Libby invited me to go shopping for costumes for the Halloween gala, but I didn’t want to get sucked down another rabbit hole of crazy spending. So, I took the creative route and headed to the Salvation Army. I snagged a fabulous dress that was shorter than my father would ever allow me to wear in public. It fit tightly around my Italian curves, which worked out well for the costume I had in mind.
The gala was Sunday night. I spent the weekend helping Dylan and a few other volunteers paint the walls at Crossroads. We scraped off all the water-damage, spackled the walls, and painted them a bland white. I suggested using a bit of color, but the director told me the teens would be putting up a series of murals.
While I did grunt work, Dylan tinkered with the electric box, which he called ‘an outdated fire hazard,’ replaced a heating unit, and fixed a leaky sink. Once or twice, he came across some issue that was out of his league, but for the most part, he knew just what to do. Dylan might have dropped out of college, but he’d never quit getting himself an education.
By late Sunday afternoon, paint was splattered on every article of my clothing, in my hair, and somehow inside my ear. After stealing what must have been my tenth wink of the day, I kissed Dylan on the cheek and grabbed my bag to go.
“You never told me what you were dressing up as,” he said.
“Nothing special, really.” I shrugged and avoided his eyes. “I just snagged a cheap cocktail dress at a thrift store.” I figured he’d be proud I’d only spent $19 on my whole costume, but I decided not to offer details. I knew it would just make him jealous. Before he could ask questions, I waved goodbye to the team and scurried out the door.
After the longest, hottest shower of my life, I massaged half a bottle of gel into my hair and wound it into curly cues along my hairline. I plastered a thick layer of mascara on my lashes and turned my lips into a veritable stop sign. I faced the mirror with a bend in the knee and a flirtatious pucker. Betty Boop winked back at me.
“How was the gala?” Dylan asked me the next day. He’d called me during my lunch break at school.
“Libby did a great job on the decorations.”
“The party itself was a bit of a downer?”
I avoided a direct answer. “The firm insisted that costumes were optional.”
Dylan snorted. “I take it corporate attorneys are hardly known for expressing their individuality?”
“You got it. I was one of about ten people who showed up in costume. Most of the lawyers showed up in suits.”
“Ouch.”
It was a good thing we were on the phone. It was easier this way to tell him only what I wanted him to hear.
I didn’t tell him the band was on fire. I didn’t tell him the bartenders were dressed up as skeletons, and one had concocted a special drink for the evening called Spook of the Night with floating olives made to look like eyeballs. I didn’t tell him how Libby and I had bid on an item at the silent auction labeled: Ladies Spa Day for Two: Massage, Manicure, and Margaritas. At first, we bid to drive up the price, but whenever we got outbid, it rankled me to the point that we always fought back. Our eventual victory set us back $185 each, but why shouldn’t we pamper ourselves once in a while?
Mostly, I didn’t tell Dylan about all the attention I drew in my Betty Boop costume, particularly from a tall Italian who was a principal in a venture capital group Kyle’s firm represented. I politely refused Anthony the first time he asked me to dance, but like a true hot-blooded Italian, that only spurred his interest. The next refusal was harder, by then, I was on my second Spook of the Night. The third time he asked, I was Spooked enough to give in, and we hit the dance floor. Anthony moved across the parquet with the grace of an athlete, and whenever he twirled me, my little Betty Boop skirt flew embarrassingly high. I drew a line when he offered to drive me home. Still, when the valets brought around our cars, I couldn’t help eyeing his midnight-blue Porsche, and I cringed when he saw my dented Honda.
“What did you dress up as anyway?” Dylan asked, drawing me back to the present conversation.
I messaged him a shot of me as Betty Boop.
“All of a sudden, I’m wishing I’d gone,” he said.
I wish he had too.
Dylan was right: there was philosophy, and then there were facts. No matter what I thought of the banking regulations, the facts were that I was authorized to spend $300,000 on a four-unit building, and now I wanted to find one. Of course, I didn’t have to buy a four-unit place. I could have house hacked with a triplex or even a duplex, but then I’d have less income from the house and accordingly could borrow less. And this wasn’t like my credit card debt. This was good debt. It was leverage that could bring me more income over time, and I wanted as much of it as I could get.
As with the used cars, I went online and researched what I should be looking for in a multi-family house. The first thing I learned was that buying real estate was nothing like buying a car. I couldn’t just go online and look up the price of an eight-year-old, cherry red Tudor. Each house is unique, so it’s priced uniquely. That’s not to say I couldn’t find data. I found plenty of data. Mountains of data. I also found tips on what to look for. Thousands of tips. And did I mention buying strategies? Dozens of buying strategies.
When school let out early on Wednesday, I went outside to meet Cynthia, the real estate agent, who, along with Libby, waited for me in the parking lot in her white Lexus SUV. As I didn’t quite feel ready to start looking for a house for me, I thought I’d accompany Libby on her search.
After brief introductions, I asked Libby, “Why the sudden urge to buy a house? You guys have barely been in your apartment a year.”
“I think a little of Dylan is rubbing off on Kyle. His firm had a really good year, and they just announced a massive year-end bonus. Kyle said, ‘Why the hell are we dumping all this rent money into the toilet? Let’s use the bonus as a downpayment and start paying mortgage instead.’”
“Smart man, your fiancé,” Cynthia said.
“He gave you the job of buying it?” I asked.
“Well, obviously, he’s going to see any house before we buy it. But he doesn’t have the time to go looking around at twenty places. I can’t blame him. Cynthia and I have already seen three houses today, and I’m totally overwhelmed. There are so many variables, like number of bathrooms, the size of the kitchen, and the age of the house. Then, of course, there’s price...” She reached back and squeezed my knee. “Thanks so much for coming with me, Amber.”
“I assure you, I’m being entirely selfish. Dylan’s been pushing me to buy as well, so I’m hoping to get myself an education.”
“Well, if you want an education,” Cynthia flicked on her left turn signal, “it’s important to start with the three most important factors in real estate.”
“Oh, I know.” Libby bounced in her seat. “Cynthia told me this morning.”
“What are they?” I asked.
“Location, location, location.”
