House #3 My first dedicated rental purchase

In early 2016 I had 2 houses, a primary I lived in and a second that I used to live in but decided to rent out instead of sell when I moved. I had been wanting to buy a pure investment property for a while at this point.

Turning a previous house into a rental is nice, but it doesn’t always produce the best deals. I wanted one that I bought purposefully as a rental from the start. So my intended plan was to find a foreclosure that I could buy cheap, rehab, rent, and then get a mortgage on later. This is commonly called the BRRRR method: Buy, rehab, rent, refinance, repeat. I needed to buy it cheap enough that when the rehab was done the mortgage would allow me to pull at least (and hopefully more than) my entire investment back out. So the house would be pure profit with no cash left invested and the rent had to be high enough to cover the mortgage, taxes, insurance, maintenance, future capital expenditure, property management, and potential vacancy.

So I had the funds to pay for the house and rehab in cash, though it took me 5 years of savings (I’ll write another blog about the specifics of how I accumulated this in the near future). This was essential because foreclosures go quickly and I wanted the ability to see a house, bid, and close FAST!

BUY: Finding an investor friendly realtor is key, my realtor is one of my most valuable business relationships, and she is one of my favorite people. She had been helping me look for units for a while now, but buying houses in a competitive market is, well, competitive. She would send me a house at 8pm and I would go see it the next day at noon and it would already be spoken for, it was brutal! 3 months of this, bidding on maybe 20 houses and this one popped up so I wasted no time and bid on it immediately (more like instantly) and won.

REHAB: Ok so house paid for, it’s in terrible condition, now I needed someone to fix it for me. Now I know some contractors, but I hate them, I had some friends who I had reached out to, but when you’re a new investor nobody believes in you. They all SAY they believe in you but they don’t, and really they shouldn’t because I hadn’t proved myself. I certainly don’t blame anyone for not taking a first chance on a person, friend or not. So I had to find a new contractor that I could trust with a fairly large job, and this is tricky. Many contractors won’t show up, their bids are all over the place, and the majority of them would come look at the house and then not even send me a bid at all. I did find someone to do this complete house and for the most part it was fine, although I overpaid by quite a bit. I had to chase him down a bunch of times, and it took way longer than it should have. That said it got done and it looked great, and I learned a lot on how to do better next time. All things considered, I was happy with the unit, it was complete, and it was ready to get rented.

RENT: For the other house I had I was self-managing at the time, but I didn’t want that job. You don’t’ really save money by managing your own units, that’s a common false understanding of the math. Pay a professional who has systems in place, and can make this passive investment truly passive, this allows you to focus your energy on things you can get the highest return on investment for your skill set. My friend Rodrick and I had just been developing a relationship talking about real estate, I hired him to manage this unit, and he has become another one of my business lifelines. Life would not be so easy for me without his help, insight, and our always growing relationship. He found a tenant in a lighting quick 2 weeks, and for the amount I was hoping for. This is important as you must properly analyze what a unit will rent for before purchase.

REFINANCE: So I had now bought this house in cash, had someone else rehab it, and now it was rented. I could sit back and just collect this rent risk and worry free for the next 30 years if I wanted to. Isn’t that what most people would do? Yeah it is, and they are dead ass wrong. It took me much longer than I had anticipated but I eventually got a mortgage on the house for a bit more than I paid for it, purchase plus rehab. If you’ve ever bought a house then you know underwriting can be tricky, and tedious. Getting a mortgage on an income producing property isn’t too hard, but the devil is in the details. Once it was finally complete though the house pays for itself each month, current and future expenses, and a bit of profit to me. Also since I have all my original money taken back out of it, it’s essentially free income. Some calculate it as ‘infinite return on investment’, since the income would be divided by my investment of zero.

REPEAT: This is the easiest part in theory. I simply have to do the same process again and hopefully get a little better at it next time. If I can do this 10 times I could retire in a few short years…or try something harder.

