4 Ways to Think Like an Entrepreneur in Your Next Real Estate Venture

A version of this article previously appeared on BiggerPockets.

Any way you approach the real estate game — there’s an entrepreneurial angle to it. Whether you’re a seasoned real estate developer with years and years of experience or you’re taking on your very first project, we’re all entrepreneurs here.

Why is that?

Simple: we take something that needs improvement (a vacant parcel of land, adusty old apartment property, etc.) and inject value into it.  We transform our physical world. How is that not entrepreneurial…and exciting!?

We marvel at successful entrepreneurs because, against all odds, they’ve built, created, and transformed industries.  However, few pry into the inner workings of their growth to tease out exactly how they took on such ambitious endeavors.

4 Ways to Think Like an Entrepreneur

There’s a wealth of knowledge one can learn from studying how entrepreneurs operate. Many of their techniques and modes of operation translate into the real estate realm.  Here are a few ways to start adopting entrepreneurial hallmarks in your real estate investing, developing, selling, brokering, and acquiring:

Iteration – minimum viable product. The idea behind this is to develop what’s minimally acceptable in the market and then iterate from there. Too many times people, companies, and organizations stress over perfecting their product or idea to the Nth degree.

There’s a problem with perfecting for the sake of perfecting: when focusing so much on perfection, one can oftentimes have blinders on to competition, market trends, and demand.  To avoid this, don’t focus so much on perfection. Get your real estate deal functional and operational with a minimally viable product mentality. Then grow and iterate from there.

Want a good example? Look at the first iPod:

ipod_original

Now look at the latest iteration:

ipod_touch

Had Steve Jobs and Co. attempted the latest iteration first, they’d still be developing (and losing out on the market)!

Where does this most impact my world?! Pro formas and conceptual design! These essentials of the development world take time. They’ve got many moving parts and unknowns. Yet they can’t be perfected in one pass.  My hunch is that your business can’t be perfected on the first iteration either. In order to properly do one’s due diligence and build a successful project, one must iterate…not perfect on the first try.

Paranoia—startups are paranoid about the status quo. They’re edgy, uneasy, and constantly seeking change. As real estate professionals, our world is constantly changing. Taking on a “paranoid” perspective keeps one on their toes and adapted to the ever changing market.

For example: are you “uneasy” about hedge funds flooding your local rental market? Many are! That “paranoia” is healthy because it keeps one nimble and attuned to newly forming market opportunities.

Resourcefulness—entrepreneurs, mainly the successful ones, are notorious for doing more with less.  Adam Lowry, CEO of Method Products, once said a business mantra of his is to ask: what would MacGyver do?

Never before has there been so much available to us as real estate pros. We have a wealth of knowledge and resources at our finger tips (many of which is free).  So on your next deal ask: what would MacGyver do? It may help you look at it in a new way.

Failure—yes I said failure! Entrepreneurs push the limits of what’s typically acceptable in the business world. With this, one’s bound to fail once or twice (or many times). For example, it’s been said that James Dyson failed over 150 times before finalizing his very first vacuum—150 times! It’s well documented that the Wright Brothers took five sets of parts out during a single test flight knowing they’d fail.

The point of the exercise, if failure comes your way, is to learn what went wrong and grow as a real estate pro.

Conclusion

So there you have it with four ways to inject an entrepreneurial mindset into your projects and deals. Many of us are here because we love what we are doing. We wouldn’t have it any other way.  If that’s the case for you, the points above likely aren’t foreign to you. You’re likely nodding your head and thinking there’s nothing revolutionary about iteration, paranoia, resourcefulness, and failure in real estate.  This stuff is second nature to many because it comes with the love of the real estate craft.  However, if not, rest assured that you can easily adopt the points above into your business as well.

Emerging Trends in Commercial Real Estate – An Interview with A Student of the Real Estate Game Founder Joe Stampone

Joe Stampone Blog BioJoe Stampone, founder of AStudentoftheRealEstateGame.com, is one of commercial real estate’s top sources for emerging trends in the industry. I’ve been a huge fan of Joe’s writing ever since a real estate developer recommended his site several years ago.  Similar to Joe, I was still in school then and nearing graduation (and facing a challenging real estate market).

