Chad has been on the show in the past, and he’s back to tell us a few ways that people can retire early through real estate, which is also the subject of his new book, Retire Early With Real Estate. If you want to know how to build wealth with real estate, and then be able to live off of what you have built, grab pencil and paper and hit play! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment called Situation Saturday. Here’s the situation – you want to build wealth, and then you want to live off the wealth. Fortunately, we’ve got a returning guest to come talk to us about this. He just wrote a book called “Retire Early With Real Estate: How Smart Investing Can Help You Escape the 9-to-5 Grind and Do What Matters More.” How are you doing, Chad Carson?
Chad Carson: Hey, I’m very good, Joe. Thanks for having me on again!
Joe Fairless: My pleasure. I enjoyed our first conversation, and looking forward to this conversation. Congrats on the new book! A little bit about Chad, just to jog your memory… He began investing in 2003 at the age of 23. As I mentioned, he just wrote a book on retiring early with real estate, and you can say hi to him and learn more about what he’s got going on at coachcarson.com. There’s also gonna be a link to go check out the book too in the show notes.
With that being said, Chad, our conversation today is going to be tactical ways for how to build wealth, and then after we’ve built it, how do we live off of it. First, can you give us some context about your background and why you’re an expert in this particular topic?
Chad Carson: Sure. When I first started – you mentioned I started when I was 23, and I think like a lot of people, and everybody has their different life points, but when I was starting, it was all about putting food on the table. I was a full-time investor… “Alright, how can I flip a house? How can I make some income, just so I actually paid my bills?” That was always first and forefront in my mind, but as I moved forward, as I kind of stepped back from the business a little bit, it became more than a job. It was a wealth-building vehicle, which is something that is actually gonna grow over time. I’m gonna grow my network from something really small when I first started, to something bigger, and then eventually kind of hit that magic point, some people say, where you can actually live off your rental income. It’s not completely passive, I don’t believe anything is ever 100% passive, but you’re to a point where you’re not spending 40, 50, 60 hours a week grinding at it; you maybe spend a couple hours a week, paying a few bills, but you actually still have that rental income coming in consistently.
That’s been my journey as well – I started off flipping houses, I got started after a few years, saving up a little bit of money, started buying rental properties, and then evolving to the point about 16 years later where I am now… Mainly, with a business partner, the two of us have rental properties. We still do a flip here and there, and we’re more stable; we have rental income in a small college town, so a lot of student rentals, some single-family houses, and we’ve kind of gotten to the point where we have other people managing most of the day-to-day stuff for us, and we can use that rental income to do other things, which for me is travel. My family and I went to Ecuador for the last 17 months, and so we were able to use that rental income to pay the bills on the other side of the Equator.
Joe Fairless: That’s incredible. The first time – and the only other time – we’ve talked on this show is episode 457; that was over 1,000 days ago. The episode is titled “How to stay local and dominate.” At that time you owned 57 residential units in Clemson, South Carolina. Where are you at right now?
Chad Carson: We’ve got around 90 now. Since that episode we bought a value-add multi-unit property that we raised the rents on, and did some improvements to, and that was actually just before I went to Ecuador. We were in a dilemma point where we had a lot of capital that we were either gonna use it to pay off a bunch of debt and just sort of ride into the sunset that way and just chill for a while, or if we find a really good deal that we’d know we could add some value to and increase our cashflow, we’ll do that. We used the capital for that big project, and it turned out pretty well. We’ve raised the rents from $375/unit, which was super low, to about $650/unit, and it’s cash-flowing nicely, it’s stabilized. That’s what we’ve done since then. But still in the Clemson area.
Joe Fairless: Okay. In order to increase those rents, how much did you put into each unit?
Chad Carson: The total investment was 250k, so we’ll say approximately 10k/unit, or a little bit under that.
Joe Fairless: So you’ve got approximately 90 rental units – congrats on that. On average, how much do they cash-flow each?
Chad Carson: With that stabilizement? I think between my business partner and I, with all units, it’s about $100-$150/month/unit, somewhere in there.
Joe Fairless: Okay.
