leave your job. That is one way to access a chunk cash tax free. If you don’t end up needing it, 5 years later you can just put it back towards the mortgage. But at least that way you have it if you need it, only paying a small % for that safety cushion.
That’s a great thought – thanks, Brian!
— Jim