I had the honor to write a guest post for the Silicon Valley Investor’s Club, a global community of STEM professionals dedicated to making smarter investment and career decisions. Join the SVIC community – 4.5K members strong! This is originally from that guest post.
Read until the end to get free access to my real estate investment calculator – And analyze your potential returns immediately!
The Silicon Valley Investors Club is excited to have Karen Paone sharing her 16 year real estate investment story and simple value based guide on real estate investing strategy. She moved from Mountain View to San Diego in 2020.
Hi friends. I’m Karen. I’m a busy full time working mom who is excited about investing in real estate because it’s a vehicle to achieve my financial freedom goals. Over the past 16 years, I’ve figured out a real estate investing system that works for me and I’d love to share my experiences with you.
In this guide, I’ll cover:
- The most important things to do before defining your investing strategy
- How to define your real estate investment requirements
- How to keep real estate investing simple so you can stress less
- How to make confident decisions and take action once you have a strategy
Read on to hear my story. Or if you want the Cliffs notes version with actionable tips, scroll to the end.
How it started – My first property – What NOT to do
2005 was around the height of the real estate bubble. I was in my early 20’s and wanted to get in on it. My parents were thinking about investing in AZ and introduced me to a local realtor. I made a weekend trip to Phoenix and bought a new construction home in Laveen (suburb of Phoenix) that weekend. All I knew was that the market was hot and you only had to put 3% down. So on a $236K 4bd/2ba 2200 sq ft. home, I only had to put down $7K. I also decided on a 5/1 ARM. I think it was 2.5%. Crazy that the 30 yr fixed rates are down so low now too?! I remember signing the paperwork and not understanding what was happening. I was banking on this home appreciating and then selling for a considerable profit. I also thought I could get a renter in there and make some residual income since the mortgage payment was so low. Seemed like a reasonable decision.
Side note: 2005 was also the year I bought a timeshare on a whim in Hawaii. Sooo…proving even more that I wasn’t really up to par on my financial acumen. I saw the sales rep popping a champagne and doing a happy dance from the window immediately once I left.
Back to AZ.
My property was vacant for a few months, but then I was able to find a tenant – I decided on going the Section 8 route because I could then guarantee monthly payments (for the most part) from the government. The positive is that my tenant lived in the home for 10+ years. The negative is that they basically destroyed the home and did COMPLETELY SHADY things to the house – like tearing out the flooring and creating a wall to make 2 rooms out of 1 room (what?!).
My property manager never disclosed these things and so we had very long heated exchanges that resulted in me finding a new property manager, losing money, wasting time and growing my first set of white hairs (the 2nd and 3rd set caused by kids).
When I got married in 2011, my husband inherited this bad investment – and he being financially savvy really urged us to sell the home, even at a loss. We had a new property management company and a new tenant, but, unfortunately, that tenant stopped paying rent and that was the straw that broke the camel’s back.
We ended up remodelling and putting the house on the market in 2018. The good news is that it sold within 1 month and for $250K. But overall, this was still a poor investment decision. We really just wanted the weight off of our shoulders. Looking back, if we kept the home, it would be worth over $300K today. So maybe patience would have paid off.
My primary residence
Over July 4th weekend 2012, my husband and I bought our first home together, a small tri-level townhome in Mountain View. It sure felt large compared to the 500 sq ft 1 bedroom we were renting. We were in the magical dual income, no kids (DINK) stage where we did a lot of travelling, ate out all the time, and did what we pleased at a moment’s notice.
Determining your Retirement Strategy & Plan of Action
In 2015, while still in DINKland, my husband and I sat down and talked about our retirement strategy and wrote our 5 yr goals together. I still remember sitting on our bed and making lofty plans that we would own 5 properties in 5 yrs. It was an aspirational goal and hard to imagine because I didn’t know how our incomes could support 5 homes. We were delving into the Financial Independence (FI) movement and craved the ability to stop ‘mandatory’ work at any time. The concept was so exciting and freeing. I was so passionate about this. I probably read the entire Mr. Money Mustache blog in a few days. Our takeaway was to reduce our ongoing expenses as much as possible. And the biggest ongoing expenses are your debts (primarily your mortgage).
So at that time, our goal was essentially to max out retirement savings and location arbitrage:
- max out tax advantaged accounts
- have no debts except mortgage debt
- move to a lower tax state
- buy a more affordable home where our money could go farther
- invest our money into real estate so we could live off residual passive rental income
We started analyzing the different states we could move to. We also started crunching numbers hard core. Spreadsheet upon spreadsheet and tabs upon tabs to make your mind crazy. Good thing both my husband and I are spreadsheet people. We reviewed our budget, expenses, savings, etc. We decided we could be financially free by 40 as long as we followed our ‘plan’.
