For as long as I can remember, I have known that I wasn’t fit for the corporate world.
Like J.D. Roth, the founder of Get Rich Slowly, I am an introvert, not a fan of authority and even less of structure. So even before I graduated college, I had my mind on one big goal: leave the corporate world as soon as possible. I was working for a big IT multinational in business school; those were not the happiest times, but that job allowed me to graduate debt free, with a small nest egg that I immediately invested to buy my first rental property in cash.
I believe real estate is one of the best way to build wealth and make money, since you generate an almost passive income, but it was far from enough to cover my basic living expenses. I started playing with those online savings calculators to see where my savings would take me in 5, 10 or 20 years. It was a revelation.
Do you know that if you make $2,000 and invest 10 percent of your salary at 6 percent for the next 40 years, you will have $400,289 for only $96,000 invested? At a 4 percent withdrawal rate, your nest egg will produce a monthly income of $1,334. Less than the $2,000 you are making today, or the $1,800 you are living on since you are investing 10 percent of your salary, but no small change.
The thing is, I didn’t want to wait for 40 years. Playing with the calculator some more, I found out that if you can live on 25 percent of your salary, to cover your expenses in retirement, you only need to save for 7 years! Living on 25 percent of my salary was a bit of a stretch, so I looked for ways to make more money. I bought a three-bedroom apartment and took in two roommates. I took odd jobs on top of my day job; I was making money tutoring at night and writing for several travel websites on the weekends, catering at weddings and freelancing as a translator. The plan was to retire around age 40, but I was so determined to quit my last job that I considered an alternative: how about leaving the U.K., where I worked, and relocating abroad?
At the time, I was 29 and owned two rentals in France and the U.K. that would cover my expenses in a cheaper country. I had a few investments that could cover the mortgage on the second rental (the first one was paid for) in case of a vacancy. And my freelance income was more than what I made at my day job. It came from half a dozen sources, and the probability of them all drying up at once was slim. I quit my job and took a one way flight to Morocco.
I lived in Casablanca for a year, and started a life of semi-retirement. I would cycle along the oceanfront, study Arabic, spend hours shopping for fresh produce or eating grilled camel at the market, and travel for weeks at a time to get pictures and posts for my travel writing gigs. I loved my time in Morocco but kept thinking about a country I loved even more, Guatemala. I had lived there for three years after business school, and after traveling to 80 countries, it was still one of my favorite. After a short trip there, I knew it would be my next destination. I found a piece of land by a beautiful lake in the northern area of the country, complete with a lovely little house that could become a guest house someday (one of my dreams). I bought it with cash along with with a 90-acre piece of land that I am turning into a residential development.
I have been living there with my boyfriend for almost a year, and after putting quite a bit of cash into house renovations and building a detached room and panoramic terrace, we are living happily on less than $1,000 a month, or $500 each. Related Content: How to live on less
Here is our budget:
Housing: $0 We bought our property with cash. You can rent a lovely furnished one- or two-bedroom house in Antigua Guatemala or Lake Atitlán, the two favorite retirement spots in the country, for $500 to $700 a month, generally including utilities. For a bigger colonial home, you will have to spend $1,000 to $1,500 per month.
Food: $200 This is pretty high, almost the minimum wage in Guatemala but we like to eat and that includes some imported products we enjoy (like cheese!) and some alcohol. We seldom go out.
Car: $100 We have two old cars that we bought with cash and put about $100 per month in gas.
Electricity: $80 With the house renovations there were drills and tools plugged all day, we occasionally use air conditioning, and pump our water from the lake to cook and shower with an electric pump.
Natural gas: $12 for a 25 lb. container that lasts about a month.
Staff: $300 We have a full time handyman/gardener around the house, who alternates with his girlfriend who comes to clean the house. This is a great perk to living in Guatemala.
Animals: $20 We have a rooster and 10 hens, some turkeys, ducks and roosters. They eat a $20 bag of feed per month, we eat $40 worth of delicious free-range eggs each month. Win-win!
Internet: $80 We spend $40 each. He pays for a data plan on his iPhone, and I pay for a wireless USB modem. It’s expensive, but we are in the middle of nowhere!
Property taxes: $30
Accountant: $20 We own the house and land as an LLC so we need an accountant.
Random: $150 Once in a while we go out, buy something for the house or go over the grocery budget, but that never comes to $150 though, but if something breaks it could. It is quite complicated to get car parts or any parts around here.
That’s a totalof$992 or $496 per person.
On top of that, I spend about $3,000 per year or $250 per month on travel. I fly back to France for a month but stay with my family so apart from a $1,000 ticket I don’t spend a lot, my last trip cost about $2,000 so I still have $1,000 to travel somewhere else, maybe the U.S., by the end of the year.
You may have noticed that I don’t mention healthcare. When I go back to France I get my physical from my doctor, and I do not have health insurance here, just a travel insurance included in my credit card that will repatriate me if something serious happened. This year, I only got a root canal in Guatemala that cost $200.
With the cost of a rental, healthcare and travel back to the U.S. once or twice a year, you could live well here on less than $1,000 per person. Go the extreme early retirement route, and you can live on rice and beans for less than $300, housing included.
But is retiring abroad worth it? I wrote a post recently to compare the costs of early and normal retirement in the U.S. versus abroad, where I concluded that you could either live better than you do for the same price, have a bigger home, some staff, a lovely piece of land with a view for the price of a 500-square-foot condo, or be able to retire years earlier by moving to a cheaper country and living by local standards.
For me, Guatemala meets all my requirement. The weather is mild all year long (they call it the land of eternal spring), people are nice and relaxed, the cost of living is very low and you can find most things you may want or need, from imported tech gadgets to U.S. trained doctors, albeit at a cost. I enjoy my month-long European holiday to visit my family and friends. Since I have been living abroad for the past 10 years anyway, I am used to emailing and Skyping the rest of the year. They visit me occasionally, as well. I could live in France on a similar or slightly higher budget but would not get the same quality of life.
Related Content: Retirement strategies
Where you will spend your retirement is a very personal choice, and for many, being near your family will be on the top of your list. Although if your kids are on the West coast and you are on the East coast, you are just as far away as if you had retired under the Guatemalan sun.
When most people talk about money management, they discuss tactics. Occasionally, you’ll encounter someone who elevates the discussion to strategy, rather than simply scattershot tactics.
But what’s missing from both conversations — both tactics and strategy — is a wider-lens look at how to become a better thinker; how to become a crisp, clear decision-maker.
How to think from first principles. How to better your brain. How to cultivate the wisdom to know the next move.
This series is an attempt to bring first principles thinking into the conversation around money. Welcome to the inaugural post.
[Quick recap] If you read the first issue of this series, you know I’m hyped about rethinking the FIRE philosophy into four pillars:
Financial psychology — This is the foundation of everything.
Investing — Let’s be honest: technically, you don’t need the “RE.” You can stop at “FI.” If you master your inner psychology and invest in your 401k, IRA and other brokerage accounts, you can live a wealthy and wonderful life. The “FI” is mandatory for everyone; the “RE” is optional.
Real estate — It’s a hybrid between owning an investment and running a business, so the “R” fits perfectly between “I” and “E.” Did someone say “mashup?”
Entrepreneurship — The last on the list because it’s the toughest, but this is where near-infinite potential lives. You’ll want to focus on F, I, and mayyyybe R first, before you tackle this tough cookie.
Financial Psychology
We recently re-ran one of my favorite episodes on the podcast: an interview with behavioral economist Kristen Berman, who states – among other things – that habits are overrated.
Wait … what? Habits are overrated? But … but … aren’t habits the cornerstone of, like, everything?
Nope, according to Berman. Habits are an excellent second choice.
Automation is more powerful than habits. The best upfront use of your time is to set up systems — e.g. automatic transfers and deposits. Habits are a fallback option for anything that can’t be automated.
Systems are likely to stick longer. Your automations don’t crack when you take a two-week beach vacation. Your habits, by contrast, might take the holidays off.
Systems rely on software. Habits depend on humans.
And in the end, the robots always win.
Investing
Successful investors tend to fall into two camps: those who are great at making returns, and those who are great at keeping their returns.
Those who are great at making huge returns are the ones who risk it all; they bet big on a handful of individual stocks, or they bought crypto in huge quantities during the early days, and their speculation paid off.
Our collective sense of survivorship bias applauds them.
But their risky behavior doesn’t stop. They double down again and again, until eventually they lose much of their returns.
Easy come, easy go.
By contrast, the investors who are great at keeping their returns often invest with a methodical, long-term, wide-lens approach.
It takes them decades, rather than mere years, to build their wealth. But once built, they tend to be more adept at keeping it.
SPOTLIGHT ON…
What tools are kick-ass at financial automation?
One of my favorites is Acorns, which automatically rounds up your purchases and invests the difference.
If you spend $1.73 on a coffee (wait, can you still get coffee for $1.73?? okay fine, if you spend $1.73 on … um … a bag of peanut M&M’s?), the tiny robots will round your purchase up to $2 and invest the difference, $0.27, into your Acorns account.
You can choose your favorite investing style (aggressive, moderate, conservative), or double the round-ups if you’re feeling spicy.
My personal tally? Welp, here it is:
So if I’m spending too much, or too often … at least I’m investing, too.
Check out Acorns here (you’ll also get a $5 bonus).
Real Estate
Many people have some variation of the following question:
“I’d like to buy an investment property. And I’d like to _____ [insert personal use here] _____ when it’s not rented out.”
For example, “I’d like to …”:
… use it as a summer/winter home.
… use it for a month or two every year.
… have my aging grandparents or parents live there.
… turn it into a home office temporarily or seasonally, like during the summers.
… let my kids live there after they move out.
… provide a home to my brother or sister while they’re getting back on their feet.
That’s fantastic. But that’s not an investment property.
There’s a difference between buying an investment property vs. monetizing a property while it’s not in use.
The former requires cold, hard math. Your personal preferences don’t enter the picture. You make spreadsheet-based decisions with Spock-like reason.
The latter’s existence is based on your personal preferences. Every decision, from location to layout to square footage, is influenced by your homeownership ideals.
On the surface you’re performing the same act. You’re purchasing a property, and then renting out said property. You’re advertising the vacancy, collecting rent checks, performing routine maintenance and repairs, and paying taxes as a landlord.
But there’s a huuuuge difference between the decisions you make when you’re selecting each type of property.
Many homebuyers get smacked upside the head with problems when they don’t understand which set of objectives they’re chasing.
They take their cues from the wrong group. They use the wrong formulas. They play the wrong game, follow the wrong rules, track the wrong scoreboard.
The home they purchase ends up being the wrong candidate for the job.
And that’s a six-figure mistake.
In our course, Your First Rental Property, we teach our students how to clarify exactly what they want in an ideal property, so that they never take cues from the wrong voices.
Entrepreneurship
Let’s keep this simple:
“Do I need business cards?”
No.
“Do I need a business plan?”
Meh. Maybe something that’s simple enough to scrawl on a napkin.
“Do I need a suit?”
Why, are you a funeral director?
Stop playing business. You’re not a little kid on a playground; starting a business by printing business cards is a grown-up version of make believe.
No matter what type of business you’re running — whether you’re dog-walking for extra income or freelance coding for the local university — you need two things:
Either a product or service
Someone who thinks your product or service is valuable enough to purchase
That’s it. Forget the business cards. Focus on (1) figuring out what product or service you can offer the world, and (2) telling the world* about it.
*You’ll want to narrow down “the world” into something more targeted. Like, tell Bob. Especially if Bob has a dog that needs walking, or if Bob hires freelance coders for the local university.
Wahoo!! You’ve finished reading Issue #2 of the First Principles series!
I hope this series inspires you to think, learn and take massive action.
Click here if you want future posts like this straight to your inbox with more thoughts, ideas and insights on a new take on FIRE.
That’s a reasonable question. Why would anyone want to invest in a volatile market and in the midst of economic uncertainty?
But recessions create opportunities. Yes, it’s terrible that millions have lost jobs and suffered huge portfolio losses, but the unfortunate reality is recessions happen. Like it or not, this is our current situation. By looking at the market and asking “what opportunities can I find?,” we contribute to the recovery.
We contribute to the recovery in all types of investments: stocks, real estate, side hustles.
When we buy stocks, we infuse capital into companies that we believe in and/or into the market as a whole.
When we buy, renovate and rent properties, we create jobs for contractors, agents and property managers and we offer our tenants a safe, comfortable and well-maintained home.
When we start a side hustle, we build products or services that thrill our clients and create jobs for our team.
