This week Anthony spoke at a local university’s real estate society. There were a lot of new faces, so he decided to give a little crash course… welcome to real estate investing 101!
Class is in session. There’s so much information to distill when you’re trying to prepare somebody for their first real estate deal. But Anthony was able to break it down into a few easy bits.
So… whether you’re just getting out of school, or you’re looking to get out of your W2, here is a quick lesson on how to invest in real estate.
Should you sell or refinance? What’s the difference in the evaluation of a triplex vs a 10 unit? How do you pick the asset class that’s right for you?
Find out on this week’s bonus episode of Multifamily Investing Made Simple!
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“If you pick the right neighborhood in the right market that’s growing, then you can all but be assured that you’re gonna ride a wave of appreciation.” – Anthony Vicino
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Real Estate Investing 101
[00:00:00] Anthony: This week I spoke to the Real Estate Investing Club at one of the local colleges here in the Twin Cities, and there’s a lot of new faces in the crowd, so I decided to give a crash course in real estate investing. So without further ado, welcome to Real Estate Investing 1 0 1.
When it comes to real estate, regardless of how you want to buy it, how you want to get into it is every real estate deal. These three things, it needs somebody who has the. Somebody who has the experience and somebody who has the capital. All right, so lemme break this down a bit. In the beginning, it’s unlikely that you’re gonna have all three of these things that you need if you wanna succeed in real estate investing, you might have the time, but you don’t have the capital, you don’t have the experience.
You might have the capital, but you don’t know what to do and you maybe don’t have any time at all. But here’s the thing, is that. You don’t need to have all three things yourself. You can go out there and find a partner to compliment your skills and your weaknesses. So for example, if you have time on your hands, maybe you’re young and you’re just starting out, you have time, but you don’t have capital, you don’t have [00:01:00] experience, well then go find those partners who do have experience and they do have capital, but they’re strapped for time.
You bring them an awesome deal and then to say, Hey, I’m gonna run this thing for you. You fund it, and you show me what to do and I’m gonna do all the heavy lifting. That could be a great match on the other side, maybe you have capital, you don’t have experience and you don’t have time, but you still want to invest in real estate.
Well, you could still go out there and find operators to partner with. This is something that we do at Invictus. All right. Now, if you don’t have capital, well, here’s the tricky part because I don’t know if you noticed, but real estate is pretty expensive. So I started in 2012 with a TriFlex that I bought with an FHA loan.
So I house hacked one. And I rented out the other two. All right, so my first property, I put $7,500 down and bought a triplex that was worth $246,000. I did this with an FHA loan, which is for first time home buyers. It’s a great way if you don’t have a lot of capital to get into your first investment property.
Now, the downside is that you have to live in the property, so, In that Tripex, I lived in one unit and I rented out the other [00:02:00] too. This is called house hacking. It’s a great way to bring down the expenses of your, of your living on that particular deal. For me. Nine months later, after I purchased it, it had, uh, evaluated for $375,000.
It. Appreciated over $125,000 in just the nine months that I owned it. That’s incredible. How did I do it? Well, first, I’m a genius investor and not really, I’m really not. I just got lucky. Truthfully, like investing, it can be really hard to track all the variables when you’re, especially when you’re new, that are gonna matter in the grand scheme of things.
But the one. That matters the most is location, location, location. If you pick the right neighborhood in the right market that’s growing, then you can all but be assured that you’re gonna ride a wave of appreciation. You’re gonna do pretty well. So that’s number one is understanding market dynamics.
However, like I mentioned before, there are a lot of factors that you just can’t predict if you guys haven’t noticed in the last six months or so, the world’s ending. So riding market appreciation maybe isn’t like the best long term. [00:03:00] Which is why in 2013 I was like, Okay, well this is cool, but this isn’t gonna work long term.
And that’s why I made the jump to multi-family, uh, assets. So who is familiar, like with the difference in how a tripex is valued versus say, a 30 unit apartment complex? So here’s where I stumped them just a little bit in fairness, some of ’em got half of it right? Some got the other half right? But nobody got it entirely right?
And this is important because this is the reason why I made the jump from house hacking that triplex in. Over to larger commercial multi-family properties, which are defined by having more than five units because of the type of loan that we’re gonna put onto it. Now, this is important because properties that have less than five units, so like a single family at duplex, at triplex and a quad, they’re gonna be valued based off of what’s called the comparables approach.
Whereas the larger multi-family, if it’s five units and above, it’s based off of the income approach. So, lemme break this down real quick. The income. Is saying, how [00:04:00] profitable is this business? The more profit this business generates, then the more it’s worth. Right. That makes sense. That’s pretty straightforward.
So if I can go into, say, a 10 unit apartment complex and I can increase the revenue and I can decrease the expenses, this makes my building more profitable and thus worth more. I like that. And that’s compared to what I had with that triplex, which is the way these buildings are valued is off the comparables approach.
