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Surround Yourself with People Who Are Where You Want to Be

September 14, 2016

Busted!

High school you skipped out on class with a few friends to avoid the drudgery. They found you behind the portables playing hacky sack. Chuck was smoking a cigarette and Wayne was decorating a no parking sign with a sharpie.

Hauled into the office, the vice principle pulls you aside. They always do this because you have “potential”. She once again says:

“You are the average of the five people you spend the most time with.”

Well you happen to like your friends and don’t want to stop hanging out with them just because they don’t have “potential”. That would be lame. So you obviously don’t act on her advice.

The problem with that advice is that it is often taken as removing the people from your life who drag you down. A Negative Nancy who is always upset about something and you rarely have fun with any more. A Pulldown Paul who attacks rather than supports your wacky ideas and ambitions.

Good advice, certainly. But on the positive side, I prefer the advice:

Surround Yourself with People Who are Where You Want to Be

No matter what goal you have, someone has accomplished it before. To 99.99% of the population, your goal sounds ridiculously impossible. They might not say it to your face, but you can tell they think failure is inevitable.

To the 0.01% of the population who has reached your goal, they know it is possible. They can see a path where is works out, although it takes a lot of work and some luck.

The good news is you don’t have to spend a ton of time with these people to get an uplifting benefit. They don’t have to be one of the top five people you spend the most time with, they just have to be one of the top five people you spend time discussing your goal with.

If it helps, think about it in terms of social media. If you follow hundreds of bloggers, you’re likely to get good ideas from them. They may even follow you back, and eventually, opportunities can arise from it. You might collaborate on a post together, which allows you to piggyback off their following to reach your own goals. In fact, it can be useful to know how to buy Instagram followers to expand your following further, which may open even more doors for you.

Talk About Different Things with Different People

When I think about some of my hobbies and goals, I realize for each one there are one to three friends who share the same interest. Rental property investing, working out, fantasy baseball, running a business, coding, reading, blogging, etc.

It is foolish to try to talk about fantasy sports with someone who doesn’t play. They just don’t care that your running back was injured and didn’t get any points. Don’t be that guy.

But if you have two friends who are also interested in rental property investing, ask yourself “are they where I want to be?” Most likely you are in the same position and not learning a lot from each other.

Find someone who is just a few years ahead of you – maybe has attained your five year goal of having 10 properties. Buy them a beer. In a couple months hang out again. It is a mistake to find someone 20 years ahead of your goal. Shockingly, there isn’t as much you can learn from them. They will be working on huge deals and their day to day will look nothing like yours. You can’t skip the in between stage.

I’m Heading to FinCon

I’m going through this process by going to FinCon next weekend in San Diego. It is basically a financial blogger conference.

I’m going to hang out with people in person who I can learn from in two categories: blogging and real estate investing. There are people who are way ahead, right at my level, and even behind me in one or both of them.

I am excited to learn a lot and make some new friends.

If you will be there, leave a comment so we can hang out!

Are You Interested in Hearing About Blogging and My Personal Attempts at Self Improvement?

I know you are interested in rental property investing, but I don’t know if you are interested in these other areas.

There are a lot of blogs that write articles about their experience blogging. They often encourage you to start your own blog and use their link to sign up. Are you interested in learning how to a blog can be beneficial for solidifying your thoughts and tracking your experience in rental property investing? Do you already have a website and are you interested in hearing my experience?

Same goes for more general self-improvement. Are you interested in hearing about financial matters outside of rental property investing? How about other things I am working on like becoming more disciplined in carving out time for different goals?

Let me know your thoughts so I can shape this website into whatever you guys and gals are most interested in!

Photo: Ron Lute

Rental Property Loans – What The First Time Real Estate Investor Should Know

September 9, 2016

You get it. No more convincing needed.

You understand there are multiple ways real estate creates spending money plus long-term wealth. You have a multi-decade outlook on your rental properties. You have even come to terms with the idea that smart leverage is the best way to earn huge returns in the long-run.

Now what? You are going to need to know if you qualify for a loan.

