How I bought my first rental property at 21 years old

What's up you guys, it's Graham here. So one of the questions I get asked a lot is how was I able to buy my first rental property when I was 21 years old? How did I buy it outright in cash? So I'm going to be sharing with you guys exactly what I did, how I saved that money, how I bought the property, how I picked the area I ended up buying in, everything. Share it all right now.

So if you guys don't already know, I started working as a real estate agent when I turned 18 years old. So if you're not familiar with what a real estate agent does, just Google it. But essentially, I was licensed to represent buyers and sellers when I bought or sold a home, and I was paid a commission on every deal I did. So when I was 18 years old, I was making all of my money working as a real estate agent, and it's not like I made a ton of money my first year. I think my first year as a real estate agent I made like 30 something grand, and then like 10 months in, I sold my first house.

I saved everything religiously, and it wasn't really saving for a purpose or anything like that. But growing up, my parents were really always just like paycheck to paycheck for the most part, and I didn't want to live a life where I, like my parents did, just constantly worried about finances and where the next paycheck was going to come in and if they had enough money for rent and all of this sort of stuff. So all the money I made was kind of like a hoarder mentality, where I'm like, if I made a commission, I would just be like, I'm going to hoard it over here, I’m going to hoard it over here. So I just stockpiled money in my bank account.

It got to a certain point; I think I was about 20 years old and I started making a little bit over $100,000 a year, and at that point, the same deal, I was just stockpiling money. Every commission I did, I just pretended like I didn't even have the money, it just went straight into a savings account. I essentially, I mean, I don't recommend everyone do this, but for me at least, I lived like a hermit between the ages of 18 and 21. I barely went out, pretty much just worked all the time, and I was working between like 10 and 14 hours a day.

I didn't really have any friends at the time, I didn't really have anything else going on, so all I was doing was just working, saving, working, saving. I worked so much that I didn't have time to spend any money, so I was just like working, saving, working, saving. The way I started viewing things too was that all the money I'm saving, I just saw that as additional income. So for an example, if I saw everyone going out and spending, let's say, $50 on a lunch, if I didn't spend that $50, essentially I was just thinking, well, it's like I got paid an extra $50 because I didn't spend it.

That sort of mentality is still with me to this day. If I don't go and buy a Starbucks for $5, even though I want the Starbucks for $5, if I don't go and do that, I see that as myself just getting paid essentially another $5 because that's money that I'm saving and money that I can invest instead. At that point, I really just got way more enjoyment from investing and saving money than I did from spending it. I’m still a little bit like that today. I mean, I still get way more enjoyment for the most part by investing money and not spending it, but I'm definitely on the frugal side of things.

That's how I was able to save so much money. So from 18 to essentially like 2ish, so about 3 and a half years, I was doing this basically not spending any money. Everything I made, I would just save it, save it, save it. At the time, I was thinking, well, I could always just buy that Lamborghini, that superer spider that I'd always really wanted. Maybe I could just go and do that. In the back of my mind, I was thinking, well, I could just have a moment where I just go on eBay and just like click, you know, buy it now, but I never did that.

I had saved all this money, and part of my concern with working in real estate was that it was commission only. So if I didn't work, I wasn't going to earn any more money. So I knew that I was only going to earn money as long as I hustled, as long as I put in like insane hours, as long as I worked with everybody, as long as I was like really busy, I would earn money. But even then, being busy and hustling and meeting clients and showing houses is no guarantee you're actually going to make any income. I mean, in real estate, it's so sporadic. Even with me to this day, I mean, there are some months I can make over $100,000 a month and other months I earn nothing for the most part or I earn like, you know, a few grand.

So I was a little bit concerned, you know, having all this money in the bank and not having any guaranteed income coming in. So I knew I wanted to do something with that money, and since I was in real estate, real estate was, you know, my interest; it was all I knew. I spent, you know, 12 to 14 hours a day in real estate, so it was something I felt like I had, you know, a leg up on by just being in real estate all the time.

Now it's about 2011, and I started noticing real estate prices just became really, really, really cheap, and especially in San Bernardino, which is like my prime focus for investing at the time. I was noticing these properties that were selling between $50,000 and $100,000 that, in their prime in 2005 and 2006, were selling between $250,000 and $500,000. So you could buy these properties for 25% of their value that they were selling for just a few years earlier.

