You Must Love the Process

Our society has built a capitalist infrastructure unlike any the world has ever seen and it allows us to create jobs nearly endlessly, at the time of this writing unemployment is at a historic low.

Throughout my entire life, I’ve been taught that in order to make good money I should go get a good job, it seemed that entrepreneurship and capital investing are considered nearly luxury methods of making money.

These things and others have compounded and been baked into our culture to create a very entitled way of thinking:

“I’m not doing any work unless I’m paid for it”

While this statement is written specific enough that maybe many people think they aren’t guilty of it themselves, it’s my belief that almost all of us are guilty of this, and we need to break free of it.

The problem is that we have set up our society in a way so that we negotiate salary at the start of employment, setting a standard of value, no matter who applies.

This runs directly counter to how investors and entrepreneurs make money, by investing capital and taking on risk up front than working to create a return afterward.

In traditional employment, the employer has to take all the risk: an unknown employee only vetted by resume and a few hours of interview, and they have to commit to putting up all the capital before a single finger is lifted by the new employee.

It would be extremely short-sighted to think that this behavior on such a large scale doesn’t directly affect the mindset and expectations of our population, of course, it does and it’s obvious if you look at how people invest their time.

Some people will tell you it’s because “kids these days are so entitled”, which is obviously false, people today aren’t different than they were 12,000 years ago.

As a country, we have been fortunate enough to create a system where we can assign a value to someone’s work BEFORE they actually go to work.

While on a whole this is fantastic for our society, but as an individual it’s misleading and a hindrance, what if a person is worth more than the set value of their job?

This “equality of outcome” style of economics strips people of having to take the risk or the burden of having to prove for their worth in the marketplace, it results in people taking less risk, and being less willing to work without a financial output guaranteed beforehand.

You don’t have to know where it will lead

If you want to make $100,000 a year, you can search jobs that pay that amount, find the credentials needed to qualify, get them, and then you’re done.

Why is this a problem?

Well, what if one day the job no longer pays $100K?

What if the industry goes into decline?

What if when you get done with all the credentials and you find out you hate that line of work?

You haven’t taught yourself how to be competitive in the marketplace, you’ve just learned how to follow guidelines and apply known steps.

At absolute best, you’ve limited yourself to the $100K salary you wanted, and even if you earn it, is that the pinnacle of your dreams?

What about everyone else who’s chosen profession pays far less?

What if you get your dream job, and your assigned salary and find out you work harder than everyone else, but can’t get a raise equivalent to your increased worth ethic?

You must take the risk of the unknown in order to succeed.

Having a job which guarantees a salary also means you’re a prisoner to that salary. Creating something new has limitless potential for income, but also self-worth, and self-respect.

Going to college and lining up a predetermined job with a guaranteed salary is EASY, and to be fair in many ways this is good, certainly for society as a whole, but it’s not good for the ambitious person who wants something out of life that isn’t pre-determined.

Jeff Bezos didn’t know what Amazon would become, but he saw potential and committed FIRST. Before he was a household name, he was grinding for his company to grow, when the probability of it failing was actually much higher.

If I didn’t start this blog unless I could guarantee an income from it I would never have written the first word, to my own detriment, even though I haven’t taken in a dollar from this site!

If we change our thinking to look at the value of the work first and believe in the value of our output, our potential to earn income will match.

When I first started building my real estate portfolio I decided I wanted 10 houses in 10 years, this would fund my retirement but the goal was way too small.

I see now that setting such a small goal is limiting, just like if someone offered me a set salary, I’ll only work as hard as I have to earn that salary.

I no longer want to get 10 houses, I’ve learned instead to just love the process of real estate portfolio building.

Now I am unshackled from my limits, my potential is unlimited, the pressure is off, and the possibility for bigger gains has been opened.

Don’t chase a paycheck, chase creating value.

If you do that, the money will work out easily.

Trying really works, who knew?

For years of my life I tried very little, I just did what my jobs and society told me I was supposed to do.

If I were to be really honest with myself though, I was doing the minimum standard of their expectations and perhaps it was even below the minimum of their expectations, maybe it was the minimum amount of effort just to keep from getting fired.

I wasn’t maximizing my value for myself, and I wasn’t maximizing my output for the employer, it was a lose-lose situation really.

Complacency runs rampant in the absence of excitement.

It wasn’t until a few years ago when I picked up real estate and realized I could do a lot of work to get better at it, with no guarantee of success and yet it started to produce returns anyway: big ones.

How much work was I doing really? I was just reading and listening to other people’s’ success stories, it was nearly effortless but it changed my life significantly.

I wasn’t working very hard to improve, but I was at least trying for once. I was interested, I was loving the process, and when you enjoy doing something you don’t really care if it’s profitable.

Somewhere along that way I started putting this together: when I didn’t try at life I was not that happy, I had no growth to enjoy or look forward to, and it was unfulfilling.

Trying a little bit though, in ways that weren’t even that hard started to add up to big results.

Learning something new would ping my interest, give me an increase in intellectual confidence, and encourage me to learn more. Reaching out to people to create new relationships was easy, and the rewards were huge.

I was making new friends, learning from them, and leveraging our combined resources to get more done. I started applying this to other areas as well, my relationship, work, and anywhere else I could.

Trying to get better, all the time, at everything. It seems so obvious but the reality is most people don’t try at all, at anything, ever!

When I ask people these days “what’s new? How is business? What are you working on lately? And they answer: “not much, same shit different day” I start to worry.

How can someone having nothing new going on, and be getting better at like?

My fear is that this is not possible.

Cruising through your work day, waiting for the weekend, and not working on any big projects to invest your ambitions on is a mistake, a grave one.

It’s imperative to consistently try hard, at everything, and it has to be done without a promise of a future payout, otherwise, you’ll never work harder than the assigned value.

Small wins add up

People get better when they struggle and overcome adversity. This is the basis for how we develop competence, self-esteem, and our self-assuredness to tackle bigger tasks.

Most successful people aren’t just walking around closing big deals in one fell swoop, it’s a culmination of lots of small tasks compounded into something huge.

You don’t need big wins to get ahead, you need just need lots of small wins.

Buying houses seems like a big accomplishment to outsiders, but it’s deceiving because while closing may take a single day, buying a house takes lots of small unseen wins beforehand.

Searching for houses, preparing a lending strategy, making sure my property manager is on board and likes this unit, all sorts of stuff.

I also had to read enough books to ensure I feel confident I can pull it off.

Once the house is closed I need to find a renter, keep the place occupied over the long term, and I need to reinvest the profits to the next deal. All these tasks are a part of the small wins needed to make a rental property profitable.

The next time you meet someone who seems like they are killing it at life, try to see the small wins it took to create their success.

Try to think of things you want to accomplish not as a large daunting task, but a series of small wins you can tackle, each separately.

Don’t limit your value to what the market sets it at, forget about salaries forever.

Try hard at EVERYTHING, ALL THE TIME, and do it without the promise of reward.

Focus your ambitions on a goal and chase them relentlessly, don’t love the money you may make, instead: love the process.

I moved to Las Vegas knowing it would be a good move, and it’s been far better than I thought.

After considerable research in late 2016, I was convinced moving to Vegas was worthy of taking big action on, so in early 2017 I moved my family out here. We closed on a house that my wife had not seen yet, and we had no jobs lined up. Some people probably thought I was silly, some thought risky, 18 months later I’m ready to recap on how things have turned out and what the future looks like from here out.

First, it’s important to know why we looked to move in the first place. We were in a small town in the southeast part of America, in North Carolina. Metro population of about 400,000, little to no growth and few opportunities. My wife and I had lived there a while, and it was a good place for us to meet, grow, and take some risks, but at this point, we wanted to spread our wings and capitalize on some massive new opportunity. So we wanted a growing city, somewhere warm, somewhere with low cost of living, and a place where we could start new careers easily. I had been coming to Las Vegas for years (to party!) so we had some small social connections to this town already and we had visited tons of times, just so happened that it was primed to be a fantastic economic location as well.

 

As a real estate investor, it was a bit tricky for me to navigate this move. I wanted to buy a primary house to live in (which normally I consider a lousy investment) but I was convinced the market out here would appreciate greatly, and I wanted to be a part of it. Since neither, I or Nikki had jobs lined up, and my passive income wouldn’t yet allow a bank to finance the amount of house we wanted to buy we put her mother on our loan to show income. I flew out alone one weekend to check on 3-4 houses, we made a good offer on one, we set to close a few weeks later so we packed out all our stuff and drove 3300 miles across the country.

 

We closed on a great little house for $223,000 in February of 2017. I came out of pocket ~$12,000 for closing costs and a 3.5% down payment. A few weeks later we both found great jobs and we were able to get paychecks before our first mortgage was due. SO EASY. In only 18 months the house value has increased dramatically to $270,000!! That’s a $47,000 increase in value just for being here! Also, on the $12,000 I invested that makes a return of 25%! This summer we will refinance our house to take the MIL off the loan and since the loan amount has increased to an 80% LTV I can drop the PMI off as well. The house looks to continue to increase in value over the foreseeable future and perhaps might be my most profitable property yet.

 

If you’re stuck in a town with no appreciation or opportunity, Las Vegas might be a good place to check out. Now, it’s become MUCH more competitive since we moved here, further solidifying my top-notch decision-making skills, but that doesn’t mean the all the opportunity has been extracted, actually I think Las Vegas has momentum that seems unlikely to slow for quite a while.