It became pretty obvious right away that Joe cared deeply about learning the craft of real estate. Because of this deep curiosity and passion, A Student of the Real Estate Game has become the go-to resource for what’s current and on the horizon in commercial real estate.

I love seeing how A Student of the Real Estate Game has grown and evolved. However, Joe’s emphasis on “student” still rings true. Since Joe writes about, researches, and interviews some of the top leaders, emerging entrepreneurs, and strategic minds in commercial real estate, I’ve been eager to hear about what he’s learned as a student of the real estate game and what’s currently on his mind.

So without further ado, here is an exclusive interview with Joe Stampone!

Real estate degree programs are as popular as ever and many recent grads are fresh to the workforce this summer.  You launched your website while in grad school. Looking back and learning what you’ve learned since then, what would you tell yourself when you launched your site?

My advice to recent grads is not to worry if your first job isn’t the sexiest, most sought after role. We can’t all be rainmakers at real estate private equity funds. In real estate, there is no linear career path. Use your network and find a job. Don’t be picky; you can learn a lot in many varying settings.

When you inevitably do land a job, you should move vertically, horizontally and jump around within your own company, while being open to outside opportunities, if you want to be successful.

The best advice I received is that in real estate all you have is your reputation, so don’t ruin it. Peter Linneman once wrote “in order to build a great reputation, always do the very best you can to fulfill what you said you would do, help others simply because you can rather than because you believe it would indirectly benefit you, and do this for the next thirty years, and you will have a great reputation and network.”

Easy, right?

Your site is, in my opinion (and many others), the place to gauge what’s current and upcoming in commercial real estate. What are you most excited about right now and why?

What I love about real estate right now is all the start-up tech companies with great founders. A few of my favorites are office search engines 42Floors and thesquarefoot, data firm Compstak, financial analysis tool Valuate, and 3-D modeling company Floored.

However, what I’m by for the most excited about is crowdfunding for real estate. Two of the leading sites are Fundrise and Realty Mogul.

What makes this interesting is what’s happening with the Jumpstart of Business Startups (JOBS) Act. The JOBS Act allows companies to solicit publicly for funds from individuals in return for equity or debt. Last week, the SEC went a step further by lifting the ban on general solicitation as they were asked to do in Title II of the JOBS Act. However, this only applies to accredited investors. The rules governing the part of the JOBS Act that deals with non-accredited investors have yet to be written. Once they are, things will become really interesting.

This is going to have a big impact on the real estate industry. First, it’s moving the investment platform online. Instead of mailing thick binders full of legal documents and tracking down paper checks from investors, the investor could make the full transaction online—everything from reviewing the deal, to signing legal documents, to sending an electronic check. This allows real estate companies to reach hundreds of investors in the time it used to take to reach one.

Crowdfunding also allows real estate companies to tell their story on a new platform – the story of the business and the story of the deals they do is really important. Real estate companies will need to figure out how to become brands beyond the real estate business. I wrote about this in a recent blog post.

Real estate is a clear passion that has to be more than just your day job. What are you reading on Saturday mornings?

Throughout the week I’m constantly reading short digestible news articles; that’s how Globe Street, NREI Online, the RE Alert, and the Real Deal are designed. On Saturday’s, where I have a few uninterrupted hours, I like to read articles with a bit more depth and substance.

Right now, I’m reading an article from the March edition of the Institutional Real Estate Letter on the 7 Megatrends that are changing the direction of institutional real estate.

While I think the short blog-style articles are great, if often requires a deeper dive to truly understand macro trends that are impacting the real estate business.

As a student of the real estate game, what aspects of the game are you digging into now, in the future?

As mentioned above, I think crowdfunding is going to change the status quo. I’m personally preparing by building up the ‘A Student of the Real Estate Game’ (ASotREG) brand and thinking about doing a few interesting small-scale projects in the near future. I want ‘ASotREG’ to be known beyond real estate.

A few other macro trends I find interesting that are greatly impacting the real estate business include the increased focus on intelligent and sustainable buildings, the impact of global urbanization, the rise of e-commerce, and the shrinking (changing) demand for office space.

Very intriguing with expanding and further building the ‘ASotREG’ brand. I’ve loved following your site over the last few years.  Can you elaborate on what you’ve learned with building your brand to this point and how you’d like to grow it in the future?

The ASotREG brand is a story, although it’s a story about me, not the brand. Every brand has a story which includes expectations and history and emotions.