The way I saw it back then is that these homes were selling for a fraction of their replacement value. So if you guys don't already know, the replacement cost is the cost to rebuild that same house, and insurance companies use this a lot in case there's like a fire or in case there's an earthquake or something that damages your property; they always have a replacement cost. Now, most properties in this area, the replacement cost was somewhere between $120 a square foot and maybe $200 a square foot on the really high end.

But these properties that I was looking at in 2011 were like $25 a square foot, $30 a square foot, $40 a square foot. I mean, just it's absurd. So the way I saw it is that you couldn't even build a home for a profit at these prices, and my thinking was that this should at least come back to replacement cost values because it doesn't make sense for a home to sell at less than replacement cost. You have to think it takes a long time to build a home; someone's got to make a profit, a lot of things have to go on for someone to actually build a house and sell it.

Let's just say, for example, a home that costs $150 per square foot to build, chances are it's going to have to sell like $175 per square foot for everyone to make a profit and come out ahead and to make that worth their time. So I thought in my mind it doesn't make any sense for these homes to be selling at the values they're selling at. At the very least, even though this is the worst market we've ever seen, it has to come to at least replacement value.

So at the time, my thinking was pretty much there's no way for it to stay at these levels for it to ever make sense to ever build again. It needs to come back to at least replacement cost. Now in 2011, there were so many short sales and foreclosures, and everyone was concerned about the real estate market. Nobody thought it was going to come back, but I thought it just doesn't make sense to have these prices. So I knew whatever I bought, if I bought it at $35 a square foot or $50 a square foot, it had to at the very minimum be worth about $100 a square foot to $120 a square foot for things to even make sense to ever build again.

Now, I wasn't just looking 100% into a future appreciation of what it might be worth because I didn't think it was going to rebound as quickly as it did. I knew it was going to rebound at some point, but I didn't think it was going to happen in like a few years. What I was really looking for was rental income. Now in San Bernardino, a lot of people lost their homes. This is an area that just boomed in 2004, '05, and '06 and got hit really, really hard when people started losing their jobs and the stock market crash and everything in 2009.

So this area got hit especially hard, and I saw it as just like a massive overcorrection. I didn't think the market should have been as high as it was, but I didn't think it should have dropped as low as it did. So when it dropped that low, I thought this is just a major correction; this is just going to be temporary. Now is a good time to buy. But at the same time, people were renting because nobody was buying. The people that lost their homes couldn't afford to buy another house, and a lot of the people that could buy homes just weren't buying because they were afraid of the market, and everyone was calling for the shadow inventory.

I can't tell you how many times I kept hearing about this shadow inventory when I was buying. So many people told me I should not buy in 2011 or 2012 because there's a shadow inventory that's about to hit the market and prices are about to plummet even lower. But I didn't even care. I mean, I just thought like even that if that did happen, I was buying things so cheap; it has to at least be worth replacement cost at some point. So I didn't really care. At that point, all I cared about were two things: it's going to be worth replacement value and what I can get for rent.

A lot of people were renting when the real estate market tanked. A lot of people became renters, and that created a huge demand for rental properties. So I began analyzing all of these deals in San Bernardino, and I was able to find these houses that were $60,000 to about $120,000 that would rent between $1,100 a month and like $1,600 a month.

But now, since I've just lived really frugally, I've saved all of my money, I have all this reserve, and now I want to buy real estate. But the problem was that San Bernardino was like an hour away, and it didn't make sense for me to keep driving to and from San Bernardino seeing all these properties. I needed just to do something really quick. The thing is, all of these properties that I was buying were short sales and foreclosures.

Let me describe really quick a short sale because all of these properties I bought were short sales. A short sale is when a buyer owes more on a property than what the property is worth. They can't make payments, and they let it go into foreclosure. This is where the bank steps in, forecloses on the property, and they take it back. But the bank is not a property owner; a bank is a bank. They just want their money; they want their cash flow. They don't want to be holding on to all this real estate.

