Building Personal Real Estate Portfolio

If your plan is to go off on your own eventually or build your own portfolio, then from a learning perspective, you ideally want to work at a shop that works on projects/investments as similar to the ones you want to pursue in terms of size/property type etc...I also worked for a smaller development shop prior to the large developer and the work/deals I was doing was much more similar to my family's business, so not only was I able to learn a lot, but I was able to apply some of the same exact investment strategies that I learned from that smaller developer to my family's business. I also built very important relationships with the same architects/zoning attorneys/engineers/banks that the smaller developer uses and now I use them for my projects. The downside to working for a smaller developer generally is less money.

As for the larger developer, I was bored out of my mind and absolutely fucking hated it because the work I was doing was mind-numbing, but I also didn't like the institutional environment. There were very specific procedures of how everything gets done. For example EVERY decision requires multiple levels of approvals, so a lot of my job was writing approval emails to the dev manager, then the dev manager would provide comments and then once I made the edits I would send it to the VP and then the VP would have comments and finally when I made those edits, I would then send it to the managing director. I also hated the level of detail orientation that was expected because it was to a point that it didn't move the needle, but I would spend hours trying to achieve perfection. For example, when building a financial model for a new development, our goal was to build to a 5.50% ROC, but the deal was only coming out to a 4.70% because of the city's affordable housing requirement. We were so fucking far off the mark that unless market rents increased significantly, there was no way we were going to come close to 5.5% (we already owned the land, so a lower acquisition price was not an option), but my dev manager would dig so deep into the model such as wanting me to check every single soft cost line item of the budget and make sure that they are accurate, but in the grand scheme of things these soft cost items were very small dollars...i'm talking about tens of thousands of dollars on a ~$250mm TPC...knocking off $10k here and there was not going to fucking do anything to move the 4.70% ROC. It was clear as day that the affordable housing component is what is killing this project, but my dev manager had me spend hours combing through the budget. This type of work is just not relevant to the small projects you will do on your own. The "model" that I literally use for all my family's projects is Revenue - Cost = Profit or I just calculate cash-on-cash return for rentals. I don't need a complicated model for a triplex investment. There are a plethora of examples I can give of what I do on the day to day with my family vs at an institutional shop and the skillset/type of work is so different I don't even know where to begin. At a large developer, you are an office worker. You don't even need to go to the site to do your job and there is an entire team for the project. On your own smaller projects, you have to do everything and will have to go to the property multiple times to do various things. You may also need to get down and dirty at some points and do some work yourself.

In my experience at the large developer, I realized very quickly that I was just being trained to be a very good employee and realized that I did not want to be a dev manager there. My perspective of the dev managers was that they are very good at their job and doing their day to day. But none of them own property on their own (other than maybe their own home if that). If you were to ask any of them to develop an investment thesis/strategy on how to make money on their own in real estate they wouldn't have any idea how to because that is simply not their training/background...tbh even the VP would be clueless.

[EDIT] However, you may want to consider moving to a larger shop eventually because it pays better. Once you feel like you have learned enough at the smaller shop and you eventually want to invest in real estate on your own, then your goal is really maximizing your income and savings (although maybe you get promoted faster at the smaller dev shop and maximize income that way) or you could raise some money maybe from friends and family

IcedxTaro

Would it make sense to purchase out of the state for small units such as du/tri/fourplexes or it is better to purchase in the current state one resides in?

I know there are lots of people on bigger pockets posting about all their out of state purchases, but it honestly doesn't make a lot of sense or sound very appealing to me.

I purchase in my immediate market because I know the market well, I've made relationships with a lot of brokers, contractors, lawyers, and other owners, and I can easily tour deals in person, tour prospective tenants + meet them in person (great for vetting who's going to be a problem), oversee renovations, make simple repairs myself (thanks youtube!), etc..  I feel a lot more comfortable doing this and it definitely wouldn't be possible to self manage / self GC the general operations and capex out of state.   

