Enjoy the picture above of a beautiful creek in Cades Cove, TN.
This post is a follow-up to the post on Paying off our house 25 years early.
Here is what happened next.
After hitting the million-dollar net worth mark I started thinking more and more about rental property. Toying with the thought a little and then discarding it while I focused on continuing to save. When we finally decided it was time to move in 2020 I thought hard about this again. A common strategy people sometimes use is to keep their starter home as a rental. I talked to several people about this and crunched numbers but ultimately decided to sell the house. I had good reason to do so, it was a hot market and I felt like if I bought in a hot market I should also sell in a hot market.
Also, I was going from no debt to a $400K mortgage and had the opportunity to buy into the company that I work for several months later which would also be an expensive debt event. At the time I had been told I had to pay for it upfront or get an outside loan. For all of these reasons, I sold our starter home after we moved into the new home.
A Feeling of Regret…
A few months later as I got the deal worked out for seller financing on the company stock and I settled into paying a mortgage again, I immediately regretted not holding onto our starter house. It didn’t help either that the real estate market was on a tear north unlike we had seen before. About 6 months later our $319K house would have sold for around $380K. Oh well… just $60K, right?
As I watched this incredible growth of real estate I was bummed. I felt like I missed out on a great time to buy. I didn’t want to jump into this market. Houses under $300K all had multiple bidders, no appraisals, and all-cash offers, it was crazy. I was stuck in this “Zillow Obsession Zone” that many of us get stuck in. I looked daily, knowing I couldn’t land any of those houses and just being bummed. This then lead me to look into something different – Private Real Estate Syndications.
Private Real Estate Syndications
Private Real Estate Syndications is best described as creating a partnership to involve investors in a real estate transaction. Instead of going to the bank for funding, they form an LLC and raise money from investors. This is a win/win and it allows the investors to participate in the upside along the way and when the asset is sold. It is also nice for the company acquiring the real estate as they don’t have to mess with banks or pay fixed interest. Instead, they form a partnership where investors share in the risk and return.
At the time I read a book called The Hands-Off Investor. This was a fascinating read by Brian Burke (Who owns a Syndication Company). Brian talked about all the ins and outs of syndications. There are all shapes and sizes of syndications but what is pretty typical would be a syndication company raising $10 million to buy 3 apartment complexes that they think they can improve on. They would raise $10million from investors, buy the complexes and then start improving the property. They would want to raise the quality of the apartments. They would renovate the kitchens or add amenities and start the process of raising rents. By year 3-7 of the investment, the goal is to have raised rents enough to sell the property or do a cash-out refinance and pay the investors off.
All along the way the investors should get quarterly cash flow, participate in tax benefits and get a big payout when the property is sold. I saw many deals where they estimate your return to be around 15% annually with the projection of doubling your money in the 3-5 year time frame. Of course, that assumes everything goes right.
These are typically for accredited investors only, which is currently defined as an income of over $200K a year or a net worth of $1million outside of home equity. I started reading, listening to podcasts, and looking into this. If you have any interest I strongly recommend The Hands-off Investor by Brian Burke. He is a syndicator and has been for decades. His book does a great job explaining this and giving you details on what to look for from a syndicator. I felt like this was my opportunity to get into real estate, do it passively, and participate in something outside of residential real estate. There were industrial opportunities, people renovating apartments, etc. I was excited until I started talking to some syndicators.
You see, I would get on the phone with these people. They would vet me to be sure I was qualified and I would ask them my questions. One of my final questions was always what is your minimum investment. I liked to act like it was a question I just thought up at the last minute, but truthfully I was scared to ask it. I was shocked when people started telling me the minimum was $100K, $250K, and $500K. Heck, I was just happy I barely qualified as an accredited investor, but now I had to come up with six figures to invest – in EACH deal. I felt like it might be over my head, but it still felt like a good opportunity to participate in real estate passively.
When I talked to Alison about it, who is my “risk barometer”, She told me she was open to it but pictured our life being like something you see in the movies. She would awake one night to find me not in bed, come into my office and see me yelling into the phone “Where is my money… I wired you $100K… what did you do with it?” I took a deep sigh and agreed, that there was some risk here that made it a little outside of the level of comfort. I disappointedly decided I would skip real estate until the market cooled. I plowed $200K into my new mortgage within 5 months of being there and recast the mortgage, dropping the payment to under $800. It felt like the smart thing to do until a real estate deal fell in my lap that I couldn’t pass up.
Isn’t that just how life works? You prepare, you make plans, you work everything out, and then life throws you a curveball.
Alison Here!
We have had so many conversations about real estate. We still do, we actually were talking about it all last night. Ricky likes to think about decisions and research for a long time. He does not like jump in to anything quickly which is a good thing. So, I end up being his sounding board for all these decisions. I try to ask questions so I know what is going on and also to help us stay focused on what we are trying to accomplish. For example, where we were discussing the real estate syndications I was very concerned. It sounded to good to be true and for me that is a red flag. I asked questions like:
“How much money is required?”
“What kind of control do we have in the decisions?”
“Could we loose all of our money in the deal? What would have to happen for that to occur?”
“Can we afford to loose all of that money?”
Our ultimate goal is for you to stop working, Will this help us get there or hurt us?”
“Is this legit!?”
After much research and conversations, this is legit, however it just wasn’t the right thing for us at this time. Part 3 will be about our conversations about finding our rental house, or how our rental house found us. Ricky will talk about all the things he debated over and all the nerdy math that goes along with it. Stay tuned!