 

Let’s go through this list in a sort of “decreasing order of potential impact”:

 

Climate change was a big one I considered and still do. I didn’t list this just for laughs, and while some people may consider it controversial, it’s important to consider the facts.. As the climate changes threats on the coast will increase, especially the east coast and costs associated with increased weather events will have to be paid, both state costs and insurance costs will go up. We were caught pretty badly in 2016 with Hurricane Matthew, which did $25,000 of damage (to my $60,000 house!) and for me that was a tipping point, we moved shortly afterward. In 2017 the Hurricane season was much worse, I was glad not to be there. While this example by itself is absolutely anecdotal, it’s still part of a cogent long-term analysis. The coasts are going to more expensive, and higher risk to live on. Storms will get worse, water levels will rise, costs of repair will burden the states (and people) who are late to adapt. Over the next few decades as specific instances occur in larger frequency people will start to move inland and upwards. I chose Nevada, anywhere far from a coastline would have been acceptable.

 

Look at the financials and compare states who have implemented a lousy economic policy which has made them bankrupt (Kansas!) and compares them to states with progressive Marijuana legalization programs that are making money hand over fist! We closed in early February, and Marijuana went on sale in July, but the law had changed back in January so I KNEW it was coming, and I KNEW it would have a significant and sweeping impact on the state’s financials. Income from this new economic industry will allow the state to fund improvements in infrastructure, education, and more. Now eventually all states will legalize, but I want to make money right now, and this is easier in a state that can afford to reinvest. It’s important to consider the margin between states and their respective economies. Not all states grow at the same rate, just like your business responds to how you invest so do state governments. Get to state that encourages new industries and reinvests profits to benefit its citizens.

 

Population growth forecasts for Las Vegas are massive. Metro area population numbers in 2017 were around ~2 million and are projected to jump to ~3.2 million over the next 10 years. This is a lot of people! Where the people go, so does the opportunity. These people will all need jobs, things to spend money on, and places to live. This will further increase home appreciation but also job opportunities will get more competitive, this might be bad if you’re a talentless slacker, but if you like capitalism this will only serve to benefit.

 

For weeks before we closed on our house I was watching the news about the potential deal for the Raiders to move to Las Vegas. I don’t watch sports at all, nor do I think the stadium itself or the franchise coming here will have a much direct positive financial effect on the city. However I do think the cultural effect it will have on this city will be substantial, and I believe regardless of how things actually shake out, the perception alone will cause beneficial economics worth capitalizing on. I also knew that once the Raiders deal closed, the market wouldn’t go up overnight, it would take time. That said, the earlier you can get in, the better, so while we were bidding on houses I was also watching the news about this potential deal. Towards the end, I was VERY convinced this deal would move forward so I did as well. I ended up closing on my house about 3 weeks before the Raiders closed. For anyone who sees this as a benefit they can’t partake in, remember the stadium won’t be complete for another 2 years. That leaves a lot of time left to get in early!

 

I wanted to consider the low cost of living in Nevada (who wouldn’t?). One thing I will say about small towns, they are cheap to live in. Nikki and I had gotten spoiled living in a town where we can buy houses for $50K, property taxes and utilities are low, cost of living inflation is minimal to none. This isn’t without its negatives as well, in fact, this is a symptom of the negatives I spoke about earlier. A town with little opportunity, no growth, not much demand to go or live there certainly can’t be expensive as well, these things go hand in hand. So a concern of ours when moving was that our cost to live would increase as the opportunity did, this is correct thinking, but it’s not a direct correlation. Meaning, different markets have a different ratio of potential income to cost of living. California for example on average can produce far higher than average salaries, but the cost to live is exponentially higher than even that. We didn’t’ want this, we wanted to keep the margin between increased income and increased cost of living to be a minimum. Turns out that cost of living in Nevada is REALLY low! Nevada is one of only 5 states with absolutely NO state tax, Nevada utilities are cheaper than you would think, property taxes are really low as well, and There are 5 states without a state tax, Nevada is one of them. The cost of living change for us was mostly in housing and transportation. Houses here are just more expensive, and by a notable margin (Though they are much newer and nicer so we were happy to pay up!). We also found when we moved here that auto insurance rates are the highest in the country, so that cost went up slightly as well, neither have made us need to adapt or change our habits. The change in the cost of living was unremarkable if not altogether noticeable. At the same time, we get paid much more than back east, so in essence, we moved to a city with vastly more opportunity, and we get paid much more to have a better life than we did previously. Easy choice

 

Have you seen the data of movement out of California? California is a pain in the ass!  This is no secret, and it will have a significant impact on the Las Vegas economic future. I’m certainly not saying that people are moving out of California in droves to move here, but rather the cost/benefit ratio of living in California is trending downwards, especially at the low end. It’s just more expensive to live there, and it’s only going up. As this happens people will move, and where will they want to go? How about a place that equivalent in weather, has a huge swing in the cost of living for similar lifestyle, has grown and is a well-established city? This is why Las Vegas, Phoenix, Miami, and others are topping lists for migration, now which one is closest?

 

Late last year the federal government significantly changed the tax law, and one aspect of this was eliminating the ability to write off property taxes for high dollar houses, it also eliminated the ability to write off state and local taxes. Now for most people they won’t notice really, the standard deduction was increased enough to offset this change for most people, but not everyone. People with high taxes (state, local, and property) are going to get pinched and it’s going to be expensive. Maybe they will stay and take it, maybe they won’t, certainly, some will do both. If only there was a place ~5 hours from LA that had similar big city amenities with low property taxes, low housing costs, and no state tax……….

 

I somehow missed this information in my analysis but shortly after moving here we found out about massive strip investmentscurrently ongoing. One I did know about was the Raiders stadium, but a few new casinos in the works, the gorgeous T Mobile arena, Richard Branson just bought the Hard Rock Hotel and is converting it to a Virgin hotel, and more. Total investment will be about 10 Billion and the casinos should be complete in the next year or two. You don’t have to do a lot of market research in an area to see it’s future, instead look to the market research that was done by someone with more resources and experience. Simple explanation, I don’t have to speculate if Las Vegas is a good investment, smarter people than me just recently sunk 10 billion into it, so I’m going to assume they didn’t do it on a whim.

 

Las Vegas is very proactive about infrastructure. I’ve lived in a few cities in my days, and I’ve never been to one as universally afflicted with construction traffic like Las Vegas. Now, this isn’t to say traffic in Las Vegas is bad, the opposite actually there is hardly any traffic considering the size and population. So why is everything under construction when it doesn’t seem needed? The city is proactive about the incoming population, and they are not screwing around.  We have great new, clean, wide roads that handle tons of traffic and will only improve thanks to the foresight and capital injection into infrastructure that is not reactive, but proactive.

 

Have you heard of the Golden Knights? I’m certainly not one to follow sports, I don’t think I’ve watched an entire sporting event in entirety in my whole adult life. I really could care less, but like the Raiders I absolutely care about the cultural and economic impact this has on my city. The Golden Knights are a hockey team that sprang out of nowhere with this being their first year playing, and they made it to the super bowl. To say that this was a local cultural phenomenon is an understatement, people are losing their minds. While I would never argue that this has direct economic benefit, it does change the cultural outlook of the city. Just like the Raiders coming, I think the impact will be indirect. People will look at this city differently, less as ‘sin city’ and more as a large metropolitan city with lots of opportunity, amenities, and it just so happens to be the entertainment capital of the United States. This bodes well for our future.

Where next

Feel like it’s too late to move to Las Vegas and you missed the rush? It’s certainly harder than it was 18 months ago. Houses are gone inside of 72 hours and going for well over asking price now, it’s a brutal fight to buy an average home right now. So where else is there to go?

Denver – Denver is a great choice! When I started my search it was my first choice, but it’s also on the upswing already so I couldn’t’ get in early. The second was that it was just too cold for me. If you’re looking for growth, Denver fits many of the benefits I listed and has a long road of prosperity ahead

Nashville – If I had to move again today, Nashville is where I would go. It’s in the south I know, which is horrible but Nashville is a large and respectable city so shouldn’t’ be too bad. It’s insulated from climate change fairly well, low cost of living, and poised for massive growth.

Phoenix – Similar to Vegas! It’s growing, it’s got a great long-term forecast and it’s well established. Phoenix, like Las Vegas, has a strict no-snow policy so you don’t need to worry about investing in heavy winter jackets!

Wherever Amazon HQ2 lands – What did we talk about in regards to letting other people do market research? Amazon is spending a lot of time and energy to find just the right place when they announce it, you might want to jump. People don’t all get up and move at once to capitalize on an opportunity, they filter in as it becomes more apparent. If you’re paying attention you can get in on the upswing of new developments without needing inside knowledge. Wherever Amazon chooses will likely be a good place to follow. There are exceptions however, Toronto is a current leader which I wouldn’t recommend and Washington DC as well. These places are overcrowded and overpriced, these are not underdog cities you can jump into and ride the wave. If Amazon goes to Raleigh though, I would jump on it quickly.

 

Summary

Deciding where to live is important. Most people die within 50 miles of where they were born, If you live where you were born then you didn’t choose it! It may be a good location or it may not, find out and then make a decision to live there or not, don’t stay out of comfort if it’s not lucrative. Live in a place that can maximize the strategy you build for yourself. If you live in New York City or Los Angeles and you’re struggling, LEAVE! Come back when you can more easily afford it. Paying the high cost of living for no reason other than complacency is a mistake and one that can be fixed. It’s important we all live in a city we have chosen and for valid reasons, winging it is relying on luck, and luck is fickle.

Make your underwriting EASY

Ask your lender first, fast, and often

 

People have debt and lending questions all the time and they seem to insist on asking friends, fellow investors, or the internet. Don’t be fearful to ask a lender directly because you may not be “ready” to buy yet and doesn’t want to waste anyone’s time.

You’re not wasting anyone’s time!

