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22 Years Old: First Apartment Building Acquisition Done

G_Alexander

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After many brief hiatuses I am back; and with good reports.

Many of you may remember my mobile home investment thread from when I was 19 years old. After a couple additional mobile home deals, some miscellaneous arbitrage, and saving; on Monday this week I closed on my first multi-family apartment building.

prop.jpg

(little rainy on Tuesday morning)

The building was an REO from Wells Fargo and has 3-units, 2 of which are currently finished:
Unit 1 - 1st floor: 2 Beds, 1 Bath
Unit 2 - 2nd Floor: 3 Beds, 1 Bath
Unit 3 - Garden: Unifinished (Will be 3 Bed, 1 Bath)

apt.jpg


The bank really polished this one up to get it sold. Brand new wood floors, 3 separate water heaters all brand new, two new kitchens with new appliances, three separate electrical meters, replaced galvanized pipes with copper piping, new furnace, separate gas meteres, new steel main-beam and supports, and more.

Got in for 70% of the current FMV (~$211,000). Put 3.5% down under FHA lending, seller closing credit of $7,500. Locked in a 3.25% 30-year mortgage.

Deal Details
Cost summary:
$5,000 earnest money
$900 due at closing

Capital Improvements:
Injecting $5,000-$6,000 cash to have top two units fully operational
Future injection of ~$17,000-20,000 to finish basement

Pro Forma garden unit renovation operations:

+Monthly Cash Inflow:
Unit 1 rent: $1,100 - ($550; because I currently occupy one room)
Unit 2 rent: $1,350 w/ parking
Unit 3 rent: $1,200 - (projected)
Laundry: $50 per month
Total: $3,700 (without me)

(-)Monthly Cash Outflows:
Expenses @ 45%: $1,665
Vacancy @ 5%: $185
Total: $1,850

=NOI: $1,850/mo

(-)Debt Servicing:
PI+PMI: $1,106

=Monthly Cash Flow: $744

The building across the street which has similar finishes and layout just sold for $300,000 in March with an unfinished basement. Instant equity has been created. I am currently appealing tax assesment to get tax amount even lower. All in, I will have spent $11,900 to own two operational units, and will likely use a HELOC for the basement reno.

You make your money when you buy, not when you sell.

I need to thank GLC65, RealOG, SteveO, and DRB for the continued inspiration over the years :cheers:

Short term: Finish basement to legal code(~$20,000), full occupancy; live-in gross rent of $3150 (I’m still living here)
Mid-term: Continue working (high paying job I am only doing for two years) and cash-out refinance the building for equity in 2 years or sell depending on market conditions
1+ years: 50 Units in an select overbuilt market and two creatively financed mobile home parks with 40-60 lots each.

Side note: I continue to dabble in domain ownership and have a few website ideas I am tinkering with also.

Stay hungry, stay foolish.

G. Alexander
 
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G_Alexander

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Update: September, 2013

Wow, time really flies. I can’t believe in just a few more weeks I will have had this property for a year: and it is finally stabilized. I have learned a lot (and spent a lot), and I am so ready for more.

In November of last year I got my first tenants, a nice family, for the 3-bed unit upstairs. Rent was $1,300 with parking (1 of 2 spots). I rented out the remaining garage spot in January for $100. Gross rents coming in were $1,400 + roommate rent of $550 for the first half of 2013. In mid-February we began construction on the garden unit in the building. It was a gut-rehab and the only hiccups involved seepage in the cove (dampness where the foundation wall meets the floor) and a change in contractors due to continued delays. To mitigate the cove seepage we installed an interior drain tile system for ~$5,000 (ouch!). Construction in the unit was completed in August, a full 6-months after we started. I present to you, the result:






Got renters in within a week for $1,000 a month! Current gross rents are $3,550 (with me hypothetically “paying†$550 a month).
Unit 1: $1,100 (me and a roommate)
Unit 2: $1,350 3 bed and garage spot
Unit G: $1,000
Parking: $100
Total: $3,550

In reality $3,000 comes in every month and I live for free. After my mortgage, management fees, etc. (40% expenses) the property is pulling in just over $600 in cash flow a month now that it is stabilized. Without me living there, it’s closer to ~$1,200! I use this expense ratio to illustrate expenses over time, but most months my expenses are just management fees and common area electrical and the rest comes straight to me. This is not to say that it doesn't hurt my heart when the garage door fell apart last month (new one was $900 w/ warranty) or when the A/C went out in the unit upstairs in July ($1,400 = ouch!); but these unkowns were to be expected (oxy-moron) in the first year of ownership!

