Back Nine Finance

This is the first of a 2 part series where I detail how I first got started in real estate investing.

I’ve talked a lot on this blog about my interest in real estate investing. Recently, I talked about the process I was going through in Choosing My Next Real Estate Investment. I thought it might be informative if I could provide some background on how I first got into the “game” of real estate investing.

The Birth of an Idea

One of the main things I really enjoy about being a commercial banker in my day job is getting to see all the ways that people are able to make money. I come in contact with business owners who have built manufacturing companies that are so complex, it can takes months or years to understand the business. I deal with owners of oil and gas companies that are also working in businesses that are very complex (or at least it seems that way to me). But from the very beginning of my career, every time I met a customer or prospect who made their living (or maybe just extra income) by investing in real estate, either residential or commercial, it always just “clicked” with me. I found it very easy to understand the business. You buy the property, you get it into rentable condition, you locate a proper tenant, and you start making money.

I’ve always had a desire to have ventures going on the side that would help me build wealth. So, after coming across several people who were able to make money in real estate (a business model I understood), I decided to try and get myself into the real estate business.

Finding My Entry Point

Once I decided that I wanted to try and invest in real estate, there were still plenty of challenges standing in my way. As a commercial banker, the investors I deal with on a day to day basis are primarily seasoned investors who have been in the business for quite a while. They might own $2MM to $5MM income producing office buildings, or perhaps a large apartment complex. So while even though real estate as a concept seemed to make a great deal of sense to me, I was still having a hard time conceptualizing an entry point that fit my level of experience and available capital to invest.

One day I got lucky.

Late one afternoon, a random guy walked into the bank where I was working and asked to speak with a commercial lender (note: this is typically not a good sign for a lender – good deals rarely just walk in the door). Being a young lender, I was eager to volunteer to speak with this gentleman. It seemed like an interesting way to end my day and offered the remote possibility of generating some new loan business.

Interestingly enough, the man quickly informed me that he was a real estate investor. Over the next 30 minutes or so, the man walked me through his real estate portfolio, and his need to find a lender who would be willing to refinance the loans on all his properties. In a lot of ways, this meeting was very underwhelming. All of his properties were currently financed by a private lender charging a high rate of interest (over 12%). His 5 properties were just barely squeaking out positive cash flow each month (maybe $50 bucks total each month). The man had a large amount of personal debt that was a strain on his overall financial condition. These were all bad signs to see as a lender, and I knew immediately that there was nothing I could do to assist this gentleman. He thanked me for my time and left.

Immediately, I knew this was a very successful meeting for me.

Why, you might ask? Well, despite all the things working against this particular gentleman’s situation, he had taken one step that would end up giving me just the piece of information I needed to get my real estate investing idea off the ground. His 5 properties consisted of condos in the city where I lived, and all had been acquired for under $50,000 each. This was a market that up until this point I had no idea existed.

I spent countless hours over the next few weeks learning everything I could about 3 to 5 local condo complexes where properties could be acquired for between $35,000 to $75,000.

This was just the market I had been looking for.

The Search for my First Property

After narrowing my target market down to  approximately 3-5 condo complexes and spending hours researching the pros and cons of various locations, I began to set up appointments to go and start viewing particular condo units. By this time, I had narrowed my target complexes from 5 down to 2, primarily due to the location and condition of the complexes, as well as the long term investment potential of the various complexes (as viewed solely by myself). After viewing several different units, and doing quite a bit more research via the internet, books etc., I developed the following list of criteria for my first rental property:

• First floor unit – based upon my research, I knew that older people would be likely renters within the 2 complexes I was focused on. It was my opinion that a first floor unit would be most attractive to this segment of the market.
• At least 2 bedrooms – based upon comparing the sale prices of 1 and 2 bedroom units in my target complexes to the rental rates of 1 and 2 bedroom units, I decided that a 2 bedroom unit would provide better returns from a financial standpoint, and likely rent more quickly.
• Move in condition or close to it – it’s no secret that there is tons of money to be made by purchasing properties in sub par condition, fixing them up, and then renting them out (or selling them immediately). But as a novice investor, I wanted to exclude one variable from my first deal. Not having experience in what it costs to totally remodel a property, I decided that only looking at properties in good condition would make my first investment much cleaner.
• Priced under market value – if I wasn’t willing to create equity in a property by fixing it up prior to renting it out, I decided that I wanted to be patient enough to locate a property that met my other 3 conditions while still being priced under market value.

I’ll continue the story tomorrow. Be sure to check back tomorrow morning for Part 2…

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