No.  No thank you.  No can do.  No means no.  No go. No way Jose.

As adults we’ll do almost anything to avoid having someone tell us no.  But children, they have absolutely no fear of rejection.  That is, until their parents, grandparents, aunts, uncles, teachers and babysitters unmercifully beat them down with a never ending chorus of no, no, no, no, no.

According to a UCLA study, the average toddler hears NO up to 400 times a day.  It should come as no surprise that by the time a child becomes a teenager they’ve built up a healthy aversion to the word.

Just imagine what you could do if no wasn’t so difficult to hear.  What if you and I were a little more like my 8 year-old daughter Allyson?

Last month, with an order form in one hand and pen in the other, she eagerly left our home with one goal in mind – to sell as many Girl Scout cookies as possible.  Allyson knocked on every door in our neighborhood.  She was confident in her delivery and prepared for any objection, the most common being “I don’t have any money right now.”  She politely informed the prospect that they didn’t have to pay until the cookies were delivered.

The end result was an 88% conversion rate.  Of the 25 people who answered their door that day, only three said no.  All 22 buyers purchased at least two boxes of cookies, or more, and one sugar-deprived woman proudly ordered 20 boxes for herself.

Of course, it helped that Allyson had a desirable treat to sell.  And her passion for the product was clearly evident to the customer.  Mix these things together with her no fear of rejection attitude and it’s surprising her conversion rate wasn’t higher.

So, do you have the following?

1. A desirable real estate related product or service to offer your customer?
2. A passion for that product or service?
3. The ability to shake off a steady diet of no, no, no, no, no?

My hunch is that if your real estate investment business is struggling it’s because you answered no to at least one of these questions.  A lousy product, lack of passion and fear of rejection is a recipe for failure. It’s much easier to sell something you believe in.  The word no doesn’t sting as bad either.

Now, Allyson would like to know – who out there would like to buy some Girl Scout cookies?

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Motivated Door Knocker has 88% Conversion Rate

Any investor or homebuyer that has worked through a short sale in the last year knows what a lengthy process this can be. I actually bought a new personal residence in 2011 and it took 8 months for the bank to finally approve our offer. Of course, this was after multiple denials and re-offers, appraisals, inspections, etc.  Because the process took all of 8 months, we eventually resolved that the bank wasn’t going to approve the offer and had mentally resigned ourselves to this fact. As far as we were concerned, if the short sale eventually did get approved, it was going to be a pleasant surprise. While 8 months isn’t the norm with most short sales, waiting multiple months to get an approval (or denial) is not uncommon.

For many investors or wholesalers, it’s very difficult to build a business model around an acquisition strategy that can take months just to get a “yes” or “no” decision. I have found that many of the short sales we are involved with as investment properties take upwards of 3 months to get approved. At first, I was hesitant to use short sales as an acquisition strategy because I didn’t want to get muddled down for months at a time waiting for a bank approval that may or may not come.  However, as a turn-key provider always looking for rock bottom bargains, I couldn’t overlook the opportunity that the short sale market presented.

Once we committed ourselves to the short sale market, it became a matter of building a pipeline of short sale contracts. The idea being that after a few months of filling up the pipeline, we would get to the point where we are consistently closing on approved short sales.  Of course, this requires that we are continually adding short sales to the pipeline as well. Keep in mind that for every 2 or 3 contracts that get put into the pipeline, we may end up closing on only one of those.  Thus, if I want to consistently close on 3 short sales a month, I probably need to have 6 to 9 submitted every month as well.

As an aside, 3 months can be a very long time in a real estate submarket. Some of our short sales don’t go through because we choose not to move forward, not necessarily because of a bank denial. If a neighborhood experiences decline over a 3 month period as a result of foreclosures and there aren’t any newer comparables to work with we may choose to walk away from a property. It’s very important to keep a close eye on the submarkets and neighborhood you are buying in. In this volatile market, it’s not uncommon to have a detrimental shift in values in a short period of time that can kill your numbers.

Whether you are new to investing or a seasoned professional, working in the short sale market is a very viable strategy right now. While the thought of getting entangled with a bank for a one to three month period of time may not sound like fun (especially for a single deal), the principle of building a pipeline of short sales can make the time investment worthwhile.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Building a Pipeline of Short Sales

The questions I get most frequently via email from the BiggerPockets audience are:

- Can you tell me more about your model?
- Why do you think it works?
- Can I copy your model in my market?
- How can I participate in it?