When we invest, we participate in the recovery. Recessions are an unfortunate fact of life, but they carry a silver lining. And for newbie investors in particular, recessions can open the door.
Unfortunately, during times of uncertainty, many people surrender to their fear of investing. They sit in cash until it’s too late.
To be clear, I’m not talking about people who don’t have the capital to invest. If someone is financially unstable — if they lack an adequate emergency fund, for example, or if they’re buried in high-interest credit card debt — then they should be applauded for focusing on the fundamentals first. Build the foundation; everything else rests on that.
But many financially stable people will sit on excess piles of cash.
I get it. Investing is scary during a recession.
It’s normal to feel scared of buying index funds, only to watch them drop the next day. It’s natural to feel scared to start a side hustle, when you know this is a tough time for small businesses. It’s normal to feel scared about buying a rental property; what if your tenants lose their jobs?
But by sitting on too much cash, you miss the opportunity to pick up undervalued deals.
You also miss the chance to start building momentum, so that when the economy starts rebounding, you’re already established. You’ve started the side hustle. You own the rental property. You’re not scrambling to get started after the recovery is underway; your projects are in place.
You might not have enough cash to buy cheap assets at this moment. That’s okay. Focus on the fundamentals (like building an emergency fund) and don’t worry.
If you’re fortunate enough to be able to invest, though, don’t sit out this opportunity due to fear.
We discussed stocks at length in this podcast episode, and we talked broadly about how to finish 2020 financially stronger than you started in this episode.
In this article, we’ll focus on real estate.
Should you invest in rentals during a pandemic? Might we see another housing crash, 2008-style? Is this a good time to buy? To sell? Let’s explore.
“Is the real estate market going to crash again?”
Have you heard of the availability heuristic?
It’s defined as “the tendency to overestimate the likelihood of events with greater ‘availability’ in memory.”
We overvalue examples that can easily come to mind, while we undervalue examples that are harder to imagine or recall.
If something happened recently or if something is emotionally charged, then it’ll easily come to mind. And if it easily comes to mind, we overestimate the likelihood that it’ll happen again.
Prior to the pandemic, the 2008 housing crash was the most recent recession. It comes to mind quickly: it was recent and suuuuper emotionally charged.
And so it’s natural — it’s logically flawed, but natural — to assume that this current recession will resemble the last one, to overestimate the likelihood of another housing crash.
But the factors that led to the 2008 recession (subprime lending, speculative building, shady credit-default swaps) are nothing like the factors that led to the 2020 economic collapse (a deadly virus).
The Great Recession was created by weakness in the housing market. The chain of events in 2008 wasn’t: “a recession struck, therefore home prices collapsed.” It was the opposite: “home prices collapsed, therefore recession struck.”
If you started investing before the 2002 dot-com burst, or if you were already an adult during the 1987 market crash, you’ve experienced bear markets that didn’t coincide with a housing crash. But if you’re under 40, the Great Recession was the first major recession in your adult life.
If that’s your situation, then it’s especially tempting to associate recessions with real estate crashes. After all, as a millennial, 100 percent of the recessions of your adult life — 1 out of 1!! — have been tied to a massive real estate crash.
But that was a dozen years ago. The underlying economic factors are different today.
There may or may not be a temporary slight dip in housing prices. (I doubt it, but it’s possible.) If that happens, clickbait headlines will refer to this minor dip as a “crash,” because that’s eminently more clickable. Don’t be fooled by the phrasing.
Study the housing market. Read the price-per-square-foot declines. Look at the average days-on-market of homes for sale. Scan for the number of new mortgage loan originations. This data will tell you far more than any screaming headline.
“What if my tenants can’t pay rent?”
Let’s look at statistics:
In a normal market, around 20 percent of tenants are late in paying their rent, according to data from the National Multifamily Housing Council, which tracks 11.5 million apartment units nationwide.
In April 2020, that number increased from 20 percent to 31 percent. That’s not as bad as many landlords feared.
In normal conditions, 80 percent of tenants pay rent on time, and 20 percent are late.
In pandemic conditions, 69 percent of tenants pay rent on time, and 31 percent are late.
But wait! It gets better.
The NMHC surveyed apartment managers again one week later. They found a huge improvement: 84 percent of apartment households paid rent by April 12th.
Tenants might not be able to pay rent on the 1st of the month. But the overwhelming majority — 84 percent — were able to pay after a delay of less than two weeks.
As far as the data shows so far, worries that tenants won’t be able to pay rent have largely not come to pass. Most tenants are still able to pay rent; they just need extra time.
(The NMHC noted that a huge number of apartment managers volunteered to waive late fees or offer flexible payment plans.)
That said, millions of people have been helped by a combination of stimulus checks, enhanced unemployment benefits (which currently provides an extra $600 per week in addition to normal state unemployment benefits), or payroll protection if either they or their employer qualifies for Paycheck Protection Program funds. Will these programs get renewed or extended? What will happen if they don’t? There are many lingering questions, and the future remains to be seen.
The simple truth is that nobody can accurately predict the future. We can look at data about our current situation, and as of now, we know that 84 percent of tenants (out of 11.5 million household units) paid rent within two weeks of its due date. But we do not know if or how that number will change in the future. Variables that cannot be predicted — such as the speed of recovery, the level of government intervention — will play a major role in shaping these answers. We don’t know how those variables will take shape.
The greatest risk is assuming that we know the future. Beware of certainty. Those who pretend to know the future are clinging to security at the expense of honesty and accuracy. Don’t listen to any economic or market projections that are expressed with too much confidence. We don’t have a crystal ball. Nobody knows what the future holds. The wise ones recognize this and accept it.
We cannot state what will happen. We can only state what IS happening. And from that, we make preparations for what is and what might be.
“What risks should I be wary of?”
Of course, there are serious risks ahead. We do not know:
… how long the pandemic and global shutdown will continue.
… how long such a large portion of the population will remain unemployed.
… how many employees have had their hours reduced or accepted a temporary paycut, and how this will reverberate throughout the economy.
… how long the recovery will take.
… whether or not there will be a tragic second wave, or third wave, which triggers an unavoidable second or third shutdown.
How can you approach smart real estate investing in this context?
Here are a few Do’s and Don’ts:
Don’t avoid investing. The people who made that mistake during the Great Recession — those who avoided making new investments from 2009-2012 — missed out on massive, opportunity-of-a-lifetime recovery gains.
Do thoroughly analyze any new rental investment that you’re eyeing. Run a variety of “what if” scenarios on a spreadsheet, crunching the numbers with different assumptions.
What if occupancy rates fell by an additional 10 percent? What if you reduced the rent by 20 percent for the next six months? How would this affect your returns?
In our course, Your First Rental Property, we provide robust, detailed spreadsheets for heavy number-crunching.
We teach our students that the cliché thrown around by other investors — who tell you to “calculate the return” — is too simplistic.
You’re not calculating “the” return; you’re calculating a range of possible returns.
You’re not stubbornly insisting that a given rental property will have an 8 percent cap rate. You’re calculating a range of cap rates in best-case, worst-case and middle-case scenarios.
Unfortunately, there are sellers who will advertise properties as having an “X” cap rate, and there are investors who take that information as a fixed number. That’s baloney.
Properties don’t have a single fixed cap rate; they have a range of cap rates, and we teach our students how to assess this range before they commit to a six-figure investment.
Don’t over-leverage. You don’t need to borrow every penny you qualify to receive.
Ignore the real estate investors who are fixated on cash-on-cash return, a popular formula that inherently rewards overleveraging.
Instead, focus on an investing strategy that prioritizes the property’s cap rate (essentially its dividend stream). This is the investment philosophy and strategy that we teach in our course.
Do maintain strong cash reserves. We teach our students to keep a minimum of three months’ gross rent, which translates to six months of operating expenses.
Don’t jump in without a specific, carefully-thought-out written plan. Before you start investing in rental properties, write your personal investor statement.
Your written investment statement should articulate how many properties you want to purchase, the speed or rate of acquisition, the type of financing you want to use, your ideal debt-to-equity ratio or leverage maximum, the type of neighborhood you want to target, the age and condition of properties you want to purchase, and more.
We provide a fill-in-the-blank template to guide you through this exercise in our course.
Do prepare a variety of ways that you can accommodate tenants who are financially struggling. Here are some examples:
Offer an incentive: Offer your tenants one month of free rent — which they can use immediately — if they extend their lease by an additional year.
This is a win-win scenario. You’re spared from the costs of a turnover and vacancy. You pass these savings directly to your tenant.
Waive late fees: If your tenant is waiting on unemployment benefits, they may not be able to pay rent on the 1st of the month. That’s fine; they’ll have the money once their benefits arrive.
Offer to waive late fees, under the condition that they stay communicative.
You want to avoid a tenant ‘ghosting’ you, screening and dodging calls from you or your property manager.
You can avert this situation by (1) letting them know you’re flexible and accommodating, and (2) telling them you’ll waive late fees as long as they send you frequent updates about their situation, like a quick text message or email, every two to three days.
Set specific and measurable communication criteria, such as: “Please text me with an update at least once every three days, even if your text is as simple as ‘hey I’m still waiting on my benefits to start’.”
Spread the payments: Another option? If your tenant is waiting for their unemployment benefits to arrive, offer to spread next months’ payment across the rest of their lease.
Let’s say their rent is $800 per month, and they have 9 more months remaining on their lease. In this example, they would pay $0 next month, and their rent would rise by $100 per month for the remaining 8 months.
The Bottom Line: Recessions are tragic, but they also carry the hope and promise of a recovery. If you have money to invest, don’t let fear hold you back. Invest in the market, start a side hustle, or invest in rental properties. Don’t let another year or two slip by, and then scramble to get a foothold after the recovery is well underway.
Our flagship course, Your First Rental Property, opens for enrollment again on Monday, November 30th.
Learn about the course in this video below, or check out this page for FAQs, testimonials, and your chance to join our VIP waitlist. When you join, you get a free 7-day crash course on the fundamentals of residential real estate investing.
If you’re interested in investing in rental properties and want an A-to-Z guide of everything you need to know, learn all the details here.
You know those flashy “real estate seminar” types, the ones who wear $10,000 wristwatches and flash cheesy Powerpoint slides of their Lamborghini at you? 🙄
Don’t trust them. (I reaaaalllly hope I’m stating the obvious.)
I call them Lamborgurus, driving their Scamborghinis. They can be found lurking in the spotlight, dispensing a blend of platitudes and high-leverage, high-risk speculative strategies from the stages of big hotel chains.
They can be forgiven for being tacky. But not for destroying peoples’ retirements with their shoddy ‘investment’ advice.
Here’s the thing:
Be careful about choosing who you take advice from. This is true in any arena — health, fitness, personal finance, business, real estate, travel. Some teachers are better than others. The slick, sentient-infomercial Scamborghini types offer the most dramatic cautionary example.
But there’s another reason.
Most people who teach or offer advice (on any topic) are good people — great integrity, great heart — but they’re not a good fit.
There’s nothing ‘bad’ or ‘incorrect’ about them; they’re a great fit for someone else. But they hold a philosophy, approach, strategy and framework that’s not right for you.
If you want to learn about index funds, you don’t seek out a day trader.
If you want to learn about asset allocation, you don’t ask the neighbor who’s obsessed with penny stocks.
If you want to learn about financial independence through rental property investing, you don’t seek out the mega-deal, high-leverage, speculative-style instructor.
I made a video about this. You can watch it here.
In the video, I chat about real estate investing, but the big-picture idea applies across topics — including music, art, fitness, cooking, creative writing, nutrition, stock and bond investing, and personal finance 101.
Choose your mentors wisely.
— Paula
Our class, Your First Rental Property, is an 11-week online training that walks you, A-thru-Z, through everything you need to know as a beginner rental property investor. Learn more here, where you can also check out stories from our students and alumni.
If you want to prepare for investing in real estate this year, join our VIP waitlist, where you’ll get a 7-day sneak peek of the material inside the course.
We open enrollment twice a year – once in the spring, and once in the fall. Our students have lifetime access to the course, which includes quizzes, worksheets, spreadsheets, templates, forums, and peer support from small accountability groups.
Our students benefit from learning from our Teachers Assistants (TA’s), all of whom are alumni from our course and successful real estate investors. Students can also bring their questions to me directly during our live Q&A Office Hours calls on Zoom. We will hold Office Hours twice weekly during the 11 weeks, and students and alumni are welcome for life.
P.S. Got questions?
“I’m an out-of-state investor.” “I’m interested in Airbnb.” “I’m househacking.”
