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Real Estate

Why Your First Real Estate Purchase Should Be An Investment Property

When I visited my hometown of Long Beach, CA, I heard one thing over and over from real estate agents: Long Beach, CA is the last beach city in Southern California to get developed.

I haven’t fact-checked it, but regardless of whether it’s true, it matched what I was seeing. Long Beach was different every time I visited. New stores were opening up, new buildings were being built, and new businesses were moving in. It was obvious that change was coming and would only accelerate.

I began thinking about purchasing property and talking to real estate agents in 2018 because buying real estate seemed like “the right thing to do.”

Interest rates were down at the time and prices were going up. Based on my research, it seemed like homes were getting swooped up by individuals, families, and financial institutions.

In 2018, I started spending a lot of time browsing properties on Redfin and talking to people who owned properties to learn about the process and the market but didn’t do anything beyond that. No tours, no requests for quotes on mortgage rates.

In 2019, I had a sizable down payment ready. I got preapproved for a mortgage and began touring properties in Long Beach. Some places were interesting but I wasn’t actually ready to purchase. 

In 2020, the market had gotten much hotter and was a forcing function for me to finally decide I had to buy something. I was home for three months that year to escape the Boston winter and declared I would buy something before I traveled back to Boston.

And I did.

As I told friends about this purchase, four questions came up:

  1. Why did you decide it was time to buy?
  2. Why did you purchase an investment property instead of a primary residence?
  3. Why did you decide to buy real estate instead of investing in index funds?
  4. How did you decide which property to buy?

Why did you decide it was time to buy?

The biggest reason was that the housing market across the nation was on fire at the time. Home prices seemed to only go up. I looked at properties that were purchased the year before and their values had gone up at least $100,000 in just a year.

I know real estate doesn’t only go up, but I believe it does with a long enough time horizon.

Even if the property of a home crashes, it’ll be up again in 10 years and beyond. My time horizon is longer than that so I’m not worried about short-term crashes.

Increasing property values means increased equity. I wanted equity to use as leverage for future investments.

The second reason is I wanted to have an asset outside of my content marketing agency. Presumably, the business will succeed and be worth more than the property, but I like the idea of owning a tangible asset.

The third reason is personal: I wanted to own a piece of my hometown before it became completely gentrified. Coming from a Cambodian background, my parents were able to build a life in the states after fleeing genocide and coming to the United States as refugees.

I want to build generational wealth and have something to pass on to my kids.

Why did you decide to buy real estate instead of investing in index funds?

I ran the numbers to understand the potential appreciation of properties in Long Beach, the potential rent I could collect, and what cash flows might be.

I’ll be honest, it was improbable that I’d be cash flow positive. I accepted that I’d be buying expecting to build equity, not generate cash flow.

That was a tough pill to swallow.

To be explicit, the investment didn’t make clear sense from a cash flow perspective.

It was still a decision that was informed by data, but the choice to commit was purely an emotional and gut decision.

If I was just going by the numbers, it would’ve made a lot more sense to take my down payment and put it into an index fund to get a 10% year-on-year return.

Before going into the scenarios, here are some quick numbers:

  • Condo cost: $450,000
  • 20% down payment: $90,000

I mapped out three scenarios (get the model here):

  1. Scenario 1: I take my $90,000 down payment and put it all into index funds and assume I continue to invest $10,000 each year into those funds (that means real estate is not part of this equation). Assume 10% year-on-year growth.
  2. Scenario 2: I take my down payment and purchase the property and just look at the appreciation of home value (that means this scenario assumes I do not invest in index funds at all). Assume 3% year-on-year appreciation.
  3. Scenario 3: I take my down payment and follow through with purchasing the property and look at appreciation AND continue to invest $10,000 into index funds each year.

Keep in mind this model is built purely on assumptions and it probably isn’t the most accurate model, but it at least helped me play out what those different futures could look like. (Remember: All models are wrong, but some are useful.)

Based on those assumptions, it’s clear option 1 to just invest in index funds and forget about real estate makes the most sense financially.

Option 2, only betting on only the investment property going up in value and not investing in index funds is obviously the worse decision.

But if you combine both option 1 and 2 and treat both of them as opposite ends of a spectrum, you land somewhere in the middle closer to the results of option 1.

Why did you purchase an investment property instead of a primary residence?

Well, I didn’t plan on living there so I had to call it an investment property or else it’d be mortgage fraud 🤷🏽‍♂️

A secondary reason is I’d like to eventually own a portfolio of real estate properties as part of my financial strategy over the long term. I’ve heard that it becomes easier to build a portfolio of properties once you have a few properties under your belt because of the equity you build. I figured it was best to start sooner rather than later.

I also wanted to learn the process first-hand and not surprisingly, it was very confusing. I didn’t know who to trust or how people were paid. I could’ve researched all of that but I knew myself and I knew that would result in analysis paralysis. My goal was to buy a property, not understand the ins-and-outs of the real estate industry.

Realizations at the nd of the process: Of course my real estate agent thought it was a good time to invest. Of course he thinks it’s a great deal. Of course the mortgage lender thinks the investment makes sense. Of course, of course. They’re all incentivized to convince me to buy because that’s how they secure the bag. 

They’re not looking out for me. They’re looking out for themselves.

Actually, that’s not completely true. My real estate agent was truly looing out for me when he recommended that I don’t waive the inspection. This was a tactic buyers did to make a more competitive offer but that leaves you open to potential issues after closing. He didn’t want me to have a bad first buying experience.

I also learned that the market is competitive as f***. I put in offers on multiple properties at once and others often bid above the asking price beyond my budget. It was tough. Now I know.

The final reason is building an important muscle as a business person: learning to let go of control in order to scale.

I decided I would not be the person managing the property. I’d be living in Boston after all. Nor would I allow my parents, who so graciously offered to manage the property, to do any work. I saw owning an investment property as another area where I needed to learn to trust others to build a business and build wealth. Similar to how I built my business’s financial infrastructure, I have to learn to hire people who know how to do it right so I don’t have to figure it all out myself.

I hired the team at Beach Cities Management, closed on the property one day, and handed the keys off to Viviana who has managed the property since. I’ve been impressed with their level of service and Viviana is on top of everything. I had no part in listing and advertising the property, finding and screening tenants, or managing the property. I haven’t met or spoken with any of my tenants and it’s great.

How did you decide which property to buy?

I saw at least 30 properties the purchase process. I spent at least 30 minutes a day browsing Redfin and booking tours. After seeing about 10 in the $350k-600k range, I understood what I could get with my budget.

I ended up buying a condo a few blocks away from Downtown Long Beach, an area that continues to get developed as of this writing.

Why that one?

  • It was available and in my budget.
  • I was allowed to rent it out.
  • It’s walking distance to the popular downtown area.
  • The neighborhood was and is getting developed, you can see newly renovated homes on the surrounding blocks.
  • I wouldn’t mind living there if I were to move back to Long Beac

But really, a big reason was that my offer actually got accepted.

I had gotten outbid on other properties It wasn’t the only property I had put in an offer for so it was a big deal that my offer got accepted.

So that’s why I decided to buy an investment property.

There was a ton of thought put into it and plenty of overanalyzing and doubt, but I had to commit.

A big reason I was able to commit was the story I told myself, it was personal.

Long Beach is my hometown. I wanted a piece of it. If I was strictly going by the numbers, it would’ve made more sense to put that money in an investment account and let it grow.

But not all great decisions are made through a spreadsheet.