Welcome. The following articles will guide you through your first steps to understanding real estate investing. I’d love to follow up with a meeting over coffee to go over any questions, provide some more details, and discuss any potential investments I have in the pipeline.
- What would you do with some extra cash every month?
- How do you plan to retire?
- Do you understand your stock portfolio?
- Why invest in real estate?
- What kind of investor are you? Active or passive?
- What is real estate?
- What kind of real estate is right for you?
- Let’s recap.
- Bonus: What is your why?
1. What would you do with some extra cash every month?
Would you eat at restaurants more with your husband or wife?
Would you put your kid through private school?
Would you buy a newer model car?
Would you take a 2-week dream vacation?
As a freelancer, it’s tough to just ‘make extra money’ since your job will end in a few short months at best. You are constantly saving money to tide you over during that hiatus that is coming quickly. Plus, you work long hours and don’t have time or energy to cook, so you eat at expensive restaurants almost daily, killing your budget that you’re struggling to hold to.
And what about retirement? That dream? How are you supposed to get there?
Does any of this sound familiar?
I want to encourage you to take your financial life into your own hands and look into investing in cash flowing assets like real estate – to create passive income streams that send you monthly or quarterly checks, to pad your freelance income, and set you up for a more stable income stream now and into retirement.
2. How do you plan to retire?
There are two ways to retire:
- You can save up a large enough pile of money that you can spend until you die, and hopefully not run out. Hopefully that pile is large enough to afford you a ‘comfortable’ lifestyle, and hopefully nothing bad happens that causes you to spend more than you budgeted for.
- You can create cash flowing assets that pay dividends, AKA “mailbox money.” You can spend, save, give away, and do whatever you like with this money, because it will replenish itself on a monthly basis!
How are you doing with option #1? Is your pile of money going to be big enough when you stop working? Remember, on your way to retirement, you will be paying your mortgage/rent, car payment, kids’ schooling, after-school activities, their first car, college tuition, etc. As a freelancer, it is pretty daunting to cover all of these line items, much less save for your own retirement fund.
I choose option #2. I want to create an income that I can expect and count on when I stop working; an income that allows me to live the life I desire, spending the time with my family and friends at my leisure, without clocking in for a 50-60 hour/week job.
How about you? Which option sounds better to you?
3. Do you understand your stock portfolio?
Where is your money currently invested? In the stock market? Good for you! 2019 was great, wasn’t it? And 2020 so far has been decent?
But why is your stock portfolio doing great this year?
The global financial climate? The latest announcements from the President? The athleisure trend? Luck? And how do you predict 2021 will be?
Personally? I do not understand the stock market very well. Scary, isn’t it? So much of my money is tied up in something I don’t fully understand.
And if you’re like me, you don’t really know the answers to the questions above either. And while I appreciate my financial advisors and their guidance, I choose to have a grasp on where my finances are going.
But why do I invest in real estate?
4. Why invest in real estate?
While I don’t exactly understand the stock market, I do understand real estate, because, at a base level, it is a very graspable concept.
I have lived in a home my whole life. I know what it feels like to go to work and make that all-important rent payment at the beginning of every month. It’s not a complicated concept, it’s daily life.
Except now, as a real estate investor, I am the one who provides that home for a tenant, who works at their job, and whose most important bill every month is their rent payment…to me.
Or in financial speak…
I purchased an asset that is now being paid down monthly by someone else. I get incredible tax write-offs, and since it’s cash flow positive, I receive extra money in my bank account on a monthly basis.
That’s right – the rents I receive don’t just ‘cover the mortgage’ on my properties, but sometimes double or triple it, leaving me with more money to invest or spend on extra activities, like the ones I listed above in article #1. This is called ‘positive cash flow.’
5. What kind of investor are you? Active or passive?
There are 2 ways to be involved with real estate.
- You can be active – get to know the markets, find your own deals, analyze the numbers, submit offers, counter offers, bid against other buyers, line up all the attorneys and entities, and close the deal. Active investors do more work, and are generally paid slightly more accordingly.
- You can be passive – let someone else do all the work mentioned above. Simply read over the offering materials provided to you, perform your due diligence, then invest your money into deals that make sense to you. Passive investors do less work, and are generally paid slightly less accordingly.
What level of involvement are you looking for?
6. What is real estate?
There are many forms of real estate; from single-family residences to apartment communities; storage facilities to mobile home parks; non-performing notes to undeveloped land…the list goes on and on. Essentially, any form of land and the buildings on it can be classified as real estate.
As an investor, every form of real estate can produce returns once you master them. I encourage you to find what clicks for you and makes you excited and also what matches your risk tolerance.
