I'm reading up on real estate these days, with the objective of identifying small multi-family units to invest in. The more I read, the more interesting it gets. Occasionally I'd like to put out posts that collect my thoughts as I go, as a guide post to others who might share this interest.
Real estate involves assessing multiple variables and deciding unemotionally on a strategy that will make the most sense financially. From a tactical perspective, it reminds me of the monthly game night I've come to relish with close friends.
Board games I'd never hear of before (Puerto Rico; Terra Mystica; Feast of Odin) involve learning to maximize value in both goods you receive and actions you can take, some random and some within your control, in order to create a winning strategy from the pieces you start out with.
One of the interesting aspects of reading in earnest and speaking with friends who have succeeded in the space has been to get a more complete picture of the world of real estate.
Each time I read a new book or speak to another friend, there's a period where I can genuinely envision taking their path and excitedly sketch out how life might look if I were to follow it. I enter the overly-excited puppy phase where I am easily distracted by any shiny object waved in front of my face.
My wife, who displays infinite patience at these moments, listens sympathetically to my fantasy scenario du jour despite knowing that in a week it might change with the next book (I told you I married out of my league!). It's part of a process of talking through different shared visions of our future to figure out what will work best for both of us.
I've thoroughly enjoyed reading Cory Fawcett's book on the subject, which helped me see investment properties through the lens of cash flow that allowed him to thrive while a small town Oregon surgeon.
It was also extremely helpful in understanding seller-carried loans and no-money-down purchases, the latter of which had always seemed to me the stuff of late night infomercial sketchiness until Cory explained it.
Another resource I've enjoyed is binge reading the blog Semi-Retired MD, which is written by a dual-physician couple as a dream-big approach to leveraging your high income in medicine to accrue sufficient capital that you can invest like crazy in real estate. They advise investing out of state for both diversification and to find better values.
A key feature of their strategy is to obtain Real Estate Professional status, which requires (among other things) that you spend >750 hours on real estate related activities per year and that it be your major gig based on time spent. The benefit of obtaining this status is that it confers tremendous tax benefits in shielding income from other sources (medicine, for example). The irony is that, to obtain it, you need to be on your way out of medicine to meet the hourly requirements.
I had coffee twice with a friend in LA who has built a substantial real estate empire, going from 8 doors to over 300 in the past 5 years. The second time was after recent California legislation that has essentially subjected the entire state to rent control - a very landlord unfriendly proposition.
When I asked him if he still plans to invest in LA or start seeking better returns out of state, he replied that he will continue to stay local, as a stunning 60% of his returns have come from property appreciation and only 40% from cash flow. He also felt leery of being an absentee landlord since his strategy relied on a trusted local property management team.
An invisible friend I met and have kept up a valued dialogue with through the blog has advocated that money is always made at the time of purchase, and has reiterated that cash flow should always be the primary goal irrespective of property values. His take is that appreciation is really speculation, and he quotes Buffett that when bad times hit, and property values drop, "you discover those who were swimming naked."
He also says that buy and hold investing is usually a long-term win because you are essentially paying off today's high cost debts with tomorrow's cheaper dollars thanks to inflation.
How do I reconcile this occasionally conflicting advice from bright people whose success is evident?
I'm currently re-reading Frank Gallinelli's book What Every Real Estate Investor Needs To Know About Cash Flow...And 36 Other Key Financial Measures, and it's the first book to provide a framework that incorporates these disparate bits of advice I've been getting in a cohesive manner. He describes 4 ways of making money in real estate:
- Cash Flow
- Loan Amortization
- Tax Shelter
Now suddenly I am able to fit each bit of advice into the proper categories, and it all makes sense.
Cory Fawcett used cash flow plus loan amortization to succeed.
Semi-Retired MD is using a combination of cash flow and occasional appreciation with a major dollop of tax shelter.
My local friend is using appreciation plus cash flow.
Finally, my invisible friend is using a combination cash flow and loan amortization strategy.
This book has provided me several similar "Aha!" moments in other areas as well.
My hope is that by reading up, talking to friends smarter than me (that would be most of them), and "gamifying" my approach to investment real estate, I can apply the skill set honed in game night to my financial life.
I'll keep you posted on how that goes.