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My Journey to Real Estate Investing and Financial Freedom

August 3, 2017 Leave a Comment

Gen Y Finance Guy is an awesome website all about young person finances. I’m very grateful they shared my story when I first launched my website. Since many of you haven’t read it yet, here it is!

I’ve always looked at things a bit differently than most, somehow devoid of the fear of looking stupid by going against the crowd.

Five years ago, at the age of 25, I quit my well-paying Silicon Valley tech job and blasted out this email to everyone I knew:

Have you ever been to a wild and crazy retirement party? Well this Friday night is your chance – we are celebrating the fact that it is my last day of work and throwing an ABBA themed retirement bash.

That’s right – a party featuring all ABBA music. Gems like Dancing Queen, Take a Chance on Me, Fernando, and Waterloo (you can look forward to both the English and Swedish versions).

It was a good time, although I could tell by the 2nd hour of ABBA not everyone was as into the music as I was…

That one action (leaving my job, not throwing an ABBA retirement party) put me on the path to financial freedom. I’m not there yet, but getting started is the hardest part.

Today I am a small business owner in an area I’m passionate about and building passive income through investing in out-of-state rental properties.

Where My Journey Began

Some people are born on third base and go through life thinking they hit a triple
-Barry Switzer

This quote struck me the first time I heard it. And not just because I love baseball.

Across the landscape of financial blogs there are people in many different positions, from broke to rich. If you are signed up for the Gen Y email list you know the hardships he had to overcome to get where he is today. Others are riddled with student loan debt that will take decades to repay. Then there are a few with millions in net worth.

I feel very fortunate to start my journey in an excellent position – I won the genetic lottery with a loving upper-middle class family in California suburbia. You could say I was born on third base.

Rather, I prefer to think of it this way: the ball was hit to the deepest part of the ballpark for me, all I had to do was hustle my way around the bases to get to third. There are many people who have the same advantages and decide to coast into second base.

The goal is to make it all the way to home plate though: financial freedom. Reaching third base is worth zero runs.

The Working World

I entered the workforce in 2008 with an engineering degree from Stanford and no student loans. Terrific starting position.

Silicon Valley is the place to be for tech jobs and I landed a role at an enterprise software company. Making pretty decent money too.

I just couldn’t imagine staying there forever. Or any company really. It’s so slow! I just don’t enjoy small talk around the water cooler. Keep doing this another thirty to forty years? No thank you.

After three years I knew the gig was up – it was time for me to move on to the next thing.

The 4 Hour Workweek has a chapter about mini-retirements. It challenges the idea of waiting until 65 for a traditional retirement and proposes an alternative. Some call it a sabbatical – every few years taking several months off.

I knew if I was going to be finding a new job anyway, this would be a perfect opportunity to see the world.

So I quit, threw an ABBA party, moved out of my apartment, and started a new journey.

The Second Chapter

After traveling for 5 months, mostly in New Zealand, it was back to reality. I would have to work again eventually. The first retirement wasn’t meant to last.

But I got to thinking – if I don’t like the traditional workplace, it should be a fall back option, not the primary goal. This employment gap might be the best chance I have to start my own small business and work for myself in an area I’m passionate about.

It would mean going through a tough period with very little income, but if successful, I’d be in a much better position in the long run.

And if it didn’t work, at least I’d be able to go back to traditional employment knowing that I’d given it my all. No second guessing, wondering if there was a better way to make a living.

The business I started is 1-on-1 mentoring for kids who are learning to code. I’m able to make decisions to go about it the right way, not simply the easiest way to make money. I’m able to fit work around my life, not the other way around.

But What About Financial Freedom?

If I’m currently on third base, how do I reach home plate? My plan to get there is through passive income.

There is more than one path to financial freedom. Some recommend cutting expenses by doing things like making your own deodorant or getting your ketchup from the free packets at McDonald’s. Most advocate saving a huge chunk of money and reaching a certain account balance before retiring and living off a small percentage per year.

