Just a quick summary about myself. I am a 28-year-old lawyer, living in Orange County, California, and after reading Rich Dad Poor Dad, realized I would like to start building assets before buying a new TV etc. So far, I have read 8-9 books on real estate investing, listened to the free Rich Dad webinars, and had a blast reading all of the investing articles on this website. So, onto the questions.
I attended a Rich Dad free webinar where the host used a formula for making an offer. He calculated his maximum allowable offer by multiplying the yearly gross rents by 7, then adding or subtracting 10% based on the condition of the property to allow for repairs.
(Yearly Gross Rents) *7 +/-10% = Maximum Allowable Offer
This seems like a great formula because you are using the income of the property as the basis for your offer. Unfortunately, when I looked at Loopnet and Realtor this formula has my maximum allowable offer as approximately 1/2 - 2/3 of the list price. Is this normal? Even my own personal real-estate evaluator that I created, which takes into account mortgage payments, taxes, insurance, maintenance, etc. states that the offer should be about $200,000-300,000 lower than what the asking price is (almost everything I have seen has a negative cash flow going for it). So, are prices in Southern California too high right now, and should I stay away? My goal was to own my first properties nearby as I gained experience so I could watch the property and work with a property management company.
I read Larry Loftis’ “Investing in Duplexes, Triplexes, and Quads…” and I like the idea of having a triplex or quad versus a single family residence, to cover any vacancy that the property has. Last thing I would like is to be paying for the full mortgage while looking for a tenant. However, it does not seem there are a lot of triplexes or quadraplexes for sale in Orange County.
Just a couple of quick questions on real estate education. I listened to the webinar by Larry Goins, who recommended purchasing $5,000 properties, and selling the property for $30,000 on ebay, and auctioning the down payment on the house. Has anyone had success with this? I have looked on ebay, but have not seen anyone auctioning a down payment on a home.
Those are national books you are reading. They are really good at concepts but won’t tell you how to make money where you are. They may work in Kansas City or Springfield but just like politics all real estate is local. What makes you money in New York won’t work in California. What works in California won’t work in Florida and what works in Florida won’t work in Texas.
You are in southern California and it is a special situation. Don’t listen to anybody about how to make money in southern California except for people making money in southern California.
When you get a response look at the person’s profile. If you can’t tell by their profile just ask where they are investing. If they don’t say southern California don’t use their advice.
As a lawyer, I know your schooling has taught you to analyze the heck out of every word and punctuation mark. But that can be a hindrance in the real world as far as real estate investing goes. I think it’s called Paralysis of Analysis. Put down the books and DVDs and take some legit steps to getting a deal done.
What is the price range of the properties you are looking at? It will be hard to find cash flowing properties as you are in the mid-six figures; I arrived at this number based on your mention in point #1 that your maximum offer should be $200-300k lower than the asking price.
Real estate investing is not standardized, as a few members have already mentioned on this thread. You have to find ways to make money in YOUR market. I can find turnkey properties, or close to it, for $10-30k in my area. A vacancy on a $20k property is a heck of a lot easier to absorb than a $200k property.
I am actually joining one of the local real estate investing clubs to begin meeting people and start making some deals. I know my education has taught me to analyze everything to the minute detail, but I am looking forward to putting together my first deal.
I haven’t really picked a price range yet (my time the last few months has been finding a job, gaining financial education, and starting a business). The deals that I have been looking at are between $300,000-1,500,000. I have been focused on triplexes and quadraplexes, or appartment buildings (6-12 units). What has been strange is that I have seen many quadraplexes in the $1,000,000 range, but I have also seen small appartment buildings for about the same price with a much better cash flow.
There is a quadraplex for sale in my area for $80k. All units are rented, hardly any deferred maintenance, and the seller is willing to negotiate. Another quadriplex 5 or so miles away is for sale and the owner is asking $140k. The only real difference between these two properties? $60k and a heck of a lot less cash flow.
One thing to remember is all real estate is local. What makes money and is possible in one place does not necessarily work in another one. Southern California makes no sense to a person who is not from there. You need to know that there are people in southern California is actually making money doing something (whatever that thing is). That being said learn how to make money there. Here in Texas you would never make any money buying a $200k house but in southern California that may be a house that is right in the wheel house for rentals. That is why I would only listen to people making money in southern California.