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Looking for Motivation? Tie it Into a Bigger Purpose

April 19, 2016

Hundreds of millions of people have marched into battle and died.

Jeez that’s a heavy opener. I really hope I can turn this article around, wouldn’t want everyone to leave depressed…

Do you ever wonder – what the heck were they thinking? Looking back, a lot of those wars didn’t matter. Worse still, most of the deaths were on the losing side, so it’s not like their death affected the outcome. So why bother?

The human mind is amazing – somehow we are able to convince ourselves to march into battle to meet nearly certain death. Let that sink in for a second. Wow.

How do we harness that power?

A Bigger Purpose

Each and every one of those men who died in the wars had their own reason. A purpose.

It might have been protecting their family or homeland. Or stopping injustice. Or spreading their religion so more can access heaven.

It might have been more personal, like proving their manliness. Or earning money to feed their kids.

With a big enough purpose, we can take any action.

Start With Why

There is a great Ted Talk by Simon Sinek “Start With Why”.

It is about how successful leaders and organizations inspire others. But it is just as powerful thinking about this for ourselves. How do we inspire ourselves to take action?

You need to know why! Not just what. Not just how.

Taking Action in Rental Property Investing

Most people on this website already know what – they want to invest in rental properties.

Some even know how – the steps necessary to get there.

But I bet you won’t take action without knowing why. There are too many obstacles in the path to just waltz right in and be instantly successful. You need a purpose for motivation.

What is Your Why?

Take some time to think about this.

Why do you want to invest in the first place? Why do you want cash flow or passive income? Why, why, why?

If your answer is something like “so my money works for me”, you need to keep going. Keep chaining together whys until you get to something that gets to your purpose or identity.

I want freedom and flexibility – not a standard job where I have to show up every week for the next 35 years. I want to be able to spend time with my family with the ability to take days or weeks off when I want. The time freedom to put family and friends first rather than being too busy. I want the ability to control how much money I make rather than just whatever the employer decides to give. The flexibility to earn more if that’s what our family wants or needs.

That is why I want the passive income and wealth from rental properties.

That is what gets me through the scary aspects like writing my first $20k down payment check.

That is what gets me through the tough days when there is a repair or tenant issue.

It is a powerful why.

What is your why?

It’s All About the Ratios Baby – Why I Invest In Rentals from Thousands of Miles Away

April 14, 2016

Have you heard someone say “the DOW is up 250 points today”? Or that is a specific stock has gone up $10 in the last year?

Well that sounds great, but how the heck am I supposed to know that that means without knowing where it started?

In the words of Einstein, it’s all relative.

What was the DOW at before and what is it now? What is the ratio or percent change?

It’s All About the Ratios Baby

Let’s look at an example to see why this is important. Let’s say you purchased 1 share of Dingle Enterprises at $10,000. And lucky you, it goes up 50 points!

Sweet, you made $50 with no work at all! But is that a good return?

Obviously you have to evaluate it based on how much money you originally put in … in this case your return was half a percent. Not so exciting now.

When we are evaluating rental properties, we won’t deal in absolutes (only a Sith deals in absolutes). We have to look at the ratios – in this case the rent to purchase price.

Example Time

Look at Zillow for a home in your area and let’s evaluate if it would be a good rental. Here is one in my part of San Francisco. Every property has a Zestimate, which is the estimated sale price, and a Rent Zestimate, which is the estimated rent. Those numbers aren’t all that accurate, but they can give us an idea of the ratios. As of the time of this writing, the numbers for this property are $1,091,542 and $4,500.

Don’t be the idiot that says “wow, I get paid $4,500 every month for doing nothing? Awesome!” The ratio of rent to purchase price is 0.41%.

Or to put it another way, the monthly rent is about 1/243rd of the purchase price.

Ok, now let’s look at a random property in a market I would potentially invest in. Here is one in Atlanta. The Zestimate is $104,430 and the Rent Zestimate is $1,110.

The ratio for this is 1.05%. The monthly rent is about 1/95th of the purchase price.

Wow, see that difference? In terms of ratios, it is a 2.5x improvement!

If you think I cherry-picked these examples, go ahead and take a look yourself. Look up a property in your area and see the rent to purchase price ratio.

Expensive markets will reliably be below 0.5%. Areas with potential for cash flow rental property investing are reliably over 1%.

There is More to Consider

Don’t be the idiot that just looks at the numbers though. The area has to have job growth and new people moving there.

But this is a quick way to eliminate markets from consideration. Especially if you live on the East or West Coast, you’ll see you should look out of state.

Also don’t be the guy who says “if I drive just 2 hours to Stockton then the ratios are just about .1%” (or insert any podunk “suburb” where people generally don’t want to live).

