Ask Marco: What was your first-ever real estate deal?

So, short story, long, my first deal was when I was about 18 years old. I actually knew around the age of 18 that I wanted to get involved in entrepreneurship, have a business, and invest in real estate. And at the time, I thought real estate was the way to go because it was what a lot of wealthy people who I noticed around me from time to time had and held.

And I know that in the community that I grew up in, which was made up of a lot of Italians, they were really bullish, if you will, but pro real estate, they all thought that real estate was the way to create wealth. And later in life, I learned that it’s not just a great way to create wealth, but a good way to actually preserve your wealth. So I set out to make my first real estate investment. Now, fortunately, I had a really good paying job at a grocery store at the time, so I was able to save up a down payment while I was working there. And then when I became an adult, I was able to qualify for mortgage financing through the credit union attached to the grocery store chain that I worked at. So it was convenient in the sense that I was already an employee, had credit, and had the ability to borrow through the credit unions attached to the place of employment I was working at.

So I looked around and I found myself a nice end unit town home unit, and it was a pretty decent property. It needed some work. It wasn’t dilapidated or distressed or anything like that. It just needed a fair amount of updating. So my uncle at the time was a carpenter, so he was pretty handy with tools. He knew how to do renovations from cabinets to countertops to flooring, and you name it. So I essentially hired him to help me. He gave me a good deal in renovating this town home unit that I had purchased in the northeast quadrant of the city I grew up in. And it wasn’t a very expensive property. Now, this was so long ago, we’re talking decades ago that I don’t remember the exact numbers. So obviously I don’t have that property today. In fact, I sold it a long, long time ago.

But I do remember that it was relatively speaking, affordable just because of the area it was in. It was what I would call maybe a BB minus type of neighborhood. So it was, it wasn’t expensive, it was affordable. It was probably a mixed class neighborhood with white and blue collar workers. And it was a somewhere between a middle to lower middle income type of area. So this town home unit was under a hundred thousand dollars. I I don’t remember the exact number, but I know that it was priced right and that it would rent in this area for enough to cover all the expenses and leave something left over for cash flow. So I did my analysis, I ran the numbers. I made sure that I could cover all my expenses with this particular property. Well, I acquired the property, I did the renovation to the property, and then back then there was no internet.

So for me to lease this property, I literally had to put a sign in the lawn and print flyers and run an ad in the newspaper. And so that is what I did in order to attract potential tenants. So ultimately, some people came through and I <laugh> didn’t know exactly what I was doing as far as screening tenants. I could tell you it would’ve been a lot different back then than it what it is today. But I had them fill out a simple one page application form, which was really more of a formality at the time, but it gave me a sense of who they are, where they lived, their income, and a few other things. I did not do a background check or anything that we would do today as far as checking the tenant’s credit history eviction history, criminal records, or anything like that.

Again, remember this was pre-internet days. So the number of tools were limited. I probably didn’t know about all the tools that were out there that I could have used, and there was no online resource like the internet to go on to and, and find subscription services or tools that I can do my own research and due diligence on particular tenants. So a lot of it was gut, it was what they wrote on the paper and my quote unquote interview with them to get a feel or a sense of who they are and whether they are trustworthy. And ultimately that’s how I leased the property. So after the purchase and the renovations were done, and it was rent ready, I put the sign in the lawn, ran in the ads, collected some applications, picked someone through my particular type of interview, and then leased it.

And although it was a fair amount of work and it unfolded over the course of weeks, ultimately I looked back and I thought, yeah, you know what? That was interesting. Hard wasn’t unnerving, but I learned a lot from doing it. And you know, I’m glad I did it. I, that’s how I cut my teeth. That was the first real estate deal that I did, and I cut my teeth on it. And believe me, you’ll always learn a lot on that first deal that you do because it’s all new to you. It’s foreign. But what I found is that I learned a number of lessons from it. By the way, I did keep that property for a few years. It was probably two or three years. And I don’t know what gave me the itch or the bug to sell it, but there was enough equity in there, enough equity growth that I thought, wow, you know, I, I just hit my first single or double and I might as well just take my profits and go off and do something else.

