Back of the napkin underwriting, the 50 percent rule.

It goes like this. “Yeah we were having lunch and we were just talking about some ideas and started writing them out on the back of a napkin. And now we have this multi-million dollar company, brand, or product.”

All you need to know is what is the rent roll for a given property. If you can’t get the rent rolls, you can look also look at market rents and do an estimation.

Again, at this point in the process you are just trying to see if this particular property fits the criteria you are investing for. Your criteria and strategy for investing is something we have talked about extensively and you need to determine before looking at any properties.

So if you have the rent rolls, you now know how much income the property will or should generate. Once you know this number. Then you just want to subtract 50% percent of it.

50% is very conservative by most people. But when you add up all of the expenses such as maintenance, utilities, property management, cap-ex, etc. Then the money you have left over must cover your debt on the property and any remaining cash flow, if there is any.

You can do all of this on the back of a napkin. If you determine that this property may be a good fit, then you can take the next steps in the underwriting process and get into the details even more by getting the real data on the income and expenses.

So you would need to see the rent rolls and the T12. The rent rolls are the rents that the building are getting on each of the units. The rent rolls should include the lease date of each unit as well and in most cases the tenants name and information, even though that is irrelevant at this point in the process.

The T12 (trailing twelve): Is the income and expenses a property has had the last twelve months. You could also, get a trailing six as well, which would be the last six months. But you get the point.

Now that you have these two documents you can take the back of the napkin underwriting to actually underwriting to see if this a good deal.

The back of the napkin approach is a way for you to look at more deals and sift through them much quicker.

I hope this was helpful as you are looking at deals. Also, when it comes to single family home investing the metrics are not as simplistic. There rents as many variables and they can vary widely. We will talk more about these later.

To your success and your future.

Why your decision making is keeping you stuck

Several years ago, I read the best book I have ever read on human decision making and the two type of decisions we make.

One of the decision making types really doesn’t do much for you other than it helps you get through your day. The other type of decision is one that actually moves you forward in your life and your goals.

At the end of this article I have the link to the book and the author so you can check it out for yourself. I highly encourage you to do so.

Prevent Pain: One of our motivations and desires when we make decisions is to prevent us from having pain in our lives. It usually isn’t actual pain, like an injury. But it is pain from what happens when we don’t make that decision. These decisions usually are urgent.

Things such as brushing our teeth. This is a prevent pain decision because we don’t want to have bad breath and ultimately our teeth rot out. Taking the garbage out. Again, this is a prevent pain decision because if we don’t take the trash out the house will stink and our spouse might not be happy with us.

Doing the laundry, is another prevent pain decision. If we don’t do it we wont have any clean clothes. Changing the tires on our car. Following up with that email with our boss. Paying the bills.

Prevent pain decisions are simple little decisions we have to make every single day, or it can be infrequent but required when the need arises. Our life doesn’t change much when we make these decisions but they have to be made. If we don’t make them, things will eventually happen that will cause us a lot of problems.

Gain Decisions: Decisions that are driven toward producing more significant positive results in our lives and our business. Gain decisions usually aren’t required for us to make, because there isn’t a consequence for not making that decision like there is with a prevent pain decision. These aren’t urgent decisions.

Gain tasks are focusing on something you want. And like anything we want, we have to actually make time and invest resources in to getting it.

A few examples of this are writing a book, getting further education, spending quality time with our children, closing a big deal, investing in income producing real estate.  

Look at these examples compared to the prevent pain decisions and you will see a big difference. If we don’t accomplish the gain decisions, usually nothing happens, at least not quickly, but if you neglect to do them over time they could have significant consequences.

And this is what causes the problems in our lives and keeps us stuck.

We get caught up making the day to day decisions that are urgent and we never get around to making the bigger and more important decisions that will actually impact our lives significantly and move us closer to our goals we want to accomplish.

How do we start to make better decisions? To get more out of your life and to get out of the day to day decisions that are keeping us where we are, you have to plan.

Everything we do everyday can be broken down into three categories: Habits, To Do items, and calendar events. 

Habits:  Mostly influence parts of our life such as hygiene, health, eating, repeat spending, relaxing chores, emails, and rote tasks.  We don’t have to write them down, because we won’t forget to do them. These are typically prevent pain decisions/tasks.

To do Lists: Maintenance tasks that you don’t want to forget. Updating a file, sending out an email, checking in with a client, going to dry cleaners, grocery shopping, paying a bill. Again these are prevent pain items usually, because if we don’t do them it will cause us immediate pain.

