“You are only as successful as your team is. “– Jorge Vasquez
Ever wondered how top real estate investors started their journey or how much money do you need to get into the business? What to expect in your first year? Read on and find out as Jorge Vasquez, CEO of Graystone Investment Group, along with Rafael Castro, COO of Graystone Investment Group, talk about tips on how to begin your journey as a Real Estate Investor.
This article has been created based on the YouTube video titled “How Much do You Need to Start Investing in Real Estate?” by Rafael Castro and Jorge Vazquez.
Rafi: The question today is, how much should I have before starting to invest seriously in real estate? So Jorge, how much do you think is the minimum?
Jorge: That’s a good question. It depends on what asset you want to buy. But if we’re referring to the kind of stuff we buy, typically you have to look at acquiring properties anywhere from $50,000 to $60,000.
Rafi: For California and New York people out there listening to us, you can get a property here for only $50,000 to $60,000.
Jorge: If we are talking about those types of properties, my suggestion is for you to have at least $100,000.
Rafi: Why $100,000?
Jorge: That’s a good question. You have $50,000 to $60,000 for the acquisition. Another $20,000 to $25,000 for repairs and the other $25,000 is for reserves.
Rafi: I’ve heard that you can get into real estate with $10,000 or maybe even just $5,000 or even with no money at all. What are your thoughts on that?
Jorge: There are different ways of buying property without putting down your own money. But there’s always a deposit needed, whether it’s $1000 to $5000 depending on the asset. Some people get it wrong and say no money down, but somebody still has to pay to secure that contract.
Rafi: Got it.
Jorge: How do you get this done? How would you get someone else’s money?
That is a bit more complicated. It is an advanced investor assignment that requires a joint venture that includes trading with the seller. This is a little more high-level, but it can be done.
Rafi: Okay, back to the question, you suggest $100,000. So we are talking about $70,000 to $80,000? With the $20,000 to $30,000 reserve, what are the items that can come up that you will need that?
Jorge: It could be a lot of different things depending on what type of asset you’re buying. For example, putting a brand new roof or waiting until a little cash flow comes in. The whole process will have some risks and you have to back it up with some reserve.
Rafi: Got it!
Jorge: Several things can happen. You have to be ready for anything. You are not married to those numbers specifically, but you do need some reserves.
Rafi: I think a lot of people forget about the taxes. Some people do not factor taxes in their initial equation, and this includes insurance as well. So those reserves may be used for that.
What is the key to be successful in rentals?
Rafi: The key for rentals to be successful is to have happy tenants.
Rafi: Vacancy is one of the highest expenses that you can have in rentals! If something happens, like the bathroom floods or you need to change carpets, you don’t have to wait six to seven days to get the funds. If you respond quickly, you will have a happy tenant that stays longer and takes care of your house better. So if you use those reserves to take care of these issues, you have a happy tenant and a happy manager.
Jorge: That is a good point Rafi, investors forget that during your first year you try out the tenant and the house. You don’t know if certain things will come up. Once you identify and go through the process with this property, you will find out several things. So don’t expect to get the cap rate in year one. That will probably happen in year two. So in the first year, learn the process and the property.
Rafi: When a property is vacant, everything looks nice and sounds great. But once someone starts living in it, things start coming up. We had a property before that when we turned on the AC, it worked and cooled for about an hour. Everything looked great! Then I moved in and that same AC in Florida, during the summer, was switched on every day for 8 hours or more. A month later, that AC goes down.
Rafi: What happens is, you have a house that has not been used consistently and these things start bubbling up. The cap rate in your first year will be lower. But based on our experience, the cap rate from year one to year two will jump between 3% to 4%. If you have that house in the first year with a 6% to 7% cap rate, don’t panic. What you are doing is investing and finding out these small things that are bubbling up and once you fix them, you start reaping the benefits. That is why you need the reserve. That is why we suggest having at least $100,000.
Jorge: Well, It doesn’t have to be cash, it could be with a landing. Somebody could come in with $20,000 cash in a pre-approval for $80,000. It does not need to be all cash.
Jorge: Rafi, you mentioned Cap Rate a few times, can you tell us a little about that.
Rafi: Let me put it in the equivalent of the interest rate that you get in a banks’ savings accounts. If you put a CD (Certificate of Deposit) for $100,000, they will give you around .001% to .005% in interest. When we compare it to Cap Rates, they are similar, but at 10%. This is a perfect topic for another time. We can cover taxes, vacancy, insurance, etc. In a nutshell, it is still a savings account interest rate.
Rafi: This is where flips are great. You may only make 10% on that flip, but remember banks calculate interest rate annually. If you got 10% for three months and you did it over a year, you made 40%. It is all on how to calculate and refresh that money.
Rafi: We strongly suggest hiring a good property management company. They will range anywhere between 8% to 12%. But if it’s a good property management company, you get that money back and more.
Real Estate Investment Teams are Important
Jorge: You are only as successful as your team is.
Jorge: If you have a solid team, you will be successful. The weakest link will hurt you. You need to make sure you get the right person. Even if a property manager has been there for a long time and manages a lot of properties, but what if he does not manage your type of property?
Jorge: So it’s very important that you have the right team from start to end: Acquisition, rehab, and property management.
Rafi: I think we should invite one of the property managers to one of these sessions and have a session regarding property management.
Jorge: By the way, going back to the original question. If you do not have $100,000, call us anyways. We’ll work a plan out as long as you have the desire, we will help you out. We’re going to make it happen.
Rafi: We’re very transparent, and if you are honest with us and your situation, we can give you options and find ways.
Jorge: We can even use 401k. You can use your retirement funds to buy real estate.
Rafi: So give us a call! Where can you find us?
Jorge: You can find us at homes4income.com.
Rafi: Thank you very much.
Jorge: See you guys!