Ultimately, I ended up buying another property, but I did sell that property and I took the equity out and I went off and did whatever else I did with it. Here is essentially some of the lessons that I learned from that experience. First of all, I always like to start my presentations that I do in front of live audiences, which is what I just did this past weekend in Florida at one of our mastermind events. And I ask people to answer the question about ignorance, and I say, what ignorance is blank? And I let people answer the question, and they normally say that ignorance is bliss. And I respond by saying, well, that may be true from time to time, but in my world, ignorance is expensive because you don’t know what you don’t know. And those things that you don’t know will definitely cost you time, money, opportunity, and you just don’t recognize a deal or an opportunity when it’s there because you don’t know what to look for.

You know, it’s, it’s the whole thing that ignorance is expensive. The cost of ignorance is much more expensive than the price of education. And that’s a huge, huge lesson to be learned. And that’s something I talk about often on this show, this podcast, the cost of ignorance is far more expensive than the price of education. It’s almost free to educate yourself. There’s so many free and great resources out there, online podcasts, YouTube, you name it. Even audio books and video courses and paper books off of Amazon. They’re all relatively inexpensive. We’re talking, you know, 10, 20, $30. So it’s not hard to educate yourself. So ignorance is expensive. And that’s one thing that I didn’t know back then, but I’ve learned over the years. So I constantly make the effort to educate myself. Another thing is that properties really should be held forever, quote unquote.

You should never sell unless you absolutely have to. And if you do sell, typically what you do is you sell through a tax deferred exchange. It’s called a 1031 in the us. And that just simply means that you take the equity and you can move it and reinvest it tax free. You don’t have to pay capital gains taxes on it, so you can actually move your equity or build up your portfolio and do that through a 1031 exchange and it’s tax free. Now, again, I didn’t know you could do that back then. If I knew you could do that, I probably would’ve had a different exit strategy in selling that property. I probably would’ve taken the equity and reinvested it. But again, you know, it’s the old saying that I keep saying ignorance is expensive. And so I didn’t know that you could do that, and that would’ve been a great option.

There are certainly tax benefits and probably one of the biggest lessons I learned is that real estate truly is a get rich slow investment. You see, when I look back at the price of that property, the value’s the same, but the price has gone up more than tenfold. So what could have been a 40, $50,000 property at the time today is worth over $500,000. Now granted, you have to adjust for inflation, and you have to consider the fact that the purchasing power has dropped over the years. So it’s not an inflation adjusted gain, but all things considered, I still would’ve been farther ahead, not just kept up with in inflation, but surpassed inflation. So it is definitely a powerful get rich, slow investment and you’ve gotta keep that in mind. So those are some of the big benefits. If I were to summarize all that in bullet point form, I basically say this, it’s a great long-term wealth building investment or tool residential real estate investing is often seen as a long-term wealth building strategy, and we’ve gotta keep that in mind.

Also, you know, with the combination of rental income, the property appreciation, mortgage interest and mortgage pay down, that’s basically done by your tenants. Real estate can be a very powerful tool for building wealth over time. The other thing that I knew about but learned how incredible it is, is that real estate provides a steady stream of income. It really is one of the most attractive features of residential real estate investing. It’s the potential for that steady rental income. By renting out your rental property, investors generate, you know, monthly and annual cash flow that can cover the mortgage payments, maintenance costs, provide a profit, and you can bank some of that away in reserve. And then if you have excess profits, you just reinvest that. You could accelerate the mortgage payment too, but you can reinvest your profits. What a lot of investors invest in real estate for is appreciation, and that’s great.

It’s not the the be all end all, but it’s, it’s pretty powerful. But over time, residential properties have historically appreciated in value. And this means that the value of your property can and usually does increase over the years, and that allows you to sell it for a higher price than what you initially paid. Not just sell it, but trade it, doing what I said before, a 1031 exchange. So this potential for capital appreciation can certainly and significantly boost your return on the investment. It’s not just the cash flow which gives you cash on cash returns, it’s really about the capital appreciation that you get. And then a big one that I didn’t know at the time, and I really didn’t actually need it, but now I care about it, are the tax benefits. You see, real estate investors often benefit from various tax deductions and incentives.