 

FINANCIALS:

This blog wouldn’t be helpful if it wasn’t transparent. These are the real world figures for this deal, albeit simplified:

Purchase price:    $45,000

Rehab:                    $23,000

Total cost:              $68,000

Appraisal:              $95,000

Cash-out loan:       $70,000

Cash profit:          $2,000

Equity profit:       $25,000

 

Monthly rent income:            $950

Monthly expense:

Maintenance (5%):             $47.5

Management (10%):           $95

Vacancy (8%):                      $76

Insurance ($500yr/12):      $41.6

Taxes ($900yr/12):              $75

CapEx (5%):                         $47.5

Total Expense:                           $382.6

Debt Service:                              $367.77

Total Monthly Profit:      $199.63

Total Money invested:       $0

 

Now 200 dollars doesn’t seem like a lot, and it isn’t, but it hardly paints the full pictures of profitability. First off, remember this is nothing invested, so it’s 199.63×12=$2395.56 per year essentially for free. Secondly this doesn’t take into account the full rehab has basically eliminated my maintenance and CapEx costs for a few years going forward. Also, this doesn’t take into account tax benefits and while my vacancy is set to 8% my real world vacancy rate across my portfolio has been under 5%. Add these conditions all up and the worst case scenario is unlikely to actually occur. In the meantime that difference in funds piles up and quickly allows me to buy another one.

Without debt service, the total monthly profit would be: $567.4

and the Cash on Cash return would be: 10% 

 

 

PICTURES:

Lastly, this wouldn’t be as fun without before and after pics!

How I fixed the money problem

Have you gotten sick of living week to week yet? Do you ever stress about money? Worry about paying the bills? I’m sure you do because the vast majority of Americans share this stress, and I’m here to tell you it’s not only voluntary, it’s fairly easy to beat.

 

Here was the real stress for me. It wasn’t living week to week, or never getting ahead it was being stuck in jobs and situations that I had no control of. Do you hate your job but can’t afford to leave? Too strapped to save for a new place or move to a new city? When your economic situation causes you to stay in a situation you hate but can’t afford to leave, it’s called “Wage slavery”. It’s common, it ain’t new, and it’s awful.

I fixed it, so I know other people can. Unfortunately people largely take no control of their situation, they make zero sacrifice, and they just don’t make any efforts to get better. If your economic situation is stressful or not improving then ask yourself “what have I really done to improve it?”. luckily while it may take time to get better, it takes little effort, little sacrifice, and zero luck. This is a situation of design, not advantages. I went from broke, bad credit, stressed about it all the time, and STUCK, then one day things went from just stressful to catastrophic. I decided to find out how I could fix it and find financial security and I have been amazed about how easy it’s been. I’m not special by any means: I’m of average intelligence, I’m lazy, and I started out with really bad habits. I fixed my money problems, anyone can fix theirs as well.

 

Understand common cultural financial pitfalls.

 

A: It’s incredibly taboo to talk about money in America. This is ubiquitous, and dangerous, especially with the prevalence and ease of credit debt. Everyone around you is broke, but no one appears to be, and no one talks about their financial standing so you think you’re not doing so bad. Even most parents don’t talk about money to their kids. I don’t know why the culture is like this, maybe because everyone is ashamed to be so broke, but it gives people a false sense for the volatility in our daily lives.

B: Lifestyle inflation, maybe the hardest pitfall to avoid. Almost no one is immune too, if you make more, you spend more. If you make $200,000 per year, you’re going to buy the most house you can afford, not the most house you need. Creating wealth is a function of habits, not income. Plenty of people with large salaries struggle too, they get a raise they get nicer cars, nicer houses, spend more on clothes, private schools, etc. Not too say you shouldn’t spend any of your income as it goes up, but you don’t get ahead by spending, you get ahead by investing. If your pay period goes by and 100% of your income is spent, it guarantees you will always have to work to sustain. Do you want to HAVE to work forever?

C: Instant gratification. You want things now, you think you deserve them, and they make you happy….for today.  I sold cars for 10 years and telling people “they deserve to buy this new fancy car” is so easy to use against people it’s unethical. We aren’t worried about how to sustain a lifestyle through our whole lives when we are 25, we just want to live the YOLO life and have fun. Don’t sweat about tomorrow, have fun today right? Well tomorrow you’ll be losing sleep on how to pay for that Lexus you didn’t need, but for today you’re happy and you get to look cool on Instagram.

 

Find out where you are

The next thing I did was start really understanding my financial position. This is easy, free, and invaluable. Can you make a grocery list without checking your fridge first? No, so lets take an inventory of where we are. It’s like using GPS software for directions but not letting it know where you’re starting from.  How can it possibly know how to get you where you want to go if you don’t know where you are. This is EXACTLY how finance (among many other things) works. You must know where you are so you can calculate what it takes to get where you want to be. You have to have a starting location, and a destination. This is a simple concept that will really help and very few people do it, which is a testament for how little people are doing in order to improve their situation, it also shows how a few easy steps can help you get control. Now there is an unlimited amount of information on methods and ways to do this but to keep it extremely simple I personally only do and recommend these 2 things.