So what they do instead is they allow for a short sale, which is where the seller of the property owes way more money than the home is worth. They essentially just declare, "Listen, I'm going to sell the house at its market value, and we're going to walk away from this deal. It's going to mess up my credit, but that's okay; I just want to get out of this property." The bank just absorbs the loss.

So all that money that the bank lent out, essentially, that's what a lot of these bailouts were for—were for these banks just making really crappy loans, and a lot of these people just walked away from massive amounts of debt. I mean, it screwed up their credit, but at the same time, they walked away from this property they may have owed $300,000; the bank was able to recoup like $80,000 of that, and the seller just walks away scot-free with no other obligations on this loan.

So the way a short sale works is that the seller first has to stop making payments on the house. They have to fall behind; the bank has to foreclosure on them. But at the same time, they can put the house on the market and apply for a short sale. Short sales at that time were so backed up, and to get approval on a short sale could take between four months sometimes as long as a year. So what they do is they put the property on the market even though it's in foreclosure, and they say they're going to be applying for a short sale.

They collect all the offers if they have any offers, submit that to the bank if the bank approves it. If the bank approves the short sale, they can sell the house, and the new buyer can buy the house. That process, like I said, takes like four months to twelve months. So what I do, since I'm a realtor and I have access to all these properties and I see them as soon as they come on the market, is I would make an offer sight unseen cash for every property that came on the market that fit my certain criteria.

This was my criteria: any house newer than 1978 with more than three bedrooms, more than two bathrooms, more than 1,200 square feet on a lot size of over 20,000 square feet. This was my criteria; this is what I found to be the best for renting out the properties at the maximum value. So if any property came on the market that fit that criteria, I'd just go ahead, I'd submit an offer at a price that I felt it would cash flow really well for me, and I submitted maybe like 50 or more offers, no joke. I mean, I was probably writing an offer almost every single day on something; some days I'd write multiple offers on all these properties.

Of all those properties, I maybe got like seven of those offers accepted. Then they get sent off to the bank, and I had no intention, by the way, of closing on seven properties. But I knew that the bank would take four months to twelve months, if at all, to ever approve the deal. A lot of these didn't even get approved by the bank, so it's like I wanted to get as many feelers out there as possible so I had a large range of properties to choose from. That way, I can pick the crème de la crème, whatever properties were the best at the time they actually came up.

I was able to get all these properties accepted, and then it was just like a waiting game. But while I was waiting for the banks to approve these deals, I just kept submitting offers, kept submitting offers. Whatever came on the market that fit my criteria, whatever price I wanted to offer, I would just offer it, try to get it accepted. The banks slowly started to come back saying, "Okay, we accept you on this deal, we accept you on this deal, we accept you on this deal, but we want like a little bit more money on this," and I would either agree or disagree.

Now the first home I bought was listed somewhere on like $7,000. It was listed online as 1,200 square feet, three bedrooms, two and a half bathrooms, 24,000 square foot lot built in like 1980 something. So I submitted my offer at like $60,000, which at the time was like really low. This was a home that sold in 2006 for almost $250,000, and I submitted an offer at $60,000. It was sent to the bank; the bank waited a few months. The bank got back to me; they actually accepted the price of $60,000.

Now keep in mind too, I had never seen this home before in person, but at that price, the house was too cheap to ever pass up. So with these homes, even though I wasn't specifically viewing each house individually, I still would go there every single weekend and check out different homes that came on the market, just to see what else is out there, check out the area, figure out which areas are good and bad, and just overall decide which parts of town I really wanted to be in, ideally.

Surprisingly, the bank actually came back and had accepted that price, which was so shocking to me. I had no idea the bank would actually accept that price. A lot of these offers I throw in are just total lowball offers to see if they actually go for it. I never actually expect them to go for it. Some of them do. This one was just like a total shock to get that offer accepted.

So then once I got the offer accepted, we opened escrow, and that's when I do my investigation to make sure everything is as it seems and to see if there's like no major defects of the property. So I go in, and I realize in this house it's owned by a drug-addicted hoarder. I can't even make this up, but there were like needles everywhere. Some people were, "Well, maybe she's diabetic." No, you can tell she was not diabetic. These are not, you know, any sort of medical-use needles. I mean, she was a hoarder. I mean, she must have had like five years' worth of trash, just items of everything piled up, and it was hard to even see through a lot of the house just because there were piles of stuff going up as tall as I am.