Calendar: For things that are time specific: events, appointments, and anything you have to be on time for, whether it’s business or personal.

Use your calendar for Gain:

  • Anything on your calendar you will defend and protect.  You won’t skip.
  • Use your calendar to give your goals and better decisions the attention they deserve.

So if you want to get out of the constant cycle of making decisions that only affect you in the moment or the day, you have to start planning for it.

For new or veteran real estate investors, if you want to start investing in incoming producing real estate you have to make a decision to do that and put it on your calendar when you will actually make your first purchase, your second, or one-hundredth.

For those who want to spend more time with their children, but can’t find the time. You have to put it on your calendar when you will allocate time to do this.

The key and the point of the book is to get you out of the rat race of everyday small tasks, that won’t actually move you closer to your goals. Making better decisions is thinking about what it is you want to accomplish.

A goal.

And then working backwards to set aside the time to make the goal become a reality.

This is the key to making better decisions.

I wrote a summary of this book you can check out here.

But I highly encourage you to read the actual book you can access it at the link below.

Link to book: http://www.amazon.com/Decide-Smarter-Reduce-Stress-Example/dp/1118554388/

To your success and your future.

The criteria I used to create a million dollar portfolio with single family homes

As a new real estate investor a lot of questions may be running through your head. How do I know which property to invest in? What should I be looking at with each of the properties? And the list can go on and on.

To help you get out of your own head and get you on your way in to investing and accumulating wealth. I compiled a short list of things I thought about and still use in many cases, although my strategies have changed some, when I invest in income producing real estate and more specifically single family homes.

As we have discussed many times before. You first need to determine what is going to be your strategy for investing. Meaning, what are you looking for. Click here and you can learn more about each of these things, but I will quickly outline them for you.

Are you investing for cash flow, cash on cash return, appreciation, tax benefits, etc, or a combination of all of it. By knowing specifically what you are investing for it will help you to look at the right properties and stay away from the ones that don’t fit.

Early on in my investing my criteria was pretty simple:

I had a picture of the type of person or persons that would be renting the place. Typically a two parent household, making about the average household income, and either one or two kids. Or a single mother/father with two kids making less than average household income and could afford one of my places.

I wanted my properties to be in line with what it would cost them to rent a b-c class apartment (to learn more about classes click here), but what they really wanted was a house and would be willing to pay a little more than they would in an apartment to get one.

Specific criteria:

  1. The rent collected had to be double the amount of my mortgage.
  2. Back then and even for the most part now, I want the rent to be at least 1% of the value of the home each month. See here for more information on the 1% rule.
  3. The property had to be in an area that I wouldn’t be afraid of knocking on the door and collecting the rent.
  4. I wanted to be able to get my down payment to be paid back with in two-three years. Ex: If I had to pay $10,000 down, then I wanted to get that amount back before the third year was up.
  5. I preferred houses built on a concrete slab.
  6. No basements.
  7. 3 bedrooms and 1 bath was an absolute. These are way easier to rent.
  8. Not located on a very busy highway.

I had a few other less subjective things as well. Things such as nothing weird about the lot of the house or the layout of the house. I wanted it to be simple. You can be amazed how some of these older houses just have weird configurations or even things built in to the home.

I also preferred no very large trees close to the house. Trees can become very costly to manage and especially costly to get torn down.

Would I compromise on any of the criteria? Not really. Now you have to analyze each deal individually, but the purpose of the criteria is to help you not get paralysis from over analysis. You can’t look at everything. So by coming up with a criteria and a strategy it helps you, your realtor if you are using one, and lastly it helps you make decisions quicker.

As you can see by my criteria, I am really looking at cash on cash return. I want the downpayment back pretty quickly and the only way you can get that is with a great cash on cash return. With cash on cash return, I am investing for cash flow, not extreme cash flow, but I want it to carry my mortgage and all expenses with the property and actually have some cash left over to use.

I used this simple strategy and criteria for close to ten years of investing and I still use it when I am looking at single family income producing real estate.

If you are currently an investor, what is your strategy or criteria?

If you are new and haven’t bought your first property yet, what are you thinking?

Please share in comments.

To your success and your future.

Lessons learned from being a landlord…Going cheap cost you more

One of the goofiest lessons I learned and I say goofiest, because it never crossed my mind in a million years that this would happen.

