In Fall 2006 I was flipping through “The Automatic Millionaire Homeowner” by David Bach and it forced me to re-think my perspective on real estate as an investment vehicle.
Previously I’d always viewed real estate as intensely speculative. You hear about the areas where properties go up in value 36% in a year, but when you view it as a whole, I was very unimpressed with the returns (I don’t buy 11% average returns, I suspect 3-4% is more realistic). Bach gives a list of the 5 ways you get income from real estate, and taken as a whole it seemed a lot more appealing. The one that really convinced me was the idea of leverage. If you can get a property that’s cash-flow positive (makes money every month after all expenses are paid), the apprication is basically increased the lower your downpayment.
E.g.: You buy a house that’s worth $100,000. You make a downpayment of $10,000 and the income equals the expenses. After a year if it goes up in value by 3% and you sell it (for $103,000), you now have $3000 more then you started with, a 30% return.
Obviously this is an overly simplistic example (in real life the transaction fees to buy and sell would cost far more than the $3,000). This concept is the core of “other people’s money” that the get-rich-quick low-lifes love to chant about. Leverage is a very powerful concept, and although it can be dangerous, real estate is one of the easiest ways for normal people to use it (trading on margin would be the other I guess).
My plan was to start small. Instead of getting a 93 unit building, I decided to get a condo near the Subway line. I would get the cheapest place I could find, rent it out if I could, and live there myself if I couldn’t. It seemed like the best way to “hedge my bets” if landlording didn’t work out for me (be willing to live there myself so I wouldn’t have to turn around and start trying to sell a couple of months after buying. I realized from a strictly dollars-and-cents perspective, condos aren’t the best investment, but they have a lower price tag, and it seemed like a good way to learn (with training wheels firmly attached).
Luckily I had a friend who owned multiple buildings (from Condo townhouses up to a recently aquired 8-Plex) and he was a great source of information. I also spent tons of time in Chapters/Indigo reading the Real Estate Investing books (for free).
By chance, my girlfriend got a notice under her door for a free seminar for first time buyers (clearly a sales presentation for a Real Estate Agent). I went to that, connected with an agent, and started my house hunt…
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