Lenders work by selling you a financial product; they get paid to convert you from a tire-kicker to a closer. If you want to casually call up a lawyer and ask for legal advice, you’re going to get charged. Lawyers work on their knowledge, and they charge for their time and information. If you want to be someone who takes action and closes deals, it doesn’t make sense to avoid the lender when they have all the answers you need and they want to help you close a deal.
If you have lending questions, even if they are in the future, ask someone with direct information. Use your ramp-up time to build a relationship, and get good information straight from the source. Not all banks are equal and not all have the same products, so it’s important to get correct and thorough information that applies directly to what you’re trying to do.
These days I speak with my lender at the beginning of the year to discuss everything I want to do and how I need to maneuver to match my buying strategy with my subsequent lending strategy. Imagine if you purchase a house and do some rehab, now you want to cash out and throw a loan on it, except you haven’t spoken to a lender before now and then find out that there is something restricting your approval for a loan. Don’t get stuck assuming your lending strategy is solid, get in front of your lender FAR in advance.

Smooth is fast

This is a phrase I learned in the military, the premise is that when trying to accomplish a task under pressure we often force ourselves to go fast. The problem is that going fast just for the sake of speed doesn’t always improve efficiency; it causes us to make mistakes and not think thoroughly. The end result is an overall longer time period rather than a shorter one, the opposite goal of going fast. So in the Army they say “smooth is fast” to encourage troops to develop proper habits, think clearly and thoroughly, and not succumb to pressure. This way when a similar event comes to our mental and physical preparation will serve us far better than simply trying to excel under pressure.
I admit this is a wild extrapolation of the lesson, but I think about it every time I begin underwriting and it’s helped me. The motivation is obvious; I want to close my loans smoothly and quickly. I don’t get stressed and go into a disorganized panic, I create a system to make the process easy and I prepare diligently to execute. Building upon this idea, here are some other tips to make lending easy:
Your processor is going to provide you a list of loan docs (sometimes called stips) you’re going to need to close a mortgage, and the bigger your portfolio gets, the more you’ll need. What I do to make this easier for all parties is:

I prepare all my docs before I submit a loan application. I keep them well organized in a single folder on a cloud account waiting until the processor asks for them, then I can instantly copy him/her a link to the entirety of the docs needed and then I’m 90% done with my underwriting within 10 minutes of submitting an application.

There is always some scrounging for a weird request after the fact but the bigger the bulk of stips I can get the faster my overall process goes. It also shows the processor that you actually care about getting this done while the overwhelming majority of borrowers who delay providing their stips out of sheer laziness and/or apathy. Show that you’re well prepared, organized, and quick to respond and you’ll make loan closing a breeze.

Make them love you

Your lender will love you for being organized and prepared. I’ve worked in lending for a long time and the number of borrowers who are being chased down for documents to close a loan is staggering. This makes it incredibly easy to set yourself apart and get a reputation for efficiency. This is like any other service in that your relationship plays a significant and unspoken part of the dynamic and has a direct impact on the quality of service provided. If you are disorganized, unmotivated, and a jerk, you’re going to get the worst service someone can provide. Anyone who has worked in service knows that the best service goes to the clients who are liked the best. BE THIS CLIENT. Be prepared, have a positive and helpful attitude, be proactive, and understand. Work harder to make their life easier than you expect them to make your life easier, this may seem counterintuitive but consider the end goal: a loan that is closed quickly and smoothly. This will be done by a processor and underwriter who are motivated and excited to help you in your endeavors, you must invest in the relationship.

Conclusion

You’ll never need this list without a lender giving it to you first, but as I said, I like to be extremely prepared. When I put a loan application in, I like to have the lender all my documentation within minutes, far sooner than his processor could even get me the list. With that idea in mind, I’m going to provide a very standard list of documentation required to hopefully make life easier, or at least prepare my readers for what’s to be expected. I’m taking this list from a loan I just recently closed.

2 years W-2

2 years tax returns

2 months pay stubs

2 months bank statements (all bank accounts)

All home insurance policies

All lease agreements for rentals

All recent mortgage statements

All HOA balance statements (current)

This is certainly not a comprehensive list, and it’s subject to change based on lender and market conditions, but it’s the standard majority of what all lenders will ask for. It’ll most likely be a bit less if you’re just starting out, but still good to know. Yes, the process can feel invasive, especially the first time or two, but you get used to it.
Follow these simple guidelines when considering your debt policy and I’m confident they will make your life easier, and more productive.

Rental #5 Full rehab and refi in less than 9 weeks

I promised I would update this post when the deal was complete. Since the original post is mostly just text, I’ve decided to put the pics up top here along with some context of the deal. The second part will be a detailed description of the overall strategy and acquisition process:

This deal was by far my fastest. From the day I closed on the property to the day I closed on the loan was just under 9 weeks. Why is this a big deal? Well, I used 100% of my cash and was refunded 100% of my cash while having to leave it in the market for a very short amount of time. Also after 9 weeks, I have all my original capital plus the $19,000 I made in equity and a few hundred dollars a month in cash flow. Since I pulled 100% of my capital out, that’s all free profit. Imagine if I could do this 5x per year and make $100K in equity plus $1200 per month in cash flow, without having to put any money in my deals. The dream! In fact at the time of me writing this, less than a month since this current deal has been completed I already have another house offer accepted and look to close on it soon, and hopefully repeat this process.

The house rented nearly immediately once it was complete. When using delayed financing one of the requirements is having a signed lease with tenants in place before you can close. I didn’t want to start underwriting and then have something go wrong with our brand new tenant which prevents them from moving in. The week of overlap would have been nice to have but really seemed like an unnecessary risk.

One big mistake I made on this deal was my ARV estimate came in low. I had anticipated the house would be worth 85K but in the end, the appraisal only gave me 78K. Not the end of the world, but I wasn’t pleased. This allowed me to only borrow 58.5 instead of the 59.9K I had in the deal. Luckily my rehab came in about $1300 cheaper so really I broke even like intended! I learned my lesson though, need to take my time to ensure the house will really appraise at what I need it to. Overall this was a great deal, profitable and as FAST AS POSSIBLE. EASY!

ORIGINAL POST:

I had just finished my last house refinance and received the funds on February 12th, wasting zero time I started to bid on units the next day. While going through the process there were a few unique situations which I thought would be valuable to share with those who want to buy rental properties. I decided to document the process as detailed as I could, a change from my usual ranting about high concept abstract topics.

 

The hard part of home purchasing for beginners is that it’s easy to learn the concept, but the details and the day-to-day operations aren’t often talked about. Houses aren’t lined up on a shelf like at a store; you have to HUNT for what you’re looking for, beat out competition and, and most times fit what’s available to what you’re trying to do.

 

February 14th
Bid like a madman

I bid on 7 houses today, a few that I really think will be great and a few that I’m just feeling out the activity on the property. I fully expect the good units to come back and ask “highest and best price” which is common, and most I’ll just never hear about or find myself passing on as new information come in.
My realtor is GREAT and an invaluable member of my team, she sends me properties as often as she can, but I still spend a good chunk of time looking on my own. I’ll email wholesalers or other investors and see if they have any leads, I’ll check websites like bigger pockets, Zillow, Trulia, realtor sites, craigslist, and anything else I can think of. When in buying mode I like to be aggressive.

February 15th
Highest and Best….and Pass

One of the houses I bid on came back with a “highest and best” response. The property looked great on photos and I really liked it, the numbers looked good and the location was good, but when I called my PM he told me it was a 3/2 and could not be converted to a 4/2. This is a BIG DEAL for my strategy because we use a lot of section 8 tenants, and section 8 pays by the number of rooms. So we convert 3/1.5 to 4/2 when we can to get more rent in case we use section 8. 4 bedrooms just commands a higher price point as well for a very low conversion cost. This house would rent for $900/month as a 4/2, but as a 3/2 we would only expect $750, that’s a HUGE difference and enough for me to pass on the unit. It’s important to develop a plan and then work the plan, not deviate out of excitement or fear. If I had gotten emotional (since I really like the house) I may have overpaid or made a poor decision. Hold steady and trust your strategy and your team.
On to the next deal….

February 16th
Hold on the current bid, don’t get stupid

Living in Las Vegas has a really small but impactful benefit that I often consider myself lucky for: time zone difference. When my people get to work and start doing business at 9am east coast time, I’m starting my work day at 6am thanks to the time zone change. While going to work at 6am doesn’t SOUND great, I see it as an advantage that I can start working 3 hours earlier than my Vegas peers. Plus I find nothing more motivating than waking up to text and email with information that can help me make money.
So 6am I get an email about a house I had bid on that said: “highest and best on Walnut”. Houses move quick, no time to delay. I bring up Walnut on Zillow and start looking at details to see where I want to be, I also text my PM for his thoughts on the unit. I loved the area of the house, the price was decent $34,000 list and rehab would have been about $15,000. I figure the house would be worth $80,000 when we are done and it could rent for $700-750. These are close to my numbers, this is a deal I would be willing to do, but I could tell my PM wasn’t very fond of the area, and I know that $80,000 ARV on this house could be a stretch, any lower than that and it can start messing with how much money I can pull out of the deal afterwards. Bank will only lend 75% of value, and no less than $50,000, so an $80,000 house gives me a $60,000 loan, not much room for error. Based on these factors I figured I could bid up to $36,000 but I didn’t feel much reason to stretch so I held at $34,500, and I expect not to win the bid

 

February 20th
Having no results is boring

President’s day made for an expected slow weekend, so, it also seems that most houses drop onto the MLS on Sunday night or Monday morning. Since this week started on a Tuesday after a vacation weekend, I didn’t get a lot of opportunities to bid on new units this morning that said I did find one small house I was interested in. It’s on Rim Road and I know this is a popular location, and very popular for rentals. It’s a straight shot to the military base, but far enough away to satisfy those who may not want to live close (this is common) or those who have no affiliation to the base as well. The unit was a bit smaller than I would like, I can’t convert it to a 4/2 and the ARV will be a lower than I usually like, regardless of all that I know this is a GREAT location for my strategy. I bid on this house at asking price, which may have been a little high honestly, but I would love to own a unit in this area and I want to be bidding on everything that’s even CLOSE to my goal. The name of the game for me isn’t “get the best deal of all time” it’s “get all the profitable deals I possibly can FAST”. Competition has been higher and increasing over the last 2 years here as well, so it’s not as wise for me to hang on and wait out for the best deal, it may never come. This one will make money so I bid on it.

