When I quit my job in advertising and moved into the real estate industry, I knew it was important to develop a central goal that would guide me throughout my professional life. I thought about why I wanted to become an investor in the first place. I thought about what I hoped to accomplish. And the answer was clear: I wanted to help people attain financial independence through real estate.
Perhaps you want to spend more time with your family, but your work schedule makes that impossible. Maybe you want to travel across the world and do crucial volunteer work. You might want to finally write the book you’ve been putting off for years.
Since my big career change, I have been able to achieve this goal by working with people just like you on fruitful investing opportunities.
In this section of my blog, I will help you understand what it takes to substantially improve your strategy for gaining financial independence through real estate and other business endeavors. I will walk you through the steps I took to become a successful investor. I will spell out seven key principles for attaining a net worth of half a billion dollars. With the help of financial planner Joshua Sheats, I will offer financial advice that can change your life forever.
Once you have read through all the posts, you can check out both of my books to learn more about financial independence through entrepreneurship. Additionally, for regular insights on the industry, you can listen to my podcast, Best Ever Show, the longest daily podcast on real estate investing ever made.
And if you want to schedule a planning session or feel ready to start investing with me, you can get in touch anytime by clicking here.
A little more than a year before the onset of the coronavirus pandemic, I wrote a blog post entitled “Why I Am Confident Multifamily Will Thrive During and After the Next Economic Correction” (which you can read here).
The economy was experiencing a record long expansion and showed no signs of stopping. However, like most economic expansions, various economic and real estate experts were warning about an impending recession.
“The stock market is inflated” and “real estate prices and rents will not increase forever” they said.
However, whether the economy continued chugging along or experienced a minor or massive correction, I was confident is multifamily real estate’s ability to continue to perform.
My confidence was not emotionally driven or biased because I am a multifamily investor. It was based on my analysis of the facts. The most telling fact was the change in renter population.
Historically, more people rent during recessions (which is one of the reasons why I was attracted to multifamily in the first place) and more people buy during economic expansions. The former held true for the 2008 recession as more people began to rent. However, during the post-2008 economic expansion, the portion of renters continued to increase (more US households were renting in 2016 than at any point in 50 years).
Therefore, I predicted that the portion of renters would increase or, at minimum, remain the same during and after the next correction.
Then, coronavirus hit and induced an economic correction (or a temporary slowdown, depending on who you ask).
A metric that is used to measure lending standards is the Mortgage Credit Availability Index (MCAI). The MCAI is based on a benchmark of 100 set in March of 2012 and is the only standardized quantitative index that solely focuses on mortgage credit. A decline in the MCAI indicates that lending standards are tightening while an increase in the index are indicative of loosening credit.
Joel Kan, Mortgage Bankers Association’s Associate Vice President of Economic and Industry Forecasting said in the August 2020 report, “credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales shows a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”
People will always need a place to live. Their only two options are to rent or to own. As indicated by the massive MCAI declines since the end of 2019, less and less people will be able to qualify for residential mortgages. The programs available to people with low credit or who cannot afford a high down payment have disappeared.
Therefore, by default, more people will be forced to rent.
One last interesting thing to point out is how the MCAI during the current economic predicament compares to the 2008 recession.
Here is an expanded MCAI graph that shows credit availability back to 2004. The pre-2011 data was generated biannually, making it less accurate than the post-2011 monthly generated data. However, the graph still highlights an important point. At least as it relates to the availability of credit at the time of this blog post, the current economic recession is nowhere near as severe as the 2008 recession.
One of the most life-changing discoveries came to me years ago when I realized I was earning income the wrong way. This was uncovered when I read the book, “Cashflow Quadrant” by Robert Kiyosaki. It’s a powerful book that helped guide me to become a full-time investor and to make financial freedom a top priority. Additionally, this book has single-handedly helped me save thousands in taxes over the years.
As you can see in the diagram above, each quadrant (E, S, B and I) represents a different way to generate income. Some people earn money in only one of the quadrants, while some earn money in multiple quadrants. There are advantages and disadvantages to each quadrant.
The two quadrants on the right side (B and I) are the primary paths to financial freedom. The majority of the Cashflow Quadrant book is about the unique skills and mindsets required to succeed on this path. If you haven’t checked out this book, it’s a worthwhile read. You can learn more here.
Let’s Explore Each of The Four Quadrants:
E – Employee
An employee earns income via a job. This is the quadrant where most people earn their income. The job itself is owned by a business, which could be a single person or a large corporation. The employee exchanges his or her time, energy, and skills to an employer in exchange for a paycheck and often other benefits such as healthcare coverage and/or a retirement account match.
Employees can make a little or a lot of money, but when an employee stops working, or if the business goes under, the income stops.
The lack of control over income is a serious consideration of the E quadrant and something I became intimately aware of when I worked in the oil industry and layoffs began to occur around 2015. An employee’s financial freedom is dependent upon the success of the employer and the ability to show up to work and exchange time for money.
Kiyosaki points out that the reason as to why most E quadrant workers pay around 40% of their income in taxes (as shown in the diagram above) is simply because most personal expenses aren’t deductible. You can’t, for example, deduct the expense of your personal car from your taxable income. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.
Federal Tax: 27%
State Income Tax: 5%
Social Security Tax Rate: 6.2% (half paid by the employer)
Medicare Tax Rate: 1.45% (half paid by the employer)
Total = 39.65% in Tax
S – Self-Employed
Many employees eventually get tired of the lack of control over their pay and schedule and choose to work for themselves instead. A self-employed individual still exchanges time for money, but they “own” their job.
Common examples of the S quadrant workers include dentists, doctors, insurance agents, realtors, handymen, among many other skilled trades. It is possible as a self-employed individual to earn a large income, but like an employee in the E quadrant, when they stop working, so does their income.
Self-employed workers have more control compared to an employee, but more often than not, they also have more responsibility. As a result, success usually means working harder and working longer hours. Over time, this can lead to burn out and fatigue as I also experienced first-hand in 2015 when I was actively investing in real estate with fix and flips and vacation rentals.
Kiyosaki points out that the reason why most S quadrant workers pay the highest taxes, around 60% of their income (as shown in the diagram above) is that Social Security and Medicare Taxes are paid 100% by the self-employed individual (they are not split by the employer as is the case with an employee). Additionally, an S quadrant individual often earns more income compared to an employee and therefore can be in a higher tax bracket. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.
Federal Tax: 37%
State Income Tax: 5%
Social Security Tax Rate: 12.4%
Medicare Tax Rate: 2.9%
Total = 57.3% in Tax
B – Business Owner
Those in the B quadrant own a business system and they lead other people. In this quadrant, the business often has 500 or more employees. The systems and employees who work for the business can run successfully without the business owner’s daily involvement.
Unlike the S quadrant where a plumber, for example, might own and work in his own plumbing business, a B quadrant business owner might create a plumbing company and hire 500 or more plumbers, administrators, managers, and other staff to run the systems in the company.
The wealthiest individuals in the world typically own B quadrant businesses. A few of these individuals include Bill Gates of Microsoft, Jeff Bezos of Amazon, and Mark Zuckerberg of Facebook.
Kiyosaki points out that the reason why most B quadrant business owners pay around 20% in taxes (as shown in the diagram above) is because businesses can deduct a wide variety of expenses from the income of the business, which can lower the businesses income taxes. Additionally, the recently passed Tax Cuts and Jobs Act in 2017 allows for a qualified business income tax deduction of an additional 20% for eligible businesses. You can learn more here.Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.