Instead of responding to emails weekly around these topics, I thought I would take the time to write up a detailed review of our model.  I will take you through a specific deal we have just locked up and hopefully answer the majority of the questions we receive.

Step 0: Learn your market and establish relationships

Our model starts with doing the homework required to understand what a good deal means in your market and establish relationships with multiple agents.

By putting in the leg work up front you can quickly understand what a good deal means and you can put yourself in the path of success by establishing relationships with agents who control the inventory.

When you spend quality time with agents that control the inventory, you can share with them specifics on what you looking for.  When they trust you and they know you will close on deals, they will bring you into the deal flow. They will show you what is available, what is coming and what might be a shaky escrow.  Investors who can get in the deal flow with the most agents will find the best deals!

Step 1: Purchase a Property at a significant discount for Cash

As an example we just locked up a tremendous deal because we were in the “Deal Flow” with a particular agent.  We were presented with the opportunity to purchase a Tri Plex for only 65K.  The Tri Plex is a single building with three units, one of which is two bedroom, one bath unit and two of which are one bedroom, one bath units.

We agreed to pay 65k cash and close quickly.

Step 2: Repair Acquired Unit

The units are in relatively decent shape given they have been vacant for a year.  Two of the units just need a good cleaning, new carpet and paint and they are ready.  The third unit needs some attention in the bathroom as the subfloor needs work.  But all in all, we are looking at under 12K for all the make ready costs.

Once complete we will receive between $1,600 and $1,750 in rent.

We may have a surprise or two arise during the make ready process, however, given our initial price point we have plenty of security and cushion.  Regardless of any surprises we will make sure the Tri-Plex is a safe and secure building for our tenants and a great long term investment.

Step 3: Lease Unit

We will stick a for rent sign in the ground and start marketing the property on CraigsList as soon as we clean up the yard and paint the outside of the building.  I want to get as many people interested in the units as I can while we spend 2-3 weeks repairing the units.

If the trend holds, we will actually have at least one and probably two of the units rented before we have completed the remodeling.

If we have any vacancies post make-ready, we will run ads in the newspaper, and we might offer a move-in special or other promotions to fill up the building.

Step 4: Secure Passive Investment

The most important step in our model is to recycle our capital by offering a secure long term return to a passive investor.  Some past investors have chosen to invest cash while others have used their IRA.

Either way the investor gets a secure 1st Trust Deed and 10% Interest Only Note that pays them every month for the next 10 years.

Each investment is different, but on a deal like this Tri Plex a Passive Investor will lend between 48K and 60K.  The payment on said loan would be between $400 and $500.

We could certainly afford a higher payment given our low end rent expectation is $1,600 but we never want to over leverage our properties.  We believe this type of margin of safety gives our passive investors the security they need and deserve.

Our Passive Investors’ downside risk is they get a building already repaired for about 80% of our invested capital which is a tremendous deal if you ask me (Given I already bought the deal at a tremendous discount).

Step 5:  Recycle Capital

Repeat!  We never spend our real estate capital on anything but more real estate! We work with agents and get in the path of deal flow and find the next tremendous deal.

Our 5-step model takes work but once you have done the upfront homework of learning your market and establishing relationships, it can become a lot of fun. The real key is securing passive investors to recycle your initial capital.

I offer double digit returns on purpose because I want them to work with me.  I have had several emails asking why I pay 10% when I could offer 6-8%.

While it may be true that I can offer less, I won’t because I want the passive investors to profit from this relationship.  Plus, does saving 2% on a relatively small balance really save you that much?  If your deals are that skinny then you need to do different deals.

Everyone should win if you follow my model.

Hope this additional detail provides better insight into our model.

Good Investing!

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Our Real Estate Investing Model in Detail

Over the last 35+ years I’ve spoken with literally hundreds of people convinced they were seriously preparing for retirement. The problem for many is one of scale. For a couple in their 40s who make $80,000 yearly between them, $250,000 is one heckuva lotta money. Yet, if they’re 45, retiring at 65, turning that  amount into $1 million would require 20 consecutive years of just under 7.2% annual yield. No losing years allowed. ‘Course, they’re gonna have a down year or two, right? That means a few months to a few years on the ol’ treadmill catchin’ up to where they were when Murphy showed up. At that point, more likely than not, double digit returns would be needed to arrive at the coveted million dollar mark.

A million bucks at retirement probably ain’t gonna cut it for most retirees.

Think about it. For those getting their income from 401s and IRAs, two things sober ‘em up big time, and quickly.