Really? So you want not quite as good of returns in a town that is miserable with poor job prospects so you can spend your weekends driving there to keep an eye on it? Uh ok.

Don’t be the person who says “ya but the appreciation is better in San Francisco”. It could be. Or it could crash. Sounds a lot like gambling – you will probably be just as good at timing which color the roulette ball is going to land on. And besides, over decades the appreciate will trend equal to the more boring linear markets that keep chugging along.

An Investment, Not a Part Time Job

The numbers told me to invest out of state. The properties are also way less money, so someone can get started with just $20k rather than $60k for the cheapest properties a couple of hours away from me.

But the thing I like most is that it helps me approach my rental properties as an investment, not a part-time job. It certainly is a thing. Whether you invest in real estate, shares, or crypto through an agent from bit index ai offizielle seite (bit index ai official website) or on your own, the more effort you put in, the better results you get. If you treat it like a part-time job, it will fetch you results likewise.

If my properties were local (or even a couple of hours away), I would likely be the landlord and way more active in maintenance. For instance, I would have checked the condition of the roof, windows, doors, home flagpole, and rain gutters and got them repaired. This would certainly save some money. But would that allow me to set up for long-term success?

All those hours of work would weigh upon me and make me hesitant to add to my portfolio. At some number of properties (4?) I would probably not want to purchase another because I’m already devoting enough time to it.

With the out of state investing, my rentals are much more passive. Yes there is still a little time required with the property managers, but it is more scalable. I am not afraid of the on-going time investment with 10 properties.

More passive with better returns? Sign me up!

What do you think? Have you found investing in your local area more appealing than out of state? What are the ratios like?

Photo: Juli

Want a Guru? Look Somewhere Else

April 11, 2016

There is no shortage of real estate gurus out there – all kinds of fancy training and coaching programs that promise a path to riches.

They will share their secrets for only 4 payments of $3,999. And you can have an ongoing coach for only $6,999 per year.

As crazy as it sounds, this is actually attractive to plenty of folks. They want to get into real estate investing but are lazy so don’t want to educate themselves. They want someone to tell them exactly what to do.

The Guru Way

It starts with a conference or short event – heavy on motivation and light on details.

In fact, most of it is telling success stories – whether the namesake’s experience or someone else they claimed learned through the program.

Oh you want details? Well lucky you, they are running a promotion for everyone who is at this conference. You can join the hands on training program for just $17,999!

Then when you are done with the program you are hit with reality: it still requires action.

If you weren’t that type of person going in, you aren’t coming out either.

High Profile Examples

If you follow politics you likely heard about Trump University.

People were dragged along and upsold all the way up to $35k. The results vary. Of course a few are successful. And there are many more who never make a single dollar.

An even bigger example is the Rich Dad education seminars. Huge scale. Free 1 day seminars are held all over the country, followed by a $1k three day seminar, all which sets up for a $12k to $44k payment for their advanced material. Oh and they help you raise your credit limit so you can put it on your credit card.

If you want to be sick, watch this video that secretly records a three day seminar with constant upsells:

I Am Not a Guru

I admit that I’m still learning about investing in rental properties. We are in this together and I’m less than 5 years ahead of someone with zero experience.

I happily tell you that this isn’t a get rich quick scheme. It’s get rich if you can be patient over decades.

Everyone is different so I’m not going to promise a one size fits all approach. Find your own sweet spot.

And above all, adjust your mindset.

The Rental Mindset Way – Get Educated Wisely

You can get most of your education for free. It’s important to make sure the education isn’t passive – you need to talk to people and take action.

By reading only 2 books and listening to 20 hours of podcasts, you have just enough knowledge to move on to the next step.

You will be able to hold conversations with people will a lot more experience. Admit you’re a beginner and learn from them.

After a series of conversations with everyone from investors to lenders to property managers, you will be ready for the next step. It’s the hardest one.

Get started! Purchase a rental property in your name while limiting the risk as much as possible. You will learn way more by doing.

Which Isn’t to Say – Don’t Pay Anything

Don’t be the guy who is thinks everything should be free either. Small investments can really pay off.

Take books for example – they might cost as much as $15. Yes you can probably find all the information somewhere online for free. But purchasing a book will save you time and deliver one consistent message.

A low priced event is a great way to meet people. Just be careful that it isn’t with an organization that will hold back information and entice you to sign up for more training.

I went to Jason Hartman’s Meet the Masters weekend. I already knew a lot of the information presented (although there was plenty I didn’t know about lending and taxes), but the real value was meeting others who invest in turnkey rental properties.

