Congratulations to all the new college graduates! You’ve got the world ahead of you, so go out and conquer it. Actually, it’s probably pretty stressful right now because starting a new phase of life is a huge endeavor. I was very nervous when I graduated and moved to Oregon to start a new career. It was an exciting time, and there were so many changes. It took about 4 years before I got comfortable with my new life and suddenly I felt like I could do anything. I was getting promoted in my well paying career and my expenses were low. We lived in the cool part of downtown and were in a stable relationship. Everything was looking up. Ahh… I miss being 26. I felt like anything was possible. That was when we bought a home…
We just got married and I thought we needed a house to build a family. Our income was solid so we could buy a brand new house in the suburbs near my old office. All my coworkers were buying houses and everyone said it was a good investment. This was in the late 90s and everyone was feeling rich from the dot com boom.
Our house was too big
There was a little hitch, though. We decided to delay having kids because we enjoyed being a DINK couple so much. The 2,000 sq ft house turned out to be way too big for the two of us. We rarely had visitors and the 2 extra bedrooms weren’t used much. It was a nice house, but we decided to move back downtown after 7 years because it’d be closer to Mrs. RB40’s new job. We turned our old house into a rental and that’s how we got started in real estate investment. What I didn’t know at 26 was that buying a home isn’t a very good long term investment unless you’re extremely lucky.
The secret to building wealth is buying assets and avoiding liabilities. From that point of view, our home was a big liability. We had to pay a ton of money every month to live there. Homeowners have to pay the mortgage, repair and maintenance, property taxes, insurance, utilities, yard work, furnishing, and of course, fun toys to fill the empty space. People tend to collect stuff and the more space they have, the more they’ll buy. That’s a lot of money going out of your pocket every month. Sure, the house may appreciate, but would the appreciation be enough to surpass all the expenses plus inflation? It’s not a sure thing unless you got very lucky or you’re willing to do put some serious DIY work into a fixer upper. We all need a place to live and a house is great in that regard, but it’s not a good investment. It took me a long time to learn and I wish I knew this when I was younger.
Arnold’s first million
Recently, I listened to Tim Ferriss’ podcast – his interview with Arnold Schwarzenegger. It was a great episode and I encourage you to check it out if you haven’t heard it yet. Did you know Arnold was a millionaire before he was a successful actor? I’m a big fan of his old action flicks and I never knew that. I thought he got rich from his acting career. How did he get rich before he was famous? It wasn’t through his bodybuilding career because there wasn’t much money in it back then. Well, the answer is – real estate.
Arnold was a serial entrepreneur and started many small businesses when he was young. He and Franco Columbu started a bricklaying business in LA to finance their bodybuilding careers. Arnold also had a fitness mail order business, workshops, and seminars. These small businesses enabled him to save up enough to buy a house. However, Joe Weider (his mentor) advised Arnold to invest in real estate instead.
Arnold borrowed $10,000 from Joe Weider and invested $28,000 of his hard earned savings in a 6 plex in Santa Monica. He lived in one unit and rented out the rest. Two years later, he sold it for a $146,000 profit and rolled the money into a bigger apartment building. Rinse and repeat and a few years later, Arnold became a millionaire before he was Conan the Barbarian. That’s a great story.
Hindsight is 20-20
Arnold was smart, but he was very lucky to live in a location and period of unprecedented real estate growth. It would be more difficult to make that kind of money so quickly now, but I think it is still a better way to invest than buying a home. In 1999, I lived in the downtown area and should have looked at multi-family housing more closely. I could have purchased a good size 4-plex in an awesome part of town for around $400,000 back then and it would be worth well over a million dollars today. That would have been a huge profit on the $80,000 down payment (20%.) Also, the rental income would have helped pay the housing expenses and kept increasing over the years. Oh man, that would have been an awesome investment early on.
Unfortunately, I was a conformist back then and I figured my stable engineering career would last 40+ years. Why become a landlord when it’s easier to just keep working in a job I loved. Oh boy, was I wrong about that one or what? In any case, it maybe a little later, but I became a believer in real estate investing. We turned our first home into a rental and acquired a 4-plex soon after. A few years ago, we did a 1031 exchange and turned those properties into a duplex nearby because these would be easier to manage. Currently, we have 3 rental units and they are a significant part of our net worth at 25%. In contrast, our home (condo) is worth only about 5% of our net worth. That’s the estimated price minus mortgage.
The big problem now is that all our real estate holdings are in Portland, Oregon. The housing market has been red hot for several years now, but I doubt it can hold up over the long haul. The local economy just isn’t strong enough. This isn’t San Francisco or Seattle where Fortune 500 companies are dime a dozen. We only have a few big employers here and Nike is going to lay off a bunch of people soon!
The creative and tourism sectors are doing great, but most of those jobs don’t pay all that well. Housing is getting too expensive for a lot of people in Portland. That’s why I’m trying to diversify by investing with RealtyShares. They are a real estate crowdfunding company and I could invest in other US regions. Currently, I have a small stake in a commercial property in Arizona and I’m looking to invest more. Check RealtyShares out if you’re interested in diversifying your real estate investment. We also plan to sell our home before we take a year off from early retirement to travel around the world in 2021. That will pare down our Portland investment a bit.
Disclosure: We may receive a referral fee if you sign up with RealtyShares through the link above.
What would you do?
I wish I had been more financially savvy and purchased a multiplex instead of a house when I was 26, but that’s in the past. I’ll just have to pass on this lesson to the future generations and hope they make better decisions. Real estate is a proven way to build wealth and the earlier you start, the better off you’ll be. So my advice is to consider a multiplex when you’re looking to buy your first home. You can live in one unit and let the tenants pay the mortgage for you like Arnold did. Or you could buy a fixer upper and put in some sweat equity like Ms. Montana. Just don’t buy a dream home as soon as the bank approves a huge mortgage for you. It’s not a good investment. I’ll break down the numbers in another post.
Real Estate Crowdfunding
It can be tough to find a good real estate investment locally, especially if you live in expensive coastal cities. Fortunately, there is a new way to invest now. Real estate crowdfunding sites enable investors to pool their money and invest in bigger projects. Check out my experience with RealtyShares. Now, you can invest in real estate even if you don’t want to be a landlord. Sign up with Realty Shares and see if they have any project you’d like to invest in.
Did you know that Arnold was a millionaire before he was a famous actor? He was very driven and got started in real estate at the right time. What about you? Were you a savvy real estate investor or were you like the rest of us who passed up that opportunity?
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.