1.  Every single dollar coming out of their plan is taxed.

2.  If they were 65 today, the 10 year treasury bond would yield them exactly $19,000 a year plus two $5 foot-longs at Subway — before taxes.

The same million bucks in debt free real estate?

Well located real estate, assuming no increase ever, as in never-ever, in net operating income (NOI), the income would be roughly $60-80,000/yr give or take. $1,000/mo into an EIUL from 28 years old ’til 58, with inflation adjustments of about 2% annually on the premiums, will get my own daughter and her newish hubby around $100,000 annually — tax free — ’til they die.

The combination of those two investment vehicles, wisely used, with careful and Purposeful Planning, will slaughter, literally, the anemic performance of a million bucks in the average couple’s 401k or IRA.

Thing is, Purposeful long term real estate investing is relatively rare. This is especially true when compared to those with the ‘qualified retirement plans’ at work. Seems most everybody has one, but they’ll quickly tell us how the performance has been mediocre at best, and dismal at worst. What TV does with real estate is Barnum and Bailey. There’s the required flipper. Then they find a property. Then there’s some false drama created to keep us coming back after the commercials. Then they make a profit. Then it’s time for the new Netflix movie that came in the mail today.

The Takeaway

Your 401k or IRA ain’t gonna get ya there, regardless of what you’ve been told. The next person who tells me about the six figure retirement income they’re enjoying, courtesy of their 401 or IRA — will be the first. They gotta be out there, but I’ve yet to meet one.

Are you gonna be the exception proving the rule? Not freakin’ likely.

Marshal your capital, and commit to learning about how to invest in real estate, long term. Don’t travel the road most are on, it’s a dead end. There are thousands of Americans thinkin’ they’ve succeeded with their retirement plans, solely due to the fact they’re nest egg requires two commas. They were woefully misled, but after the last guest at the retirement party leaves, it’s a bit late.

Now, it might not be too late, IF, that million bucks can be extracted tax free. Alas, a pipe dream for most.

What’s that I see comin’ round the corner? Another birthday?

Time . . . is . . . not . . . your . . . friend.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Purposefully Planning Your Retirement – What Is Time To You?

Our education in any business is infinite, and my passion in note investing has given me the opportunity to meet with some amazing people in the note business and I actively look for new information to perfect my craft. Currently I receive daily newsletters and publications on the concept of note investing, some of which make me very nervous.

As the “new” frontier of hands off, passive real estate investing there are more and more companies and gurus popping up teaching the concepts of note investing. From “Defaulted Mortgages” to Non-Performing 2^nd Mortgages” “Note Funds” “Trust Deeds” and a slew of other topics are hitting the web with vengeance all designed to make you a ton of money in a short period of time. Unfortunately, if you have been in this business long enough you realize all aspects of real estate investing take time and effort and there is no better substitute for experience as you perfect your craft. So, as I see all of these boot camps and programs that are designed to make you wealthy in notes with little to no money down I fear for the legitimacy of those that are actually trying to get into this business and do things the right way. Here are a few suggestions I can offer for those looking to get into the note investing world.

Find a Mentor- Like any other business strategy, working with someone that has seen the highs and lows and will offer advice for you to help you succeed is critical in this area of investing. Its less common to find a seasoned note investor at a REIA meeting, but if you look around you can find someone to help you grow

Learn Your State Laws – Do you know if the state you are investing in is a foreclosure or forfeiture state? Do you know if there are unique statutes in your state that will have an effect on enforcing notes? Do you know what RESPA is? The SAFE ACT? After you find a mentor, meet with a good real estate attorney in your area that understands mortgage financing laws and learn as much about the state and federal law as you can. It will be worth the investment

Focus – After you do these two things you head will be spinning with so many aspects of note investing you can delve into. Focus your efforts on the one area that most fits your personality and goals. Don’t worry about the glamorous case studies out there of other strategies. You will make money doing what you love and that you do passionately.

Keep it Simple – Guru’s and their courses are often filled with neat “tricks” that you can apply to either speed up a process or circumvent a law. Keep those tips and tricks on the sidelines. Develop sound principles and build your note business the right way.

Note investing is truly a labor of love for me, and one that I think has been under the radar for too long. It is my hope that bad information does not destroy good note investors before they get started. Feel free to share your experience. Your feedback and readership is greatly appreciated.

Photo Courtesy: Dimension Guide

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Even Note Investing Has Guru Traps

Many years ago a guy in his early 40s called for an office appointment. He’d invested in his first small income property, and was troubled by the advice his 70 year old dad had offered. In fact, there was tension between them about what investment strategies the younger man should employ.

