When we started our real estate investing business in 2003, I had $1,000 in the bank, a paid-off 1994 Toyota Camry, and no college debt thanks to a football scholarship from Clemson University (Go Tigers!). My business partner, who was a little older, owned a home and had an internet business that paid his bills (barely).
We faced many of the same challenges other new entrepreneurs and investors face: we couldn’t possibly learn everything we needed to know, yet we couldn’t wait forever to get started.
So, I initially apprenticed for a year finding deals for a more experienced investor. Down south in the US, we call this being a “bird dog” because I sniffed out deals for someone else. I learned an incredible amount from this on-the-job training and saved some cash. At the same time, my business partner and I gave ourselves a crash course of real estate education from books and seminars.
After this first year of learning, we began buying properties on our own to resell at higher prices (aka flips). We used money partners, debt leverage, and a small amount of our own cash to fund the purchases.
About the time of our 2nd or 3rd purchase, we attended a real estate class that made a big impression on us.
Can We Buy 50 Houses Per Year?
The class was taught by an experienced house flipper with an impressive business. At the time she was flipping fifty houses per year for an average profit of $20,000 per house.
I did hit my head a few times playing football in college, but even I could do that back-of-the-envelope math. 50 deals x $20,000 = $1 million per year!
This will likely sound naive (and it was), but my business partner and I decided that 50 deals per year and 1 million dollars were probably good enough for us (ha, ha). So, we decided that our goal was to build a real estate business as “successful” as the teacher of that class.
We figured the wealth building would take care of itself as we grew our business (oops again).
Between 2004 and 2007 was our sprint up the real estate mountain. My business partner and I ramped up to buy and sell more properties by creating business systems and investing a lot of money into marketing.
We became REALLY good at finding real estate deals. We also became good at finding the money to buy them. As self-employed investors in their 20’s, we were not exactly attractive borrowers for traditional financing. As a result, a large majority of our financing came from private loans and seller financing.
By 2007 (right before the cliff of the Great Recession), we had our buying machine in full motion. We had nearly 50 acquisition closings in that year alone! Somewhere in between that crazy amount of activity, I also found time to get married to my wonderful (and patient) wife.
But had we reached the goal we set earlier? Were we an impressive business like the teacher at the class? Not exactly.
The Results of the Sprint
Our 2007 sprint up the mountain did achieve a similar level of yearly volume as the teacher who inspired us. But our results were a little different.
On the positive side, some of our 2007 acquisitions were flips that generated even better profits than the teacher had made. We also did more than just flip houses. Some of our acquisitions were keeper rental properties. By the end of the year, we had 43 separate buildings (58 units) either owned or under our control with lease option contracts. And some of these rentals had low-interest financing that would pay off in only 10-15 years.
But not all was positive. A large enough handful of the new properties were NOT good deals. Some were in bad locations that made them harder to sell or to attract good tenants. On others, we underestimated repair costs, which meant we had to invest more of our own cash. And some properties had negative rental cash flow because we underestimated operating costs like maintenance and vacancy.
Plus, by the second half of 2007, we noticed signs of a slowing real estate market. We did not predict the severity of the recession to come, but we certainly saw the storm clouds brewing.
All of this caused us to step back and reflect on our journey up to that point.
Reflections From High Altitude
In some ways, we had reached a milestone. We were successfully buying, selling, and holding profitable real estate. We had more cash in the bank and equity in real estate than ever before. But the economic realities and our mistakes weighed on us.
My business partner and I sat down to talk towards the end of 2007. We realized some important lessons.
- We realized we had used borrowed goals. The lady who flipped 50 houses per year was impressive, but we needed to find our own path. We learned that a massive, fast-growing real estate empire wouldn’t automatically give us the life we imagined.
- We realized that business and investing weren’t just about making money. They were most of all about life! So, what did we want our lives to look like anyway? I can still vividly remember writing down some of my favorite things to do in life. These included playing pick-up basketball in the middle of the day. Learning something new, like a foreign language. And traveling to new, interesting places with my wife, family, and friends. I can also remember being shocked that these activities that constituted “the good life” didn’t even cost that much money!
- We realized that life didn’t start once we reached our final goals. Financial independence for us was both the peak and the plateaus along the way. We didn’t have to put our lives on hold until “someday.” We could enjoy life while continuing to climb the financial mountain.
Bracing For the Economic Storm
My business partner and I had our work cut out for us as the storm of the 2008-2010 recession hit. Because the market was soft, we had to keep a lot of properties rather than resell them. And as I explained before, we had to handle the mistake properties that we acquired in 2007 and before.
But our frugal habits and low cost of living now benefited us. We had not spent most of the cash we made during our sprint up the real estate mountain, so we drew on that to cover many of our mistakes. This allowed us to enjoy life during a time of decreased income.
But more than simply surviving, I wanted to enjoy the plateaus during my climb towards financial independence.