“That’s right.” Cynthia eased onto Park Lane. “A house isn’t like a car you can take wherever you want. Where you find it is where it stays, so you’d better choose wisely. That’s why I selected the next house we’re going to see, Libby. It’s a bit bigger and a bit pricier than you specified, but it couldn’t be better situated. It’s less than a block from the best primary school in the district, and as you’ll see, it’s just stunning.”
Cynthia didn’t lie; the house was gorgeous. The downstairs had all hardwood floors and an open plan kitchen that looked out on the back yard. The master bedroom, one of four on the second floor, had walk-in closets and a giant bathroom that had two sinks, a jacuzzi bath, and a separate shower.
“One of my favorite features of this house is this walkout basement.” Cynthia led us down carpeted stairs. “This gives the children their own play space to make as much noise as they want without disturbing the adults upstairs.”
Children? They weren’t even married yet. Libby’s face flushed, and she squeezed her hands into her chest. “Can’t you just imagine our kids playing here?” She whispered into my ear.
I matched her body language and forced a smile, but before I came up with something sappy to say, Cynthia led us back up into the dining room and kitchen. Libby periodically opened cabinet doors to peek inside but was mostly quiet as Cynthia pointed out the features, including an office that would be perfect for whenever Kyle brought work home.
Libby said next to nothing until we came back around to the foyer, and Cynthia asked, “What do you think?”
“It’ll need new curtains, and I’ll want to repaint the living room and den to brighten them up.” Libby always had a great eye for design. “But otherwise, I wouldn’t have to change hardly anything.”
“That’s something to keep in mind.” Cynthia slid her hand across the granite kitchen countertops. “Some of the other places will need work, especially that first one we saw. You’ll have to add that to the cost of the purchase. And renovations aren’t usually covered by your mortgage.”
“I thought they were,” I said. “My banker told me that with an FHA loan, I could get renovations covered by the 203(K) provision.”
Cynthia ran her thumb across her manicured nails. She did a poor job of hiding the cringe on her face, the same one cheerleaders back in high school would give if you showed up in thrift store clothes. “Uh. Yeah. That might be true for low-income housing, but none of the estates in this neighborhood are eligible for such a loan.” She turned back to Libby and reconfigured her lips into a dental poster smile. “So, do you want to make an offer?”
“I love it.” Libby’s arms entangled around one another. “I’m just concerned that it’s above our budget.”
“It is a bit above, and that’s certainly something you’ll have to discuss with your fiancé. But…,” Cynthia pointed her pen like a schoolteacher, “bear in mind: your house will likely be the largest investment you’ll ever make and the largest asset you’ll ever own, so you want to choose it well.” She opened her notebook to the listing of a smaller house with blue shutters. “That three-bedroom we saw today is more what I’d call a ‘Starter House.’ It’s well within your range and should be fine for your needs for the next five years or so. Many couples choose to go that route, to start small and then upgrade later.”
“You don’t like that strategy?” Libby asked.
“Truthfully, I don’t.” Cynthia closed her binder again and faced Libby with a worried expression. “Moving is one of the biggest stresses in life, on the same list as divorce and losing a parent, and beyond the stress, it’s expensive. I never like the idea of setting yourself up to have to move, not when you can buy a 30-year house right off the bat.”
“Hmm…” Libby’s face fell.
“But the bigger reason is that real estate around here is exploding. There’s no guarantee you’ll be in any better position to buy a house like this one in five years than you are now. And let’s face it, houses like this, with everything a family could need, right next to a great school and down the block from the park, they just don’t come up every day. If it were me, I’d grab it.”
“How is the pricing relative to the other houses in the neighborhood?”
“It’s a shade high,” Cynthia said, tipping her hand back and forth, “but I know they’re open to offers.”
“OK. We’ll have to think about it.”
“Of course, but don’t think too long. This one just went on the market, and I don’t expect it to stick around. In fact, if your fiancé wants to come see it when he gets off work, I’m willing to come back and show it again tonight.”
This all felt very pushy to me. We’d only been in this place for twenty minutes, and it was selling for a hundred times more money than I’d ever held in my hands at one time. Was Libby really supposed to jump so quickly?
My friend mirrored my sentiments. “Whoa, that seems fast.”
“Don’t I know it.״ Cynthia shook her head. “You’d think that with such a major life choice, you’d want to take your time, but real estate’s a fast-paced game. Those who wait get beaten to the best opportunities by those who act.”
“You’re saying we should decide tonight?”
“I can’t even guarantee it will be around that long. I’m showing it once more late this afternoon, and I already have two appointments scheduled to show it tomorrow.”
Libby turned to me. “What do you think, Amber?”
“It’s a great house. But I don’t know. It does seem like short notice.”
Cynthia gave us a sly stare. “You want to know my favorite buying trick? You make an offer, but you put in a contingency, like it has to have a clean inspection report, or your mother-in-law needs to approve it or something like that. That way, if the seller agrees to the offer, you’ve locked in the property and the price, but you bought yourself time to think. Then if you change your mind, you can always say there’s something you didn’t like on the inspection report, or your mother-in-law refused to give her consent. You could even make an offer now, and we’d make it contingent on your fiancé agreeing. What do you say?”
My trip with Cynthia had given me a lot to consider. All through my evening run through Granger Park, I kept thinking about that house. The shame was that the kitchen, with induction stove, dual ovens, and an island big enough to house a marina, would be completely wasted on Libby, but I would thrive in a space like that. My own kitchen felt downright cramped by comparison. Still, I put on a pot of fusilli and invited Dylan to join me after work.
“How’s the house hunt going?” he asked as we sat down to dinner.
“I’ve learned quite a bit online, and I tagged along with Libby today. They’re going to put in a bid on this gorgeous house we saw this afternoon. But I haven’t seen anything for myself yet. Any advice to get me started?”
Dylan swallowed a mouthful of fusilli. “The first thing to know in real estate—.”
“Yeah, yeah, I know.” I puffed up my chest and pointed like Jiminy Cricket. “Location, location, location.”
“You finished?”
I shrank back. “That’s not what you were going to say, is it?”
“No.”
