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Our start in real estate, year 2:

In our last post, we talked about our first year as real estate investors from November 2020-November 2021. If you didn't read that post, check it out here. For the Cliff's Notes version, in our first year we bought our first investment property, renovated it, setup a property management business, built out our business systems, and placed our first tenant in that initial property.

Turning over the keys was honestly a weird experience. We spent so much time getting that house ready to rent, but when we handed over the keys, it didn't really feel like our house anymore. We still owned it but not only would we not be spending all of our extra time there, we wouldn't even be allowed to go back without asking permission or giving notice. Getting it rented to a great tenant was obviously our goal, but it left us with a feeling of "what now?"

We enjoyed not having a house to work on (for a few days)... and then we started our search for the next one. Being November in a hot seller's market, there weren't any houses listed on the MLS that met our criteria. Less than a week after we started looking for our next investment property, our realtor (Holly's mom) called us. Her neighbor was a builder and real estate investor that owned 3 residential rentals, many commercial properties, and a number of self-storage facilities. He was looking to move on from his residential portfolio to focus on his commercial units and building. He asked Holly's mom and her broker to do a market analysis and give him an estimate of what he could list each of his residential properties for. Holly came into my office and told me of this development with a big smile on her face. I said "that's great, if we can see them before they're listed maybe one of them will be right for us." Without losing her smile, she said "I was thinking more along the lines of buying all of them." I laughed. When she didn't, I realized that she wasn't joking. My obvious question was "how on Earth are we going to afford to put 20% down on 3 houses?" "We'll figure it out" she said as she walked out of my office.

We saw the houses a few days later and they were all good fits for what we were looking for. There were two 2 bed/1bath houses and one 3 bed/1 bath house. They were more updated than we would usually be looking for. Our strategy is generally to find houses that need a lot of cosmetic work so that we can get them at a bigger discount and add some equity. However, Holly was 8 months pregnant at this point so less work was sounding better than usual. The seller was also asking for about $15K less than what Holly and I estimated was fair market value for all 3 houses.

We knew after seeing them that we would like to add all 3 houses to our portfolio, but going from 1 to 4 seemed very daunting. It was definitely outside of our comfort zone. See our first blog post for more about getting outside of our comfort zone. Instead of saying "we can't do this", we asked "how can we do this?"

Our biggest "mistake" on our first rental property was putting too much money down. We put much more than the required 20% down thinking that it would help our cash flow. While this is correct, we ended up with a lot of equity tied up in that property, especially after doing a renovation that significantly increased the value. Our purchase price was $152,000 and after a ~$20k renovation it appraised at $208,000. With under $95,000 left on the mortgage, we were able to do a cash out refinance and get all of our initial down payment money back.

While this was a good start, we were still a long way from the $115,000 needed for our down payment on 3 houses. Holly had cashed out her 401K from her first job to fund the renovation on our first property. We decided that I would do the same which would cover most of the rest of the down payment amount. I want to sidebar here before people start posting in the comments that it is irresponsible to cash out your 401K.

  1. I generally agree with that sentiment. 401Ks are the biggest vehicle for most Americans to save and plan for retirement. I do not recommend cashing them out unless absolutely necessary, or if you can use that money to make a bigger return elsewhere.

  2. Cashing out a 401K requires paying a 10% penalty. If your money is also making 10% in the stock market on average, you would need to make over a 20% return on your money to make that move worth it. On our first property, our Year 1 return on investment was 26%, and that will only go up each year as rents increase. I will do a more detailed breakdown of these numbers in a future post or YouTube video. That return was after doing a cash out refinance which allowed us to recycle that capital and use it again for another investment to further increase our returns. That money from Holly's 401K was able to create much more cashflow and equity in our real estate than it would have in the stock market, even after paying the taxes and penalty.

  3. Your investments should match your goals. Our goal is not to work until we are 65 and then live off of our 401Ks. We want to scale a real estate portfolio, reach financial independence, retire early, and create generational wealth. If we are successful in doing this, our 401Ks won't matter.

  4. The accounts that we cashed out were still the minority of our overall 401Ks. They were from our first pharmacist jobs. We still continue to contribute to and grow our current 401Ks as a "security blanket" in case our real estate journey doesn't work out and we don't reach our goals. We could likely make a larger return on the money that we are contributing, but it is a tax advantaged "safety net" for us, and as I will discuss later, we do take loans against it to continue to scale our real estate portfolio.

After the 401K withdrawal, we only needed to pull a little bit extra out of our stock market funds that we discussed in the last blog post to reach our down payment number. Just like that, we went from 1 rental to 4. After stabilizing these new properties, we increased our monthly cashflow to over $1,500 (after setting aside reserves for maintenance, capital expenditures, and vacancies) and we increased our equity to $~191,000. But the stabilizing took some work...

We closed on 2 of the properties in December and the 3rd in February as the seller needed. The first 2 already had tenants so we had to let them finish out their leases at significantly below market value rents. When we took over the 3rd (vacant) house in February, we started our renovations and finished them in May. We rented it starting June 1st to a great couple that we were excited to get.

Meanwhile, the acquired tenants had moved out of one of the other houses on May 1st and we had to overlap renovations briefly. We had another well qualified prospective tenant that applied for the house that was available on June 1st but wasn't able to see it in time and missed out. We showed her the renovation that we were working on and she wanted it, but she needed it by July 1st. We almost killed ourselves getting the renovation completed in just over a month, but we did it... barely. I was literally finishing projects and Holly and her Mom were cleaning the house hours before she arrived with the moving truck.



