Simon 10x’d his first deal. Seven years later, he’s balance-sheet rich and cash poor.
Today we kick off a new series on the real estate investing journeys of real people.
Although I change their names and some of the personal specifics, these are real stories based on real people I know. They have generously given me permission to share their real estate investment experience.
In 5 Ways to Invest in Real Estate (From $60 to All-In), I introduced seven fictional investor types:
Perfectly Passive Penny: owns REIT shares.
Hands Off Harry: invests as a limited partner.
Freakout Frank: invests as a limited partner but tries to micromanage the work of the general partner. Don’t be Freakout Frank.
Active Alice: buys a duplex and lives in one unit while renting out the other. This is known as house hacking.
Patient Peter: buys 1-4 unit residential properties to hold for cash flow. Pro Tip: a variation on this approach is to sell or refinance each property after 3-5+ years and then repeat the process.
Rockstar Reggie: works as an employee of a real estate company and participates in the company’s property success after 5-10 years.
All In Alex: creates a real estate investment company and raises money from LPs.
These are helpful to give you a sense of who you may relate to, but these personal case studies take a step further by showing you how they did it.
I will follow a consistent format for each personal case study over the next weeks:
Investor background
Goal as a real estate investor
The first investment
Current portfolio
Wins and challenges
Advice for prospective investors
Professor Bateman’s observations
A HUGE thanks to each of my friends who were willing to let me share their story!
Let’s dig in.
Investor Background
Let’s call this first investor Simon. Simon is 31 years old and has bounced around in his career a bit. Although he has developed good organizational and analytical skills, he has changed industries multiple times.
He worked for a broker for the last two years in a sales role. He wants to get back to internally focused operations where he feels his skills can best be leveraged.
Through active networking and perseverance, he lands a job as the junior person on the acquisitions team at a growing real estate investment company that focuses on value add deals with a hold period of 3-5 years. The company plays the role of the general partner (GP) and brings in money from outside investors (the limited partners aka LPs).
Goal As A Real Estate Investor
Simon is pretty straightforward in his goal: he wants to be a real estate investor and make a lot of money. He has talked with multiple mentors who have successfully invested in real estate. He has seen the financial independence it has given them.
But that is about as detailed as he has developed his goal. He just wants to start investing and believes it will all work out once he is rich.
The First Investment
Simon puts his head down and works hard. He does everything that is asked of him and more. He asks lots of questions and really tries to understand why the company buys certain deals and not others.
He spends his time on a combination of underwriting and due diligence of new acquisitions. He loves it!
One of the cool things about his role is that he does the initial draft of the equity waterfall for each deal.
As discussed in The Power of Promote: A Real Deal, Fully Broken Down, equity waterfalls show the amount invested by and going to the GP and the LPs. It is through seeing these equity models that Simon decides to push hard to invest in as many deals as he can on the GP side through the company.
After being there a year and demonstrating he is doing an excellent job, he starts asking to invest in deals. He is told “not yet” many times. He is persistent, but not aggressive.
Towards the end of his second year there, he gets his chance. He is able to invest $13,000 in a deal on the GP side. He will participate in the promote just like the CEO and other executives. He is pumped.
The first deal goes really well. It is sold in 15 months and he makes over 10x his invested capital.
He is blown away!
He realizes that this is exactly what he was looking for: a way to turn his limited capital into big dollars.
The CEO doesn’t let him invest in another deal for two more years, but in years 4 and 5 of working at the company he is given the opportunity to invest in 8 deals in amounts between $15,000 and $20,000 per deal for a total of $145,000.
These eight deals don’t go nearly as well…or at least he doesn’t think they will. A recession hits in year 5 and the economy starts to slow down. Yikes.
But he decides to stick with it.
In years 6 and 7 of working there he makes 7 more investments totaling $161,000 ($23,000 average amount per deal).
Current Portfolio - End of Year 7 Working for GP
Simon has made 16 real estate investments through the GP he was working for. The first one was a home run but the other 15 deals have not yet sold.
He now has 15 active investments that were made in years 4-7 of working for the GP. He has invested $306,000 and he is 38 years old.
This has only been possible because (i) he is saving and investing his annual bonuses in deals, (ii) he has a home equity line of credit (HELOC) he can use, and (iii) his wife works, making a nice salary and bonus.
Will the deals work out? Only time will tell.
Wins and Challenges
Win #1 - He is in the Game
Simon has become a real estate investor. It took a couple of years of working at the company, but by age 33 he had made an investment.
Win #2 - A Successful First Deal
The first deal was a huge win. Simon invested $13,000 and made over $150,000 in less than 2 years. It was great to make that much money, but also spoiled him into thinking that all deals would work out this way.
Challenge #1 - Investing Phase Before The Properties Are Sold
One of the most challenging things for Simon has been coming up with the money to invest in each deal without more of his earlier deals selling.
A typical investment looks like it will take 3-5 years until it is sold. He has spent the last 4 years in the “investing” phase, writing checks without getting sale proceeds. He doesn’t know how much longer he can keep this up. He really wants a property to sell so he can have some more cash.
Challenge #2 - Economic Turmoil
The investments in years 4 and 5 were made just before the economy went bad. These deals may not make any money.
The investments in years 6 and 7 were made in what Simon hopes is the bottom before the economy recovers. Hopefully these deals will make a lot of money.
Advice for Prospective Investors
Simon has a few pieces of advice for prospective real estate investors:
Dual Income Really Helps: it would have been nearly impossible to invest at this level without his wife’s income sharing the household expenses.
Home Equity Lines Are Stressful: he has used most of his home equity line of credit for real estate deals. This is causing him some sleepless nights, especially being that some deals may not make money.
Use Real Estate Profits for Real Estate Deals: he spent some of the profit from the first deal on buying a bigger house than planned. He wished he had kept that money separate for new real estate investment instead of buying a bigger house.
Investing Where You Work Creates Engagement: Simon really enjoys working on deals in which he has invested capital. This is known as having “skin in the game”. He feels like he can affect the performance of the deals.
Investing Takes Patience: he finds it hard to wait years to see how the deals do. The types of investments his company makes are value-add deals that don’t have any cash flow. All the profits come at the end of the deal.
Overall, he feels that he is on the right path. He will continue to reinvest profits from deals into new, bigger deals with the goal of driving his net worth to $10,000,000. He still has a long way to go.
Professor Bateman’s Observations
Rockstar Reggie: Simon is an example of Rockstar Reggie in action. He proved himself as a valuable contributor and then patiently, but persistently, asked to invest.
Unrealistic Expectations: his first deal was a home run, setting unrealistic expectations that each deal would work out. This spoiled Simon a bit. Pro Tip: a 10x equity multiple on a deal is EXTREMELY rare. 2x is great and 4x would be considered a home run. Simon’s experience was extremely unusual.
Investments Take Time: his 15 other deals are still active. He won’t know how they do until they are sold. This is because he is working for a company that focuses on equity multiples instead of cash flow.
Cash Strain: assuming the deals are worth more than Simon and the company paid for them, Simon is “balance sheet rich” and “cash poor”. His net worth has increased but his available cash has gone down and his debt has gone up (through the use of his HELOC).
Simon’s Fuzzy Goal: Simon’s goal was “to get rich”. He didn’t take the time to think about his goals in more detail as discussed in Investment Strategies for Each Stage of Life. His net worth may have gone up, making him richer, but he is crunched for cash.
Put yourself in Simon’s shoes. How does this make you feel? Excited? Nervous?
As I share other stories, find the one that fits you best.