I want people to love the memory of how ASotREG made them feel once. It’s hard to explain, but I want these posts to inspire and get people to think about the future of the real estate business.

More than ever, we express ourselves with what we buy.  People also express themselves based on what they read and what companies they invest in. I want people to feel __________ that they read ASotREG and eventually invest in my deals.

You’ve researched, wrote about, and interviewed some of the top entrepreneurs in the real estate industry. What characteristics, mentalities, and/or qualities stand out from these interactions? 

I think there are a few traits that successful investors in general share:

  • They have a sense of urgency, passion, and commitment to their vision that most people don’t have.
  • They pay a lot of attention to risk, understanding not just how much they can make, but how much they can lose.
  • They go for batting average, not home runs
  • They’re honest and have integrity

I’ve actually created an ‘isms’ page on my blog which contain my favorite real estate/business quotes – I call them ASotREGisms.

Finally, (and candidly), how do you find the time to keep up with so much going on in commercial real estate?!

I was watching a Seth Godin interview and he was asked how he manages to get so much done and Seth responded that he doesn’t watch TV and he doesn’t take meetings.

Well, I take lots of meetings and watch my fair share of TV. Blogging can be time intensive, but the writing comes pretty easily because I write about topics that interest me. It may be a deal I’m currently working on or a something hot in the news. The time-intensive aspects include the technical component of the site, promoting posts, responding to comments/emails, and fixing any bugs.

I find the key to being productive is to do one thing at a time. I try to write for an hour or so during times where I know I’ll be uninterrupted. Early Saturday or Sunday morning or late in the evenings are great because there are no emails coming in and my phone’s not buzzing.

It’s gotten to the point where my days are spent in meetings and answering emails and the evenings and early mornings are when the real work gets done. I use that time to be creative and make something meaningful.

——-

Joe, it has been an absolute pleasure to work with you on this interview. Thanks so much for jumping on the hot-seat for us!

Want more? Follow Joe on TwitterFacebook, and at A Student of the Real Estate Game.

Joe Stampone Blog Facebook

A Few Resources for Starting Out in Real Estate Development

resources[1]

Real estate development can be a scary and complicated beast. It draws upon so many disciplines and pulls one in so many different directions.

What’s the day-to-day life like for a developer with a green-lit project? A mentor of mine always describes the role of the developer as a cat herder.

Architects, lenders, equity partners, brokers, lawyers, engineers, consultants, general contractors (sub contractors), alder-people, public officials, zoning boards, tenants (the list goes on and on). The developer, in most cases, interacts with them all.

Why the reason for this complexity?

The nature of the business requires the developer to be the expert. If they want that building built, acquired, or sold, they have to understand how it all fits together–literally, operationally, politically, and financially. If they are not the expert (many cases this is also true), they need to understand who is and how to collaborate with them.

In an entrepreneurial sense, despite the complexity and opaque-nature of the business, every successful developer starts somewhere. If you’re itching to get into the business or are looking for resources to sharpen your skills, here are a few worth their weight in real estate development gold: (quick note, no affiliate partnerships here, just resources I’m jazzed about)

REFM: The financial model is probably the number one tool in the developer’s tool kit.  Like your golf game, it can always be sharpened and perfected to the Nth degree. Real Estate Financial Modeling (GetREFM.com) is the go-to source for gaining and sharpening your financial modeling skills.  The best part: it doesn’t matter if you’re a seasoned analyst at Goldman Sachs or you don’t have the slightest clue how to build a quality financial model, REFM’s resources cover it all.

Books: Search Amazon for “real estate” and you’re bound to get pages after pages of real estate investing books to choose from. If you’re just starting out, here are a few that provide solid, honest advice:

What Every Real Estate Investor Needs to Know About Cash Flow…and 36 Other Key Financial Measures by Frank Gallinelli is a great source for understanding the mechanics of analyzing a real estate deal.

RE Book Image 1

Ditto for The Real Estate Game: The Intelligent Guide to Decision-making and Investment by William J. Poorvu .

RE Book Image 2

There are many quality books available, but these two books do a tremendous job at clearly explaining the nuts and bolts of sound real estate investing and development.

