March 2016

A lot of people ask this question in forums for real estate investing. Usually, they already have one cash funded property and they’re thinking about going and get credit for the following properties, but are afraid the strategy fails. Sometimes, they already have credit funded properties and wonder if their credit is too large. However, what is not trivial to see is that all these investors suffer from the same problem: fear. In theory, we only buy rental properties where the demand for them is high. So if we do believe we’ll have tenants, what would on earth stop us from buying all credit, other than not qualifying for more?

Long story short, all cash funded properties are incredible tools, and so, it does make sense to buy some properties all cash. Why? Two main reasons: first you increase your income, which enables you to qualify for more credit in the long run. Second, you can borrow against these properties.

I tried to solve the question of the post, and here’s what I came up with:

I was asked the other day what methods I use to find properties, and why it takes so long. “If your plan is to have 12 properties, why does it take you so much to find new ones?”

Well, I live in Germany and my RE is to be bought in Portugal. This limits my opportunities to actively look for new properties, but this is not what consumes the most time. It is actually the rules that I use to buy new properties. Remember, saving 20% now on a 40K property (8K) will have a tremendous impact in even 5 years from now. I am not just trying to get rich by doing smart financial decisions, I am on a hurry to retire! This means that I need to be extremely savvy and get the best of the best deals! I am also a goal setter, so I have a lot of goals to meet. Let us discuss what I do to buy new properties.

Studying the market is not an overnight job, but this is done and I know exactly what I am looking for. If you’re considering going into real estate, study and re-study your market (I will post something about this in the near future – stay tuned there is a lot to come up in March). So if I know my market, what else do I need? Here is what you need:

• Consider start time and establishing a long term relationship with one or two contractors. They will be crucial for you to have substantial gains now but mostly in the future. This is especially true if you decide to buy undervalue, distressed properties. This is also done in my case.
  

I have noted that my philosophy about real estate is very peculiar. While I am eager to invest more and more, I only take a step ahead when I see that the deal complies with all my rules. Here are they:

• I only buy undervalue, and in particular 20%+ undervalue. The funny thing is that money is there to be made even on fair deals. Well, tomorrow may be a different day. If you buy undervalue, you’re protecting your butt. If the market comes down by a 20% factor, you are still fine. OK, this sounds trivial so far, so let us analyze the complicated questions: if the only great deals I find are in less prosperous areas, do I still buy? Depends on what is less prosperous, but yes, I am willing to take up way more risk. The only thing I really care about is having tenants I can serve (see point 2). Rule #1: I know my market inside out.  

After 2 years studying Real Estate (RE), I came up with 7 reasons that make it a great investment. It is not that I think that RE is the best investment ever, but RE has certainly advantages over other types of investment. Let me break point out 7 great advantages of RE and break them down for you guys:

My property manager just gave a call to inform me that he found new tenants for my rental property #1, which is great news! The condo was leased out to the tenants on a one year for €275 a month (I will sign the contract next week). From that, I have to pay the condominium fee, property and renting taxes, and management fee, so this will be about €170/month cash flow positive. Since I have renovated the place recently, I will have some tax advantages in 2016, so I expect the net cash flow to be about €200/month.

Two weeks ago, I also started to look for a second property, which I expect to buy until August. I will most likely buy this property in a different city (but also in Portugal). I expect to spend up to €40K, using leverage, and rent it out for €350 (about €3000 net per year). As I said in other posts, I stick to one rule when it comes to the math of a RP: every condo I buy should generate cash flow to be paid in 15 years if no mortgage is used (these figures exclude fixing costs but account for taxes and property management fees).

In August, I will assess the performance of RP#1, and the performance of my property manager, as I have to decide if I want to extend the contact I have with him. Up until now, I think his fee is totally worth it.