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McKenzie Robinson | SBJ

Real Estate Investing Is for Anybody, Just Not Everybody (Sponsor Letter)

SBJ Economic Growth Survey: Market Development

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When I was working for the state of North Dakota and attending graduate college, a professor said real estate is one of the safest investments for creating passive income and allowing for the creation of wealth.

A grad school friend and I bought a building similar to one you would see on Commercial Street in Springfield. It had five apartments with commercial space on the bottom level. We each had savings. I put in half, and he put in half, each starting with a $5,000 cash down payment toward a purchase price of $50,000.

I lived in one unit and did management, maintenance and leasing when I wasn’t working my full-time job. My partner handled accounting, insurance and finance portions and also helped with maintenance. Because of my job and his business, we had strong enough credit, a willingness and professional credibility that the lender took a chance on us despite our lack of real estate experience.

Then, we were invited into a partnership on a second property. Because the building appraised for significantly more than what we purchased it for, none of us had to bring any capital to close on the mixed-used apartment/commercial complex originally built in 1918 as a 120-room hotel with commercial space. Because our two properties were in close proximity, we were able to continue our hands-on roles at both.

The second property allowed me the opportunity to subsequently buy more assets. At which time, rather than fixing the toilets myself, I started hiring somebody and figured out other ways to replicate myself as best I could with additional partners or vendors. But I’m glad I started by rolling up my sleeves. It was important for me to learn those skills so I wouldn’t be taken advantage of later.

Almost 20 years on, I am in the original partnership, and we still own one of those two buildings. I have long reaped the benefits of the passive income generated from my original $5,000 investment and have vastly increased my real estate portfolio throughout the Midwest.

If you’re interested in investing in real estate, you first need to determine what you want to do: Flip to sell or own to lease? Next, what type of real estate interests you: habitation (single family, small multifamily or multifamily apartment complex) or commercial (retail, industrial or offices)? Different types of investments have different risks and rewards. For instance, you can realize immediate cash flow from a sale in the flip model. Or you can lock in a tenant for a long period of time in a retail lease for long-term passive income. You have to understand and focus on one area until you get confident.

For the next step, you need to do your own due diligence in the marketplace. You need two things in real estate investing: cash and experience. That’s why when getting started you need a good team around you. Call a real estate professional, accountant, attorney, brokerage or property management company. Each can provide you with strong counsel depending on where your knowledge may be lacking. Then, you can go to the bank and say, “I may not know all that I need to know, but I have my property management company selected, my attorney has established the organizational papers, and my accountant has put together this financial analysis.” The team comes alongside you to help make your investment successful, giving the bank confidence you thought through the investment and have sought guidance in areas you don’t have experience.

Financing is an art. You have to really understand who you’re talking to. Ask what the bank specializes in and if what you’re doing is of interest to them. Banks have their own risk tolerances. For instance, there are some banks that won’t lend in some forms of real estate, regardless of how solid you are as a borrower or how great your deal is. It’s also possible the seller is willing to owner-finance the down payment if you’re a good borrower. I have done that as a buyer and as a seller. It’s beneficial for both parties because it allows for someone to buy more assets without exposing their liquid cash, freeing up money in the bank for reserves when needed.

If you’re truly just starting out, maybe even still in college, and haven’t purchased your first home, consider purchasing a habitation complex with two to four units. You possibly could qualify for a residential Federal Housing Administration loan rather than a commercial loan for your investment. You live in one unit and the other three units pay the mortgage and more.

It’s important to understand, that even with a team working with you, real estate investing is a lot of work and should not be entered into lightly. If you’re looking for guidance or a mentor to help you get started, please feel free to call or contact me at Prosperiti Partners.

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