C-Corporation Flat Rate Tax Rate = 21%
Total = 21% in Tax
I – Investors
Now to my favorite quadrant. The I quadrant is comprised of investors who own assets that produce income. This is the quadrant for truly passive income.
Investors in this quadrant have usually accumulated capital that was earned in one or more of the other quadrants and now they place that capital into income-producing investments to produce even more income. This is the magic formula for financial freedom.
For example, an investor might purchase shares of a company privately or publicly owned in the form of stock. This influx of capital from the investor helps to fuel the systems created by the business owner, and this fuel can lead to even more growth in the business and for everyone involved. Investing in real estate is a common example of an asset that can produce passive income from collected rents and other income-generating aspects on the property. Investing passively in private placements (apartment syndications) has been my preferred asset class in the I quadrant.
Kiyosaki points out that the reason why most I quadrant investors often pay as little as 0% in taxes, legally (as shown in the diagram above) is that long-term capital gains tax rates (for assets like stocks or real estate held the long-term) are between 0% and 20%depending on the individual’s tax situation. You can learn more here.Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.
2020 Long-Term Capital Gains Tax Rate (For Single Individuals) Earning $78,750 or Less = 0%
Total = 0% in Tax
There are many paths to financial independence, but most of them lead to the right side of the Cashflow Quadrant – B and I. If you want to achieve financial freedom, it will pay to learn the skills and mindset required to make this move to the right side. I have earned income in the E, S, and I quadrants but the I quadrant has been the most impactful. This is because of a concept I refer to as “Time Freedom”. Which to me, means having freedom and flexibility over your time. When you have more passive income than you have lifestyle expenses, you become financially free. This is where a new world of opportunities and possibilities open up and the world becomes your oyster.
To Your Success
Disclaimer: Travis Watts does not provide tax, legal, or accounting advice. This material in this blog/article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction, investment, or other change.
The condo conversion investment strategy involves purchasing an apartment community, converting it from individual rental units to individual condos, and reselling the individual condos for a profit.
This post isn’t going to discuss which investment strategy is the best, because like most things in real estate, it depends on what you are interested in and what your goals are. However, if you do decide to pursue the condo conversion investment strategy, here are the 9 things you need to consider:
Speak to an attorney: First and foremost, speak with a real estate attorney that specializes in condo conversion projections. You need to know the state and local laws on condo conversions and the step-by-step process you must follow.
Vacating the property: The largest potential challenge is the process for vacating the apartment building. An attorney will tell you the laws that protect the rights of the existing residents. In some markets, the residents must be given a specific time frame of the notice to vacate. You may even be required to cover their relocation costs and give them a chance to purchase a completed condo. The longer it takes and the more expensive it is to vacate the property, the greater the holding costs.
Hidden fees: There are a lot of hidden fees involved in condo conversions, which the attorney can help you uncover. There are application fees with the city, surveying fees, attorney fees, and fees related to code compliance. Once the conversion is completed, the city will inspect the condominium for code violations, which you will be required to address. Therefore, another fee is associated with hiring a private condo pre-inspection specialist to inspect the property to give you an opinion on potential code violations and the costs of the repairs. Another hidden fee is the increase in insurance costs. Insurance on condominiums is generally higher than apartment insurance, so make sure you obtain a quote for the new insurance premium. Last are the upfront and backend fees you charge for putting together and managing the project.
Financing: You will need to speak with a mortgage broker who specializes in condo conversion projects to securing financing. This conversion needs to begin prior to placing the deal under contract so that you can estimate the debt service and other important loan terms, like I/O periods, loan term, interest rates, prepayment penalties, financing fees, and closing costs.
Timing: To determine the holding costs and hold period, you need to know the estimated timelines for each step in the condo conversion process. First, how long will it take to vacate the building? Once vacated, how long will the renovations take? How long will it take to list the condo units for sale after the renovations are completed (i.e., post-conversion requirements like setting up the HOA, inspections, etc.)? Lastly, what is the average days on market and closing timeline? Add these all together and you have the hold period and can calculate the holding costs.
Holding costs: The holding costs are the ongoing expenses paid during the hold period. These include insurance, taxes, utilities, and debt service. Since you will be generating no cash flow (or some cash flow in the beginning while vacating the property), these expenses must be covered by initial equity.
Renovation costs: There are four aspects of the renovation costs to consider. One is the cost to convert the apartment units into individual condos. Two is the investment amount is required for the common areas. Three is the cost to address deferred maintenance. Last is the size of the contingency budget.
Sales process: The first thing you need to know is the projected after-repair value of the condominium units, which requires a sales comparable analysis. You also need to consider the costs associated with marketing and selling (i.e., the broker’s commission) the condo units.
Limited partner compensation: Lastly, you need to determine the compensation structure offered to the limited partners who invest. What type of return will you offer (i.e., preferred return, profit split, or both) and when are they paid (i.e., after each condo is sold or when all condos are sold)?
To address all the above, you will need to work with at minimum an attorney, a mortgage broker, and listing broker, and a contractor – all who specialize in condo conversions.
Purchasing an apartment community and converting the rental units into individual condo units is an alternative to the traditional apartment investment strategies. However, you need to understand the laws surrounding condo conversions, the added costs, and the required team members to properly underwrite the deal, successfully complete the conversion and conserve and grow the investors capital investment.
I love helping other people cut the learning curve. There have been several instances in my life where I condensed years and even decades of time by using a simple “Knowledge Hack” strategy.
I Have a Question For You…
Have you considered having a mentor? Is it worth your time to read books, listen to podcasts, watch how-to videos, and network with others?
Today I was researching some of the most successful people in America from the Forbes 400 List and realized that almost all of them had mentors at some point, and many still have mentors today.
A Few Examples Include:
Bill Gates had Ed Roberts as a mentor
Oprah Winfrey had Mary Duncan as a mentor
Mark Zuckerberg had Steve Jobs as a mentor
Warren Buffet had Benjamin Graham as a mentor
Sam Walton (And family) had L.S. Robson as a mentor
Michael Dell had Lee Walker as a mentor
Rather than thinking about having a “mentor” think of the word “coach” instead. It’s essentially the same thing, but using the word “coach” helped me put all of this into perspective years ago.
A Quick Story
From 2009 to 2015 I did everything on my own as an active real estate investor in the single-family home space. It wasn’t because I thought I knew it all, it was because I did not see the need for a mentor or coach at the time.
What I finally realized in 2015 (after 7 years of trial and error), was there were other people in the active real estate investing space who were operating much more efficiently than I was. They had more connections and were finding better deals and had a broader range of skill sets and ultimately… they were more profitable than I was. I had to do some soul searching, self-reflection, and take a long, hard, look in the mirror. Was active investing really the best use of my time and skills?
What Happened Next?
I made a decision to start partnering with investment firms who had better skill sets, track record, connections, and efficiencies than I did. I essentially “piggybacked” off their success by becoming a limited partner investor in other people’s private placement offerings (mostly in multifamily apartments). This provided a hands-off approach to investing where I had the best of both worlds. I could participate in real estate, which I love and enjoy, while not having to be “in the business” of real estate in an active way, which I did not enjoy.
After dedicating some time to networking, reading, listening to podcasts, watching how-to videos and seeking mentors, I inevitably became a full-time passive investor in real estate. I left the active single-family strategy behind because I was tired and burned out from trying to do it all myself, trying to make the right calls and know all the ends and outs. In addition, the hands-on approach was taking too much time away from the things I loved doing. I had far less spare time because my real estate projects were consuming more and more of my availability. 2015 was the beginning of an entirely new education process that has been life-changing to say the least.