Deal Metrics: Purchase Price: $210,000
All in cash out of pocket (down payment, upstairs and basement renovations): ~$45,000
Prior Equity Value: $7,350 (3.5%)

Current Property Value: $340,000
Less Total Debt: $202,000
Current Equity Value: $138,000 (40.6%)
Less cash invested: $45,000
Return: $93,000
ROI: 107%

While I created lots of value on this deal and had fun with the construction, my next project will involve much less construction necessary. I will be looking for simple cosmetic fixes. I will also be hunting for something much larger in size (~30-50 units)

Let’s do it again!

G. Alexander
 

G_Alexander

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Hey guys! Saw a couple notifications that this thread had gotten bumped. I wish you all a wonderful 2017 of hustling hard. Go out and GET IT!

I'm on a flight to China while writing this (on United Airlines wifi). This property appraised at $450,000 in September 2016 and I only owe $186,000. I took out a $100,000 HELOC on it which I'm investing into more brick and mortar business deals. Have tons of updates on my two businesses (eCommerce biz has grown 4x this past year, now hiring another employee... and my brick and mortar biz is opening our second and third locations this year). Lots to be thankful for and to look forward to in 2017.

Much love!
 

G_Alexander

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Well done, however it seems like a shit ton of work for $750 per month. How much cash do you have tied up in it? 5900 is all?

Yes, just $5,900 right now. Seller credit of $7,500 helped out a lot there. Will have $11,900 tied up after setting up laundry, and getting everything perfect for long term for the two main units.

The goal here is not cash flow. If I sold the property next month, fully leased, it would fetch low $300,000s. I will only have $221,000 in the two units ($11,900 personal cash). That smells like $80,000 in equity to me.

On a downside, if it only sold for $300,000 with basement reno (~20,000) included, there is potential for $59,000 ($300,000 - $241,000) in equity value creation.
 

G_Alexander

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Also, I am curious about the financing. You said you saved up quite a bit with the lonnie deals and whatnot, is that money what you used for additional collateral or was the bank willing to just straight up finance it since it is technically owner occupied? I am assuming you have a good credit score.

The bank was willing to finance the acquisition due to my full-time employment; no additional collateral was necessary. The FHA loan federally protects the bank in the event of a default. I do have a strong credit score as I have been building it since I was 18.

I had one quick questions if you wouldn't mind pointing me in the right direction. I've seen the Scuggs book recommended on a couple of RE threads... is the book USA market specific or would it be suitable outside the US?

The book is written for the U.S. market. I am not sure how many mobile homes (or similar more affordable home-types) there are in your location, but the concepts in the book can be applied to almost any asset. I would give it a read regardless, it will take you one or two days and is very valuable.


Very impressive. I know nothing of real estate, but do know you grabbed that bull by the horns and went at it! Did you go to college? How could you afford such a thing with student loans?

Yes, I did go to college. I earned scholarships for a significant amount and was fortunate enough to have my parents cover the remainder of my educational expenses. I saved personal money to get the first mobile home deal done. I competed in, and won, entrepreneurial seed funding competitions and saved everything I earned from operations then-on in order to have a substantial cash position for the apartment acquisition.

Thankfully I am not hampered by much student loan debt, and had a very strong credit score and solid income when locking down the financing for this property.

This building is essentially the backbone to my future operations. It is the castle I can work from for free as I pursue my future challenges unhindered by the worry of one major necessity: shelter.
 
