Experiments In Real Estate

Once I achieve an extremely early retirement at 35, I will consider my self a professional investor (capitalist).  Because I take this very seriously, I want to learn as much as possible about actively investing in different sectors, including real estate.  And so yesterday I made my first move into real estate by purchasing a home.

Actually, my first move was 2 weeks ago when I sought out a successful landlord in my area and asked her to be my mentor.  In addition to teaching me a lot, we’ve agreed to go into partnership on some homes.  She is cash strapped and actively working many deals. I, on the other hand, have lots of cash but no time to seek out the best deals.  We’ve got along well, so we agreed to do business together.

The house we purchased is what is called “subject to”.  Basically, the owners will keep the mortgage in their name but have signed over the title to a trust that we set up.  We will set up a “rent to own” offer, where we find someone with low credit that wants a house but can’t yet get a mortgage.  The rent will cover the mortgage payments that we agreed to make, with slight positive cashflow (mostly insignificant).  But we believe the price we can sell it for as rent to own will be about a $30K gain.

I put $7K down, which covers a finders fee, paint touch up, and carpet cleaning.  My partner will manage the property, including marketing the house, collecting rent, handling issues, etc.  Once the renter can get a loan, they will buy it at the predetermined price which hopefully will be a $30K gain.  I will first get my $7K back, then we’ll split the remaining $23K evenly.  If all works out, I will make $11.5K in two years from a $7K investment.  That is a 62.5% annualized gain.

My worst case scenario is that we only sell it for a 10K profit.  The first $7K is paid to me, and we’d split the remaining 1.5K.  That would be a huge disappointment, yet would still be a 10.1% annualized gain.

Overall, this isn’t the best deal in the world.  But it’s a great way for me to learn another investment approach as I train for my new career in capitalism.


10 Responses to Experiments In Real Estate

  1. This sounds like the perfect way to get into real estate.  I’ve thought a lot about this, but it seems to have a very high “pain in the ass factor” and a lot of expertise I don’t have.  It seems like you found the perfect manager.  Those gains are impressive by any measure.

    • Yes, to be successful it will take a lot of work.  Some of the successful RE investors I’ve met work harder than I do with my 9-5 job.  I’m willing to trade-off the potential high returns in order to keep it completely passive for now.  I have lots of capital and very little time so it makes sense.

      After I retire in two years, I’ll have the option and knowledge to get more involved it I want to.

  2. I’ll be honest, I read this and it sounds like a too good to be true type deal. You’re investing money and will get paid back as first priority. That’s sounds fine. But your new partner is actually going to be doing all the work. And she’s not getting a premium for that? She has agreed to split profits with you 50/50, even though she does everything and you do nothing?
    I’m not saying you are getting taken, please don’t think that, but I think its appropriate to caution other people that deals like this don’t fall out of the sky and that you’d researched this person in advance (knowing that she actually IS a successful real estate investor).
    And, because I have a sense of fairness, I would seriously take a look at this agreement again and talk to your partner about a way to compensate her for the work she does. Otherwise, I wouldn’t be certain that this partnership could go the long haul- that there might be resentment on her part coming up in a house or two.

    Otherwise, this sounds like a great deal, and I wish you the best of luck. Certainly partnering with someone who knows what they are doing is the best way to get in to real estate.

    • She has agreed to split profits with you 50/50, even though she does everything and you do nothing?

      But I am doing something, I’m providing her with money she needs to do the deal.  An investor like her can only get so many bank loans, and she is tapped out.  There are people like her that own and operate 50+ houses, but the bank would never fund so many houses even if she has positive cash flow and can pay them the loans on each.  It’s too much risk for the banks.

      Instead, she seeks personal equity investors like me, who get a higher return for incurring a higher risk.  This is why I consider myself a professional capitalist.

  3. Mustachian says:

    As an RE investor, I’ve heard of this before and have a question about Subject To: why would the original owner do it? Seems like a big risk (you could default, hurting their credit) – what’s their reward?

    • The original owner will generally do this because they have some house equity, but can’t afford the mortgage anymore. Frankly, it;s a bad situation but a better one than foreclosure. Basically, they get out of the house, have the mortgage paid for, and lose some amount of equity.

      Looking at it this way, I don’t like it. But I’ve also come to realize that RE is an efficient market where there aren’t a lot of “nice guy” opportunities floating around.

  4. Mustachian says:

    Makes sense. So they get to save at least a portion of their equity and can probably do this deal a lot faster than trying to get the place sold, especially if it needs work. Thanks for the quick explanation.

    • Yep, that’s the other thing: the house sells fast because there is very little money that changes hands. I put down just a few thousand dollars for some repair, marketing, and some lawyers fees and that’s it. No actual “purchase” has to occur, so there’s no delay for bank loans.

  5. Eagle says:

    Geez, that’s unvlilebabee. Kudos and such.

  6. Would like to see an update on how this all turned out–perhaps I’ll find it in a future post. I’ve started from the beginning.

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