(Today’s guest post come from Dr. Jordan Frey)
On May 1, 2020, I couldn’t have told you what cash-on-cash or cap rate meant.
I definitely would not call myself a real estate investor nor tell you that I harbored the slightest inkling that I would become one.
Yet, here I am writing this post just three months later in the process of closing on our very first investment real estate property with my wife.
What Kool-Aid Did I Drink During Those 3 months?
To make it brief, on May 1, 2020, I was a fellow in microsurgery at NYU. I was financially clueless. I had dug myself a huge financial hole and I didn’t know where to begin. So, I had avoided it.
But then I unburied my head and started learning as much as I could about personal finance. I realized that as I increased my financial well-being, I overall felt a lot better and even less burned out.
I dedicated myself to my financial education and the goal of working towards financial well-being.
So, in terms of Kool-Aid, there were a lot of different flavors. Some White Coat Investor, some Millionaire Next Door, some Semi-Retired MD, and a sprinkle of Financial Success MD. It all added up and now I can’t get enough.
Why Real Estate?
I initially envisioned that my personal investment plan would largely incorporate a high savings rate (20-40%) and investing in broadly diversified, low cost index funds.
This is still a good plan. However, as I explored more of the financial landscape, one vehicle kept coming up…real estate.
Real estate investing for me always seemed way too complicated and way, way too risky. Plus, I really knew nothing about it. Kind of like most people who poo-poo real estate investing…
But I like reading so I felt that a couple books on the topic would be a good investment towards my future. If I decided real estate investing wasn’t for me, I would only be out $30 and a few hours of my time.
I read three books: Rich Dad, Poor Dad by Robert Kiyosaki, The Millionaire Real Estate Investor by Gary Keller, and The Doctor’s Guide to Real Estate Investing for Busy Professionals by Dr. Cory S. Fawcett. We signed up for a great course by Semi-Retired MD called Zero to Freedom Through Cash-Flowing Rentals.
I learned all about the benefits of real estate investing including cash flow, equity build up, and tax advantages.
I was in. My wife and I amended our written personal financial plan such that 1/3 of our 41% savings rate would go towards real estate investing.
Learn as Much as You Can…But Don’t Let That Stop You from Taking Action
Obviously, education was the first step. Like I mentioned above, we read innumerable books and blogs. We took an extensive online course and picked the brains of local investors that we contacted. We learned as much as we possibly could about our market of Buffalo, NY (my hometown and our new home after moving from NYC).
The toughest step of all was now in front of us. We actually had to act.
This is the step where most prospective real estate investors get held up. However, every source that I read emphasized beyond emphasis that there was never a time when you will feel ready. You have to jump in at a certain point.
So, we jumped.
A big hurdle for most people is feeling they do not have enough money to get started investing in real estate.
The hard truth is that there will never be a good time to start. If you are already wealthy and have tons of extra cash laying around, you probably don’t need to invest in real estate. It’s people like you and me, who are building wealth, that should invest in real estate. And that means that in the beginning we need to get creative.
For us, we had some retirement savings from our old jobs as a teacher (my wife) and resident (me). It amounted to about $40,000. When we created our written financial plan, we did not include these investments when planning for our future. They were icing on the cake. So, we decided to liquidate them and put them towards real estate investing.
How Did We Do It?
I’m proud to say we did not hesitate or succumb to analysis paralysis. We fought against our limiting beliefs and set our goals. We will cash flow $300,000 in 5 years (notice I say we will, not we want to). We are relentlessly pursuing these goals.
And we’ve already taken the first big step by securing our first investment property.
I will forgo an extensive review of the ins and outs of real estate investing philosophies. However, after learning about the various ways to invest, we decided we would pursue multifamily rental real estate properties offering immediate cash flow with a cushion of at least 5-10% cash-on-cash. This basically means that each year, we would get 5-10% of our initial investment (down payment + closing costs + renovations) back.
This set our criteria. Once we established this, we went to work looking for a property that met these criteria. It’s really quite freeing to go searching for real estate this way. You fall in love with the numbers, not the property. Find a great property that doesn’t meet your criteria and your numbers, it’s easy to walk away. You take on a Spock-like mentality (I’m obviously a total nerd).
We bugged the stuffing out of our investor real estate agent. We searched properties all the time and inquired about any that met our screening criteria using the 1% rule (estimated monthly rent should be 1% of the property purchase price). We viewed a ton of properties.
We put in one offer that was rejected despite being the highest offer because we would not waive our inspection contingency. This meant that the property didn’t meet our criteria. We needed a due diligence period to investigate further. They wouldn’t meet these terms so we walked away calm and not upset (not unlike Spock).
The Ups and Downs of Real Estate Investing
Finally, we found two other duplex properties that we loved AND that met our criteria. Offers for the Property #1 were due one day and for Property #2, offers were due the next day. We ran the numbers and came up with a competitive offer for both.
On offer night for Property #1, we got a call from our real estate agent. The sellers were wary that we wanted an inspection contingency. We assured them that we were operating in good faith (we were).
They took our offer!
We were elated and so excited! We called our real estate attorney, mortgage broker, family and friends. We were real estate investors!
Not so fast.
The following morning, we were called by our agent to inform us that the seller’s attorney killed the contract. Why? Because he advised the sellers not to take an offer with an inspection contingency on the property.
We were upset. But then we took a step back and realized it for the blessing it was. This was obviously a concerning sign and likely indicated that something would have come up on property inspection.
We would have wasted our time and likely missed out on…
The following night, we submitted our offer for Property #2. We waited and waited for so long that we assumed we did not get it. Finally, at 10 PM, our agent called.
We got it!
We have now gone through our due diligence period and negotiated a slightly lower purchase price with success. We are working towards a close in about a month or so.
All of this in less than 3 months for someone who started with no knowledge at all about finances or real estate investing.
I share this story because if I can do it, so can you!
Just take one small step in the right direction and you are already started. Buy a book and read the first chapter. Talk to someone who has done whatever it is that you want to do. Read a blog. Then keep going and set your goals. Make them big and pursue them uncompromisingly.
Before you know it, you will have your first property under your belt too. You will be one step closer to financial well-being!
Dr. Jordan Frey blogs at The Prudent Plastic Surgeon.
If Jordan can do this, I can do this, and my grandmother can do this, then so can you! If you are ready to get into real estate investing, pick up a copy of my book The Doctors Guide to Real Estate Investing for Busy Professionals (Who Don’t Think Real Estate is for Them) and get started today. Keep an eye out for my new course, The Doctors Guide to Automating Your Real Estate Investments so you can become a real estate investor without sacrificing your family time.