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G_Alexander

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Congrats man..im 23 and looking to do the same thing..this is definitely motivation...how did you learn the in's and out's of real estate though? im looking at the numbers your posting like damn i have a lot to learn..but where to start.

I learned first and foremost by reading. I majored in Finance and Entrepreneurship in college, but you don't have to go to college to learn these things. Grab a couple of intro to finance books at your local library, and while you're there, grab some real estate investment books.

I read several apartment specific investment books recommended by members here at the forum. Great reads by: Vollucci, Berges, and Scruggs.

Another thing I did was I sought out and talked to the people I wanted to emulate or partner with in the future.

What you put into your preparation is what you will get out on the other end. I would start by reading until your eyeballs hurt and your brain feels maxed out on capacity; then take a break and repeat the process. The more up-front deal diligence and preparation you do, the more you mitigate your downside risk. I have yet to see the results of this particular deal, but I feel like going into it I was well prepared and had calcualted the potential outcomes.
 

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Nice deal, keep it up! I did nearly the same exact think when I bought this 4plex in June. Bought for 170k with seller paying 7k and FHA financing at 3.75% and I get gross rents of about 3,100. The trick is getting the next building!
IS-1oygsdxdu93rx.jpg

Good Luck!
 
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andviv

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You could easily invest $30K into 1 site (in SEO) and have a site that makes you $10K + per month after 6 months and sell it after 12 months for a nice profit!
Great idea. Please do tell us more about it and share links to your sites. How much are you personally making every month? What was your initial investment? How long did it take you to get there? We all would love to hear more, I am sure...
 

G_Alexander

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Wow, great post! I know very little about investing in Real Estate, but I'd really like to dive into this subject when I get more time. Great job, you're very young.

Just curious, why are you only working your high paying job for 2 years? What plans do you have after the job?


I have always been entrepreneurial and working for someone else is exactly the opposite direction of the way my heart pulls me. My high paying job made me realize how much I truly hate having no control over my most valuable asset: my time. I knew this would happen going into it, but needed to make the time sacrifice for capital. Also, the job relates highly to the valuation of assets and therefore I look at it as paid schooling/reading. I am not concerned with security; I know deep down that I can create value on my own.

Per the end of my post above, my plans include a larger and more carefully considered multifamily project (hope to make my greatest mistakes on this small first project, and avoid them in the future) and a few mobile home park acquisitions with additional seller financing to renters in the park. I will also hopefully have an operational ecommerce store...but that is currently a back-pocket project. I honestly think deals related to mobile home assets are hidden gold.
 

G_Alexander

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G - congrats on your continued success, and thank you for sharing. Yours is definitely an inspiring story, and the details that paint the process behind the events are fascinating.

Originally Posted by G_Alexander
I honestly think deals related to mobile home assets are hidden gold.

My main focus is software/mobile, but I love learning about the real estate market (perhaps for future reference). This statement in particular piqued my curiosity. Were there any resources/reading out there that helped you formulate this opinion? Mind sharing?

VanToai,

No problem, thank you for the kind words. To answer your question, the one resource that pushed me toward mobile home investments was a book by Lonnie Scruggs called "Deals on Wheels". I read it when I was 19 and decided not to waste any time in my execution.

Successive deals were all gravy from that point on. Personal experience with mobile home assets has shown me that they hold extreme potential for value creation and rest in both a segment and in markets that are typically less competitive (read: not overcrowded with under-sophisticated, over-funded competitors).

You won't get Joe-blow Hedge Fund/Private Equity Fund coming in to compete with you over a mobile home park or mid-sized apartments, but you will compete with them in the foreclosed single-family housing space (they buy 800 homes at a time) and in the mega-sized apartment complex game.
 
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MJ DeMarco

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Great job man, pardon the language, but FN impressive. :)
 

G_Alexander

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**Update: 10/29/2012

Things are moving along nicely. My property manager has had 10 potential renters through the property and has rejected four applicants. The applicants may have turned out to be decent tenants…but not my PM’s ideal long-term qualifiers. His strategy for my neighborhood is to get very high quality multi-year tenants who are working professionals typically searching nearby yuppie neighborhoods for places to live.

