10.11.14: Book Review: From 0 to 130 Properties in 3.5 Years

My quest to read one real estate or business book a month continues. This month I splurged a bit to buy From 0 to 130 Properties in 3.5 Years by Steve McKnight. I hate paying over $10 for a used book just on general principle.

Steve McKnight is in Australia and started with buying houses and selling them to tenant/buyers with seller financing. He compares real estate investing to a game of chutes and ladders – an on-going combination of fast-tracking returns and setbacks. 2014 has been more a year of chutes than ladders, but the game is ongoing…

Steve seems to buy into the voluntary simplicity movement, he suggests spending 10% of pre-tax earnings to each of these categories: charity, investing, debt reduction. Leaving the remaining 70% to spend guilt free. Financial freedom doesn’t make you happier, but provides time and money to spend on activities we are most passionate about.

We would never buy a negative cash flow property in today’s local market, but he goes into a bit of detail explaining why “negatively geared” properties are a bad idea. The focus on investing should be to make money, not to save tax. Our tax bill has gone up a lot since we started to invest, but that means our take home pay has too!

What he said about taking action resonated with me. Being comfortable and having nice things numbs the motivation to dig deeper and go for great. The plateau effect is getting stuck in a rut and having difficulty getting momentum. Investors get out of real estate because they don’t correct the plateau effect fast enough. Beware if you find yourself with not enough knowledge, time, or money, and watch for these events:

• Lack of long term investment plan
• Cash flow shortfalls in rentals
• Unlimited imagination, but very limited finance
• An inability to locate deals
• Negative experiences with current investments
• Fatigue or boredom with the idea of property investing when once it was exciting and exhilarating.

To achieve impressive results, think big, set a goal, break it down into mini steps, and take immediate and massive action. 92% of investors only own one or two properties, and only 3.6% own 5 or more. Success comes with doing things differently. Along those lines, he treats his tenants as clients rather than menaces.

I liked what the author said about the goal not being to buy the prettiest house, or even a trendy location, but to make the most money in the quickest time for the least risk. Scarcity, not location, drives prices higher. He has a concept called the asset zoo, where there are 4 different animals that properties can be characterized as, depending on how passive the income is and how much growth potential there is. We chose the most difficult tortoise, which is not passive and has little appreciation potential. Part of the emphasis is to have a diversified portfolio, not all one animal. The author also states that the poor performers need to be sacrificed to be lean and efficient.

The author asserts that many real estate investors hang on to properties too long thinking that holding is the best alternative, when selling could bring more profits and freedom. The longer a property is held, the more profits that are eaten up by inflation. Appreciation is about timing the market rather than time in the market. Property values over time trend sideways or down as much as they have trended upward. He was always adjusting his strategy to match the prevailing market conditions; the economy is always shifting.

Steve spends a lot of time discussing the different ownership options and how to protect assets and save taxes. He’s a big fan of structuring real estate in trusts and has used them to qualify for more loans.

The aim is to get enough knowledge and experience to spot a good value as well as a real estate agent, and better than most buyers. Money is made in spotting the properties, not in doing the labor yourself. Roll up your sleeves and focus on buying problems and selling solutions. He also talks about surrounding yourself with people smarter than ourselves, and listening and applying what we learn. It’s interesting to think about; how much time do we spend with people smarter than us, do we seek them out?

Overall, an interesting and insightful book.