I had this tenant named Donna. Donna was a tenant for about three years. She was on section eight (government assistance).

She had already gotten another apartment approved for her to rent before she calls me and tells me she is moving out. I hated to see her go. But it happens. It was smart on her part to get the other one approved before she let me know.

Donna, was a little bit of a hoarder so needless to say she had a lot of junk in her place. What was weird though is she had a bunch of baby stuff. Like brand new stuff that had never been used. And she didn’t have kids.

Donna, calls me a couple of weeks later and tells me that she had taken everything she wanted from her apartment.

I said, “Ok. But did you leave anything in there?” She said she left a few things.

I trusted Donna, so I didn’t think much about it. We said a few words and that was that.

I go over to the apartment and quickly found out that she left a bunch of crap. I called her, but she didn’t answer and didn’t care any longer, because she already had her new place approved through section eight, so I was left with cleaning this place up.

By this time in my evolution as a landlord I thought I was a little more advanced. I didn’t do things I knew I could pay someone to do for me. But I was still cheap though.

I call up a reputable company to come out and give me a quote. Three guys come out. One guy you could tell was the boss and then he had two other guys with him.

I don’t mean to be disparaging here, but all three looked like convicts. I think the main guy picked the other two guys up at the Labor Ready office that morning. Because it didn’t seem like they all knew each other that well.

The boss guy does a look around. The mess is evenly scattered throughout the apartment. This apartment is 1200 sq feet with 3 bedrooms and 1.5 baths.

After he does his assessment he calls, who I am assuming the big boss, and starts explaining to that person what it looked like.

While he is on the phone, I am in another room with the two other guys. One of the guys whispers to me that they would be willing to do the job themselves for $500 dollars.

When they whispered this to me, I had not gotten the quote from the boss guy. He was still in the other room on the phone.

I replied back to the guys when they gave me the price. And I pointed to them and said,

“Just you two, and not him?” One of the guys said yes. That they have a truck and would come back after their shift and do it. I said give me your phone number.

I also said, “Will $500 be cheaper than what he is about to say to me? He said “Yes, I guarantee it.”

The boss guy comes and find us. He says to me.

“This job is going to be several thousand dollars and we won’t do it unless you put all of the loose item in to boxes.”

I said, “why would I put it in boxes if you are just going to haul it out and throw it away?”

He said “We can’t move it without all of the small stuff being boxed up.”

I said, “Can’t you all box it up and haul it out?”

He said, “We can, but it is going to cost you more.”

It was obvious to me by this time that this was a job that was not what they normally do and it sounded like they really didn’t want to do it.

So I said to the boss guy, I will let you know what I want to do. But I had already made up my mind that I was going to call the other guys immediately.

They leave, and about an hour later. One of the guys calls me. Out of the two guys, one of them was the leader so to speak.

I met them over at the apartment around five to let them in. They were in a pick up truck and not in one of the big van trucks like they were in earlier and like most moving company’s have.

We confirmed the price again, and I asked them how long it would take. They said a couple of hours.

I said “sounds good” and I left.

Don’t ask me why I was so trusting other than being an idiot, but I knew they wanted the money and I wasn’t going to pay them unless the job was done and done well.

About an hour or so later, the leader guy calls me.

He said “Do you care if we keep any of this stuff?” I said “Heck no”.

He said “Even some of this newer stuff, it is probably worth money?”

I said “I just want it all gone, I could care less.”

We hang up.

About another half hour goes by and he calls me again.

He says “Do you have someone that is going to do the actual cleaning of the place?”

I said “I do, but would you do it and for how much.”

As a landlord you just want to get things done as quickly as possible.

He said “Their wives would do it for an extra $200 dollars.”

I told him what I expected to be done and he said ok.

About three hours go by and he calls me and says they are done.

I go over with the cash in hand. I look at the apartment and they had done a great job. The two guys were there and so were their wives.

I was quite satisfied with their work. I paid them and they left.

About three weeks later, my tenant downstairs calls me and says that there are two citations on her front door from the city. I said what do they say? She couldn’t really tell me, so I go over there later on and pick them up.

I couldn’t understand the citations. So I call the number on the document.

A lady answers the phone and looks the citations up in their system.

She then says “Are you a landlord?”

I said “Yes!”

She said “Did you recently have someone move out of one of your apartments at this address?”

I said “Yes!”