 

February 21st
Slow week, keep prodding

Had a long weekend and a bit of slow period here, not much action or conversation for a few days. Things got back in the groove this morning with an email for another house on street I had bid on a similar house earlier this week. I came across a house on Bemwick that I got excited about but quickly remembered that Bemwick had a house we bid on last week and ultimately passed on because the floor plan wasn’t what we wanted. Considering this house is only 2 doors down from the last one, I can safely assume they are similar designs, so I passed on this one. I was also told that I’m still in the running for the Walnut dr house and I still think that one will be a decent deal if I can snag it.

 

February 22nd
Patience is not my strong suit

My realtor texted me this morning and let me know we are still waiting for the Walnut property. I liked this unit but wasn’t too excited about it, but that’s to be expected when looking at ~40K beat up forec

 

losures: hard to fall in love with them.

 

February 23rd
Moment of truth

Got one! The email came through that my offer on Rim rd was accepted. As I started diving in to see what commitment I’ve actually just made I start to realize I probably should have bid a bit lower. I call my PM to see what he thinks, he saw the property last week like I did and looked through it already. He does this a lot because myself and other friends of ours are always buying houses so stay on top of what comes on the market in case he ends up doing the rehab or PM for one of. This allows him to help us make good and fast decisions, and it’s invaluable to me since I’m across the country. Regarding the deal, he says the same thing I thought: I probably paid a little too much, but it’s still a good deal as I expected.

Before I could even print out and sign my offer letter, I find an email from the selling agent saying “thank you!” Open it up and I find the offer agreement already has my initials and has been sent to the seller agent, the realtor must have done it for me. This is the value of GREAT people, my realtor did all my paperwork for me and my property manager already has been through the unit and has an expectation of rehab costs. The value of finding and relying on great partners cannot be understated.
Next thing I did was call my lender. I want to use a program through Fannie Mae called “delayed financing” and to do it the way I want requires some critical steps to be taken BEFORE I purchase the house. Getting your team in order early and ahead of your moves is an important albeit undermentioned strategy. I don’t want to buy the house and then go to the lender 3 months later only to find out he says I can’t do the loan for some reason. Get them involved early and often to strategize both short and long-term.

 

February 26th
The devil is in the details

We are set for a 20-day close, starting on the 23rd. Lots to do in that time.
One key to real estate (maybe all of life) is to get AHEAD of your problems as early as possible. This means planning and lining up WORKING on everything you have to do as far ahead as you can.

• Pay EM (earnest money) immediately
• Prepare my settlement sheet with rehab included and get it to my lender to approve
• Talk to my rehab partner to make we have a solid estimate, and he can start as soon as the house closes. Idle time is expensive. If you don’t have a contractor lined up, waiting until you have a house to get one is a mistake!
• Speak with my photographer friend about taking GREAT after photos. This is not something that everyone needs to do at this level of rental, but I happen to find value in it. It helps make units look nicer on advertising and it’s great for before/after photos for the blog
• Get insurance estimates and prepare to have service started on the day of closing. Also, I will add this cost to the settlement sheet
• Start advertising for a new tenant IMMEDIATELY. It takes time to find tenants; I like to start telling them the unit will be available as soon as we start work on it. Sure not everyone will be willing or able to wait for it to be finished, but many will be! This is an easy and small benefit that costs nothing and can only help.

Once all this stuff is done we will close on the house. The rehab will start immediately and I expect it to take about ~6 weeks. In the meantime, I’ll be working with my lender to ensure a smooth underwriting process. Hopefully, this informal but thorough blog is useful to anyone who may be curious about the day-to-day of the closing process. It’s probably a boring one for most, but in my opinion, that’s a good thing. Closing on a house SHOULD be boring because nothing boring is scary and fear is what prevents people from moving forward on investments. So if this process seems mundane or easy then I consider that to be a success.

March 5th
Is it easy? Yes. Does it go smoothly? Never.

I was waiting patiently for our closing date. I had spoken to my partner about getting invoices for total rehab which we needed prior to closing to use delayed financing. I had my HVAC contractor get me an estimate on a replacement system since the house had been gutted of the nearly the entire system. Things were going smoothly and I was feeling confident that this deal would go smooth

Then life came around and smacked some sense into me

This happened in the form of an email from the law firm who is closing the deal telling me they found out that the local water utility company will be doing some sewer infrastructure work to the unit in the future and it would cost approximately $5,000. OUCH! Time to damage control!
I emailed my realtor and asked if we could either

A. Bail from the deal completely
B. Re-negotiate our purchase price

This house had been on and off the market a few times in the past, this certainly gives me leverage. If I bail on the property I’ll lose $1,000 which is painful but not the end of the world. Far better to lose $1,000 now than get a property that doesn’t make money each month for the foreseeable future. If I can get the seller to eat the $5,000 then life is great, a really good middle ground would be if the seller will meet me halfway and eat $2,500 and I’ll eat the rest. This keeps all parties in fair circumstances and we get to keep moving.

After I did some research this expense doesn’t seem to be so painful. First, it’s scheduled for the future but at an unknown time, and the longer the I can stretch the deferment the better for me, in fact, I wouldn’t pay for anything until long after I’m dead if I could!! Defer Defer Defer! I also found out it’s not a lump sum charge but instead can be made in installments, and I don’t really have to get this paid until I sell the property, not that I would take this long, but it does mitigate the risk quite a bit. As I learned more about the situation I became less worried. I told the realtor my thoughts and we are hoping to come to an agreement once we find the sellers’ position.

March 7th
Renegotiate to win

The seller was easy to work with and offered to split the $5,000 future expense with me by reducing the price of the home. So my new purchase price on the house is $38,500.
If I had bailed on this deal it wouldn’t the end of the world, this deal isn’t even that great. That said I didn’t want to bail on it I want to get it done, get it making money, then go find the next deal. Having worked this out with the seller allowed me to make a fair compromise and keep moving, happy to do it again.

Also on this day, my rehab guy sent me an invoice for the work to be done. This is a crucial step in delayed financing because I want the rehab costs on the HUD statement so I can pull the cash out of purchase price AND rehab costs later. I sent this invoice to the closing attorney so she could have it put on the HUD.
The last email of the day was a group message from the realtor and the lender advising me that we are set to close Wednesday, March 14th. Hopefully no more hiccups

March 13th
Last step

I made this post probably longer than it could have been, but I wanted to express how laborious the process can be. Every deal is always one unexpected phone call away from falling apart, and keeping it together requires TENACITY and perseverance. Everyone will move along just fine and forget about you if you give up on deals or can’t see through to close. You must be diligent in solving problems as they arise, and you must be willing to always be the sole advocate for your success.
Today was simple, I got an email with the HUD early morning and I sent it to the lender
THIS IS A CRITICAL AND UNDEREMPHASISED PART OF THE DELAYED FINANCING STRATEGY
My lender and I have an aligned goal: get Alex as much of his cash back from purchase as possible so he can buy more. As soon as I sent the HUD over he told me to include a cost of insurance, good call too!
For full transparency I have placed the ACTUAL HUD here, also called a Settlement Statement, this will come with all your real estate purchases.

I have to come up with $58,553.36 and remember, I want to get as much as the possible back of this cash as soon as a tenant is placed. So if I think the house will be worth $85,000 when I’m done, and I know I can only borrow 75% of that. With delayed financing, the rule is you can pull 75% LTV or 100% of HUD whichever is LOWER. So I want the LTV number to be higher than my cash input, but not much higher because that means I’m leaving money in the deal.

ARV: $85,000
75%: $63,750
HUD: $58,553.36

Difference: $5,196.64What this difference means is that if I waited for 6 months of financing I could pull out 75% of that additional $5,757 or $3,897. It would be a little less actually since this takes into account taxes and other costs. Point is, I sacrifice a little capital (~$4,000) to get my money back in 2 months rather than 6: WORTH IT!
So with the HUD updated, lender happy, insurance quote in place, and lawyer set to close in 2 days, I expect my next update to be as boring as possible.

 

March 14 & 15th
ALWAYS BE CLOSING

The closing attorney sent me the docs to sign for the house. I filled them out, ALL 4 OF THEM, sent them back and wired the money. It’s 10x as much paperwork to buy a cell phone than a house!
On March 15th I got an email saying they had recorded the deed, I’m an owner. EASY

House #2 First house hack

In 2012 I started learning about real estate, and when I say I started learning I really mean that I became obsessed.

I crammed education for almost 2 years when my girlfriend and I decided to move in together. I considered this a great opportunity to turn my knowledge into profitability. So around 2014 when we moved I was better equipped to make a good financial decision rather than just find a house I liked.

We house hacked

House hacking basically just means some variation of living in your investment. Sometimes people do this with a duplex, they live in one side and rent the other. Sometimes it’s done as a live-in-flips, I did it by living in a foreclosure that I turned into a rental later. My plan was to buy a foreclosed house that was move-in ready, had a lot of value-adds, and I could use the FHA 3.5% down program.

Why this is valuable:

  • Buying a foreclosure means the purchase price is depressed, I can get in cheaper
  • Value-add is a term that describes a house that will respond well to a capital investment. Upgrades have a large swing in increased value
  • The Fair Housing Authority (FHA) is a loan program that will allow owner-occupied homes to get loans with low down payment

The combination of these things allowed me to move into a house with a lot of equity potential, without putting up a lot of my own cash. It takes time to search for great deals that fit in this category, and not everyone will be willing to move into a distressed home with lots of work to do, but I highly recommend it for anyone who can put it together.