Chad Carson: We have some that are a little bit more leveraged than others, and some are free and clear. It’s a pretty low rent market. Some of the stuff we had left over from pre-2007/2008, we have little mobile homes that rent for $400, and that kind of thing… So your margins are pretty tiny on those, but over time it’s gotten better and better.
Joe Fairless: And you have a business partner in most of these deals?
Chad Carson: Just the two of us. I had one guy that we started 16 years ago, 50/50 partners. I would be the acquisitions guy, private money guy, finding the money; he would manage the remodels and manage either selling them or renting them. That’s evolved a little bit since then. He’s got another business that he spends a lot of time on, but we’ve kind of maintained that old structure where we’re 50/50 partners, and it’s worked out really well.
Joe Fairless: Very cool. So $13,500, 50/50 partners… So you’re bringing in about $6,700/month on this rental portfolio.
Chad Carson: It might be a little bit more than that. It’s probably for each of us 8k-10k/piece. But we’ve reinvested a lot of that money; I don’t take all that money out. Some of that money is dividends, some of it we reinvest in paying down debt or buying new properties, that kind of thing.
Joe Fairless: Yeah, asset management, baby… Right? [laughs] Okay. So 8k-10k/month. For our Best Ever listeners, now that we’ve got context for where you’re coming from, the outcome of our conversation is to help the Best Ever listeners with some tactical things or ways to 1) build wealth, and 2) once we’ve built it, live off the wealth… How do we wanna approach our conversation?
Chad Carson: There’s different camps within the real estate investing world. There’s no right or wrong here, but I think the voice that I speak for a lot is somebody who’s similar to me. I’m gonna talk about smaller business, and people are gonna hear 90 units and think “Yeah right, that’s not really that small”, but it’s all kind of relative. There’s people who have businesses where they go out and own a thousand units, there’s people who have rental businesses where they own three units, and I sort of lean towards the smaller, kind of do-it-yourself type landlord. It’s something that resonated more with me. We have our own little management business, we stay small, in one market.
So in terms of building wealth, real estate for me is a really simple game, in some ways. It’s not easy, but it’s simple. There’s a couple major paths that I write about in the book that you can use to build wealth. One of those that I think we all are pretty familiar with is just a simple buy and hold rental property. But what I try to get into the tactics is when you buy a rental property and you say “I’m gonna hold this for 10-20 years”, how are you actually building wealth? What are the mechanisms to take that rental property that you buy, which maybe has a little bit of cashflow upfront, but then turn that into wealth, turn that into increased cashflow that you can actually live off of and use in your day-to-day life? What is that?
And one of those, which we don’t have a lot of control over, is just sort of passive appreciation – you know, buying in a good location, the property tends to go up in value… I have benefitted from that, for sure, because I bought properties 12 years ago, 15 years ago, that just by holding on and a good location, over time, we’ve kept up with inflation or better… So that’s absolutely a mechanism. That’s something that if you’re just patient, and you hold, and you buy strategically in good locations, where jobs are increasing, where people are moving into, you’re gonna give yourself a chance to have that benefit you.
So I think that’s part of it, but then there’s also some more active tactics that I’ve always tried to use. Some of those – I’ve mentioned that 28-unit property that I was talking about in the beginning – one of the ways we can add value to a property to find an opportunity to use your entrepreneurship… I like properties where somebody has mismanaged that, and there’s a lot of vacancy, and you can fill up those vacancies and increase the value of the building that way; I like buy and hold properties where I see some opportunities to build something on the property, like add a washer and dryer building that you can make some coin laundry money from, or… There’s a ton of different ways. This is like the multi-unit investors like you, Joe – you all are so good at finding all these hidden income opportunities.
When we think about buy and hold, it sounds kind of simple and boring in the beginning, but when you think about it and say “I’m right here with this property. What’s the way I can maximize the value, maximize the income?” and think about that as your wealth-building mechanism. That’s been a big part of my own success, is sort of using that entrepreneurship, and not just sitting passively, but doing both – benefit passively, and also benefit from your entrepreneurship.
Joe Fairless: What are some other ways you’ve increased income at your properties?