Quick tip: Because of the assortment of real estate books available, it’s very easy to read up on shoddy and misguided content. If you find a book with a flashy title and the words “get rich quick” written all over its description, turn the other way. Real estate development is a detail-oriented and long-term game.

Text Books: They aren’t always the most entertaining Saturday-morning reads but, pound for pound, text books contain the most specific information and knowledge available.

Real Estate Finance and Investments by William Brueggeman and Jeffrey Fisher is the book I reach for when I need to get clarity on an issue that only a text book can provide.  Text books can be very expensive, but this is one I know I’ll have on my desk for years to come (unless a Kindle version becomes available, of course).

RE Book Image 3

Urban Land Institute: ULI is a real estate organization focused on the education and research of responsible land use. It’s also one of the largest organizations for real estate developers, investors, and professionals.  Most major cities in the US and abroad have chapters that routinely promote and organize real estate-specific networking events, seminars, tours, and workshops. The organization is made up of a diverse group of real estate professionals–highly recommended.

ULI-logo

Websites and blogs: Here is an amazing list of websites and blogs dedicated to real estate development, investing, and brokerage.

GlobeSt

ASoTREG

UrbanLand

Curbed (both national and major city)

Duke Long

BiggerPockets

Twitter: Yes, even Twitter can be a fantastic resource for market research and information. There is an strong community of real estate professionals on Twitter that dish out important industry news and information everyday. If you want to better understand the pulse of the market, here are a few real estate professionals, companies, and organizations to follow:

Joe Stampone. @JoeStampone1

Duke Long. @dukelong

Michael Lagazo. @Michael_MBA

Barbi Reuter. @BarbiReuter

ICSC. @ICSC

GlobeSt. @GlobeStcom

Ken Ashley. @KenAshley

BiggerPockets. @BiggerPockets

Chris McLaughlin. @mclaughlinchris

Real Estate HQ. @RealEstateHQ

Wall Street Journal Real Estate. @WSJRealEstate

For a more exhaustive list (actually much more exhaustive) check out Duke Long’s list here.

So there you have it. These are tried and true resources for many real estate developers and investors. What’s the moral of the story? Real estate development is a complex game, but the resources above help immensely in breaking it apart.

Don’t Break this Cardinal Rule

historic rehab

Not too long ago a colleague of mine was tipped off to the acquisition of an exciting historic rehabilitation project. The old structure was located in an “up and coming” neighborhood with excellent access to transit, amenities, and local shopping/dining. The neighborhood felt fresh, young, and ripe for new development.

I was getting more and more excited about the project as we jumped into the market research, schematic design, and initial due diligence.  I could visualize exactly how important this rehab was to the street-scape and the surrounding neighborhood. If we hit a home run with this project, it’d be something special!

historic-rehab 2

There was one problem…The numbers just weren’t adding up! The more I dug into the modeling the more it just wasn’t penciling out. Well maybe the we can negotiate the acquisition price down an additional 10%, and maybe we can put in a lower grade finish level in the units, and maybe our cash flow projections are too conservative.  If you see yourself asking these same questions, STOP!

I had to have a strong heart to heart with myself over the project because I was loving it too much. So I sat myself down, poured a cup of coffee and said “Kyle, I know you are loving this project like it’s your first born child, but seriously, don’t don’t don’t break this cardinal rule.”

And what is this cardinal rule, you ask?!

It’s simple: Real estate should only be treated like a box. And with this box you only do three things. You 1) put money into it, 2) manage and operate it, and 3) get money out of it.  

Real-Estate-Investing-Process

This lesson was the absolute very first thing a real estate professor said to me in his intro to real estate investing and development course back in business school. Seriously, he walked into the room and didn’t even introduce himself first because he wanted this rule to be stuck in our minds. His point: never forget this rule. 

It has stuck with me and kept me sane when I start to deviate from my numbers. It’s extremely easy to fall in love with a potential project (like I did). And why not, real estate is freaking awesome! You have the opportunity to drastically improve the physical and social surroundings of a given area…how cool is that!? But given that real estate investing, acquisitions, and development are business ventures, they have to be treated as such.

I’m still picking through my model. But the more I look back at the situation and get all excited about the possibilities, the more I’m reminded of that simple, yet powerful cardinal rule of real estate investing and development.