Mentors can come in many forms. The best advice I ever received was to seek out a mentor or “coach” who is doing what you want to do and is successful at doing it…because success leaves clues.
“If I have seen further than others, it is by standing upon the shoulders of giants” – Sir Isaac Newton
As you delve into real estate investing, your initial thinking may be to offer luxury properties that will draw big bucks from tenants. And who could blame you?
One aspect of real estate investing you may be overlooking, though, is affordable housing. What is affordable housing? Contrary to how it may sound, this is an investment niche that could very well be your ticket to a stronger bottom line in the years ahead.
The demand for this type of housing is on the rise, so it only makes sense to consider investing in these types of properties. Here’s a rundown on what investing in affordable housing involves and whether you should add it to your strategy.
What is Affordable Housing?
This unique real estate refers to properties that have relatively low monthly rents, or Class C properties. These properties include those erected via government-subsidized programs focused on providing housing for those who otherwise could not afford it.
Investing in affordable housing can benefit your portfolio, but it can also have a positive impact on the local community. When you invest in this type of housing, you’re helping families who may be struggling financially, and at the same time, you’re helping your bottom line.
Let’s take a look at some of the biggest reasons for pursuing this unique housing as a real estate investment.
Investing in Affordable Housing Offers Security
If you’re asking “What is affordable housing, and how can it help me,” a major draw of this property type is that it often produces steady, consistent rental income. That’s because local, federal, and state agencies subsidize the rents of those who qualify for such housing.
On top of this, the United States government provides many tax credits and deductions for those offering affordable housing to families with low incomes. These savings will no doubt help your bottom line.
In light of the above, it may come as no surprise to you that in many real estate markets, affordable-housing properties are completely occupied and are reliable performers. When you invest in them, you can expect a constant stream of income long term.
Investing in Affordable Housing Offers a Respectable Return on Your Investment
An affordable-housing property can usually be a safer investment compared with a Class A apartment building. That’s because the cost of the latter is climbing higher and higher, particularly in today’s coastal markets.
As a result, the return on investment for such premium apartment buildings is no longer greater than what you can achieve with the affordable-property niche.
Investing in Affordable Housing Will Lead to Numerous Tenants
The demand for affordable housing isn’t expected to drop anytime soon. After all, both tenants and multifamily property investors are becoming increasingly interested in this type of housing.
More tenants are looking for affordable housing because the growth of income has been slow in recent years. In addition, some families used to live in middle-market apartment rents years ago but can no longer afford them due to rent increases, so they’re turning to more affordable options.
Unfortunately, the current gap between poor and wealthy individuals in the United States only continues to grow wider. As a result, you can expect more people to transition from traditionally middle-class homes to more affordable housing in the years ahead.
Investing in Affordable Housing Means Less Competition for You
The great thing about purchasing affordable housing today is that you won’t have a lot of competition with other apartment owners.
Because the cost of developing an apartment building is now quite high. That means builders won’t create apartment buildings with low rents unless they receive assistance from a government-funded affordable-housing program. And these types of programs are limited in how much brand-new housing they may build.
So, instead of charging low rents in newly created apartments, investors are charging higher rents and offering luxury amenities and finishes. They can do this because institutional investors who have plenty of capital often back these types of property investments.
The takeaway here? The demand for affordable housing is growing, but the supply is far from keeping pace with it. And that’s great news for you. The reliable, strong, and stable demand for affordable housing easily makes this niche a low-risk one and thus a smart one for the modern real estate investor.
Investing in Affordable Housing Benefits Communities
Yes, you’re in the real estate business to grow your net worth. But in the process, you can grow much more than that. You can grow local communities, and this benefit is priceless.
When you create a housing option for a senior citizen or a family who otherwise couldn’t afford housing, you can have a positive impact on many people’s lives. You’re offering tangible help to other people, and these individuals often pay it forward by adding value to their local communities in a number of unanticipated ways.
Important Considerations When Investing in Affordable Housing
When you own affordable housing, you’re restricted from increasing your rental rates. This means that your success as a property owner is contingent on how well you manage your controllable expenses with the help of your tenants.
So, as a landlord, you must empower your tenants to treat their homes with pride, rather than simply allowing them to wear out. For instance, you can communicate your specific expectations when it comes to keeping the apartments clean. And you can regularly perform inspections of the apartments. All in all, investing in an affordable-housing property requires not only a financial investment but also a social investment on your part if you want to succeed.
Start Investing in Affordable Housing Today!
If you’re asking the question “What is affordable housing,” now couldn’t be a better time to begin exploring the benefits of this type of investment. With the right approach, you can make an affordable-housing property your next lucrative investment.
The good news is that you don’t have to learn about and try to capitalize on affordable housing on your own. Get in touch with me, Joe Fairless, to learn how to tap into the many benefits of investing in affordable housing today.
You take pride in being the owner of an investment property, but are you getting the most bang for your buck—or, the greatest return on your investment?
The reality is that sprucing up your single-family property can quickly add value to it. That’s exactly why recent research shows that nearly 60% of people queried said they would probably or definitely undergo home renovations or improvement projects within the next 12 months.
Of course, as you explore how to increase property value, you may be asking yourself, “What improvement projects will yield the best results for me?” Here’s a rundown on key improvements you should make to increase property value.
Improve Your Curb Appeal
This is one of the smartest moves you can make relatively quickly. That’s because the outside is a potential buyer’s first impression of the home. Unfortunately, it’s one of the areas that many investors neglect as they focus on changes to the interior.
What Exterior Projects Can You Complete to Increase Value?
Perhaps your single-family home could use an extra coat of paint, or maybe you need to replace that dilapidated fence. In addition, your driveway might be due for power washing, and you may need to groom some shrubs and trees or plant some flowers.
It’s also a wise idea to make sure that your patio space or deck is functional if you’d like to increase property value. Adding extra lighting or even a small table and setting are easy ways of accomplishing this. Getting rid of overgrown weeds from your yard, painting and weather-stripping your front door, and ensuring that your storage outside is usable and clean are also great steps that may help you to improve the value.
Upgrade Your Countertops
When it comes to your single-family home’s interior, your kitchen should be one of your first priorities if you’re wondering how to increase property value. According to research, a minor kitchen remodel (of no more than $15,000) may recoup nearly 93% of its cost at resale!
Kitchen Projects to Focus On
First, upgrading your countertops can quickly make your kitchen more valuable, thus making it easier for you to sell your single-family home or demand a higher rent amount. Quartz and cement are especially popular in higher-end housing markets, but granite is also a great option. The most important thing is that your new countertop is stylish, functional, and durable.
You could also add some fresh paint or stain to your cabinets to make them stand out and look brand new. However, if your old cabinets are made of particle board, you might want to upgrade them to something more functional and modern if you want to really increase property value.
Improve Your Fixtures
You can’t go wrong investing in better light fixtures and faucets for the kitchen and bathroom, as well as adding ceiling fans. You may also want to add new locks, door handles, or even window blinds, with faux wood blinds being especially popular for adding a lavish touch to any space.
Upgrading your fixtures will make your single-family home appear more polished. It’ll also increase the durability of the items in your home that experience a lot of wear and tear over time. If your upgrade is professionally done, you can sell your property or fill it with renters more quickly, thus maximizing your real estate investment income.