We went hunting for homes and after a few weeks of looking, Nikki found this listing online:

This was no mansion, but not a bad little house and it fit everything we needed economically. Nikki and I wanted to move in together and even though it wasn’t new or fancy it was plenty fine to live in! We chose to make a small sacrifice and not buy a big expensive house that stretches our budget. Instead, we lived in this fixer-upper that cost us FAR LESS than our peers and friends were buying. It was rewarding and profitable, it also allowed us more freedom and sense of accomplishment afterward because of it.

We paid $54,500 for the house, but I knew it was way underpriced and with a little work it would be worth much more. We put a little money into improvements, a fence in the backyard, hardwood floors (self-installed), fixtures, etc. 18 months later we went to refinance and the appraisal came in at $115,000. Because of the equity, I was able to refinance to a conventional loan and drop the PMI, this new loan was also .5% cheaper. So with the discounts from lower interest and no PMI

I was able to cash-out $20,000 and keep my house payments the same.

This was a big deal for me, and was part of the reason just 2 years later I paid for a rental house in cash. Also, I want to note that what I SHOULD have done was finance this house to the maximum the lender would allow me to which would have cost me a little bit more per month, but I could have cashed-out a lot more capital. I didn’t do this because I was scared of a perceived increase of risk. Instead, I have more equity in the house that I can’t use, the opportunity cost is far more than the monthly payment would have been.

Purchase price $54,500

Downpayment $3,000

Rehab $5,000

Total Invested $62,500

I currently have it rented for $950 per month, the total projected expenses with a mortgage is around $750 per month. Thankfully because I have a great property management and rehab parter my expenses have historically been far lower than projected. While this has allowed me to expand my business faster, it’s still important to project expenses properly and not be biased because of a good year or two.

I had to spend a few hundred dollars on repairs before we closed in order to satisfy the lender. This should not be taken lightly. Repairs were done to a house you don’t own can be risky, if you spend the money and still don’t close you won’t get that money back. I was confident this would satisfy our last closing requirements and it was a small amount so I moved forward.

House #1: Accidental landlord

When I was 27 I only knew one thing about real estate: owning was better than renting,

Now it turns out that isn’t always true, but it did set me on a course to buy my first house.

I had a good job at the time and went out to put a house purchase together. I got prequalified for to spend $270,000 which was more house than I had any business owning by a large margin (newsflash, retail banks won’t help you make good decisions). I looked at condos because I was a single guy who didn’t want a lot of maintenance and I figured I could spend a little less than buying a full house.

I assumed at the time I could turn it into a rental down the road when it was time to move.

I ended up only spending $65,000 on the condo, far less than my peers were spending on their first houses. Looking back I am so happy I didn’t spend a ton of my house because houses are a big responsibility and any money tied up in them is difficult to get out. This means buying a house can be valuable, but it can also be an anchor and this purchase was mostly an anchor for me.

Low overhead = more freedom

Luckily since I had spent so little my mortgage was low which as time went on helped more than I had considered. Ever hate paying your bills each month? Ever think they are too much and wish they were smaller? Who made the choices to get those bills? The smaller your monthly spending requirement is the more flexible you are to invest. My total mortgage each month is only $398 Mortgage+165 HOA = $563 total payment, this worked out perfect too because less than 2 months after closing on this house I lost my job!! A job I never thought I would lose, remember this when you sign a loan commitment and assume nothing in your life will change. If your life was vastly different 5 years ago, I guarantee it’ll be vastly different in the next 5, give yourself room to grow, don’t cripple yourself with high overhead. Real estate can make your life fun, productive, and flexible, but a mortgage that’s so big you struggle to make is only going to cause you problems.

I used a VA loan to buy this house so it required very little cash of mine to buy it. The VA has zero down products which I used on this loan so the only thing I had to pay for was the $1000 earnest money which I received back at closing. Certainly, not everyone has access to a VA loan, but most people have access to the FHA loan program and that only requires 3.5% down payment which is still really low. On $65,000 using FHA a person would only need to pay $2275 in down payment. Anyone can work hard and save this amount of money, which means anyone can work towards profitable home ownership (even though this particular house isn’t very profitable)

About 3 years later I moved and decided to rent it just like I had planned. This is when I realized that myself along with most new investors calculate profitability really incorrectly. Like many people, I was under the assumption that rental income minus my mortgage payment would be my profit. What I wasn’t accounting for was all the other stuff that happens in a rental: maintenance, vacancy, capital expenditure, property management. So the house rented for $650/month and my cost was $563, this seemed good when I purchased but now that I know better this is terrible. Let’s look at the detail

Rental Income $650

Mortgage (Principle/Interest/Taxes/Insurance) $398

HOA Fee $165

Vacancy (8%) $52

Maintenance (10%) $65

CapEx (5%) $32.5

Property management (10%) $65

Total Expense and debt service $777.5

This results in a cash flow of -$127.5

You sure you still want to take advice from me??? Losing money is rarely a long-term viable strategy and to be thorough I’ll say that losing money in the short term isn’t ideal either. Now the good news is that historically my capex, maintenance, and vacancy expenses have been lower than I anticipated which helps. The margins are still razor thin on this property and that’s not great. Last year I also raised the rent on the newest tenant to $750/month which is a big help but not life-changing.

What can learn from my mistakes and what to do better:

I still recommend buying real estate (obviously) but it’s important to buy smart from the very beginning, and most importantly: BUY WITH STRATEGY. If you’re buying because you think it might make money, or you really like it, that’s a mistake. Buying the right asset to later convert into a profitable rental is a financial move that can create massive wealth for almost anyone. Buying the wrong asset can also be a massive hindrance or even possibly catastrophic to your future financial situation. I recommend a few ways to maximize your first home purchase to buy better than I did:

  • Learn about real estate! If the entirety of your real estate knowledge happens a few weeks before you buy a house and then you never look into it again that’s fine, that’s what most people do, but that’s why most people don’t make much on their house.
  • Buy a house that can be turned into a rental later or sold for a significant profit.
  • Buy an inexpensive house. Stretching on first home purchases can be a financial kiss of death. Don’t buy something so expensive that you’re tied to it like an anchor. A house is an asset that works for you if you buy it right, and it’ll fight against you if you buy it wrong.
  • Learn to calculate the details of a rental income transaction and apply it.

Why it’s good to use debt for real estate

There are plenty of horror stories about people with debt and the troubles they go through over it. Dave Ramsey has made a career telling people NEVER to use debt and he’s become so famous that people think this is a hard and fast rule. Being debt free is not a completely unwarranted position to have, but that doesn’t make it ideal for growth nor does it necessarily reduce risk. Using debt to grow a company instead of relying on cash is done by all of the greatest companies we know about, it does sound a bit counter intuitive but may also be more common than people may notice.

The concept I use may be somewhat complex in the details, but overall it’s very simple.

1. I borrow money to pay for an asset
2. That asset produces income
3. The income covers the cost of the debt, plus the interest, plus profit

Once a person understands that debt created to make money is good, and it’s not as risky as it sounds, then it’s much less intimidating. It’s common not to understand debt and how it can be used to advantageously when someone has only been exposed to consumer debt (credit cards) which IS bad debt and aren’t usually very helpful usually.

The stock market works on debt as well, shares of a company are a debt which a firm sells to the market. The sold shares are debt then they take the income from the share sales to reinvest in their company at a higher yield. They raised capital from sold shares to shareholders, and then made a profit from consumers and repay shareholders in equity price increases or dividends. Now, I’m certainly no large-scale public operation but the economic principle is identical.

Using cash is slow. Now slow and steady might sound nice, but slow is really bad because it requires trading the most valuable resource: TIME, in exchange for money. Money is supposed to CREATE time buy working passively, debt allows cash to be leveraged and be used to control much larger assets and the income that comes with them. If you had an infinite amount of time, then I would advise using cash.

PLAN A

If I have a house worth $100,000 and it rents for $900 per month

900 * 12 = 10,800 / 100,000 = 10.8% cash-on-cash ROI

10.8% is good but now we have zero cash and the equity is sitting in the house not making any money. It also has a payback period of 9.25 years which means we won’t be able to buy another one for almost a decade! Paying a rental property off for the cash is a common goal but this blog doesn’t advocate for common returns, We can do better!

PLAN B

This time let’s use a conventional loan with 20% down payment.

$100,000 – $20,000 = $80,000
The mortgage will be at 5% for 30 years.
The loan is $80K so the payment will be $420
(900-420) = 480 * 12 = 5760 / 20,000 = 28.8% cash-on-cash ROI

This formula is: rental income – debt service = cash flow * 12 months = 5760 gross yearly income / 20,000 cash invested = cash ROI

So do we prefer a 28% ROI or a 10% ROI? Sure there is less cash flow per month using plan B, but remember when using the 20% down, we still have the $80,000 remaining in the bank! We could repeat this 4 more times using the same capital as plan A, make far higher returns, and much higher cash flow. The payback period here is only 3.4 years as well so in less than have the time as Plan A we can recoup our initial investment and still make some cash flow each month. Debt is looking good!

PLAN C

Here is the plan I personally use, the numbers will be slightly different than real numbers for consistency and ease of explanation, but the overall math is the same. Let’s say I buy a distressed house at a major discount. After the house is purchased and repairs are complete I have 60K in the house

$65,000 my total cost
$100,000 value the bank says its worth
$75,000 is what the bank will lend on this house. (75% loan-to-value)
75K-65K = $10,000 (I get this cash back right now)
100K -75K= 24,000 is the amount of equity I still have in the house
$402 is the monthly payment for this loan (75K for 30years @ 5%)
$900 is the monthly income from this unit
(900-402) = 498 x 12 = 5976 / 0 …….. Wait it’s not possible to divide by zero.

