Part II Real Estate Investor Interview: Market Predictions, Worst Investments and How To Get Started

This is part two of my interview with a local real estate investor, I posted part one last week and will post part three, the final post of this series, next week.

Joanne: You’re only purchasing, you have not sold. You’ve been buying for how many years?

John: Six and I have not sold a single property. I have listed one.

Joanne: So, where do you think the market is going, John?

John: It has to go up from here (laughs). I can’t express what a phenomenal year I’ve had this year, although everybody else is in pain. I guess I got lucky – positioned myself appropriately over the last two years, financially, where I took advantage of the situations. I read a lot about the earlier crisis that the United States had.

Joanne: …in the 80s?

John: Not just in the 80s, but Great Depression, back in the days when rich people had the power to purchase. The rich accumulated a lot of properties during that time. They were multi-millionaires by the time the Depression was gone - ten years from that fall out, I believe it was 1938 – but a lot of people made out really well when they purchased properties at that time. In 1983, I was a little too young; I was only in middle school at that time. I heard it was bad, but my parents say it was not as bad as right now. We actually are witnessing our customers losing their houses, losing their cars, losing their jobs. So, this has to be a one-time thing - I hope. I don’t think I will see any [more economic Depressions] in my lifetime, in the next 40 to 45 years.

Joanne: And how old are you, John?

John: I’m 36.

Joanne: So, six years ago, you didn’t have a vision - when the market was going up - to sell anything. You just always knew you were going to buy homes.

John: That’s right. I think we’re approaching one question: did you make a bad mistake on any of your investments.

Joanne: Yes, what was your worst? I was saving that one.

John: I have to say I put too much money into one of the houses I bought. I actually put $140,000. I redid the driveway for like $12,000. I did this because I got caught up in a bubble and I didn’t realize I was in a bubble. I was all wowed with all of the property increases every year. I just thought I might be able to pop a big one. But again, the bubble busted when I was in the middle with that. This investment was horrible. I put way over the upgrades necessary for the kind of house I got into.

Joanne: What was the price of the house?

John: I don’t think the price of the house would be over $410,000. I threw $125,000 in cash, no loans, no secondary loans into the hardwood floors, decked it out – decked every single room out, decked it out like it was a $700,000 house, thinking I was going to get all of this back. Wow, did I surprise myself. I’m not going to get even half of that amount invested back. Other than the kitchen upgrades, everything else is good to look at. I will never see that money again. So, that was a good $75,000.

Joanne: Learning experiment. So, how are you so successful enough to buy real estate?

John: I’m lucky enough to have gotten involved in a lot of loans back in the earlier days, when they didn’t even check your finances, when I was younger. I believe they were giving waitresses loans to buy $300,000 houses. I took advantage of that because I had great credit. Now, as soon as I bought these houses, because the loan requirements were not as strong, I started accumulating properties. And when you accumulate properties, you have income and that was positive cash flow, because every single one of my houses was leased out – like one or two years at a time. So, on top of my salary, I have a pretty big salary too on my regular job, but this real estate added on to that.

Joanne: So, you can count that as income to get more money.

John: I don’t finance anymore, but that’s how it got started.

Joanne: Because the rules have changed on that.

John: That’s right. You cannot show you owe four mortgages now and get the fifth one. But back in the day, it was kind of lenient. I had up to four mortgages outstanding and I had paid off every single one of them except for one. So, I paid it off aggressively, but I financed it with a five-year ARM.

Joanne: So, you started with four mortgages and they’re all paid off and you’ve done all of this purchasing off of four mortgages to begin with.

John: That’s right, that’s how I got the ball rolling. Now, most people get stuck because they do not have that financial strength behind it to buy that second or third one because they’re all strapped after the first purchase.

Joanne: What do you mean by financial strength?

John: Well, when you buy a house, you’ve got a lot more than just buying the house; you’ve got upgrades, you have to update the house, you have to paint the house, you have to get it ready for a renter – all of that cost money up front and banks are not willing to let you loan too many times if you have secondary mortgages. So when you have secondary mortgages on the first and second home, because of that lending power, I had the chance to update two more houses, in order to have four rental houses under my arms. In order to generate this kind of revenue. But, again, that’s how I got started. Now once you have this revenue rolling in, it’s consistent. I’ve never had a house, more than three months empty, so I always had a rolling income. With this kind of income, you definitely accumulate a big savings really quick, because I don’t spend a lot money. So, when you’re taking in $6,000 – $8,000 a month, just in your real estate rentals, that’s a lot of money a month to go buy anything else or if you save, you can save all that.

Joanne: So, you’re only buying single family properties?

John: No, I’ve got commercial – I own Applebee’s.

Joanne: Because that’s a large monthly income.

John: Absolutely, most of my smaller homes are going for about $1,200 – $1,400. Some of the bigger homes are going for $2,000 and $3,000. I just leased out one for $2,800 in Florida. That’s a much bigger home. I don’t recommend anyone buying a half a million dollar home to lease out. That’s not a good idea. Most people want to stay around (price point) of $180,000 to $250,000 – no more than that to rent. Now, the reason why is – not in my case, I put a lot down on houses because I don’t like loans. I like to own my own homes without the loans on it. If you get into a house that’s somewhere around $180,000 to $200,000 - assuming you put 20 percent down because you’ve been saving - and you get a loan, the mortgage on that is somewhere around $1,000 if you look at 30 years. I’m more aggressive, I go 15 on most of my homes. Most real estate people, they rent the property, cover their mortgage and they still have extra on top of that. So, in the long run, these properties will be paid by your tenants, if you keep it maintained and you get tenants in there who won’t destroy your house.

Joanne: So, how much extra over the mortgage – well, you’re paying for cash, so it’s all income.

John: 100 percent.

Stayed tuned for the final part of my interview next week. Doesn't this make you want to buy an investment property?