I want money to keep coming in and to be able to spend. I know I haven’t reached my peak spending years yet and don’t want to sit at home hoarding pennies.

Passive income sounds great. Everyone wants it. You just sit there and money keeps coming in? Sign me up!

Unfortunately there isn’t exactly a clear path that works for everyone. It is hard – you have to invest either time or money up front. It is also uncertain – your plan for riches might be a complete bust. Most people suck at rebounding from failure and never try again.

I believe it’s easiest to start earning passive income by investing both your money and your time.

Put your money to work because there is less competition – everyone wants passive income streams that require $0, so those methods are highly competitive. Instead invest your time in finding a better way to put your money to work and learn how to do it.

Which Led Me to Rental Property Investing

Rental properties are a proven way to build both wealth and passive income. You purchase a property and a tenant pays you every month – if you do it right, substantially more than your expenses. Meanwhile the property is appreciating, the tenant is paying down the mortgage, and you get tax benefits. Most people don’t consider all 5 components of return for rental properties.

The world of real estate is huge. There are thousands of gurus preaching hundreds of different ways to do things. There are expensive courses, workshops, and conferences. It is all very intimidating.

Yet the majority of failures are those who don’t get started at all. They worry over details and worst case scenarios “my cousin’s next door neighbor has a rental property where the tenant didn’t pay rent and used the bathtub as a toilet”.

They over analyze rather than taking a less than 100% perfect step 1. So how do you simplify step 1?

My Plan

I am starting with turnkey rental properties on the other side of the country. I live in San Francisco, which is too expensive for rental numbers to work. You want the rent each month to be at least 1/100th of the purchase price. In San Francisco it is closer to 1/300th.

Turnkey is when a company does a lot of the work for you. They buy distressed properties, fix them up, put a tenant in place, then sell the property to an investor. In the end you own the property and the turnkey company makes a profit for their work – their model is flipping homes, mine is holding for the long term benefits.

I hire professional property managers to take care of most the on-going work. That allows it to be passive income, not a second job as a landlord.

Right now my typical deal might have a $100k purchase price, requiring 20% down plus closing costs for an initial investment of $23k. The property rents for $1k per month, and after all projected expenses, it will provide $150 per month in cash flow.

And remember, cash flow is just one aspect of the overall return. Over the last four and a half years, my properties have produced a 29% annual return. This is possible even with conservative investments thanks to low-risk leverage, which most people don’t understand.

My Advice

Research rental property investing and consider if it will help you reach financial freedom. It’s not for everyone and there are always risks when doing something different. I write about my own personal journey and how I reduce my risk at Rental Mindset.

The number one book to for motivation is Rich Dad, Poor Dad. It will drive home the goal of passive income through rental properties. Don’t expect to ever find a perfect how-to guide, there are some things you will have to figure out on your own.

For more on turnkey rental properties, I recommend a couple podcasts. The earliest episodes from Passive Real Estate Investing and Turnkey Real Estate Investing will provide a nice overview.

Even if rental properties aren’t your thing, find a way to add passive income streams that you control. There are many ways to go about it and as you level-up your game, you will recognize more and more opportunities around you.

Put your money to work. Start simple. Don’t let fear of failure stop you.

How I Locked Up My Third Rental Property Investment

July 10, 2017 19 Comments

After a short and not so hard search, I have my third rental property under contract.

It is located in a Memphis suburb, currently being rehabbed by a top-notch turnkey company. Check it out!

The curb appeal isn’t great but the numbers are. Purchase price of $105k, will rent for $1150+ a month.

So I locked it up!

Let’s take a closer look at the property and my decision making process.

The Before Rehab Video

The turnkey company posts walk through videos on YouTube. Here is the property before rehab has started.

Often the before pictures are pretty horrendous. That’s what these turnkey flippers specialize in – take an ugly house and improve it.

