Investment Property – Classic Way vs. My Way

A couple nights ago, I was watching one of my favorite shows – Investment Property. I always enjoy seeing the renovations combined with putting new landlords into business.

But this time, I couldn’t help but view everything through a wealth building lens. I kept asking, “Would I do that?” And the answer was a clear “No!”

Classic way

So what was the deal? The investors picked a two story, three bedroom house that was going to cost $750,000 after purchase and renovations. The rent was estimated to be $2700/month, with $100/month profit after mortgage and expenses. The house was in their area. They could drive by it everyday, and they could even manage it themselves to avoid paying any property management fees.

That is the classic way. Look for a duplex or other property in your area, perhaps that one you drive by every day. Get it at a discount. Invest a little sweat equity so you can find quality tenants, and then hope it will grow in value down the road.

My way

I bought a Texas duplex last year for $270,000. It brings in $2650/month with about $1000/month after the mortgage and expenses. In case you didn’t spot that, I spent 1/3 of the money for the same rent, and thanks to a smaller mortgage payment, I pocket more profit.

To top if off, my duplex was brand new and didn’t require ripping out smoke filled carpet and tar covered wall paper. If I had the same money as those investors, I’d buy three of these duplexes and be pocketing $3000/month. Sadly, I only had enough to buy two duplexes.

Why invest in Texas? For one thing, Texas has shown bigger job growth in the past couple years than all other states combined. People are flocking there. Those people need a place to sleep. New construction is on the rise and the sheer volume is keeping the prices in check. Many people are ready to rent. By picking top quality units, I have attracted top quality tenants. And my property manager is ensuring there are proper background checks.

Finding experts to help guide you

On the TV show, they have Scott McGillivray. He is a contractor and income investment expert. That is the expert the people on the show use. He seems to know what he is talking about. Frankly, I would like to trade notes with him. I wonder if he is constrained by the nature of the show. If I was his client, there wouldn’t be so much TV-worthy material. I didn’t have any renovations to deal with. I wonder if he helps people that don’t invest in their own market.

It can be tricky to navigate a new market not in your backyard. That’s when I pick up the phone and call my expert, Jeff Brown. He is someone who does this type of research on a daily basis, nationwide. He looks for quality, affordability, and does rent analyses on multiple markets. If you call him, ask him how many of the past one hundred deals were investment ones. His answer will be “One hundred.” That is the mark of someone who isn’t doing investment real estate as a hobby. The man has been doing it since the 1970s.

I also talked to my father-in-law. He has owned rental properties for twenty years. He says he has usually done pretty good if he can make 1% of the purchase price each month. That’s know as the 1% Rule, and these people on the TV show were missing it by a long shot. For that much capital, they should be getting $7500/month. So instead of earning a cap rate of 12%, they instead are making about 4%.

With 100% occupancy recently achieved, I dialed up payments on my smallest loan by an extra $1000/month. I’m also replenishing my cash reserves by $1000/month. When the reserves gets back up to the level I want, I’ll increase monthly payments on the loan to an extra $2000/month. With an extra $12,000 in annual payments, we’re talking about knocking down a mortgage by $60,000 in five years. If I can step it up to $2000 in a year, the total in five years will be more like $108,000, which will have paid off the first mortgage.
Bottom line: By giving up the need to drive by my rentals, and finding the right experts to put things in motion, I got the same amount of rent and only had to put down 1/3 of the cash. And this includes total property management. It builds in a cushion where I can handle things if half my units are vacant. The results have been fantastic so far. I should be able to knock out the first mortgage in less than five years. The people on the TV show are going to take much longer to grow their portfolio.

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