Author Topic: So I Talked With a RE Investor  (Read 3835 times)

Pooperman

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So I Talked With a RE Investor
« on: February 08, 2015, 08:55:34 AM »
I picked the brain of a family friend who made his money in commercial real estate. A couple of points he told me are very at odds with what what most talk about here. I asked and got some answers, so here's what I learned:

1) The money is made through leverage and equity, not on the float.

2) #1 applies only in places where new construction is difficult (old buildings won't lose value because new ones aren't built). Places like, NYC area, Boston, LA, SF, etc.

3) The only way to make money outside of these areas is through floating properties (rents) as the value of the building will generally be lower in the future than it is now. People want newer places to live and that has a downward pressure on rents and values of older buildings.

4) The RE market is a lot more efficient than it was when he started 40 years ago. It's nearly impossible to get a deal where the seller is selling at less than actual value.

5) Watch the RE market in an area for a while to figure out what is a deal and what isn't. Dig into the numbers.

6) Buy in places with good schools. The appreciation and rents will rise faster than other areas.

7) When starting out, buying a 4-plex on a FHA loan is the best one can hope for. Find a place you want to live and rent out the other three such that your cost is less than or equal to your current rent.

8) Real estate goes in cycles, so don't buy into any hype.

9) The Internet is screwing over retailers in most places except places where a lot of poor folks live. There's a lot of foot traffic and instant gratification to make tons of money in areas like that vs affluent neighborhoods.

10) Make full use of 1031s.

11) Use self-directed IRAs.

12) If being a landlord is not your thing, being on the hard money side gives good returns (~12%).

13) Start early, and get an accountant (he's a CPA and uses one).

14) Get an umbrella policy.

15) Invest where you live and know.

He's got $25M in outstanding loans (as the lender/broker), owns several million in real estate outright. He's done something right. So what does the MMM community think of these points?

KingCoin

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Re: So I Talked With a RE Investor
« Reply #1 on: February 08, 2015, 04:29:54 PM »
Unpacking any one of these points is probably a thread in itself.

#1-3 seems to take on the debate of making money through cash flow vs appreciation. This has been hashed out in other threads. There's no right answer, but the former the former seems more reliable, the latter a better way to become a billionaire at increased risk of ruin.

#4 and #5 are somewhat contradictory, though I would say not particularly controversial.

#6 is fairly conventional wisdom, but this really can't hold true over the very long term (unless areas with good schools are to become infinitely expensive).

#7 seems fairly mustachian. You'll have to run the numbers yourself to see if it's more attractive than buying, say, four separate houses.

The rest also seems fairly uncontroversial with a sprinkling of caveats. I'm curious as to what you thought was most at odds with the general philosophy espoused here?


Pooperman

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Re: So I Talked With a RE Investor
« Reply #2 on: February 08, 2015, 05:51:02 PM »
Points 1-3 though 2 is the caveat explaining the difference (for controversial/at odds). 5 is more about knowing how the local area is doing (up/down trends, what really is the right price, etc) where 4 is just saying wrongly-valued real estate isn't common anymore with the advent of things like LOOPnet.

 I went to him because real estate scares the shit out of me. He also told me that the foreclosure rate for what he does is somewhere around 25%. At any rate, from talking to him I feel like doing the Mustachian 4-plex (or whatever-plex makes the numbers work) or being on the hard money side is more my style.

money_bunny

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Re: So I Talked With a RE Investor
« Reply #3 on: February 09, 2015, 05:47:33 AM »
I can see the freedom of information with the internet making it harder to "Corner the market" than in the past.

jmusic

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Re: So I Talked With a RE Investor
« Reply #4 on: February 11, 2015, 06:35:41 PM »
I've heard that hard money isn't really appropriate for a novice to get into.  Maybe if you have someone that you TRUST to invest with...  The big issue is that you're investing in other people's real estate deals and if they go bad you have to foreclose and finish out the project yourself. 

KBecks2

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Re: So I Talked With a RE Investor
« Reply #5 on: February 11, 2015, 07:04:44 PM »
Check out motley fool options and pro.  12% is not hard to get and you want to get it with lower risk and a good advisor.  Hml is more complicated.  Options take a while to learn the terminology but you can start small and see how you like it.

Pooperman

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Re: So I Talked With a RE Investor
« Reply #6 on: February 12, 2015, 05:58:33 AM »
I've heard that hard money isn't really appropriate for a novice to get into.  Maybe if you have someone that you TRUST to invest with...  The big issue is that you're investing in other people's real estate deals and if they go bad you have to foreclose and finish out the project yourself.

Yep. If I had money to invest with this guy, I probably would.

arebelspy

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Re: So I Talked With a RE Investor
« Reply #7 on: February 12, 2015, 12:46:40 PM »
GoCurryCracker recently posted a negative experience with HML.

http://www.gocurrycracker.com/rental-hell/

That being said, it can be an fine way to go, if you know what you're doing.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Louisville

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Re: So I Talked With a RE Investor
« Reply #8 on: February 12, 2015, 01:34:48 PM »
There a lot of terms on this thread that are Chinese to me, but I'll ask about just one.
What does it mean to be "on the hard money side"?

arebelspy

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Re: So I Talked With a RE Investor
« Reply #9 on: February 12, 2015, 01:40:26 PM »
There a lot of terms on this thread that are Chinese to me, but I'll ask about just one.
What does it mean to be "on the hard money side"?

Ask about as many as you want.  :)

Hard money is money lent on property, typically at high rates (10-15%, plus points to take out the loan) for a short term (1-3 years).  It's usually best for rehabs where your holding time (amount of time paying that interest rate) is short and where your profit will be high (to cover the interest).

The person you are quoting was referring to lending out at those rates to real estate investors (rather than being the one to take the loan and rehab a place).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

marty998

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Re: So I Talked With a RE Investor
« Reply #10 on: February 12, 2015, 02:03:01 PM »
Good thread, thanks Pooperman

There a lot of terms on this thread that are Chinese to me, but I'll ask about just one.
What does it mean to be "on the hard money side"?

Ask about as many as you want.  :)

Hard money is money lent on property, typically at high rates (10-15%, plus points to take out the loan) for a short term (1-3 years).  It's usually best for rehabs where your holding time (amount of time paying that interest rate) is short and where your profit will be high (to cover the interest).

The person you are quoting was referring to lending out at those rates to real estate investors (rather than being the one to take the loan and rehab a place).

Sounds a lot like Structured Finance and Mezzanine Debt on a small scale.

We know what happened to those type of loans in 2008 :(

Always acknowledge the risks.