Chad Carson: Washers and dryers, as I’ve mentioned, is a pretty basic one. I’ve allowed pets, which was kind of a dilemma for me. My property manager is like, “Yeah, we could get a lot of these students who want pets”, and I’ve just had mixed experiences in the past, but I have found we can add pet rent to that. I’m keeping track of the numbers on whether that’s gonna be a net win or a net loss, but that’s certainly been one for me.
The other has been changing use. Let’s say I’m renting to a family who sort of sees themself as one unit, and they have one set of income coming in, and instead of doing that, you have a 2-bedroom unit – I could rent it for example in a niche like student rentals, which in my case is sort of my niche [unintelligible [00:12:29].12] I have two students who think about each of their rooms as sort of a separate income unit. So they think about it per bedroom, whereas a family thinks about like this one rent for the whole unit.
So just by transitioning it from a family unit to a student rental unit, I’ve been able to increase the rent as well, because of that different mentality, that different demand, that different marketplace.
I think shifting who your tenant base is – whether that’s students, whether that’s group rentals, whether that’s medical students… If you can find some kind of niche, and find out whatever that tenant needs, find a way to serve their needs really well – that has a huge increased income opportunity.
Joe Fairless: That concept is fundamentally sound when you’re talking about changing the use… Because what that reminded me of is when other investors buy a plot of land, and then they subdivide it out, basically it’s the concept of multiplication, right? You multiply your income streams through some creative method… In your case, you’re changing the use.
So your focus and recommendation for building wealth is buy and hold deals, and you’ve got a couple ways to do it. One is passive appreciation – let’s cross our fingers, hopefully we buy in a good location and all is well. But it might not, so therefore the second thing is the adding value to the property, mismanagement, adding washers and dryers, you’ve allowed pets and the jury is still out on that, changing the use from family to student rentals. Anything else that you can think of that you’ve done?
Chad Carson: There’s one that’s sort of a hidden opportunity that I find a lot of investors don’t pay attention to, and that’s similar to use, but it’s looking at the zoning of a property. I think this is very relevant in urban areas. Typically the most competitive areas often are the areas where everybody wants to live, or land is really at a premium, or it seems hard to find deals, and the best deals are often hidden below the zoning. What I mean by that is if you study your zoning — and I learned a lot of the zoning, because I was on the planning commission in my little town for a couple years; I learned a ton. I had no clue upfront about how the development process and the zoning process works… But I started looking at maps of all the zoning, and you’ll start noticing trends. You’ll notice that there’s little single-family houses sitting on this one parcel that’s zoned RM4, which in my town is the most dense multi-unit zoning. Or you might have a single-family house, but it’s on a duplex zone.
When you start studying the zoning, there’s all sorts of nuances. For example, you might be able to carve that lot, cut it in half, build another duplex on the back of the lot, with a driveway. I think those are things that developers really study, and people who go from the ground-up and build from the dirt, but we – I say “we” as people who are smaller, do-it-yourself kind of landlords, or people who buy rental properties to buy and hold – don’t really study that as much as developers do… But it has a huge benefit.
Just for an example, you might be negotiating with a seller of a property, and they say “I want 300k for this property”, and you run your numbers and look at your cap rate, you’re like “No, there’s no way. That’s like a 4-cap, or that’s a 5-cap. That doesn’t meet my numbers”, but if you have those hidden opportunities, you look at it and you say “You know what, the back half of this property, the dirt there is worth another $50,000.” If you knew that, and if you knew you could go build another duplex on the back and increase your income that way, that could turn a deal that on the surface looks like nothing – it can turn it into a deal, just because of understanding zoning, city development processes and that sort of thing.
Joe Fairless: I love it. So now there’s two parts to this process. One is building wealth; anything else as it relates to building wealth before we move on to living off wealth?
Chad Carson: Yeah, I would just add your use of leverage is another point that a lot of investors think about. I wrote about it in the book – there’s not a right and wrong way to think about it. It’s like a spectrum of people who say “You should be extremely highly leveraged”, and then on the other extreme they say “You should have zero leverage”, like Dave Ramsey style.