Upgrade Your Appliances
If you are planning to rent out or sell your home after you increase the property value, be sure to upgrade your appliances as well. This is critical because appliances are some of the first items that renters and home buyers look at when entering potential new homes.
If your kitchen features mismatched appliances, or if your appliances aren’t functioning at their optimal level, you likely won’t get top dollar for your property when you sell it. This is why you should purchase an appliance package with matching appliances and make sure that it comes with a warranty.
Improve Your Flooring
Finally, don’t overlook your flooring when trying to figure out how to increase property value. A general rule of thumb is that you should install wood flooring versus carpet, as it can add a more sophisticated touch to your single-family property. Plus, if you’re renting, you may have to change out your carpet every other tenant, as a single juice or bleach stain can permanently ruin it. Constantly replacing your carpet can get expensive and, thus, negatively impact your rate of return each year.
More on Wood Flooring
Wood flooring is a broad category that includes not only hardwood but also laminate, plank/faux wood, bamboo, and laminate. A major benefit of this type of flooring, besides its appearance, is that it is better health wise for those who suffer from carpet allergies.
Still, some renters and home buyers prefer to have carpet in the children’s bedrooms, or during the winter months. Thus, it may behoove you to install carpet in all bedrooms and then use flooring throughout the rest of the single-family property’s living spaces. Also, if you have linoleum or vinyl in your kitchen or bathroom, you may want to replace this lower-quality flooring with classier travertine or ceramic tile, which renters and buyers generally prefer.
Start Making More on Your Investments
If you would like to increase the return on your investment in a single-family property, completing the above projects is a great start. Apply these tips to your fix-and-flip and wholesale deals!
No, not the popular TV game show. I’m talking about becoming a long-term, sustainable millionaire as a real estate entrepreneur!
Pat Hilban, who is a billion-dollar real estate agent, spent over four years self-reflecting, researching, and writing his New York Times Best-Selling book, 6 Steps to 7 Figures. The book outlines a 6-step, money-making strategy he, his mentors, and other successful entrepreneurs have followed to go from little to no money to over seven figures in annual income. In our recent conversation, Pat provided a blueprint you can follow to learn how to make millions and achieve the same.
The first step is to set your huge, overarching, long-term goal. Then, break it down into smaller, bite-size pieces.
Pat said, “A lot of people just set really large goals. For instance, they set a goal ‘I want to be a millionaire,’ but they don’t set the small daily goals that it takes to be a millionaire, such as ‘I save $10/day,’ or even the goal before that is ‘What are you going to do to earn that extra $10 or save that extra $10?’” In this example, the long-term goal is to become a millionaire, but what you are really striving for is to save $10 per day by doing X, whatever you determine X to be.
Finally, you want to create a statement to affirm that goal. If your goal is to become a millionaire by saving $10/day, Pat said your affirmation would be “I am a millionaire. I save $10/day by doing X every day.”
Once you have set your overarching goal and broken it down into daily objectives, the next step in this money-making strategy is to track your progress. “I’m an avid tracker,” Pat said. “I’ve tracked everything for years. Every successful person I talk to tracks like crazy. People that tend to not get very far don’t track at all.”
Pat lives by the following truism: “If you track, you succeed. If you don’t track, you fail.”
For an example, for the longest time, Pat’s goal was to become a hundred-percenter. A hundred-percenter is having 100% of your bills paid by rental real estate and passive investments. He said, “In order for me to get to a hundred-percenter [status], I need to do a couple of things. I needed to first of all earn money, and then with that money, save money, and then with that savings, investing that money and invest it wisely. So my ultimate goal is to become a hundred-percenter; my daily goal that I might track would be I needed to list a house a day, or a house every three days. My goal from that would be to save $10,000/month in commissions, and then from that it would to invest. Then I would obviously track… Everything was tracked, from what I did to get the listing, what I did to save the money, what I did once I investing the money, and then how the money paid me sideways.”
There are a million different ways to track, but the idea is to have a system that tracks your daily objectives based on your overall goal.
Step #3 – Learn from Masterminds and Mentors
Step three is to join mastermind groups and get mentors whom can each offer their money-making strategy for you to consider. “I’ve had over 50 mentors that I can count that I have learned form and stepped upon. Kind of used to climb the ladder of success,” Pat said. “Many of those mentors I was able to find at masterminds. A mastermind is just simply a collective genius, so to speak. It’s 5 to 100 people that are all thinking the same and are sharing best ideas and best practices where you could just learn in abundance from multiple people all at once. People that have gone through what you want to go through.”
I feel the same way about meet-up groups. You can follow Pat’s money-making strategy of attending meet-ups hosted by other investors in the area, or you can get even more out of a meet-up by creating your own. In fact, Anson Young, an investor I interviewed on my podcast, created his own meet-up group, resulting in over $100,000 in profit. Meet-ups are not only great places to find potential mentors, but a great way to find deals, create partnerships, and make money.
Step #4 – Act
Now it’s time to act – that is, the forceful act of moving forward.
After completing his book, Pat’s goal was to make the book a best-seller. He went out to find some mentors, and he landed on Gary Keller, who has written multiple best sellers like The One Thing, The Millionaire Real Estate Agent, and the Millionaire Real Estate Investor.
At this point, Pat’s money-making strategy was to friend request everybody he could find in the real estate industry on Facebook and post about his book daily. Gary told him that wasn’t enough. He told Pat, “What you need to do is you need to quit what you’re doing and you need to go out on tour and start speaking to real estate agents at offices throughout the country, talking about your book.” And that’s what Pat did.
Pat sold his real estate business to his top agent and went on a book tour. He spoke at 53 offices in 53 different cities across the county over a seven-month period and got all of them to commit to buying a book on the first day it came out.
“When my book was released, we sold 10,600 copies in the first week,” Pat said. “My point is that Gary told me that I needed to act. He said something I’ll never forget. He said, ‘You reap what you sow 100% of the time’ It’s so true… There’s no free lunch.”
One of Pat’s mentors used to always say “Build on a success, not from the ground up.” What that means is, you already have success with something, leverage it for more success. For example, when I am inviting guests onto my podcast, I always mention that I have previously interviewed well-known, successful individuals like Barbara Corcoran, Robert Kiyosaki, Emmitt Smith, etc. Those are all successes I’ve had in the past that I use as a sort of bait to get other successful people on the podcast.
“For a real estate agent, if you have a house in a neighborhood that you just sold, don’t go to some other random neighborhood and try to prospect and farm it,” Pat explained. “Go to the neighborhood where you had the success and build on that success up, because you’re much more apt to get a listing in a neighborhood where you could say, ‘Oh we just sold a house up the street. You may have seen my sign.’”
The goal is to find every little success that you’ve had and keep building on those same blocks as a money-making strategy.
Step #6 – Invest
Finally, the last step is to use the money you’ve saved or created from steps 1 through 5 and invest in real estate. “Bust your ass, save money,” Pat said. “Be a good saver, be an excellent saver. Take the down payments and invest in real estate – that’s how I did it – and then live off the horizontal income from those investments.”
Pat’s 6-step process for reaching your million dollar real estate goal is:
Set a HUGE goal, break it down into smaller steps, and continuously recite your goal in affirmation form
Create a system for tracking your progress
Find masterminds and mentors to guide you on your journey
Take massive action
Build and maintain momentum by leveraging past successes
Invest in real estate
Follow Pat’s 6-step money-making strategy, put yourself on the track towards your long-term real estate goal, and ultimately achieve financial independence.