Cool. This video explains whether or not the course is right for you.
“Wait … what’s inside the course, exactly?”
This video walks you through everything.
If you’re interested, get more information and join our VIP waitlist here!
But crunching numbers too much can be a crutch, rather than a tool.
Before she enrolled in Your First Rental Property (YFRP), Kelsey found herself stuck in analysis paralysis. She wanted to invest in rental property, but she kept crunching theoretical numbers without taking action.
“When people talk about how difficult it is to get over analysis paralysis, that is me, that is absolutely me, because I’m such a numbers person,” she said. “I love to analyze every single aspect of something new.”
She’s not alone.
Analysis is great. But analysis paralysis, when overthinking or overanalyzing leads to inaction, is one of the most common obstacles new investors face.
When you’re putting significant savings on the line, analysis paralysis is a normal fear-based response.
But it sidelines you. It shortens your time in the market and the compounding gains that follow.
Kelsey recognized this and enrolled in the course to learn how to rigorously analyze properties without succumbing to analysis paralysis.
She learned how to transform analysis into action.
“You level up your knowledge so much faster than you possibly could have if you were doing this all on your own and trying to figure it out as you go, stumbling through every decision.” — Kelsey Kaszas
The California resident began her search near the opposite coast, in Pittsburgh, Pa.
In 2018, Kelsey was introduced to Pittsburgh by her soon-to-be-wife, whose family lives in the area. She noticed that price-to-rent ratios looked promising, so she used the tactics she learned in YFRP to research the area from afar.
She started looking for off-market deals, including driving for dollars and working with wholesalers — “something I learned about in your course,” she said.
Yet something felt … off.
She decided to take a break and focus on wedding planning. She knew she had YFRP course and community access for life, and she could return to the course for knowledge, support and confidence whenever the time felt right.
Two years later, Kelsey had an epiphany while on vacation in Joshua Tree National Park. This is right, she realized. She wanted to invest in this area in Southern California.
She knew she’d need to be flexible, knowledgeable and innovative to make the numbers work.
Kelsey dove headfirst back into the course, refreshing her real estate knowledge by reviewing every module again. She joined a YFRP mastermind group. She attended Office Hours. She used the spreadsheets and other resources nearly daily.
“The course is just so comprehensive that when you … try to learn it and take all the quizzes and you’re engaging with the course material, you level up your knowledge so much faster,” she said.
She made offer after offer. Most didn’t pan out, but Kelsey was undeterred. She had the support of the YFRP community and the confidence that comes from deeply understanding the numbers.
“The last four months has been nonstop real estate for me,” she said.
The YFRP Analyzing Module features a robust spreadsheet that helped her make well-informed offers. She could calculate how much she’d need to pay for a property in order to get the profit margin she wanted.
During the hottest seller’s market in a decade — early 2021 — she made competitive offers, using tactics she learned in YFRP.
On March 11, 2021, Kelsey closed on her first rental property, located six minutes away from the entrance to Joshua Tree National Park.
We talked to Kelsey on the day of her closing. Here’s what she said:
“There’s so much – so many positive things I could say about my experience with taking the course … and getting to engage with the forums and with people in the mastermind group.”
“Office Hours were huge — getting face-time with you and being able to ask questions as they come up. And I know that’s been big for other people.
“And sometimes I’ll go back and listen to Office Hours recordings, because someone else will have a question that maybe I would have had. And so instead of having to ask it myself, I can just go listen to the recording and the information is all there. That’s support in a way that you wouldn’t really be able to find anywhere else.
“Being able to interact on the forums, and if someone has a question, there’s a whole group of people who are ready to help, ready to answer these questions. I think that really shows what a strong community is being built with every single cohort that goes through the course.”
What’s next for Kelsey? She’s gearing up to renovate her property — as a long-distance investor — and she’s turning to the Renovation Module within the course to support her during this project.
The Renovation Module, she says, prepared her for intense conversations with her contractor, and she’ll be returning to this module repeatedly as she makes renovation decisions from her home in Los Angeles.
The economy is tanking; unemployment claims have topped 30 million. So what’s happening with the housing market?
To wrap our minds around this rapidly-changing housing market, let’s break this down into three sub-questions:
How strong was the housing market before the pandemic struck?
What’s happening now?
Where might it be going?
Here we go!
How strong was the pre-pandemic housing market?
Home values rose steadily after the Great Recession. From 2012–2020, home prices climbed 5.8% annually, according to the US Housing Market Health Check report from Thomvest Ventures. (All stats in this article come from that report unless otherwise indicated.)
Home values hit record-breaking new highs; the current national home price index is valued at 115% of the prior peak in March 2007.
Why did home values skyrocket in the last 8 years? There are many complex reasons, but three major factors include:
Historically low mortgage interest rates. This makes monthly payments more affordable.
Wage growth and consumer confidence arising from the 11-year bull market that just ended.
Limited housing supply, fueled by a decline in new construction.
Let’s talk about that last point, because it’s crucial in understanding how the pandemic will re-shape the market.
In 2005, prior to the Great Recession, home values were skyrocketing and people across the country were drinking the Kool-Aid that says “your personal residence is an investment” (it’s not) and “home values never fall” (they do).
The rapid climb in home values – and ensuing demand from buyers who wanted a slice of the action – led builders to flood the market with a surplus of speculative new construction. Remember 2005 and 2006? You couldn’t blink without seeing a brand-new suburban subdivision arise of out nowhere, seemingly overnight.
The spike in housing supply started fifteen years ago with speculation, and continued through 2008 and 2009, as foreclosures flooded the market.
From 2010 through 2020, that supply has been steadily declining. Okay, fine, “declining” is a polite way to describe the reality. In February 2020, the government-sponsored entity Freddie Mac, an institution that’s not prone to hyperbole, stated the situation bluntly: “The United States suffers from a severe housing shortage.” They called this a “major challenge” and estimated that 2.5 million new housing units would be needed to bridge the gap between supply and demand.
What triggered this shortage? The multitude of reasons could fill an entire article, but one major reason is that the cost-per-square-foot of new construction is prohibitively expensive in some areas, particularly high-cost-of-living cities, squeezing margins so tight that many builders have decided it’s not worthwhile to construct new homes in those areas. As a result, new home construction has trailed household growth every year since the Great Recession ended.
During the last decade, supply has drastically sunk, while demand has steadily risen.
Recipe for a price increase, anyone?
Real estate analysts track a metric called “months of supply.” It’s a measure of how many months it would take for the current inventory of homes on the market to sell, at the current pace of sales.
Historically, six months of supply equals moderate price growth. Fewer than six months of supply, though, correlates with skyrocketing home values. Many sellers receive multiple offers; comparable sales figures climb as buyers attempt to outbid each other. The average-days-on-market shrinks.
If you’ve searched for real estate in the past couple of years, you may have endured the frustration of spotting an amazing listing – only to discover that it went under contract within 24–48 hours of its initial listing.
It was a seller’s market. And that’s now a relic of the past.
What’s happening now?
Cue the curtain for 2020.
As you might expect, both supply and demand have fallen off a cliff. Sellers aren’t selling (‘cuz duh, who wants to move in the middle of social distancing?), and buyers aren’t buying (for the same reason).
But here’s the thing:
Early data suggests that demand may have fallen significantly more than supply. For the first time in a decade, the tables have turned.
To be clear, supply is tighter than ever. Available homes for sale declined 25 percent year-over-year. Nationwide, one million homes were listed for sale in April 2019 vs. 750,000 homes for sale in April 2020.
But the drop in buyers may exceed the drop in sellers.
As early as January 2020, home showings had already dropped by almost half – it dropped 49% – as compared to January 2019. (And that was January!)
Of course, showings are a crude, imprecise metric. Many home buyers – even starting as early as January – began opting to tour homes through Facetime or Skype, or browsing 3D virtual tours.
So let’s take a look at a different metric: the number of people casually browsing home-buying websites such as Zillow or Redfin. Would you expect this number to rise in this work-from-home era? Stay the same? Dip slightly?
The answer: None of the above. The volume of visits to home-buying sites like Zillow and Redfin careened off a cliff after the pandemic struck, dropping an astonishing 40 percent.
It’s not surprising, then, that by the first week of April, pending home sales fell 54 percent year-over-year.
Real estate commentators have differing views on the severity of the current demand decline, which is arguably harder to measure than supply. Housing supply can be tracked by metrics like new construction permits, renovation permits, and the volume of current market listings relative to the pace of sales (months of supply). Demand is estimated through stats like the pace of sales, the number of homes sold at or above asking price, weekly mortgage applications, and web traffic to search portals.
Many analysts view job growth and population growth as strong indicators of an uptick in demand. Job losses, therefore, predict a drop in demand. (Besides, banks don’t like to give mortgages to unemployed people.) And the U.S. is experiencing the worst levels of unemployment since the Great Depression.
For the first time in a decade, it looks like the supply-demand equation is flipped in the buyer’s favor.
“But wait! Are foreclosures going to spike again? Won’t those flood the market?”
It’s natural to expect the current recession to look like the last one. Since the Great Recession was characterized by a rash of foreclosures saturating the market, it’s natural to ask: “are we going to see a firehose of foreclosures flood the market again?”
The answer: probably not, for two reasons – (1) a decade of tighter lending criteria, resulting in highly-qualified borrowers with tinier debt loads, and (2) public opinion.
Let’s examine each one.
First, today’s borrowers are far more qualified than the borrowers of 2008.
Before the Great Recession, between 70–80 percent of mortgage originations were given to borrowers with less-than-excellent credit, defined as scores of 759 or less.
Today that metric has almost flipped. During Q4 2019, almost 66 percent of mortgage originations went to borrowers with excellent credit scores, defined as 760 or higher.
Before the Great Recession, homeowners could qualify for larger mortgages and easily borrow against their home equity through a cash-out refinance. As a result, in 2007, the ratio of mortgage-payment-to-income (the “front end ratio”) stood at 32 percent.
Today borrowers often qualify for smaller amounts (due to tightened lending restrictions) and are reluctant to borrow against home equity. At the start of 2020, the mortgage-to-income ratio was only 21 percent.
Let’s talk for a moment about borrowing against home equity.
In 2007, many borrowers were encouraged to cash-out refinance their home and spend this money on consumer purchases, such as discretionary home upgrades (e.g. building a backyard patio or installing a home theater system). They were advised that this would “boost their home value,” and they were not properly educated about the core financial literacy concepts that their personal home is not an investment and that relying on appreciation is speculation.
Unfortunately, those borrowers couldn’t liquidate their discretionary purchases when the recession struck. Their personal residence upgrades don’t provide a stream of passive income. They quickly found themselves underwater.
(That’s not the only reason many borrowers found themselves underwater in 2007, of course. Some borrowed to cover necessities, such as medical bills. Some found themselves blindsided by prolonged unemployment. Many were misled by lenders, who painted an unduly rosy picture and downplayed the risks of overborrowing. And many bought near or at the peak, such that when neighborhood home values declined, they found themselves holding a loan balance larger than their newly-depressed home worth.)
But the point remains – before the Great Recession, many people borrowed against their home equity for non-investment purposes.
Today that’s a distant memory. Cash-out refinance loans dropped 75 percent after the 2008 recession and remain at historically low levels today.
Foreclosures, bankruptcies and delinquencies are also at historic lows, as of the start of 2020. This January, only 3.5 percent of homeowners were late in paying their mortgage by 30 days or more, the lowest rate in 20 years for the month of January.
Finally, more people are mortgage-free today. In 2007, around 68 percent of homeowners carried a mortgage; by February 2020, that number had fallen to 62 percent.
Let’s review. In early 2020, at the start of the pandemic, the housing market was characterized by:
Highly qualified borrowers
Smaller loans
Healthier debt-to-income ratios
Fewer cash-out refinances or second loans
Low delinquency / more on-time payments
That’s why this isn’t going to be a repeat of 2008. The conditions are different. The housing market entered the 2020 recession from a position of strength.
We’ll briefly touch on the second reason why there won’t be a rash of foreclosures: public opinion and organizational will.
We’re experiencing a loose patchwork of protections intended to protect homeowners (particularly owner-occupants) from facing foreclosure.
Some banks are offering mortgage forbearance programs. Some states are instituting eviction and foreclosure moratoriums. Unemployment payments are fueled with $600 per week in additional benefits, and businesses with PPP funding must keep their workers on the payroll.
While these efforts are far from perfect, they’re – at the moment – adequate to prevent a huge volume of foreclosures.
