What is the right real estate strategy for someone just starting to invest

(January 20, 2016 )

Peter says: I'm in my mid 20's and have about $1000 a month I can invest but I don't want to put it all in the stock market. Are there any good real estate plays I can make? I assume REIT's will be mentioned, but what should my plan be now if I am more worried about a 25-30 year horizon?

Here is Tim's advice:

I started with really no money in 1977, borrowing against my free and clear Jeep to make the downpayment on my first two family.  A year later I bought another, six months later another, three months later the bank said no to a loan but would sell me three properties on credit from their foreclosure holdings.

By 1981 I had seventy some units in one and two family properties and quit my job.   I have not drawn a paycheck from an endeavor I did not own since.  I am not suggesting that your goal should be the same as mine, just that it is possible.

Much of my early purchases were from investors who were tired, with paid off properties They financed me based on what they saw of how my first properties were run.

You must be very diligent to buy with low down payments and not fail. The risk of catastrophic failure are larger when you are under capitalized, but the opportunity for above average returns also resides in this realm.  Had I waited for 20% down, it would have been years and I would not have reached my goal of working for myself.  

While it may be very hard to work with banks today, I am sure you can find owners who wish to sell out and realize that few of the perspective buyers will get financing.  Plus there are tax advantages in many cases for owners who do installment sales. They can be your greatest source, if the properties were maintained or you know how to rehab yourself.

In regards to fractional share purchases or REITs, these may or may not create above average returns, but they will never create the potential returns of buying in today's market.  If your market is not at the bottom, it is probably close.  Some areas like Miami condos are on the rise today.

As far as learning, join a local apartment association and talk to people.  

Never lie to the bank or seller about your financial position, just impress them with your work ethic.  Lying to banks today can be a crime, as it always should have been.

Do not buy properties more than a half hour from where you live. You will not know the market and will have to pay others to manage them.  You also need to be able to check on your investments to make sure they are be kept up.  A lot of Californians bought in Milwaukee's central city in the mid 2000's as they could not believe you could buy a two family house there for $50,000. Even in 2005 those houses were actually selling at half that price. Of the ones that I met, few succeed and many were taken advantage of. 

Know your market and remember you cannot know multiple markets well. Choose one market, learn all you can about pricing  and stick to that market. By one market I do not mean Los Angles County, but a defined area of one community and a certain type of property. Most of my properties are in one small zipcode.  After 34 yeas at this I am learning my second market, which is within a half hour of my second home.  By know your market you should have seen enough properties that you can say without hesitation 'this one is worth $X and a great deal if I can get it for $Y' 

Do not buy in a neighborhood you would not feel safe in at 7 PM.  Sure you can buy houses in central Detroit for $1, but in the end the will probably drive you into bankruptcy, 

You do not have to limit yourself to low valued properties.  If you are diligent you should be able to find moderate valued homes at steep discounts, perhaps even houses that you could not afford to live in yourself.  I owned two rental properties before I bought my first home.

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