“Sorry. I’m listening.” I crossed my legs and folded my hands into my lap. “Just sitting here politely, not saying a word.”
“Let me guess, you heard that location line from the agent today?”
“Yeah.”
“What else did she tell you?”
I took him through all the tidbits I’d picked up. Dylan scowled every now and then but mostly attacked the fusilli with abandon. When I finished, he said, “I want you to throw everything you think you know about real estate into the garbage.”
“So that whole thing about location?”
“Look, I’ve heard of retail businesses that invested millions of dollars to move one store over because being on a corner gave them that much more foot traffic.” Dylan paused as he buttered a piece of french bread. “A retail store might go crazy for location, but that’s not the type of real estate we’re doing.”
“What about the other things she said, like about your house being your biggest asset and investment?”
“That’s a load of crap.” Dylan pounded the table. “For Kyle and Libby, that house will be their largest liability.”
“How can you say that?”
“It’s easy. In addition to the costs of upkeep, they’re going to have to pump a tremendous amount of money into their mortgage payments each month.”
“But much of that money will be paying down what they owe, and they’re in a hot area. The property should be worth more over time.”
“If the property does go up, then on paper they might be making money, but paper profits are a myth. The only way they’ll make anything from this house is when they sell it, and they have no intention of selling it for decades. Until then, it will be a financial drain.”
“It’s still an asset.”
“According to the basic rules of accounting, yes, it’s an asset. But I want you to start thinking in terms of Cash Machines. According to Cash Machine logic, anything that produces income is an asset. Anything that drains income is a liability.”
I cut up my slice of beefsteak tomato as I processed his words. “Cynthia, their agent, told Libby another alternative was to go into a starter home but warned her that property values are going up so fast they might not be able to afford the bigger home when it’s time for them to transition.”
“Look, if they want to put all their money into real estate because they think the market’s on the rise, that’s fine. But this isn’t the way to do it.”
“How would you do it?”
“Let’s say the most they can currently invest in real estate is a million dollars, represented by this salt.” Dylan held up a salt shaker. “If they buy Cynthia’s argument that the real estate market is going to explode, they might want to max out the amount they’re allowed to borrow and go all in.” Dylan opened up the salt shaker and spilled all the salt out onto the counter.
“Hey! I just cleaned that.”
Dylan ignored me. “Cynthia would now have them put all their money into one giant home, that they hope will one day be filled with children, but for now will be mostly empty.” Dylan pushed all the salt into one big pile. “Alternatively, they could buy a home that is just big enough for their needs right now.”
“Perhaps they could move into a crypt, like some ghouls I know?”
“Knowing Kyle’s tastes, let’s say that their bare minimum would be somewhat more luxurious than my own. Let’s call it $250,000.” Dylan moved about a quarter of the salt into a smaller pile. “If they put that other $750,000 into rental properties…,” Dylan used his knife to separate the remaining salt into lines like a coke addict preparing to get high, “then they could make income even in poor economies.”
“But eventually they do want to have a big family.”
“Eventually. Whenever they need a bigger home, they sell one of the rentals and upgrade.” Dylan moved one of the salt lines into the big pile. “And they never have to worry about getting priced out of the market, because their rental properties will be appreciating along with the market.”
Dylan’s logic felt so cold and calculating. “You’re only talking about financial sense. What about emotional? Don’t you think it’s comforting to move into a house and know that this is going to be the home you raise your family in? Like, I’ve done nothing to this apartment,” I gestured to the bare wall above the fireplace, “because I’m eventually going to leave it. But once I buy, I want it to feel like home.” My eyes glazed over as I imagined living in a place like the one I’d just seen with Libby. “I’m going to paint the walls; I’ll give it my personal touch.”
Dylan placed his hand on my arm, waking me from my reverie. “Touches like paint and decor aren’t very expensive. It’s better that you invest in those every few years then sink into debt to save yourself that effort.”
“Every few years? Cynthia said moving is one of the biggest life stressors people go through.”
“Moving’s a pain. Especially if you have as much stuff as Libby and Kyle keep accumulating. But to avoid one stress, I’m not going to take on a bucketload of others. The stress of moving is intense when you’re in it, but then it passes. The burden of making a living is constant for those without a Cash Machine. And the strain of keeping up their chosen lifestyle will keep Kyle working 60 hour weeks. It’s nice that his non-existent kids will have a huge basement to play in, but something tells me they’d rather have Daddy at their ball games.”
Dylan using the word “Daddy” pulled at my heartstrings. Was he thinking about Kyle and Libby or us? Still, the thought of moving from crypt to crypt felt not only sad but destabilizing. It’s one thing for a bachelor to grab his five possessions and bike over to the next pad, a whole other thing to keep moving a family around every time you find a good investment. “Don’t you want to put down roots?”
Dylan grabbed my hand and gazed deep into my eyes. “Of course, that sounds wonderful. But think hard about this decision Kyle and Libby are making. They think they’re buying an asset, but they’re actually buying themselves a giant liability because they’ll already bear the costs of kids’ rooms when they have no kids. They’ll pay a premium to be next to a school their kids won’t attend for at least six more years. They’ll pay higher property tax for this place, higher utilities, they’ll pay landscaping costs for a yard that no one will use, and the biggest thing is that they’ll pay massive interest each month.”
His voice grew in intensity as he added, “If the cost of securing my financial future is moving once every few years when I’m young, so be it. I never want to live in more house than I need. At least not until I’m financially independent. If I have the cash to buy a large house and I think it’s a good investment, but I only need a small apartment myself, then I’d rather buy a multi-unit house and live in a piece of it.”
His words sounded cool and logical, but the warmth of his hand told a whole other story. In the depth of his gaze, I saw him as a father for the first time. He wasn’t just trying to get rich; he wanted to build a life where he’d be present with his family. How many dance recitals had my father missed because he had a big case at work? The word “Daddy” still reverberated in my chest. If there was any chance of being part of that future, I was going to have to jump into his way of doing things.
“Righto. A multi-unit house.” I shook myself away from his gaze and brought myself back to the world of dollars and sense. “Which brings us back to house hacking.” I got myself a pen and paper. “You didn’t like my location answer. You didn’t like anything I heard from that agent, did you?”