So, what should you know about rental property loans? Do you need to secure your loan using another property as collateral? Or could a secured loan calculator help you to work out how much money you might be entitled to borrow? Read on to find out more.

Investment Property Loans

A loan is just someone giving you money for a set future return. There are an infinite number of ways this can be accomplished, but we are going to just talk about conventional loans.

“But I heard I could get a better deal on owner-financing or approved for more loans through something called hard-money lending … why limit ourselves?” It boils down to risk, effort, and repeatability, but we won’t get into that here.

Conventional loans are given by banks and secured by the property itself. So if you stop making payments on your property, the bank has the right to take over ownership. But of course, this wouldn’t happen if you’ve decided to take out some bridge loans from a money lending company. This way, if anything were to happen, the bank couldn’t take over the ownership. But maybe that isn’t entirely a bad thing. It’s fair considering they own more of it than you and you didn’t keep up your end of the bargain. Therefore, it is advisable to get a loan from established sectors, that might assist you with effective plans to meet your demands.
The bank might also be ready to provide you with another kind of a bdo business loan to fund business operations and individual customers. The important benefit of this type of loan is its interest rate. That said, it is mandatory to make a proper plan before choosing any kind of loan.

What are the requirements for these types of loans?

A Moving Target

The requirements change over time. Most banks follow Fannie Mae’s guidelines, although there is some room for interpretation. The guidelines change too throughout the boom and bust cycle: what was allowed in 2007 is not allowed in 2016.

Here is the starting place for what you will need in 2016:

630+ credit score
20% down payment
2 years of tax returns in the same industry
6 months of cash reserves

And that is just for the first 4 properties. After that the rules change. Let me clarify the last two requirements (to the best of my understanding) because they are kind of confusing.

6 Months of Cash Reserves

You need cash in the bank to be able to pay all your mortgages for 6 months, including the new mortgage you are applying for plus taxes and insurance. This is just smart anyway – as much as I love rental properties, you don’t want to stretch yourself too thin.

If you are interested in your first $100k property, the monthly payment is likely around $600. Add to that your primary residence (if you rent, take your rent amount). For this example let’s use $1000. So you need $1600 times 6. $9600.

The good news is that these cash reserves don’t have to be all cash. If you have a stock account, 65% of its total will count (they adjust for volatility). If it is an IRA or something you would owe tax on, you will probably have to reduce that from the total as well. In addition, only half of the cash reserves can be from these illiquid stock accounts.

So back to the example where you need $9600 for cash reserves. $4800 will need to sitting in a checking or savings account (or even combined across accounts). If I have an IRA with $10k, I believe roughly $5k will count towards the cash reserves after accounting for the volatility hit and tax if you have to access it.

Debt-To-Income Ratio

The debt-to-income ratio (DTI) is possibly the most difficult part of qualifying for a rental property loan. Even folks with well paying jobs and lots of cash sitting around still can’t have too many debt payments.

One important thing to point out is that DTI is about the monthly payments, not about the total amount of debt you have.

First add up all your monthly debt obligations. This includes car payments, student loans, and the minimum payment for each credit card. Add all your mortgage payments including tax, insurance, and HOA (if you rent your primary residence, just take your rent). Be sure to include the new loan you are applying for – it shouldn’t push you past the limit.

Now figure out your monthly income before taxes. The day job should be pretty easy, but the rental property income is a little trickier. I believe if it is on the previous year’s tax return, you take the rental income and average it across 12 months. For the new property or new lease agreements, you can use 75% of the total monthly rent.

Let’s run through some example numbers. You have:

Primary mortgage or rent payments of $1250
Car payments of $250
Student loan payments of $400
4 different credit cards each with a minimum payment of $25
A previous investment property with payments of $600
The new investment property will also have payments of $600

So before the new property you have $2600 per month in debt obligations. After you have $3200.

Add up your income:

Job that pays $100k, or $8,333 a month
Rental income on your tax return of $1200 over the last year, $1k a month
New rental with lease of $1k in place, take 75% of that so $750

Your monthly income before the new rental is $9,333. After is $10,083.