On this day over 240 years ago, the United States of America declared independence from the British Empire. Over 7 years later, on September 3, 1783, the Treaty of Paris was signed in which Britain agreed to recognize the sovereignty of the United States.
To commemorate our country’s Independence Day, I want to provide a strategy for you to gain your very own independence – financial independence from your corporate full-time, 9 to 5 job.
Fortunately for you, unlike the original 13 colonies, gaining your independence will be much easier. There will be (hopefully) no bloodshed, and all you need to do is commit to following the tried and true 4 steps to financial independence that many investors have used to quit their full-time jobs and become full-time real estate entrepreneurs.
#1 – What is My Freedom Number?
The first step is to calculate your freedom number.
Your freedom number isn’t a unit or property count. It is how much income you will need to at least cover your current expenses, or be equal to the income you are currently receiving from your full-time job, or ideally, to be able to afford your idyllic lifestyle.
The best way to accomplish this is to open up an Excel spreadsheet and list out all of your current expenses. If you want to replace your current income and become a real estate entrepreneur, then your freedom number is your pre-taxed income. If your goal is to afford your ideal lifestyle, determine how much that will cost you and that is your freedom number.
Let’s say you are currently making $50,000 a year at your current job, and you calculate that you will need an additional $15,000 a year to achieve your ideal lifestyle. Your “freedom number” is $65,000, or approximately $5,500 a month.
Advice in Action #1: What is your freedom number? _____________
#2 – How Much Real Estate Will I Need to Achieve My Freedom Number?
Next, you want to calculate how many rental properties you will need to achieve your freedom number. This calculation will be based on your specific investment criteria as a real estate entrepreneur.
For example, when I was first starting out, my investment criterion was single-family homes that cash flowed at least $100 per month after all expenses. Other investors may have an investment criteria that is a cash-on-cash return – 15% for example.
Using the $100 a month in cash flow criteria, you will need 55 single-family properties in order to cash flow $65,000 a year.
If your investment criterion is to only purchase properties that achieve a 15% cash-on-cash return, you will need to invest $433,333 to achieve your $65,000 a year freedom number. That can be purchasing one apartment building for $2.2 million (assuming it is a 20% down payment loan and you have that amount of capital available), but most likely, it will be a combination of single-family homes and small to mid-sized multifamily properties worth $2.2 million in total. For example, purchasing 22 duplexes for $100,000 each.
Advice in Action #2 – How much real estate (number of units or overall value) will I need to achieve my freedom number and become a successful real estate entrepreneur? _______________
#3 – Create a Freedom Timeline
Next, you want to create a timeline for how often you will purchase properties in order to achieve your freedom number.
Timelines will vary widely, depending on your current situation, market, investment strategy, etc. I recommend having a “freedom date,” and then reverse engineering a timeline.
For example, let’s say your goal is to quit your job in 10 years. Following with the previous examples, your freedom number is $65,000 a year and you need to purchase 55 single-family residences (SFRs) that cash flow at least $100 a month. The amount of money you will have available as a budding real estate entrepreneur to use as a down payment will be any money you have saved up, as well as money you set aside from your full-time job. So, you first want to determine when you can purchase your first SFR.
After purchasing your first SFR, you will have an additional income stream – the $100 a month. How long until you can purchase your second property? At that point, you will have an additional $200 a month towards your next down payment.
Also, at some point, you will have enough equity in your earlier SFR purchases (from appreciation and principal pay down) that you will be able to refinance and pull out capital to buy even more SFRs.
Using the amount of money you will save from your job, the added income you will receive as you purchase properties, and the money obtained from refinancing, you can create a timeline of when you will be able to purchase each of the 55 properties over a 10 year timespan and officially become an independent real estate entrepreneur.
An important note: This is a high-level timeline. Do not expect things to follow your exact timeline. Things will undoubtedly change – you will set aside more or less money from your job, you will have unexpected expenses, you will achieve a higher or lower rate of return, you won’t be able to find properties that meet your criterion, etc. This is strictly a guide to show you how long it will take to achieve your freedom number so that you can plan accordingly. As President Dwight D. Eisenhower once said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”
Advice in Action #3 – Create your freedom timeline
#4 – Start Implementing Your Freedom Timeline
Finally, after calculating your freedom number, determining how much real estate you will need to purchase, and creating a high-level timeline, it is time to actually start making purchases as a new real estate entrepreneur.
BRRRR is an acronym for buy, rehab, rent, refinance, and repeat.
Buy – Purchase distressed rental properties (the level of distress you are comfortable with will determine what properties to look for, as well as how quickly you will be able to achieve your freedom number)
Refinance – Obtain a new loan on the property to pull out the equity created from the rehab
Repeat – Use the money from the refinance to repeat the process again and again until you achieve your freedom number
Learn how real estate entrepreneur Andrew Holmes (whom I interviewed on my podcast) implemented the BRRRR strategy on over 160 properties here.
The four-step process for achieving financial independence is:
Calculate your freedom number
Determine how much real estate you need to achieve your freedom number
Create a freedom timeline
Purchase real estate, ideally using the BRRRR strategy
Achieving your financial independence may seem daunting, but compared to the sacrifice required to create our great nation, it’s a walk in the park. However, it will require patience, effort, and resourcefulness to navigate the many obstacles along the way.
Hopefully, this four-step blueprint will help mitigate the number of obstacles you will face as you become a real estate entrepreneur. But it will be the launching point for you to strategize and execute your plan to quitting your full-time job through real estate investing.
That is the main goal of many who decide to enter the real estate investment game. However, it’s much easier said than done, and learning how to create wealth investing in real estate can be challenging.
Fernando Aires, who designed computer chips in the tech industry for over 25 years, was able to achieve the coveted financial independence through real estate and leave his full-time job in 2014. In our recent conversation, in regards to quitting his job through real estate, he said, “the key for me has been to buy enough properties, mostly with long-term fixed rate financing and some cash, in order to achieve this parity with my corporate income.”
For Fernando, it was a long process, but the juice was definitely worth the squeeze. Along the way, he discovered some tricks that enabled him to expedite the process.
What are those tricks?
#1 – Tax Benefits
Firstly, Fernando didn’t pursue zero or little money down loans or a creative strategy or really anything fancy as he sought financial independence through real estate. “Most of my properties are financed,” he said. “I try to get as much long-term fixed financing as possible, so by itself, the property doesn’t generate lots of cash flow. My typical cash flow for financed properties is about $250/month.”
That’s $3,000 a year. When you have a corporate salary of a quarter of a million dollars to replace, that’s a lot of properties. However, he was able to slash the amount of money he needed to replace his salary with nearly in half because of the tax benefits real estate offers. “With income property, due to depreciation, which is the best tax write-off that you can imagine, you end up paying very little in taxes when you take that into account,” Fernando said. “When I was working for Apple in California, I was roughly paying 50% of my income to the government, which means that I only need to make about half gross that I was making in corporate America in order to be at the same point, due to the tax situation.”
Right off the bat, the tax advantages of real estate will allow you to have a “freedom number” that is significantly less than your current pre-taxed income from your corporate career. This involves hiring an accountant who has experience in the real estate niche you are pursuing. Here is a video where I outline exactly how to find the best accountant.
#2 – Appreciation
Another thing that accelerated Fernando’s financial independence through real estate was appreciation. “Appreciation is certainly something that comes into play,” he said. “Over time, the properties have appreciated and some of them I’ve been able to do an equity strip from the properties due to the things that I’ve made, and you can also do an equity strip from the properties and you don’t have to pay any taxes when you borrow money against the properties.”
