You can pretty much divide the business universe into two different worlds:
- Big corporate businesses
- Small, lifestyle businesses
Most of the business advice in books and in graduate schools is targeted towards #1 – big corporate models.
As you may know, I lean heavily towards #2 – a small lifestyle business.
A partner and I run our real estate rental business managing 55 units with a virtual office. Our business is focused on maximizing lifestyle, i.e. free time and flexibility and not just profits. I like to call this our small and simple lifestyle business.
This article is both for those who want to simply own a few rental properties and for those who want many more. If you share my goal of a real estate business that gives you equal parts cash flow, free time, and flexibility, what I share below may be of interest to you.
I will begin with some core principles to build upon, and then I will provide some specific examples of how this type of business can be started.
Three Basic Principles to Get Started in Real Estate on a Shoestring Budget
As you begin your own real estate business, I’d like to suggest three basic principles that will help you be more successful.
1. Use Smart and Safe Leverage
I have seen plenty of people go out of business in real estate investing, and the common theme among them was unwise use of debt. In other words, they borrowed too much or they borrowed on bad terms.
One way to control this risk is never to borrow money. If you are comfortable with the Dave Ramsey plan of no debt, more power to you. It will take longer to get started, but you can certainly succeed.
But I feel comfortable carefully taking on certain types of debt or leverage (especially with non-traditional or creative financing) when I invest in real estate. Real estate is very cyclical, and borrowing against real estate allows you to get started sooner and during the right cycle so that you can benefit as the markets change.
In order to control the risk of my real estate debt, I follow a list of 8 “good debt” rules that you may want to check out.
If you can safely and intelligently use leverage, you can get into the real estate game on a shoestring while still reaping the benefits down the road.
2. Focus First on Cash Flow
Cash flow is priority #1 as a real estate investor. Equity (net worth) will make you rich long-term, but cash flow will keep you alive to see the long-term.
As an investor who started during 2003 when the real estate market began to rise and then survived through the downtown of 2008-2010, I can tell you that equity was not what kept us afloat.
Cash flow allowed us to pay our bills and eventually to buy up bargains when other investors and banks had to sell cheap.
Warren Buffet and his mentor Benjamin Graham always suggested having a margin of safety when investing. In leveraged real estate the most important margin of safety is the positive cash flow margin between your rental income and your expenses and mortgage payments.
If you build positive cash flow on each rental property you purchase, you will have built a solid foundation upon which to grow.
3. Invest in Locations You Know and Understand
Another Warren Buffett investing principle is to only buy investments that are simple and understandable.
In real estate, this means buying simple properties in locations that you know and understand. I have been fortunate enough to have good, simple investments in my backyard of Clemson, South Carolina. This is a location I study daily and that I know very well because I live here.
If at all possible, I also suggest that you start investing in your own backyard. Real estate is a very local business, and just by living there you will have a huge knowledge advantage over those who do not.
If you think you must invest out-of-town, be sure not to shortcut getting to know and understand your target market. I believe you have to be on the ground, walking the streets, talking to realtors, and getting an intuitive feel for the market. Numbers and statistics will only tell you so much.
So far I have shared general principles. Now I will share specific examples and practical ideas for how to get started with real estate on a shoestring budget.
Case Study #1 – Get Started With Rentals By House Hacking
House hacking is my favorite way to get started in rental real estate on a budget. This is a way to live in your home for free by turning it into a rental property. You can buy a house and rent out spare bedrooms, or you can buy a small multi-unit building and rent out the spare units.
Early in my real estate career I decided that I wanted to own a rental property. We had been fixing and flipping houses for a few years, but I wanted to create steady monthly income that could eventually become a lifestyle business.
Because I was self-employed and did not have a large down payment, getting a permanent loan on an investment rental property would not be easy. But, getting a long-term loan on a primary residence could be done.
So, I found a vacant, foreclosed quadruplex (4-unit) building in my town that needed fixing up. It actually had a chalk line of a body in one room and “Merry Christmas” spray painted across the entire front of the building! It was clearly the worst property on the street, but otherwise the neighborhood was not bad.
I bought it at a good price ($70,000) using a combination of local bank and private financing. I then spent about $45,000 (yes, it was nasty) rehabbing and upgrading the property.
Once I had 3 of the 4 units rented out, I moved into the 4th unit and applied for a refinance. Because the value was now much higher (about $155,000), I was able to borrow $120,000 and pull out 100% of my invested money.
The end result was that I had a mortgage payment of $1,089/month including taxes and insurance, and my rent from the other three units was $1,185. I was getting PAID to live in my new home! Beautiful!
This was not an experiment completely without risk. I had to borrow money and manage a large rehab in order to achieve my end result.
But, I had a lot more flexibility because I had to live somewhere. If I had been $10,000 over budget, it would not have been the end of the world.
The beautiful thing about house hacking is that you get to turn a necessity, your home, into an investment that moves you more quickly towards financial independence.
Once you have outgrown your house hacking venture, perhaps a couple of years down the road, you can then move to another property. You can either keep your old property as a long-term rental (my preference) or sell it to raise capital for another property (after 2 years, it can be tax-free).
Case Study #2 – Master Leases – Why Buy When You Can Rent?