Your ratio before the new loan: 28%

Your ratio after the new loan: 32%

Talk to Someone Who Knows More Than Me

This is intended as an overview of qualifying for a rental property mortgage. I am not an expert and I don’t even play one on the internet. There are thousands of lenders out there who work with investors, you should talk to someone about the specifics of your situation. Often, this is the best way to get useful advice. Speaking to experienced mortgage lenders could be extremely beneficial, so it might be worth getting in touch with someone like Dustin Dimisa. He is an experienced real estate investor and mortgage lender, so it might be worth looking at different ways to contact him. You could read some of the tweets from Dustin Dimisa here, for example. Hopefully, people like that will be able to educate you and help you to make some real estate investments successfully.

I am self-employed which surprisingly complicates things. No matter how much money I had sitting in a bank account, I wouldn’t have been able to get an investment mortgage my first two years after starting my company. They needed to see two years of tax returns to count any of my income. I would not have known that without talking to a lender, so could have put in a lot of unnecessary work to find a property I wouldn’t have been able to purchase!

If you are considering investing in rentals, talk to a lender now.

If you haven’t invested in a rental before, how are you going to take the next step? How about a short phone call with a lender?

If you have invested, what was the most surprising part of the investment mortgage qualification process for you?

What I Learned From Meeting Other Investors

August 30, 2016

“Find a mentor” is common advice. Or “surround yourself with people who have found success in what you are trying to do”. Then we think “ya ya good idea, but in the meantime I’ll just keep doing what I’m doing.”

It is easy to stay in our own little world. It is uncomfortable to put yourself out there and expose how much of a beginner you really are. Yet often what is uncomfortable is the most valuable thing you could be doing.

Last week I went to my first meet up – San Francisco Real Estate Investing Out-of-State. Here is what I learned.

People Want to be Active, Hands-On Investors in Order to Replace Their Job

This is something I already knew, but I expected the out-of-state investor meetup to have more passive investors. Wrong. It was still mainly people who want to be extremely hands-on, just do it out-of-state because there are much better deals.

By hands-on, I mean going out and finding off-market deals (which the presentation was about this month), negotiating, wholesaling, and managing repairs.

This is essentially a part-time job where they are their own boss. They want to get good enough at it so that they can replace their day job.

Real Estate Can Be Applied Creativity

I was really impressed by the creativity of some of the experienced investors. There are so many different ways to find and close a real estate deal. Here are some examples from the meeting last week:

Finding leads by going to the courthouse and getting a list
Finding leads with newspaper adds in small towns as part of a wider real estate marketing strategy
Finding leads with targeted Google ads
Finding expired listing leads through software systems
Finding leads through contractors who find a house with expensive repairs necessary the owner isn’t likely to want to pay for
Investigating leads by hiring someone on Craigslist to take photos
Investigating leads with a local wholesaler like Abound, sharing the deal
Seller financing – “I can offer $50k now or $60k paying $1k per month for 60 months”, basically a 0% loan for 5 years
And much more…

But My Goals Are Different

I want to put my money to work to earn a passive income. I don’t want a part-time job on the side*, nor want to do it full-time one day.

Meeting other investors was a great way to learn about wider trends from the world of real estate investing though. For example, it seems that more people are getting involved with mortgage note investing than ever before.

In case you were not aware, investing in notes and mortgages is a wealth-generating strategy that can provide consistent returns with predictable monthly payments to the investor.

When you purchase mortgage notes, you are not buying a property outright, but instead, you are securing the rights to the mortgage and note and, therefore, the mortgage payments.

Ultimately, it is amazing to think about just how much variety is out there for real estate investors nowadays.

As for me though, ideally, I spend as little time as possible on my investments. Yet I realize in real estate there is a function between time spent and investment gains. My goal is to find the sweet spot – how can I get 80% of the benefit for 20% of the work?

The goal of passive income points me to owning rental properties. Not flipping, not wholesaling.

This narrows it down, but there are still a lot of ways to invest in rental properties. At one end of the spectrum are REITs – basically stocks representing companies who invest in rentals. This is maybe 1% of the effort for 10% of the benefit.