Dad, we’ll call him ‘Sam’, had a core belief that debt, even in the best light, was nearly evil. Nothin’ good could come from it, and everything awful was almost assured, due to its existence.

His son, ‘Jack’, wasn’t a zero down enthusiast, but his extensive research taught him that prudent leverage, executed wisely, was often a foundational factor in the creation of wealth. To Jack, though, retirement income was the reason for the season.

For those unaware, I live and work in San Diego, having moved here in June of ’67. Sam bought his first property in the 70s. It was a very well located fourplex just down the road from where my office is now. I love that neighborhood. He’d been retired for several years. Both his home and the fourplex were debt free. He had a pension of around $2,000 monthly, plus his Social Security check which he said was around $1,300 each month. The fourplex, at the time, added roughly $1,800 a month in cash flow to the pot. He had no house payment, but his taxes/insurance ran him about $300 or so monthly. Lord only knows what his cost for maintenance and repairs was, as the place was built before WW II.

Jack? With Sam literally glaring across the conference table at me, he opted to follow a pretty conservative leveraged approach. An advantage he had goin’ for him was his contractor’s license. He had a bit over $100,000 to get started. He’d acquired a one bedroom duplex a year earlier as a fixer, which had done well. Its net equity back then had hit around $50,000 +/-.

I won’t go through all the mind numbing numbers, or all the various moves Jack’s made over the years, executing the strategies I’d laid out for him. Suffice to say that he’s turned that original investment plus the $100,000 into not only a healthy net worth, but superb cash flow. In fact, an ironically to say the least, by following his Purposeful Plan, he methodically rid his properties, one by one, of all debt. His income today is five figures monthly.

His net worth requires two commas easily, and has for quite some time.

I never saw or talked with Sam once he left my office after our first meeting. Still remember that glare though.

There’s room for all the various schools of thought when it comes to investment in real estate.

This is especially true as it relates to long term outlooks. However, don’t for a minute think the outcomes are synonymous, cuz they aren’t. Not by a long shot. Be very careful, thoughtful if you will, as you choose your strategies when electing real estate investment as your main vehicle for retirement income.

Why does this come across as breakin’ news to some?

When real estate investors eschew leverage completely, by definition they limit their ultimate retirement income — unless, of course, they begin with a few million bucks. Since that’s not freakin’ likely, their retirement income will be significantly less the those who opted in favor of sagacious leverage, applied appropriately. There’s not a thing wrong with that. As long as you’re happy with the income your strategies have generated, that’s enough. We all have our own comfort zones, right. Don’t know about you, but my comfort zone trumps everything. Bet yours does too. If I’m not all warm ‘n fuzzy about something, especially to do with my own capital or real estate, it ain’t happenin’.

There are those who think puttin’ nothing down on real estate is not nearly as risky as is the general perception. They buy a property, fix it with their own cash, then sell for a reasonably quick profit. Much of the risk taken is reduced as a result of their experience and expertise. Still, it’s obviously far riskier than putting down a 20-50% down payment. Again, it’s about comfort zone. There’s allows the use of the no-down strategy.

Some of my clients, a very few to be sure, will knowingly arrive at retirement with less cash flow and net worth than might’ve been. They listened to the strategies I recommended, then decided, even though it was OldSchool conservative, that they wished to be a tad more so. They pulled out their comfort zone ‘trump card’. We then preceded their way. As I told a new client recently, “You’ll probably be able to limp along in retirement with ‘just’ $10,000 a month plus your EIUL plus your pension.”

There are certain categories of real estate I’ll never own. I have a personal bias against ‘em. Yet, I personally know many who have done exceptionally well with them. Go figure. Yet, the reason I’ve avoided them like the plague is the same reason some of these investors have gone through unfortunate times. Yet, many of ‘em not only stayed the course, they acquired more of the same.

Comfort zone. It’s always about comfort zone.

There are indeed strategies I view as, um inadvisable. But it’s just my professional opinion, based upon my own experience and analysis. Heck, Grandpa used to recoil in horror at the strategies I teach and use in my practice as a real estate investment advisor. He was 22 when the in October of 1929 when the crash generating the Great Depression hit. Many of his generation, and those whom they indoctrinated believe incurring debt is a principle espoused by Satan himself. I get it. After hearing many of Grandpa’s depression era experiences, I might’ve come away thinkin’ the same way.