So far, so good. Current data reflects no significant rise in delinquencies (late payments). If this number starts to spike in the summer or fall, there’s a reasonable chance that public opinion will pressure lawmakers and institutions to offer more protections to homeowners.
Where’s the housing market headed in the next 6-12 months?
Here’s what we’ve learned:
Home values are at historic highs. They’ve climbed steadily over the last decade.
Mortgage interest rates are at historic lows, continuing their pattern from the past decade.
Borrowers are well-qualified, and the likelihood of a 2008-style glut of foreclosures is slim. We’re unlikely to see a housing crash.
Housing supply has been tight for the last decade, but now the supply/demand balance appears to be tilting in favor of buyers.
Synthesis:
If you want to buy a property, the next 6–12 months might be an excellent time to become a buyer.
(And if you want to sell a property, wait. Hold for now.)
The pandemic may be ushering in a new era. Buyers might feel like it’s 2012 again: they can negotiate hard, offer significantly less than asking price, and not worry about getting outbid. They can ask the seller for repairs, concessions, and closing costs. Ahh, the good ol’ days.
Of course, there are people who disagree. Demand was high before the pandemic struck. As a result, some analysts have floated the idea that once mandatory social distancing restrictions loosen, buyers will unleash pent-up demand.
But if the lack of customers flooding back into restaurants, bowling alleys and tattoo parlors in Georgia is any indication, the housing analysts who dream of “unleashed pent-up demand” are … well, they’re dreaming.
When the economy tightens, people tend to become more cautious with their spending.
In the midst of a deep recession, with more than 30 million unemployment claims and a national mood of restraint, I find it unlikely that a huge volume of aspiring first-time homeowners will be eager to spend six-figure sums.
This means the brave buyers who pick up properties at this time may enjoy finding deals and negotiating from a position of strength.
Is it wise to buy in 2020?
In an unstable economy, many people are reluctant to make big-ticket purchases such as cars or homes.
And rightfully so.
Let’s turn this conversation to you. You might be wondering, “is it wise to buy a home in 2020?” – regardless of whether it’s a personal residence or an income property?
The answer: ONLY if you’re starting on a strong financial foundation.
First – If you don’t have an adequate emergency fund, focus first and foremost on building at least 3–6 months of rainy day reserves. If you think there’s a decent chance that you might get laid off or furloughed, or if you’re self-employed, extend this to 6–9 months of expenses.
Even if you’re a relentless optimizer, DO NOT invest this money. Keep this in a high-yield savings account (CIT Bank* is a favorite among our community members). Resist the temptation to throw it into the stock market, no matter how much you want to “buy on the dip.”
You can buy on the dip with a different bucket of funds. Don’t gamble with your emergency fund.
Second – If you’re carrying high-interest credit card debt, this is not the time to distract yourself with a home purchase. Crush your credit card debt first. Transfer your balances to a zero-interest card, and live on a strict budget that allows you to chip away at these balances before the teaser rate expires.
Third – If you anticipate any major big-ticket expenses (for example, if your car is 25 years old and the engine is sputtering, and it’s only a matter of time before replacing it transcends from “someday” to “urgent”), set aside enough cash to cover this cost.
Fourth – This is such a “duh” that I hope it goes without saying, but if you get a company 401k match, contribute at least enough to your retirement accounts to take full advantage of the match.
Fifth – Take stock of your dreams and goals. Everything is a trade-off. Don’t buy a home just because you think “this recession might be a great opportunity!” – that’s not a good enough reason if your heart isn’t authentically excited about it.
If you’re starting from a strong financial foundation AND this is your genuine goal, then 2020 might be the year that you, as an aspiring buyer, have been hoping to find.
(And if you’re selling a home … wait until 2021.)
Our real estate investing course, Your First Rental Property, will re-open for enrollment on Monday, November 30th! This premier 11-week online course will walk you, A to Z, through everything you need to know as a beginner rental property investor.
Read this page for all the details. Join the VIP Waitlist to hear when enrollment dates are announced first. Hope to see you in the fall!
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Unless otherwise indicated, all research and data conducted by and attributed to the US Housing Market Health Check report, released by Thomvest Ventures and written by Nima Wedlake, Principal.
*Affiliate disclaimer: We’re a proud partner and affiliate. If you use this link, we may earn a small commission (at no additional cost to you) which we use to pay our hardworking team of five, cover operating costs like hosting and software, and invest in keeping this site running.
When most people talk about money management, they discuss tactics. Occasionally, you’ll encounter someone who elevates the discussion to strategy, rather than simply scattershot tactics.
But what’s missing from both conversations — both tactics and strategy — is a wider-lens look at how to become a better thinker; how to become a crisp, clear decision-maker.
How to think from first principles. How to better your brain. How to cultivate the wisdom to know the next move.
This series is an attempt to bring first principles thinking into the conversation around money. Welcome to the inaugural post.
Welcome back to our new series, First Principles, which explores how to think clearly about money and life, make wise decisions, and better your brain.
Financial Psychology
It’s hard to separate what you think you want vs. what you genuinely want.
We’re taught that we “should” desire certain things. The sprawling, trophy house. The sleek car. The snazzy clothes (does anyone besides me say “snazzy” anymore?)
Those are mainstream examples. But in hidden pockets of internet communities, we’re also subject to that same pressure.
The community of nonconformists will pressure us to conform to their flavor of nonconformity. We learn that we “should” want to quit our jobs, to travel the world, to #tinyhome and #vanlife.
Eff. That.
Figuring out what you want = figuring out what YOU want.
Not what mainstream society wants for you.
Not what any internet community (and that includes this one!) might influence you into thinking that it’s what you want.
First Principles thinking means rejecting the temptation to embrace “copy/paste goals,” a phrase coined by a friend of mine.
This leads to the question – how do you know if what you think you want … is what you want?
The solution comes from flipping the question on it’s head. Don’t ask yourself, “what do I want?” Ask yourself, “what pain am I willing to endure?”
If you want something badly enough, you’ll sweat for it.
You’ll make sacrifices. You’ll embrace pain. You’ll stay up late, wake up early, and dive in with full force.
You might think you want [insert aspiration here]. But do you want it enough that you’re willing to become obsessed, at least temporarily?
Do you want it enough that you’ll endure the pain and sacrifice that it demands?
It’s easy to convince yourself that you want something, even when that dream isn’t in your soul.
The better question: what’s your flavor of pain? How bad do you want it?
SPOTLIGHT ON…
Have you been interested in real estate investing for years, sitting on the sidelines watching the market go up and wishing you’d gotten in sooner?
I have a secret for you: it’s not too late.
Even though parts of the US market are crazy, there are still good deals to be found; you just have to know where to look.
To date (and even in this crazy market) real estate investing is my favorite way to shorten your early retirement timeline, because of the cash flow it generates through monthly rent payments.
If you want a step-by-step, comprehensive guide, enrollment is open for my flagship real estate investing course, Your First Rental Property, for a limited time.
Explore Your First Rental Property
Investing
We talk about “risk tolerance” as though it’s a singular, one-dimensional, linear concept.
The reality is that risk exists along a variety of spectrums, and each are connected, like spokes on a bicycle.
This concept (multiple dimensions of risk) applies to all investing: stocks, bonds, index funds, crypto.
But I’ll use an example that comes from the world of real estate investing, to illustrate the point.
In real estate, you’ll encounter risk levels — low to high – associated with:
Leverage
The age of the property
The condition of the property
Neighborhood quality
Economic stability of city/state location
Population growth of city/state location
Tenant screening criteria
You’ll also grapple with risk levels across your personal life, such as:
Career choice [stable occupation vs. seasonal or low-demand occupation]
Job security
One income vs. two income household
Number of dependents, both children and aging parents/grandparents
Cost-of-living in local area
Flexibility and willingness to move
Health costs
Debt load
Volume of recurring monthly bills
When the students in Your First Rental Property ask “should I finance a property?” or “how should I split my portfolio between index funds and rental properties?,” I zoom out and walk them through exercises in which they think about risk across multiple dimensions.
If you’re dialing up the risk in one dimension, I tell them, counterbalance by dialing down the risk in others.
This framework applies to thinking through risk in all types of investments. And it highlights why the phrase “risk tolerance” implies a one-dimensionality to risk that doesn’t flow with reality.
Real Estate
My goodness, all I can say is that you HAVE to look at this.
I mean, seriously. It’s beaaauuuutiful. 😍
I don’t care if you’re planning to enroll in Your First Rental Property or not… just look at that. I’m DAMN PROUD.
I’ve been running Afford Anything for a decade. Ten years ago, I never would have imagined that one day, this little website which I grew from my kitchen table would have such a robust team, an incredible product, and a … well, I never imagined that one day we’d build this.
Wait. Let me correct myself.
I say “one day we’d build this,” but it’s taken five years of well-researched, thorough, painstaking construction. Three years of development. Two rounds of beta. Custom software. We gathered thousands of data points. We tested, iterated and improved relentlessly. And we’ve watched our 1,821 alumni experience amazing success.
If you’ve been thinking of investing in real estate, I’d highly recommend you take a look at Your First Rental Property. I’m confident it’ll help you.
Entrepreneurship
You’re familiar with the concept of “circle of influence” and “locus of control,” right?
Essentially, this framework states that there are many factors that might concern us — the weather, the economy, the stock market – but many of these worries are not within our control.
If we want to be maximally effective, focus on issues that we can directly control.
We can’t control the weather, but we control whether or not we carry an umbrella.
We can’t control the stock market, but we can control our contributions.
My theory is that the appeal of entrepreneurship is that it’s a wealth-creation strategy that’s within our locus of control.
We enjoy more control, effort, influence, and decision-making authority over an entrepreneurial project than we can, say, over an index fund.
And that feels damn good.
(One of the aspects of real estate investing that appeals to me most is that it’s a hybrid between an investment and an entrepreneurial activity. In other words, it’s an investment – like an index fund – that gives us direct control over the revenue and expenses – like a business.)
Hope this third issue of First Principles spurred you to think deeply about what you really want – and how to get it.
I’ll see you in the next issue. Until then!
Click here if you want future posts like this straight to your inbox with more thoughts, ideas and insights on a new take on FIRE.
Last Updated on February 25, 2022 by Mark Ferguson
Buying one rental property may not make you a ton of money right away. However, rentals can be an amazing investment when held for the long-term and when multiple properties are purchased. There is also the opportunity to buy larger commercial or multifamily properties, which can increase returns as well. With a good rental property, you should be making money every month (cash flow); you should make money as soon as you buy by getting a great deal; you will have fantastic tax advantages, you can use financing which greatly reduces the amount of cash needed; and the property value and rents will most likely go up in value over time.
Rental properties have been a great investment for me. I make more than $100,000 a year from the cash flow on my rental properties after all expenses including mortgages, property management, maintenance, and vacancies. I now have 20 rental properties which are a mix of residential and commercial. I bought my first rental property in December of 2010 for $97k. I started with residential properties but now buy almost all commercial, including a 68,000-square-foot strip mall in 2018.
You cannot buy just any property and turn it into a rental if you want to make a lot of money. You have to buy properties below market value with great cash flow to be a successful rental property owner. Not only do I make money every month from my rentals with minimal work, but my rentals have also increased my net worth thanks to buying below market value and appreciation (I don’t like to count on appreciation, but it is a nice bonus). This is not just a hypothetical article. I have owned rentals for many years, kept track of their returns, and written many articles about what I have learned.
The cool thing about real estate is while I have more than $6,000,000 worth of rental properties, it did not take millions of dollars to buy them.
Why did I choose rentals?
One of my passions is automobiles. I purchased a 1986 Porsche 928 a few years ago, and I absolutely love that car. I also have a 1999 Lamborghini Diablo, a 1981 Aston Martin V8, a 1998 Lotus Esprit Twin Turbo, and a few other cars. In my early 20s, I never thought I could afford any of these cars in my early. However, I started to make decent money as a real estate agent in my mid to late 20s. The problem was I was not saving much money. I just kept spending it. I knew if I ever wanted to get ahead in life and be able to afford these cars, I would have to invest the money I was making. I researched everything I could and decided rental properties were the best investment. I worked very hard to save money to buy my first rental.
As soon as I started buying rentals, I could see the fruits of my labor. I was making money every month from rent, I made money as soon as I bought the house because I bought it below market value, and it was forcing me to save money. I wanted to buy as many as I could, and I knew with steady money coming in every month from the rentals I could someday feel comfortable buying expensive cars.
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Why are rentals a good investment?