In other words, the equity that was created by appreciation can be pulled out, tax-free, to use as a down payment to purchase additional properties later on in the business plan. This is money on top of the cash flow from your portfolio and the money you are saving up from your corporate job.
Fernando journey to financial independence through real estate also benefited from another form of appreciation – inflation. And since he was leveraging the properties with debt, meaning he was able to control 100% of the property by putting less than 100% down, the benefits of inflation were compounded.
“A quick example for most of my properties is if you put 20% down on a property with a long-term financing fixed rate in place, which is what I recommend, you’re essentially leveraging your money 5 to 1. Five times 20% is 100% of the property. What that means is if the property goes up by let’s say 5% a year – basically tracking inflation numbers that we’re given – you’re actually making 25%, because it’s five times your leveraged money.”
When taking the compounded effects of appreciation/inflation into account, Fernando’s returns far exceeded what he could achieve investing in the stock market.
“If you add that 25% with a relatively low cash-on-cash return of 8%-10%, your already at 30%-35% for a property that is leveraged. Try to beat that with buying any stock. As a matter of fact, I’ve compared – since I’ve worked to Apple – Apple stock’s annualized return from 2012 to 2015 with my real estate portfolio, and my real estate portfolio beat the Apple stock,” Fernando explained. “My numbers were 14.8% averaged over the period, and Apple stock was 12.1%… So it’s just no comparison.”
Without the advantages real estate provided from a tax, appreciation, and leverage perspective, Fernando would not have been able to achieve his financial freedom, or at least not as quickly and efficiently as he did.
If your goal is to replace your current income with complete financial independence through real estate, you must become familiar with these three principles. Like Fernando, it will increase both your chances of achieving financial independence and the speed at which you will be able to do so.
On May 18th, 2017, I was on the other side of the mic when I was interviewed on the BiggerPockets podcast, one of the most downloaded real estate podcasts in the world.
During our conversation, we covered 22 different topics on how I went from my corporate job in advertising to controlling $130,000,000 in multifamily real estate – and now over $400,000,000.
Below, I included hyperlinks for each topic. Clicking on a link will send you directly to the time in the conversation when the topic was discussed. That way, you can skip around and find exactly what it is you are looking for.
If you want to listen to the interview in its entirety, click here.
There’s rich, and then there is super-rich. If you are rich, you stay in the nicest hotels, eat at the fanciest restaurants, and drive the trendiest cars. The super-rich own those things. If you’re wondering how to get rich by investing, there are seven key principles to follow.
John Bowen, who founded four multi-million dollar businesses, authored more than 15 books, and is a regular columnist at HuffPo and Financial Planning, is a leading expert on extreme wealth, which he defines as a net worth of $500 million or more.
These are not your everyday entrepreneurs. In fact, according to the Credit Suisse 2016 wealth report, there are less than 2,500 US citizens with a net worth of $500 million or more. With an estimated population of 322.8 million, less than 0.0008% of the population meet the requirement for the “super-rich” designation.
Obviously, these are great individuals to look to if you’re attempting to learn how to get rich by investing in and/or creating successful companies. So, John recently conducted a study of elite business owners with the purpose of identifying exactly how they were able to achieve such high levels of success. Upon analyzing the results, he found seven principles that were common between these super-rich individuals. In our recent conversation, John outlined these seven principles of the super-rich. Adhere to them and maybe, just maybe, you will join the ranks of the top 0.0008%!
1 – Commitment to Extreme Wealth
The first principle was an expressed commitment to extreme wealth.
Extremely wealthy individuals share a similar mindset. They consciously decide extreme wealth is what they want to pursue. At the same time, they’re also willfully committing to the amount of work and effort required to attain the millionaire and billionaire status.They understand how to get rich by investing their time, not just their money.
What it is not is a commitment to an abstract goal. It’s a commitment to a defined number. “What’s your number? That’s what you’re asking,” John said. “Commit to extreme wealth – just determine whatever that means to you. For some people, it’s a million dollars. For some people, it’s a billion. It’s anywhere in between.”
The super-rich knew exactly what they wanted- which varies from person to person- had at least a working knowledge of how to get rich by investing, and consciously decided it’s what they would pursue. Then, they engaged in enlightened self-interest.
Here’s how John explained enlightened self-interest: “What you want to do is you want to determine your counterparty – whoever you’re going to do the deal with, [who] you’re negotiating with, [and who] you’re partnering with. What is their criterion for success, too? And then you’re going to find that and leverage it to use it.”
Business isn’t done in a vacuum, and people who know anything about how to get rich by investing realize it is extremely difficult to become super wealthy on your own merits and work. You’ll need to work with others. And it shouldn’t be just anyone.
When the super-rich are going to do a deal with someone, John says, “I’m the first to make sure that whatever I’m doing is going to be aligned for my success criteria. Then, I’m going to try and gain a better understanding of what [they] want to accomplish. Can I help [them] advance what [they] want to achieve, and will that move me toward my success? Then I’m going to go ahead and negotiate in good faith to have that happen.”
This isn’t a lesson on how to get rich by investing or making deals with selfish self-interest, but enlightened self-interest. John says, “You never want to burn the counterparty, whoever you’re working with, because we’re in it for the rest of our lives. You want to make silence, and one of the things you’ll find about billionaires is they’re silent a lot. They’re letting you do a lot of the conversation, and one of the biggest risks of all is so many people negotiate with themselves. They’re going through all these mind games. What we want to do is hear from the counterparty how we can help.”
To earn extreme wealth, you want the “I’ll scratch your back, and you’ll scratch mine,” reciprocal relationship, not “I’m going to exploit this person to achieve my goals and then throw them to the wayside once I’ve done so.” The latter, which may seemingly work in the short-term, is a recipe for disaster in the long run.
3 – Put Yourself in a Line of Money
Principle number three of how to get rich by investing in real estate or business is: the super-rich put themselves in a line of money. “[For] people with $25 million or more of financial assets, 9 out of 10 made it being an entrepreneur (business owner),” John said, which includes real estate.
“If you’re going to be successful, you want to be successful on purpose,” John said. “If you’re going to do a nine to five job and you’re going to do it well, you can have a great life, but you’re not going to become extremely wealthy. You’re not in the line of money. Unless you have an equity ownership, you’re not in the line of money.”
If you are loyal Best Ever listener, you are either already a real estate investor or are in the process of becoming one and learning how to get rich by investing, so you should already have this principle covered.
A common stereotype of the wealthy is that they are cheap with their employees and/or business partners. However, according to John’s study, this isn’t the case. The super-rich are “very deliberate on who they hire,” John said. “They work with the top talent, and they make sure they’re taken care of.”
The super-rich who have become experts at how to get rich by investing are extremely well connected. They focus on deliberately forming relationships that create value, result in economic gain, and are always win-win scenarios.
Someone in a super-rich network, John said, is “somebody that I can get on the phone, and we can have a conversation and create value together in our collective, enlightened self-interest, and we’re going to maintain that relationship over time.”
More than likely, this is not your best friend, family, or college network. These are the business people that can help you reach your extreme wealth goal while you’re going to do it for them as well.
Another characteristic of the super-rich is their acknowledgment, acceptance, and recovery of failures. They don’t fail and go sulk in a corner. They fail, determine the root cause, analyze their mistakes, refocus, and try again.
