One of my goals for 2008 is to purchase my first investment property. I view real estate investment (REI) as one way to help me break free from my traditional methods of saving (401K, IRA’s etc.) and establish a retirement worth having. The more I dwell on my life’s purpose and what I want and don’t want in my life, the more I realize that I want my retirement sooner rather than later so that I can take time to actually enjoy life.
I’ve also come to the conclusion that the best ways for me to achieve an early retirement is to pursue individual business ownership and start a REI portfolio. This blog is a small step on the business front (I’ll be making some changes here soon to further that effort) and recently I started to execute my REI plan.
Initially, I had intended to invest in my backyard here Virginia Beach, Virginia. However, after several months of searching the MLS and foreclosures, I’ve come to the conclusion that Eastern Virginia is too expensive an area for me to start out investing in. After some brainstorming on how I could become a real estate investor in an affordable market I settled upon the Kansas City area. There are many reasons why KC has great real estate potential, several are outlined here. Bottom line, KC is affordable, familiar (I grew up in the suburbs of KC), an easy market to enter, has solid potential, and is a place I might reside someday (post-military, of course). So for now I’m going to try and hang my real estate investment hat there.
In June my family and I spent two weeks in KC on vacation to spend time with family and friends (my wife grew up in KC too). Being an opportunist, I spent some time with my Realtor, Chris Lengquist looking at potential investment properties that he felt would meet my stated goals, which have been to maximize monthly cash flow income. If you want to live an active lifestyle on passive income….you’ll need a decent amount of passive income, so I figured that is what I needed to place my emphasis on.
Let’s just say that I was underwhelmed with the investment properties we looked at. Yes, underwhelmed. The properties weren’t in the nicest areas of town and wouldn’t be at the top of my list of things I’d be proud to show my parents that I own. This wasn’t my Chris’ fault, not in the slightest. He showed me what the combination of my goals and investment capital enabled. In past conversations I told him I want to prioritize and maximize positive cash flow with about 15K of investment capital. The result, we were looking at Section 8 (government subsidized) housing. Don’t get me wrong, I’m sure Section 8 is lucrative and serves the greater good, but I’m not ready to jump into this niche area of REI as my first endeavor.
I felt bad that I had wasted valuable time (both mine and Chris’). But the experience was worthwhile. I learned some more about REI, my goals, my desired property criteria and how much capital investment would be required to pull them all together.
The major lesson I learned is that if I want to maximize cash flow and have a nice property I need to bring a fairly large amount of capital to the table. The corollary is that with limited capital you can get cash flow if you lower your property criteria.
I prefer to have a nicer property so one of two things needs to happen, either my goals need to be adjusted a bit (less emphasis on maximum cash flow) or I need to save more capital to invest. Since goals are easier and quicker to adjust, I’ll be modifying those first. Basically this means trading monthly cash flow for a higher quality property in a better neighborhood with greater long-term appreciation potential. I don’t normally sacrifice my goals, but I think it’s important to have the highest quality investment properties in my portfolio that I can afford. I don’t need the cash flow today, so I can practice some delayed gratification on this one.
With a new goal in hand, I continue to stash away cash for a down payment, peruse the MLS for that perfect property and continue to mind my own business.
-Jeff
I’m Minding My Own Real Estate Investments, are you minding yours?
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12 responses so far ↓
1 My Real Estate Investment Efforts · Invest-In-Real-Estate.ExplainedOnline.Net // Jul 7, 2008 at 12:49 pm
[...] Original post by San Diego Real Estate Blog [...]
2 My Real Estate Investment Efforts · Real-Estate.ExplainedOnline.Net // Jul 7, 2008 at 1:31 pm
[...] Original post by Jeff [...]
3 tom // Jul 7, 2008 at 3:12 pm
I have to ask, why not section 8? It’s basically rent backed by the US Government. I agree that it’s not glamorous, but the US could use more future landlords instead of slumlords.
4 Jeff // Jul 7, 2008 at 3:39 pm
Tom,
Thanks for the comment. My main reason for wanting to avoid Section 8 right now is that I’m not interested in dealing with some of the tenant issues that I think might arise out of Section 8 investing. I have not owned rental property before, so I’m a bit leery of jumping in to the pool this deep my first time trying to swim.
My fears are likely unfounded, but I think I need to have a couple smooth (if rental ownership can be considered smooth) experiences under my belt before I try that part of the market.