1. Track your net worth using an aggregate software like Yodlee, Mint,  or my personal favorite: Personal Capital. You’ll input all your assets and liabilities for the first time, and if your situation is anything like mine was there is a good chance you’ll find you have a negative net worth, mine was about $10K negative when I started. That’s fine, this isn’t a blog to celebrate success, it’s to move towards it. Now that you know where you stand, you can get to where you’re going.

2. Check your bank account every morning. I do this every morning on my phone the instant I wake up. It keeps me obsessed, dialed in, and in control. Transactions post at midnight so this is the perfect time to do it. If you’re avoiding looking at your account because you’re afraid of what you spent recently, this is a bad sign. Without changing any other habits, this level of increased control will keep you on financial alert and improve your situation.

 

Pay yourself first

This is the oldest rule in the book, and it changed my life. It’s actually really easy and most people don’t think they can do it, but they never try. If you try it, I bet you’ll like it and find it easy as well. For me saving money meant having some money leftover at the end of the month and then putting it in a savings account and it never ever worked, not for 27 years. Then I did the opposite, I saved first then learned how to live on the rest. People think they can’t afford to do this because they are strapped already and that’s true, but most are strapped voluntarily. You waste more money than you realize most likely. You have fallen guilty to lifestyle inflation. How can everyone be broke and everyone has different incomes? I know people who make $300,000/year and stress about paying bills in full each month. You might have to make some sacrifice, but if you cant’ afford to save 10% then you really can’t afford the way you live now. Here’s what I did. I started with 10% of any income (post tax) and put it into a savings account in an online bank that had no debit card. This eliminated my impulse purchasing and it removed the “burning holes in my pocket” phenomenon I had all the time. It also made me feel confident that if I did spend all the money I had in my account, my savings goal was already taken care of so I didn’t have to feel guilty. After only a few months I had accumulated more money than I ever had in my life and I barely noticed a change in my lifestyle. That’s when saving became fun,I started to increase that rate from 10% to 20% and then higher as I enjoyed my account grow. I found that creating wealth is much more enjoyable than spending money. Anyone can spend money that’s easy, there is pride in the challenge.

Maximize credit score

Few things are more expensive than poor credit. At best it’ll cost you large interest rate expenses and deposit requirements for things like utilities and cell phones. At worst it’ll prevent you from getting jobs, you’ll be locked out of investment opportunities, and you won’t be able to rent/buy a home. I had poor credit when I started and I fixed it with no magic, no consolidation company, and no credit fix company. I did it the ‘hard way’ you could say. I paid for a monthly credit report and consistently fixed negative events and waited for them to fall off. It takes time, but any progress helps. These days you don’t need to pay for your report you can use credit Karma for free. Track your credit score, take it seriously, fix errors, and then let it save/make you money instead of being a burden.

Educate

Want to be an investor? Invest in yourself! There is nothing with a higher return on investment than education. I don’t mean formal education like college, I mean self-sourced education like books, audio books, podcasts, blogs (if you can see this, you’re already doing it! look how easy), and anything you can get your hands on. I know that reading in our society are something everyone wants to but few people even attempt to do after high school. Still, I encourage you to try it. Everyone in the world thinks they are of above average intelligence but never take the time to crack a book. If you think you can learn everything about the world, the systems at play, the nuance of financial and social culture just by being around a while then you’re wrong. If that were possible, people would be a lot smarter, and a lot wealthier! I gave up music almost completely years ago and switched to audio-books/podcasts. My gym sessions are education, my car rides are education, I have a cheap waterproof speaker in the shower for education. Learning was annoying in school because you were told what to learn, now you can learn about things you enjoy. It’s not a chore, it’s empowering, useful and entertaining. Ask yourself if learning is something you are unwilling to do in order to create financial security in your life. If you ARE willing, then here are my recommendations to get started, you can change your life with the information provided here and it’ll cost less than $30, and they are not boring textbooks, these are entertaining books.(These are personal recommendations not paid endorsements. I don’t make any money off this site)
“The Richest Man in Babylon” – George Clason
“Rich Dad Poor Dad” – Robert Kiyosaki
The 10x Rule – Grant Cardone
The Bigger Pockets Podcast

 

The combination of these small things changed my life. They may not seem like much but the implementation of them compounds like you wouldn’t believe. Commit to taking control and your life will literally change just like mine did.

