PART III Real Estate Investor Interview: Advice on Getting Started

This is the third and final segment from my interview with local investor John, an active real estate investor in Roswell, Alpharetta and East Cobb.

Joanne: So, to tell a first-time person who has never purchased a property – what to do? What should the first property be? What should it look like for them?

John: If you are doing well, you are successful at your first job and have some extra money to invest in real estate, I believe the first property should be somewhere around $150,000, no more than $200,000. To keep the cost of the loan down – you don’t want to get in at a high APR. Right now, they’re giving loans somewhere around 3.69 percent – that’s amazing. We have never seen rates that low. I was buying homes with 5.25 percent back in the day and I was still happy with it because I was still making money on top of the mortgage. So, if you look at 30-year loan on a $150,000 house, after you pay 20 percent down, the loan should be somewhere around $130,000.

Joanne: So, you’re putting as much cash down, paying off that loan as much as possible.

John: Absolutely, because I have so much generated income. If this is your first home, you should always have a buffer of how much you want to rent it out for and that buffer should always be over what your mortgage is. So, if your mortgage for 30 years is about $800, you got to add at least $200 or $300 on top to buffer yourself for any type of repair.

John: Let me tell you why I went with ARMs. I know I’m a person that can save a lot of money. I don’t blow a lot of money. So, when I got into these houses and they were offering arms at 1.9 – 2.5 percent, I took it. Imagine if you could save $500 off your mortgage and you’re actually paying against your principle, making the same amount of payment, but it’s at 2 percent interest instead of that 5.25 percent over 30 or fifteen. All of that is going toward the principle on the house. I did that, I took the five years on – I don’t recommend that to people who can’t budget themselves. The United States got into this mess because we gave too many ARM loans. And when the ARM loans expired, it jacked up into market rate. Now, luckily, some of the market rates are not higher, at 3.25 percent right now, that’s where the index is standing right now. But imagine if we were sitting at 7 percent or 8 percent; that could almost increase your payment by almost $400 or $500. Most people don’t have that room to take that extra cost, so I don’t recommend it if your budget is stacked tight, where if you had an extra $300 a month payment and you’re going to get foreclosed you shouldn’t even play this game. Because it’s really easy to wreck yourself, on top of losing everything you currently own, I’ve seen a lot of people lose, not only their rental home, they lost their own personal home because they got behind, whether they got laid off, they did not have enough savings – they were playing it just right. I do recommend people have a little bit of a buffer, where you’re smart enough to know I can’t handle this if I lost my job. A lot of people didn’t play it that way.

Joanne: So, let’s say someone has four properties, they don’t have a lot of cash, and they have them all mortgaged – what should they try to do try to build as fast as they can? If they are more of a seasoned investor; they have three, four, five homes.

John: Wow, first question is if you’re so tight, how did you even get to four homes? That’s my biggest question: how did you get to four homes and four mortgages if your budget is tight already. So, if you could get only two of those homes rented out, would that put you behind on your payments – because mortgages need to get paid whether you got people in there or not? So, if you are tight already, how do I recommend you to go forward to the fifth and sixth? I can’t. You lose one home and you can’t pay on that one, you’re foreclosed on the other three.

Joanne: Have you ever seen a property you want to upgrade – you want to sell it and you want to upgrade and put that money into a different one?

John: I upgrade every single home. I just closed on a house last week and I ripped down the whole kitchen, I ripped down the whole bathroom, master – everything was nice to rent out already, but I like nicer things.

Joanne: Oh, I’m sorry, what I meant – and I know you do upgrade your properties – but what I mean is upgrade, like say a property have you classified as a B property, but you’ve bought an “A” property before, something you felt was a really good investment in an area. Would you want to take a “B” property that you might have and try to upgrade it, just get rid of that one and get an “A” property?