This isn't an option for everybody if they live in a very HCOL market and/or one where they don't have a positive outlook on the RE market, then yes you'd be better off buying long distance (or honestly just not buying at all, put that money in a REIT index fund instead, or find a private fund that will let you invest). 

If you can find a 3rd party PM you trust to outsource management it would work, but you'll be paying them ~10%+ of revenue and there's no way they'd give it the care and attention you would yourself.  I'm also not sure how you'd source attractive deals long distance unless you have a local contact to partner with, or if you're willing to travel long distance to do tours.   At this point I just don't see the appeal vs. buying into a fund.  A lot of the potential deals I look at and up being a waste of time and if I spent all day traveling to see them I'd give up pretty fast.

Similar to Ricky I, personally, would only ever invest within my state (and honestly probably only within a 1-2hr drive radius) because I know my market/sub-markets, I have local contacts, and honestly, if an emergency were to happen at one of my properties, I would not want to drive 4hrs to get there; however, if you are in a HCOL market I do see the appeal of investing out of state in a more "growth market." I have a friend who lives in the Northeast, but bought a condo in Miami for $130k in 2019 and recently sold it for $400k. He also has 1 or 2 more out of state properties that are pretty hands off. I think he is friendly with the neighbors or something and they help him manage it. So for someone who doesn't have the capital to invest within your state, I wouldn't take out of state investments completely off the table, you just need to factor in the logistical issues.

I do disagree with Ricky on investing into a fund vs directly into real estate. In my opinion, one of the major benefits/advantages investing into real estate directly is leverage. In real estate, getting loans between 80%-95% LTV is normal. I'm not an investing guru, but I do not believe there is any other asset out there that allows for this type of leverage, especially to the average, non-accredited investor. I don't really know much about REIT investing, but I don't think you can leverage anywhere near 80%-95% LTV. From a quick google search, a jumbo loan is $726,000, which means if you get a 95% mortgage, you can buy a $765,000 property with less than $40k...where else can you do that? If your property increases by 10% to $840,000, after paying 5% to the broker, you profit $34k...that's almost a 100% return. And it is not unrealistic for real estate to increase by 10% or more in 1 year, depending on your market. There are also many tax benefits such as claiming mortgage interest deductions, depreciation if it is an investment property, claiming capex if you renovate etc... Now of course in exchange for these advantages, real estate is more hands on and is not necessarily a passive investment, but it is possible to find the right property that can support property management and still be cash flow positive or at least neutral and reap the benefits of appreciation and ridiculous leverage.

[EDIT] Another comment I wanted to add is the advantage of asymmetrical information in real estate. When you buy shares of a REIT, the same information is known to everyone, so there is no information asymmetry. You can't really "beat the market." However, in real estate, information is incredibly asymmetrical, which means by doing your homework/research, you can gain a leg up on others. I've done deals that I bought, in my opinion well below market, either because i knew something others didn't, had the right contacts, or was just the first offer that came in and the seller just wanted to sell the property quickly. In other words, there is arbitrage opportunities in directly investing in real estate

In terms of actually starting after having enough capital, would you suggest just diving in and learning along the way with a first property or would you recommend / did you do something to learn more ahead of starting?

I knew some "best practices" ahead of time from working in RE like how to underwrite and common negotiable aspects of a PSA to strengthen a bid, how to set up the LLC, how to collect multiple bids for capex and budget for them / how to determine what capex is most accretive and/or a priority, how to manage the cash balance and reserves / when to distribute, and how to do monthly bookkeeping and have a concise accurate summary for taxes... but as I mentioned before, none of this is super complicated and could be learned by somebody smart with no RE background in like a day (your parents can teach you or you can learn from another mentor).