I tried to show that there could be success within that spectrum. My personal preference has tended to be a very conservative use of leverage, but definitely using leverage. Make sure the cashflow is very strong, make sure I have mortgages that don’t have balloons on them the next 2-3 years, always long-term mortgages… But then I’ve also profiled people and found people that use zero debt and have 35 single-family properties producing 15k/month in cashflow, and never used debt in the entire process.
As you’re thinking about building wealth, amortizing your debt is a big part of that, but reinvesting your cashflow if you didn’t have any debt or if you had little debt, and just doing it that way – it takes a little longer to get going, you might have to choose markets where the prices allow you to pay cash, or you and a partner to pay cash… But I guess I would just add that to your wealth-building stage. You’re gonna have to choose what you’re comfortable with and what your risk tolerance is, but there are strategies that can still work, whatever you choose to do.
Joe Fairless: So we built ourselves a portfolio, and now we want to live off that wealth… How do we build it to the point where we can now live off of it, versus we’re still trying to acquire that magic financial freedom number?
Chad Carson: So this is the point where — just some basic math. For example, for me – I started looking at saying “What are my expenses every year? What are the basic, basic, basics that I need to cover for me and my family just to feel basic comfort, so I’m happy with it?” I had a couple different numbers. I had just “Alright, here’s my bare bones… I could do this, this fine if I had this much per month.” Let’s just say that number was $3,000/month. If I cover that, we do okay. I don’t have enough for the trips and the fun stuff that I wanna do, but we’re okay.
Then I might take another number – in my case, I’m in a smaller town, lower cost to living, but $5,000/month. With $5,000/month I can do all the extra things I wanna do. That’s fine, $60,000/year. So I just started working it backwards from that, and saying, alright, how many properties would I need – and in my case, this kind of goes back to that debt leverage and what I’m comfortable with… How many properties would I need if they were free and clear of debt, if I had these things paid off? I’ll lean towards that in a moment… So how many properties would I need?
For example, you might say “Alright, I have a duplex that rents for $1,200/month total, and…” — let me make sure I make my math kind of simple here, so I can do it in my head… That’s $600/month net, after I pay all my operating expenses. So $600/month times 10 is $6,000, so $7,200/year is what that one property would bring in.
Joe Fairless: $600/month times 12?
Chad Carson: Yeah, times 12 would be $7,200/year.
Joe Fairless: Okay, got it.
Chad Carson: So how many of those properties would I need to do that? I don’t think I made my math easy enough there, but… Basically, when I did the math, I looked at it and it was not a lot of properties. I said, if I had had these paid off, I’d have eight properties, ten properties maybe for me personally; they would produce enough that I would have enough income to pay all my expenses.
So I guess my point there is in this transition point from building wealth to actually living off your income, is a very different animal. When you go from having a salary, or you’re working at a job and you have that income coming in from another source, that’s a different animal from you having to produce it yourself and make sure your rentals always pay your bills.
I like to go from a more leveraged portfolio to a more conservative portfolio. That could mean having them all free and clear – that’s what some people choose to do. Hey, I’m just gonna do it like a debt snowball, where I use all my income for 3, 4, 5 years, I accelerate the paydown of my mortgages to the point where they’re all free and clear. That’s one way to do it, and I’ve mentioned earlier that we had a lot of capital a few years ago, and we thought about going that route, “Let’s just pay a bunch of stuff off.”
But we actually went to another decision point where we said, you know what, right now we’re about 70% loan-to-value; let’s just get to a safer place, like 40%, 50% loan-to-value, but not necessarily paying everything off, because long-term living off your rental income there’s a lot of different risks that you need to think about. One is just having enough money to live off of, but you also have to think about inflation, you have to think about deflation… You’re gonna live off these things for a long time.
So what we decided was kind of a happy medium – having some of our properties free and clear, meaning they’re lower risk, they produce a lot of income, they’re stable; other properties – highly leveraged, with good, safe leverage, but those are kind of our growth properties, which are gonna continue paying the loans down, and if we have massive inflation, we have some good, low-interest leverage, then it’s gonna benefit us in that case.
