Category: Blog Posts

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Many real estate investors automatically assume that when they buy real estate property, that they need to be a landlord. Why this is, I am not completely sure. I do know that in my previous investing, I too made this faulty assumption. That mistake led me to real estate investing that went from a dream to a nightmare in short order.

Back in Virginia, I was a landlord of two investment properties and an apartment building with 15 apartments. When the economy was ok, the income was ok and we even made some money. However, we were in lower end units, and as soon as the market really went south in 2007 and 2008, we soon ran into problems. I could no longer find good renters, and could no longer afford to make repairs.

I ended up getting renters in these buildings that I did not really want to take. It was essential to keep the mortgages paid and everything running without my eating away my savings. At this sad point in my time as a landlord, I deal with some of the worst things that have ever happened to me in business. And here they are:

#1 – I Took On Criminals As Property Managers

Desperate times, desperate measures. I had lost my quality property manager for the low end apartment building, and the building was an hour from where I lived. An onsite manager was essential. So, I brought in a couple who I ‘thought’ were good people and could properly manage the building.

All was well for the first month. Then I began to get the rent money delivery later and later each week. And then one week, I didn’t hear from them for several days and they would not answer their phone. It turned out that they had been ARRESTED at a DUI checkpoint and were in jail, with my rent money.

As it turns out, they both had a criminal record and were drug addicts. When they got stopped at the checkpoint, they both ran for the bushes! So they were arrested.
I got a call from a tenant and he told me the property managers hadn’t been around in days. Eventually I did recover the rent money from the jail. Needless to say, I had to find another property manager, and the building never generated positive cash flow again.

Now I only buy houses like these, and let the occupant maintain them.

#2 – My First Property Manager Took Off and Left Me, Too!

The reason #1 happened was that my first live-in property manager also didn’t work out. He kept the property mostly full, but as time went on, the rent money also got later and later, and there was some missing every few weeks. I am pretty sure he was ‘borrowing’ some of the rent money which somehow never seemed to find its way back in my pocket!

In this case, this property manager eventually simply bugged out. He took off and left the place, and left me in a rather desperate situation, which led to the above disaster I already mentioned.

Actually, you could say there was a THIRD worst thing that happened to me as a landlord. I allowed myself to get into the above situations at all.

The lessons I learned from these debacles was, at the time, to NEVER buy real estate again. That was foolish. What I SHOULD have learned was not to buy that type of real estate again and to allow myself into a situation where I was desperate and forced by default to rely on unreliable people for my living.

Later, when I moved to Texas, I learned another lesson: Stop being a landlord for crying out loud with mortgages! Buy cheap houses for cash and seller finance those things! Leave the maintenance to the occupant of the home.

Today, I earn $700 per month on each owner financed house and I never have to fix a thing. Or rely on a questionable property manager!

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Are you considering the purchase of rental property and becoming a landlord? Don’t. Landlording stinks. I mean it. It stinks. Landlording is stressful, time consuming, and in many cases, a financial drain. I know of what I speak.

In my first (disastrous) foray into real estate investing, I purchased a 15 unit commercial property and two single family homes. The mortgage on each was $1200, $1250, and $2720, respectively.

With a strong economy, money flowed into my bank account. Life was grand. Here was me:

However, once the market took a dive in 2008, I soon found myself with several disastrous problems:

1. My renters stopped paying rent.

2. Repairs costs piled up.

3. Those mortgages were due and I didn’t have the rent money to cover it.

4. My savings started covering my rental mortgages.

It was at about this point I started to look more like this:

After three years of agony, stress and losing $50,000+, I finally sold off the properties at a loss and mercifully was able to move on with life. A lot poorer of bank account, but richer in experience in what NOT to do in real estate. The biggest thing I would not do is to ever be a landlord again.

Below are some of the dangers of landlording that tripped me up. Also, if you ARE a landlord, it’s not all lost. I offer some tips for current landlords who want to improve their financial, and mental, state:

1. Renter Damages: I had renters who clogged my toilets with sanitary napkins, which also clogged the septic tank lines. $500 for the plumber each time.

Tip for Landlords – Find a good property manager that you can trust that keeps a close eye on your asset and renters. Or, be very handy with repairs so you can handle them yourself. That’s a BIG money saver. If you can’t or don’t like to fix plumbing, roof and electrical problems, you are behind the 8 ball at the start, as I was.

If you can’t afford a good PM or are not near your property, you probably want to stop being a landlord ASAP because trouble is coming your way. There are less stressful and more profitable ways to make money in real estate.