She said “We found a couple of places around the city where mail, furniture, and lots of other items (junk) had been thrown out in alleys, city dumpsters, and in the streets. Did you have someone remove the stuff for you?”

I said “Yes!”

She said “Do you have a receipt from that company, if so, we can reach out to them and let them know they are responsible for these citations!”

My heart sunk and I said “No” I don’t have any receipts.

She said “You are responsible for these citations then.”

I said “How do you even know it is from that apartment?”

She said “In each of the junk piles there was pieces of mail with that address on it.”

I am sure I could have pushed back a little more, but at time I don’t think I would have won. And if I didn’t pay them, they would have filed a lien on my place. So I just moved on and paid them.

I think each citation was $500 dollars or so. I paid them and once again learned a few lessons.

1. Get a receipt
2. Don’t hire people to do work when they openly try to steal business from their current employer while on the job for their current employer. They may not be the best characters.

To your success and your future.

Lessons learned from being a landlord: My tenant died…now what?

At 26, I bought my first income producing rental property. It was a duplex about a mile or so from where I lived.

When I purchased the property, I inherited tenants that had leases in place already. And as I have shared many times, outside of just buying the duplex I hadn’t thought much deeper than that. But I would quickly learn a lot of valuable lessons about being a landlord the hard way.

About six months or so into owning the duplex I get a call from a guy claiming to be Wanda’s brother. Wanda was one of my tenants and she also had two children that lived with her. Wanda was in a wheelchair most of the time and had actually lost one her legs because of diabetes. Wanda wasn’t very old either.

I was immediately thinking why is he calling me.

He told me that Wanda had been in the hospital for several weeks and had died.

I was surprised but not shocked. I told him that I was sorry for his loss.

He said that he had been over to the duplex and has picked up his nieces and nephews things. And that they would be living with them now. He was a very nice and sincere guy. We talked for a just a few minutes.

I asked him about Byron and what would Byron be doing now. He acted like Byron didn’t even exist. And he said I don’t know anything about him.

Byron was my tenants boyfriend and he was always over there. I think he was somewhat of a streetwalker and found Wanda and shacked up with her as a way off the streets. So the fact that her brother didn’t even acknowledge his existence seemed weird to me, but I didn’t make a big deal of it with him. We hung up and that was the last time I ever heard from him or anything to do with Wanda.

Regardless of their situation, Byron being there while Wanda was a live was a violation of the lease and the law and my tenant could loose her section eight voucher if the government ever learned about this. I never made a big deal of it, because I didn’t want to lose my tenant. I assumed with her passing away and him not being on the lease he would just leave now.

Well, he didn’t leave. I learned very quickly about something called squatters rights

Once I spoke with Byron I gave him a week to get his things out and move out. I thought that was plenty of time. After the week was up, I told him I would be changing the locks. I would soon learn this was a big mistake.

I had the locks changed on a Friday afternoon. That Saturday morning was the day I was going to start the rehab of the apartment. I ride over to the duplex around 7 am and I notice the front door cracked open and you could tell the door jam had been busted.

I wasn’t thinking anything other than someone must have known the place was vacant and broke in. So I didn’t get out of my car. Instead I called the police.

Once the police arrived I got out of my car and told them why I called them. It was obvious the door was broken. I follow them up to the steps of the door and we notice a big metal bar laying next to the steps. This was the tool the intruder used to break the door open.

We walk in and the police are yelling “police are here”. In this apartment, you walk through the front door and you are in a large family room. This is where the tenants usually had their couch and tv.

You could see a body wrapped up in blankets on the couch. They walk over and are yelling at the top of their lungs “police, police” and finally the person wakes up.

it was Byron laying there. He sits up and most likely his still high or hungover from the night before and is saying “what, what”. And is very startled as anyone would be.

At this time, I started cussing at Byron. And I am saying “what the fuck did you do to my door?. He then starts saying that he was sorry and that he didn’t have anywhere to go.

In my state of absolute madness one of the police officers pulled me to the side and told me about squatters rights. And the process I would have to follow to get him out of there. I just couldn’t believe there was a law for someone to actually occupy a property they had no right to be in.

After the police left and I had calmed down, I asked Byron what his game plan was because he couldn’t stay there unless he paid rent. He asked me if I would give him a little more time to get his things out of the place.

Byron and Wanda were both hoarders. So they had the place full of junk. Literally nothing but junk everywhere. Think of an episode of hoarders and this is what it looked like.