Not all properties are a good rental, but if you can find properties that are, they can be an amazing investment. A rental property should have a number of attributes
Cash flow
Good rentals will make money every month after paying all expenses. The expenses should include mortgage, taxes, insurance, maintenance, vacancies, and property management. The cash flow is the rent minus all of these expenses. Some people like to shoot for different numbers, but I always liked to see $400 to $500 in cash flow per property.
Buy below market
I get a great deal on every rental I buy. I don’t want to pay retail when I can pay to 20% to 30% less than retail. It is not easy to get great deals, but it is possible. On almost every house I have ever bought, I got a great deal. That instantly increases my net worth, makes me more cash flow, and looks better on my balance sheet for banks.
Leverage
You can put as little down as 20 percent when buying rentals. You can put even less down when buying a property as an owner occupant and then turning the property into a rental.
Tax advantages
Most expenses on rental properties are deductible or depreciable. You can also depreciate the structure of a rental property, which means you can save thousands of dollars each year on your taxes. You can also complete a 1031 exchange on rentals to avoid capital gains taxes.
Appreciation
Many people only talk about housing prices when comparing rentals to the stock market, but appreciation is a bonus. It is not what you are shooting for when buying a rental property because no one knows for sure if prices will go up or when.
It is not easy to find rental properties that are a good investment. It takes me months to find great deals that make over $500 a month like mine typically have, and they are not available in every market. My typical rental property used to cost between $80,000 and $130,000, and it rented for $1,200 to $1,500 a month. I put 20 percent down on the properties and finance the rest with my portfolio lender. I usually end up spending $25,000 to $35,000 in cash to buy each rental property. Cash flow is not the only benefit of rental properties. I slowly pay down the mortgage every month; I have great tax advantages; and they will most likely appreciate.
I am able to save that much cash from each rental property because I make a very good living as a real estate agent as well as from fixing and flipping houses. I like to have nice cars and a nice house, but I always make sure I am saving and investing money first. There are ways to buy rental properties with little money down, but I think you will get further ahead in life by saving as much as possible and investing wisely.
How much do you need to buy a rental?
I go over the exact cost of a rental property here, but let us assume that it costs $30,000 to purchase and repair one rental. You do not have to invest $90,000 a year to buy three rentals a year because you can begin refinancing rental properties after you own them for a year and take cash out to invest in more rentals. You can also save the cash flow from your rental properties to buy more rental properties. I usually buy my properties for about $100,000, with a four percent interest rate and 20 percent down, which leaves a payment of $381 for principal and interest. Those numbers combined with rents from $1,200 to $1,500 a month leave me with at least $500 a month in income from my rental properties.
How much should a rental property cash flow?
It is not easy to make $500 a month in cash flow from a single rental property. I detail how to calculate cash flow here, and I created a cash flow calculator to help people determine cash flow. Cash flow is not the rent minus the mortgage payment: you must consider many other factors. My rents range from $1,250 to $1,600 a month, and my mortgage payments range from $450 to $650 a month. I have to account for maintenance and vacancies on my rental properties, which leaves me with about $500 in profit each month. I buy my properties for $80,000 to $130,000 and usually make quite a few repairs before I rent them out.
What are the long-term returns for someone with little money?
Investing in rental properties can provide fantastic returns when you have a lot of money to invest. Even if you have little money, you can invest in rental properties. I am going to walk through how many years it will take someone to accumulate one million dollars from investing $7,500 a year into long-term rental properties.
The more money you make and save, the easier it is to make one million dollars from rentals. However, even people who do not make a lot of money can get there, although it may take a little longer. I am going to write out this plan assuming someone has a $75,000 salary and can save 10 percent of their income a year.
When you first start out, $7,500 does not go very far, and it takes a lot of money to buy an investment property. Luckily, there are many ways to buy a rental property with much less money if you are an owner occupant or use some of the techniques I discuss here. In the first year, the best bet is to buy a HUD home or REO that needs some work but will still qualify for an FHA or conventional loan. The key to my strategy is buying houses below market value. HUD or REO houses are a great way to do that. We will assume the investor can buy a house similar to the ones I purchase in my area, which cost around $100,000. There are closing costs that the buyer is charged when they get a loan, but you can ask the seller to pay most of your costs.
Buying as an owner occupant year one
The first step is to buy a house. But you cannot buy just any house; you want to buy a house as an owner occupant that you can later turn into a rental. You also want to get a great deal on a house to gain instant equity. To get a great deal on a house, you may have to buy one that needs some repairs. With a HUD home, you can roll $5,000 of the repairs needed into the loan with the FHA escrow and only put 3.5 percent down for the down payment. If the home needs a lot of work, you could use an FHA 203K loan to roll more repairs into the loan. We will assume this house needs $4,000 in work to qualify for a loan, and you bought a HUD home with the costs rolled into the loan. With an FHA loan, you have to pay mortgage insurance every month and an upfront mortgage insurance premium (which could be $200 or more a month).
With a conventional loan, mortgage insurance is much lower than FHA, and you might be able to remove it after two years. However, you may not be able to roll the repairs into the loan, but you could get the seller to fix some items before closing. If the repairs are cosmetic items, you should be able to get a loan without making the repairs before closing. I will assume the total cash needed to close on this hypothetical house is about $5,000. Hopefully, this house was bought below market value because it needed some repairs and was a foreclosure. Once the house is repaired, it should be worth around $125,000.
Since you bought this house as an owner-occupant, you have to live in the home for at least one year.
Year two
After one year, you have gained about $22,000 in net worth; $125,000 – $100,000 purchase price – $4,000 repairs rolled into the loan + $1,000 gained in equity pay down. In year one, no rent was collected because the home was owner-occupied to get a low down payment. In year two, the house is rented out and you can buy another owner-occupied home using the same strategy. When you try to buy a home right away, you won’t be able to count the rent from the first house as income right away. It is best to buy houses priced low enough that you can qualify for two houses at once to make this work. Otherwise, you may have to wait up to a year for the rent to count as income and can buy again.
You can only have one FHA mortgage at a time, so this time you have to get a conventional loan with 5 percent down. In the second year, you have saved up another $7,500 from your job and have $2,500 left over from the first year for a total of $11,500 saved. The second home also costs $100,000, and the seller pays 3 percent closing costs. The down payment needed is $5,000, and $5,000 in repairs are needed on this second house. The total cash needed to buy an owner-occupied home is $10,000 and the repaired value is $125,000.
The first house is rented out for $1,300 a month (which I will do all the time on a $100,000 purchase), and the payment is $550 with taxes and insurance. Add vacancy, maintenance, mortgage insurance and we’ll assume $300 a month in positive cash flow.
Year Three
In the second year, you made $25,000 from buying house number two (equity) and made $3,600 from cash flow. You also made $2,500 from equity pay down on both loans (I am assuming each loan will pay down $500 more each year). In year two, all the savings was used from year one, but you saved $7,500 and made $3,600 in cash flow for a total of $11,100 savings. Buy another house using an owner-occupied loan and use $10,000 of cash. Net worth increases to $53,100 after adding the equity pay down, cash flow and equity gained in the purchase of a new home.
The second house is rented out again using the same figures, although the mortgage insurance may be less because we are using a conventional loan instead of an FHA loan.
Year Four
Another house is bought below market value in year four. Cash flow increases to $7,200 a year plus $1,100 in previous savings and $7,500 saved this year. You now have $17,300 cash saved up before we subtract another $10,000 for the purchase of a new house as well as cash for the repairs. Net worth has increased $25,000 on the purchase plus $4,500 in equity pay down. The total net worth increase is now $90,800 for the last four years.
You own four houses and three of them are rented out. At this point, you may be able to remove the mortgage insurance on the conventional loans that have been held for two years, but I am not going to in my calculations to keep things simple and conservative.
Year Five
In year five, we repeat the entire process again and come up with the following numbers. Cash flow increases to $10,800 and previous savings $5,800 and $7,500 saved up equals $25,600 saved cash. The investor purchases another property and uses $10,000 in cash to leave $15,600 in his cash account. Net worth increases by $7,000 for equity pay down: $10,800 for cash flow and $25,000 for the purchase of a new property. The total increase in net worth is now $133,600.
You may have noticed this investor just mortgaged his fifth house. For many people, getting a loan on more than four houses is very difficult. However, the investor is buying houses as an owner occupant, which makes it much easier to get a loan.
Year Six
The same process is repeated all over again. Cash flow is $14,400, previous cash is $14,100, savings equals $7,500 for $37,500 cash minus $10,000 for a new purchase. The investor has $27,500 left in his bank account. He increases his equity pay down to $13,500, has an increase of $25,000 in net worth from a purchase, and an increase in net worth from cash flow of $14,400. He now has increased his net worth by $186,500.
Year seven
In year seven, the seventh house is purchased. Cash in the bank equals $26,000 from previous savings, $18,000 in cash flow, and $7,500 in new savings, which totals $53,000. You are now able to buy two properties this year! Buy another owner-occupied property using $10,000 and an investor-owned property.
To purchase an investment property, we need to put at least 20% down, and we still need to make repairs. We are buying below market value still, so we are going to assume we are adding $25,000 more a year in equity and $3,600 more a year in cash flow. Estimated costs for down payment and repairs is $32,000 to buy an investment property. You have $11,000 of cash left after buying two properties this year. Net worth increased by $60,500 after adding the usual amounts to total $247,000.
Year eight
Year eight is very exciting because we get to add two properties into the mix instead of just one. With the extra houses added, increased cash flow, and continued equity pay down, our net worth increased $98,200 in just one year! Total net worth is now $345,200, and you are making real progress! You have $42,200 saved up after buying another house in year eight as an owner-occupant, so you can buy another investment property, but won’t, because our margins will be too thin with only a couple thousand in savings.
Even though you are still making only $75,000 a year, you increased your net worth by almost $100,000 a year. There are not many people who can increase their net worth by more than they make in a year!
Year nine
In year nine, you are adding $26,500 in equity pay down, $28,800 in cash flow, $25,000 in built-in equity with purchases, for a total net worth increase of $80,300. Your total net worth increase over nine years is now $425,500. You also have $60,000 saved up after paying for one house as an owner occupant, which is enough to buy another investment property, leaving $26,500 cash left over!
Year ten
In year ten, you have enough cash to buy two more properties and have $28,000 in cash left over. Net worth increases by $114,500, bringing us up to a total increase of $540,000.
Year eleven
You can buy two more properties and increase your net worth by $129,200 for a total of $669,200. Cash flow is at $43,200 a year, and there is $36,700 of cash left over after buying two more properties. You could buy a third house this year but decide not to stretch your limits. You need to make sure you have plenty of reserves for the rentals.
Year twelve
This year, you buy three houses because there is $94,600 in cash available. After buying the three houses, there is $22,100 cash left in savings, equity was paid down, and $44,500 and $50,400 in cash flow was generated. Total net worth is now $814,100! You are getting closer to making one million dollars investing in real estate!
Year thirteen
You have increased your net worth by $190,200 this year because you bought three houses last year. The total net worth increase is now $1,004,300! Your actual net worth will be higher than this because I did not calculate savings from your income into the net worth, just the gain from buying rental properties. Cash flow is now $61,200 a year, and you have paid off $54,000 of equity in one year!
You own 16 rental properties which are producing over $60,000 a year! The incredible part is we did not increase the rents at all, even though they are likely to go up over thirteen years. We assumed there was no appreciation, even though there likely will be over that time. Due to the tax advantages of rentals, you are probably taking home as much in passive income from your rentals as you are from your job.
Things we did not consider
This was a very basic calculation for how to make one million dollars investing in rental properties. It would take a book to go through all the variables and possible roadblocks that might come into play. Here are a few items we did not consider, which would have an impact on the time it takes to reach one million dollars in increased net worth.
Inflation will increase the prices of homes and wages as well as rents. While the investor has to pay more for houses each year, he will also be making more and saving more. The biggest factor is the rent increases. His rent on the first houses he buys will increase as time goes on, but his payments will stay the same. His cash flow will increase greatly as time goes on, which we did not account for.
Taxes were not accounted for either because that gets very complicated. The cash flow the investor is making would be income, but the investor could offset that with depreciation from the rental properties. I assumed those two factors even themselves out.
Investment property purchases had 20 percent down, where the owner-occupant purchases had 5 percent down. There should be an increase in cash flow on the investment property purchases because of the lower down payment, but I left them the same to make the math easier.
Refinancing was not considered either, but the investor could easily have refinanced a couple of properties to get more cash out to buy more rental properties. This would have increased cash flow and net worth due to the increased number of properties purchased.