Comfort zone is everything. All us have one, and it ranges from zero down to paying with cash. Some never sell anything they buy. Some won’t ever exchange to anything or things bigger. It’s all good. But it’s definitely not all the same, or more plainly put, equal.

Different strategies generate different results — sometimes wildly different. Always listen to your comfort zone when it speaks but remember . . .

Your mileage may vary.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Real Estate Investment Schools of Thought Vary – As Does Their Mileage

A patent attorney.  A certified public accountant. A physical therapist.  A Realtor.  A retired utility company worker.  A mechanical engineer.  A doctor.  A nurse practitioner. An elementary school psychologist.

These are just a handful of people I know that have strategically defaulted on an underwater mortgage.

While their backgrounds and occupations are diverse, all are honest, hardworking and well educated.  Each of them, up until they made the decision to strategically default, paid their bills on time and had superior credit scores.  They all had significant cash reserves and the ability to make payments on their over-inflated mortgage.  But it made no sense for them to continue to throw good money after bad.

U.S. companies like American Airlines engage in this sort of business practice all the time.  Last November, American filed for chapter 11 bankruptcy even though the company had over $4 billion in cash.  American used bankruptcy to trim their debt load and get out of burdensome union contracts.

So why aren’t more Americans walking away from their underwater mortgages?  For starters, lenders have a vested interest in making us believe that it is somehow immoral to purposely default on a mortgage.  If you read my post from last week you’ll find a comment from a lender who claims this course of action is fraudulent.

That is not true.

What is true is that if you elect to walk away from your underwater mortgage you’ll lose the money you put down to purchase the home, any money you spent upgrading the home and your sparkling credit score.  The latter is the other main reason most homeowners continue to pay even though it doesn’t make financial sense.  Most people fear doing a short sale, losing their home to foreclosure, or bankruptcy will destroy their credit score and prevent them from ever buying real estate again.

And that is not true either.  Here are the facts, provided to me by Glen Reiley, a mortgage consultant in Phoenix:

For FHA loans:  a borrower can obtain financing 2 years from discharge or dismissal of a Chapter 7 bankruptcy, 3 years from completion of a foreclosure and 3 years from completion of a deed-in-lieu of foreclosure, short sale or pre-foreclosure.

For conventional loans:  a borrower can obtain financing 4 years from discharge or dismissal of a Chapter 7 bankruptcy, 7 years from completion of a foreclosure, 4 years from completion of a deed-in-lieu of foreclosure, and 2 years after a short sale or pre-foreclosure (with 20% down payment).

Of course, these are traditional bank guidelines.  Very few real estate investors I know use traditional banks to purchase fix and flip or buy and hold deals.  If you’re looking for funding chances are you’ll need to find private or hard money lenders.

Here’s what I learned after my own strategic default – private money lenders could care less about my credit score.  They only care about the purchase price and down payment.  I’m currently working with three different private money lenders and I’m about to start doing business with a fourth.  Security is what they want and with the right buy price and down payment (20-25%) I can borrow up to $2 million dollars at a time.

Sure, their rates are high (from 9.95% up to 18%).  But as long as I’m buying right the profit/cash flow spreads are above average.  The irony here is that drowning on an underwater mortgage will not kill you.  It could actually help you swim again, farther and faster.

(Legal disclaimer: Deficiency laws vary from state to state; always consult an attorney before you consider a strategic default.)

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

How to Buy Real Estate after a Strategic Default

Yesterday, a guy called me wanting to sell his mortgage on a small piece of land located in a desolate area, far from any population centers.  The parcel had access to water (from a well) but no other improvements.  He purchased the property last summer for $60K and had just sold it for $110K.  Of course, he wanted us to pay him the full note balance.

Where do we even start with this real estate note?  It has so many problems and red flags that no investor would even consider buying the full note.  The isolation of the property and the fact that he wanted to flip what was almost certainly an overvalued note limits most note buyers to either buy a small piece of the note or, more likely, pass on it altogether. 

Actually, I knew that we would pay less for this mortgage note as soon as he told me that it was collateralized by land.  No matter how strong the other characteristics of the note, land notes will command a lower price than will real estate notes on houses and commercial buildings.  Simply put, because bare land is usually less valued by owners than are other parcels, there is a higher likelihood of default in the minds of note buyers.  Land, other than that in prime locations, takes longer to sell and can decrease in value more quickly.

Notes on land without several improvements are even harder to sell because of the additional risk.  We consider improvements to include water, power, sewer or septic, paved roads going to the property, etc.  These improvements all add value to the property and make it more likely that it will someday be built upon.