No-Real-Estate-Love

 

 

Real Estate Investing Advice and Chat about BiggerPockets with Brandon Turner

If you’re interested in real estate investing, Brandon Turner’s work–both on his blog and through BiggerPockets.com–has helped many new and seasoned real estate professionals take on new projects and expand their portfolios. Brandon is a true student of the game. So when he recently announced that he’ll be joining the BiggerPockets team as a senior editor and community manager, I had to track him down for a chat about his career as a real estate investor and to see what he’ll be up to in the new role.  In the chat, Brandon offers amazing advice to anyone looking to get started in real estate investing and explains what’s in store for the BiggerPockets community in the future. Thanks for tuning in!

Be sure to say a big congrats on the new gig to Brandon and BiggerPockets on Twitter @BrandonAtBP and @BiggerPockets

Also check out:

realestateinyourtwenties.com

biggerpockets.com

60-Second CRE Tip: Growing Your Real Estate Network with Meetup Groups

networking event 1

What’s the one rule any real estate professional will tell you? Location, location, location! Like it or not, real estate is a local game whether you’re developing 1,000 multifamily units or selling a 1,200 square foot single-family home.

Doing market research on professional and personal real estate projects, it never ceases to amaze me at how different real estate markets are–sometimes down to specific block and building.  Because of the need to be hyper-aware of your real estate surroundings, the strength of your local network of real estate professionals is crucial to understanding these local subtleties.  But how the heck does one grow this network of trusted local real estate brethren?!

Here’s one resource that can help you get started. Enter Meetup.com

What is Meetup.com? Here’s a quick intro straight from our trusted friends at Wikipedia:

Meetup is an online social networking portal that facilitates offline group meetings in various localities around the world. Meetup allows members to find and join groups unified by a common interest, such as politics, books, games, movies, health, pets, careers or hobbies. Users enter their ZIP code or their city and the topic they want to meet about, and the website helps them arrange a place and time to meet.

While Meetup.com isn’t new (launched in 2001) or specific to real estate, it continues to grow and develop strong networking opportunities for real estate professionals. Simply type in “real estate investing” or “real estate development” and see who’s meeting up in your local market.

If you’re in a big enough market, chances are there are multiple Meetup groups dedicated to your specific real estate investing and development endeavors (and your calendar will fill up quick). Many of these groups meet on a regular basis to talk shop about real estate and offer networking opportunities to grow your local contacts. You can also create a group and build a community of your own.

Quick example:

My local market, St. Louis-MO, is fortunate to have one of the largest real estate-specific Meetup groups in the country (over 1,500 members). The group holds monthly networking events, tutorials, expert panel discussions, and seminars.  In just three months of actively participating in this group, I have already met many developers, investors, brokers, consultants, and business owners that are just as jazzed about real estate as I am. The best part–many have deep knowledge of my real estate market and are more than willing to help with advice and guidance. Likewise, I try to give back when I can.

So if you’re new to the real estate game or looking to meet and collaborate with industry experts like yourself, search out real estate Meetup groups in your area and join the conversation.

Where are some other resources to help you get local (not postal) on your real estate network? Be sure to check out these organizations and real estate communities to meet people in the industry and build your real estate business.

-Check out events held by your local or regional Urban Land Institute chapter.

-Ditto (does anyone still use “ditto” anymore?!) for REIA.

-Join the online conversation at BiggerPockets.com. I’ve been a “long time listener, first time caller” guy but am jumping in!

Just starting out in real estate – where to begin

I’m fascinated about learning how great developers and real estate investors got their start in the industry. Titans of the industry always seem to be negotiating multi-billion dollar deals or announcing the plans for some new ten million square foot master planned development, but they all had to start somewhere—usually from very humble beginnings.

Here’s what stands out so far:

  • There never seems to be one clear-cut path to follow to be a successful real estate professional.
  • Despite this, they all seem to follow a similar formula: gain expertise in a particular facet of the industry –> start with a small enough project where one can use that expertise to add value while reducing risk –> grow.

If you’re a 20-something guy/gal just starting out in the industry, you may want to strike out on your own someday (maybe that day is today, maybe it’s ten years from now).  Yet many of us don’t know what to start with, which steps to take, and how to go from step A to step B to (eventually) step Z. I was delighted to read this article over the weekend by Jeff Brown of bawldguy.com via biggerpockets.com.  It demonstrates some very simple (yet doable) steps a 20-something real estate pro can take to get that first project under the belt and start to grow a business.

