Multi Property Saga

I have been working with single family houses the last few years.  I have decided to buy multifamily.  I contacted my realtors and told them that I want to find a 30 unit complex for $800,000.  She came back with 23 unit for $850,000.  It has been rehabbed with granite counter tops and hard surface floors.  It has a small laundry and is made up of 5 duplexes 2 bedroom 1 bath 12 – 2 bedroom 1 bath apartments and a single family house all platted as one property. It has a Net Operating Income of $79,000 on $148,000 annual revenue.

Now to look for operational improvements to increase value.


Investment Property Appliances

One of the things I like to do is to buy appliances, electrical and plumbing fixtures when I find them cheap. I don’t wait until I have a project.  The problem with waiting until you need them, you are at the mercy of the store.  What I find is, if you go to Lowe’s the district manager will come in and tell the store manager that he wants to change the store layout on Monday so get rid of these clearance appliances and fixtures by Monday.  The store manager then marks down the items and puts them in the aisle.  So Saturday morning there are these items lined up in the aisles that are good deals a lot of time.  Another place to look is the end-cap (the end of an aisle) and look for the clearance items.  What I do is walk the store and when I see something that I want like a $900 dishwasher for $100, I buy it and put it in my storage unit.  When a dishwasher goes out in one of my rental houses, I have a replacement that was purchased cheap and not in the heat of need.  There are several advantages to using Lowe’s; one is that when the items are clearance items they are still covered under warranty. At Depot on the other hand many of their clearance items are “as is” no warranty.

An example of what you get is in these pictures.

clearance dishwasher
clearance dishwasher


Investor Grade Professionals

When you are investing in real estate, you need to realize that real estate is a team sport.  You can’t be the best at everything and if you were it would take too much of your time. With that said, you need a team of professionals helping you with your acquisitions.  Now you ask who should be on your team?  Well it is mostly the same professionals you used when you bought the house you live in, except that they must be investor grade professionals.  When you ask a mortgage broker to finance a house that is not habitable; including the fix up costs and by the way you don’t want to leave any of your own money in the deal and he says that is impossible, you know you are dealing with a retail professional…not investor grade.  You need someone who can execute this task as often as you find property to purchase.  The situation that I just described is done all the time by investors.

Your present professionals aren’t  bad, they are just not the kind of professionals we are looking for. The mortgage brokers at your local bank or your cousin that sells insurance don’t know how to do the things that investors need to have done.  The best place to find these investor grade professionals is at your local real estate investors club meeting.  At these club meetings you won’t find help from the people in the audience.  Most of them have never and will never buy a single piece of real estate.  The people you want to talk to are the people who are sponsoring the event. These are the agents, lawyers, mortgage brokers, and title companies that are investor grade.  These guys usually stand at the back of the room during the meeting.  Once you contact one of them they know other investor grade professionals.  Another way to find investor grade professionals is to ask an investor.  If you don’t know any real estate investors,that’s not a problem.  Look in your local newspaper under houses for rent.  Look for an ad that looks like an individual.  Call that number and ask them if they are an investor.  If they are an investor ask them if they will help you get started.  Most of them will help you out as long as it doesn’t take a lot of their time.  One thing to bear in mind is that you don’t need him to give you his entire list because the professionals know the other investor grade professionals.  I would ask for his title company contact because that is likely to be the least personal. I would then ask the title company contact for other professionals that are in the investor arena.  The title company contact may know a lawyer that lawyer may know a real estate agent the agent may know a contractor and so on. I also drive through new construction neighborhoods and talk to the tile workers and painters. This is another way to find investor grade workers for your team.

You will need the following:

Real estate agents

Mortgage brokers

Insurance agent


Subcontractors such as:

Air conditioning contractor


Flooring guy


The Magic of Real Estate

In order to retire it is not about an age and it is not about a big pile of money.  The problem is that the pile of money is never large enough.  Why is the pile never large enough?  That is because what keeps you from retiring is that there is a bill that comes every month and what you need to pay that bill is income.  So piles of money do not retire you income retires you.  The problem with stocks is that they don’t create income.  If you buy stock for $1.00 and it goes up to $2.00 the only way to get the $1.00 of profit is to sell the stock.  That means it is not making you money anymore.  That is why real estate is such a good vehicle to retire you.  A rent house will produce you $500/month every month forever and you still own the asset.  Remember the story of the goose that laid the golden egg?  What do you think that was designed to teach you?  The problem is that teachers taught you that story and they don’t have a golden egg laying goose of their own.  Heck they don’t even know that this goose exists.  Real estate is the goose that lays the golden egg.

The way to retire is to look at how much money it takes for you to live.  Not the amount that you make but what it takes for you to live.  The way to do that is not to do a budget.  Budgets don’t work because what they are is wish lists. You will say, I am not going to spend any money on going out and then you will go out eventually.  My mentor told me that people have a financial thermostat.  That means  you have an amount that you will spend no matter what you want to do.  If you try to spend less, your spending will eventually creep back to your thermostat setting.  The way to determine what that number is; look at your bank statements from the last 3 months.  The reason you want to do that is, you didn’t know you were going to look at them so you don’t do anything artificially to make the numbers look better.  These numbers are true numbers.  You want to put every dollar spent from the last 2 months into categories.  You want to know what you spend from rent to dry-cleaning.  If that number is $5,000 then all you need to do is generate $5,000/month of passive income and you are retired.  You may continue to work but you will be working for other reasons than to live.