If you own a parcel of land and are thinking of selling it, recognize that a buyer will probably not be able to get a bank loan.  Unless they can pay all cash, you will probably need to carry a note (offer owner financing).  To decrease the risk of the note and to maximize the amount that you’ll receive if you later sell it, you’ll want to structure the note correctly. 

Here are a few hints:

1. Get as big of a down payment as you can.  At a minimum, get 25% down, and shoot for 30-50%.
2. Sell to a buyer who has good credit, and who has the means and willingness to cherish and improve the property.
3. Ensure that the sales price is close to the actual value, as determined by an appraiser.

Happy investing!

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Mortgage Notes – A Hard “Land-ing”

It’s so enticing to be able to buy a home relatively cheap, for cash, isn’t it? Sometimes, though rarely, it’s even better when they’re young and pretty. If there’s little or no fix-up, the high lasts extra long. You’re in that sweet career spot where you’re above the middle point in your career earnings, say 40-55 years old or so. The cash flow literally makes you giddy at times. You’ve got four of ‘em now, and are takin’ a breather. Though you paid around $70-80,000 apiece plus closing costs, they’re worth a bit more — you got ‘em at a discount. Does the good news ever end?

Well, maybe, and maybe at the worst possible time.

Let’s say you were in your early-mid 40s when you acquired this portfolio for cash. You plan to retire somewhere in the range of 60-65, but sooner is a much better concept than later when you’re pondering that day, right? The assumption here is that those four rental homes were bought to supply you with income when the big paycheck ain’t automatically arrivin’ at your bank account twice a month any more. Good plan — as far as it goes. But allow me to help you find the black fly in your chardonnay.

When you think end game, think retirement income and net worth.

The same time you were happily writing checks for the purchase prices of these nice homes plus the closing costs, others were doin’ something a bit different. They weren’t thinkin’ about the cool cash flow now, though it surely doesn’t hurt their feelings. No, they were thinkin’ in terms of the last guest leaving their retirement party. They saw themselves huggin’ their wives, while realizing they only had a couple days before they had to be at the cruise ship. See, they spent the same original capital on the same number of real estate investment properties, the same time you did. The only difference was they didn’t pay cash. They didn’t sacrifice location quality either. In fact, what they bought cost a bit over triple what yours did.

Remember though, they were thinkin’ way down the road, even as they were closing their acquisitions, knowing that yeah, they’d have loan payments, but would still be enjoying some fairly significant cash flow. Again — they were thinkin’ end game, NOT how cool it felt to buy cheap houses with super sexy price rent ratios.

Fast forward 15-20 years.

The four homes are still renting for a monthly total of around $3,800 or so. This results in an annual cash flow (read: retirement income) of (being kinda sorta generous) $30,000. Your net worth is, well, the same as it was when you bought ‘em. Maybe around $400,000 +/-.

Our couple who bought the much higher priced props? They’re also debt free now. Their gross monthly rent is about $10,200. Their properties are just 15-20 years old. Their annual cash flow (again, read: retirement income) is roughly $75,000 +/-. Their net worth from these properties alone is in excess of $1 Million.

I dunno — which properties do you wanna have at retirement?

BawldGuy Axiom: It’s about the cash flow and net worth when you retire, not a decade or two before retiring. If your Plan doesn’t have that as a foundational assumption, the Plan has little if any value when it comes to creating the retirement income you wish to generate. It’s about the end game — key your eye on that ball — or pay the price when it’s too late.

Retirement planning is not a sprint, it’s a marathon. The smart runners do well cuz they realize it’s about the long, slow process. They know the end game of the marathon is about gettin’ to the finish line — not racin’ around the track once or twice. Look at what you’ve been doin’ or at least planning to do.

If it’s all about the end game, pat yourself on the back, you’re doin’ a great job.

For those who already own the cheap ‘n pretty homes? There’s still time for ya. Trade your net equity now into the bigger, better properties. Even the new math tells us that $75,000 a year is a lot mo betta than $30,000.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Attention Cash Buyers With Cheap, Free ‘n Clear Rental Homes

I have been asked many great questions by the readers of BiggerPockets, but one caught me off guard and caused me to sit back and think about what we are doing: “Why I are you still working and why haven’t you jumped into investing full time?”

I found the question to be very thought provoking, as I have focused on being a full time employee and a part time real estate investor for so long that it feels like part of my DNA.  Part of my target market is other investors who choose to hold a full-time job and want to be passive investors in real estate.  I feel a kinship with them, as I know how hard it is too get started, stay motivated, and continually build a passive income portfolio.