At the other end is doing everything yourself – finding a deal, repairing the house, renting it out, and handling the on-going management. This is 100% of the effort for 100% of the benefit (but there are some big risks while you are still learning).

In between is everything else. This includes participating in pooled investments (which really varies in terms of time and returns) and notes (maybe 5% time and 30% benefit).

What is my current approach to get 80% of the benefit for 20% of the effort? Purchase turnkey properties where someone else finds the deal and does the rehab. Pay for a property manager to deal with the tenants.

Sure, it still requires time on my part, but not a whole lot. Even with conservative projections, I believe I can return 20-25% per year when you consider all the components of return. The fact that I’m ahead of projections, at 29% per year after 5 years, is great. I’m happy with that, I don’t need to chase greater returns with greater effort or risk.

What is your goal? To replace your job by being an active investor or to put your money to work and be passive?

*I do think it is really important to create a situation where your effort directly controls how much you make. Most people have no ability to change their income through their day-job, so the only way they can save more is spend less. They forget about the other side of the equation of increasing your income. This could be as simple as driving for Uber part-time or running your own business (whether real estate or otherwise).

I’m Married!

August 25, 2016

The impossible happened – the logical, cool nerd fell in love and got married!

The wedding and honeymoon were magical. Everything I had envisioned since I was a little boy (We returned from our honeymoon a few days back and I’m currently getting back in the swing of things. So if you left a comment, used the contact box, or replied to an email (if you sign up for email updates, you’ll receive 1-2 emails a week with juicy details), I’ll get back to you soon.

Marriage and Finances

This is a financial blog about rental properties, so let’s examine marriage through that lens.

Finances can be a huge strain on a relationship – it might even be the #1 cause for divorce. Each individual has their own ideas on money that might not be discussed. I suppose it all comes back to communication.

I am naturally a big saver. I don’t buy many things, even clothes – “I want for nothing” is a Brian-ism. But I do spend big on travel.

Without defining my approach and my wife defining her approach, we would likely just keep our previous behavior, and at the same time expect the other person to behave the same way. That is a recipe for disaster.

Rather than me just saving everything because I don’t spend it, I am going to have to communicate. We are going to have to set goals together and modify our behaviors to reach those goals.

Gen Y Finance Guy has a 50% savings rate goal to reach financial independence quickly. I don’t think we will be quite so ambitious, but simply having a set number and tracking it will help.

Now that I’m married, I feel greater responsibility in this area. I have heard it is a much bigger kick in the pants when you have your first child, but suddenly my decisions don’t just affect me.

Combining Finances – What’s the Right Way?

There are several options for how to combine finances once you are married. Or even not combine them at all.

You can have a joint checking account but keep open personal accounts with an allowance deposit each month. You can have joint bank accounts but personal credit cards. You can share absolutely everything. You can file taxes jointly or separately.

We haven’t decided exactly what we want to do here yet. We already have systems in place for rent and sharing household expenses (I handle most bills, she handles most grocery and household shopping). We already have a joint credit card we have been using for wedding and honeymoon expenses (which is a whole nother discussion).

It will probably stay this way until all the name change paperwork is complete. Then whatever we decide, it will be close to combining everything since we are on the same team.

How Does this Affect Rental Property Investing?

There are a lot of questions I don’t know the answer to yet.

How will combining finances affect our ability to get investment mortgages? Will our credit score be affected? Will debts held in our individual name matter for debt-to-income ratio calculations?

How will filing taxes jointly change our taxes? I am self-employed so set aside money each month to pay quarterly estimated taxes, then usually owe a lot more in April.

How will marriage affect our mortgage sequencing? Right now a conventional loan on the first 4 investment properties are 20% down and 25% down for loans 5 through 10. Should we try to put some properties in my wife’s name? I know some investors do this.

I tend to delay learning details like this, waiting until it is actually time to act to decide. But some of these might change the strategy or how we set things up, so I will start learning now. If you have any insight, please leave a comment!

Give me some tips – how do you make sure this communication happens? Is there a regular time you sit down and review finances and decisions together?