And so what this. My building is gonna be worth more or less, exactly what the neighbor’s house is. Or the houses within a particular region. So if Bill down the street for whatever reason, loses his job and he has to sell his house because he can’t pay the mortgage anymore, he might sell it at a loss.
Now that is bringing down the value of my home. So just because of Bill’s life circumstances. My real estate is worthless, and that never really sat very well with me when I was living in that triplex. Now granted, my triplex appreciated by 125,000, which meant that Bill did a pretty good job. He sold, he sold his house and made a pretty good penny.
So [00:05:00] thank you, Bill. However, I didn’t like not having the control of being able to say, If I go in here and I operate my asset, well, if I increase the revenue, decrease the expenses, then I’m guaranteed that my building is gonna be worth. And that’s all fine and Danny, but it’s one thing to say, Hey, we’re gonna make our building more valuable by going in there, increasing the revenue and decreasing the the expenses.
It’s a whole other thing to actually go and do it. So how do we actually improve the operations of our building when we go into a multi-family asset? If we can improve how it’s operating, If we can improve, like its revenue that’s the rent or the ancillary income that it’s getting from fees, like at fees and things like, And we can decrease the expenses, then we can make the building more profitable.
All right, so when we go in, we buy a building for 2 million, we add value, we improve the operations. We can be really confident that it’s gonna be worth $3 million when we go to refinance it. Now, wait. What do I mean when I say refinance it? Why don’t we just sell this thing? So if you’ve ever watched HDTV and like the [00:06:00] house flipping shows where they’ll just go buy a home, they’ll, they’ll fix it up, they’ll make it really pretty, and then they’ll sell it at a big profit.
That’s a great way to make money, but the problem with that model is at the end of it, You don’t have a house, you sold it. So in multifamily, what we do is a little bit different. Instead of selling the asset to realize all of this equity that we forced into the asset, we go back to the bank and we say, Hey, we’ve improved the product.
We’ve made it more valuable. Would you be willing to lend on this now at the higher valuation? And most of the time the bank will say, Yes, sir. We’ll do that. And so they’ll put a new piece of loan on this product. We get to pay back the old loan. And we get to realize the equity that we had forced into the.
Now, this is really important. This is powerful because one, we still own the asset, right? At the end of the day, we’re getting to pull the equity out of the building, but we’re not selling the building. We still have this cash flowing product. Number two. Is this refinance event is actually tax free. One of the [00:07:00] biggest wealth generating lessons I’ve ever learned is it’s not about what you make, it’s about what you keep.
And taxes are generally gonna be one of your bus biggest expenses in life. So anything that you can do to reduce that is key. This tax free event puts cash back in our hands and into the hands of our investors. So now we and our investors benefit from getting this capital earlier, which allows us to increase the velocity of our capital cuz.
We can take that money that’s no longer tied up into that building and we can reinvest it. So we can say, Go buy another building that’s cash flowing, while still owning the first building. That’s also cash flowing. This is how you get the compounding effect on your side. So the cash out refinance is a super powerful secret weapon that we like to use whenever possible.
In fact, we’re doing a refinance right now that’s returning 60% of our initial. just in two years. It’s crazy. So here’s the next question that we got from the students is how did we pick multifamily and do we invest in any other asset classes? There’s a lot of different ways to make money in real estate.
This is the thing, is that there’s, [00:08:00] there’s no shortage of ways to make money, whether that’s single family fix and flips, industrial, flas, office storage, mobile home parks, like there’s tons of ways to make money. And you’ll hear people say like, This is the best investment, this is the best asset. and the truth is that there is no best, there’s just best for you given your context.
And your context is going to be dependent on the skills that you have that you can bring to bear on that, on that asset. We love multi-family investing at Invictus Capital cuz it’s, It’s all we do. But I mean, there’s a ton of great ways to make money in real estate. You could be in self storage, you could be in mobile home parks, you could be in industrial.
But for us, we don’t know what we don’t know if I go into self storage sure. It looks a whole lot like a multi-family building. We’re renting out some square footage and it’s a building. But I don’t know what I don’t know. And because of that, it increases the risk profile of the investment. And so for us, we’re all about mitigating the downside.
And to do that, we stay in our lane. And that would be my number one piece of advice for new investors out [00:09:00] there trying to figure out how to make their way in the real estate world is pick a lane, doesn’t, doesn’t really matter which lane it is because in real estate there’s a ton of great ways to make.
Just pick a lane, stick with it until you master it and you get to the point where it’s just so boring, cuz you’ve done it so many times that now you have the extra bandwidth to maybe turn and look at additional assets. But until you get to that point of being so good at what you do that it’s just.
Humdrum monotonous, you’re probably not ready to take on more risk. So when you’re starting out, just keep it simple. Stay in your lane. Don’t get shiny. Object syndrome. All right, and that’s gonna do it. That concludes real estate investing 1 0 1. If you have questions, reach out. I’d love to field them. Put ’em in the comments below.
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