One of the least used methods to get started on a shoestring with a real estate lifestyle business is to rent instead of to buy.
You might think I’ve got it backwards. Investors rent to tenants, not the other way around, right?
But actually, some of the most sophisticated real estate investors choose to rent a property instead of buying. Entire skyscrapers in Manhattan are built without even owning the dirt underneath. The developers simply lease the land over many decades.
Why would anyone use a lease instead of a purchase? Here are a few reasons:
- Leases can control the property’s cash flow, just like owning.
- Leases can allow you to sublease, which means you can profit on the spread between the payment coming in and the payment going out.
- Leases allow you to avoid large down payments.
- Leases can reduce or divide up risk for large capital expenses, like new roofs, heat and air, etc.
- Leases may allow you to benefit from a property where the owner won’t sell or will only sell at an unreasonable price.
- Leases can avoid the risk of having to pay back borrowed money.
If you are just starting your lifestyle real estate business, you could begin by leasing your principal residence or by leasing a rental property.
One of my favorite real estate teachers, John Schaub, rented his principal residence instead of buying for the first 15 years of his investing business. He owned many rental properties, but he rented his residence because he was able to negotiate a favorable, long-term lease payment on a vacant waterfront house.
John’s lease payment was much less than the mortgage payment he would have paid had he bought the same house. And he was able to use the down payment on investments instead of wasting it on his principal residence, which does not produce any income.
I have also leased investment properties from motivated property owners. In the world of income properties, landlords often become burned out and don’t want to deal with tenants or property maintenance.
Instead of cash, you could offer a landlord a fixed master lease, which means you would make him or her one payment for all the units. You would then sublease each individual unit, hopefully at a profit.
This can be a way to control the property with a much smaller down payment than buying it outright.
I created a short video that gives a more detailed explanation of this technique.
Case Study #3 – Credit Partnering – Let Other Investors Borrow the Money
Let’s say you either don’t have the capital or the credit to get started investing. If you know someone who does have the capital and the credit, you can partner with him or her to control the deal.
It basically works like this:
- You find a good deal.
- Your credit partner gets the deal under contract.
- Your credit partner gets a loan and makes a down payment.
- You lease the property back with an option to repurchase it during a set period of time.
- You eventually execute your option and buy the property (or assign the option to someone else for a profit).
The arrangement can be beneficial because your credit partner gets a profitable passive investment that you found and that you manage. You get to control the cash flow and profits on the property with little or no cash down payment and without borrowing any money.
If you’d like a more detailed explanation of this method, check out my YouTube video that diagrams the mechanics of a credit partner deal.
Case Study #4: Become a Bird Dog – Leverage the Knowledge and Money of Others
For the first 12 months after I graduated from college, I became a real estate bird dog. This means I became excellent at finding deals for other investors who had the knowledge and the money.
Becoming a real estate bird dog, at least temporarily, has a number of advantages:
- You can earn a little money while you learn.
- You borrow confidence and experience from others.
- You don’t have to take great risks.
- You can get started quickly.
- You can transform your bird dog business into your own real estate business.
Starting a bird dog business requires three essential ingredients:
- Investor buyer(s) for your deals: I bought for one investor for the first 12 months. I think this is a smart method because you can learn exactly what that buyer wants instead of figuring out criteria for multiple investors. To find this investor, begin networking where other real estate investors hang out. You can start with online sites like biggerpockets.com or at local REIA groups.
- Basic education for deal finding: A big part of the value you will contribute to your investor is your hustle and enthusiasm. But, you still need some basic knowledge of putting real estate deals together. I recommend focusing upon four core areas:
- A Method to Get Paid: The simplest way to get paid is by obtaining a real estate license in your state. This will require you to take mandatory education classes and to hang your license underneath an established broker. Both of these can be very helpful in the big picture because you will learn the basics of contracts, paperwork, and real estate laws in your state. After you get your license, you’ll then become a buyer’s agent for your investor, most likely on a deal-by-deal basis. This means that every time your investor purchases a property you found, you’ll get paid a set commission. Your broker will keep part, and you’ll keep the rest.
One interesting part of starting as a bird dog is that the evolution to doing deals on your own is not difficult. You will already know how to put deals together, so the next step is simply to find a source of funding (perhaps from your investor or from a bank) and then buy the next deals yourself.
Just Get Started
Like anything else worthwhile, creating a business that will eventually provide the income and the flexibility you need will not happen over night.
Whether you are on a shoestring budget or have a pile of cash, just get started. The intent of this article was to give you ideas and strategies that will help you to get in motion.
Unlike launching a big corporation, your small, nimble, lifestyle business can move quickly. You don’t need big offices, venture capital, a 50-page business plans, or a team of employees.
You can get started tomorrow with a car, a full tank of gas, a smart phone, and google maps.
Do your homework and make sure you have basic education on this subject. But then quickly use what you know and get in motion.
Ride your neighborhoods.
Make your first offer.
Talk to your first money partner.
Network with other entrepreneurs.
The real education of entrepreneurship comes from the feedback you get after taking action. This article and any other education you receive is all theory until you do it yourself.
As you move forward I can’t promise that the road to a successful real estate lifestyle business won’t be bumpy, but I can promise you the end result is worth it.
Autonomy, flexibility, and freedom are worth it.
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