A year ago I sold all of my investments in the stock market. I’d exceeded 15% returns in less than a year, but that didn’t impact my decision to sell. The more I learned about the stock market, the more it scared me. It’s incredibly difficult (some would say impossible) for the average investor to beat the market on a consistent basis, especially if you account for risk.

The stock market has two main flaws:

  1. Returns are out of your control. Even if you invest in a winning company, a systemic crisis could drive the whole market down.
  2. Decisions are out of your control. A company can make a decision you don’t agree with that negatively impacts their stock price, and there is nothing you can do to prevent that. Once something goes wrong you can sell for a loss or hope that the price comes back up, but there is no way to actually impact the outcome.

Even though I’d done well picking stocks, I realized that I was taking on significant risks investing in the market, and I didn’t have good system in place to mitigate them.

Then I discovered the world of real estate investing. The more I researched, the more I was hooked. I decided to pursue a strategy in multi family apartments in the midwest, specifically in my hometown of Saint Louis, Missouri. This strategy had everything I was looking for.

Predictable Returns

While some areas of the country are experiencing a massive increase in rent prices, St. Louis has remained constant, in both price and vacancy rate. During the 2007 financial crisis, the average rent in St. Louis only went down by $12, and the vacancy rate actually decreased by .91%.

With a predictable source of rental income, it’s easy to model an investment and project returns over time.

A recent deal we’re looking at

As long as you’re knowledgeable about the condition of your investments, and the costs of maintenance, repairs, taxes, insurance, vacancy, and property management, you can accurately predict how much you should be putting into an escrow account every month. You can find this information from contractors or your property manager, but I strongly recommend taking the time to learn yourself. When my business partner and I were rehabbing our first apartment, we made a point to do almost everything ourselves so we could learn exactly how much work it took, and how much materials cost. It took us 2 months longer than it should have if we hired a professional, and our work is nowhere close to quality, but I wouldn’t trade that experience for the world. We’re now able to walk into any building, and quickly create a rough estimate of costs and a timeline for any necessary repairs.

Our second kitchen remodel

You Can Hustle

Anyone who knows me would probably describe me as a hustler. Real estate is the ultimate sport for hustlers to get ahead. Every aspect of real estate is a game that’s up for negotiation. There are some properties listed for sale on the MLS or Zillow, but a hustler knows that they can call other landlords or frustrated owners and buy their properties before they hit the market.

Once you find a property you like, it’s time to make an offer. When I see a property listed for sale, I view the asking price as a suggestion, not a number that actually matters. My partner and I base our offers off of our financial model, so we’re only paying a price that makes sense. While this strategy takes time, and your real estate agent will probably begin to resent you for making them write 100s of offers, it works. Eventually you will find a seller willing to meet your price, and that’s when the fun really starts.

Once you’re under contract, you can negotiate on anything and everything. You can change the price, ask for credits, demand repairs, or even change the terms of the offer. A good negotiator can sometimes convince a seller to finance some of your down payment, allowing you to purchase an expensive property for a fraction of the cost. Negotiating with sellers deserves it’s own post, but know that when it comes to seller concessions — if you don’t ask, you’ll never know.

Protection From Downside Risk

A couple days ago a friend of mine asked me if I’m worried about a correction in the real estate market, and how that would impact my portfolio. One of the best facets about investing in multifamily apartments, is that a younger investor can answer, “I don’t care.” If the market has a downturn and cap rates go up again, you might not be able to exit your investment for what you paid, but as long as you don’t sell you can continue to collect rent and receive a great return. You can simply wait until the market goes up again, and sell at the appropriate time. This is especially true for investments with a 30 year fixed mortgage. If you buy a property correctly, you will never have to sell unless you want to. If you get into commercial properties with adjustable rates and balloon payments, it’s crucial that you know exactly what terms you’re accepting, and that your investment is able to handle a substantial increase in interest rates.

Control

For the most part, the success of an investment depends on your ability to execute and build systems. Through every step of the process you have control over the outcome. I choose my purchase price, ask for seller concessions, manage renovations, choose a property manager, rent prices, and approve every tenant that moves into one of my buildings. If something goes wrong, I can look in the mirror and see the guilty party.

If a situation comes up where no one has an answer, you can step in and save the day. On our first rehab we hired a bad contractor to drill through 12 inches of concrete floor to run ducts for an HVAC system. When he failed we received incredibly high quotes from professional concrete cutters that would put our rehab $5,000 over budget. My partner and I did some research, called an expert, rented the largest hammer drill that Home Depot sells, and did the work ourselves. It was backbreaking work, but we were able to save $5,000 by getting our hands dirty. How can you do that in the stock market?

Next Steps

If you’ve never thought of investing in real estate before, I hope this post sparked your curiosity. If you’re a younger investor looking to make your first purchase, I strongly recommend that you house hack to purchase your first property for as little as 3.5% down.

If you’re looking to buy or sell a home, my startup, Clever Real Estate, can connect you with a local, investor friendly agent to help you buy your first property with a commission rebate. Clever also let’s you list your home for a flat fee of $3,000 with a full service agent. If your home is worth more than $350,000, a 1% fee is charged.

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Feel free to contact me at Ben@MoveWithClever.com