“She was right about one thing.” Dylan sank back into his plate and layered a piece of mozzarella and basil atop a chunk of tomato. “If you see a property you like, you’ve got to move fast. Making your offer contingent is a way of protecting yourself lest there’s anything seriously wrong. I know investors who make offers on properties sight unseen, then rely on their contingencies to get them out of the deal if they don’t like it.”
“Glad to hear you two agree on at least one thing.” I wrote Rules at the top of the page and underlined it. So what do you consider the primary rule of real estate investing?”
“You make your money when you buy.”
I held my pen over the paper but didn’t write anything down. “That doesn’t make any sense. Wouldn’t you make your money when you sell?”
“There are people who try to time the market. They buy in cities and neighborhoods where they think prices will increase, and they make their money when they sell. They’re called real estate speculators. But that’s not us.”
“So how do we make money when we buy?”
“Two ways. One, we buy properties at below market rates.”
“Got it.” I wrote down buy at below market rates. “So if we can buy a property at 20% less than market and then turn around and sell it at full market price, it’s as if we made the difference in the value when we bought, right?”
“Yes. The people who buy and sell like that are called house flippers. But that’s also not us.”
Us? I didn’t even own anything yet. “So who, my dear, are we?”
“We buy and hold. Mostly, we aim to buy cash flowing properties. A property cash flows when it brings in enough money to cover its costs and still generates a profit.”
I wrote down his definition. I was such a good little student. “In essence, we’re buying ourselves an income stream?”
“Correct.”
I considered the difference between this type of investment and the speculating Cynthia was pushing Libby to do while I scooped up some pesto with my fusilli. “Since we know the rental value when we buy the property, it doesn’t even matter so much if the market goes up or down. Is that what you mean?”
“If the market goes up, it can be a great thing for us. But you’re right, the rental market is far more stable than the purchasing market, so even if the cost of homes goes down, our income stream on the property should be unaffected.”
“But why would anyone sell a house for below market value?”
“There are quite a few reasons. I bought my first property on foreclosure. Banks are not in the business of buying and selling properties, so when they foreclose on a place, they often sell below market price to get money back as fast as they can. But it’s hard to buy foreclosed places these days.”
“Why is that?”
“The market’s been going up for years. Most foreclosures happen when the market goes down.” Dylan grabbed a piece of paper and wrote down numbers as he spoke. “Think about it. If you owe $240,000 on a house that is now only worth $200,000, you might be tempted to walk away from it and let it become the bank’s problem. But if the house is worth more than you bought it for, if you owe the bank $200,000 on a house that’s now worth $240,000, why would you default and let the bank take your profits? If you don’t have the money to pay your mortgage, it’s better to sell the property, pay off the bank, and pocket the difference.”
“So other than foreclosures, how else can we buy below market?”
“I can take you through the basics if you want, but I’m no expert.” Dylan cleaned up the last of the sauce with a chunk of french bread and popped it in his mouth. “How about if you put on another pot of fusilli, and I’ll ask Jade to come over and explain it herself.”
“Who’s Jade?”
“She’s my wholesaler.”
Jade was the anti-Cynthia. Cynthia’s hybrid-electric SUV glided up the driveways of multi-million dollar homes. Jade’s Mustang rumbled down my street. Had this been a movie, the soundtrack would have blared Bad to the Bone, but instead, her radio blasted techno music that drowned out even her souped-up engine. Cynthia comfortably showed off marble-floored foyers in her matching pink blouse, skirt, and heels. Nothing about Jade matched. Her leather jacket screamed 80s punk rock, her jeans were ripped, her pitch-black hair was dyed with streaks of the same flashy red as her lipstick, tattoos with a tiger and Chinese characters ran up her neck, the makeup on her pale skin would embarrass most whores, and those candy-colored nails looked like talons. She was twenty-two at most and looked like she’d feel more at home at a rave than a real estate club.
She shook my hand with a polite “how do you do,” then attacked the fusilli with an appetite that put Dylan’s to shame. When she came up for air, she asked, “So what’s the score?” I noticed green speckles in her deep blue eyes. Behind all that noisy garb, Jade was gorgeous.
“House hack.” If Dylan was at all embarrassed by Jade, he didn’t show it. “Quadruplex if we can find one.”
“Not many quads around. Cash or charge?” She asked Dylan, as if I wasn’t even there.
“Amber needs a full mortgage,” Dylan replied. “FHA loan if we can get one.” I just sat there, nodding like his sidekick or something.
“Bummer. That limits the options. Neighborhoods?”
“Preferably B. I’m willing to go down to C+. Maybe even C if it’s a great property, but this is Amber’s first deal, so I want easy. Definitely no D.”
“Can someone please tell me what’s going on?” I tugged at Dylan’s shirt like a snotty kid. So embarrassing. “What the hell are those letters?”
Dylan turned to me. “Kyle and Libby are looking to buy in an A grade neighborhood. The scale goes down to D. You wouldn’t feel safe walking at night in a D neighborhood.”
“Why would anyone want to buy in a D neighborhood?”
“Cheaper purchase price and better returns.” Bits of bread flew out of Jade’s mouth as she spoke. “The people who want to live in A neighborhoods have good jobs, pay their rent on time, and rarely go on three-day benders that leave their houses trashed. The slum lords deal with a lot more risk, so they collect higher rent relative to the purchase cost.”
I held Dylan’s bicep with both my hands and forced my sweetest smile. “I’m sorry, Jade, but I’m still not even sure what it is you do.”
“I’m a wholesaler.”
“What’s a wholesaler?”
“You ever seen those signs that say ‘We Buy Ugly Houses?’ Those are from wholesalers. We find houses, cheap.”
“And you do what with them?”
“I agree to terms with the owner.” She pulled another hunk of bread and pointed it at me. “Then, I sell the term sheet to someone like you to make the actual purchase.”
Something about this chick didn’t add up. “If you’re getting such great properties, why don’t you just buy them for yourself?”
“Cash retention isn’t my strength, and my credit is hardly what you’d call impeccable. Besides, property management isn’t my gig. My deal is I get in fast and get out faster.”