After weeks and months of analysis, we finally landed on Austin, TX. I created a proposal for work to move to the Austin office. It seemed to be a green light. We were looking at neighborhoods, securing appointments with potential rental houses and starting to pack. Our plan was that we would rent for 6 months to 1 year before purchasing. Did I tell you we both had never been to Texas? We also didn’t know anyone in Texas. When you are a DINK the world is your oyster.
Define your Real Estate Investment Requirements
While we were planning for Austin, we also started real estate investing. I lived in Idaho on and off during my childhood (2nd grade, most summers, 7 – 12th grade), so I was familiar with the area and felt comfortable investing there. We also foresaw the homes in the Boise area appreciating as we thought it could be a destination where many people would want to live. We pulled migration stats and saw the population growth trend in those areas. Here was our strategy and the requirements going in:
- Buy & hold for the long haul – it’s about the residual monthly income and less stress. This means no renovations, auction purchases, flips or hopes for quick appreciation, and absolutely no over leveraging money.
- ‘Bread and butter’ properties only – Single family starter homes (no HOA) in specific zip codes, no larger than 1500 sq ft, less than 10 yrs old, low maintenance yard, not on a large lot, in good communities, good schools, low crime, flourishing businesses.
- Cash on Cash return of at least 7%
- Hands off – Solid property management – auto-pilot mode
With the requirements in mind, we narrowed our property search to certain zip codes/areas and purchased our first ID property on a weekend trip. Because we were confident in our strategy we ended up purchasing 2 more properties within a span of a few months – sight unseen. I didn’t have any heartburn over investing there. Idaho prices were so low compared to the Bay Area ($160K – $200K range).
Then, I found out I was pregnant. And, thus, our DINK lifestyle ended. It was a rather quick decision to call Austin off. We needed the support of family nearby. Let’s have the kid first. And then go from there. 2016 – 2018 was a blur of newbie parenting. I also call it the dark days of my life (but that’s a story for another day). We bought our 4th ID property during this period – same strategy as above.
We would have purchased more properties but it was almost impossible to find any good deals and we really didn’t prioritize spending time to actually research other areas/states. We were in parenting survival mode.
Define (or re-define) Your Lifestyle Requirements
In 2019, we were still on our FI path, though it was sidetracked due to now having 2 kids. As DINKs we seriously underestimated the costs of kids, so we had to make adjustments to our plan. We also had to re-evaluate our location arbitrage strategy. We no longer wanted to move to Texas or Idaho or Colorado, primarily because we were spoiled by California weather and realized we were total weather wimps. But, we couldn’t afford the home that we wanted in the Bay Area. The prices where we were living were at least $1200/sq ft so the type of home we wanted would have been in the $4m/$5m range. Even if we could afford that, I never wanted to pay the property taxes associated with such an expensive property. It would go against our plan of having as little ongoing expenses as possible. But, we also couldn’t continue living in a tri-level home with no backyard/space.
We felt stuck. But continued to be patient.
This is when we seriously started considering moving to Southern CA, somewhere between Carlsbad and San Diego. We would vacation in San Diego every year – it was the best. People always talk about retiring in San Diego. We thought why not fast track and just move to the place that we want to retire? We were going to make it happen no matter what. We could afford a nicer home with space in a great neighborhood, be close to the beach, and family would only be a short flight away. The prices were higher than being out of California, but it was the compromise we were willing to make to delay our financial freedom to get the lifestyle we wanted. For 2 years, we closely watched and studied the areas between Carlsbad and San Diego, but eventually focused on 2 very specific zip codes/areas (92130 + 92127).
Be Patient and Prepared
2020. The pandemic happened. The lockdown began. Everyone was working remotely. We saw an opportunity to purchase our dream home and had all our ducks in a row – patience and preparation paid off. We took fast action and ended up purchasing our new San Diego home (at a great deal) smack in the middle of the most uncertain time (May 2020) and selling our Mountain View home. The sale of the Mountain View home was last minute and we went back and forth on it for a long time. We calculated that it would take 20 years for the rental money to equal the instant money we received based on the $500K no tax basis for selling a primary property. Who knew if that tax savings would be around much longer? It could have been a bad decision to lose our foothold in the Bay Area, but we were thinking about our purpose – to simplify, reduce stress, reduce ongoing expenses and give us stability, security and freedom. With the equity proceeds we could invest in other properties or the stock market (to increase our liquidity), and even pay off a huge chunk of our new mortgage. It gave us more options. And options = freedom.
