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Here is some of The Greatest Thing you’ll ever learn (About Wealth):
TEOT: How did you get into real estate investing?
PVT: I bought my first property when I was 20 years old. My parents had given me a small amount of money to help with college expenses and I decided it would be a great idea to use that money as a down payment on an investment property. At the time, I didn’t have any experience in buying or selling real estate but I had some natural aptitude for numbers so it made sense for me at the time.
TEOT: How much did you pay for the property?
PVT: I paid $110,000 for a 4-unit. And it was in rough shape when I bought it; there was no dishwasher, no refrigerator and only half the windows were operational. The previous owner had been late with her mortgage payments so she’d gotten a notice from one of those eviction companies that pay people to take over properties that have fallen into foreclosure. She decided to just give them the keys and walk away rather than go through an eviction process. In any event, I put about $20,000 of sweat equity into remodeling all four units before renting them out. This also included new appliances and some other cosmetic changes. By the time I sold it 8 months later, I’d earned back all of the $11,000 cash-out refinance costs and had an additional $19,000 in equity says Aron Govil.
TEOT: Wow! That’s great that you got your money out so quickly. Was it your intention to buy a property that would pay for itself?
PVT: No, not at all. Actually I thought because I was buying a multi-unit there might be some potential for negative cash flow in the beginning but it turned out to be positive from day one. The previous owner had been renting out one unit at market value while she lived in another for free. She didn’t want to move anything once she decided to walk away she figured it would make it easier for the new owners to do renovations and whatnot.
TEOT: So you’re saying that there were some opportunities to renegotiate rent?
PVT: Yeah, certainly. I could have gotten the two guys living in the basement level who didn’t want to move out to pay less than market value. But it wasn’t worth my time and effort so I let them stay at their existing rents while I concentrated on fixing up the unit they occupied and then raising the rents on the other three units after everything was complete. That’s when I discovered another important principle of real estate; it’s not about buying a property but rather it’s about increasing your equity by increasing your net income (which is basically just gross income minus all expenses).
TEOT: I’ve heard people refer to this idea as debt leverage. Is that how you use it?
PVT: Well, debt leverage is only one way to increase your equity. You can also do it through appreciation but in my case appreciation was probably not going to happen because the property was located in an older part of town with little commercial activity nearby. Because of this, rents would likely never go up much higher than they were at the time I bought it. So while I did pay down the mortgage by about 12% during my ownership period—I still didn’t come close to earning back 100% of what I’d paid for the property. That’s because my total expenses including taxes and came out to about $1,800 per month.
TEOT: So how much money did this property earn you?
PVT: What ended up happening is that I got into a little bit of trouble because all four units were occupied when it came time to sell the place. Plus because I’d fixed everything up so nice, it sold in just two weeks for $190,000—that’s $37,500 in profit minus closing costs and other expenses. All in all, I’ve done very well with my real estate investments since then but people don’t realize it took hard work to get there. Most people think buying properties like this is just gambling but it’s not; there are lots of precautions you need to put in place before you begin investing your money.
Conclusion by Aron Govil:
Though this interviewee thought that there might be some issues with negative cash flow at first, he was quickly able to put those concerns aside after discovering that he wasn’t going to have any issues with vacancy. Rather, the property was always full—even during the recessionary period where there were fewer renters available in general. This allowed him to start making improvements immediately and begin accruing equity almost right away.