One of my other goals was to see first-hand how reputable the company was. I made an in-person connection with the investment counselor I worked with in my first properties.

Add it up and I spent $500 on my education. Could it have been free? Yes. But it was $500 well spent and gave me the confidence to move on to actually purchasing a property.

If there are events less that $1000 that you would like to attend, and it will push you towards your first investment, go for it! Just make sure there isn’t an up sell.

If there is a course that is less than $1000 and will provide the spark needed to get started, go for it! Just don’t expect it to do everything for you. (I’m excited to hear people’s results from Afford Anything’s upcoming class).

Be smart about your education and don’t fall for the guru trap.

How did you go about your investing education? Are there any books or podcasts you recommend?

The Thing Most Investors Don’t Understand about Leverage

April 5, 2016

It can be frustrating when people just don’t get it.

Like when someone says they don’t like chocolate. Somehow logic just isn’t going to convince them how awesome it really is.

It’s sad because they will never understand and there is nothing you can do to share that joy with them.

A similar thing happens with leverage in rental property investing.

The Common Man’s Access to Leverage

Banks have all kinds of crazy access to loans. When they invest in something they only have to put up 6% of the price in actual money and borrow the rest.

Try walking into your local Scottrade office and doing that. “I’d like to buy 100 shares of Google. I know the price is $736, but I’ll give you $44 and finance the rest at 1% interest.”

Ya right.

Is it a rigged game? In some ways. But you know where the common man has access to leverage? Real estate investing.

20% down, 100% of the upside

The standard mortgage on a rental property right now is 20% down at a 4.5% interest rate. In fact, if you happen to ask around the jumbo mortgage wholesale lenders circle, they might agree to these statistics.

You get to own an asset by paying only one fifth of the price. Where else are you going to be able to do that?

Even better, it’s not like they require the rest of the money within a year or two. You pay the same amount every month for 30 years!

Since you own the rental, you get all of the upside. The bank doesn’t benefit if the house appreciates, you do.

Appreciation with Leverage

By now you know there are 5 different components that make up the overall return on a rental property.

Most people make the mistake of only focusing on one component and forget about the others. Right now we are just going to consider appreciation, but keep in mind this is just one aspect. Don’t forget the others.

The rentals I purchase are in somewhat boring midwest and southern United States cities. Most years they will appreciate at the rate of inflation – this isn’t a speculative beachfront Miami condo I’m hoping to run up 15% per year (as long as there is a greater fool to purchase it from me).

If the property appreciates 3% and inflation is 3%, did I actually make any money? This is where the leverage comes in.

Let’s Run Some Numbers

Over 15 years, what happens?

If you paid all cash, you won’t make anything on the appreciation in real dollar terms. The house goes up 3% per year, but is exactly canceled out by inflation. Your dollars are worth less. After 15 years at 3% inflation, $1 in year 0 has the same purchasing power as $1.56 in year 15.

If you use leverage? Let’s look at a hypothetical house where you put down 20% for a $100k property.

To keep it simple, we will just look at appreciation and assume you don’t pay down the mortgage at all over those 15 years. So in year 15 your mortgage balance is still $80k. This number will never go up, so this is the worst case scenario.

See What’s Going on Here?

The investment just keeps up with inflation, but since you used leverage, you made $44,637!

Had you paid cash, the appreciation is exactly zero.

This is powerful stuff people. You took 1 of the 5 components of rental property return from $0 to $44,637, just by taking advantage of leverage.

With Great Power Comes Great Responsibility

That’s a Spider-Man quote, but it is true – leverage can provide huge returns even when the house appreciates at the same rate of inflation.

Don’t take this to mean you should buy a Miami condo which “projects” for even more appreciation. Instead look for the most boring, predictable, steady growth markets – you’ll still get a great return without needing to resort to gambling.

How Much is Too Much?

Leverage is a powerful tool that most people are brainwashed into thinking is bad. You now know better – this isn’t credit card debt, it’s strategic leverage.

The lending limits right now are 1:5 ratio for your first 4 investment properties (20% down). For properties 5-10 it is a 1:4 ratio (25% down). Remember banks are gambling at a 1:16 ratio backed by the FDIC and our tax dollars!

But is there a point where even with boring and predictable rentals, you can have too much leverage? Sure.

If you have 10 conservative cash-flowing properties at a 1:3 ratio, I would argue that is not over-leveraged, even if you have a one million dollar loan balance.

The leverage ratio and loan balance is less important to me. What matters more is how predictable the markets are (not gambling on appreciation, which comes with huge crashes) and if there is enough cash flow to provide a comfortable cushion if things don’t go as well as planned.

What are you comfortable with?