After a lot of thought, I came up with 5 reasons why I am still an employee and not a full-time real estate investor.

The first reason is the most obvious to me.  I love my job, its challenges, and my ability to make a positive impact on a large number of clients, prospects, and colleagues.   My job does require a lot of travel, entails a bunch of stress, and many late nights, but I find the reward of a job well done to be very satisfying.

If I hated my job I guarantee you I wouldn’t be doing it, and I would be focused 100% of the time on real estate investing.

The second reason is that I don’t want a full-time job in real estate.  A lot of the people that I speak with who made the transition from a 9-5 technology job to real estate investing full-time, do so by picking up another source of income.  They could choose to become real estate agents, brokers, appraisers, loan originators, or property managers.

I appreciate these choices but I have zero desire to have one of those jobs.  I would rather have my current job than the headaches of starting a second career framed around one of these jobs.  I want freedom of choice and I don’t see the flexibility long-term by picking up a second career.

The third reason is that we want to continue buying as much distressed real estate as we can.  The income we get from our jobs and our passive income allows us to buy a property every month or so and we don’t want to turn off the flow of deals.

If we stopped working we would become 100% dependent on our passive investors, and I don’t want our growth limited by relying only on passive investors.

By leveraging income from our jobs, our existing rentals, and our passive investors, we can grow at our measured and controlled pace.  I want to make sure we close every deal we find, and I don’t want to have any regrets when it comes time to stop buying.  The last words I want to utter are “I wish I bought more distressed real estate”.

The fourth reason for not jumping in full-time is that I hate to sell real estate that is producing positive cash flow.  Our model keys on extracting most if not all our initial capital after we repair and lease a property.   By doing so we secure returns north of 40% consistently and thus recycle our capital into the next deal.

Another factor of the current market is that only forced sellers are listing properties.  I don’t want one of our repaired and leased properties to compete with the current market of junkie properties.  Someday I will sell, but it will be in a seller’s market and not a buyer’s market.

The final factor of our motivation to keep our full-time jobs is that our income from our employers shows that we have alternative sources of capital to repay our private investors, as we take on more distressed assets.  Said simply, we can pay for repairs out of our income, thus reducing any perceived risk our passive investors might feel.  We don’t run a business that requires the next investor’s funds to repair the next purchase.  That is why our model leverages our cash to buy and repair a property before we look to secure a passive investor and recycle our capital.

I am sure sometime in the future we will make the leap from employees to full-time investors, but until then we will continue sharing our story and focus on growing our portfolio our way.

Good Investing

Photo by Jere Keys, www.jerekeys.com

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Five Reasons Why I Keep My Full Time Job while Investing in Real Estate

“If you think education is expensive, try ignorance.” – Unknown

Your first real estate investment should be a solid financial education

If you are like me, you’ve probably made a few mistakes in your investing career. Every successful real estate investor has made plenty of them. However, you can limit your mistakes and increase your odds of success by building a strong real estate investing financial education.

My biggest investing mistake happened because I didn’t know what I didn’t know. I didn’t have a team around me with experience to guide me away from danger and it cost me in both time and money. But that is a story for another day. Today, with all the education available, this does not have to be the case. You can limit your mistakes and make more money in real estate investing by having a solid real estate investing financial education.

On the flip side, by learning a few things at a seminar we attended, we were able to immediately apply what we learned to turn a potential disaster into a real asset. For example, we turned a potential $75,000 environmental mess on one of our properties, which was preventing us from being able to sell it, into a property we could sell, had a government program clean up the mess, and made a $125,000 profit. What was that seminar worth to us? Well… about $200,000 on that deal, and the event cost less than $1,000. Talk about return on investment.

Below are 4 things you can do today to start building your real estate investing.

Become a student of the industry. If you want to be successful in commercial real estate, read everything you can on it. If you want to be a successful multifamily investor, subscribe to newsletters and read blogs on multifamily real estate investing. There are numerous free information sites available including blogs, free reports, and industry publications. After that, buy a few really good books on the industry. It’s amazing how much information you can pick up that you can apply to your business.

Pick an area and focus. There are 100+ different ways to make money in real estate. Every guru has a system for making money. From short sales to flips to long term apartment investing, you can make money in any of them. However, you won’t make money in any of them if you don’t focus. Pick an area and be the best in it. Don’t spread yourself too thin always trying to find the next best thing. Real estate investing can be hard work. By picking an area and focusing, you will increase your odds of being successful. You can always try new things once you’ve started making money.

