Good Credit, Great Income -- Now What?
Hello all:
First, I must say that everyone -- and I do mean everyone -- on this site goes out of their way to help others succeed in their own endevours. Just thought you should know, your generosity with your time and knowledge it is greatly and warmly appreciated.
Second, here's my question. I am a newbie RE investor, and, after reviewing all of the ways of REI, I think I want to specialize in commercial multi-family.
To achieve this goal, I have been reading every book under the sun, and have signed up for David Lindahl's Boot Camp in January, 2004 (Everyone on this site raves about his boot camp).
Now -- the two things I have going for me are Great Credit and Good income. My credt score is a 780 and I earn in about $240,000 a year as a patent attorney in New York City. Unfortunately, I have been historically bad at saving money (hehe). My question is, what is the best way for me to leverage my good credit and income to my advantage in the multi-family market? Is there a particular strategy that may be more accessible to me as compared to other investors? Will my good credit score and income give me a better chance at receiving a higher % financing on a deal?
Remember, like everyone on this site, my goal is to use as little of my own money as possible, thereby increasing the return on my investment. Will my good credit and income allow me to better achieve this goal? If so, how?
-Bryan
Good scores will give you better access to money, better rates and the ability to put less down. Good luck! I wish my investment clients were doing as well as you!
Bryan,
You are a perfect candidate for a passive investor partner. The truth of the matter is that spending your time chasing real estate deals is probably not cost effective. You should work on building billable hours.
That said, you should be investing in real estate-- with a partner who does the leg-work, chases the deals and oversees the management and sale of the properties.
I have a partner who is in a very similar situtation. He's a highly paid consultant with IBM. Even if he did really good deals on his own he'd take a pay cut to be in the real estate business. On the other hand we use his excellent credit to buy buildings where I use my real estate expertise (developed over 20 years in the business) to add value. We both do better than either would do seperately.
We've done no-money down deals where his credit score and financial statement funded the whole transaction.
The other thing that makes this kind of investing a good thing for you is that you don't get to see the money, therefore your historic "bad savings" habits don't come into play. Put a LLC or sub-s together and let the money stay in that company, roll your profits into new deals. Now your "team" has not only your excellent credit but also cash to work with.
Mark
CommercialKing -
You said something in your response that is somewhat concerning to me and that is he should not focus on RE but rather attempt to increase billable hours..
I am in a similar situation in that i have a good income (230k-265k) and am looking to become a full-time investor for the long-term, time-freedom aspects. I do, however, expect to be able to replace and exceed my current annual income AND build net worth... Your comment makes me think that goal is either unrealistic or, at least, extremely difficult in that only a very rare few actually attain it??
I guess my question comes down to.. Do you feel a 250k/year income is a realistic goal in apartment investing? Also, if it is possible, would you say it's possible in 5-7 years?
shaunk
$250,000 a year is very do-able in real estate. But lets face it one of the things you are attempting to get in the real estate investment biz is "time-freedom aspects". If you are doing RE with property that requres management your time-freedom just went out the window. True hands-off managment requires a partner who is hands-on.
So lets look at this another way. $250,000 is a 10% roi on $2.5 million of RE equity. Unless you have $2.5 million laying around someplace you're going to make your $250,000 either by working hard (chasing deals, doing rehabs, etc.) or by investing really smart (i.e. buying something on a 13% cap and borrowing the money at 8%) or some combination thereof.
Now neither of those are impossible but lets look at working hard first. Assuming that you're not working 100 hours a week, you are making over $100 per hour now. It will take some period of time for you to get efficient enough at real estate to match that hourly rate. I'm not saying it cannot be done but the guys I know who are doing that as a result of their labor are working pretty sophisticated deals which took them some period of time to figure out how to do. Now Bryan has already paid the dues to make that kinda money once (law school). Why not continue to reap those benifits and develop another stream of income?
As to investing smart, this, to, is always a possiblity but ask around here about how easy it is to find 12 cap deals and you will suddenly realize that you're going to spend a lot of time finding these investments. In the long run you have to ask whether that time is better spent chasing deals or generating more of that $100 per hour salary? Maybe even working your way up to a $200 per hour salary.
My point is that it is possible to get the best of both worlds. Keep the big salary. Find a partner who chases the deals, uses your income/credit to get the leverage that makes those high rates of return happen and manages the property. A 12 cap (or even higher) is not that hard to achieve if you start with vacant land and/or vacant buildings and do development deals to get there. Find a developer who will work with your financial goals and structure deals around what you want to accomplish. In this way you can build your $250,000/year passive income in 5 to 7 years then decide whether you want to get more involved in the day to day.
Now all that advice is different if you hate the job. But I saw nothing in Bryan's post to say that he disliked the patent law business and most of the patent lawyers I know seem pretty happy in their work. Seems he was looking for a way mostly to force himself to save some part of the salary. That makes him a perfect passive investor. He can be patient while the equity grows for a few years, continue to make pretty good money and spend most of it, concentrate on his carreer, let the partner worry about the real estate.
Most of the real esate guru advice is written for people in a very different situation. Thats why so much of it is about no money down and how to borrow with bad credit. This information is targeted to people for whom a $250,000 year would be a big boost in income. So I don't think it necessarily applies to people in the other situation. When you are making $40,000 or $50,000 per year picking up lets say $50 per hour doing something else makes a lot of sense. But if you are already billing at $150 per hour then for some period of time you are probably going to take a cut in pay to work the real estate business.
Again, that doesn't mean you should sit on the sidelines, only that you should be smart about how you do your real estate investing.
CommercialKing
Thanks very much for your response.. I appreciate you taking the time to write it all out..
I wasn't questioning your recommendation, I was really just trying to understand what can truly be done..
I think the root of my question stemmed from an uncertaintity about the true potential of this type of opportunity..i.e.. All the "gurus" continue to talk about making TONS of money.. My cynical side says.. "Oh yeah, well if you ARE making all that money, why are you travelling the country speaking instead of travelling the world?".. Don't get me wrong, I understand the "math" of how you make money in this business, I have just been curious as to how much money people are truly making.. A LOT of money means different things to different people..
Thanks again for taking the time
In a nutshell, higher credit/more credit increases your financing flexibility. Combined with your high income, you will be able to leverage better (think small down payment, or zero down payment, or even overfinanced) thus improving your ROI.
However....
Don't forget that increased leverage not only increases your risk factor but narrows the scope of deals that are profitable. IE, there's a lot less stuff that works on 105 leverage than at 70.
As for working versus investing, I would look at it this way. Your learning curve on investment in real estate will be very long (lifetime). You'll make alot of mistakes, and it will consume alot of your time.
Creating passive income greater than your salary is more than possible, however it won't happen immediately. With your already high income level (150ish after tax), it will take much longer to exceed than someone who earns 20k given the same size of deals. Essentially, in order to meet/surpass your current salary you'll need to risk more money or put more capital (yours or someone else's) into play.
That being said, in the long run, you'll still outrun your base salary assuming you learn your lessons well and expand your asset/revenue base. More property = more earnings.
That being said, I would say your biggest risk is getting too far ahead of yourself. Don't risk too much capital initially (since you already hopefully have a substantial amount to lose), and work your learning curve carefully.
As for partnering, my personal view is avoid partnering on the management side unless you know the person VERY well. Also, don't partner until you know what you're dealing with. A savvy partner can fleece you blind without you even noticing if you can't read the P&L's and don't realize the real picture behind the expenses. Learn it yourself first, then once you think you understand it competently, then look at hiring someone to do it if you still so desire.
As for your personal spending habits, I would say that's a serious personal risk. Without good money management skills, even the best properties can fail.
Galahad