Based off what the officers told me, I was better off to work with him instead of going through the judicial system and the court to get him out of there. So I agreed I would give him a little more time. Even though I was furious about the door.

Later on that night, I rode by the duplex again. This time, I could see a crack in the busted up front door again. Instead of calling the police I opened the door myself.

This time I see Byron, the crazy lady in the duplex next door (which is another story for another day), and her son and they are all sitting in the front room smoking pot. I think it was pot, it could have been crack.

Again, I was livid and said I was calling the police and I told the neighbor and her son that they were trespassing. I don’t know if that is the legal term or not, but as you can imagine I was really pissed off and that is all I knew to say.

The police arrived again. Again nothing really could be done. They told the neighbors they can’t be inside the apartment and they didn’t do anything to Byron.

The nosy crackhead neighbor lady always sat outside on the front porch. So on Sunday, I rode over to the duplex. I acted like I was on the phone, because I knew she would be listening.

So I am standing there acting like I am talking to someone and I say “He is gone. Can you all be over here tonight to throw everything out?” I may have said some other things, but that was the gist of it.

Then I left.

Literally about three hours later. I get a call from Byron and he says he has moved out of the place. I said, “Oh great, you got everything out of the place?”

He said “No!”

I said “Why not?”

He said “I don’t want anything in there!”

I said, “Ok, but you can’t leave me with all of that stuff!” And at that time I really didn’t know how much it was actually cost me to get rid of it all.

He said “Well, I don’t want anything and I heard you were going to have people over to get rid of it anyway.” I said “How did you hear that?” (even though I knew my planned had worked)

He said the lady next door had to told him.

I was glad my planned worked and I knew she would tell him.

I hung up with Byron and never heard from the guy again.

I think it cost me about $3,000 dollars to replace the door. I am still mad about that, because it wouldn’t have happened if I had not changed the locks before I had the Byron situation resolved.

So what is the lesson I learned here, well there are several.

  • Don’t let someone not on the lease live at your place.
  • Learn about the laws around tenants and landlords or consult an attorney.
  • Lastly, in todays world there are a lot more resources at your fingertips that can assist you through your journey becoming a landlord. Be sure to use them.

Another lesson I learned through this ordeal is why it is important to always get a receipt when you are hiring contractors, or people pretending to be contractors, because you may need that receipt to prevent you from having to spend an extra $500 dollars on fines that you weren’t planning for. Check in tomorrow to learn about this one.

To your success and your future.

Is the 1% rule still applicable in this market?

At 26, when I bought my first income producing rental property I wished I had known a few basic principles to investing in real estate. The only thing I knew was that everyone I had known growing up that owned real estate, which wasn’t anyone in my family, was rich to me.

This was the whole reason for me to like real estate and want to invest in it. Nowadays, knowledge on investing and real estate in general is everywhere, but 17 years ago, this just wasn’t the case.

Years later, I learned something called the 1% rule. The 1% rule in real estate investing means this. You should be able to rent a property that you purchase for at least 1% of the value of that property.

Example: Property purchased for $100,000 x 1% (.01) = $1,000. This property should be able to generate at least $1,000 a month in rent.

It’s pretty simple. If you put 20% down on $100,000 house. Your mortgage will be $80,000. Let’s say you have 5% interest rate on it. Your mortgage payment is roughly $450. Add in taxes and insurance, which might be another $150 a month. You are now at a payment of $600 or so.

Again, there are a lot of variables here. But you get the point.

I wish I would have known this when I bough my first property I mentioned earlier.

I am sure the critics out there are now saying is the 1% even feasible anymore in today’s market?

I say yes. With some caveats. Years ago I could buy properties in B- neighborhoods and easily get the 1%. However, in the last few years, I have had to downgrade some in to C- neighborhoods to get the 1%. These purchases were in areas I wouldn’t have considered before, but if you are committed to the 1% as a strategy then you have no choice.

However, my point here is clear. You have to come up with your own investment strategy. I have been telling people this for years.

I wrote an earlier post on all the ways income producing real estate makes you money. You can access that article here. Decide what your strategy is and then go look for properties that fit that strategy. Nicer places in better neighborhoods may not fit the 1% rule, but overtime they may appreciate more. And you may have less turnover in the unit and less maintenance.

So the question is can you still find properties that fit the 1% rule? I would answer, yes. However, they may not fit other criteria you may have. Like location and tenant base. Or they may be in other states than you are currently considering.