“Why does needing a mortgage limit the options?” I asked.
“There are hundreds of reasons that someone sells a house for below market,” Jade said, “and none of them are good.”
“Like what?”
“Some are just structural.” She slipped a toothpick out of my ladybug holder and pointed to the ceiling. “Say you’ve got a hole in your roof, and you don’t have the cash to fix it. It might only be a $3000 repair, but no bank is going to write a mortgage on that property until it’s fixed. The law of supply and demand. Once a mortgage is out of the question, 95% of buyers disappear. The price comes crashing down.”
OK, I could see the logic in this. “So a cash buyer could come in, buy the house, fix the roof, and then sell it at market?”
“That’s one option.” She picked at the basil stuck between her teeth as she spoke. “The banks are anal as hell. I did a property last month where the first floor was six inches too low. Six inches! The banks all cited some regulation about the water table and said they’d have to consider it a basement. Guess what that did to the property assessment? It put it in the toilet.”
Now she was losing me again. “That seems harder to fix than a hole in the roof.”
“Way harder. Not worth doing the work. Not a great fit for a house flipper. But perfect for someone looking for a cash flowing property on the cheap. Those six inches may have tanked the purchase price but don’t do squat to the rental value.” She gulped down a whole glass of water in one go, slammed it on the table, and asked, “You got anything sweet around here? My mouth reeks of garlic, and I’ve got plans tonight.”
My fusilli had just the right amount of garlic in it, but I suppose it was natural for her to be sensitive to garlic, given her resemblance to a vampire. “Uh, sure.” I gritted my teeth the whole way to the kitchen, where I pulled out a box of chocolates I’d gotten as a gift from the PTA. On my way back, I asked, “But there are also cheap places without structural issues?”
“Sure. I did a deal once where there was a deadbolt on the bedroom door. Who the hell has a deadbolt on their bedroom?” Jade nodded slowly as she spun her tale. “Turns out this woman was married to a real dirtbag. This guy would get drunk and beat the crap out of her all the time. When he could catch her, that was. The deadbolt was how she kept herself and her kid safe when he went into one of his rages.” She picked through the chocolates, touching one after the other, but only took a dark one with white stripes.
“How do you know all this?” I grabbed three latte-colored caramel squares before she could get her talons on them.
“I’m a wholesaler. It’s my job to know what’s wrong with a property. People tell things to their wholesaler they’d never tell their therapist.” She tossed another dark one into her mouth. “Anyway, she’d decided that she’d had enough. But you don’t just calmly tell a guy like that, and you sure as hell don’t put a For Sale sign on your lawn. I checked it out; the house was all in her name. The day of the closing, her movers got her out of there in three hours flat. The jackass came home from work to find a pair of bouncers from the local club waiting for him, one carrying a baseball bat.”
I almost spit out my chocolate. “They beat him up?”
“Oh, no.” A sly grin came up Jade’s face. “These guys are pros. They gave him a letter from his wife explaining she was leaving him, had sold the house, and was filing for divorce. The new owner changed the locks and hired the bouncers to make sure the scumbag didn’t go into a rage and wreck the place. The bouncers opened the door and escorted the guy from room to room while he gathered his things. Then they locked up and left.”
“All this is legal?” I asked.
“Wholesaling is a grey area in the law.”
While Jade downed yet another of my chocolates, I mouthed to Dylan. “What the hell are you getting me into?”
He perked up and smiled like a puppy. “Real estate.”
My head tilted towards my shoulder. “Funny how none of my other friends risk jail time when buying a house.”
“Chill out.” Jade smacked my arm and rolled her eyes. “I’m the only one taking risks here. There’s nothing illegal on your end.”
“Why is that?” I asked.
“It’s a question of whether wholesalers are brokers or not.” She leaned in, and I almost gagged on her perfume. “I’d say no, I’m just going out and finding you a deal. But licensed brokers hate competition, so they argue we shouldn’t be able to do deals without becoming brokers first, which none of us would ever do. Far too much time, money, and effort. So they harass us when they can, but it’s no big deal ‘cause most of what we do happens under their radar.”
I turned to Dylan. “Why can’t I just call a normal agent and go see a normal property? That woman I met today doesn’t even charge the buyers a commission.”
“Typical agent commissions are 6%,” Jade said, grabbing my attention. “You’re right they’re on the seller, but that doesn’t mean the buyer doesn’t pay for them. Think about it. You sell a house for $100,000 with an agent. How much’ll you pocket?”
“Uh…$94,000.”
“So if before you get an agent, a friend comes up to you and asks what’s the lowest you’d take for your house, what would you say?”
“I guess I’d say $94,000. OK, I got it. Still, I can’t do a cash-only deal, so does any of this help me?”
“Not every wholesale deal requires cash. Needing a mortgage limits your wholesale options, but you still have a chance of finding a deal way better than anything an agent will show you off the MLS.”
“What’s the MLS?” I asked Dylan.
He rubbed my shoulder. “The Multiple Listing Service. That’s where the online real estate sites get their properties, and where most real estate agents find them as well.”
“The thing about limiting yourself to the MLS,” Jade licked the smudged chocolate off her fingers as she spoke, “is you’re competing with every other eligible buyer, so you’re probably paying full market price or close to it.”
“You don’t go through the MLS?”
Jade rolled her eyes. “Hell no. There are no wholesale deals on the MLS.”
“Where do you find your listings?”
“My deals aren’t listed.” She poured herself another glass of water and downed it in two seconds flat. All that chocolate must have dried her out. “Typically, I buy lists of homeowners and send them postcards saying I want to buy their house.”
“And people say yes to that?”
“Some do. Then I’ve got to figure out why they want to sell and what stops them from doing it through the MLS. Sometimes there’s nothing wrong; they just never thought to list it or couldn’t be bothered. Looking for a property for you, I won’t bother with a postcard, though.”
“Why not?”
“I do postcards when I’m targeting thousands of homes and hoping to find a couple of dozen owners willing to talk. You’re looking for a quadruplex. There aren’t a ton of those around, and even fewer eligible for a bank loan. I’ll narrow down the list, identify the owners, and knock on their doors. Either we’ll get lucky, or we won’t.”