We had about a month in July without any renovations to do!... before the tenants in the final house moved out August 1st and we started our 3rd renovation of the year. This was around the time that we started getting "the itch". We now had 3 rental properties that all had equity from both our renovations as well as the recent surge in the housing market. They all had outstanding tenants in place and were cashflowing well. We felt like we knew what we were doing now and we wanted to do more. We had put in more time and effort than we ever expected, but we were starting to see the results. We believed in ourselves all along, but seeing the process work grew our confidence significantly.

Coincidentally, another change was happening at the same time. With inflation out of control, the Fed starting increasing interest rates, and kept increasing them. As the summer came to a close, the red hot seller's market started to cool, and then freeze. Buyers of low price point houses in our area are either locals who no longer want to rent, Chicago residents looking for a vacation home, or investors. Many investors struggled with losing significant cashflow to higher interest rates. Many buyers of vacation homes stopped buying due to uncertainty in the economy. The lower income residents looking at lower price point homes were the hardest hit by increases in food prices and gas and weren't able to afford the higher rates. For the first time in our short time as investors, houses started to sit on the market. One particular house was listed at $135,000 and sat on the market for over 2 weeks. Houses at that price point had been going in multiple offers over asking price in hours for the past 2 years. It was small and needed some cosmetic updates, but it had major potential as a rental due to the high rent to price ratio. Where others saw uncertainty and fear, we saw opportunity. Even with the higher rates, this house could cashflow very well on Day 1, and we could always refinance later when rates come back down to increase that number even more. We weren't necessarily looking to buy another house right then, but it was something that we couldn't pass up. We had gotten good bonuses from our pharmacist jobs over the summer and we used most of our bonus money and a 401K loan to fund the down payment and renovation. We were able to get it for $125,000 and it appraised for $145,000. We closed on that house in August, right as we were finishing up the renovation on the final house from the 3 unit portfolio.

As we were completing the finishing touches of that 3rd renovation and preparing to look for a tenant, we got an unexpected phone call from Holly's mom (again, she's also our realtor). Another local investor had just asked her broker to list his 8-unit apartment building downtown Saint Joseph. It was a building that Holly and I had looked at and admired since we first moved to the area. We had looked at a couple other apartment buildings in the past year and had started to educate ourselves on commercial real estate, but nothing had materialized from those other opportunities. She wanted to know if we wanted to see it before it was listed. We did and it was the perfect opportunity for us. It was in an ideal location. It was built in 1902 and had tons of character. However, the owner had renovated everything in 2017/18 including new plumbing, electrical, HVAC, roof, kitchens, bathrooms, laundry, etc. Commercial real estate is valued like a business by its net operating income (NOI) and this property had opportunities to both increase the income and decrease expenses. We would be able to significantly increase the value of the building and also cashflow at a very high level.

Holly was elated and I was dejected. She saw the opportunity to "level up" our business, put us on the map in our local market, and potentially start to transition out of her pharmacist job and into real estate more permanently. I saw the best opportunity that we had come across so far and no way to afford it. The seller was asking almost a million dollars which would mean a ~$200,000 down payment. We had already cashed out our first 401Ks, used most of our stock money, invested our bonuses, and I couldn't think of where we could possibly get that kind of money. I wished that we hadn't spent the money on the 3 houses so that we would be able to get this apartment building instead. Holly once again told me "we'll figure it out". This time, I didn't know if we would.

Two days later I had looked at all of our checking and savings accounts, done an inventory of all of our finances, and determined that we couldn't afford the down payment without a partner. Holly had also been doing her own thinking and came to a different conclusion. We could sell that house that we just finished renovating. It wasn't ideal since our plan was to hold it long-term and it would have cashflowed well, but selling it would allow us to pull out our equity and original capital and that money would have a better return in the apartment building. She then pointed out that we had over $200,000 equity in our primary residence. We could get a home equity line of credit (HELOC) for the rest of the down payment and the cashflow from the apartment building would more than cover the payments. Then we could use our cashflow from all of the properties as well as our next year bonuses to pay down the HELOC. This seemed so simple and reinforced to me the importance of having a better mindset. By saying "how can we do this" instead of "we can't do this", she found a way to make a down payment 5x bigger than any we had ever made when I felt like we had the least amount of money available. Sure it would stretch us in the short term, but the upside was undeniable. We also committed to getting more lean on our personal finances, cut costs where we could, sell our boat, "trade down" my car and make some short-term sacrifices to brighten our long-term outlook.

It is now November and the 2 year anniversary of becoming real estate investors. The sale of our rental house recently closed and we also just closed on the apartment building.

Here are the pictures of that 3rd renovation that we sold:

And pictures of closing day on our apartment building:

One year ago we had 1 rental house and a big dream. I still can't believe everything that I just typed has happened in the past year (and did I mention that our first child just turned 1?!?... yes we did all of this with a brand new baby while learning to be parents and having a serious lack of sleep).

None of this is meant in anyway to brag, but just to show others that it is possible. It takes a lot of hard work, dedication, and commitment, but anyone can do it. We now have 12 units and once stabilized, will have a good stream of cashflow to continue investing. We also will be able to do a cash out refinance on the apartment building and have a large amount of money to reinvest in the next project. We feel like we are a snowball that is starting to roll downhill. I have no idea what the next 12 months will bring, but I can't wait to find out! Thanks so much for following along with us!

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Nov 29, 2022

Way to go!

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