Even more importantly, they are confident enough to test different strategies without fear of failing. They seek out failure as a natural part of learning how best to get rich by investing.
John says, “The nice thing in today’s world [is] the cost of testing anything has gone way down, whether you’re creating products, the ability to 3D print, whether you’re doing it electronically, the Internet, buying a few ads digitally. It’s very low cost.”
“Good business people always mitigate risk – we’re not big risk takers. But what we want to do when we fail, we want to fail quickly, and then [ask] how do we avoid making the same mistake repeatedly? And more importantly, doing an autopsy so we can see ‘Is there some value here that we can capture and tweak it, refine it, [and] refocus it to create value?’”
The key takeaways for this principle are having fearless approach, and, when testing something, if you’re going to fail, fail quickly!
The final principle may seem redundant, but that is because it’s the most important principle when you’re learning how to get rich by investing. The super-rich didn’t just make the initial commitment to extreme wealth and then forgot about it. It is always top of mind and something they continuously focus on.
John said, “It’s always keeping number one in place. One of the things I like to do is to take a look, from the standpoint of ‘Where are you spending your time, your money and your energy?’ because really time isn’t an [infinite] resource, its energy. [So] take your calendar … and look at it for a week. We can really get caught up in going ahead and thinking because we’re so busy, we’re doing well; what I find over and over again (and it’s one that I struggle with, too; and many business owners and entrepreneurs do) is it’s so easy to lose track of what’s working and get defused… And as we get defused, boy, we’re in trouble. So it’s focus, focus, FOCUS.”
Whether it’s daily affirmations, a vision board, or getting your number tattooed on your face, you must constantly remind yourself of your commitment to extreme wealth and to spend your limited time and resources accordingly.
Based on a study of the super-rich, who are entrepreneurs with a net worth over $500 million and experts at knowing how to get rich by investing, there are seven common principles they all follow:
Commitment to Extreme Wealth
In the Line of Money
Pay Everyone Involved
Networking like a Machine
Failure to Refine and Refocus
Stay Focused on Extreme Wealth
I hope to see you in the Forbes millionaire or billionaire list one day!
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Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.
One of the main reasons why people become interested in real estate investing is the allure of financial freedom. Purchase enough real estate to cover your personal expenses and voilà, you’re financially independent. For some, one of the hardest parts may be learning how to determine whether the rental property in question is good investment.
However, the fastest financial freedom strategy I’ve ever come across is Andrew Holmes’ 2-5-7 strategy. He has successfully implemented this strategy, which is a version of the renowned BRRRR strategy (buy, rehab, rent, refinance, repeat) on over 160 properties. In our recent conversation, he outlines, in extreme detail, his exact step-by-step 2-5-7 formula for how he purchases a minimum of 5 properties every 2 years and pays them off in 7.
What is the 2-5-7 Investment Formula?
Andrew’s investment strategy adheres to what he calls the “2-5-7” formula. In 2 years, the goal is to accumulate a minimum of 5 properties and using the cash flow pay them off in 7 years. Andrew said, “The formula doesn’t change, it’s just the number of properties, how much cash flow you want to create, and you scale based on that.”
In order to achieve his specific investment goals, Andrew has the following four additional requirements at are not necessarily included in the original BRRRR Strategy:
1. Deal Location – “Most people, whenever they own rental properties, they tend to buy … in areas that are rather challenging. We have a different philosophy, which is we tend to buy in bread and butter areas, right next to what we would call premium areas. Basically, if premium areas are A, we tend to buy B- or C+.” Click here for my ultimate guide on selecting a target investment market.
2. Minimum 25% equity– “Whenever we’re buying a property, after rehab, it must have a minimum of 25% equity.”
3. Small Ranches– “We focus on buying small, three-bedroom, one and one-and-a-half bath ranches.”
4. $400 to $450 cash flow– “They must cash flow to the tune of $400 to $450 per property after all expenses, including management.”
Similar to the BRRRR Strategy, you start with the end goal, which will likely be the amount of cash flow required to cover your personal expenses, your current salary, or your ideal lifestyle, and then reverse engineer your 2-5-7 strategy to determine what market to invest in, how much equity you need (more on that later), the property type, and the monthly cash flow requirement for each deal.
Here’s an example deal Andrew provided to see the 2-5-7 formula in action:
“Let’s say you’re buying a bread and butter property: three-bedroom, one bath ranch for $65,000. You’re going to put $20,000 to $25,000 into rehabbing the property. You have a carrying cost of another $5,000 to $6,000, so you’re all in cost into the property is somewhere around $90,000.”
“This is the most critical part, which to me [distinguishes] investing versus what most people do, and that is the property needs to appraise on a conservative refinance appraisal for $120,000 to $130,000. That’s the key thing – that’s the only way you’re going to be able to get all the capital that you put into the property out, so that you can efficiently recycle the same money over and over and over.”
“So the property appraises for about $125,000. The lender is going to give you about 75% of appraised value… That’s the key thing. That’s the benchmark people have to look at. If the property appraises for $120,000 to $135,000, now they’ll give you the $90,000 to $95,000 refinanced.”
“So you take that loan, you pay your first lender off – the loan you used to buy the property and to do the rehab – and then you just recycle the same funds. Or if it’s your own money, that’s fine also, but you just repeat that process over and over and over, [with the] goal being you need to get to a minimum of five.”
How to Finance the Properties, Completing the “Buy” Step of the famous BRRRR Strategy?
On the front-end, Andrew explained that there are three major ways he funds his deals:
1. Partnership– “Number one, you can partner with somebody that has the capital and do a 50/50 joint venture. They buy the property, they put up the money for capital [and] you’re the driving force. You’re doing all the work, but you’re giving up 50% of the returns. That’s where I started initially”
2. Hard Money Lender– “The second way to do it is the traditional route, which is you borrow money from a hard money lender, and put in some of your own money.”
3. Private Money– “The third route, which we tend to use the most [is] private money… Join your local REIOs, join the local groups; whichever town you’re in, there are tons of them. There are people that are willing to make loans out of their IRAs, they have personal money, and you end up paying anywhere from 8% to 12% and that’s what we tend to do and that’s what we always try to get people to understand – there’s a lot of money out there where people are willing to loan for the front end of the transaction.”
As an apartment syndicator who sometimes uses the BRRRR Strategy myself, this last option – private money – is my bread and butter. Here are posts on the most effective methods for raising capital from private investors:
On the back-end refinance, the biggest challenge Andrew faced in regards to following this take on the BRRRR Strategy and buying 5 properties in 2 years is that most residential lenders will usually only provide up to 4 loans. However, he has found a solution to his problem: commercial loans at small, local banks.
“Basically, a five-year balloon with a 25-year amortization. It’s a commercial loan at five, five and a half percent,” Andrew explained. “The speed at which you can scale and grow is much faster.”
“We tend to go to the small banks that are in town. Typically, they’ll loan on anywhere from one to five, ten, fifteen, twenty ranches. We’re not going to go to Chase Bank and we’re not going to go to the big lenders, because they don’t really offer these programs for small investors.”
When Andrew walks into a small bank to get a loan and implement his BRRRR Strategy, his goal isn’t to speak with a teller or a manager or a loan officer. He wants to go straight for the bank’s Vice-President. “You always want to go and directly talk to the VP. Typically, at these small banks, the VP is pretty much the main guy there, and that’s the person you want to approach.”