This is what is sometimes called “infinite return on investment”. When you try to divide the cash return, by the amount left invested in the deal, but all the money invested in the deal has been cashed out with my loan. This results in a house that makes $5976 per year and not only is there nothing remaining invested in the property but it’s also already made that $10,000 in cash right at the start.
Also, let’s not forget about the original 100K we started with.

plan A: Use the entire 100K, make 10.8% yearly and then wait 9.25 years for it to come back to me
plan B: Use 20K cash, still keep 80K and good cash flow each month. I make 28.8% ROI and it only takes 3.4 years to be repaid
plan C: Keep the 100K, an additional 10K in cash, plus good cash flow each month. Infinite CoC return and instant payback period.

So which do you want?

$10,000 per year income with ZERO cash
Or
$6,000 per year plus $110,000 in cash?

It must be noted that none of these examples include ancillary and overhead costs, so the returns won’t be this extreme in real life. In fact, the real world numbers would be even less favorable towards paying cash since that 10.8% would likely drop to a return that is closer to low-risk stock market gains. Regardless of this information, the basis for how the money works out is identical. If I added a 40% expense ratio to each scenario, the total returns will fall, but relative to each other would be the same.

Paying cash is actually the riskiest part of my business

The method I use to buy houses requires me to pay for houses with (someone’s) cash, and then get a mortgage on them usually around 6 months later. It wasn’t until I paid cash for my first investment property that I not only learned the lesson this post tries to teach but it also really made me FEEL the risk of being cash poor. Being cash-strapped and running a business is not fun, and it creates a risk where there wasn’t any before. I’ve heard plenty of people say being debt free gives them peace of mind but a much safer peace of mind comes from keeping $100,000 cash in the bank. It will protect against a lot of unexpected costs and a lack of cash opens up to 2 kinds of risk, opportunity risk, and emergency risk.

Let’s say we use our $100K to pay the house off. On $100K the principle and interest payment will be about $540 each month, so once the house is paid off we save that $540 per month but what if something comes up that is unexpected and expensive? By letting go of all that cash we have gotten rid of the REAL safety net and the peace of mind people claim they so desperately want! Once the house is paid off and some unexpected $10,000 expense for (anything) comes up how are we going to pay for it? Will we borrow against the house, which is possible but not easy? Wouldn’t that be ironic, to “save money” by paying off a house only then to loan back to it going back to square one? Also, loans are nowhere near as easy to put together as writing a check is. Houses are very illiquid, meaning spending the equity is not easy, this is why the saying goes: cash is king.

Also we must consider opportunity risk, which might be the most expensive cost of all. means, the cost spending money is all the other opportunities that were available. If I spend $100K on a house, and the next day a GREAT deal comes across my desk and I don’t have the cash to close, that’s my opportunity cost. I can’t afford to do that deal because my money is tied up in dead equity. Paying cash literally costs me money! The cash I use isn’t usually tied up for long thankfully, but if I left the house paid for in full I would miss out on a lot of opportunities. This is why I mortgage everything and I do it as quickly as possible.

But Alex, you’re paying so much in interest!

Am I?

Seems like most people are one of two ways lately, lousy with money, or anti-debt.

How much is the interest really?

$100K loan @ 5% interest, again, $536.82 monthly

$536.82 * 360 = 193,255 Total payment

193,255 – 100,000 principle loan value = $93,255 total interest paid.

Admittedly $93,000 sure is a lot of money (well, for me it is, you may think it’s chump change!) but people act like this interest is a fee they aren’t willing to pay no matter what. It’s important not to look at the costs of doing business as an unfixable problem, it’s much more valuable to look at the upside. Why worry about a measly 93K when this house could make me $500,000 over the same amount of time or maybe better. Think about what will happen over the next 30 years: The tenant is going to pay that interest, plus profit, 92% of the time (I factor in an 8% vacancy and it’s calculated before profit). This means as the loan gets paid down I gain equity, which I could borrow against again down the road if I want. Another thing that is going to happen, and is very commonly overlooked is inflation. Inflation makes future dollars worth less than today’s dollars so that $93K is going to scale down in buying power relative to what money can purchase at the time. Also, I intend to keep growing for the long term, 93K is going to be a much smaller portion of deal size as time goes on as well, making the 93K cost less burdensome. Lastly, inflation helps me on the income side as well, what happens to rent prices over time? What happens to all goods over a long period time? The costs of goods go up and rent will be no different, the $900 rents now will be $2000 or better 20 years from now. All these small effects compound over time to really add up, and it was still profitable from the start! Worrying about the interest compared to how much wealth that can be created is a mistake, chase the HUGE upside and don’t let the fact that someone else is going to pay all these costs bum you out too much.

Ive tried to explain this topic clearly and thoroughly but it can be hard to grasp at first because sometimes it doesn’t FEEL right. It’s important to always trust the math, and to understand the process as deeply as possible. I was very opposed to using debt when I first started but it was simply out of fear, not logic. As i’ve learned the process more clearly and had experience to show me which is better ive learned that debt is a valuable tool, and hope to help other people understand it better as well.

Money isn’t that important

Money isn’t important

It doesn’t take long to realize that I talk about real estate and finance a LOT. I certainly take the topic seriously, and have even known to write blog articles about it! Recently I was speaking with a friend about mortgages and he became quite irate with my comments. He ended our conversation quickly and summed up his thoughts on the interaction with “Money isn’t that important”.

This isn’t anything new nor is it a profound statement, but when used one way it is absolutely true; money isn’t important. When used another way it can be used as a defense mechanism to justify a poor financial situation. I thought it would be interesting to analyze the usage of this phrase and the context behind it.

Money is a means to an end

“Money can’t buy happiness” is the other common phrase of similar position to “money isn’t that important”. Also true! plenty of people are happy and plenty of people don’t have much money, I was a happy guy when I was poor, and I’m a happy guy now that I’m less poor. That said unless your definition of happiness is swimming in a giant vault of gold coins, and your name is Scrooge McDuck, you probably want money to solve problems, not create happiness. This is the center of all money needs really, to solve problems, so how much you need is determined by how big a problem you want to solve.

My friend who said money isn’t that important might actually believe that for himself, but to assign that to everyone is short-sighted. Obviously, money is important to SOME people and situation! This guy likes to spend time with his family, they don’t like fancy clothes or nice new cars, and they have inexpensive hobbies, Him and his wife both bring in a good income, and they live in a low cost of living area; their needs are all met. He really doesn’t need any more money to solve his problems. It sure SOUNDS like the dream right? It is if you have similar interests and ambitions and don’t plan to ever get sick or have unexpected costs.

It’s easy to say money isn’t important when you have enough, don’t have unquenched ambitions, and don’t have any large problems to solve.

For everyone else on the planet though, who doesn’t have their life needs met, haven’t satisfied their ambitions, and want to leave their mark on society, money is of the MOST importance. How many people have a job they hate and can’t afford to quit? How many people are drowning in debt and are constantly overwhelmed with not having enough money to solve basic needs? What about people who have huge dreams but can’t afford to fund them? Majority of us think to ourselves, “I could use a lot more right now” several times a week, or even throughout the day. For those people who think money is important, can solve problems, and remove stress from life it’s important to learn how to properly manage and maximize economic resources. To disregard it is to ignore one of the most valuable resources we have.

To say money isn’t important AFTER you have enough is pure arrogance. Money was important to get him where he is now, but now that he’s comfortable he gets to look around and say “money isn’t important, a family is”. Sure, everyone would agree, but he only gets to enjoy his family because he has a stable life with a rock-solid job and low overhead. He would care much more about the value of money if he was in need, and my point is that there is a lot of life left to live. Things will change, the economy will change, needs will change, and unexpected costs will impact your life,

Freedom is what’s most important, and it’s for sale

My friend says money isn’t important, but he and I are both at work Monday morning. Now we may both enjoy our jobs, but I know I would rather be hiking, at the gym, taking photos, spending time with my fiancé, talking to real estate investors, traveling, etc. Plenty of stuff we could be both be doing, but instead, we are both at work so we can earn a paycheck….seems money is a LITTLE important then huh? Maybe he’s working hard now to pay his house off, reduce his overhead, then retire with a low cost of living and have enough on just his retirement. Sounds nice, a common approach, but then he’s beholden to that retirement amount. No new fancy car, no house upgrades, no expensive toys, now maybe he doesn’t care about that stuff because he won’t have a choice. He can’t afford to care about that stuff because he certainly isn’t going back to work after retirement, he’s going to quit early, quit with JUST enough, and then his life is confined to that income he chose to rely on. People say money isn’t important, but that’s only true once you’ve adjusted your dreams and ambitions to fit into the economic conditions that you’re used to.

Imagine if you could stop working, forever. You could afford a nice house, you had enough money to fix all your house problems, pay all your debts, fix your credit. You could have enough for your significant other to stop working, the kids won’t have to work, you could pay for their college as well. Even better than that you would have enough not to worry about health problems or changing the economy. This requires a LARGE volume of resources but it’s not impossible, it’s just hard. It’s far easier to just say “money isn’t important” when dealing with the struggle of not having enough is quite a bit harder. People who say money isn’t’ important are vastly undervaluing how much they will need in the future, and how much more they could do with their life if they maximized the efficiency of their money spent. I’m not advocating to get a second job or higher income or work until you die, I’m simply advocating to respect your resources, use them to maximum efficiency, and take your economic situation very seriously.

It’s my dream house/car and I deserve it

Think about your dream house and think about how big it is, what it looks like, what amenities it has.

Marble floors?

Infiniti pool?

Giant backyard?

Helicopter pad on the roof?

15 bedrooms?

Staff suite to house your full-time cook, a landscaper, and housecleaners?