“What happens if we don’t get anything?”
“Then I’ve wasted a few hours of my time, and you don’t owe me anything. You can decide if you want to expand the search to triplexes and duplexes or wash your hands of me. It’s not like we’re exclusive anyway. You think I care if you look yourself or with an agent?”
It was abundantly clear that this girl didn’t care. “What happens if you find something?”
“I negotiate the deal and get them to sign off on it. You’ll get first dibs to buy it off me. You’ll check out the place. If you want it, you give me $5000, and it’s yours. If you don’t, I’ll sell it to someone else or let the deal fall through.”
“You can do that?”
“Oh yeah, I always have contingencies in my deals. But I rarely need them. I’ve got quite a few repeat buyers who trust that if I bring them a deal, it’s a good one. Some of them buy off me sight unseen.”
My gaze went from Jade’s thick eye liner to her jagged earrings to her three-inch heels. Did I really want to enter the real estate underworld? I felt squeamish as I turned to Dylan. His puppy grin was back, and he nodded. I didn’t know about Jade, but I trusted Dylan enough to take the risk. “OK, let’s try it.”
The day after my meeting with Jade (after I scrubbed down everything she’d touched), I began my hunt in earnest. I wasn’t about to seek out abused wives looking to sell fast and disappear in the middle of the night. That wasn’t my kind of real estate. But if Jade could do all that, I could at least call an agent and browse through online listings.
My first call, during a free period in the school day, was to Cynthia. “Amber, I was hoping I’d be hearing from you. Did you hear that Libby’s offer was accepted?”
”I heard. That’s a great house. But totally out of my price range.”
“No problem. Let’s start simple. What neighborhood and price range are you looking in?”
I was proud of myself that I knew enough real estate jargon to tell her exactly what I wanted. “I’m looking for a B neighborhood, though I can go down to C+.”
“I’m sorry, I’m not following you. What’s your price range?”
“Up to $300,000.”
Cynthia coughed, and her voice dipped a few notes. “Well, that’s somewhat lower than I normally go, but I have some ideas that might work for you.”
“That’s for a quadruplex.”
The silence on the line made me cringe.
“You know, Amber, I’m not sure I’m the agent for you. There’s a new girl in my office who’s willing to do some lower-end housing while she gets up to speed. Let me give you her number.”
I wrote the number down but called Dylan instead. “I want to start seeing homes with an agent. A real agent.” I took a breath to keep my voice calm. “They don’t have to drive a Lexus, but I prefer someone who looks less at home on a wanted poster than Jade. Don’t you have anyone for me?”
“Sure, hang on a second.” Dylan put me on hold and was back a moment later with another guy on the line. “Phil, I’d like you to meet Amber. She’s pre-approved for an FHA loan and wants to start looking at properties immediately.”
“Fantastic, Amber. What sort of neighborhoods are you interested in?”
I felt like a fool repeating what I’d said to Cynthia, but I braced myself and said, “Ideally B, though I’d be willing to go down to C+.”
“No problem,” Phil said, and I immediately sighed with relief. “What have you been pre-approved for?”
“Depending on rental values, I should have a budget of around $300,000 for a quadruplex.”
“That budget is fine.” He spoke at an easy pace, which I found calming. “Quads aren’t the easiest properties to find. Are you willing to consider triplexes as well?”
“Yes, but...”
“But the budget would be a bit lower, I understand completely.” I could almost hear the soothing smile on his face. “Do you want me to send you pro formas and comps?”
My head jerked back. “Sorry, are we still speaking English?”
Dylan broke in. “All that’s a bit above her head at the moment, Phil. Why don’t you take her out and show her a few places?”
I nodded. “Yes, what Dylan said.”
“Great,” Phil said. “When would you like to start looking?”
“Any chance we can do it after work today? I’ll be off at 3:30.”
“Absolutely. I’ll set up our first appointment around 4 pm to give you time to get there. Does that work?”
“That sounds wonderful. I’ll see you then.” My hand rested on my chest. “Dylan, please stay on the line.”
“Is that more your speed?” Dylan asked once Phil dropped off.
“So much more. But he’s experienced, right? I called Cynthia earlier, and she tried to push me off on the new girl in the office. She also didn’t have the slightest idea what I meant when I asked for a property in a B neighborhood.”
“That’s what you get for calling Cynthia before me.”
“What’s that supposed to mean?”
“Look, in your school, the kids have art classes, right?”
“Yeah, so?”
“Let’s say the art teacher gets sick one day. The normal substitute is unavailable, but they hear of this other guy who’s extremely qualified. He’s got a Ph.D. in Art History and is a professor at the University. He comes into class and starts lecturing the kids about Gaugin. Good fit?”
I laughed. “Obviously not.”
“And it doesn’t mean that either the art teacher in your school or the professor are bad teachers. There are different types of art teachers in the world. The same with real estate. Cynthia deals with high-end, residential clients. She’s all about location. She’s going to take a handful of clients and a handful of properties, and really work them both. She’s a saleswoman, and she’s going to do everything she can to make one of her clients fall in love with one of her properties. This is a whole other bucket of fish. The fact that Phil’s willing to work within your purchase price doesn’t mean he’s anything like the new guppy in Cynthia’s office. Phil probably sells more properties in a month than Cynthia does in a year.”
“How can he do that?”
“He’s swimming in a different ocean. He deals with investors. His clients don’t fall in love with his properties; they buy when the numbers work out.”
“So his clients aren’t looking for a love affair. Why does that mean he sells so much more than Cynthia?”
“He casts a much deeper net.”
“What’s with all the fish talk? Is that more of Luther’s influence?”
“Could be.” I could almost hear him smiling on the phone. “Look at Libby’s case. Now that she’s bought herself the 30-year house, Cynthia will never hear from her again. Each time she sells a client like Libby, Cynthia has to go out and find another one to take her place. Phil has clients who buy from him multiple times a year. For some of them, seeing the property is only a formality. By the time they step in the house, they’ve already looked at the pro forma, so they know exactly what their income and expenses should be, and they’ve looked at the comps, which tells them what similar properties in the area have recently sold for. For them, it’s all business.”