Obtaining more than 4 or more than ten mortgages can be difficult. I am assuming the investor is able to get as many loans as possible with a lender. I can have as many loans as I want with my portfolio lender, but many people cannot. This would be a roadblock once he reached ten financed properties.
Buying owner-occupied properties each year is possible but may not be realistic. Moving thirteen times in thirteen years may put a bit of stress on the family!
I also assume the investor manages his homes himself, which is doable in the beginning but it maybe tough when he gets ten homes or more.
How Did I Build a Rental Property Portfolio
I have 20 rentals now, but I did not buy them overnight. I started in 2010 and slowly bought them over the last 9 years. I bought 1 in 2010, 2 in 2011, 2 in 2012, and kept building from there. I worked very hard to make a great living as a real estate agent, but I also used real estate to buy more rentals.
I bought my first rental by refinancing my personal house and taking cash out of it. I also refinanced some of my rentals along the way so that I would have more capital to buy even more rentals. I was lucky that our market appreciated so much, but I also bought every rental property way below market value, which allowed me to take cash out when I refinanced.
I stopped buying residential rentals in 2015 because the market in Colorado became too expensive. However, I was able to invest in commercial rentals in my area and cash flow on them. There are a lot of different ways to invest in real estate!
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How much have my rentals made me?
I put together some stats to show how much rentals made me after four years of owning them. It has been a few years since then, and things have gotten even better! At the time, I had bought 11 rental properties. After doing some calculating, I discovered my rental properties have appreciated and been bought cheap enough to produce a gain of $600,000 since December of 2010! It is important to remember that net worth is all on paper, and I would not realize $600,000 in profit if I decided to sell all of my rental properties today. I would have to have selling costs, and I would have a large tax bill if I sold my rental properties.
How much equity have I built with rentals?
One thing I have done with every rental property I buy is buying them below market value. I try to buy my properties at least 20 percent below the current value, and if a home needs repairs, I want that rental property worth 20 percent more than the price I paid plus the cost of the repairs. For example; if I buy a rental for $100,000 and it needs $20,000 in work, I want it to be worth $144,000 or more when I am done repairing the home ($100,000 + $20,000 = $120,000 * .20 = $144,000). That means I usually gain at least $20,000 in net worth on every rental property I buy. The 11 rentals I have bought have gained at least $220,000 (I buy many properties at more than 20 percent below market) just by buying homes at the right price.
I also have been lucky that prices have increased significantly in Northern Colorado in the last few years. I would say lucky for the sake of calculating net worth, but the increase in prices has made it harder to buy cheap rental properties with great cash flow. If you want to know how much my houses have appreciated, I broke down each rental and how much money it has made below.
Rental 1
I bought my first rental property for $96,900 on 12/5/2010. At the time I bought it, I knew it was worth at least $125,000, which is not a huge spread between the buy price and fair market value, but the home needed less than $2,000 in repairs.
The house is now worth at least $165,000 and most likely more. I had it appraised earlier this year, and the appraisal was $165,000 and our market values have increased since that time. If the house is worth $165,000, then my net worth increased about $66,000 after you subtract the repairs. The home was rented out for 1,050 a month when I first bought it and now is rented out for $1,400 a month.
Rental 2
I bought rental property number 2 for $94,000 on 10/5/2011. This home needed much more work than number one, and I spent about $15,000 repairing the house. At the time I bought this house, I thought it was worth $140,000 after it was repaired, and this house is now worth around $175,000. That leaves me with a net worth increase of about $66,000 on this property as well.
This house has been rented to my brother-in-law since I have owned it. The rent has been steady at $1,100 the entire time but could be $1,400 to $1,500. My brother-in-law has a house under contract and will be moving soon.
Rental 3
I bought my third rental property for $92,000 on 11/21/2011. This house needed repairs, and I spent about $14,000 getting it ready to rent. At the time I bought this house, I thought it was worth $135,000 fixed up, and this house is now worth around $170,000, which creates a net worth increase of $64,000.
This home has been rented to the same tenants for $1,250 a month, but we just raised the rent this month to $1,300 a month. It would probably rent for $1,400 to $1,500 to a new tenant.
Rental 4
I bought rental property number 4 for $109,000 on 1/25/2012. This home also needed about $14,000 in repairs before it could be rented. At the time I bought this house, I thought it was worth $145,000. This house is one of my most valuable rental properties and is worth $185,000 in today’s market. That leaves a net worth gain of $62,000.
This home was rented for $1,300 up until this year when I rented it to new tenants for $1,500 a month.
Rental 5
I bought rental property number five for $88,249 on 12/14/2012, and it needed more repairs than the others. The market had definitely begun to improve at this point, and finding a home that was under $100,000 was very tough. This home was a good deal, even though it needed $18,000 in repairs. I thought it was worth around $130,000 when I bought it, and I now think it is worth $165,000. That leaves a net worth increase of $59,000.
This home has been rented to the same tenants for $1,200 a month.
Rental 6
I bought rental property number six for $115,000 on 3/7/2013. This house needed about $15,000 in repairs, and I thought the property was worth about $150,000 after it was fixed up when I bought it. It is now worth $170,000, and that leaves a net worth increase of $40,000.
This home was first rented for $1,300 a month until earlier this year it was rented for $1,400 a month.
Rental 7
I bought rental property number 7 for $113,000 on 4/18/2013. This house needed only $9,000 in repairs, and I thought it was worth $155,000 when I bought it. This neighborhood has done great, and the home is now worth $185,000, which leaves a net worth increase of $63,000.
This home has been rented for $1,400 a month since I bought it.
Rental 8
I bought rental property number 8 for 97,500 on 11/18/2013. The home needed $15,000 in repairs, and I thought it was worth $150,000 once fixed up. It is now worth $165,000, and that leaves a net worth increase of $52,000.
This home has been rented or $1,400 a month since I bought it.
Rental 9
I bought rental property number 9 for $133,000 on 2/14/2014. This home only needed $4,000 in work before it was rented, and I thought it was worth $155,000 after it was repaired. I think it is worth $165,000 now, and that leaves a net worth increase of $28,000.
This home is rented for $1,400 a month.
Rental 10
I bought rental property number 10 for $99,928 on 4/13/2014. The home only needed $3,500 in repairs before it was rented, and I thought the home was worth $125,000 when I bought it. I think it is worth about $130,000 now, leaving a net worth increase of $26,500.
This home is rented for $1,250.
Rental 11
I just bought rental property number 11 on 7/24/2014. This house will need about $15,000 in repairs, and I paid $109,318. I think this house is worth $155,000 repaired, leaving a net worth increase of $30,000.
I think this home rents for $1,400 a month.
What is the total gain?
If you add up all these numbers, my total net worth has increased by $556,500, but these numbers do not tell the entire story. I had more costs than I listed when I first bought these houses, but I did not go back through each closing file to get those exact costs. On many of these properties, I had the seller pay some closing costs, which covered much of my buying costs. I also had some carrying costs while I was getting the properties repaired and they were not rented out yet. However, I also did not include any of my cash flow or the money I made on these properties since 2010. I used all of my cash flow to pay off rental property number 1, which added up to over $70,000. That $70,000 in cash flowdefinitely covers all the closing and carrying costs I had on each property and went directly to increasing my net worth by paying off a loan. Speaking of paying down loans, I did not include the equity I have gained over the last 3.5 years by paying down my loans. I have paid down thousands of dollars of loan balances with regular payments on my rental properties.
Net worth is not money in my pocket but what I am worth on paper. Even though it is cool to see this number increase over time, this money is not all readily available. I would have to sell my rental properties to see this money, and I would not see all of it. There would be selling costs when I sell the properties and taxes owed once I sold them. Since I am using the depreciation on the rental properties to save me in taxes, I would have a higher than normal tax bill because I would have to recapture that depreciation.
What about in 2019?
I have 20 rentals that have increased my net worth about $3,000,000 in the last 9 years. I have gotten lucky that Colorado has appreciated like crazy, but they were still awesome deals even without that appreciation. They make me about $13,000 a month after all expenses. The cool part is I have spent less than $350,000 on the properties after refinancing some to take money back out. Talk about an amazing investment!
You can see all my rentals here.
My book on making money with rental properties
I provide a lot of information on my blog and YouTube channel, but I also have written six books. My book Build a Rental Property Empire has been a best-seller for years. It goes over everything I do to find, finance, repair, manage, and even sell my rentals. I also added a commercial chapter to go over that aspect as well. You can find the book on Amazon as a paperback, audiobook, and Kindle. Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely.
Conclusion
It can take time to make a lot of money with rentals, but it is possible. Over the years I have bought a 1999 Lamborghini Diablo, a 1998 Lotus Esprit, a 1981 Aston Martin, and more thanks to the rental properties. The rentals have also allowed me to be aggressive with my house flipping business because I know I have that cash flow coming in every month. We flipped 26 houses last year!
I am a big believer in making big goals and one of my goals is to purchase 100 rental properties by 2023. I have been a real estate agent and investor for more than 15 years, and I love the income my rental properties provide. Buying 100 rental properties will allow me to retire with more than enough money to reach my current dreams and goals. I do not want to buy 100 properties quickly without concern for the returns or risk. It takes a lot of money, time, and effort to buy 100 properties in the right way. I only buy houses that are well below market value and have great cash flow.
I first wrote this article in 2013, but have tried to update it frequently. I now have 20 rentals that make me over $10,000 a month after expenses. I am way behind on my goal, but many things happened that I could not have predicted like our housing market going crazy. I have bought commercial properties in the last few years instead of residential because they have been better money makers in my market.
Why I made a more challenging goal
In 2010, my original goal was to buy 30 rental properties in ten years. I based that goal on what I thought I could realistically achieve when I started buying rentals. A couple of years ago, I realized my goal was too easy because I knew I could buy 30 houses in ten years. I had given myself no room for improvement in my investing strategies or real estate business! At the start of 2013, I reworked all my goals including my rental property purchase schedule. My new goal was to buy 100 rental properties by January 2023 because it challenged me and would make me work hard. I had no idea when I first made this goal how I could buy 100 rental properties, but that is why we make big goals; to challenge us to do more and to change the way we do things.
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Why real estate?
I want to buy 100 rental properties because of the income and freedom that 100 houses will give me. I make over 15 percent cash on cash returns on my rentals because I purchase them below market value with great rent to value ratios. If I can buy 100 rental properties with the current cash flow requirements I have, I will make a lot of money. According to my calculations, I will be making over $900,000 a year in cash flow, have at least 60 houses paid off, and have over 11 million in equity in my rental properties. Those figures are not adjusted for inflation and assume no appreciation or rent increases. That kind of income should allow me to afford whatever my family and I want and allow us to do whatever we like. We only live once and I want to get everything that I can out of life.
The first part of this article discusses the philosophy behind buying 100 rental properties, why it is important to have big goals, and why it is important to think big. The second half of the article discusses the numbers and a detailed purchase schedule.
Is it possible to purchase 100 rental properties?
To be completely honest, I do not know how I am going to buy 100 rental properties by January 2023. I do not make nearly enough money to buy 9 or 10 houses a year. I have barely been able to buy three houses a year. I bought my first rental property in December 2010, and I started my rental property purchase goal on that day. I should have had three by December 2011, six by December 2012, and nine by December 2013. I started out very slow buying only one rental in my first year. I have picked up speed and as of March 2016, I own 16 rentals, still behind where I had hoped to be. That does not mean I will not reach my goal. The reason I have not purchased as many rentals lately is they are much harder to find in our market. Our prices have increased significantly making it harder to cash flow. I have been buying many more fix and flips since I cannot find rentals.
Why do I think I can purchase 100 rental properties by January 2023 if I am so far away? After reading and listening to books on how to become wealthy I started reworking my life goals. A couple of ideas are repeated in books and audio tapes beginning with Think and Grow Rich by Napoleon Hill. Think and Grow Rich was published in the early 20th century after Napoleon Hill followed Andrew Carnegie for decades. Carnegie was one of the richest men in the history of the world and wanted someone to study rich people in the world and write a book about how and why they became rich. Because Carnegie was one of the richest people in the world, he was able to grant Hill access to most of the world’s wealthiest people. Think and Grow Rich is now known as one of the first self-help books, and many of its basic ideas are still taught today by the world’s most famous life coaches and teachers.
How will my attitude affect my success?
