Why income producing real estate has the best customers

Here is an exercise for you to consider.

You have most likely been on both sides of the equation. You are definitely a customer. Meaning you frequent certain stores and buy certain services on a monthly basis from different companies and organizations.

And most of us have also been on the other side of having to be the person who provides those services and products for our own company or our organizations customers. Whether you are doing directly or indirectly.

So what makes a great customer? What is interesting about this question is you don’t see very much information on this question on google. Anything related to customers is usually the other way around. Meaning, how can a provider be a better provider to their customers and provide better customer service.

Here is my simple list of what makes a great customer:

  1. They love your product
  2. They are willing to pay the price for your product
  3. They use your product exclusively
  4. If you take your product away from them they are willing to pay more to keep it.
  5. They value your product.
  6. There is an inherent need for your product.
  7. They pay a recurring fee to continue to use your product.
  8. Somewhat difficult to change to another provider of your product.

I am sure we could come up with more on this list. But I think you get the point here. A great customer realizes they need your product or service as much as you need them.

I think this is when the relationship works best.

So why does income producing real estate have the best customers. Look at the list.

The person needs your product. Everyone needs food, water, clothing , and shelter. Period. In that order as well. So it is essential.

They pay a recurring fee on a monthly basis for your product. All of my customers pay monthly. Sometimes they may even pay in advance.

And it is somewhat difficult for my customers to switch to another provider of my product. Sorry, but it is true. Nobody likes to move. It is a pain in the ass.

Now, on the flip side of the equation. As a provider of housing I must do my part as well. And I must provide great customer service.

I have to serve the needs of the customer on a daily basis. I have to respond to their requests. I have to make sure all of the appliances are in good working order. I have to make sure things are kept up. This is my obligation in the relationship.

And it isn’t very hard to do these things. The old “slumlord” moniker doesn’t apply in my world. I take care of my tenants and my properties. It would be stupid not to.

For all of the reasons I outlined above is why I believe income producing real estate has the best customers. Additionally, owning income producing real estate is a business that anyone can do, including me.

To your success and your future.

Why saving your money in a bank is stupid

When is the last time you looked at your interest payments you have received from a bank on the money you have saved in there? If you are like most people. You probably rarely do.

It doesn’t matter if you have a lot of money in the bank or very little in the bank. The interest they pay you on holding your money is absolutely negligible.

Here is the dirty secret. Banks have a reserve requirement of 10%, the deposit multiplier means that banks must keep 10% of all deposits in reserve, but they can create money and stimulate economic activity by lending out the other 90%. So, if someone deposits $100, the bank must keep $10 in reserve but can lend out $90.

Read the above again. Banks are lending your hard earned dollars out 9 – 1. And they are getting a premium on that 9 and giving you peanuts of that spread that they are getting in interest on the loans they give to others.

The average savings account right now pays you about is about .16. What a joke.

Look, I am a big believer in saving some cash. But save your cash to invest. Don’t save your cash to have cash because it is useless sitting in a bank account.

Look, I realize that the banks must have some money in the bank to be able to lend, which is what allows me to buy the real estate that I buy. However, not everyone knows this dirty little secret about the banks. Now that you do, you can use this information and learn how to capitalize on it.

Save your money long enough to be able to invest it in something that gives you a great return. It could be 3% or it could be a risky investment that gives you 30%. They key is to save enough money to put it to work for you.

This is the lesson most of us didn’t learn in school. I know I didn’t. Don’t earn to consume. Earn money to invest and let that money multiply. Multiplication is way better than addition and definitely way better than subtraction.

I work with people all of the time that are looking to sell their house. And if they don’t need the money now. I tell them to take a down payment from me or another investor. And become the bank. Allow me or some other investor to pay them a rate of interest to them to buy their home from them over some specified period of time.

How it works…

We agree on a price for their home. Then we determine how much of a downpayment makes sense for myself or another investor to pay the owner. The balance of the amount for the house we agreed on is then set up like any other payment you have ever made.

The balance is amortized over 15-30 years. This makes the payment realistic and doable. And then usually it has a clause that says the remaining balance of the mortgage should be paid in full within 5-7 years (balloon payment).

This works well for both the investor and the seller. The seller gets to earn some extra money during the term of the agreement/loan and the investor gets to own the property.

These scenarios allow both the investor and the seller to win.

It can only work if the seller has a paid off home or whatever kind of property it is.

This is the condensed version of the scenario, but my point in telling you this is for a few reasons.

If you are saving lots of money, STOP it now. Quit allowing the banks to profit so much from your hard earned money. If you are saver type, I get it, at least put it in to less risky investments that are giving you a better return.

If you currently own your home and are looking to downsize, move, or do something else. And you don’t need the money out of your home or investment. Consider being the bank and selling it to someone else.

And if you are a aspiring investor. Consider asking a seller if they are willing to become the bank so you can buy their property from them.

To your success and your future.

Lifestyle Creep and why I do these three things first

I can remember standing outside the shop door talking with the president of the company. I didn’t report directly to him because he was now overseeing a different part of the business. But from time to time I would join him and the lead engineer outside and talk to them while they got their nicotine fix (smoked). There were only four of us that worked in the building.

I think I was about 19. Not far removed from high school for the most part and about mid way through my associates degree in electronics. My technical title was electronics mechanic. My job was to fix the electronic safes that the company sold. The president and lead engineer were the founders of the company and had sold it to a bigger company, but they were primarily focused on developing new products.

I had many conversations with the president. He was obviously a very smart guy that had built a business that was bought by a much larger business. I doubt he had money problems, but as I have learned in my 43 years on this earth, you can never assume anything about anybody.

