Is possible to make a living from investing in buy and hold properties?

[Joel]

Buy and hold properties is something that brings you equity by paying off your mortgage and through appreciation, which is something you can take out when selling or refinancing your property.

But to make a living for today, you need the cash flow. So let's take an example if you wanna make $35,000 a year in cash flow, you will need capital of $500,000 to invest with. Assuming you make a 7% ROI (which is a good return today).

Now if you don't have your own money, you can work with other peoples money. But to raise money you have to offer for your money partners a decent ROI, so to make $35,000 a year is a long way. For example, you found a property which brings a 8% ROI, and you offer your partner 6% ROI and keep 2%, you will have to raise $1,750,000 in capital to make $35,000 a year, or 1,170,000 in capital if you offer your partner just 5% and keep 3%.


So based on that, investing in revenue properties to hold, is for someone who has his source of income from somewhere else and invests in real estate for the equity he will take out in 5-10 years from now.

Or somebody who has already experience so he can convince enough people to invest with him and raise these amounts.


I would like to hear comments from more experienced and long time investors on this, what would you suggest for someone interested in real estate investing for a full source of income, where should he start?

 

[Thomas Beyer]

[quote user=Joel]where should he start?


Aller Anfang ist schwer [All beginnings are hard] !



Es ist noch kein Meister vom Himmel gefallen [No one ever started as a
master .. not even Steve Jobs or Donald Trump or Don Campbell .. they
all started knowing little put working extremely hard & improving
constantly & learning always..] !!



You always start small, unless you are lucky enough to inherit wealth or win the lottery.



You build a track record, with your own money (or from folks that know you very well, say grannie or rich uncle George or your parents) with a few smaller assets, say townhouses or up/down houses. Then, after a few years of demonstrating you actually know s.th. and can turn knowledge into action, profitably and repeatedly, you can ask others to co-invest with you.



The numbers you outline make sense, but you forget that most of the real estate profits are not from cash-flow but from mortgage paydown and value appreciation. That can be tuned into cash every 5 years or so, upon re-finance or sale. cash-flow is there to hold an asset, to get to the 5 or 10 year mark, not to spend and live on [unless your mortgage is well below 70%]



Example: If you buy a 5% CAP rate asset, say a house or a commercial shopping centre or an apartment building, say for $1M it makes $50,000 in net operating income (5% of $1M). With the $50,000 you pay a mortgage of say $700,000 with $300,000 down. a 25 year amortized $700,000 mortgage @ 3.25% costs about $41,000/year. That is a cash-flow of $9000 on $300,000 invested, or 3%. However that $9000 is eaten up in upgrades or accounting or "miscellaneous" so budget 0 please at 70%+ LTV.



However, in 5 years the mortgage is paid down to about $630,000 and the asset is worth say $1.15M (up 3%/year for 5 years). So you made $220,000 on $300,000 invested, or about 70% or 14%/year. Not bad. You take some of it (say 30-40% and the investors take some of it, say 60-70%), say $72,000 or $14,000/year and the investor who put up the $300,000 makes 50% on her/his money or $150,000. If you aim for, and can actually deliver, 10% annually investors will flock to you.



If you do the math with a 6%, 7% or 8% CAP rate asset is gets better, of course, but those assets are harder to find today and you get less appreciation in higher CAP rate assets. So, do the math with an 8% CAP rate asset with a 0% or 1% annual value growth (like many US or small town assets).



Doing real estate full time should not be your initial goal. It will realistically take 10 years, likely more, if you're good and start with little cash. Less if you have $500,000+ invested yourself and are very good at selling AND asset selection AND asset management.



Real estate investing is a great part-time strategy for wealth creation, far safer and more reliable than stock picking. It will take a while though. Not for the impatient mind (like mine in my 20's and 30'). I started in earnest in my late 30's, with cash from a 15+ year career in IT, after an almost 10 year "gee, I should invest in real estate education-and-thinking-but-inaction-phase" with finally one condo per year, from 1997 to 2000. Then one building a year until 2002. Then with friends/close people's money from 2003 to 2005.



The rest is history, as they say, and the many pitfalls and lessons and trials and tribulations will be in my upcoming books that will hopefully hit the shelves this late fall "80 Lessons Learned on the road from $80,000 to $80,000,000" .. or perhaps called "5 ways to make money" or "How to become an owner as opposed to staying an employee" .. or s.th. like that ..



Happy trails .. and: enjoy the ride please, even if the horse bucks once in a while and throws you off occasionally.

 

[Joel]

Makes a lot of sense what you are saying, but what about different types of RE investing, like fix and flip, small condo conversions, where the profits come in faster?

 

[Thomas Beyer]

[quote user=Joel]where the profits come in faster?
Do they ?



Then it is just another job. Of course, some jobs are more to your liking than others, and some pay more than others. If you are handy, and can buy ugly assets cheap, and know how to fix them fast and well enough, then of course you should try that. The money you make may exceed that of minimum wage McDonald employees, possibly by a wide margin. It depends how good you are. Once you count all costs on a fix-and-flip or condo conversion the profit margin may be smaller than initially thought. Consider all holding costs such as:

• 
  realtor costs on exit
• marketing costs on exit
• 
  legal fees - in
• 
  legal fees - on exit
• 
  utility costs, such as
  
  
  • electricity
    [*] gas
    [*] water
    [*] sewer
    
    
    garbage
  
  
  property taxes
  
  interest costs
  
  mortgage setup fees
  
  mortgage payout fees
  
  sub-trades
  
  material
  travel to and from site
  travel to and from Rona/Home Depot/Lowe/Ikea

I have tried 4 or 5 fix and flips and never made any significant money, certainly not when counting all the time invested. I have made considerable money in two condo conversions, but over a 2-4 year hold-and-upgrade-then-sell period. I have put 3 condo conversion projects on hold due to costs, risks or market changes.



I have always made money when holding for an extended period when purchased in the right markets. twice (out of 35 buildings) I lost money, primarily due to poor market research i.e. in the wrong locations.



Get educated (for example through REIN), then start slow, try a few things that might not bankrupt you if done poorly, then repeat with more money and far more vigour what works for you. What worked for me may not work for you and vice versa.

 

[Joel]

Thanks Thomas.



Keep me posted when your book is available.