That triggered a memory of something Jade said. “Will Phil’s clients ever buy from him sight unseen?”
“Absolutely. He usually finds his properties on the MLS, so he’ll rarely find outrageous deals. But when he does, it’s a lucky client that gets first crack at the property. His more successful clients know enough not to hesitate, even long enough for a viewing, lest they lose out to someone else.”
“This first property is a triplex selling for $275,000,” Phil said that afternoon. “One thing that I love about it is that it’s just a block down from the hospital.”
“Dangerous neighborhood, is it?” I asked.
Phil looked confused. “No, why do you say that?”
“Why else would it be an asset being so close to a hospital?”
Now he grinned. So far, I liked Phil. He was a clean-cut guy in his mid-thirties and felt like a younger Morgan Freeman. He wore a blue polo shirt and drove a Subaru Forrester. Perfect. Not too high-end, not too scary. “Close to the hospital is good because that means there’s a steady influx of high-caliber tenants. Doctors doing their residencies love to live close by.”
“Got it.” I needed to start thinking more like an investor.
We walked into the first-floor apartment, a spacious two-bedroom. “This house is sixty-years-old, has hardwood floors throughout, and is structurally sound. It doesn’t look like there’s been much work done to it over the years, so you might want to upgrade things like the electricity and appliances.” He walked me through to the back. “There’s one thing in particular that made me feel like this place could be a good fit for you. Look at that: a back door.”
The door opened onto what could best be called a mudroom. Phil grinned as if he’d just shown me a piece of hidden treasure, but I just stared back at him blankly. “And that’s exciting because…”
“Because you were hoping to get a quadruplex, and this one’s only a triplex. You’re looking to maximize the rental income you can get with a property that still qualifies for a primary residence mortgage.”
I still didn’t get it.
“The doctors who are most particular about getting a rental close to the hospital are those here on rotation. They come for three months and then they’re gone. While they’re here, they’re working their butts off, and the last thing they want to think about is their housing. Granted, they’re a bit more work than getting long-term tenants, but they’ll pay a premium for places that are fully furnished and close by. “
“Is there a hidden invisible apartment I’m missing here?”
“Yes!” Phil gave me a high-five. “That’s exactly it! This back door allows you to divide the ground floor apartment into two, one large, one small. The smaller one will be perfect for doctors passing through on rotation and should give a nice boost to the cash flow of the house.”
My vision expanded. I saw where a kitchenette would fit right next to the bathroom and how I could add cute touches to make this place feel homey to a resident living far from home. I was still taking baby steps, but I was starting to get it.
Once we finished the walkthrough of the house, we left my car there, and I rode with Phil to the next place. It was time to get a deeper understanding. “Walk me through the numbers.”
“The house is listed for $275,000, and I think you should be able to get it for $265,000. I expect the attic apartment will cash flow at about $75 a month. That’s the least valuable, so you might want to take that one yourself. The middle apartment should bring in $125 to $150 a month. The bottom one should do the same, but if you divide it like I’m suggesting, I think that apartment could cash flow $400 or more.”
“Slow it down for me, Phil.” I pulled out my notebook and a pencil. Math demanded a freshly sharpened #2. “How did you get to those numbers?”
“OK, we’ve got about a ten-minute drive to the next place, so let me give you a real basic overview of real estate accounting. Cash flow is the amount of money you have left in your pocket at the end of each month after paying your expenses. Have you got that?”
“Yeah, that much I understand.”
“OK, good. Coming up with the number is not quite as simple as taking your income and subtracting your expenses, though.”
“Why not?”
“Because many things can go wrong and you need to be prepared. In reality, a quadruplex might have $2000 of positive cash flow one month and a $500 loss the next.”
“Why?”
Phil stopped at a red light and faced me. “Because tenants move out, and it might take a month or two to replace them. Things break, and it might cost you money out of pocket to fix them. So when investors look at properties, they always leave a margin of safety by making conservative estimates and having cash reserves for when things go wrong.”
“Like what?”
“You could get a tenant who skips town, or worse, a squatter who refuses to pay rent. The plumbing could go bust, or the roof could start leaking after a storm. Anything’s possible.”
My mind raced, thinking of all the repairs my parents had made over the years, the worst of which was a rat infestation that evaded the efforts of the best exterminators. My stomach sank as though I’d just swallowed three eggs whole. “That sounds like a lot of headaches to deal with.”
The light turned green, and Phil stepped on the accelerator. “It’s only a headache if you’re not prepared. That’s why smart investors buy properties that give them enough wiggle room to cover difficulties. Plus, we add extra wiggle room on top of that. In running your numbers, you’ll be safer assuming eleven months of rent per year instead of twelve. Each month you’ll want to put aside a bit of cash for repairs.”
“I’m going to have to deal with all these repairs like Dylan does?”
“Not if you have a property manager. Adding a property manager will cost you about 10% of your rental income.”
“But if I manage them myself, I can just leave that out, right?”
“I always encourage clients to leave it in.” Phil made a right on Brookline Ave. “That doesn’t mean you can’t do the management; it just means when running the numbers on a property, run them with the assumption that you’ll be paying a property manager. If the numbers still work out well, then go ahead and buy the property and feel free to keep that extra cash yourself. But if you buy a property where the numbers only work out if you do self-management, you haven’t invested in a passive income source, you’ve bought yourself a job.”
“So the numbers you’ve given me…”
“Are all after taking into account some fairly conservative assumptions.”
“Where’d you pull out these assumptions, out of a hat?”
Phil laughed. “Let me give you an example. The apartments in this next house we’re seeing have separate electric meters, so the tenants will pay their own electric bills. When there’s just one meter for the entire house, that expense normally falls on the landlord.”
“Shouldn’t that expense just get added into the rent?”
“Don’t I wish. I suppose if all tenants were logical decision-makers, they’d be willing to pay a $100 a month more for an apartment that includes electricity, since that’s about what they’d be saving. But most tenants don’t think that way. The next time you have friends apartment shopping, go on and ask them to break down the expenses of each apartment they’ve seen, and be prepared for the blank looks you’ll receive in return. Oh, they’ll remember all about the neighborhood, the number of bedrooms, the rental price, and I’m sure they’ll go on and on about some favorite features, like the view over the park. But few of them will remember which places include electricity and which don’t.”