I might have been making $10.50 an hour in this position. Which at that time was very good. It was so good that I can remember telling my mammaw how much I was making and she told me that it was more an hour than my pappaw and ever made during his career in the union job he had. Now this was around 1998-1999 and my pappaw had retired some time in the mid to late eighties. But it definitely gives some perspective.

As I am talking with the president that day. We were talking about money, career and things. I am not sure exactly what led us to he conversation, but I remember what he said exactly to this day and I have never forgotten it.

He said “Brian, I can give you a salary tomorrow of $50,000 dollars and within six months you will be living your life according to that salary!” He said “Your lifestyle will increase to where that amount of money is no different than what you are making now, you just might have different things.”

My young naive self said “No way, I would do this or that with the money and I would save a lot more of it.”

Anyway, I learned that lesson that day. I still remember it. I would be a liar if I didn’t admit that there has been a little lifestyle creep at different times in my life. However, for the most part I have always lived in a way where I didn’t spend everything I made.

For most of my life I have tried to live within my means. The phenomenon of “lifestyle creep” is real. It is described like this:

Lifestyle creep happens when increased income leads to increased discretionary spending.

I have to say that I don’t do without, but I am not a freak about it. Like, don’t eat out. Don’t spend money on coffee. Don’t buy nice things. I actually do a lot of all three of these things. But I only do it after I have done these three things first.

  1. Bills are paid
  2. Invest
  3. Save

These three things are in order for a reason.

Make sure your bills are paid. And if you can’t afford to do number 2. Eliminate and decrease some of your bills and figure out a way to earn more income.

Investing is the most important thing you can do. Putting money into something that provides you a return. That return can be today or at a later date.

Saving is last, but once you hit a certain threshold. You should invest more of that money than you save.

Look, lifestyle creep can happen to us all. The key is to be aware of it and manage it accordingly.

To your success and your future.

Procrastination or Fear?

Somedays I wake up and I know what needs to be done. I know what I have to do. I know what I should do.

But then I don’t do it?

Does this sound like you?

I am not taking about eating well, or working out, or doing my job. This is the shit you have to do. Let’s call it what it is. This is the easy stuff. This is the stuff that in many cases inertia can get us through.

What I am talking about, is the harder stuff. The stuff you haven’t done before. The stuff you think you still need to research. The stuff you have been thinking about for a while. The stuff that will cost you money or it is going to cost you your time. Probably more importantly it is going to cost you your comfort zone.

What is it that is holding you back from the harder stuff? Is it fear or procrastination?

Procrastination is the act of delaying or postponing a task or set of tasks. It is the force that prevents you from following through on what you set out to do.

Fear: a distressing emotion aroused by impending danger, evil, pain, etc., whether the threat is real or imagined.

So which is it? Well, I encourage you to read one of my favorite authors thoughts on procrastination. He explains it better than I can. Read it here.

I look at the definition of fear. The word that jumps out at me is PAIN. And that pain is real or imagined. Pain isn’t necessarily actual pain that you would feel from hurting yourself. I am talking about the perceived pain of giving up your time, your money, and your comfort zone.

We as humans don’t like this kind of pain. When we have to give up time. We look at it as if we are going without. When we give up our money. We often worry that it won’t be worth the money and we also think about what happens when we have less money and all the possibilities we might not be able to pursue because of it.

For me, every time I have had the fear, the emotional pain that I think will be associated with whatever it is I am considering pursuing. When I have overcome that fear. It has allowed me to expand my life in so many ways.

When I spent the money. I received great benefits from it. When I spent the time. I learned that it was well worth it on many levels. And in most cases I walked out if those situations with more value than the costs associated with it.

So what is it that is holding you back? Fear or procrastination?

To your success and your future.

Take action!

Leverage: Good or Bad?

Leverage is one of the most powerful tools we as humans can use.

Think about it.

With the right amount of leverage a person can move a large boulder weighing hundreds and even thousands of pounds by themselves.

When it comes to business and finance and most specifically real estate, leverage is the way individuals can create massive wealth.

A basic definition for leverage: use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.

We have talked about all the ways real estate makes individuals money. Check out this post here.

Income producing real estate is one of the very few businesses that you can invest as low as 3% in and own 100% of the asset. Yes. You can own 100% of something that you only have a 3% commitment/investment in to.

They key to that investment is whether or not that the investment makes you money. Owning a home and living there paying your monthly mortgage is not an investment.

Owning an income producing piece of real estate that pays you more than it costs to own is investing and leverage allows you to do this.

Think about this. If you were to go to your bank right now. And let’s say that bank is a publicly traded bank and you can actually buy stock within that bank. That bank will not loan you money to purchase their own stock. They would never do this. But they will give you a loan on an income producing piece of real estate.

Some of the detractors out there are saying:

Is too much leverage a bad thing?

And I would say yes. But if you are getting a return on the money you borrowed greater than the money its costs you to borrow it. Then you should be in a winning position.

Early in my investment career I took the conservative approach. I paid off five single family homes. But then I said, I must increase my portfolio and the quickest way to do this is by leveraging the wealth and assets I have already accumulated. I doubled my net worth when I made this decision and this is how.

There is a number in business that is looked at called Return on Equity (ROE): ROE is a gauge of a corporation’s profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits.

When I took one of my houses that I had paid off. It was worth $100,000. Each year it generated about $12,000 in income. And profits (net income) of about $7,500.

So $7,500/$100,000 = 7.5% return on that $100,000.

Let’s say I take that house and I tap in to the equity. I access $50,000 of that equity and I invest it in a $250,000 income producing real estate. That generates $25K a year. and 15K a year in net income.

So now I still have the $7500 of net income from the house I tapped for the equity. And an additional $15K of net income from the new $250,000 asset.

$7,500 + 15K = $22,500. Now I am getting 22.5% return on that $100k versus a 7.5% return.

This is the power of income producing real estate and leverage.

To your success and your future.