Ok is 15 bedrooms and a full staff too much? Probably, but why? Is that not a dream you have, or is it not a dream you bother with because it’s unrealistically expensive? Are we talking about dreams or realistic goals? See this is the problem with saying “money isn’t important”, or “this is the dream house I’ve always wanted”. We say these things and it blends the lines between our wildest ambitions and mundane reality. Therefore every person who has stretched their income to buy a house because It was their ‘dream house’ has lied to themselves. That isn’t your dream house, that’s just the nicest house you can afford and if you could afford more you would buy more! If your dream house costs $150,000 and then you won a 10 million dollar lottery, I’m willing to bet you will upgrade. People are so impatient and so willing to give up on their ambitions that they will buy a barely expensive house, stretch their income to get there just so they can buy it while it restricts them from investing that money and buying something really big later. Buying your ‘dream house’ early is helping to kill your dreams, not fulfill them.

Now to my all time favorite self-delusion: “I deserve” it, well let me be really clear: You already have more than you deserve.

In fact, if you live in America and you have a low income, you already have more than you’ll ever deserve. Americans have been born into the greatest infrastructure of all time. The amount of money spent over the last few hundred years here have made social and economic mobility easier than ever. We hit the geographic JACKPOT just by being born here and to think anyone deserves more than that is insulting to the billions of people who didn’t get as lucky. If you earn $34,000USD/year then you’re in the top 1% of global earners, should be pretty clear that you got more than you deserve just by pure luck, enjoy it and say thanks to your parents; They have done more for your financial opportunity than you ever could.

I sold cars for many years, this rationalization is used by both parties and it’s the same disservice to both. People would buy cars they can’t afford and say “but I deserve it” and when I had trouble closing a deal I would say the same thing “you deserve it” (yes, I feel a bit sleazy about it). This happens so often but is it true? If you work hard and have the resources to buy a new car, does that mean you deserve it? Of course not. Here is what people deserve: exactly what their choices have given them. Also, I like to think what people really deserve for working hard is to look towards a day when they don’t have to work AND don’t have to stress about money. If you work hard at your job, isn’t what you deserve is for one day it to be OVER??!? When you buy a car what you’re really doing to yourself is pissing money away, money that could have been invested, compounded and then funded your (perhaps early) retirement. Instead, you’re guaranteeing that you will have to work longer and harder for that retirement and during that time you’re going to watch that car you love and deserve lose value, rapidly, it’s going to turn into an old car you hate right before your eyes. Your emotional attachment to it will be long gone, along with the money you spent on it and you’ll be so frustrated with it one day you’ll go to a car dealership and buy something new to make that feeling go away. The next car will also be too expensive, you’ll say “I’ll drive this one till the wheels fall off”, and you’ll stretch to buy and repeat the cycle while telling yourself that ‘you deserve it’. No friend, you deserve freedom, don’t rationalize out of it just for a shiny piece of metal.

People love to overspend on a fancy car and say “but it’s my dream car”. Really??!? That fancy new Camaro is your dream car? Sure it’s nice, but it’s a slightly above-average mass market mid-sized car, it’s special in no possible way. How long has it been your dream car, the one you bought is a new model that just came out this year? If you want just wanted “A CAMARO” you could have spent a lot less. You only said it’s your dream car to rationalize a HORRIBLE financial decision, you stretched to get it, and if all that wasn’t bad enough in a few months it won’t be new anymore, It’ll be dirty, the new car smell will be gone, and it might not be your ‘dream’ anymore. Next year’s model will be your new ‘dream’….wait, that doesn’t’ sound like a dream, that sounds like dangerous consumer capitalism. How about this example, take your dream car and buy the same model but 15 years old. Would you buy a 15 year old Camaro and be just as happy? No you wouldn’t because a 15 year old Camaro is old, ugly, and not fancy, you just wanted a new car and you used “it’s my dream car” to rationalize it. That new car is going to be old, ugly, and not fancy before you know it. The marketing machine by the auto industry is vast and convincing; don’t let them help you make a bad decision. Stop telling yourself you need a nice car, what you need is freedom; the rationalization to buy one is not profitable or helpful.

If you had more money, your dreams would get bigger!

This happens because money is REALLY important, and it dictates our lives far more than most people give credit for, and certainly more than dreams. That’s why people change their dreams to fit their economics. Pretend for a moment that you agree money IS important (difficult scenario to imagine I know!), now what real problems do you want to solve, what ambitions could you fulfill with a large volume of economic resources.

Own a ridiculous house

Pay for your kid’s college

Have enough money to self-insure against future sickness and injury

Travel the world

Buy your parents a ridiculous house

Buy your in-laws a ridiculous house as well

New cars for the whole family

Donate to charity

Donate to community

Donate to humanity

Now, this plan might not be for everyone, but I figure this is a general enough ‘Dream plan’ for most people to agree to. So how much money do you need to get down this list and accomplish it all? I know if you asked people how much it would take to get that list done, most would look at the list, mentally give up, and say: “Money isn’t’ that important Alex”. Money itself isn’t important, but technically neither are a person’s dreams, what’s important is what you can actually accomplish, and for that, you’re going to need a fat purse.

Stop telling me you don’t have money to invest

I ask people all the time to invest with me. From small amounts to large, it doesn’t matter what I propose and it’s rare that I actually get into details before I hear this common reply: “I don’t have that kind of cash”

It’s amazing how many times I don’t even get to say a dollar amount and still hear people tell me that they don’t’ have it. When I used to sell cars I would hear a similar response: “I’m just looking” I wouldn’t have even heard the person’s name yet and already they are refusing to deal with me. I can understand more in the car business because people generally hate buying cars and a car purchase is a guaranteed way to lose money so I don’t blame people for not being excited about it. What about investing though? People don’t want to make money either? And why default to thinking it’s a shortage of cash?

I asked a friend recently to learn about real estate with me. He replied that there is no point to learn about real estate because he doesn’t have the money to buy any real estate. This is such a common default position, and while I’m not sure what causes it I know that it’s fundamentally misguided. Imagine the opposite:

If someone dumped a large bag of cash on your lap today, would you be a successful investor?

OF COURSE YOU WOULD!!! You’re brilliant with money, you would be responsible, and you would make good business decisions. Just like you do now right? RIGHT?

Unlikely, the more probable scenario is that you would treat that windfall cash the same You would blow through and waste that money faster than you’ve ever wasted money before. How can I be so sure? Let’s look at other people who have run into windfall cash:

  • Lottery winners – well known to be awful with money and bankrupt soon after winning
  • Professional Athletes – These guys go broke so fast after leaving sports it’s depressing
  • Inherited youths – Just watch an episode of “my sweet 16” to see how family money can help young people make really responsible economic decisions
  • Famous movie stars – Depp, Stallone, Snipes, Mike Tyson,

So cash didn’t help these people, in fact, cash is what hurt them. People say “you need money to make money” but just because it’s a common phrase doesn’t mean it’s correct, or complete. What you really need if you want to make money is knowledge. You need to understand how systems work; you need to instill confidence in the people you deal with that you can pull it off.

What would you do with $100,000?

If you don’t already have a concrete plan of action, then it’s most likely you’ll just blow it. This is what everyone already does; consider how people spend bonuses, raises, or tax returns. People don’t have a money shortage problem; they have a money implementation problem. If you can’t properly invest your $3,000 tax return, why would you be so arrogant to think you could properly implement a $100,000 cash windfall? Have you ever said or heard the phrase “I’ll save more when I make more?” this one is also total nonsense. When you make more you’ll just buy a fancier car and nice new clothes because “you deserve” it.

Start saving and learning immediately.

Let me provide some perspective on my own story. I was broke for years and thought the same thing “I would love to invest if only I had some cash”, and when I thought that way I never did have cash. When I started reading about personal finance once of the things it taught me was that successful people aren’t created from windfalls, they are created from grinding out small returns until they grow into massive portfolios. The reason people don’t do the hard little stuff is that they don’t think it works, and it’s really not fun at all. The important part here though is that grinding out small returns, when you can’t really afford to invest much, is what will make you a great investor. It’s too easy to blow through large volumes of cash, but when your balance sheet is tight it forces you to become efficient. You have to learn this by grinding and when you do it’ll stay with you forever. If you get a large handout of cash you’ll be too tempted to pay for your inexperience with excess cash, you’ll be able to afford to lose money and subsidize your business, You’ll have to ask you won’t know any other way.

Here is some good news though; it’s unlikely that anyone is going to drop a big cash payout on you anytime in your life. So you’re going to have to grind out small savings, learn to invest small amounts and grind out small compounded returns until they do become large amounts. While you’re doing this you’re going to learn a ton about maximizing return on investment and protecting your hard-earned portfolio. So when the time finally comes that you do have a large swath of cash, you know what to do with it and the knowledge is by far more important.

You can buy a house right now, with zero cash.

You really don’t need cash for real estate. Now I just explained how the lack of a large cash account isn’t’ the biggest problem (but you should save for it anyway), however, I want to explain how much more valuable the knowledge is over having cash. So let’s assume you have $0 to spend towards investing, but you had a deep understanding of the economics and infrastructure of real estate. I’m going to use my last deal (READ: DEAL #4) as an example of how to accomplish this:

  1. Say I borrow $60,000 from a person
  2. I find a foreclosure for $36,000, and it costs $24,000 to rehab. I’m all in for $60,000
  3. I get a tenant and rent the place out.
  4. I got to a bank and ask for a loan, they say the house is worth $95,000 and will give me a mortgage of $71,250
  5. I pay back the original $60,000 and keep $11,250 in my pocket
  6. The house pays the mortgage back, short/long term expenses, and then I’m still left with $200/month profit and have nothing invested (free income!)

Sounds easy right? It’s not a trick, it’s just easy. So if you don’t’ feel like you can pull this off, there must be another reason besides money, because we just showed that YOUR money isn’t’ needed.