Just my opinion, thanks again for yours.
Jeff
5 dw // Jul 7, 2008 at 6:01 pm
You might do a bit more research. Last I looked into it, the government not only guarantees your rent, but will also pay for repairs to the property after the tenants leave.
6 Everybody Spends // Jul 7, 2008 at 6:32 pm
[...] My Real EstateInvestmentEfforts [...]
7 Jeff // Jul 7, 2008 at 7:13 pm
DW,
My understanding after talking with my Realtor and potential property manger is that the Government sets the rent then subsidizes a portion of the total. Some portion will be paid by the tenant and some portion by the Government. The only sure thing is the portion to be paid by the Government. The rest has to be collected from a tenant that likely has a less than stellar rental history.
As for repairs, your comment is the first I’ve heard of anyone saying the Government will pay for repairs. The PM I interviewed made it sound like repairs between tenants are pretty standard and owner paid. Something to look into.
Thanks.
Jeff
8 Chris Lengquist // Jul 10, 2008 at 7:45 am
I guess my response from the Treo never came through….
Anyway, I don’t feel you wasted your time. You got yourself educated. Hearing me say something and seeing it are two entirely different things.
And no, S8 does not pay for repairs. Nor do they pay deposits.
9 My Real Estate Investment Strategy Changes Again | Minding My Own Business // Jul 28, 2008 at 7:13 pm
[...] I shared my impressions of some potential real estate investments located in Kansas City. That trip to KC made me realize that my REI goals were not necessarily in [...]
10 Kevin // Aug 8, 2008 at 12:49 pm
Good post, Jeff. I’m interested in REI as well. I’ll continue to read the blog and see how things progress for you.
My idea is to use the home we’re currently living in as a rental when we’re ready to move - which could be as early as next year. We’re in a fairly stable RE market (suburb of St. Louis) so there’s not much risk of the property decreasing in value. I figure at worst, if the renting thing doesn’t work out, we can sell the home and that money elsewhere. The big downside to my plan is not being able to use the equity (about $25,00o) in our current home as a down payment when we move.
11 Jeff // Aug 8, 2008 at 1:02 pm
Kevin - Thanks for the comment. For many reasons, 1) It’s nice to see someone is reading my posts, and 2) MMOB has been hard down for the last several days so your comment means I’ve exercised the demons (for now) and the site is working.
I used to live in St. Louis many years ago. I worked for what was then McDonnell Douglas while I was in college (Rock Chalk Jayhawk!).
As for REI, I’m going through the same thoughts as you. I have almost $250K in equity in the beach house which would go a LONG way toward keeping my wife happy in a home in Bean Town. I’ve discussed ways to pull it out with Chris over at BBQCapital (a Kansas City REI site). So far I haven’t found a way that really sings to me.
One interesting idea that I happened upon this week came after my wife mentioned that a couple neighbors had expressed interest in buying our house when we moved. That solves the equity issue, but it leaves me w/o a rental property. Then I had a Eureka, maybe I could just trade houses. Yes, I said trade. My house is on one of the best lots in the neighborhood and is one of the largest as well (no, really, it is). Would it be possible to swap my house for one of thier’s plus some cash. That would keep me in REI and could put some cash in my hand at the same time.
What do you think?
12 Kevin // Aug 8, 2008 at 3:34 pm
Jeff-
I clicked over from Free Money Finance and your blog seems to be working just fine.
Small world, my dad worked for McDonnell forever before it was bought out and his department switched over to IBM.
Anyway, keeping the wife happy is certainly priority #1. I have a similar issue in that my wife is not sure about becoming a landlord, so I have some convincing to do there I guess. I may just have to wait a little while to start the REI thing, but we’ll see.
The idea of trading sounds interesting, however as a CPA my first thought is to think about the tax consequence. I wonder if it would be better to structure it as a sale to take advantage of the gain exclusion and a then purchase of the new home. Maybe this is what you were thinking and I just mis-interpreted the “trade” part of it. If you don’t already have a good CPA, now might be the time to bring one on to advise you about such things. It’s always better to do it up front than to learn the hard way afterwards. If you don’t mind working long distance I’m always looking to take on new, entrepreneurial clients.
\shameless plug
Incidentally, my wife has a friend (in the Navy) that recently moved from VA beach to Monterrey and also thought about keeping their house to rent out as well. I haven’t talked to them recently to see what they decided.
Kevin
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