“What are these other assumptions?”
“Most of them are pretty basic, such as property taxes, gas, water, sewer, garbage, and insurance. Then there’s property management, which will fluctuate based upon how much rent you take in.
This was getting overwhelming. “Can you just write all the numbers down for me so I can see them?”
“For sure. They’re all in the pro forma. I’ll email it to you when I get back to my office.”
All this jargon was making me feel pretty stupid. “What’s that again?”
“It’s a statement that gives you all the numbers of how a property stands today and projections about the cash flow you can expect in the future.”
“That’s one of those files you offered to send to Dylan?”
“Exactly. The other is the Comps.”
“Remind me what those are?”
“The Comps show what other properties of a similar size recently sold for in the same neighborhood. The Comps help you assess whether the asking price is within market range. The Pro Forma helps you see how much return you’ll get for your investment.”
Phil slowed down at a stop sign. “Bear in mind, these numbers are only for year one. In general, both property values and rents tend to go up over time while your mortgage payments will stay the same.”
“Until they all magically disappear when it’s all paid off.” I waved my imaginary wand.
“Exactly.”
“Phil, can you tell me honestly, is this really a good investment?”
“What do you consider to be good?”
“Well, Dylan says he looks to get at least 15% annual growth on his money. Will I get that here?”
Phil laughed. “Are you serious?”
“So it won’t get that high, eh?”
He only laughed harder. “Do you have any idea what the cash-on-cash ROI is on a purchase like this?”
“I have no idea what you just said.”
“Sorry, let me slow it down. ROI stands for return on investment.”
I scribbled the definition in my notebook.
“So,“ Phil continued, “if you bought a house in cash for $300,000 that brings in a profit of $30,000, it would have a return on your investment of 10%. Do you follow that?”
“Yes.”
“But few investors want to buy real estate with cash.”
“Dylan said cash buyers can get amazing deals.”
“That’s true. Let me restate that. Few investors want to buy real estate with cash and keep their cash in the investment. Those who buy with cash get great deals, improve the property so they can get a mortgage, and take their cash back.”
“Why take it back?”
“Because what makes real estate such a fabulous investment is leverage. You don’t need $300,000 to buy a $300,000 house. Most of that money will come from the bank. You have $20,000 to invest. When you ask me what your return will be, you’re not asking how much money you will make relative to the $300,000 purchase price, but relative to the $20,000 investment. That’s your cash-on-cash return. The cash you get out, relative to the cash you put in.”
“OK. I get that.” Grateful to be using a pencil, I erased the $300,000 and replaced it with $20,000. “So if I want a 15% return, then I’d have to make $3000 a year, right?”
“Precisely, assuming that you put in the full $20,000.” Phil drove us into a more suburban part of town while I licked my lips, ready to do some number crunching.
“So let me figure this out. So you said I should live in the attic and that the middle apartment could bring in $125 to $150…”
“Let’s be conservative and assume $125.”
“OK, so $125 for that one, and I’m not sure how much I’ll make on this splitting thing, so let’s go ultra-conservative and say I only make $250 on the bottom apartment. That’s $375. How’s that greater than 15%?”
We’d stopped at another light, and Phil reached over and pointed to the number I just wrote. “That’s monthly. The cash-on-cash return we’re talking about is yearly.”
“Woah!” Of course, how could I have missed that? “But you said to only assume 11 months, right?”
Phil lit up like a father watching his kid smack a baseball for the first time. “You got it! But, in this case, I already took that into account when making the monthly cash flow estimates, so you can go ahead and assume a full year.”
”You mean…” I bit my lip as I multiplied 375 by 12. “I’d be making $4500 a year. That’s more than 22%. Pretty good…”
“It’s way better than that. Let’s not forget you’ll be living there as well. When allocating the costs, I divided them between the two main apartments, figuring you’d keep the attic for yourself. How much are you paying right now in rent?”
“$1200 a month.” I still remembered my times tables and knew that 12x12 = 144. Adding the two zeros meant, “I’d be saving $14,400 a year?”
Phil offered a thumbs up. “Add it together, and you’d be making closer to 100% return on your $20,000 investment.”
I arrived at Dylan’s before 9 am, but he was already breaking a sweat turning up soil. I’d agreed to help him weed his garden, or the jungle as I called it. He figured I should put my muscle where my mouth was and help civilize the place.
“So, how’d the house hunt with Phil go?”
“Pretty great.” I tied my hair back. “He showed me three triplexes and a quadruplex. All four of them cash flow, or so he says.”
“Which one did you like the most?”
“Like?”
“It’s not just an investment; it’s a house hack. That means you have to live there, so you might as well choose the place you’d most like to be.”
“Since when did personal preference matter to you?” If he wasn’t full of sweat and dirt, I would have kissed him right then. “I figured you and I would go over the numbers, and you’d help me choose the one with the best return.
“Let’s just say that I know my customer. This whole process will be far easier for you if you find a place you can fall in love with.” Just when I thought aliens had transplanted his brain, Dylan added, “As long as the numbers work out.” He handed me a pair of gardening gloves and showed me how to yank the weeds strangling his pumpkin patch.
“There’s a triplex not far from my school.” I slipped on the gloves. “The numbers aren’t quite as strong as on some of the other properties, but it’s this cute Victorian and will be less than a five-minute commute.”
“That’s not an insignificant factor. There’s nothing more valuable than your time. If you can save ten minutes a day in the car, just think of how much more tiramisu you can make me over the course of a year.”
I threw a wad of weeds at him. “Perhaps I’ll use that extra time to peruse online dating sites.”
Dylan’s phone vibrated. He pulled off his gloves and slipped the phone out of his pocket. “Just how much did you love that Victorian?”
“Why?”
He turned his phone around to show me the message from Jade:
Found a quad. Total steal. Mortgage no prob. Will hold for 24 hrs b4 shop around. 1639 Haber rd. House vacant. Key under mat. Go see.