7. What kind of real estate is right for you?
There are many classes of real estate, but for this article, I’m going to focus on residential real estate –where tenants live in the property. These are in residential areas, occupied by singles, couples or families – people just like you and me. The tenant pays rent, not a mortgage. There are things like utility bills, gardeners, paint, carpet, plumbing issues here and there, nothing extreme or fancy. Just basic, day-to-day living. Once you understand that, it’s a lot less overwhelming. This is not rocket science.
Let’s look at the small properties:
A traditional house is called a Single Family Residence or SFR.
Anything with 2-4 units (duplex, triplex, or quad) is considered residential multifamily.
Both SFR’s and residential multifamily (1-4 units) can be purchased with leverage, using a traditional loan – a mortgage.
SFR’s and residential multifamily (1-4 units) are relatively easy to acquire. You can find them yourself on sites like Zillow or Redfin being sold by families that are moving on, or investors who are changing asset classes.
When you buy 1-4 units, the pricing is determined by the market, by comps, and by the seller’s personal situation. You are buying from 1 of 2 sellers: either owner-occupants that live in the property or investors who owned the properties as rentals.
When you sell 1-4 units, the same pricing factors come into play, and you have the same 2 buyers to sell to.
Let’s look at the large properties:
Anything with 5+ units is considered commercial multifamily. A 5-unit building, a 20-unit apartment complex, or a 200-unit apartment community are all examples of commercial multifamily real estate.
Commercial multifamily (5+ units) must be leveraged using a commercial loan.
Commercial multifamily is a bit more complicated to acquire. You are not necessarily going to find these on Zillow or Redfin, and you will not necessarily be dealing with owner-occupants.
These are generally for investors-only.
When you buy commercial multifamily the pricing is determined by things like rental rates, operating expenses, cap rates… essentially numbers and spreadsheets instead of emotion and market trends. This is a business, and businesses are valued based on their profitability.
When you sell commercial multifamily, you are selling to savvy investors who are running the numbers, not making an emotional decision based on their personal lives.
Which do you prefer?
I invest in all of these, but let me tell you why I prefer commercial multifamily.
Commercial multifamily is more complicated, yes, but the returns are more calculable and in your control. A bank will look at a commercial multifamily asset and loan, or refinance your loan, based on something called the Net Operating Income (NOI). This is a calculation based on the rental income vs operating expenses. Basically, the bank is looking at how much is left at the end of each month. These are numbers that I can control to some extent.
There are several things I CAN DO to affect my NOI. I am limited only by my creativity. For instance, I can raise rents by 5%. I can negotiate a better rate with my gardener or cable provider. I can change all light fixtures to LEDs and save on electricity. I can install water-saving toilets and cut my water bill. I can install covered parking and charge a reserved parking fee. By doing tasks like these, I raise my NOI, and literally raise the value of my property. This control is exactly why I love commercial multifamily real estate, and I think you will too.
The issue is that commercial multifamily is more complex, more expensive, and requires larger deposits to get a commercial loan. But don’t worry, this is why I partner with teams of investors to purchase and manage the properties.
8. Let’s recap:
Real estate is simple:
You buy a property for a fraction of its actual value, using a down payment.
Someone else pays for it.
You get tax benefits for owning the property.
While you hold the property, you collect rent checks every month.
Eventually, you sell the property and collect the equity, or hold it long term and collect mailbox money for life once the tenants pay it off completely for you.
What inspires me to buy real estate:
Extra cash flow each month.
I don’t understand stocks; real estate is an easy-to-grasp concept.
Passive, can be on autopilot.
Calculable and mathematical.
Putting a roof over someone’s head, not just money in wall street.
Tenant pays down the property.
9. BONUS – What is your why?
Have you ever tried to go to the gym for the first time?
After week 2, you all of a sudden lack that fire that got you to sign up for your $49/month membership. Then by week 4 you’re simply “too tired” and “will just go next week.” Sound familiar?
Or perhaps you’ve decided to save more money. It’s easy for the first week, but then in week 2 you already want to go back to your old ways of eating at restaurants, drinking soda at lunch, buying Starbucks, etc. All the things you just vowed to moderate now that you’re supposedly saving money.
Motivation is hard…
…unless you know your ‘why.’
My why motivates every real estate decision I make:
“I want to have more time to spend with my wife and son.”
This is a stronger motivator than simply telling myself ‘I want to have more money,’ because it’s more loaded and has a more personal impact that affects my whole family.
I have a vision of spending months with my wife and son, traveling to Hawaii, going to baseball games, etc. As a bonus, when the time comes, I have a vision of handing a box of keys to my son as his inheritance: “Here you go son, you never have to work again if you don’t want to.”
When I analyze real estate deals at 12am, or open up another book before I go to bed, or board another plane to look at a new market, or schedule another call during a lunch ‘break,’ my why is what keeps me going.
Before you move forward with anything, take 5 minutes right now and write down your why. What will motivate you as you make these decisions that impact your future?
Thanks for reading. Please contact us to setup a meeting for more information and to hear about future opportunities from us.