 I Want To Be A Real Estate Investor. How Do I Start?

I’m Not A Flipper — I’m 20-Something and Want To Be A Real Estate Investor — How Do I Start?

I get asked that question almost weekly, usually by the 20-something generation. Their relative profiles are fairly similar with a few obvious exceptions. They’re pretty smart. Most of ‘em have degrees of one sort or another. They make decent money — generally speaking, in the $40-60,000 a year range. They’re evenly split between married and single. To their credit, and my undying appreciation, their ‘spidey sense’ tells ‘em the get rich quick with other people’s money nonsense involves somebody on the losing end, financially. They just wanna know how they can begin the journey to earning their piece of the financial pie.

Fair enough — here’s what I’ve been tellin’ beginners for years.

Instead of using my home market, San Diego, I’ll use a market more in line with values experienced by most regions. Though the concept works just fine, thank you, in San Diego, most prefer to use the numbers the majority of the country is used to. Let’s talk about the concept. But first here are the factors usually involved in the front end of the process.

1. You don’t currently own squat, unless you count the used car you drive to work and the payments taggin’ along with ya.

2. You’ve either already saved some money towards this end, or can in a reasonable time, say 6-18 months.

3. Your credit is either fine now, or you can make it so, and sooner rather than later.

4. Ditto with too much auto and plastic debt.

Here’s the end game in a nutshell, so if you’re not interested, you can move on. 

You’ll find a 2-4 unit property in an area in which you’d feel comfortable living, cuz you will be. You’ll be renting the other unit(s) to others. This will not only get you started, but will give you the mostly irritating experience real estate investors need to succeed in the long run. You’ll be buying this property using either FHA or VA financing. I guess in some cases HomePath would work, but I’m not all that familiar with their operation. The down payment and closing costs will end up in the $8-15,000 range.

The numbers

Let’s use the price and rent from a recently closed transaction. Price: $262,500  Rent: $1,350 each side — it’s a duplex. The location is good enough that I’d put my own mom to live there, alone. She’s 81, and I wouldn’t be where I am today but for her. So I care. Here’s how your FHA loan might roll out.

LTV: (loan to value) 96.5% or $253,300 (rounded).

Payments: This will include three separate factors. 1) Principal & interest 2) Taxes and insurance and 3) Mortgage insurance

Principal and interest at today’s rate of around 3.75%, would be approximately $1,173 a month.

Taxes and insurance will vary a great deal from market to market of course. Let’s cut it down the middle and say your annual tax bill will be around $4,000. In San Diego it’d be about that or a tad less. In other places a lot more, blah blah blah. Insurance will run around $1,200, more or less depending upon the state and the carrier, your mileage will indeed vary. So, let’s pick a monthly number and call the monthly tax and insurance portion of your monthly loan payment, roughly $435.

Mortgage insurance will run around 1.25% the last time I checked with the FHA lender. Add another $265 or so to the monthly payment.

We’ve arrived at your monthly loan payment which, in addition to principal, interest, taxes and insurance, will include mortgage insurance. It all comes to a pretty grand total of about $1,875 a month, rounded up a couple bucks.

I know what you’re thinkin’ ’bout now, which isn’t what’s gonna happen. “Let’s see, if our monthly payment including taxes and insurance, etc. is $1,875, and our tenant is giving us $1,350, we’re freakin’ awesome! That’s just $525 a month to us. Why doesn’t everyone do this?!”

You’ll VERY likely be paying for their water and sewer. You can probably, in most markets, have your tenants pay for trash pickup. But how ’bout landscape upkeep? Who’s gonna mow the grass if there’s a lawn? Oh, that includes the backyard too, right? Right. Also, the tenants will probably pay for their own power and gas. That is, if there are separate meters. Most 2-4 unit properties do sport separate gas and electric meters, but not all by any stretch. Sure, your rent would likely reflect no G&E bill, but that almost always goes against the landlord when the dead presidents start their monthly escape from your wallet. When tenants don’t pay for something, they tend to, um, use it like somebody else is. Make a note.

