Friday, October 23, 2015
My Top 5 Insights for Real Estate Investing
I call it the R.O.I. Journey to Financial Freedom. I’ve seen hundreds of people like my wife and I move from Renter >> Owner >> Investor to achieve financial freedom. My wife and I bought our first home in 1994 and moved from Renter to Owner. In 2005, we moved from Owner to Investor and we’ve never looked back. We now have over 40 units in our portfolio with a goal of reaching 200 in the next 5 yrs. Our purpose is to build long-term wealth and passive income for our two children. Our goal is financial freedom for ourselves while building long-term wealth for our kids and their kids. Our first LLC is named after our kids initials, and oh yeah, our dog KC :). With that said, I wanted to share our top 5 learnings with you about moving along the R.O.I. journey from Owner >> Investor and achieving financial freedom.
1. Have a clear vision and purpose of why you want to be a successful real estate investor, and what your business needs to do for you. Are you looking for short-term gains with flipping houses or long-term cash flow with passive income? Do you want to do this full-time or part-time with property managers and others doing the day-to-day work for you? For my wife and I, our goal was to do this part-time while building long-term wealth via passive income over a 20 yr period.
2. Build a Great Team. Find great team members to help you pull off your overall vision and purpose. One person alone can only handle so much (and it limits your education). You need a real estate attorney, a realtor, and accountant as a minimum to round out your initial team. If you don’t want to be a property manager, but rather just want checks deposited in your account so you can focus on the next property acquisition, then hire a property manager. Just build this property management expense into your business model which will run you between 6-10% of monthly gross rent. It’s what I do. My goal is to be a real estate investor, not property manager. My current team is one that I’ve built over the past 10 yrs, but consists of a real estate attorney, a broker, 3 agents, 2 property managers, and a handyman. I also have built relationships with 3 different mortgage lenders that I trust and they trust me. Like any business, it comes down to building a great team that trusts one another and understands each other’s role on the team.
3. Know your business model and focus. It's easy to get emotional about a deal, no matter how experienced you are. If you know your numbers and stick to them, it takes the emotion out of the equation. This can save your wallet, big-time. For us, every property has to be cashflow positive from day 1. Meaning, I don’t purchase properties with negative monthly cash flow on a hope of significant future appreciation. My business model is they have to be cash flow positive after all expenses are paid (mortgage, property mgmt, insurance, taxes, etc.) and I can put a plan together to achieve at least 25% annual return on my money after 1 yr. If I can’t make a property perform at this level, then I move on to the next. To be honest, it’s not that difficult to achieve this in real estate, one of the greatest leveraged investments around. As an example, if you invest $20k on a $100k property (20% down), your tenant will pay down about $1300/yr in principle for you and if the home appreciates at the rate of inflation or 3% per year, that’s $3000 in appreciation + $1300 in principle reduction or $4300 gain in the first year. This gives you just over 20% return on your initial $20k downpayment investment. If you are cashflow positive and with depreciation tax deductions, you should be well over 25% annual return on your initial investment of $20k consistently year after year. Compare this to 8-10% in the stock market.
4. Be fanatical about due diligence. Try to obtain and confirm every bit of information you can about an investment — not just the physical property but the history and potential future of revenue, operating expenses, and capital costs. Work with your team to get you the data and put together the numbers to meet your business model or not. That’s why you have a team (realtor, mortgage broker, property manager, etc) to work for you, get you the data, so you can make the investment decision or not.
5. Be a Closer Not a Poser. It only takes a moment to tarnish your reputation. You can’t fake it till you make it. If you can’t close, don’t make an offer. If your plan is to be a long term investor in the area, you’re reputation is bigger than the deal. Be open and realistic with your team. Long-term trust is critical with not just your team, but also your reputation among other realtors, investors, contractors, etc..in the area. If you burn the trust of a contractor, they talk to 10 other contractors, and your next fixer-upper/flip becomes impossible.
Take action. We all have fear when we do something that pushes us out of our comfort zone. The only way around fear is to take action, learn, and educate yourself in the real world. It will be uncomfortable at first, but like anything else, you will become used to it and will most likely get excited about it. I know I did. My wife and I love looking at properties, running the numbers, and envisioning what we can do to improve the property’s financial performance and how it might fit into our long-term vision of passive income and financial freedom for our family.