Seeing success makes it possible

Have you ever met someone and they are really good at something and default to thinking they are lucky, or they have always been that way, or they had some advantage you’ll never have? Of course you have. We hear about successful business people all the time and assume their situation is impossible to replicate, they got lucky, or they are somehow better at life than you.

This is what I thought for years, and I know for a fact this is what many people think. Now we may have listened to these people tell their story about them working hard for years, struggling, and making sacrifices, but that’s not what we see. We just see the success, and our brains default to say “I just found out about this person, they are successful, so they must have always been”. How could you imagine them any other way? When you meet someone so far ahead of you in an area of life, it can even be hard to relate because they haven’t had the struggles of a beginner in years. Each persons perspectives and circumstances can be vastly different, causing us to feel like we just aren’t designed to attain that level of accomplishment. So how can we convince ourselves to take steps towards goals that we deeply feel are unattainable?

 

Seeing is believing, literally.

 

A common phrase, certainly not one that is life changing, but with the right perspective and surroundings is quite powerful. For example: I’ve lifted heavy weights for years. If I tell someone to dead-lift 2x 2.5x or 3x their body weight they are going to tell me it’s impossible. Spend some time in the gym with me, watch me do it, be around it, the commonality of seeing heavy weight being lifted removes the mystic and magic of the feat. When you see it happening all the time it not only loses the impossibility, it seems trivial. You could certainly do something trivial right? I thought big lifts were meant for superstar athletes but never someone like me. I watched other people do it enough and didn’t run into a single Olympian along the way. Just regular people, well I’m regular so I decided I could do it to.

When I joined the military it seemed daunting, impossible, and terrifying. Well,  I signed up and shipped away, and it was fine, easy in fact. Guess who else was in basic training with me? A bunch of other scared kids that were all succeeding in this seemingly impossible task. How could it possibly be? (Hint: basic training is just easy). How can we beat this mental block and use it to our advantage? What actionable steps can we take take advantage of this?

 

Surround yourself with those on a path towards success.

 

A few years ago I met a guy online who does real estate like me. He was fairly ahead of me in his accomplishments. Had a much better career, a few more rental houses than me, knew more about it than me, and had more momentum than me. That said, he wasn’t a billionaire and he wasn’t’ so far ahead of me that it seemed impossible. It was possible, so I had a goal and I was encouraged, and he encouraged me greatly as well. It worked well enough, between the time we met and now my rental portfolio increased, I made improvements in many areas, I was smarter, and my momentum was building. So we recently spoke about a recent success he had and in the 2 years I had gotten better, he had gotten a LOT better, and he was doing it in areas I was apprehensive to tackle. He was writing a blog that went from a small hobbyist venture to a profitable and having a large following. If you met this guy today, you would say he’s killing it. He got lucky, he had unfair advantages, or he’s always been successful, but that’s not the case, and this time my brain didn’t’ trick me, I KNEW it was possible because I watched him do it. Seeing has turned me into a believer.

 

You must be persistent!

 

You ever pick up a new hobby and suck at it. Good! Welcome to how absolutely everyone starts out at everything. By the time you see them doing well, they have put in a grind of countless, thankless, result-less hours that you’ll never comprehend. This is why if you want to get somewhere, you have to start from nothing, you have to suck at it, and you’ll be nervous, uncomfortable, and insecure. The only way to rid yourself of those negative feelings is to put in the same thankless work that goes noticed by literally everyone until you wake up one day and someone wrote a blog about how your success inspired them like I’m writing this blog.

 

Focus on your goals and take action, regardless of how small.

 

I have known for a while that one major way I can increase my success is by increasing my exposure to the world, and helping others to learn what I’ve learned. I intend to do it by writing blog articles like this. For me this is uncomfortable and it makes me insecure, but for the same reasons listed above I know it’s only because blogging is new to me and I’m bad at it. As I get better, it’ll be more effective. I’ll attract and be able to help more people. I know this because I’ve seen it happen, and now I believe. For those people who have followed me in what success I have seen, they will now know it’s possible as well. We can beat this mental block together.