Find a mentor. The fastest way to take your investing to the next level is by finding a mentor in the industry that you can learn from. They can help you cut the learning curve dramatically. Find someone who is willing to teach and share with investing experience that can guide you along the way. A mentor can be instrumental in helping you take your investing career to a new level. They also have the experience you need to help you avoid major mistakes.

Invest with Experienced Investors. If you aren’t ready to go out on your own just yet, invest with experienced investors in the area you would like to be in. It’s a great way to learn hands-on while earning a return on your investment along the way. Investing with others will allow you to experience the entire investment process without trying to do it all yourself before you are ready. You will be able to walk through the properties. Look over how they evaluate properties. You can also view the offering materials and find out what makes a good investment. Review the monthly reports and learn the important measurements of successful real estate investments. Just be sure to do your homework before investing.

Building a solid real estate investing financial education is one of the best ways to limit costly mistakes in real estate investing. It will also help you make better investment decisions and in turn, more money. Education doesn’t have to cost a lot of money, but I can guarantee you this: whatever you spend building your investing education before investing will pay big dividends once you start investing.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

4 Ways to Build a Strong Real Estate Investing Financial Education Today

I have a lot of different types of buyers on my buyer’s list.  They have come to me from a variety of different sources. Some of my best people I met at my local REIA group. I found a couple of quality rehabbers for my buyer’s list from BiggerPockets. Yet others have come from sources like bandit signs, Craiglist and finally, from old fashioned networking. Like most real estate investors and especially wholesalers, having a good solid buyer’s list is essential to my business.

I would put investors that are Realtors right up on the top of my list.  Over the years, I have worked with a number of these folks — many of them are active in my local REIA. They are well informed about the market and they already understand things like double closings, assignments and other facets of real estate investing that regular folks sometimes find puzzling. In other words, a lot of times they actually make my job easier.

Is There a Downside?

Not for me. However I can tell you from experience, you don’t want to take any marginal deals to these folks. They know how to spot a good deal, and that’s what they are looking for — a good deal! They can be tough negotiators, so be sure you’ve done your homework when you take a deal to them. Understand what a realistic comp is for the property and what the repair costs will be; you can be sure they will figure this out pretty quickly themselves.

The Ideal Buyer’s list

I am always looking to add more cash buyers to my list. However, not only do they need the ability to close quickly, they need to be able to make a decision quickly. This is one thing that seems to separate experienced investors from the “wanna be” investors and the tire kickers. An experienced investor will look at one of my houses and be able to make an immediate decision regarding whether or not it meets their needs and their investing goals.

Individuals that have “retired” from their first career after 30 years or so with a major corporation can be a great addition to your buyer’s list. Sometimes they have a nice pension that they want to invest in real estate, and they can be very excited about this new phase in their life.

I also love ordinary people that just have a passion for real estate investing. These folks can be from just about any walk of life. They may be looking for a second career, or possibly just looking to earn extra money rehabbing houses. Often they are trades people that have good skills and can do a lot of the work themselves.

Just about anyone that has a passion for real estate investing and a strong desire to succeed, will ultimately find the resources needed to become successful in this business. These are the folks that I want on my list.

Four Types of Cash Buyers

How do I define a cash buyer? For me, anyone that can close in 7 to 14 days and doesn’t get a traditional mortgage is a cash buyer. Where does the cash come from? It can come from a variety of sources.

1. There is always the true “cash buyer”. I am lucky enough to have a couple of these folks on my list. They simply pull out their checkbook and write a check. I have closed deals in as little as 3 or 4 days in these cases.
2. A HELOC or home equity line of credit.  This is just as good as actual cash in the bank. These folks also just pull out their checkbooks and write a check.
3.  Using a self-directed Roth IRA. This is a popular investing strategy for a lot of folks.
4. Loans from an investor friendly bank. This is just as good as cash in the bank as far as I’m concerned. If your buyer is pre-qualified and takes a great deal to their lender, this works as smoothly as any of the other “cash sources” above. You will most likely be closer to the two week time table for closing with this source of funding.

Building a quality buyer’s list should be on the very top of your goals for 2012 especially if you are a wholesaler or a rehabber. You want to be the “go to” person when someone needs a house to rehab, or they need to add another rental to their portfolio this year.

Image: ddpavumba / FreeDigitalPhotos.net

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Building the Ideal Real Estate Investor’s Buyer’s List