Make Money With Real Estate: An Introduction
If you’ve read all my letters, you have a pretty firm grasp on the topic of personal finance.
As we approach the end of the series, my goal is to point those of you asking “what’s next?” in the right direction.
Hence today’s letter.
Why Talk About Real Estate?
If you venture deep enough down the “early retirement community” rabbit hole, you’ll find most people got rich in one of two ways: Entrepreneurship or Real Estate.
Not that there’s no overlap between the two (buying and selling property can be categorized as entrepreneurial).
But when I talk about entrepreneurship, I usually refer to startups (specifically, software startups).
Since my next 4 letters will cover startups, this letter is for those of you who lean towards real estate.
Sidenote: Besides, I’m sure most of us want to buy a house one day, right? So in a way, this letter is still valuable to a nice lil’ majority.
This letter is divided into 2 parts: principles for buying, and principles for renting (to a tenant).
I won’t go into the “should you rent or buy” debacle. My philosophy is simple: if you have to ask, you should probably rent.
This letter focuses more on principles that will help you make money with real estate.
Principles For Buying
Make no mistake, buying a house is a business transaction.
Remember when I told you to ignore your monkey mind when investing? You do remember.
Well, the same goes for buying houses. Avoid emotional decisions.
This means that whenever your monkey mind says something like “sure the price is a bit above my paycheck, but look at this view!” you ignore that sucker.
You’re buying some land with a bunch of construction materials assembled on top of it. Remember that.
Sidenote: It helps to write down in detail what you’re looking for. If any one criteria is missing, you pass (this is what some of the world’s best investors do before purchasing stocks… It helps them avoid emotional decisions). Don’t worry, better opportunities will come your way.
The most obvious advice here is to buy when the economy is down (yup, this means that post 2008 was the best time to buy houses in the US).
I don’t want to talk about “whether or not now is a good time to buy,” because that would be as silly as trying to tell you which stocks are hot right now.
However, what I can do is give some tips that will help you get a house for cheaper in any market. Here they are:
- Look for a house that’s been on the market for at least 3 weeks.
- Do your research! (this is a great time to use that list we talked about) Does this house meet all your criteria? All of it? Are you sure? If so…
- Tell the seller you will buy the house today if she accepts your price.
If the house has been on the market for a few weeks, the seller really wants to sell.
By offering to buy the same day, you’ll get your ideal price (the seller would rather have a lower amount that’s guaranteed instead of a higher offer that may never come).
Don’t worry about deals all around the US. I did this for some time and realized how silly it was.
Why? Because even if I found a house that fit all my criteria, it wouldn’t be very useful to know I have to fly all the way to Wisconsin to buy it (let alone maintain it!).
So, make sure you stay local.
Watch every listing and sale in a neighborhood that you like (use a tool like Zillow).
I say “a neighborhood that you like” because you obviously want to buy houses where you feel safe.
It’s also good to aim for the best neighborhood you can afford. Those houses will make you more money over time.
Pro tip: Schools really affect a neighborhood’s value. Often, tenants and buyers want to live near the best school district they can. So try to aim for a house near the most desirable school.
4. Learn To Recognize A Good Deal
A good deal is one that is likeliest to make you money.
Here are a few tips to recognize a good deal:
- If a house costs more than 20 times the annual rent, it’s probably too expensive.
- The majority of buyers and renters prefer a 3-bedroom, 2-bathroom house. This will increase your demand.
- Look for a house with a garage or basement (people looooove their storage space).
- Small yards will attract more families with children and pets.
- Stay away from busy streets or corner lots (those houses sell less on average).
Principles For Renting
1. Look For Long-Term Tenants
When asking possible tenants how long do they plan to stay in the house, most will say “one or two years.”
The correct answer is forever (or at least three years).
Tenants who stay for two years or less will cost you more time and money. You want people who will reliably stay for a long time (hence why I talked about looking for houses near a school).
Also, this is why I mentioned finding a house with a garage or basement. It will attract people who own a bunch of stuff (not everyone is a minimalist like you and I). The more stuff people own, the less likely they are to move. Too much work.
2. Look For Ethical Tenants
This means you want to make sure that a) tenants won’t ruin your house and b) tenants will pay on time.
A good way to ensure tenants respect your house is to know your neighbors. Introduce yourself to them, give them your number, and let them know that if a tenant is making too much noise at 1am, neighbors can call you and you’ll take care of it.
Then, tell the tenants you know all the neighbors and they keep an eye on the house for you (that way, tenants will think twice before sneaking in some roommates).
Also, make sure the tenant will pay on time. How? By paying them to manage themselves. Give them some discount on the rent if they pay on time.
Pro tip: You can also use this system to make sure tenants maintain the house. How? Tell the tenant that if you have to call someone to fix something, the tenant has to pay more rent. In order to avoid higher rent, they’re incentivized to handle things themselves (thus making your life easier). Win-win.
This letter barely scratches the surface of the real estate universe. But it gives you a good, general idea of what it’s like.
You want to dig deeper you say? I highly recommend saying hi to the good people at Adventuring Along. They went from $0 to retired in 5 years. How? Real estate! Listen to their interview with the Mad Fientist here.
Sidenote: In fact, Joe Olson from Adventuring Along is who taught me the magic of listening to podcasts/ audiobooks/ YouTube videos at 2X speed. Changed my life. Cheers Joe!
Want to dig even deeper? Read John Schaub’s “Building Wealth One House At A Time.” It’s a good starting place to learn the tried and true real estate methods that work in any market condition.
Oh wow, you still want more? Ok then, this forum has an amazing list of books that’ll turn you into a real estate pro.
However, (as usual) the best teacher is experience. Commit to buying a house (when you can afford one!) and rent it out. You’ll learn far more that way than with any book.
Then, you can follow John Schaub’s strategy:
“Buy one investment house a year for 10 years, and then buy the house of your dreams for cash.” — John Schaub
And that’s it for today!
Today, we learned:
- The two best ways to get rich are entrepreneurship or real estate.
- What principles you need to know before buying a house.
- What principles you need to know before renting out a house.
- What are the next steps you need to take if you want to further your real estate education.
See you next week (follow the series here to be notified).
P.S.: Speaking of houses, am I the only one who loves Kasita?? Would totally get one.
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Since I write about finance, legal jargon is obligatory (because the guys in suits made me). Before following any of my advice, read this disclaimer.