When I talk to people, young and old, looking to get into real estate investing, they often struggle to understand how they are going to turn their small amount of savings into an amount that could be truly called ‘capital.’ They have saved up 10 or 20 thousand dollars and are looking to invest, but the success stories of their mentors and gurus seem so far away. In this video I wanted to share with you all how I turned an $8,000 investment into $600,000 as one part of my journey to financial freedom -- just to illustrate how this is not only possible, but it is something that you can do if you make just a couple smart deals.

Buying My First Home

In 2009 I had just graduated from Cal State Northridge and was interested in getting into real estate investing. I thought I would need to work for two years before I qualified, but I was fortunate to discover that such requirements are waived if, as a university graduate, you get a job in the field you studied. That knowledge is why, whether you think you have the money and qualifications to start investing now or not, you should always talk to a loan officer; it is their job and passion to get people the funding they need, and they will leave no stone unturned to find a loan product that works for you. With that loan, I bought a property through the Federal Housing Administration (FHA), which provides loans for first-time home buyers who plan to live on the property and can make a 3.5% downpayment on the home.

This was in the middle of the housing crisis, and people all around me were telling me not to buy, that the market was going to continue dropping. So I made a simple calculation: at a purchase price of $250,000, with a downpayment of 3.5% or $8,000 and a monthly mortgage payment of $1,700 a month, what would happen if I ever wanted to move out of my house? Would I be stuck with a money drain, unable to accumulate enough cash for another investment? As it turned out, the local market rate for similar rentals was $1,900 -- a small profit of $200 a month. I made the purchase.

Calculating a Return on Investment

What I realized was that I wasn’t smarter than the market: I wasn’t looking for a ‘bottom’ to maximize my return. Rather, I saw an opportunity that had a positive-cashflow option, if I needed it. After a year living in the home, I moved out and began renting it for that $200 profit. It wasn’t a lot of money, but based on my investment of $8,000 it was a great return. $200 per month times 12 months is $2,400! That’s a 30% return on investment each year! I was ecstatic.

Focusing on My Return on Equity

Over the next couple of years, the housing market stabilized and the property I had purchased for $250,000 had appreciated in value to $350,000. While I was still getting that 30% ROI each year, I tried to calculate the value of this investment in a different way, what is called a “Return on Equity” metric. By dividing my net income ($2,400) by the equity I had in the home ($100,000), I calculated the return on the equity I had: 2.4%. That seemed low.

What I learned was that money has an opportunity cost -- letting it generate value in one property excludes its generation of value in another. Soon after, I came across a 4-plex for $405,000 that would generate $2,000 per month from rental incomes. Were I to move my equity to this property, I would be generating almost 24% ROE! It was then clear that for my first property, though I had a great ROI, I had a terrible ROE. I decided to sell my old property and buy this new 4-plex.

… Profit!

I have held onto that 4-plex for 6 years, which has netted me approximately $150,000 in rental income; in addition, the property’s value has appreciated from $250,000 to $700,000 for a $450,000 profit. Combined, this is means I turned that initial $8,000 investment in my starter home into $600,000.

It wasn’t difficult. I didn’t try to beat the system. I just talked to a loan officer, made a purchase that would generate positive cashflow, and then shifted my money into a higher ROE investment once I had accumulated enough equity in the property to do so. If you are getting started in real estate, this kind of simplicity is something that you need to understand. Don’t get caught up in wondering how to get from A to B, just be brave enough to good choices and you’ll find yourself there soon enough.

 

If you want to talk to me about getting into real estate investing, I love running numbers for people and helping them get started on their real estate investing journey. Call me at 805-228-4672 or email me at MRG@moralesgroup.com.