Everything else is best learned by doing.  You'll figure out what kinds of tenants you like, how to market to them, and how you like to deal with them and what additional terms you want to put in writing in the lease if there's any disagreement between who's responsible for what in your first go around.  You'll figure out your municipality requires an annual fee/inspection to have a landlord license or a random tax that has to be filed monthly or an extremely archaic website where you have to spend hours trying to figure out how to register your entity or pay a bill.  You'll figure out which contractors offer great pricing for passable work, or are expensive and do a great job (and when its worth using which), and which ones are just scammers who ghost you after you pay a deposit.  I could go on and on, but there are a million little things you just won't be able to prepare for until you dive and in learn as you go. 

Probably the least risky way to learn on your first property is to just buy a property for yourself to live in and maybe some roommates if you want. You have to live somewhere anyways and over time you'll probably gain some property management/handyman skills just by nature of things breaking in your own house. Also if you're buying for yourself, you can take advantage of first time home buyer programs with only 3%-5% down. Also for your primary residence, gains up to $250k are free of capital gains tax if you live there for at least 2 years.

ArizonaTe

Quick side question/hypothetical. You max out the number of loans you get from a bank at around 10. Is it the same with refinancing properties ?

If I have a private lender that has unlimited money can I get 100k from him buy the property for 75k put 25k into then it would appraise for 155k.

Now I can pay back the lender the 100k plus profits/fees once I refinance.

1. My question is how many times can you refinance properties ? Is there a limit like on loans ?

2. Could I do this in a infinite loop as long as the private lender was around ?

I can't speak to the lenders you're thinking of using, I would schedule intro calls with them directly and ask.

Whether you are financing a property for the first time or refinancing it for the 10th time doesn't matter. The bank is going to stop lending to you based on the dollar amount of loans they have with you, not the number of loans or refinances. All a refinance is is getting a new loan to take out the previous one so effectively there is still only 1 loan.

As for your private lender scenario, in theory this should work, but in practice lenders might be apprehensive about this. In my experience, you need to find an aggressive bank to do this strategy. I've probably reach out to over 30 banks regarding financing properties and I'd say there are only 2 banks that I would feel confident that would back me with the strategy you are talking about (unsurprisingly these are the only 2 banks that I use because they give me the most aggressive financing). In my experience, banks are willing to finance 75%-80% on new acquisitions, but only 65%-75% on refinances. The reason for this is to prevent the type of strategy you are proposing. Most banks aren't very fond of lending to borrowers with no skin in the game. With the strategy you are describing, you would ideally want to build a relationship with the bank first and once you've proven that you are a good borrower, then they will give you more leeway in terms of financing. I've done a couple deals with the 2 banks that I use and now they will pretty much finance anything I present to them and give me very favorable terms (lower than market interest rate, Interest-only period, 30 year amortization, favorable pre-payment penalty, etc..) because they trust me and want to do more business with me. They will reach out to me and ask me if there is anything they can finance.

Regarding your 2 questions:

1.) There is no limit on the number of refinances. I've seen the same propery refinanced 3 or 4 times over 10 years because the value kept going up, so the owner used it like an ATM. There is a limit on the size of loan though. If the original loan was $10mm and now the property is worth $100mm and you are seeking to refi $80mm...the bank will likely have an issue with that.

2.) Yes you could do this in infinite loop if you have enough aggressive banks, strong relationships with them, and if you can find deals that are actually that good. But in my experience, those types of deals are a diamond in the rough

I'm not in the multi family space unfortunately and am located in Canada. Here I believe you can get about 5-6 loans or so before having to go to an alternative lender (non-Tier 1 bank). Not sure what the strategy would be in the US.

It is really a big challenge that at least I personally have overlooked.

At the end of the day I'm finding that you either 1) find a banger of a deal or b) you either go with an alternative lender and take a lower return to secure the asset until you can refinance out

Either way, very challenging and something I wish I had thought of earlier.

Ideally this is where you see doctors, dentists etc. grow a nice little commercial portfolio using their own capital as the financial wherewithal is there to guarantee loans. The knowledge is great in RE, but you can gain the knowledge even if you're not a real estate professional. 