There was also like animal vomit and poop like throughout the house. I think she had had like a poor dog or something like that, and the pet had just like peed and pooped everywhere in the house. But I'm like, you know what? At like $60,000, I can't lose. Even if it cost me like $20,000 to clean up this entire home, I can't lose. This is a house, by the way, that would rent for like $1,300 a month.

So I ended up asking for like a few thousand credit for certain things; the bank actually gave me a $500 credit on top of my offer of $60,000 to buy the house. So I ended up buying this house all in total $59,500 to buy my first rental property. But it actually gets a lot better because the day I closed on the home, I hired workers to go in there and clean everything out and to begin prepping it for like painting, floors, remodeling—like really light stuff.

What we discovered was that on paper, it looks like it's a 1,200 square foot home, but she had hoarded so much and somehow we had all missed this. There was a room off to the side of the house with things piled all the way up to the top and like a bookshelf half covering it, but it turned out when you removed that sort of stuff, there was another full like 600 square feet behind it.

Now this is just like me getting totally lucky, but it looks as though it was like an enclosed patio at one point that had been done really nicely, and there was like an extra bonus living room with another bedroom off of it. It looks like this was all done really professionally. Now this is like usable square footage that whatever tenant wants to live in there can definitely use this as like an extra bonus room. I had no idea, and that added a ton of value to the home having this additional add-on that none of us ever expected.

So when I bought this house, I started doing some really light cosmetic remodeling. All I did with this house is I took up all the carpet, put in laminate flooring, I changed out all the vinyl for the kitchen flooring and the bathroom flooring. I changed it to tile, did some like minor countertops, repainting, some landscaping, some really basic things, and I think all in all I was into this home for $112,000 total for all the remodeling I did on the property, including some like basic landscaping, which is really inexpensive.

Once I did all of this work and finished it, I took pictures of it, I put it on Craigslist for $1,250 per month, and I found a tenant really quickly. If you've seen my video "My Top Three Mistakes in Real Estate," part of my mistake was picking that tenant and picking the first tenant that came through. Even though I had a ton of interest at $1,200 a month, I mean, I just picked the first tenant. Big mistake; I'm never going to do that again.

So all in, I bought the house for $59,500, I spent about $112,000 remodeling the property, and I ended up getting about $1,200 per month in rent from that. From there, I started buying other properties in the adjacent area. So there were other properties within the same block that ended up getting, and all of those were just cash flow positive from the very beginning and were bought outright in cash in the same ways I described I bought this house.

Overall, the whole reason I did that was just to be able to create some income so I didn't have to worry about selling real estate all the time or not making a commission or going through a dry spell in real estate or like something happening with my real estate career and then all of a sudden I'm out all this money.

So a few takeaways from this is that it was so important for me to save as much money as I could. I think if I just blew all the money I had when I was like 18, 19, and 20, by the time I was 21, I wouldn't have had anything left over to take advantage of these opportunities. So saving money for me was like a total priority, and even to this day I save as much money as I can so that when opportunities do come up, you have the money to take advantage of them.

Now I do want to mention, by the way, that luck had a lot to do with this as well. Not only was I saving money and making good money too in one of the worst recessions we've seen, but I was also saving money and happen to buy real estate at essentially the bottom of the market. I was not expecting the market to rebound as much as it did. So in that sense, in terms of the value of the properties, now a lot of that was luck. I mean, I did not predict it was going to go up that quickly.

But I mean, again, it's saving the money and paying close attention to what things are selling for and where there's value because I guarantee even now there is still value if you know where to look. So that's pretty much it. I mean, that's exactly my story—story of how I made my money working as a real estate agent, how I saved everything, how I bought these properties at the bottom of the market, how I found the opportunities when they came up. I mean, that's everything.

So if you have any questions though, feel free to comment down below. I'm happy to answer any questions you guys have. If you haven't already, feel free to click subscribe; I'm going to be doing my best to upload as much real estate content as I can, so you don't want to miss out on that. Also, feel free to add me on Snapchat or Instagram if you want to follow me there, feel free. And that's it, you guys, till next time.