When it comes to multifamily properties does the 1% rule still apply? For me it does. Now, when I do a full underwriting of a multifamily property I will look deeper into the financials. But when I do a quick back of the napkin underwriting of a deal on whether or not I want to look at it deeper. I will look at what are they asking per door. And what is the rent they are getting per door.

If it is close. Then I will dig deeper into the deal.

One of my mentors says it like this. He says if you can find a property that gets .005% or a half a percent, he said buy all you can. Because it is worth it over time.

And if you take nothing a way from this post, I would say this.

Don’t wait to buy real estate, buy real estate and wait. Because it is the one investment that has proven itself over and over that it goes up over time.

What are your thoughts?

To your success and your future.

It isn’t procrastination and it can be deadly unless you fix it now.

We have all had that moment in life when we get really excited about something, maybe it is dieting, getting out of debt, planning our day more effectively, redoing the kitchen, painting the bedroom, investing, etc.  You name it.  

At that moment we get excited about doing the “thing”, but we don’t take any action to get the ball rolling on actually doing it. For every second, minute, hour, day, week, month that goes by, we lose that passion and excitement about accomplishing what we were so excited about accomplishing.

This is called the “law of diminishing intent”.

I can remember learning this lesson years ago.  It was around November or so, and I was telling a friend of mine that I was planning on starting to workout after the New Year.  Sound familiar?  He replied back “Why wait, why not start now, what is the difference between now and then?”  

The only thing that could have happened over the next 45 days was I would lose interest in actually pursuing the goal and I may have never even started. Instead I started that day.

Starting is obviously very important, but more importantly by starting today you actually start the process of developing the disciplines and habits that will help you continue down the path until you accomplish the goal.

My mentor Jim Rohn says it like this:  “The pain of discipline weighs ounces and the pain of regret weighs tons.”

The key is to set up the discipline while the emotion is at its highest.  

Buy the paint, clean the refrigerator out of all of the snacks, cut up your credit cards, go outside and run a mile or walk, find a realtor to start sending you possible income producing properties.

When it comes to your health it really could be a life or death situation. Maybe you get short of breath, or you see something that looks odd on your body. The key is to call the doctor now and set up an appointment. Because as time goes by, you will start to tell yourself that it is not not that bad and justify not taking action and it could ultimately kill you.

Is there something in your life right now that you are excited about?  What are you doing to set the disciplines and activities in motion to ensure you keep the energy and actions moving forward? Please share with me, I would love to hear them.

To your success and your future.

4 Ways Income Producing Real Estate makes you money

Are you still on the fence about investing your hard earned dollars in to income producing real estate? You can keep sending your money to Wall Street and be subjected to the highs and lows of your money constantly going up and down, and in many cases invested in to something you don’t know anything about. Even worse, it could be invested in a company that goes against your values.

Or you can control your own destiny and invest your money in one of the safest and surest ways of making you more money, which is income producing real estate.

Below I explain all the ways real estate can make you money, and in many cases all at the same time. You definitely don’t get this with your money when Wall Street has it.

  1. Tax Advantages

    I am not a CPA, so I am not going to provide you tax advice. However, I will tell you that when you own income producing real estate you are now operating a business. And businesses get tax advantages that an indovusal W2 employee do not have.

    The most taxed income you make is from a W2 job. When you have income producing real estate you can use some of the following to reduce your personal taxes.

    A. Depreciation: is the incremental loss of an asset’s value, generally due to assumed wear and tear. As a real estate investor that holds income-producing rental property, you can deduct depreciation as an expense on your taxes. That means you’ll lower your taxable income and possibly reduce your tax liability.

    B. Pass through deduction: Allows you to deduct up to 20% of your qualified business income (QBI) on your personal taxes.

    C. 1031 exchange: This is when you own a income producing property and you sell it. The money you make above and beyond what you paid for it, you wont have to pay taxes on it as long as you invest that money in another similar property within a certain time period. I recently did one of these myself. Very simple process. Just make sure you let everyone know at the very beginning what you are doing and then find an attorney that can assist you with it.

    D. Write offs: This is the biggest tax benefit. You get the opportunity to deduct any of the expenses tied to owing the real estate. All of the insurance, taxes, interest on the mortgage, maintenance, etc. Additionally, you can deduct any of the expenses accrued to operate the real estate business. Thing such as advertising, office space, business equipment, etc.