Figuring your monthly real world net

This isn’t rocket science, but the rose colored glasses need to be set aside when figuring your actual bottom line. Let me first give the same talk here that I give in person or on the phone to investors. There are two bottom line numbers when you’ve invested, as it relates to cash flow. There are the spreadsheet numbers, over which you sweat blood. Then there are Murphy’s numbers, and he doesn’t sweat at all. He just cackles. Go ahead and do the spreadsheet. Get the numbers as painstakingly accurate as humanly possible. Get every operating expense down to the penny. Then pat yourself on the back, and set it aside for future comic relief. That’s experience talkin’ to ya there.

The spreadsheet says that your annual NOI (net operating income) will be around $20,000. But that figure assumes both sides are rented, which ain’t the plan. Your real spreadsheet NOI should approximate $3,240 or so — $270 monthly. That’s after all operating expenses (including taxes and insurance, so remember not to shock yourself by double counting them when computing your monthly bottom line), a vacancy rate, and exiting your unit’s rent.

Your principal, interest, and mortgage insurance payments amount to $1,173 + $265 = $1,438 a month. Subtract the (spreadsheet monthly NOI) $270 from that, and you’ll get $1,178. That’s what the spreadsheet says, more or less, will be your before tax (as in April 15th) monthly cost of living. When we compare that figure to having opted to buy a traditional detached home, you’re probably saving in the neighborhood of $400-900 a month. Figure $1,500 PITI + $265 for mortgage insurance = $1,765 monthly. That doesn’t include those pesky utilities, water/trash, gas & electric. We’ll lump those together and add $200 more to your monthly nut. That brings the traditional detached home to just under $2,000 a month, pretax, using the same price and loan.

The difference is simple. You’d save around $800 monthly, +/- by opting for the duplex. That’s almost $10,000 yearly.

Now for the reality check

Throw the spreadsheet numbers out. Instead of applying the vacancy rate and operating expenses on which you worked so hard for accuracy, simply divide the gross schedule rents for BOTH sides by two. Then, decide that’s your real NOI. Might it be even less? You bet. Murphy knows where all of us live. Sooner or later it’ll be your turn in his barrel, cuz that’s the way it works in real life. Not to worry, cuz you’ll still come out ahead with the duplex approach. Understand that real estate income properties don’t pledge allegiance to the spreadsheet. I know, it’s crazy.

After tax

The traditional detached homebuyer will benefit from $13,400 a year in tax shelter, ballpark. That’s interest paid and taxes the first year of ownership. If their marginal income tax rate, state/fed, is around 30% or so, that results in a direct tax savings of roughly $4,000 for the year. They get to take interest/taxes dollar for dollar against their job (ordinary) income.

The duplex buyer who lives in one side would (assuming sides are perfectly equal) be allowed half the interest and taxes as direct write-off on their income. In other words, $6,700 a year, or about $2,000 in tax savings. But wait! There’s more!

They get to take the half that’s rented, and depreciate it. Depreciation is a ‘paper’ loss that you didn’t experience. In this case it’ll be, more or less, around $3,800 annually. Again, unlike the interest and taxes you deducted on the ‘owner occupied’ side, this is a phantom loss. You still get the tax shelter from it though, which is almost always way cool. This property’s depreciation would generate an additional tax saving of $1,140 yearly. When combined with the tax savings garnered from your ‘homeowner’ side, $2,000, your total annual tax savings the first year comes to give or take $3,140. In other words, the guy across the street who brags about the superior tax savings generated from his traditional detached home, gets pretty quiet when you show him your monthly before tax cost of living.

He’s ahead about $860 a year in tax savings. However, before taxes you lived for nearly $10,000 less than he did. Even if you ignored your spreadsheet’s numbers, your Murphy numbers still beat him by $7,000 a year before income taxes.

This doesn’t take into account the strategies which would accrue to having opted for a 2-4 unit property vs traditional home. When you ultimately wanna sell and move, you can neatly separate the two ‘entities’, AND their equities. But that’s another post altogether.

The only factor that really counts in this decision

What it comes down to is your personal comfort zone. Are you ok being a landlord, with your tenant next door? Are the long term benefits worth it to you? There are no right or wrong answers here. If you’re not comfortable, and it’s not due to false information, there’s likely little that could change your mind, right? I know that’s how I am. Don’t violate your comfort zone. Life is way too short for that kinda stress. But if you are comfortable with this approach, it can put your future financial plans ahead of the normal chronology — and usually impressively so.

You can also find the original article here.