A property that will eventually be flipped to an investor at $105k might cost around $60k pre-rehab. With $25k of work put into it, including financing and other expenses, they can turn a profit of $20k. That is if everything goes according to plan. They have the risk and have to execute quickly.

As you can see, this property is in pretty good shape. It was built in the 1960s, but fixed up about 10 years ago. Most of it will be improved again.

What will the inside look like after rehab? Take a look at this video of a finished property by the same company.

The Search

This is me searching for rental properties.

I do my best work in a cowboy hat…

My actual process is to first decide the city, then decide a couple turnkey companies I like in that city.

See: Starting the Search for My Next Rental Property Investment

All my properties so far have been through Jason Hartman’s investment network to make this a little easier. They currently work with 6 of the best turnkey companies in Memphis.

Don’t make the mistake of stopping there and waiting for properties to get posted to the website. In 2017 things move fast.

See: Turnkey Rentals in 2017: Why You Need to Adjust Your Approach

You also probably want to filter those 6 providers down even further. Not all of them fit my criteria.

Some had numbers that were consistently not all that impressive. A couple were too big (100+ flips a year) which makes me worry about their quality and my voice being heard. Others weren’t strong communicators.

I found 2 that I liked out of the 4 or 5 companies I researched. So that narrowed my search scope of potential properties considerably.

Both of those companies do around 60 turnkey flips a year, selling 5 rental properties a month to investors. It might take them roughly 1 month to buy the property and 1 month to do the rehab.

In 2017 most properties are put under contract before the rehab is finished. This means to get first dibs, you are committing to a property before it is rehabbed.

That’s why it is so important to focus on individual turnkey companies. That is the product you are buying, not the house.

You are essentially buying the ability for the turnkey company to deliver an impressive property that appraises as expected. Someone with integrity who will fix anything uncovered by the inspection report.

You still have the ability to back out later if you can’t agree on what should be fixed on the inspection report. It’s less than ideal though because you are out the price of the inspection (maybe $250) and a lot of time invested, including getting your financing in place.

The Location

My original Memphis property is in the Raleigh-Bartlett area, northwest of the city. It is a 20-25 minute drive to downtown.

I liked the area three years ago when I researched more thoroughly. The other area with a lot of turnkey investments to compare it to is south of downtown, by the airport.

Both have very solid job opportunities, but I liked the long term prospects of the northwestern suburbs a little more. More opportunity for growth to the north, touching on a very nice suburb of Bartlett, and not as old.

I did a little research comparing the suburbs again, but largely trusted what I decided three years ago. Of course I was open to the right deal elsewhere if necessary.

Wouldn’t you know it, one of the two providers had a property in that area they were in the process of purchasing.

The Details

I thought I wasn’t interested when I first saw the property.

Built in 1968, it is way older than my other two rental properties that were build in the 1990s.

Plus the curb appeal sucked. First the fact that it was an older property, but also the front yard is mostly dirt because of a huge tree that provides a little too much shade for healthy low-maintenance grass.

That’s a lot of dirt! But it is also before rehab… a little work can go a long way, but I don’t think it will every be that impressive on the curb appeal.

The numbers met my requirements though. With a purchase price of $105k and rent of $1150 per month, that gives a 1.1% ratio. Great!

One of the things you have to consider – is the rent projection believable? In this case I believe it is. We might even be able to get more the first year!

The property is huge at 2200 square feet – 5 bedrooms plus an office or walk in closet, 2 bathrooms. It looks like a freshly rehabbed 4/2 might be around $1150 a month, so a 5+/2 might draw a little bit of a premium. I’m also intrigued by the idea that a large family or someone with a lot of stuff to store is less likely to move. Keeping tenants for a long time is a huge factor for cash flow.

I also liked the location. On the east side of Raleigh, it is just 2 miles from the nice Bartlett suburb.

