My Secret Non-Software Developer Life I’ve Never Told You About
I’m not a secret agent.
I don’t work for the NSA.
I don’t parade around at night dressed in women’s clothes.
My little secret isn’t all that impressive, but it is something that I don’t think I have ever mentioned on this blog.
I am a real estate investor.
It isn’t really that big of a secret, but it is something I haven’t really felt the need to talk about here, because I didn’t think it related very much to software development.
I am beginning to change my mind though…
Software developers need to know how to invest
It isn’t just software developers, but everyone needs to know how to invest. There is a extremely large amount of bad information about investing and money management out there and it is easy to just do what your financial advisor says and retire at 70 years old barely making enough to survive.
Money management and investing skills are especially important to a software developer, because software developers tend to make a pretty decent wage.
Let me start off by telling you a little bit about my story and how I got started in real estate investment.
I actually started investing in real estate when I was 18 years old. As soon as I got out of high school and went to find a place of my own to live, I had decided that I did not want to rent.
My limited, but somewhat correct assessment at the time was that renting was throwing away money, but if I bought a house instead, I would be actually investing that money. (This view is not quite correct, as it is a bit of a simplification, but that is what I thought then.)
I didn’t really have any money, just a couple thousand dollars, but I decided that I would try to find and finance a property somehow.
I finally found a pretty beat up small two bedroom house for about $68,000 that I could buy, but I needed to borrow some money for the down payment and because I had basically no credit history at all, I had to accept a 13% interest rate with a stiff penalty for paying off the loan early. (Ouch)
Somehow I did it and became a homeowner though and ever since then I have been learning about real estate investment and adding more properties to my holdings.
After purchasing my first house, I ended up moving to Santa Monica taking a job that I was not at all qualified for during the crazy dot com boom. I ended up renting out my property to a friend of mine when I left town.
Renting was hell. I had all kinds of problems. I had a string of bad renters who took advantage of me. The house got torn up and I got overcharged to repair it. Lots of bad stuff… It was so bad that I tried to sell the house, but the deal fell through.
But, while I was in LA “making the big bucks,” I started to do a little math. I was making a pretty big income, but even at the size of the income I made, if I saved almost all of it, I would only become a millionaire after 10 years of hard work—assuming nothing went wrong and I could keep that inflated hourly rate that long.
I remember thinking to myself “holy crap am I about to waste 10 years of saving every dime I can to barely become a millionaire in 10 years?” I didn’t even realize at the time that inflation would have made the 1 million end up actually being worth about 800k. Also, 1 million US dollars isn’t exactly rich anyway.
I remember thinking a more realistic scenario would be 20 years, and that was something I couldn’t stomach.
So, I started to do a bit of research. How could I do something smarter than the default? I first looked at mutual funds and thought that a 6-7% return would accelerate my plan by quite a bit, but when I looked at the numbers, I realized that the compounding effect would take around 20 years to start to be really effective as well.
For example, if I had started with $50k, adding $9k savings per month for 10 years at a 6% interest rate, I’d end up with $1.5 million at the end of 10 years, but $4.1 million at the end of 20 years. $4.1 million is pretty much rich, but 20 years is still a long time and a 6% interest rate is not something you can just bank on for 20 years.
There had to be another way. Some way that I could do something smarter.
I did a bit more research and found that the richest people in America made their money in real estate. I also stumbled upon this interesting scenario that convinced me real estate was the right track.
Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there. If you open up a trading account on a margin, you can usually only leverage at 100% or less. So, if you wanted to buy stock with credit, you could put down $50k and borrow $50k… perhaps.
Now suppose you find a house that you think is a good deal for $100k. And suppose that house is actually worth $120k—because house prices are very subjective. Now suppose you go into the bank and say “hey, can I borrow $90k to buy this house, and I’ll put down $10k?” If you have decent credit, you’ll get the loan easily.
Now, let’s suppose that the stock actually increases by 20%. So, the stock is now worth $120k. You made an investment of $50k of your own money. You had to pay some interest on the other $50k you borrowed, because you can’t really rent your stock (well, you can, but that is sort of complicated.) So you end up making a profit of let’s say $120k – $100k – $5k interest = $15k on your $50k investment. Not bad, but it is about a 30% return on your investment.
Now, imagine the house you bought increases by only 10% to $110k. You made an investment of $10k of your own money. You had to pay interest on the $90k you borrowed, but you were also renting out the house, which covered the cost of that interest. So you end up making a profit of let’s say $110k – $100k = $10k on your $10k investment. Cha-ching $10k became $20k, a 100% return on investment.
Where the heck are you going to get that kind of return?
The way was clear to me
It was pretty clear to me after this little mental exercise and all the other research I did, that real estate investment was an almost guaranteed way to create true wealth in a much shorter amount of time than it would take to do so in just about any other way (Except for starting my own business, which I really wish I would have done back then.)
I began purchasing properties and financing them with 30 year fixed interest rate loans.
My plan was this: buy a new property every year if I can.
I figured the worst case scenario, as long as my rents covered my mortgage, would be that in 30 years I’d own millions of dollars worth of properties.
I figured best case scenario would be that the values would go up and I’d be able to sell some to pay others off and have millions of dollars worth of properties in a much shorter time frame.
All of my plans hinged on making some sacrifices and investing in real estate for at least 10 years, I still wasn’t thinking short term. But, this plan seemed much better than the alternative which required me to have a very high income for 20 years and live on a tiny portion of it. It was also much less susceptible to possible problems. I was in much more control of my future with this plan.
I figured best case, I could basically “retire” at 30. Worst case, I could retire rich at 50 (After all the 30 years loans were basically paid off.)
So that’s my story
Well, that is my story of how I got into real estate investment. I actually ended up getting a real estate license and learning quite a bit about properties, rental management and investing. And I did figure out how to deal with tenants. With many units today, I have less trouble than I did with 1 unit back then.
By the way, if you are interested in learning more about real estate investment. One book I highly recommend is The Millionaire Real Estate investor. There are many really bad and “scammy” real estate investment books out there, but this book is actually really good.
So, what do you think? Is this a topic that interests you? Do you want to hear more about financial matters and real estate investment here?
Like I said, I think all software developers and programmers should at least have some money management skills, but what do you think?