John: No, I haven’t been in that situation yet. I just buy the A property anyway. If you’re already in love with a piece of property – because I have to be in love with piece I buy – why sell it, if you don’t need it? If you don’t have enough money to get that bigger one – and I haven’t ran into that problem yet – but I hope, I hope to run into a $1.5 million property that I don’t have enough money cash down for and trying to liquidate two. But here’s the bad situation about that: anytime you try to sell a property fast, you’re always going to leave some money on the table because you are leaving your emotions on the table. I never like to get caught up in emotion playing. And sometimes, you see that nice piece of shiny coal that you want and you want to drop some and just cut your losses on some and leave that behind; that could be a bad investment. You could lose, easily, 10 percent or 20 percent on what you could have gotten, just because you’re trying to get rid of it quick. We saw that case in (the most recent house) that we purchased. They left some money on the table because they just wanted to get the heck out, right? You can’t let your emotion play into this game of real estate. It is definitely not a short-term plan, especially when you get caught in bad situations. But no, I have not run into a property where I had to liquidate to upgrade it.

Joanne: So, where did you learn all of this?

John: I was a hedge fund broker at Georgia Tech, when I was in college. I made a lot of money hedging. I started a mutual fund in college and I had all the Asian people behind me because they didn’t know how to invest their money. I was turning over 20 – 25 percent yearly, on the investment, where the banks were only offering about 5 percent in a CD rate, so I was quadrupling what the banks were offering. But that came to an end when we crashed in 2001, we found out when the bubble busted, we call that the Internet bubble. When Yahoo crashed from 300 down to 20, and Lucid failed, a lot of big companies folded. You had the Enron problem; I realized that wow, my income stopped – I was making $400 – $500 per day just making trades for people. I got $100 per trade and I was selling a couple of times for each client each day. Well, after the market crashed, I had to look for an alternative source on how to make money because obviously, that wasn’t working after college. So, I started looking into other aspects of where can you find a better income than your bank savings, because if you park your money – $150,000 in a bank, you’re getting what, $100 a month? But if you bought a $150,000 property, you’re getting $1200. That’s $13,000 a year minus your real estate taxes and your upgrades. Who is going to give you $12,000 interest on $150,000 cash? Nobody. Mutual funds won’t give you that. On top of that, we have a double whammy here. A $150,000 house is not really $150,000. If you found a good deal, it’s actually $250,000. Not only will you make 50 percent on your money in the long run, because eventually, you’re going to sell it for $230,000 or $240,000, when the market comes back, in about, let’s say, five years. But during the meantime, it’s generating income that’s hedging against inflation and also CD rates. Because a CD rate right now is 1.79 percent, so for every $150,000 you’ve got parked on the side, it’s earning you $175 per $100,000…you get $150 a month for your money. So, imagine if you could get $1,300 for your money versus $125 for your money; it’s a no brainer. And on top of that, your $150,000 is not really $150,000, it’s really $230,000, five years down the road. So, not only did you get money on the principle, $150,000 down because you found this excellent deal, you are also generating monthly income… So, if someone came up and said, “Hey, I’ll pay you 50 percent for your CD.” Whatever money you want to lay down, say $100,000, would you put it out there? If someone gave you 50 percent on a CD, I would, but no one is ever going to offer that. CD rates only go as high as 7 percent, as we found out in the last ten years. So, after college, after the mutual fund experience, I had to find other avenues that generated money. I went to commercial real estate first. Then I felt that commercial real estate got too high, because everyone demanded double digits in rental, per square footage. So, I got into the residential, because the residential was hot. So, I got off the commercial, went into the residential, and when the residential crashed, I did even better because more deals were coming across my table. 

Joanne: So, anything you think you could have done different, better? If you could go back.

John: Yeah, if I laid $300,000 on Google when it first IPO’d… at $70 a share. That would have been the biggest return; that would have been a 600 percent return on my money in less than two years. Obviously, it’s hard to lay that kind of money on one stock. Apple went from $70 to $300, so imagine you had $200,000 there, you would get $1.85 million back. I don’t know if I could have done any better, if I would have changed anything, I don’t know the outcome today if I would have done anything different in the past. I like where I am now.

Joanne: Well, I do, too. You’ve been super successful. I appreciate your comments.

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