Being positive is a theme that is repeated in every self-help book and audio recording I have ever listened too. I am a strong believer that our attitude has a huge influence on our success in life. The books range from slightly crazy to extremely scientific reasons for how being positive can greatly affect the success we have in our lives. You may have heard of the law of attraction, which states that the universe will return to us whatever we put out. If we are positive and happy, we will get positive and happy things back. If we are negative and sad, negative and sad things will come our way. I am a very logical and scientific person and was not sold on this idea right away. I had to know why this would happen. How could being positive magically bring positive things into our lives?
I started doing research on the brain and on how the law of attraction theory worked. I found out that it is not all magic, there are scientific reasons why the law of attraction works. It is based on the subconscious part of our brain and on how it operates our bodies. We know that our conscious mind is only a fraction of what our brain is responsible for. Our subconscious mind is constantly working to keep us alive by telling our heart, lungs, muscles and the rest of our bodies what to do. Most of our movements and actions are performed by our subconscious, not our conscious mind. We do not have to think about walking, talking, driving, writing, or even most of our daily tasks. By doing those things repeatedly, we have programmed our minds on how to do them.
Tying this back into the positive thinking idea, if we are always thinking positively, our subconscious will think positively, too. If our subconscious thinks we are happy all the time, it will do what it can to make us happy. Why do we care what our subconscious thinks? It is much smarter than our conscious mind. The subconscious is responsible for handling millions of tasks at once, while our conscious mind can only handle a handful of ideas at once. If we let our subconscious know what we want it will help guide our lives and help us to get what we want. Whether it is love, happiness, money, or material items our subconscious has much more power than we think. The theory also states that you must think about what you want, not what you do not want because our subconscious cannot tell the difference. If you are constantly thinking about not having money, then your subconscious will do its best to make that come true as well. If you are constantly thinking of not getting sick, our subconscious will do its best to get you sick. Think of being healthy, think of being rich, and think of the good things, not the negatives.
Why such a big goal?
Almost every self-help book will tell you goals are extremely important. Without goals, we have no direction, no path, and no idea of what we really want in life. There are varying ideas of how our goals should be constructed. Some say we just need broad wide-open goals such as being as happy as possible all the time to make whatever is best for you to come to you. Others say to be as specific and detailed as possible with your goals, break your goals into smaller goals, and then have a period for when those goals will be accomplished. Eventually, you will have a detailed blueprint for how you will get to where you need to go.
Some people say you need realistic goals and others say you need outrageous goals. As you have probably guessed, I like outrageous goals! The reason I like outrageous goals is that they are challenging! If I know that I can reach a goal and if I know exactly how to reach it, where is the motivation for me to push myself? I want goals that make me think and reach for new ideas and systems. I have no idea what opportunities or challenges will face me in the future, so why should I limit my future goals to what I can do now? I may have a huge increase in income or find a new system that allows me to buy houses cheaper. I have such a lofty goal because I have no idea what could happen.
Who will I need help from?
Many of the self-help books also talk about how we all need friends, co-workers, or acquaintances to help us reach our potential. Some use the term mastermind to describe groups of like-minded people who meet to help each other succeed by offering advice and motivation. The idea is that the more people to brainstorm ideas, questions, problems, etc. the better the chance a great idea or solution to a problem will come about. I do not have a mastermind group (this has since changed), but I have recruited my best friend to work with me and learn the real estate business. He was a top-level manager in the corporate world and left his six-figure salary behind to learn real estate from me. I benefit by having a new mind to bounce ideas off and have more help in the office. He benefits by getting out of the corporate grind and learning how to be truly wealthy. He also has a flexible schedule and he is not stuck behind a desk all day.
Why focus is so important
The self-help teachers also say how important it is to focus on one task or goal. All the greats had something in their mind that they really wanted. They did not let anything stop them until they got what they wanted or died trying. I have always thought of myself as being able to multitask, a jack-of-all-trades type of person. So far, it had worked out well, but I know I can do better. I know there are things I can improve in my business to make it run better and make more money. I have always thought that I knew everything about finding good deals in real estate. After starting this blog, I have realized that there is a whole world I have been missing in direct marketing to off-market properties. Instead of trying to manage five different sources of income myself, I need to delegate less important tasks to my staff and focus on the real moneymakers. If I can focus intently on a couple different areas of my work instead of just skimming over 50, I know I can improve my numbers significantly.
Why visualizing the goal being achieved is important
Many great athletes will tell you how important visualization is to succeed in sports. Great golfers visualize exactly how their shot will look before they hit it. Basketball players repeatedly visualize hitting the game-winning shot. The wealth teachers are all huge supporters of visualization. They say visualization will give your subconscious a clear picture of what you want and then your subconscious will do its best to make it happen. If you want to change your life, start visualizing how it should be every day. Better yet, go see, touch, and smell the things you want. Test-drive the car you always wanted, look at your dream home, or immerse yourself with the things you want and your subconscious will get to work. I wrote a ten-year dream story on exactly how I wanted my life to be. I described a beautiful house and in three months, I bought that house. I was not even planning to move and in no way thought I could afford a house like the one I have now, but it became a reality.
Using all I have learned to reach my goals
Based on the ideas I have just discussed, I think I have a good chance of reaching 100 rental properties. I still do not know exactly how it will happen, but I know it will or I will find a better and more challenging goal. I have to train my subconscious to help me reach my goal. I have to be positive all the time. I have to think about my goals constantly and break it down into manageable pieces. I must have help and I have to focus more intently on my important goals. I also have to visualize myself already achieving my goals and having everything I want. Even if not all of this makes me rich, worst-case scenario, I am a positive, determined, focused person who knows exactly what he wants.
Breaking down big goals makes them more realistic
I have broken down other goals in my life, but I have yet to break down a goal this big! I am going to work through the goal while writing the blog and see where I end up in 9.5 years. I wanted to write this article to help convince myself that it is possible to buy 100 properties. The first part of this article was all about my mindset. Now, let us get down to the numbers. Here is a year-by-year breakdown of how I plan to purchase 100 rental properties.
Year one
With my current income, I can purchase three rental properties a year and I have purchased that many in the last three years. I should be able to do a cash-out refinance on at least one rental property in 2014 and get enough money to buy another property. I am also counting on my new attitude and work ideas to create enough extra income to purchase one more rental property. I also just acquired a HELOC on my personal residence for $60,000. I think that will allow me to purchase one more rental. New goal for 2014 is to purchase six long-term rentals.
I will have 15 houses with about $9,400 in monthly cash flow. That is $112,800 a year all going toward paying off mortgages on my properties. I will have paid off one house at the beginning of 2014 and will pay off one and a half more in 2014.
Year two
In 2015, with income and savings, I should be able to purchase four properties. I should be able to do another cash-out refinance and buy another rental property as well. I also believe my continuous improvements will allow more increases in income, through either listing or flipping houses. The increased income will allow me to add another rental and HELOC another as well. I am hoping the addition of my friend beginning to work with me will bring in more income from his real estate activities, which will allow another purchase. My goal for 2015 is to purchase nine rentals.
I will have 24 houses with about $15,200 in monthly cash flow. That is $182,400 a year all going toward paying off mortgages. I will pay off the other half of one property and two more rentals in year two and will have four properties paid off.
Year three
I believe I will increase my income and savings enough to be able to buy five rentals. I will have 24 rentals and I should be able to refinance at least two of those properties. That will allow two more purchases and the HELOC should add the flexibility to add another rental. I am still planning to add to my income every year with increased business. This year I see a big jump in income with my friend being around for his third year and our new marketing and listing techniques taking off. I see three more rental properties being purchased from new income. My goal for 2016 is to purchase 11 rentals.
I will have 35 houses with about with about $22,200 in monthly cash flow. That is $266,400 a year all going to pay off mortgages. I will pay off four and a half more properties for a total of eight and a half properties paid off.
Year four
From my current income, I will be able to buy eight rental properties. I will continue to refinance two properties a year, which will allow at least two more purchases. I am also going to use the HELOC to buy another, and I am still planning to increase my income. I am going to stay conservative and assume enough income to buy one more property this year. My goal for 2017 is to purchase 12 rental properties.
I will have 47 rental properties at this point with about $31,400 in monthly cash flow. That makes $376,800 a year all going to mortgage payoff! I will pay off the half of a mortgage left over from 2016 and five more properties in 2017, making 14 properties paid off.
Year five
From my current income, I will be able to purchase nine rental properties. I will refinance two more properties and use the proceeds to buy two more rentals. I may not have enough money in the HELOC this year so I will not count on that, but I will count on my income increasing enough to purchase one more rental. My goal for 2018 is to purchase 12 rental properties. Note: To buy this many properties I will need about $300,000 in cash for repairs and down payments.
I will have 59 rental properties with a monthly cash flow of $41,000. That makes $492,000 a year all going to mortgage payoff. I will pay off seven and a half more properties in 2018 making 21.5 properties paid off.
Year six
From my current income, I will be able to purchase ten rental properties. I will refinance two more properties and use those proceeds to buy three more rentals. With inflation and appreciation, I should be able to refinance the properties for more money than in previous years. I will not use increased income to buy another property. If my income increases, I will use it for fun stuff such as vacations or cars! My goal for 2019 is to buy 13 rental properties.
I will have 72 rental properties with a monthly cash flow of $51,600. That is $619,200 going toward mortgage payoff. I will pay off the half mortgage from 2018 and nine more properties in 2019 making 31 properties paid off.
Year seven
From my current income, I will be able to buy ten rental properties. I will refinance two more properties and use that money to buy three more rentals. I will not count on any more raises in income since I do not need it at this point. My goal for 2020 is to purchase 13 rental properties.
I will have 85 rental properties with a monthly cash flow of $63,400. That is $760,800 a year going towards mortgage payoff. I will pay off 11 more properties in 2020 making 42 properties paid off.
Year eight
From my current income, I will be able to buy ten rental properties. I will refinance two more properties again and purchase three more rentals with that money. My goal for 2021 is to purchase 13 rental properties.
I will have 98 rental properties with a monthly cash flow of 75,600. I will have $907,200 a year going towards mortgage payoff. I will pay off 14 more properties in 2021 making 56 houses paid off.
Year nine
I only need to buy two more properties to reach my goal! I made it ahead of schedule and when I started writing this article, I was not sure how I would be able to reach 100 properties by 2023. I do not need to refinance any properties at this point and I can start using my income any way I want or I could retire!
I will have 100 rental properties with a monthly income of $82,400. I will have $988,800 a year going to whatever I want it to go to at this point. I can stop paying down mortgages if I want to or I could keep buying properties if I get bored. I came really close to the figures I estimated before writing this article. Falling just short of one million in income from my rental properties (which was more than I thought) and just shy of 60 properties paid off.
Assumptions in my plan to purchase 100 rental properties
You may be wondering how I came up with my figures. To be honest I used very basic figures to make things easy on myself.
I assumed $600 in monthly cash flow per property. I am making between $500 and $700 per property now.
I assumed each mortgage that I paid off would increase monthly cash flow by $400.
I do not assume any inflation because that would cause the numbers to be much more difficult to figure!
I assume my portfolio lender will continue to lend on as many properties as I want. I will have 43 houses financed at one time and then those will start to decrease as I pay them off.
I assume I can continue to do cash-out refinances with my portfolio lenders.
I assume interest rates will not increase significantly.
I assume rental rates will not go up.
Additional benefits of rental properties that my income projections did not account for
Rental properties have great tax advantages, which I discuss here. Every rental property can be depreciated, which will save me thousands in taxes each year. I assume my rental properties will not appreciate, but they have already seen huge appreciation in the last two years, increasing my net worth by $600,000. I assume rents will not increase, but my rents have increased as well over the last couple of years. I rented my first rental property for $1,050 a month in 2011 and it now rents for $1,300 a month. I will most likely be better off than my projections indicate if I can buy 100 rental properties.
Potential roadblocks
These are many assumptions and one or more of them may not work out as I plan. However, other factors may help me do even better than I planned or balance out any roadblocks I run into.
New ways to find properties: I am going to start direct marketing to off-market owners. This should allow me to buy properties even further below market, and I may even find a few owners who will finance down payments. I recently realized I could use my IRA to buy properties!
Private money: One of my goals is to find new sources of private money that will allow me to finance more repairs and down payments. This would allow me to put less money into properties and buy them faster.
New income sources: I have no idea what the future holds as far as opportunities and money. I may find a gold mine that will allow me to buy properties for cash and not have to worry about financing at all!
I assume I will not do anything with the houses I pay off free and clear, but if needed to I could easily get a line of credit or refinance one of these houses to bring in enough money to buy a few new properties.
What will I do in 2023 if I reach my goal?
I have many things I would love to do if I did not have to work. Here is a list of a few of the things I would love to do with one million dollars a year coming in and no job!