Continue Patience and Preparation
In 2021, we really didn’t think we could find a good deal and were just going to wait it out. But, this is where patience and preparedness comes into play again. We were watching the market for potential homes for our parents and ended up purchasing our first condo investment in a 55+ community. Read the purchase story here. The cash on cash return would only be ~4% but our thought is that soon our parents could move in and it would be a win-win situation – securing a single level condo that lives like a single family home in a great active 55+ community, close to us and purchased at a great price. The home is an investment, but the return is not so much monetary as it is for security and stability.
And here we are today, looking back on my 16 year real estate investing journey. It started haphazardly with no real plan, but over time I slowly learned from each stage – each experience building upon each other. It’s only when a strategy + plan + follow through come together that the ball started moving. We’re approaching our initial FI by 40 years old goal. But, you know, it was actually attainable earlier, depending on what we were willing and not willing to sacrifice or tradeoff in our lifestyle to get there. The biggest tradeoff was moving away from family and friends. We could have been financially free if we sold our townhome and moved to Texas or Idaho and purchased a more affordable home. But we realized we were not willing to sacrifice location (as we initially thought) and lifestyle. So we made a compromise – move to a slightly more affordable area within CA that is easy and desirable for family and friends to visit, with great weather, great public schools, awesome activities, and opportunity for our children to nurture their Chinese heritage.
We’re so happy that we made the move. It was the best. decision. ever.
Keep it Simple, Options = Freedom
There are many times that things felt too overwhelming, like my head was going to explode due to analysis paralysis. Times when we gathered all the data we needed and decisions were no longer based on just facts. The struggle became an emotional heart one. These are the most painful struggles to overcome. If you get to this point, I found the most helpful exercise is to take a step back and review your values. If you don’t know what your values are, I found this free quiz fun and helpful. It’s worth it!
Once you’ve determined your values:
- Ask if you’re living them?
- How do you want to feel?
- And what are you willing to trade off to get to the life you want to live?
Making decisions becomes easier when you understand your values. It also helps with muting any perfection tendencies you may have.
Thank you so much for reading. I hope my story has been interesting and you’ve gleaned some knowledge from it. If you want to learn more about me, visit my blog, www.MOMentswithKaren.com where I provide practical strategies and tips to optimize #momlife. Or follow me on Insta: MOMentswithKaren
Please find a recap of my tips below:
Let’s Recap
- Determine your overall retirement strategy – Does it align with your values? What gives your life meaning and purpose? How do you want to live your life? How do you want to feel? Make sure you and your family are aligned. Real estate investing is not the be all end all, it’s a piece of the overall strategy.
- Determine your lifestyle requirements – What are your P0/P1 requirements?
- Determine your real estate investment plan and how that fits into your retirement strategy – How much of your retirement plan will be focused on hard asset real estate investments?
- Define your real estate investment requirements – What area(s) are you scoping – narrow it down to zip codes and better yet to areas within zip codes. Watch, read, set up alerts, but more importantly talk with the people that you know there.
- If you don’t know where to focus your attention, ask your friends, family, network. People connect people and having a trusted partners with experience is key.
- Create your real estate investing modeling sheet – Whenever you see an opportunity you can plug in the numbers and see the potential return. We created our own Google sheet with some simple formulas. But keep in mind that it’s not all about numbers – review the qualitative aspects of the property too.
I want to share my simple to use real estate investment calculator with you. Just plug in your numbers and see your return potential immediately. It’s as easy as that!
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- Be patient and prepared and take action when opportunity presents itself. Now a days it’s really hard to find a good investment deal anywhere. Instead of chasing big returns you may want to invest in more ‘quality’ properties with lower return but more consistency. Use a spreadsheet to calculate your returns quickly and easily. Patience and preparedness can pay off. Once you find something that meets your requirements, take action. You should have a pre-approval letter ready and a realtor that’s quick and efficient.
- Keep it simple – unless you don’t want to because you love the complexity. How much time do you want to spend on real estate investing? Are you giving yourself more options or limiting your options? Options = Freedom
- Keep the end in mind – If you start feeling overwhelmed and analysis paralysis starts creeping in, take a step back and think about your values again – the things that give your life meaning and purpose. How do you want to live your life? How do you want to feel?
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