That’s sort of the decision point that all of us, if we’re transitioning to a more passive state with our rental properties, need to think about – what does our portfolio look like? How many properties do I need? Do I need 150 units, or could 10 or 20 units be enough to do what I want? Because the other side of that is the more properties you have and you’re trying to be more passive with it, the more potential management issues there are. You can definitely hire more people to take care of a lot of the day to day stuff, but my philosophy is the simpler you can make it with your portfolio and still meet your financial needs, the better, because it’s just more efficient.
Joe Fairless: So identify your number and the amount you need to bring in monthly, and then reverse-engineer that to see how many units you’ll need to do that. You mentioned earlier your units cashflow around $150 – it sounds like a little bit more, based on the 8k-10k/month cashflow… So what numbers should we use to ballpark that, to determine how much we need?
Chad Carson: I think it’s market-driven. I always use $1,200/month as like a gross, round number. If you could look at a local duplex in your area, or a single-family house, and that was the median rent for you… In a lot of Southern metropolitan cities where I am, that’s sort of a realistic number. I like to work it backwards from there and just say, alright, $1,200/month; if I had 50% expense ratio, which could be a little conservative, or it could be more to some people, or it might be right on… But you’re gonna net about $600/month. I look at it that way – if you’re going to go the free and clear route, if you’re gonna say “I’m just gonna pay these properties off”, I would just look at it that way: about half of my rent is $600/month, so how much do I need? If I need $6,000/month, that’s 10 properties, and I would just work it backwards.
For me, my numbers are a little bit more leveraged still, at this point; that’s just the decision we made. So maybe you look at it and say “Alright, on average I make $200/unit on the properties that I have. I just need to acquire and stabilize this many units to $200/month and work it backwards that way.”
Joe Fairless: Anything else as it relates to building wealth and then living off wealth that we haven’t talked about that you think we should?
Chad Carson: I would just say over the long run diversification is something else I’m thinking about a lot. I’m a real estate investor through and through. I love owning assets, I love the control you have with real estate, I love the influence you can have on your returns, but over the long run, I think when you’re taking like a 30-40 year view, and this is your nest egg that’s gonna support you, and not your kind of aggressive “I’m gonna go after it” entrepreneurial money, I’m thinking more about beyond real estate a little bit, too. I still have a heavy portion with my properties, but within real estate I’m thinking about being a lender a little bit more, not just the landlord… So being a hard money lender, owning some notes.
And even beyond real estate, I’m thinking about equities and index funds, particularly in my retirement account, because I don’t wanna spend as much time on those, focused on those as much, but I like this idea that if the real estate market did really poorly in your area, you have kind of a 3-legged stool – you’re supporting yourself potentially with equities, you’re supporting yourself with rental properties, maybe you have some notes here that are not as correlated with your rental properties, and not just depending on one source, or maybe even one location. I’m very concentrated in one market, so having properties in multiple markets, having your money in multiple markets and having that diversification is a pretty smart move in the long run, because nobody can really predict exactly what’s gonna happen… So spreading your bets out a little bit can make a lot of sense.
Joe Fairless: Chad, how can the Best Ever listeners learn more about what you’re doing, and check out your book, and get in touch with you?
Chad Carson: I hang out at coachcarson.com. I write a weekly newsletter there, so you’re welcome anybody to come over there; I have a lot of free information that you can check out, along the lines of what we talked about today, using real estate to retire early, financial independence, a lot of case studies, so feel free to visit me there. I also have links to my book there. It will be on Amazon and Bigger Pockets as well.
Joe Fairless: Thank you again for being on the show and talking about building wealth, and then also living off the wealth. Once we’ve gone through the acquisition stage of getting our properties, then it’s transitioning that into actually living off that wealth. The way you suggest to acquire those properties is to do buy and hold deals in good areas, where you can get that passive appreciation, hopefully, but don’t rely on that.
Focus on adding value to the properties, looking for mismanagement, building washer-dryer buildings or putting in those units, in your case allowing pets, changing the use from families to student rentals, or just looking at the zoning and seeing what type of opportunities there are for zoning. Then also taking a look at the leverage too, and optimizing it for the accumulation – that’s the word I was looking for – stage, and then when you transition into the living off wealth, then perhaps optimizing it for something else, and you walked through the process for how you do that… So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
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