This article originally appeared in Forbes.

My Back Story

I spent 2006 and into 2009 fighting the good fight but slowly coming to the realization that I was in a financial position that I could not fix.  I got really good at borrowing money and the banks I worked with were happy to work with me.  

I overpaid for several single-family houses and small apartment buildings.  I managed to buy them with little money down. I had little equity and no room to reduce rents as the economy in southwestern Ohio hit the skids.  I filed for bankruptcy in April of 2009. It sucked.  

I’m No Guru

There are many books, seminars, and home study courses written by industry ‘gurus’ that teach how to buy houses with little or no money down.  I question the ethics of most of these purveyors of ‘get rich quick’ schemes. These tactics have no place in my business today, or this blog post.  I hope this does not come as a disappointment.

It’s Going To Take Some Money

Buying real estate takes at least some cash, either your own, a partner’s, or a bank’s.  Accessing bank financing may be easier than it was a few years ago post-crash, but for most of us, a fairly significant down payment will be required.  Figure 20% to 25%. 

Furthermore, depending on the type of mortgage you qualify for, the condition of the investment property generally has to be fairly good. At a minimum, the lender will look for a functional heating system, running water, and electricity.  

Here’s What Is Possible

It is possible to buy property in a place like Springfield, Ohio, for very little money.  However, the condition of the property will be poor and will require a tremendous amount of physical effort on your part to put it in service, or, a significant amount of money to pay someone else to put it in service.

One way or another, a lower-priced house in the city of Springfield is going to cost $30,000 to $35,000.  You may be able to acquire a property for as little as $2500, which I have done, and put $25,000 to $30,000 in it to get it in service.  

On the other hand, you may buy a property in good if not quite move-in condition for $30,000 to $35,000.  Either approach is going to yield a property in your portfolio that will rent for $600 to $700 a month. 

Pay Now Or Pay Later

The first approach requires a lot less money upfront and usually a huge investment of sweat equity.  It also allows you to improve the property as you have cash available, either from other rental properties in your portfolio or your full-time job. 

The second approach is probably preferable if you have the cash up front or bank financing.  The interest and principle required to service bank debt are going to impact your profit to some degree and your cash flow to a substantial degree.  

Crawling From My Wreckage

Within just a couple of years after the crash and my subsequent bankruptcy, I was anxious to get back into investing.  I was not interested in borrowing money. Unencumbered real estate – real estate without debt or mortgage – is a very beautiful thing.  My goal was to acquire as much as I could afford.

An investor client of mine was in the habit of buying multiple properties with cash at sheriff and tax sales at rock bottom prices.  These properties were in very bad shape. They were literally uninhabitable most of the time. My investor friend would then sell them to me via land contract at a substantial markup.  

I would then fix them up using the cash flow I earned from my real estate brokerage business.  I was able to get help from the people and resources we put in place building our property management business.

Price And Terms

The purchase prices of these properties ranged from $2500 to $10,000.  As a rule, I would make an interest-only payment for six to 12 months while I put the property back in service with my cash and effort.  After the initial six to twelve-month period we would term out the loan usually over 30 to 36 months.  

My investor client was very happy and I managed to accumulate over a dozen cash flowing properties free and clear within five years.  I continue to work with this investor to this day and it has been very profitable for both of us.

No Free Lunch

If real estate investing was easy everyone would be making a lot of money.  Real estate investing is not easy. The only easy thing about it is the ability to lose a lot of money relatively quickly.  I hope you can learn from my mistakes and avoid making the same yourself.

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