    All of these deductions lessen your taxable income from your W2 job.

    As i said, I am not a tax expert so please consult your CPA before purchasing income producing real estate.
  2. Principal pay down: This is the big one. If you buy the right real estate with the right terms the tenant will pay your mortgage each month. Which means they are paying down the loan for you.
  3. Market Appreciation: This is the one that is not talked about enough. Real Estate historically doubles every 20 years, and in the case of the last three or four years, this has been exponentially increased. Now, the last few years are historical highs for real estate.

    We all know that property values have and will continue to go up. Which means your wealth is going up as well. Because as you owe less, and the property is worth more than you paid. You make money.

    Typically the fed tries to keep inflation around 2% a year. Which means your real estate even if there is no market appreciation at all, will typically go up each year by no less than 2%, just because of inflation and the cost of everything has gone up.
  4. Cash Flow: In an earlier post (see here) I talked about cash flow and cash on cash return. As you can see above with the other ways income producing real estate can help you make more money or save you money, my hope is it is providing you additional income on a monthly and yearly basis as well.

    Different people have different strategies when it comes to owning investment real estate. I call it income producing, because I want it to provide some cash flow over and above the costs of owning it, in addition to the other benefits of it. However, some people will invest in an asset and in some cases may take a loss on a monthly basis hoping that the assets value will increase significantly making the losses the incurred early on in owning the asset is wiped out.

    Again people have different strategies for their investment goals. You have to decide them for yourself.

My mentor says it like this. “Don’t wait to buy real estate, buy real estate and wait.”

As you can see from all the ways above that real estate can make you money, it is not a get rich quick scheme. When you decide to buy your first income producing property, you must think long term especially in todays market.

Real Estate has created more millionaires than any other business.

What are you waiting for?

To your success and your future.

The one calculation that changed my life that I never learned in school

Like most of you I served my twelve years in K-12. Additionally, I spent another two years earning an associate’s degree in electronics and engineering. Then I moved on an achieved a bachelor’s and master’s degree in business.

So I have spent a lot of time in the education system.

In all of those hours and years in classes, I never learned this one equation that made me a millionaire.

Cash on Cash return is the one calculation/equation that changed my life.

What is it? In any investment, but I am talking specifically about real estate here, because that is how I used it to become a successful real estate investor.

You have to put up money or some kind of other resource to be an investor in it. You have to give up something, to get something. We all know this.

Cash on Cash return is the amount of money you invest and the returns you can expect on an annual basis to receive on the investment.

Here is a simple example that doesn’t include all the specifics, but I want to give you something to consider.

If you invest $100,000 dollars and it gives me a 10% cash on cash return in a year. It would provide me $10,000 a year back on that investment. I invest $100,000 and I get $10,000 in return.

In the case of real estate you invest a percentage, usually 20-30% of the value of the property, but you now own 100% of the property.

Real Estate is one of the only investment opportunities where you can invest such a low percentage of the value of it, and own all of it. The rest of the money comes through a loan. This is also called leverage. Which we will talk about another day.

Now the simple example I provided you above didn’t include all of the other specifics that you have to consider when making this investment.

Things such as loan payment, insurance, taxes, maintenance of the property, management, etc. So you must include all of these expenses in to the equation to get a full analysis of a cash on cash return.

Lets see a full example here:

Property price: $250,000
Investment (20%): $50,000
Mortagage/Loan: 5% interest rate amortized for 30 years: $1370, $16,440 annually.
(More context here: Why 30 years not something shorter. Well this would depend on your strategy, but in the world of real estate it is all about cash flow. So by extending the payment out over 30 years you can increase your monthly cash flow, because your payment is smaller. Again, real estate is one of the rare businesses you can do this in)
Property taxes (1% of value of property): 1% of $250,000 = $2,500
Insurance (depends, but conservatively): $1,200
Maintenance (5% of revenue):
Vacancy (3% of revenue):

How much can you rent it for? This depends not he area obviously. And there are a lot of resources to help you determine market rents such as rentometer (website) or you can call around. But I am old school, and I like to use the 1% rule. It is simple, and over the last couple of years in this crazy market it has been tough to find properties that can earn 1%, but you still can.

Gross Rent (1% of the value of the property): 1% of $250,000 = $2,500
Annual rent: $2,500 X 12 = $30,000

One of the things to remember here is this. Do all of your calculations on yearly basis.