You know, you have your expenses, expenses such as mortgage interest, property taxes, maintenance, depreciation. Those often can be deducted from the rental income and that reduces your taxable income. But long-term capital gains on the sale of a property can be taxed and will be taxed at a lower rate than ordinary income. So if you do happen to sell, the taxes on the capital gains are much, much lower. But a beautiful thing about real estate is the depreciation. You can depreciate your property, residential property that is over 27.5 years. And that means you can take that one small piece of depreciation each and every year and deduct that from your passive income. And if you’re a professional real estate investor, you’ve got the designation to be a professional property investor, then you can actually apply that depreciation towards your active income, not just your passive income.

And that becomes very, very powerful. And then, as we all know, real estate is a natural hedge against inflation. It acts as a hedge inflation because it’s made up of what I call sticks, bricks, copper, and concrete. It’s just all put together into a house or a duplex or a fourplex or whatever it may be, on a chunk of land. So as you know, as the cost of living goes up, so do rental rates, so do property values. This can and will help preserve the purchasing power of your investment over time. Plus, you’ve got the beautiful leverage that comes with it where you can finance up to 80% of that property. And lenders are tripping over themselves to lend to you as long as you’ve got good credit and a good credit profile, they want to lend to you because that’s how they make their money.

By lending to people like you, real estate investors who will pay them interest each and every month for the loan that they give you. And remember, it’s not just you, it’s your tenant. Your tenant is paying the mortgage through their rent. So that means you can control a larger asset with a relatively small amount of your own money. And if the property appreciates its value, the return on your invested capital is magnified, it’s amplified, it’s leveraged. And that’s the beautiful thing about leverage with real estate. Real estate gives you some great diversification. You don’t have to be all in on real estate or the stock market or anything else for that matter. So you have that factor going for you. You have full control over the investment, even if you have a full service professional property management company managing your property, which in most cases is a wise decision and something you should do, you still have control over the investment.

You are basically hiring or outsourcing the property management. You are quote unquote, managing your real estate property managers. But at the end of the day, you maintain full control and make all the strategic decisions to maximize your returns and optimize your portfolio. And don’t forget, real estate is a tangible asset. It’s a hard asset. It there’s only a limited amount of land in the world and in the country. There’s a limited amount of real estate. It’s not a finite supply. It does grow and change, but demand exceeds supply right now, which is great for you as a real estate investor. It is a strong, long-term wealth building tool. Residential real estate investing has often been seen as a long-term wealth building strategy. It’s a great wealth preserver and a long-term wealth generator. Again, it’s a get rich slow investment, not a get rich quick.

So those are the lessons that I learned in real estate investing with my first deal. But that’s how I got started. It was that one single end unit town home that I got for probably 40 or $50,000 way back when, and I just jumped in, cut my teeth on it and learned a lot, learned many lessons, and never looked back. And I hope that this is inspiring for you. If you haven’t done your first deal or you’re looking to your first deal or even your second or third, just don’t think twice about it. Just have the right team around you, the people who can guide and advise you and help you make that next purchase or that first purchase. So if there’s anything my team can help you do, contact one of my investment counselors. We’re here to help you at no cost, no obligation, but if you’re doing it on your own, great, keep doing it.

Don’t stop, don’t slow down years down the road, you’ll want to look back and not regret the decisions that you made or didn’t make in terms of investing in real estate. So that is it for today. I hope this has been helpful. If you have any questions about real estate investing or finance that you want me to answer on a future show, just let me know. You can go to passiverealestateinvesting.com, click on the Ask Marco button, and I will try to get to as many questions as I can. If you haven’t already done so, remember to subscribe to the show. That way you get our episodes every single week. Share them with your friends, family, whatever it may be, like it <laugh>, give us a thumbs up, whatever the case is. That is it for today. Thank you for listening and we will see you next week.