Improvements I have made so far include: added mini blinds, updated light fixtures, rehabbed the large garage (also cleaned it rigorously), and changed all door hardware/ synchronized keys for the property. I opted to go with upgraded door handle sets throughout the whole property, and also updated light fixtures where necessary. This was a tip I gleaned from Scott McGillivray (Income Property) which I too believe can have a subtle, but positive impact on ROI.

Scott's Blog

I will post pictures of the changes here when I get a chance to take some during the day. In the meantime…the hardware:
hardware2-1.jpg


Thus far, my expenses are as follows:
budget.jpg


The electrical work I had done included: adding individual meters for the basement unit and common areas, upgrading from 100 amp to 200 amp service, additional security/motion lights, and tidying up wires in the rear stairwell.

First mortgage payment is not due until December 1. As long as Unit 2 is rented by November 1 (showing to two more potential tenant groups today), I will have one month of direct gross income in the amount of $550 for November (I manage my own roommate, $1,350 from unit 2’s first month would go straight to my PM as fee) with no fixed expense. In December the goal is to be operating at breakeven on the two units.

The only decision making that needs to occur now is whether or not I go ahead with an all cash basement renovation during this late autumn/early winter, or do I forego the income and wait until the spring to finish the basement unit possibly with a HELOC?

Returns are always amplified when leverage is used and personally, I love having liquidity available so that I can go after any attractive investment that presents itself. It is these reasons that make the HELOC route more attractive to me.

Still, I feel that my payback period for the all cash renovation option isn’t a terrible either. Realistically I work so many hours at my J.O.B right now that I would not be able to actively use the cash elsewhere, and it means less time to stable, perpetual cash flow.

I have some thinking to do, and if anyone has any thoughts or additions I gladly welcome them! I will continue to post what I learn and what issues/successes I have with the current project.

I am still filled with excitement and smitten to know I own the building I walk into every night. It is truly a great feeling!
 

G_Alexander

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Same here man trying to build capital, on the other hand great effin work Alexander man your my hero bro one day I will be like you haha, anyways what else do you suggest to read to learn the real estate market? Im 21 and I was thinking of going to school for the Real Estate Prelicense what do you think of that ? Good or no ? So I can work buying and selling houses or is it just a waste of money going to school for that ?

Thank you 21elnegocio. I would suggest reading Stephen Vollucci's and Steve Berges books on apartment investing, and I would also suggest reading Deals on Wheels by Lonnie Scruggs and any finance related books for that matter. While I wouldn't want to steer you off a path you have an interest in, I would suggest that you do not need a real estate license to be a successful investor.

I hired brokers and specialists to take care of things that I didn't want to / I wanted to automate. The key is to focus on what you are good at doing in the business. I value my time more than scouring through MLS ads and drafting up offer documents. There is no reason that you can't start doing smaller deals TOMORROW if you are prepared; even if you have to pool capital. I would spend time reading and learning, and then take the following steps:

1. READY
2. FIRE
3. AIM


Get prepared, pull the trigger, refine as you go. Keep what works and discard what doesn't. Don't sit life on the sidelines wondering what if.

Well done for taking action.

But why would you risk $300K debt just to get $1K of monthly income ?

You could easily invest $30K into 1 site (in SEO) and have a site that makes you $10K + per month after 6 months and sell it after 12 months for a nice profit!

If you go back and read the post on the first page that I made, while the cash flow AND not paying to have a roof over my head are both great...they were not the point of this deal. I am all in at roughly ~$13,500 and if I sold the building tomorrow it would fetch between $290,000 - $305,000. Less my debt and cost basis, that puts my profit at $66,500 - $81,500. If I finish the basement and wait for market recovery, the returns have the potential to be higher (but time and a higher cost basis then factors in). The play was instant equity creation, and I very much like that play.


How much are you putting away for future maintenance and unexpected expenses?