When approaching a conversation with a bank VP, the first thing Andrew does is explains, in two minutes or less, his business plan. A condensed version of his two-minute elevator pitch is, “Hey, we’re buying foreclosure type of properties or investment properties that are rentals. When we come to you, they’re going to be purchased, they’re going to be already stabilized (they like that word) and there’s already an existing tenant. We do two-year to three-year (minimum) leases only; we don’t do short-term leases.”
Next, Andrew explains he has his version of the BRRRR Strategy, the 2-5-7 formula, as well as his philosophy of aggressively paying down the properties in 7 years. Then, he goes into more details and shows the VP a couple of successful past deals. However, if you’re brand new, just show them a property or two that you have in the works.
How to Find Local Banks
A great resource for finding a local bank in your target market is https://www.bauerfinancial.com/home.html. Also, Andrew advises, “whatever community you live in, I would draw a 10 to 15 mile radius around it, and then start with the ones that are closest to wherever you’re going to buy properties. Especially if it’s in a B-market, a C+ type of market, then the banks that are local in that area, they have depositors from that particular area and they need to make a certain amount of loans in that particular market. So that’s the first place to start.”
Advantages of Local Banks
Besides the ability to provide more loans than a standard bank, Andrew said local banks have three additional advantages:
Building Relationship– “As you start developing relations, as you start having credibility with a particular bank, they’ll scratch their arms a little bit, but in general, the place to start always is the community banks – they want to have a relationship; it’s a relationship sort of lending, and they really like that word. If you go in and say, ‘hey, we want to develop a relationship with you’ and you tell them that you’re going to put your rental deposits in their bank, they’re all over that because that’s really what in the long run they’re looking for.”
Flexible Loan Qualifications– “They don’t have stringent criteria. For people who may not have a W-2 income, they’ll work with 1099. If somebody doesn’t have a W-2 or 1099, but has retirement income, they’ll work with. If somebody doesn’t even that but has some assets, a good portfolio in the stock market, or just cash, they’re much more forgiving and they’re not as sensitive, even in the department of credit scores.”
Loans to Business Entity– “As you work with these commercial banks, you can buy properties in your LLCs, you can buy properties in your S Corps, you can buy companies under a trust.”
Andrew follows the 2-5-7 investment formula (which is similar to the BRRRR Strategy): purchase a minimum of 5 properties in 2 years and pay them off in 7 years.
The three ways Andrew finances his deals on the front-end are partnerships, hard money, or private money loans. On the back-end, he refinances the properties with a commercial loan from a small local bank. When walking into a bank, Andrew goes directly to the Vice-President and explains his business plan.
For those interested in following this strategy or just want to find a small local bank, visit: https://www.bauerfinancial.com/home.html. The three main advantages, among many others, of using a small local bank is the ability to form relationships, flexible loan qualifications, and loaning to your business entity.
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In my conversation with financial planner Joshua Sheats, he explained how integrating personal and professional financing is beneficial and almost a requirement to the speed and longevity of building wealth. He also provides the best approach to truly achieving and maintaining financial freedom.
Personal vs. Professional Technical Financing Defined
Personal finance is all the stuff that you do with your money. Classic examples of personal finance advice are:
Don’t buy a latte everyday
Invest in real estate
Get out of debt
Fund your 401k
These are the “should and shouldn’t” pieces of advice that are commonly promoted in financial articles and financial shows.
The world of professional technical financial planning is more specific.
If I am going to buy a piece of real estate, should I purchase it within a trust or a business entity?
When investing in a retirement account, should I use a solo 401k or should I establish a defined benefit pension program?
If I am going to buy life insurance, should I buy term life insurance, universal life insurance, or whole life insurance?
Personal vs. Professional Technical Financing – How it’s Sold?
Typically, personal finance and professional finance are sold and promoted in very different ways. Personal financial advice, especially in the realm of real estate, is usually sold through motivational seminars.
“You can get rich if you buy rental properties. With only $10,000, I can teach you how to create an empire with no money down!”
These types of seminars and forms of education are very influential. However, they promote a mentality that may land you in trouble when the going gets tough. Joshua finds those investors who avoid getting into the specifics (i.e. technical planning) will always try to solve all financial difficulties by simply buying more and more properties. For example, if an investor wants to increase their rental income to fund a vacation, instead of taking a deep dive into their budget, refinancing, etc., they will just buy another property. In other words, they take massive action with minimal details.
On the other hand, if you only focus on technical financial planning, you will lack the motivation and practice. For example, someone will worry about how to optimize the asset allocation in his or her retirement account when they should be sending out direct mailers or putting in offers. In other words, they have maximum direction with minimal action.
Therefore, the combinations of personal and technical financial planning are required to be fully successful financially in the long-term.
The Best Approach – Setting Goals
The best approach to financial planning always starts with goals. You should always build from precise, stated goals that are specific to YOU. However, often times, this isn’t the case. When Joshua asks people how much real estate they want to own, they will almost always throw out round numbers. “I want to own 10 rental houses.” “My goal is to own $10 million worth of property.” “I plan on owning 25 units.”
In response, the first question that Joshua asks is “why?” Usually, these whole numbers come from reading a motivating book. Maybe they came from a motivating speaker that talked about how rich they are and all the things that they can buy. Going back to the best financial planning approach, “are these goals specific to what you want and what you need?” If the answer is ‘no,’ then it is time to sit down and reevaluate “why” you are investing in the first place.
Real estate should simply be a funding mechanism for your life. Therefore, take the time to sit down and actually figure out how much money you need. The median household income in the US is in the $40,000 range. Depending on your market, you can hit $40,000 in net profit with 4 to 5 rental houses once they are debt free.
However, many people don’t actually take the time to sit down, look at there expenses, figure out how much money they need, and create an investment strategy to meet that goal. Instead, they wind up pursuing an inefficient or riskier plan to hit a financial number that they read in a book or heard from a motivational speaker.
The Best Approach – Create a Foundation
Joshua doesn’t think that there is anything wrong with wanting to spend more money (i.e. have more life expenses) or trying to accumulate a bigger portfolio. But, he believes and has seen that the quicker you can get to a place of financial stability and the lower your goals are, the easier it is to get there with minimal risk.
Therefore, place your $10 million goal to the side – at least for now – and do the following first:
Determine your monthly expenses (Joshua believes that you can have a great lifestyle on $4000 a month, but ultimately, that is up to you)
Create a plan to achieve a monthly income that covers your expenses
Once that income level is achieved, aggressively pursue the clearing all of the leverage on the portfolio (with zero debt, no matter what the market condition, you will have total safety)
After you’ve created a foundation, then begin pursuing your $10 million goal
Creating a solid foundation to launch yourself from will set you up for a lifetime of wealth. Then, if you choose, pursue the big fancy personal finance goal of $10 million. That way, in the pursuit of this lofty goal, if you make mistakes and lose everything, you’ll still have a solid foundation. This is much better than losing everything (like many investors did in 2008) and having to start from scratch.
Real Estate Is a Means to an End
The idea behind taking this approach is to recognize that owning real estate is not an end in and of itself. Rather, it is a means to an end. As soon as you have your foundational goals achieved, you should be working to stabilize it. It is far better to achieve a basic goal, stabilize, and move on from a place of strength, than it is to be always extending out your hand for more, more, more. Joshua believes that real estate is a fine investment class that has created many wealthy people. However, it still has it’s own problems. Without focusing on something like good financing and minimization of financing, you end up stretching to far. Then, if the market conditions change, the immature investor has to start all over again.