Introduction

Like many people whose retirement savings shrunk by 40% between 2000 and 2002, we were wondering if there would be enough money in our 401k for us to retire on and maintain our current standard of living. We were both 35 years old so the age-old advice of dollar cost averaging and the stock market always goes up over the long haul still seemed to make sense. After all, we had 30 years until retirement.

After we opened our 401k quarterly reports in April of 2002, we decided that the risk was too high to have all of our eggs in one basket. True, we had investments in different segments of the market, but our retirement relied solely on the stock market. What if we were going to retire in a year with an economic environment similar to 2000 and our savings dropped by 40%? The thought of working into our 60s and 70s was not appealing. We needed other sources of income.

That is when the real estate bug bit us. We read many books and decided that real estate made sense. Who wouldnt be interested in real estate with all of the talk about no money down and the thought of buying foreclosures for pennies on the dollar? In May of 2002 we started our real estate journey and soon learned that the books and seminars do not tell you the whole story.

That is where this book comes in. This book is a journal of our first year in real estate investing. Or, as we like to call it, real estate spending. The purpose of this book is to share our experiences, emotional and intellectual, in real estate so others are more prepared for what lies ahead. During our first year, there were many times when we wanted to give up because of all of the surprises, as we believe most people in real estate do. Real estate is not rocket science, but it does take a huge commitment and a high level of determination to succeed. While many people say they do real estate, the fact is that very few are actually succeeding in real estate.

As you read this book, remember, we believe in real estate, we continue to invest, both financially and emotionally, in real estate, and we look forward to a prosperous and secure retirement. The purpose of the book is not to discourage real estate investment but to educate with the intent that when the going gets tough, you will continue to follow your dreams.

John and Donna Naughton

The Beginning
The Truth Must Be Told

Before we start our journey, we wanted to share some basic real estate lessons we have learned. The first is this:

No money down means none of your money down.

The bottom line is the seller, in one way or another, gets their money. If you owned a building worth $500,000, you will want the entire amount. It might come in different forms such as cash, secured and unsecured notes, contract sale, etc., but the total will be $500,000. Why is this important? Because the second lesson we learned was this:

Using other peoples money is not free.

When you deposit money in a bank, the bank will pay you interest. If you buy a car, the bank will charge you interest. Any time money is loaned or borrowed, interest is charged. The same holds true in real estate. If you bought a building for $500,000 with no money down, you will, in one way or another, pay interest on the entire $500,000, plus closing costs, and the interest will vary depending on the source of the money. For example, the terms of a first mortgage for 80% of the purchase price from a bank might be 7.0% over 25 years with a seller carry back for 10% of the purchase price at 10% over 10 years. That still leaves 10% of the purchase price. Where does that money come from? Hard money lenders at 16%? Uncle Joe at 10%? No matter where it comes from, no money down always involves borrowing money at a price.

Does that mean that purchasing properties with no money down does not work? No, it just means you have to be careful. In our experience, properties that work with no money down do exist but they are harder to find and evaluate.

If you do not understand these two important points, do not buy any real estate until you do. These points are important because if you underestimate the amount of debt service on a property, it will change from positive cash flow to a loser very quickly.

Understand what the meaning and actual cost of no money down is for each deal.

Lessons Learned

We boiled down our experiences in the following bullet points. If you remember these lessons and find real estate investment rewarding and maybe you too can retire early!

* Understand why you are investing. It is more than money! What will you do once you have additional income.
* Build a solid team of advisors and support. Do not be afraid to walk away from relationships that are not working for you. You do not have to do everything yourself.
* Stay focused. Pick an area and learn more about that area than anyone else. All but one of our rental properties is in a one-mile radius of our first property. This allows you to evaluate deals quickly and act decisively.
* Do not be afraid to make mistakes.
* Understand local ordnances regarding rental properties. Get to know the local law enforcement.
* Finally, just start! Start looking at properties. Start meeting with financing sources. Start meeting with lawyers, bookkeepers, accountants, and brokers. The best lessons are not in the pages of books but are waiting for you in each property you walk through.