Will keep a retainer of ~$5,000, but I have access to additional capital if necessary. The building was recently updated almost everywhere, brand new water heaters, furnaces, roof isnt old, new steel support main-beam in the basement with steel support columns, new copper piping, new appliances, new light fixtures, and I just updated all the electrical. I realize anything can happen at any time though, and that is why the retainer will remain in place.
 

G_Alexander

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Thank you everyone for the kind words :D

This is a fantastic story! Do you mind me asking how you found this property? Are you working with an agent?

Rickson9,

I found this property through a buyer's broker. I interviewed about 4 or 5 buyer's brokers before picking one that I knew had his interests aligned with mine. He is only 26 years old and has 5 small multi-family properties in the same area himself (invests with his father). We get along great and I have faith in him. I hired him on as my PM because he has been running at 100% occupancy for a while now and is also a family friend.

He knows the neighborhood very well and has a great strategy for pulling high quality tenants from a nearby neighborhood where prices are higher by showing them the benefits of heading up the transportation line a couple extra stops.

We searched for Homepath properties (search homepath on google) which usually give a first-bid benefit to owner-occupiers. Esentially this prevents investors from coming in and scooping up all the good properties from would-be homeowners, because owners who will occupy get the option to bid for the first 8 or first 14 days.
 

G_Alexander

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Do you guys have a coach or mentor? If so, where did you find him or her?

If you are interested in finding a mentor, I would join the local real estate club in your town. Great way to network and meet others, both seasoned and novice, with the same interests.

That being said, I have met my mentors on this forum, through my univeristy and through other means, such as car meets. Just keep your eyes peeled while you live your life and never be afraid to ask someone who interests you a question.

Mentors will likely be just as flattered that you appreciate what they do, as you are by the fact that they are talking to you.
 
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Thread marked GOLD ... this thread started before we began using GOLD and NOTABLE tags, it just slipped by!
 
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G_Alexander

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@G_alexander

Phenomenal progress. Congratulations!

Was wondering how you financed the reno. Was this cash you saved up over a period of time? PL? HM? Friends/family?

Thanks, T14.

I used cash from work throughout the construction; while keeping my savings from prior deals in-tact and adding any extra cash earned right back into my fastlane pool of capital for my next set of deals / other projects. I took a look at the financing alternatives for the renovation, but ultimately decided to go with cash due to the fact that I planned to exit the property in approximately 1 - 2 years. I am now torn between selling and holding the property because the interest rates were so low when I purchased. I am locked in at 3.25% which in my eyes is free money. Cash flow is strong and tax benefits are good...I will likely refinance soon, but interest rates have crept up approximately a full point to 4.3% recently. Still, tapping the equity to purchase more properties has always been the goal. I am seeking additional apartment investments and a large scale mobile home investment plan.

Just need to keep my leverage at "sane" levels going forward; have learned first-hand from watching many investors in the past how too much leverage can destroy your empire.
 

G_Alexander

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Great thread! Thanks for sharing.

If you don't mind me asking, what would you consider to be "sane" levels? 50% of equity? 75% of equity? Something else?

The short answer is: It depends.

When making an acquisition I would prefer to use as much leverage as possible up front (and buy the property as far under-market price as possible) then stabilize the operations to create a large equity position. Leverage amplifies returns and as much should be used as possible / sensible in each property acquisition scenario. How much leverage you can or should use will depend on the operations or potential operations of the property, the financing available and how long you intend to hold the asset.

If a property has solid margins and strong cash flow potential I am better off levering up to 90% LTV (10% down) with a combination of traditional and seller financing if available. Once the property is stabilized and your equity position has increased, it is time to refinance to pull cash out or sell.

It is when you get into a HOLD scenario that is important to consider leverage, i.e. the part where it is important to be "sane". If you decide to refinance your building the banks will only let you tap so much of your equity value to keep themselves protected. If you pull out every dime allowable by the bank (probably 70-80% LTV) it makes sense if you will be purchasing additional properties which can help contribute cash flow to your cause.

