The Simplest Way I Know To Start Real Estate Investing!

person holding silver keys

If I could go back in time and talk to my 24 year-old self, I would tell him to take his vitamins, get plenty of sleep, don’t date girls based solely on looks, and…….buy a duplex! My focus as a real estate investor is on accumulating rental property and not flipping,  so duplexes are right up my alley.

As a rental property investor, I do not buy single door, a.k.a single family, homes as rentals! Why? Because if your tenant moves out you have 0% occupancy. I agree with Grant Cardone when he says “Single Door- No More”.

The number one question/excuse I hear from folks is how do you get started investing in real estate if you don’t have a lot of money. In this article I will lay out the simplest strategy that I know of. It’s a strategy that nearly everyone can do.

Let’s go back to my 24 year-old self. Imagine if instead of buying a single family house to live in, I instead purchased a duplex. Single family “starter” homes were going for around $100,000 in my market at the time. These were your standard 3 bedroom, 2 bath ranch homes, usually sitting on a 1/3 acre lot.

At the time you could find duplexes for anywhere from $125,000- $150,000. Interest rates were around 7% on 30 year mortgages. So with that said, a 30 year mortgage on a $100,000 single family was $665. A $150,000 duplex would have been $997. This is assuming no money down (which back then was very possible). Let’s assume taxes and insurance were another $150 per month for the single family and $200 per month for the duplex.

This brings the total monthly payment to $815 for the single family and $1197 for the duplex.

I would have purchased the duplex in an LLC and rented one side for $700 per month and paid myself rent of $700 for the other side. When I say “pay myself rent”, that means I would have written a check to my LLC that owned the duplex and deposited it into a bank account just for the LLC.

So, let’s compare the two… I own a single family home that I live in and I pay $815 per month. Or I own a duplex and pay only $700 per month. The $700 I pay along with the $700 my tenant pays goes towards the mortgage, taxes, and insurance, which was $1197 per month.

So in one example I pay $815 per month and I build a little equity on a $100,000 property, OR I pay $700 for a $150,000 property and also net $203 at the end of the month AND build a little equity. If I lost you, let me recap. I pay $700, the tenant in the other side pays $700, for a total of $1400. The mortgage, taxes, and insurance are $1197 per month, which is where the net of $203 comes from.

After 5 years, assuming I don’t raise the rent, I would have $12, 180 in my LLC’s bank account. For those of you who hate math, let me show how I came up with that number. $203 per month cash flow x 12 months x 5 years= $12,180.

Okay okay… yes I know, this is assuming 100% occupancy and isn’t taking into account any expenses that may arise. So let’s take half out to account for those things. Now you have $6,090.

But keep in mind that I am only paying $700 per month versus $815. So there would be personal savings also.

At 24 years old I was making $30,000 per year, so if I saved 10% of that I would be saving $3,000 per year. In 5 years that would be $15,000. In total, if you include the $6,090 in my LLC account, I would have over $21,000 cash  after 5 years and still own the duplex.

Five years later I’m 29 years old. I meet the girl of my dreams and we get married. If she’s really the girl of my dreams, then she understands the value of owning rental property…

So, we buy another duplex, live in one side and rent out the other. Now I have 4 units total and my wife and I are only occupying 1 unit. We continue to cash flow and store our cash in the LLC’s bank account. Pretty soon we buy another duplex.

At some point in our mid 30’s we grow tired of living in a duplex and decide to buy a single family home to raise our kids. But by this point we own 6 units and we are making somewhere around $600-$900 per month cash flow.

How different would most people’s lives be if they owned 3 duplexes in their mid 30’s? Sure, there’s the hassle of managing them, but at some point you could (and should) hire that done.

Well ,this isn’t the path I took. I instead bought a single family home and lived in it. I did successfully flip it for a nice little profit and I went on to buy rentals after that. It wasn’t a bad way to do it, but for most folks flipping isn’t easy. You have to buy the property at a discount, fix it up without spending too much, and then hope it sells at a decent price. It worked for me and it has worked for others, but it involves a lot more risk.

Therefore, I would tell anyone who is just getting started in life and wants to own property to buy a duplex! This strategy works for nearly everyone. The key is to pay yourself for where you live, don’t over-spend personally, and don’t buy junk properties. If you do those three things, then this strategy should work. Of course there is always risk with anything and I can’t make you any guarantees that this will for sure work for you… But it’s the simplest strategy that I know of to accumulate rental property!

 

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