The Journey of Building Wealth, Part 1
“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.” I guess you heard this somewhere before. Me too. Yet working with a lot of investors in my career has given me the opportunity to witness this first-hand and believe it from real experience, not just from a real estate forum online. I always think of Ms. Molly and her husband, Ray, as one of the most astounding stories of the real American Dream.
I first met Molly and Ray 6 years ago. They were looking to buy their first home and had a very limited budget. They wanted me to find them a fixer-upper where they could move in and work on the house improvement at the same time. After only a few showings, they picked one that had the most amount of work needed but it fit their budget. I was worried if they could ever finish the project. Fast forward 1 year later, I found out they finished most of the projects in the house and even made a little garden in the front yard.
Molly and Ray reached out to me again and said they wanted to invest in real estate. Again, they had a very limited budget since the money they had was from their corporate job savings. This couple had been very modest and humble in their lifestyle and they were good savers. We started the hunt but, again, we only had a couple of options and they ended up buying a condo with an existing tenant in place. I always recommend my investors to stay away from investing in condominium because of its restrictions, yet I’d recommended this couple to buy this condo for the return they’d see from the rent vs the price at that point. They were brand new landlords and having a tenant already in place was good practice for them to learn how to become a successful landlord before they’d have to learn how to screen and select good tenants. They knew it was a short-term strategy.
Year two approached and I got a call from Molly and Ray again. This time they had saved enough to buy a single home with me. We again looked for properties that needed some love so they could improve its condition and gain some equity that way. Ray proved himself as a handyman from his primary home project so we got him a fixer-upper that required less work than his primary home.
And just like that this couple bought 1 or 2 properties with me every year from all the savings they made from their corporate jobs plus the cash flow from their rentals. If the location of one of their investment properties was no longer desirable for them to keep as a rental, they would fix and sell it. Yet they would still use the profit from their flip to buy another rental. I did not think much about their portfolio until one day this Spring they came to me and asked, “Tracy how much equity do you think we would get from our rental properties and could we use it to buy a commercial property now?” I started to do the math for them and then I came to the realization that the formula of cash flow + appreciation is how my dear client applied and built wealth for their family.
The first property value was 3x the price they paid 6 years ago.
The little condo was 2.5x the price they paid 5 years ago.
The first rental single home was 2x the price they paid 4 years ago.
Appreciation gained for the rest of the portfolio too depends on how long they held it.
I asked them to share their insights during the 6-year process as I realized it would be helpful to my other new investors and here they are:
- Have a good job to provide for the family plus some
- Financial literacy: know how to budget family spending, the emergency fund and put the rest into savings. They have an excel sheet to list down exactly what the monthly expenses are from grocery shopping to eating out on the weekends to vacations and donations. They know exactly what pennies come in and out of their pocket. It’s like company booking!
- Buy your first home! Never rent long enough. Do house hacker if it fits your style (buy a duplex, live in one side and rent out the other side to pay for mortgage)
- Invest immediately when there are enough savings to buy something. They would then buy something in their budget knowing that real estate value will go up in the long-run despite any market conditions. The best time to buy real estate is now.
- Know your numbers! They have a separate excel sheet to calculate cash flow from any properties they bought and stick to their math. This is a financial decision not emotional decision.
- Learn new skills. While Ray’s handyman skills got better over time, Molly gained all of the knowledge and experience of being a landlord. She became a member of landlord and real estate investor groups to learn from others and leverage the power of networking.
- Stick to your criteria: they are medium risk-takers and want a B neighborhood with good cash flow (not a super high return but it will give them less headaches in terms of being a landlord). They know they still need to spend the majority of their time on their corporate jobs. If a property did not fit their criteria, they flipped and sold it.
- Be purposeful. They made buying a new property a financial goal so that they’d work hard at their corporate jobs, manage their rentals properly to make sure they were profitable and be good savers. They know they can’t work in corporate forever and real estate will give them the freedom to work when they choose to, not they need to.
- Be learning-based: they learn about all real estate products and processes including lending and are open-minded when it comes to different real estate strategies. They often bounce ideas off of me on how to extend their portfolio. When I told them that I started to do commercial real estate, they set up a meeting with me to learn more about commercial products and processes and how to invest in commercial real estate. When I explained the concept of syndication and shared that a friend of mine was looking for investors, they invested a small amount into it after my friend’s presentation. I like to think of them as my experimental investors for any strategy I come up with. It’s been a fun journey between us so far.
- Last but not least, know that the American Dream is real and don’t let anyone tell you otherwise. “If we could come this far from our first “trash” house, so could anyone else with some determination” said Molly.
Stay tuned for Part 2 to see how Molly and Ray got into commercial real estate and their analysis on different products. Meanwhile, please let me know what questions you have for Molly and Ray as they promised to answer any that come along. For confidentiality purposes, they would like the questions to go through me at this time; as you know they’re modest and humble and don’t really want to brag about their achievement, yet feel the need to share their journey and encourage more people to invest in real estate.
So what questions do you have?