A smart investor will use the cash they pull out in a refinancing for additional cash-generating property / investments to create more cash flow, control more assets and have the ability to service more debt.

An unwise investor will use the cash to buy themselves fun things, thus "debt fudning" their dreams. In the second scenario, when the roof goes bad on one of your properties and you can't get a loan to repair it due to your over-levered position, you are shit-outta-luck and can kiss your dreams goodbye.

I want to avoid the latter scenario!

I am happy to talk about any financing questions, if you have any others feel free to shoot me a PM.
 
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G_Alexander

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Have been very busy this past week at work, but as of November 1st, Unit 2 is rented:
$1300 a month with parking. :D

Valuable lesson: the rental market tanks yearly from September to April (the low period of the year). Much harder to rent, and rent ceilings fall. Was hoping to market lead with $1400 a month including parking, but I am satisfied with my current tenant and the rate!

I structured the lease to end 7/31/2013. I will give the tenants the option to resign at market (leading) rents at that point (roughly $1450 with parking, $1350 without), or I will have new tenants in place. Current tenants are a family who kept their last rental for 6-years though, so they may opt to pay the the higher price. I would prefer a long term tenant, and will assess the situation based on the finished garden unit (basement) rents and my cash flow at that time.
 

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I wasnt advocating keeping your job, just wondering what you planned to do if/when you quit. As it looks like you have some overhead and need to keep a strong paycheck coming. Keep the posts up, they're informative and inspiring!

My first thought was...creating wealth from mobile homes to apartment buildings. Would make for a great story.
 
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This is GREAT! I like the positive cash flow, the positive return on investment, but most of all, I bet you've learned a million things that will help you in future deals and/or business. Congratulations!!!!!!!!!
 

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I absolutely LOVE seeing real progress here. It's like a little fire to warm up my a$$.

Speed+, mostly cuz I thought you were dead
 
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Have been very busy this past week at work, but as of November 1st, Unit 2 is rented:
$1300 a month with parking. :D

Valuable lesson: the rental market tanks yearly from September to April (the low period of the year). Much harder to rent, and rent ceilings fall. Was hoping to market lead with $1400 a month including parking, but I am satisfied with my current tenant and the rate!

I structured the lease to end 7/31/2013. I will give the tenants the option to resign at market (leading) rents at that point (roughly $1450 with parking, $1350 without), or I will have new tenants in place. Current tenants are a family who kept their last rental for 6-years though, so they may opt to pay the the higher price. I would prefer a long term tenant, and will assess the situation based on the finished garden unit (basement) rents and my cash flow at that time.


After reading your 19, and 22. I just have to say I'm amazed and jealous lol. Well I wasted my youth like other people my age. Well I'm trying to save up for RE business, but the cost here in California is much higher then other state. I wish I can move out to different state if my wife lets me lol.
 

jlwilliams

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Well done! I wish I'd bought an income property first. When I bought my first house I was married and all decisions were joint decisions, and her needs and wants all weighed heavily in my heart and mind. We did ok with our first house but a multi would have been a better move. We were also a little older than you at the time. I was 28 when I bought first house. At 20 I was spending my time and money on beer and weed. Seriously underperforming assets right there. I hope my son spends his young adulthood more like you did than like I did.

Anyway, good job. I'm going to go back and read your other threads. (Put "deals on wheels" on my kindle while I was reading this one)
 

RHL

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Credit history, assets, income. If you have a 795 credit score, paid off school loans, s new-ish car, and a $100,000/yr salary, they won't even blink to approve you for $200,000. You could probably get one for $500,000 or $600,000 with stats like that.
 

Kak

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Well done! How much cash do you have tied up in it? 5900 is all?
 

Runum

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Congrats on the deal.

I did the same thing in 2007. Bought a 3 unit REO. Cashed out in 2010. I have all of my money out of it and I get the monthly cashflow and the appreciation.

Only difference is, you have about a 25 year head start on me.

Good luck with the future acquisitions.
 

MMatt

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Awesome man. I'm 20 and trying to build the capital to do this while I'm still young like yourself.
 

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