  • Can you find someone to loan you money? No? That’s because you probably aren’t a good investment. If you know this process like the back of your hand, you’ll find someone to take a risk on you. Like this whole blog has said, you need to be better first, and then the money will come.
  • Can you find cheap foreclosures? Shouldn’t be too hard, they are everywhere in markets all across the United States. If you haven’t seen any, its’ because you haven’t spent much time looking.
  • Do you know what the bank is going to look at when considering a mortgage? Do you know how they are going to evaluate the unit and what they will lend based on that? If not, you’re just one loan broker phone call away…

So in a few short minutes, I’ve displayed how possible it is to buy a house with no money, make it profitable, and put you in a position to do it again. There are certainly obstacles to this process, but that’s business, it’s not hard but it does take effort. If the only hurdle between you and financial freedom is knowledge, you must ask yourself if you’re going to let learning be the thing that keeps you poor. There are many other ways to buy houses without money as well (owner finance, joint ventures, etc) and there are even more ways to buy houses when you have a LITTLE bit of cash. I’ve bought 3 houses with small down payment products now, one of them I bought with only $2,500 and it made me $20,000 the next year!

What to do while you’re learning

Have I convinced you that real estate investing is not a money problem, but an education problem? I hope at least partially! I would like to explain this phenomenon worked for me in a real-world situation. When I first started I didn’t have any money or know-how, so I set out to accumulate both the slow and hard way. I started listening to podcasts and reading blogs every single day, while doing this I was simultaneously savings money as much as I possibly could (READ: HOW I SOLVED THE MONEY PROBLEM). After some time went by I learned that I could buy a foreclosure with 3.5% down, well that was only a few grand and because I had started saving I had already accumulated the whopping (#sarcasm) $2,500 I needed. If I had waited for a large unexpected cash payout to buy, I would have waited forever, if I simply saved money and didn’t’ educate, it would have taken much longer, but since I started on the education immediately it was easy. I could have certainly found someone to lend me the $2,500 at that point as well, so the only factor that really was necessary was the knowledge.

The reason you aren’t investing isn’t due to a lack of capital, its because you don’t know how. If you knew how you could get started immediately and if someone dropped 100K in your bank account you would still need a few years of learning to properly deploy it.  If you want to start building wealth, start educating immediately, that’s the real thing that’s holding you back. Not having money is just an easy excuse similar to “I’m just looking”, it may be socially acceptable but it’s not helping you make any money.

Rental #4 or, how I bought a house from across the country that I couldn’t afford, and still made a profit

In 2017 I was antsy to buy another rental, a bit too antsy.

I had bought my previous deal the Summer before in 2016 and I was waiting to cash out on that house before I bought the next, at least that had been the plan. Patience is far from a strength of mine and luckily this hasn’t gotten me in too much trouble, actually, when done right moving fast is quite valuable.

I looked at all my finances and decided that I spent every dollar I had in both my business and personal accounts AND leveraged my HELOC to the max I could scrape by and buy another house. This is also assuming the rehab stayed cheap and no other large expenses happened in the meantime, which is never the case.

So I contacted my realtor anyway and told her I was in buying mode. The leads started coming in and it only took a few short days before I came across a deal I thought I could put together. I saw a few pictures of the property through email, I looked at the numbers and the area and decided it could work. From the pictures the house was awful but the neighborhood was decent

Usually, this process takes 2-3 days at the most. I’ll put an offer in, and I’ll know whether it was accepted quite quickly, so when I didn’t hear anything back (which is common) I assume I didn’t win the bid and went about my business waiting for the next deal. This turned out to be for the best because a week later I had an HVAC failure in one of my units that needed a full repair and some upgrading (it was a very old unit), so $6400 later I was really happy my bid wasn’t accepted because I was so tight on that deal I would no longer be able to afford it. Then OF COURSE about a week goes by and I get a call from the realtor letting me know I won the big, we close in 30 days.

 

Mistakes have been made.

 

I was terrified, but I took some time to really look at the situation. but I knew I could still afford to write the check for the house if I had to so I kept moving forward. It’s important in real estate to always move forward on deals. If you run away at ever hiccup you don’t get ahead and you don’t learn how to overcome. I learned a TON by moving forward no matter what and learning how to solve problems rather than bailing. The house was a deal, and I knew I had refi money coming in a few weeks. I had exit strategies

Ok let’s see where I was at this point:

  • House bid was mine, I intended to close
  • House was 2600 miles away, contractor hadn’t seen it yet
  • I was ~$6500 short on this deal IF the rehab came in at my lowest expectation.

 

Here was the strategy I built to get me out of this mess:

IDEAL:

  1. Get my rehab contractor over there immediately to get final rehab costs
  2. Start talking to lenders about getting a mortgage for House #3 and use those funds to pay for the costs of this house
  3. Look for partners/friends/everyone/loan shark who would lend me the fund to bridge the costs
  4. Use refi funds from house #3 to repay
  5. Install tenant, make fat stacks

LESS THAN IDEAL:

  • Close on house, then sit on it until I build funds to rehab
  • Wholesale the house as-is. Basically, I would sell it to a fellow investor to do what I couldn’t
  • Bailout of the closing

 

These are the things that were swirling through my head. As I had spoken with my lender more it seemed that doing a refinance for the last house HOUSE #3 was going to get done smoothly. This gave me some confidence AND provided me some additional risk mitigation when asking for private money.

 

I had never borrowed private funds before

 

This was a big deal for me actually as I had never borrowed money from a private source before and it’s there isn’t a massive demand to take the first chance on a guy like, especially when the ask is “hey can you loan me money for this great deal I locked down but didn’t find out I couldn’t afford it until AFTER”. People would probably describe me as arrogant, obnoxious, and intense, these are not qualities that make new investors want to fork over cash. Maybe this is a bit of an exaggeration, I’m not totally polarizing, more of an ‘acquired taste’. In all honesty I did have a few things working in my favor:

  • I spent a few years in sales and I got pretty good at it
  • The deal I had was solid
  • The loan would only be for a short-term
  • The amount I needed wasn’t an unreasonable amount,
  • I had skin in the game, so I set off to ask around.

So with this in mind I prodded and poked a few people I thought might be interested with zero success until I got to Frank. Frank and I met online at www.biggerpockets.com about a year ago. We had become really good friends through the site and hanging out in person, I introduced him to local resources and we met regularly to talk real estate and personal finance.  I explained to him the numbers on this deal, the risks, and my exit strategies, just like I did in this post. He knew I could pull it off, and he trusted me since I had just helped him lock down a similar unit earlier this year and I didn’t ask him for any fee. Just from our conversations I knew he probably had a bit of cash he could part with at least temporarily so I pitched him the idea and he was quite receptive. We negotiated terms, he agreed, and he wired me $20,000 in a few days. This was both a big step for this deal, but also for what I started thinking I can accomplish next. The ability to raise private capital could open all new doors of opportunity.

 

The Rehab:

This house was such a dump. It was ugly, beat to hell, and it had very few positive characteristics. As the pictures started coming in I knew it was worse off than I had originally thought, but I was feeling better that progress was being made

 

 

 

 

YOU SEE THIS GROWTH INSIDE THE HOUSE!!

 

 

 

 

 

 

 

The house needed all of the standard stuff I knew about and that we do with most houses. Paint, floors, cabinet painting, landscape, etc. What it also needed was a whole new HVAC, new roof, new driveway, and we converted it to 4/2 rather than keeping it the 3/1.5 that it started. This is going to set our rehab WAY over budget. This is bad news in the short run but not terrible news in the long run as long as I can still come out profitable. I don’t mind paying for capital expenditures up front if I have to, but if I can defer costs that’s always ideal. Why pay today for an expense today when I can pay the same for that expense down the road where I’ll be in better financial condition to absorb the cost.

 

Wrapping up:

The house was purchased for $36,000 and ended up needing about $26,000 for repairs. This is WAY over what I had expected to pay out, and it’ll all be ok. First off the bulk of the unknown cost came from CapEx that I knew weren’t far out to replace anyway. Basically, when I bought the house I knew it would need a roof and HVAC and I was HOPING I could defer these costs for ~24 months or so, this would allow me time to receive rent income ahead of the expense. Sadly I had to replace both during rehab, this means for cash outlay I had to put out more now, but this also means no roof/hvac/capex costs for a LONG time down the road.

I paid Frank back in 60 days exactly, I was able to do this because I had done a cash-out on the previous house HOUSE #3

during this rehab.  Worked out perfect, he was happy and I paid him a big bonus for the help and now I’m poised to ask him for more the next time (and coming soon hopefully!)

This wasn’t a great deal, to be honest; it was a good one but not a great one. I certainly paid a premium for being so far away and moving forward so arrogantly. I plan to fix this with the next deal by including my contractor much closer in the process. I’m thankful that my contractor’s goals and mine are closely aligned (not by accident, by design) so it’s in his best interest to make sure I’m as profitable as possible. If I had been a little more diligent and strict on this deal I could have saved money or found a better one. That said, I would do this deal over and over again if I had the chance.

Buying a house for many people is terrifying, buying one across the country must be worse, and buying one across the country and then finding out you can’t afford it should be debilitating right? Hopefully, this story makes it seem less scary. Fear is usually fear of the unknown, but this can be largely mitigated by KNOWING what can/will happen. Education is a valuable way to mitigate risk because thoroughly understanding a situation makes you less scared of it and also allows you to more accurately account for and deal with potential hazards. This is why I wasn’t too scared to get this deal done, I knew the risks and how to account for them. Next time you’re scared of taking a risk, just learn as much as possible about the situation and you’ll be surprised how much more confident it can make you feel.

What’s next?

So I bought a house I couldn’t afford and I’ve never seen from 2600 miles away. The deal not only worked out, it’s profitable. I’ve written my 2018 Goals in depth but the basic premise is to repeat this deal 3 more times this year. The cash from this deal plus hopefully being able to raise more private capital than last year should allow me to buy at least 3 units, maybe more!