So lets put it all together here:

Property price: $250,000
Investment (20%): $50,000
Annual rent: $2,500 X 12 = $30,000

Mortagage/Loan: 5% interest rate amortized for 30 years: $1370 (monthly) $16,440 (yearly)
Property taxes (1% of value of property): 1% of $250,000 = $2,500
Insurance (depends, but conservatively): $1,200
Maintenance (5% of revenue): 5%/$30,000 = $1,500
Vacancy (3% of revenue): 3%/$30,000 = $900

$30,000 (gross rent)-(expenses) – $16,440 – $2,500 – $1,200 – $1,500 – $900 = $7,460

So the amount at the end of the year you would have left us $7,460 dollars. And how much did you invest to earn that $7,460 dollars? It was $50,000, your downpayment to get the loan.

So what is the cash on cash return? $7,460/$50,000 = 14.92% but lets round it up and say 15%.

This is only one part of the equation though. Something we will talk more about in later posts are the other benefits of owning real estate. Things such as the tax implications, especially if you have a w2 job. Your loan pay down, your equity position increasing and how inflation helps you year over year when you own real estate.

I kept the math simple here. Some critics, may say, well, what if there is an HOA fee, or you didn’t specifically lay out the costs of closing, or lawn care, or management fees.

I get that. But with a single family home, most likely your tenant will do their own lawn care. If you self manage, which you might want to do on your first few properties you wont have that added expense.

Again, you can get more granular, and you should when you are analyzing a deal and whether or not it makes sense or not. However, I have found that more often than not, people analyze too much and never buy. You can analyze yourself into oblivion and never take any action. I don’t want you to do that. If a dummy like me he sucked at math can become a millionaire by following the above advice, anybody can do it.

If you do this over and over with multiple properties, single family, small multi-unit, commercial, big apartments, etc. You can see how this can grow.

Another thing we will discuss in later posts is how long does it take for you to earn the money you put in the deal back and what that means and how to use it.

So why did I never learn the cash on cash return equation in school? Was it taught and I missed it? And everybody I know missed it? I’m not sure. However, once I learned it. And once you learn it, it can change your life forever, like it did mine.

Cash on Cash return is one way to analyze an investment. But it is one strategy of many that you may consider as you start to invest your hard earned capital into real estate.

I look forward to expanding on this topic and example in future posts.

To your success and your future.

What would an extra thousand dollar’s a month do for you?

My mentor asked me this question over a decade ago.

What would you be able to do with an extra $1000 dollars a month?

At the time, I thought, I could pay off my student loans quicker, my car note quicker, I could increase my savings rate.

The question was a powerful one, because up until that time, I am not sure I thought of earning an extra money outside my normal W2 paycheck job.

I bought my first investment property at age 26. A duplex. When I tallied everything up at the end of the year. It probably created an extra $200-$300 a month. So I had that in place. But keep in mind I owned this well before my mentor asked my this question.

Fast forward a few years and I was pondering the question:

My best friend had a connection to Worlds Finest Chocolate. Yes. The candy bar company. We all either sold these candy bars or were asked to buy one at some point in your life. Until the health nuts took over the school system, but I digress.

Your school would sell these chocolate bars for a dollar a piece to fund raise. And the buyer also got that nice little couple on the back of the wrapper. So it was a great deal.

I worked full time, so selling this fund raising opportunity posed some challenges. However, I ended up finding a lil niche within daycares. I didn’t even know daycares did fundraising. I don’t have kids, but hearing how much parents pay, I would have assumed they wouldn’t have to fund raise. I did this for a little while and made some extra money.

Then my best friend and I started a business. To make a long story short. We operated the business for over seven years. It never really took off, but it provided a few extra hundred dollars on average over those seven years.

Another thing I did was I started pursuing some certifications through a training company. I figured the certifications would allow me to train and earn extra income. It eventually did, and actually became a full-time career, but it started off very part-time with no money, and ultimately provided a full-time income.

Lastly and most importantly, I bought my first investment property at 26. I unfortunately didn’t buy another one until about six years later. And then I bought another one, then another one, and well, I think you see where this is going.

That extra $1000 dollars a month my mentor challenged me with over a decade ago, now has become 15 times that. And it is all because of real estate.

Here is the lesson. I don’t want you to miss it. Its not only about the extra $1000 a month. More importantly, it is your commitment to the extra $1000 a month. You have to be willing to make the commitment to it and do whatever it takes to earn it.

To your success and your future.