2025.  Easily.  The mistake the FED made in the 70s was to cut rates as soon as inflation dropped and the rebound inflation cost Carter his re-election.  Think about why: prices have been seen double digit increases for years, rates went up a few points and prices only slowed their increase…what conclusion will people draw if there’s a rate cut?  That an asset which is 20-50% overvalued is now supposed to continue its upward march?  Because that’s exactly what people surmised after the late 70s rate cut and inflation came roaring back, then requiring extreme cuts in the early Reagan years.  The extreme fetishization of Reagan that to me looks like civilization level Stockholm syndrome during that period is another topic but you can see what financial scenario is clearly NOT desired.  Who knows, maybe Reagan was the only guy who could make the public feel good about getting fucked so hard.  But anyway, who cares.  Valuations are stretched far beyond historical norms and everyone knows we’re due for a correction.  Maybe not a crash but definitely price reductions across the board. They may not like it…but they definitely know it.

Or think of it in simpler terms: why would the FED give a shit what stocks are doing?  They don't even include stock prices in inflation calculations despite there being a straight line between low rates and high stock prices...we learn this in econ 101.  If in their view ALL prices everywhere are too high, and they are, why would anyone think they’re going to prop them up when inflation is the undoing of entire civilizations?  The FED knew what it was doing when they lowered rates and puffed up the balance sheet.  And they definitely need some room to maneuver when commercial RE loans all start to reset 12-18 months from now….if rates are low and the balance sheet is high they have no tools.  This is the conversation they don’t want to have publicly but certainly are having amongst themselves every day after they wake up in a cold sweat thinking about commercial office space crashing because all the regional lenders are too weakened to have any hope of financing the sector

Or, and this is my inner cynic talking, recognize Powell is a lifelong Republican Wall Street type that would love nothing more than to give Biden a black eye by “fixing” inflation via making people too poor to pay high prices (i.e. recession, just by another name).  Side note…Biden is already expecting this which is why he’s so deferential to the FED publicly…so he can blame them later.  There’s a multitude of other policy options the federal government could pursue but due to congressional gridlock won’t….kind of like how during covid the govt could have organized rapid mass emergency mask building programs but settled for “everyone stay home” i.e. the dumbest, laziest possible option because Congress can’t get shit done.  (WHY is another reason but frankly it doesn’t help that republicans WANT government to fail so they can justify killing it)

Powell knew perfectly well what would happen if he lowered rates too long but did it anyway.  One wonders how much his personal portfolio benefitted or if he really couldn’t see beyond the end of his own nose.  Now he’s going to try to find redemption in a recession.

Personally, I foresee the RE buying opportunity of a lifetime coming up and I’ve been waiting to pick up rentals and retire for some years now.  High rates, mass unemployment, and a credit crunch will RE drive prices down….buy in and then you can play the bonus round and refinance to lower rates when the fed finally does see economic growth as a bigger priority than inflation concerns (2025 to 2026 is my guess).  And note I’m saying economic growth not gdp or stock price inflation….real increase in the exchange of goods and improvements in average peoples' lives.  The era of paper money wealth being the gold standard are behind us.  For now.  In a decade or two humanity will make the same dumb fucking mistakes all over again.  Because people are stupid, selfish, and lazy.  INCLUDING THE CAPITALISTS.
 

But if I was so smart I’d already be retired so take my point of view with a grain of salt.

Curious as to how you found the multifamily deals and roughly when that was. I figured it would be hard to get in with the brokers without prior experience.

In my experience in the small-cap space, being a first-time or new buyer isn't really a hinderance.  A lot of sellers and brokers just want a good price and tight closing timeline and don't get into the whole buyer vetting process that happens at a more institutional level.  Most people in this space are not very sophisticated and it often feels more like buying a house than some complex investment (no broker/seller has ever asked about my underwriting or capital stack or track record etc.).

Best way to meet brokers is to go tour listings.  I've toured a bunch of deals I knew going in weren't realistically a good fit just so I could chat with the broker and build a relationship.  Now many of them text me their listings immediately before they even go to market.