This means, if you can find rent houses that yield $500/month you want to buy 10 of them.  You may ask what about income taxes.  One of the best things about rent houses is the rent is basically tax free.  This is because the house is depreciated on your taxes over 27 ½ years.  So if you have a house that is worth $100,000 then the lot is probably worth $20,000.  The remaining $80,000 is the house.  You take the 80,000 divide it by 27.5 and you get to deduct that depreciation from your income taxes.  That is $2900, if the house rents for $1000/month or $12,000 for the year, almost $3,000 of it is taken off the top for depreciation and then the normal deductions equal it out pretty regularly.

I believe in changing out houses after 5 to 8 years with another house.  You should always have 10 houses but not the same 10 houses.  That is because the house is getting closer to some major repair.  The way to switch out the house is by using a 1031 exchange.  This is a tax treatment that allows you to roll the money from the sale of one house into another, without it being a taxable event.  That means you never have to pay the taxes until you die.  Now when you die your heirs inherit the house at the stepped up basis so nobody ever pays taxes on rental property.  That is why 80% of rich people get rich in real estate.

Let’s Get Rich

I looked at several ways to make enough money so that if I worked or not I would have enough money to live my lifestyle. I deceived I needed a business. I had a vending business, a video store and real estate. Although they all made me money the only one that took virtually none of my time was real estate. So real estate is a business that I can own and take weeks off at a time and the business still makes me money month after month.

In Houston Texas you can buy a single family house for around $100k with a payment principal interest taxes and insurance) of around $600 per month. That house will rent for around $1200 a month. If you take out a little for a buffer you can put $500 a month in your pocket. So if you buy 10 of them you will have $1million in real estate and make around $5,000 a month.

You may ask how you can afford $1million?  You don’t, you need to borrow that $1million.  Dave Ramsey promotes debt is evil and he is correct when you look at credit card and personal debt. Income producing debt is the only way to get rich. If you have to wait until you save $1million you won’t get there until you are 50 years old. What you want to do is get there in 5 years or less. I always say that retirement is wasted on the old. You want to retire and travel to tropical locations but you want to do it while you still look good at the nude beach.

Let’s look at debt. If you have $100,000 and you buy a rent house and charge $1200 month for rent you will make $12,000 per year. That is 12% on the money you employ. That is good but what I would do is put down $10,000 on that house, take out a mortgage for $90,000. The PITI on that will be around $600 per month. Rent it for the $1200 and you make about $600 per month. That will make you $7,200 per year but since you only have $10,000 in the deal you get a yield of 72%. Of course you can’t live on $7,200 per year but since you have $90,000 left over from your pile of $100,000 you can do it nine more times. So you now have 10 houses yielding $7,200 per year per house for a total of $72,000 per year.

It gets better. The loans that we use are hard money which funds the money to buy the house and fix it up. The beauty of this is you don’t have to buy houses that are habitable, which is one of the requirements of an FHA loan. So you buy this house and it needs carpet appliances paint and one major system. Because of that you buy this house for $65,000, borrow the $10,000 to fix it up along with the $65,000 to own the house. Once the rehab is done, refinance it into an FHA loan and boom you end up with that $100,000 house for $75,000.

How Retirement Works

The US census of 1990, 2000 and 2010 all show that 90% of Americans retire at or below poverty income levels. Why is this you ask?  It is because there is only 1 way to retire that is to have social security, a passive income stream (like a pension) and personal savings.  What companies have done is eliminated pensions so we are retiring on only the social security and whatever we have in our 401k account.  You have $101,000 or so in your 401k.  I know that because Vanguard recently reported the average 401k balance at year-end 2013 was only $101,650.  If this is the average then some are more and some or less.  But a realistic view of what that means is that a whole lot of us are below that figure.  Nobody can retire on $100,000.

The typical investment advisor will tell you how to diversify your portfolio.  They will tell you to grow your nest egg.  But growing a large pile of money never retires anybody.  The pile can’t ever be large enough for you to retire.  What stops you from retiring is that at the end of every month a bill comes in.  That bill could be rent, car note, or food.  Since you like eating you need income to pay that bill.  What retires you is not piles of money but income…passive income.  A pension is income and they took those away.  So what you need to do is replace the income lost when pensions were taken away.  That is what real estate will do for you.




What It Takes To Retire

I was in corporate America working sixty to eighty hours a week at a job that I really loved.  Although I was paid very well and I was under a pension system and had a 401k, I was still trading time for money. I was too busy earning a living to have a life. When I graduated with my bachelor’s degree in Mechanical Engineering, I was in my orientation with a major international chemical company.  There were people who came in to explain how the purchasing process worked, how project funds were approved, how to organize projects for successful monitoring of costs and completion, how to work with contractors and bids etc.  They even explained the difference between projects that were going to be capital versus expenses.  Then the session changed and they discussed human resources issues.  They told us about the progressive discipline process, hours of work and how the performance review process worked.  Then the benefits session came up and the director of human resources came in to do a section on retirement.  As a newly minted 23-year-old engineer, retirement was not even on the radar.  All I could think about was buying fast cars and chasing as many girls as I could.  But I did learn from him how to retire.  He told me  that retirement was a 3 legged stool. Three legged stool  You can’t retire effectively without all 3 legs. The 3 legs are company pension, social security, and personal savings.   He said that social security is in place, and working for a good company like DuPont, Union Carbide or Enron would secure your pension.  The government realized that personal savings was too low in America.  Because of this they instituted a change to the tax code in section 401k.  This was intended to add incentive for people to save.  This was an adjunct to your retirement program.  As you now know the 401k is THE retirement program.  They have taken an ancillary part of the retirement program and made it the only retirement program. We are looking to retire with only 1 leg under us.