When I was studying real estate and finance at Arizona State University, I thought I had the world by the tail and could hardly wait to get out and carve my niche in the real estate business. I was living in an upscale apartment near campus, driving a nice car, and was doing well in my classes. I became the president of the Real Estate Club on campus, and at that point no one knew more about real estate (at least in my mind) than me.
That all changed when my father, Douglas McPherson, who was a successful real estate investor and owner of a prominent commercial real estate brokerage firm, sat me down and said, "Look, you think you know a lot about real estate, but it has only been from textbooks with no practical experience. If you really want to get in the business, you need to step up and buy something!"
I was planning on going to work after school for my father's company, but I did not know that it was predicated on me actually going out and buying some property. That twenty-minute discussion with my father was probably the best advice I have ever received in my career, and here is why.
I went to work trying to find a single-family home to buy, live in, fix up, and rent in order to get into the game. I got the newspaper out and suddenly realized
I did not know where to even begin. After a couple of weeks looking at homes in locations that I wanted to live in, I quickly realized I was way out of my af-fordability range and unsure what to do next.
It was very hard for me to accept that I was about to get a degree in real estate and finance from a major university, and I was not prepared to buy a house!
I asked my father for help, so he spent two weekends with me, driving neighborhoods and reading want ads in the newspaper. We finally found something that sounded interesting. It was a small ad by an attorney who represented a widow that wanted to sell two houses for $15,000. AS IS. We went and looked at them, and I was completely not interested. They were in an older neighborhood in Phoenix and needed lots of clean-up work.
My father and I went to lunch, and he proceeded to tell me what a great deal this was. He pointed out that the properties were below replacement costs, and were in good rental neighborhoods. My problem was I could see these homes only as places for me to live and not as a real estate investment!
The other benefit of this deal was that the seller would carry her own paper or mortgage back because of the property's condition. I had no idea what this meant at that time, but I quickly learned that it was the key to becoming a real estate investor. I bought the property for $15,000 with $1,000 down, and the seller carried the mortgage of $14,000. I was on my way!
My father made me put together a budget for the property acquisition and renovation along with a stabilized pro forma once rented. I cannot stress enough how I struggled trying to figure out if this was a good deal or not. My father put up half of the down payment; $500 for half of the profits and turned me loose.
I really struggled at first, but I realized I had to make this work because my whole career was on the line. I spent a year fixing up the properties and leasing the homes and eventually sold the properties for $25,000 in eighteen months. During that time, I learned about basic property renovation, negative cash flows, property management, partner issues, tenant lease issues, and how to develop an exit strategy for my investment.
I learned more about real estate from owning two fix-up homes in a rough area of Phoenix than I did my entire time in college.
TIP | went on to purchase twelve houses over the next two years and I found one common thread in all my purchases: Understanding the financing was critical.
I was now addicted to real estate investing! I went on to purchase twelve houses over the next two years and I found one common thread in all my purchases: Understanding the financing was critical. Just like the first two homes that I purchased, I almost always had sellers carry the mortgages for me. This did two things: One, it allowed me to get much better leverage and financing terms than a conventional lender would or would not give me; and, two, it allowed me to close very quickly without appraisals. When an owner wants out, he or she wants out fast.
I quickly realized that having a good knowledge of how to finance these homes was paramount in my business plan. I actually enjoyed trying to come up with some pretty creative ways to get someone else to put up 80 to 100 percent of the capital to make my business plan a reality.
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The dynamics of investing can be very emotional and stressful if not properly managed. When you are aware of what is all involved you give yourself the power to avoid those situations or at least manage them effectively. That will make your investments more exciting, rewarding, and enjoyable. Those positive factors will only lead to greater success in all that achieve with investments and life.