Start a pizza restaurant
Start a car dealership
Travel the world with my family
Donate time and money to those less fortunate
Play in the World Series of Poker
Attend a Super Bowl
Play golf all over the world
Buy a Lamborghini Diablo (done!)
Buy a beach house
Help teach others about real estate (doing my best now)
I have a much longer goal list than what is above and I hope to do many of these things before 2023. I know I will have time, money, and the freedom to do these things at that time.
Conclusion
I plan to purchase 100 rental properties by January 2023, but I realize that may not happen. If something better comes along to change my plan, I am ready to embrace fully any new opportunities.
Update on my plan 2014
I have already changed focus slightly in 2014 to fix and flipping over buying long-term rentals. I have done this for two reasons:
There have been more fix and flip opportunities than rental opportunities in my market.
The money from flipping will help me buy more rentals; rentals take a great deal of cash.
It seemed crazy to think I could increase my income enough to buy this many properties when I first made this goal in 2013. However now that it is late 2014, I can easily see myself making more than enough money to buy 100 rental properties and have plenty of money left over to do other fun activities. At some point, I may decide it is better to buy larger multifamily buildings than single-family homes, but for now, I see more opportunity in the single-family market in my area than multifamily.
Update on my plan 2016
The market has gotten even crazier in Colorado. Houses I was buying for $100,000 are now at least $160,000 or more. The rents have not increased nearly as much as house values have increased. It is very hard to find rentals and I have stopped buying them in Colorado. I have started to look at other states including Florida for a new market.
I also stopped paying off my mortgages early. I decided my money was better used to buy as many homes as I could. It has paid off buying 16 rentals in the last five years since our market has gone up so much. I have invested about $300,000 in buying my houses and my equity is close to $1.5 million. I have even decided to sell some of my rentals and re-invest that capital into more properties in another market.
I wrote this goal out in 2013 and updated it in 2014, and it is now 2016. I think goals are vitally important to achieving what you want in life. Will I reach this goal? I do not know. If I don’t reach it, will I be a failure? No! I am already way ahead of where I would have been without this goal. That is the point of goals, to motivate you to go farther than you think you can.
Update on my plan 2018
Right now it is the middle of 2018 and I have not come close to where I should be with my goal. Am I disappointed? No. Many things have happened that are out of my control; good and bad. The biggest challenge I have faced is the housing market in Colorado. Prices have almost tripled since I made this goal. Some of the rentals I bought for less than $100,000 7 years ago are worth close to or more than $300,000 today. I can no longer cash flow on residential rental properties in my market. I have thought about buying rentals in Florida, but in the end, decided to buy commercial properties here. I even bought a 68,000 square foot strip mall this year. I am buying rentals worth a lot of money, but not as many as my plan called for. Sometimes we have to change our plans based on changes in our lives or markets.
I have also focussed more on flips because I can make money with those in my market. I flipped 26 houses last year!
I strongly believe that real estate is one of the best ways to achieve wealth. Rental properties, in particular, are an awesome way to build net worth and create passive income.
I own a real estate brokerage, have been an agent for 17 years, and flip houses as well. My strategy is to make as much money as I can by selling houses as an agent or flipping houses and investing that money into rentals. Real estate has made me quite a bit more than a millionaire and anyone with a work ethic can do it. If you become a millionaire, it may not mean what it once did thanks to inflation and the cost of living. However, being a millionaire is still a big deal, and only 5 percent of American households have a net worth of one million dollars or more.
Why is real estate a great way to become a millionaire?
Real estate is one of the best ways to build wealth with or without a lot of money. I am not saying you don’t need any money or that it is easy, but it is possible. One of the main reasons real estate is a great vehicle for wealth is the ability to use leverage. Leverage is basically using loans or other people’s money. You can get loans relatively easy on real estate because it is a hard asset. The more money you have the easier it is to make money in real estate. While it is possible to get started with nothing or next to nothing, it is much easier if you have money to invest.
While you can borrow money to invest in other businesses, it is usually not as easy as it is to borrow against real estate. Banks love to lend on houses and commercial properties because they have an asset backing the loan. If banks lend on stocks or businesses and they go under the bank has nothing. If they loan against a house and the borrower can’t make payments the bank can take the house.
Because banks like to lend on real estate you can get some of the best loan terms available. Real estate also has amazing tax advantages that are not available with other investments. You can buy and sell a primary house, make $200,000 and pay zero taxes on that profit in certain scenarios. Not tax-deferred, no tax at all, ever. You can also force appreciation with real estate; you do not have wait for it to go up in value. I flipped 26 houses last year and all of them I bought for much less than they were actually worth. You can also make improvements to a property to increase the value. All of this can occur while you are making money on it every month after paying expenses including the mortgage.
It is also possible to take money out of your real estate investments by refinancing properties. You can use that money to buy more and more properties. This is what I have done in my career and one of my only regrets is that I did not start sooner!
Is a primary house an investment?
I want to start with the question of whether a primary residence is an investment. Many people talk about how it is dumb to buy a house and smart investors rent. I disagree. I think a primary residence can build a lot of wealth. I have increased my net worth buying and selling houses that I lived in over and over.
I bought my first house when I was 22 years old. I paid $190,000 for the house, which was full retail value for it. I lived there for 7 years and spent at least $10,000 on materials to remodel the home. That money does not count the time I personally spent updating bathrooms, painting, installing fixtures and fixing many other small things. I sold the house for $180,000 after doing all that work! It did not help that the market dropped, but I could have done much better if I would have been patient and waited for an awesome deal. Not every personal house is a great investment but I also did not have to pay rent, I was not forced to move when the landlord decided he wanted to sell, I could have pets, and I could change the houses however I saw fit. I did much better financially with my second house.
I bought my second house from the foreclosure sale for $215,000 in 2009, put less money into it for repairs, and sold it for $343,000 three years later. I bought the house with money I borrowed from my sister and father in law because I had to pay cash at the foreclosure sale. I was able to refinance all of that money out with a conventional bank a couple of months later. The awesome part about making so much money on that house was that it was tax-free. When you live in a house for 2 out of the last 5 years the money you make is usually tax-free! I sold the house to my friend so I had no real estate commissions to pay. We spent less than $10,000 on the house while we owned it and we did not even have to change the carpet.
I took the money I made from that house and used it for a down payment on a house I purchased for $560,000 in 2013. I have owned that house since and it is worth more than $850,000 now. I was lucky that our market has taken off, but I also focus on getting great deals on all the houses I buy. My loan on my personal house is less than $400,000, which means I have created $450,000 in net worth through my personal residences. that money is tax-free if I ever decide to sell the house I am in now. They limit your tax-free gain to $250,000 for an individual or $500,000 for a couple. I can also get a line of credit or refinance the house to pull money out tax-free and use it to invest.
I have not become a millionaire through these houses, but they have definitely helped to grow my net worth. When you buy a house as an owner occupant you can put very little money down. Because you are putting little money into the deal, the returns can huge if you got a great deal or values increase. If you do not have a lot of money to invest in rental properties, buying a personal residence is a great way to start. When you gain equity in the house or buy below market value, you can get a line of credit, pull any money you invested out plus some and use that money to invest. I bought my first rental property by refinancing the second primary house I had.
Why are rentals a great source of wealth?
The biggest increase to my net worth came from rental properties. I always buy properties below market value, which creates instant equity. When I buy a rental property for $120,000, it may be worth $160,000 or more after spending $15,000 to fix it up. When I buy that property and fix it up, I add $25,000 to my net worth. I have 20 rental properties now and all of them have added money to my net worth in multiple ways:
Buy below market value
You can buy below market value in many different ways. You do not have to be a professional investor to do it. There are deals on the MLS, on auctions, and even on Facebook! Buying below market value allows investors to use the BRRRR strategy which in turn can get you into rentals with very little money. Every house I buy adds $20,000 to $50,000 to my net worth because of the great deals I get.
Appreciation
I never count on appreciation but it is a nice bonus. I buy rentals that will make money today without prices increasing. However, my rentals have seen huge increases in prices. I started buying rentals in 2010 and spent about $1.3 million on 13 residential properties ( I also have commercial). Those rentals are worth over $3 million dollars today. Part of that is appreciation and part of it buying below market. The cool part is I spent very little money buying them after refinancing a few.
Cash flow
My rentals make me about $12,000 a month in passive income every month. I have property management who takes care of them for me and it takes very little work once I buy and renovate the property if needed. That money will keep coming in as long as I own the properties and will increase over time as rents go up with inflation. I love rentals because of the steady money they bring in.
Equity pay down
I have mortgages on all of my properties and my tenants are slowly paying them off for me. Every month my net worth increases because the mortgage balances on my properties decrease. This is on top of the cash flow I make every month.
All of these factors have increased my net worth directly or given me more cash, which allowed me to invest in more properties and add to my net worth. Rentals did not make me a millionaire overnight, but they have been an awesome investment and made me a millionaire a few years after I started buying them. Making a lot of income is great, but people can make hundreds of thousands of dollars a year with nothing to show for it if they spend it all.
How can you make money flipping houses?
One way I make a high income is by flipping houses. I flipped 93 houses in the last five years but started doing one or two a year with my father many years ago. Flipping houses is not as glamorous as they make it out to be on TV, but it can be a lot of fun as well as lucrative. I typically buy a house for $150,000 to $250,000, spend $20,000 to $50,000 fixing it up, spend another $20,000 to $30,000 on other costs, and sell for $250,000 to $350,000. We try to make $30,000 on each flip we do. Sometimes we do and sometimes we don’t.
I have used the money I make from flipping to buy more rentals and buy more and more flips every year. I would love to have more rentals but it is actually harder to find good rentals than good flips!
Below is a video of one of my flips.
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How much money can you make being a real estate agent?
I have also made very good money being a real estate agent. I use to be an REO and HUD broker which meant I sold foreclosures for banks. I had multiple years that I made well over $100,000 a year after expenses from being an agent. I now own my own real estate brokerage but focus on the flips more than selling houses.
Not only is being an agent a great way to earn income that you can invest, but it is a game changer for my flipping and rental property businesses. I am able to find more deals and pay less in commissions because I am an agent.
How long did it take me to accumulate one million dollars in net worth?
I bought my first rental property at the end of 2010 when I figure my net worth was about $180,000. I had been a real estate agent for 8 years, and flipping houses with my father for many years, but had not accumulated a huge amount of money. I invested money in the stock market, but most of my net worth was in my personal house.
I hit one million dollars in net worth in 2013. At the time I had seven rental properties, which had contributed greatly to my net worth. Not only did buying below market value, and appreciation increase my net worth, but I was saving as much money as I could to buy rentals. I put 20 or 25 percent down on each property and made repairs to most of them. Here is what a typical rental looked like:
Buy for $100,000
Put down $20,000
Spend $15,000 on repairs
When I was done the house was worth $150,000 to $160,000
After buying and fixing up the rental I had a house that was worth $160,000 with a loan that was $80,000. After a couple of years that house increased to $180,000 in value and my loan balance decreased to about $77,000. For each of my rentals, I gained $100,000 or more of net worth after a few years of ownership. On some of my houses, I built much more net worth because I got really great deals on the property. That does not count the cash flow I earned each month, which was about $500 per month, per property.
Some of my net worth was from my personal residence and other investments, but most of it was from rentals. It took me about four years to accumulate a net worth of one million dollars from just rentals. While it took cash to buy those properties, it forced me to save money as well. I know I would not have saved as much had I not been buying rentals.
What if you don’t make a lot of money?
My story may not be relative to many people. I have a successful real estate sales team, a successful fix and flipping business, and a blog that makes money as well. I have had extra money to invest in rentals to increase my net worth. Even if you don’t have a lot of cash to invest, you can buy real estate. You can buy houses with little money down as an owner occupant, and with many other strategies. You could turn owner-occupied houses into rentals or sell them, collect tax-free profits, and re-invest it into more properties.
You may not be able to buy as many rentals as I did as fast, but you can definitely start building wealth. How fast it takes you to reach one million dollars in net worth depends on many factors like:
How much cash you have to invest
How good of a deal you get
How many houses you buy
How fast your market appreciates or possibly depreciates
What strategies you use you to accelerate growth like refinancing, house hacking, or the BRRRR method.
Conclusion
It is possible to build a net worth of one million dollars in a couple of years with real estate. It also may take five years, ten years, or even fifteen years. Only five percent of households are millionaires so even if it takes a while you will be ahead of the pack. It may be tough to get your first property, but the more you buy the easier it gets and the more money you will make.