It is 2 miles south of my other property, which helps if I want to switch to a local mom-and-pop sized property manager (which I think I prefer, but haven’t done yet).

But the real kicker – it is walking distance to the major thoroughfare with a grocery store, restaurants, and shopping.

That can’t hurt!

The Decision

I asked myself – should I put this property under contract or wait and see what else comes available?

The property checks a lot of the boxes and I lean towards taking action…

See: What If I’m Not Picky Enough? Next Rental Property Update

Last week I signed on the dotted line and mailed in my $2500 earnest money deposit. Wahoo! My rental property empire is officially growing!

As soon as the ink was dry, my investment counselor (through Jason Hartman’s network) emailed a property for sale in the same ZIP code by a different provider. Even though the provider hadn’t gone through my personal vetting process, the curb appeal alone made my knees weak.

Built in 2001. Purchase price of $133k. Meets the 1% rent-to-income rule. I don’t know where exactly it is though and it has a Jacuzzi, which sounds like maintenance hell.

I’m pretty good at looking forward and not second guessing decisions. This picture really tested that ability.

How Did I Do?

I’m excited to soon have rental property number three join the portfolio!

In the first sentence of this article I said the process was short and not so hard. This is because I previously invested in my education, have been through this before, and already have some contacts.

In calendar time it took about a month. Hours invested? Approximately 10 – mainly phone calls and online research.

What do you think – how did I do on this property?

Did I show investing in rental properties doesn’t have to be hard?

Photo: Dean Shareski

6 Months, $9596 More Dollars – Rental Property Portfolio Update

July 3, 2017 9 Comments

It’s a great day to be alive!

Let’s give this article a soundtrack:

What am I so happy about? How about making $9,596 in six months with close to zero work!

Owning rental properties sure can be glorious. My portfolio is skating along nicely right now.

Let’s dig into how I got to this point and the latest numbers.

A Little Work Several Years Back

I earned $9,596 with little effort because I put in the effort to purchase the properties a few years back.

But it wasn’t a ton of work… I purchased turnkey, fully rehabbed properties on the other side of the country. I still haven’t seen them. Most the effort was getting educated and developing the right mindset to take action.

Then I sat back and relaxed.

I own two rental properties.

The first is in the Atlanta area, purchased in 2011 for $81,500. After closing costs, my initial investment was just $19,936.

The second property is in the Memphis area, purchased in 2014 for $93,000. My initial investment was $24,030.

A little money, a little effort, but now I get to sit back and collect checks.

The Last 6 Months

The big news was finishing a cash out refinance on property 1.

The property appreciated so much, I was able to refinance it and get a check for $36k. Significantly more than my initial investment! BOOM!

See: Cash Out Refinance on a Rental Property – My Actual Numbers

I spent 6 to 8 hours on the phone with lenders, gathering documents, and signing lengthy contracts.

Even though I have this huge chunk of cash, I haven’t put it to work yet. It is just sitting in a savings account until I purchase my next rental.

So temporarily, this move actually hurt my bottom line. It cost about $2k in closing costs to access this money.

It’s all about the long game though. I’m setting up for even more profits in the future, as that cash equals the down payment on one and a half more rental properties!

More on this later, let’s look at the numbers first.

Property 1 Numbers

Even though the property just appraised for $130k, I decided to be conservative with a $123k value in my estimate.

That’s still up $6k. A thousand dollars a month straight to my net worth!

Add in $1500 more for the tenant paying down the mortgage, cash flow, and tax benefits.

In six years, the total return of this property has been $55k. On an initial investment of $20k. You kidding me!?!?

Compounded rate of return of 25% a year.

Property 2 Numbers

Appreciation here has been more modest, as expected. Memphis is an even more linear market than Atlanta. Flatter peaks and valleys.

The Zillow estimate actually went down, but I average it with Redfin and make small adjustments. The result is $1700 of appreciation in the last six months.

Big cash flow of $2k plus another $1k from the tenant paying down the mortgage and tax benefits.

