The purpose of this blog and video is to let everyone know that regular people can invest in real estate successfully. Let’s go back to the very beginning… High-school. I’m not sure how I got the bug in my head to invest in real estate but very early on I knew I wanted to own rental properties. The simple concept of getting paid just for owning something really stood out to me. I loved the idea of financial freedom even back then (2006). I didn’t walk around talking about “financial freedom” but the concept was loosely floating around in my head as a teenager, probably because I did not and still do not like to be under the thumb of authority. Ironically… I joined the Army straight after high-school.
How the heck did someone convince me to join the Army? I have no idea and recruiters are good at their job. I suppose the idea of independence and not taking out student loans really appealed to me at the time. I went through all my training and eventually got to my first duty station in Mannheim, Germany. As soon as I got their I found out we were deploying to Iraq for 15 months. During my time in Iraq I spent a lot of time reading books and an awesome online forum biggerpockets.org. I got so excited to start investing and I couldn’t wait to get back to the US. After my deployment I requested to move back stateside. Eventually, I get sent to Fort Hood Texas which is near Killeen, TX. This was some time in 2009 right after the housing bubble burst. The first day I got to Fort Hood I started driving around looking at neighborhoods and researching the real estate market online. A few weeks later and I set up a meeting with a local REALTOR to discuss what I was looking for. I explained I was looking to what is now called “house hack” which is buying a multi family home, living in one unit and renting the others. House hacking is my most highly recommended strategies to get started investing because you can use low down payment loans like the FHA or in my case VA loan. Basically, you don’t need very much cash saved to get started, and multi family homes typically are better investments. During my meeting with the REALTOR she told me about a “quadplex”(4 unit multi-family) property that was for sale. I said I was interested in looking at it, and the next day or so we go to look at the property. It was built only the year before so it was in great condition. It has two 2 bedroom 1.1 bath units and two 3 bedroom 1.1 bath units and was fully occupied and grossed $2,500/month. The property was listed for $176,000. I quickly did some math and realized the gross rent was $1,000 more than the mortgage. Now I didn’t do much other analysis because… I didn’t know any better, and I definitely should have. After looking at the property I let the agent know I wanted to buy it even though it was the first and only property I looked at.
I sat down with the REALTOR in her office and she called a loan officer for me and we went over my income. It was pretty straight forward because I had great credit, I had no debts, and my car was paid off. Also income from the military is very standardized so it was really simple. I got declined… at first… The loan officer forgot to add in the rental income from the units so my debt-to-income ratio was too high. The REALTOR was shocked and I had no clue what a debt-to-income ratio even was. The REALTOR was about to call another loan officer when her phone rang and it was the loan officer that just declined me. She realized her mistake and approved me for a VA loan. The great thing about the VA loan is I could buy the property with no money down. At the time I probably could have done a 10% down payment but that was the max, but I preferred to keep the cash on hand rather than putting into the down payment. The REALTOR busted out the sales contract and did a great job explaining everything to me and I signed to buy my first investment property. She explained to me that this was a short sale and it may take awhile to close because the seller bought the property for $240,000 the year before and was just trying to get rid of the property.
The Crash… (some context)
This was all going on in 2009 when the housing market and the general economy was at it’s lowest level. Homes were not selling and a lot of lenders were going out of business or just froze lending. There were also a massive amount of short sales and foreclosures that were way beyond the banks’ ability to manage. When I signed the contract to purchase the property I had no idea it would take almost a year to eventually get to the settlement table, but it did. Fortunately, during the time I was waiting I had the opportunity to rent the property I was buying because there was a vacancy. Living at the property gave me confidence that it was a good investment because I knew the tenants and the REALTOR I was working with also did the property management so I had access to the rent rolls and expenses.
Finally, after almost a year I got the clear to close. I drove to the title company, signed the papers and to my surprise I got a check for $147. At the time I was so confused as to why I was getting money back but I didn’t question it. I was now a 22 year old house hacking real estate investor, and it only cost me less than $1,000 cash due to the VA loan.
Purchase Price – $176,000
Gross Rent $29,158 (+$1,850 carry over)
Financing Cost, Taxes & Insurance $18,444
Net After Financing, Taxes & Insurance $7,329/year or $610/month
Over the the last 8 years I could have made about $58,000, but I decided to refinance the property into a 15 year mortgage. I’m not sure if this was the right move but that will be a discussion for another day. Hopefully this video and blog helps you to see how a very basic house hack style real estate investment works. In the future I will do the same for our first house flip. If you have questions or comments I would love to hear from you.