In 3 years the total return is almost $17k.

Compounded rate of return of 19% a year. Not as good as the other, but pretty darn impressive.

Overall Portfolio Numbers

Those numbers don’t tell the whole story though. It is more accurate to do a cash flow analysis.

When you have an asset that spits off cash in addition to going up in value, it matters when you get that cash.

$1k received six years ago is more valuable than $1k received today. I can invest it and make extra money over that time. That’s what a cash flow analysis accounts for.

Usually it is done monthly or yearly. As a happy medium between accuracy and simplicity, I opted to look at 6 month chunks of time. I used a discount rate of 2% per half year (basically what I think the money should earn pretty risk free).

So what has the portfolio earned over the last six years?

30% yearly return!

I’ve earned $66k in that amount of time. Between the equity in the two properties and the refi cash waiting to be invested, the portfolio is worth $96k!

It Never Gets Old

Aren’t those numbers exciting? Who is having fun here?

Now for a dose of perspective.

The biggest driver of return has been appreciation. I don’t believe this current run is sustainable.

My Atlanta property has appreciated 8% a year over the 6 years! That is incredible, but over a whole real estate cycle, I would expect it to settle closer to 3%.

See: How to Visualize the Real Estate Cycle

I’m not worried about it though. Even with 3% a year appreciation, basically the same as inflation, an investor can make a killing.

How? You only have to put 20% down and get 100% of the benefit. Multiply that 3% by 5 and you get 15% a year return from appreciation alone. You certainly won’t hear me complaining about that!

See: The Thing Most Investors Don’t Understand about Leverage

That was a dose of pessimism, now one more reason for excitement looking forward.

Each individual property has done well, but there really hasn’t been any compounding effect yet. I want exponential growth!

The only thing remotely exponential so far was that I used the $7k in cash flow over the first 3 years of property 1 towards purchasing property 2. Not a big effect considering that was less than a third of the initial investment.

But now?

Property 1 cloned itself and then some. The proceeds from just the cash out refinance will allow for the purchase of another rental property and a half. Add in the cash flow and it has earned enough for two more rentals!

See: Let’s Double Down! Cash Out Refinance on a Rental Property

Double the cash flow, double the mortgage pay down, double the appreciation, double the tax benefits.

Wish You Started 6 Years Ago?

Too late for that, the next best thing is to start right now.

Do you think I possess some special skill or luck that you wouldn’t be able to replicate?

How can you learn just enough, limit your downside, and purchase your first rental?

What’s holding you back from getting started or adding to your portfolio?

I want to hear from you!

If you want to dig deeper into the numbers, the full spreadsheet is available here.

What If I’m Not Picky Enough? Next Rental Property Update

June 22, 2017 6 Comments

Art is hard to understand.

I’m a logical person. Art is about feeling. It defies logic.

How do you compare a piece of art to another? Which one is “better”? Of course there are groupings by quality, but within the group, how do you rank them?

There are so many different dimensions you can evaluate on. What is important to one viewer isn’t the same with the next.

Are rental properties the same way?

I’m searching for my next rental property and worried I’m not picky enough compared to other investors.

The Search Starting Point

Last month I finished my cash out refinance. The Atlanta rental I’ve had for 6 years appreciated enough for me to start a new 30 year loan and turn some of the equity into cash.

See: Cash Out Refinance on a Rental Property – My Actual Numbers

I have $36k to invest in a new rental property.

First decision is the city. I already have investments in two cities (Memphis and Atlanta) and want to keep it that way for now – fewer property managers is a good thing.

Out of those two cities, Memphis makes more sense in 2017. We are a bit higher up in the real estate cycle right now, so I want a city that behaves in a very linear fashion – no big swings.

See: How to Visualize the Real Estate Cycle

Next is the neighborhood. Again, if the neighborhood I’m already in still makes sense, that’s where I’m going to begin my search. This isn’t as important because property managers usually operate across the whole city, but if I move to a smaller mom-and-pop company, location within the city will matter to them.

I’m Picky About the Rehabber

For someone doing passive out of state investing, the turnkey company is extremely important. This is the company who does the rehab work on the property you purchase.

My first level of filtering is achieved by working with a company like Jason Hartman’s investor network. They have relationships with the best turnkey providers in various cities and can send a warm introduction.

But you don’t have do to it that way. Other ways of filtering are using Turnkey-Reviews or BiggerPockets forums.

I’m not a believer in doing something like Roofstock or purchasing straight from an aggregator’s website. They do a certain amount of filtering and quality control, but it is a whole lot easier to decide the rehabber you trust than it is to judge the quality of an individual property from thousands of miles away.

My preference is a turnkey provider who has been operating for 10 years at 50 to 100 rehabs a year.

Experience matters. They need a certain amount of scale to have a full time crew and know what they are doing. I want a company that wants repeat buyers, not just in it to make a quick buck.

At a certain size, maybe 10 properties a month, I fear the quality goes down. Too many other projects going on. Too specialized.

I want that sweet spot.

My Worry – I’m Not That Picky About the Property!

Once I know the rehabber, neighborhood, and rent-to-purchase price ratio I’m targeting, the particular property doesn’t matter all that much to me…

Did I just say that on the internet? What will people think?

Real estate investors are usually all about the buying. Buy low, that’s where you make the money.

They will spend months searching through deals, waiting for the perfect property. They will put in dozens of low-ball offers for every one that is accepted.

I do the opposite. I set my standards and buy quickly when something meets the requirements.

That really doesn’t match my identity put forth on Rental Mindset as an investor who gets a 31% yearly return. Am I not really a real estate investor then? Just a charlatan? Am I doing something wrong?

Maximizers vs. Satisficers

I enjoy nerdy books about decision making. Like Predictable Irrational.

In The Paradox of Choice: Why More is Less, I learned about identifying people as maximizers or satisficers.

The maximizer wants the best deal possible. These are the people who go to multiple grocery stores and look up Amazon prices from the store. It doesn’t matter how good the deal is if they can get an even better deal somewhere else.

The satisficer looks until they find a deal that meets their requirements. Their criteria are more modest. They buy knowing full well there might be a better deal elsewhere. They say this and move on:

If a maximizer and satisficer are shopping for the same thing, the maximizer will get the better deal.

It is apparent that the maximizer also paid a greater cost in terms of time. Depending upon how you value your time, this alone might tip the balance towards satisficers being the overall better decision makers.

But wait there’s more.

The maximizers got the better deal, but who is happier about the decision? Satisficers.

The maximizers are more likely to have buyer’s remorse. Even after they buy, they continue to comparison shop. Not just for a better deal on the item, but what else could they have used that money for?

But wait there’s more.

Decision fatigue is a real phenomenon – the more decisions you make, the worse they get.

So if you put a ton of cognitive load into comparison shopping laundry detergent, you are more likely to snap at your kids or fire off that snarky email to your annoying coworker.

The book helped me stop trying to maximize every decision. If you are cheap, check it out.

Satisficing on a Rental Property

The turnkey approach isn’t really for maximizers. There are always better deals out there if you put in more work, including finding the deal and rehabbing it.

Some people are interested in the more passive nature of turnkey investing, but have a mental block paying market rate for a house when discounts are available elsewhere.

They take issue with the turnkey provider making a profit off of them. Why should someone make $15k off flipping a property to them? Shouldn’t they shop around and find someone willing to do it for less?

I am firmly in the satisficer camp on this one. It is ok if the turnkey provider makes money as long as I get a good enough deal (what constitutes a good enough deal changes over time).

What do you think is the right approach here?

Is my lack of pickiness about the particular rental property actually a better decision making process?

Am I really a real estate investor if I’m not hunting out the best deal for months?

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