This house below is one I bought two years ago. It was an old rental. Surprised?

My first Texas property – it was an old rental. Scroll down to see how it looks now.

2. Constant Repairs: Related to the above point. My life as a landlord was to play a monthly lottery of Will I Make Money This Month? Between broken water heaters, leaking roofs, electrical problems and clogged toilets, a month in the black was rare.

Tip for Landlords – Keep your property in good repair to avoid expensive headaches! Also, rent to the best tenants you possibly can, as they will care for your house better. Stay away from low end rental properties; between late rent, evictions and constant repairs, it will drain you financially and emotionally. Buy higher end properties that attract better clientele. Yes, it’s harder to make profits on high end homes, but there are fewer problems. Put down bigger down payments so your return is higher.

Or ideally, get the heck out of being a landlord and consider other ways to make money in real estate.

3. Rehab costs. I spent thousands of dollars on rehabbing houses that just got run down by the renter. Rehabbing houses is stressful and expensive. I didn’t get into real estate investing to be stressed out. Being a Cleveland Browns fan is enough stress for me.

Tip for Landlords – The best situation is to be a contractor yourself and able to handle your own rehab. Also, contract with an expert real estate agent/investor who can find you below market value properties in decent condition. There are scads of bankrupt former landlords who grossly overpaid contractors on rehab jobs. Don’t be one of them. Oh, and don’t over rehab your property – another classic landlord mistake. Your expert agent/investor should know how much to rehab any property you buy.

Bonus Tip for Landlords – Buy your properties in cash! I know that can be hard, but the benefit is never stressing about a mortgage payment.

Bonus Tip II for Landlords – If you have a mortgage on your property, does it fit the 1% rule? That is, does the monthly rent equal 1% of your TOTAL purchase price (including closing costs and rehab/repairs)? If not, you could be headed for big trouble. The 1% rule is a general guideline that many rental investors follow. Some rental investors opt for 2% in lower priced, riskier neighborhoods.

I know many a landlord who is happy with their $200 a month in cash flow. If that’s me, I’d be very worried. When the good times run out, you’re losing money.

Landlording CAN be profitable, but as my tips above indicate, there are a lot of variables that can turn a profit into a loss – fast. That’s why I think landlording stinks, and there are much better ways to earn money – as in 10-15% annually without maintenance costs.

I discuss one of those no-stress options in this Linkedin Pulse post.

Note – Here’s how that house above looks now. The occupant rehabbed it, not me. I’m not a landlord :).

 

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We’re in the affordable home market in San Antonio TX, and it used to be quite easy to resell distressed homes with owner financing with little to no repairs, such as my first one here:

I bought that one for $51,000 (about 30% under FMV) and resold it with seller financing for $79,000, IIRC, 9% int., 5k down. No repairs were done by me on this one.

(Dodd Frank rules followed, FMV charged to owner finance buyer, value based upon sold comps in the neighborhood).

Our old model was – buy a distressed house in certain areas, no repairs, resell it with seller financing, 10-15% ROI typically for investor. That’s how it used to be.

These days, things have changed. Another property was purchased for $49,500, also 30% under FMV, below:

This one was a 3/1, 1 car garage, built in the late 50s. It was nicer than the house above. We put it on the market to sell with seller financing:

• $5000 down
• $895 per month PI/TI
• 30 year amortization
• 10% interest
• No prepayment penalty
• No balloon
• Final price: $89,900 (FMV)

We probably had 100 people look at it over 3-4 months. No one wanted it. This was a new experience for us. What the heck was going on?

It turned out that a few miles away, there was a new luxury apartment complex with units for about $800-1200 per month that were really nice. Our theory was that people were getting pickier as the economy gets better and are opting for better housing.

So, we altered our model a bit.

We did a partial rehab on this house – AC, paint in and out, kitchen and bath rehabbed with new flooring, tile and countertops, light fixtures and outlets. Total rehab was $11,000.

Then we put it back on the market.

It sold with seller financing with the above terms in less than 60 days. Even with rehab, the investor clears 13% ROI with no further repairs or maint.

Lessons learned:

• Markets change – people get fussier as they have more money and better jobs
• Have the investor do a $5-10k light rehab that ensures the roof and foundation are ok, plumbing works, basic electrical works and paint touch up. This will get the house sold much faster.
• Keep a close eye on revitalization going on near your house – you may have to upgrade to keep up with the competition

Eventually, the market in San Antonio will go down, and we expect that we will be able to resell houses without repairs again. For now, however, we do light rehabs and our investors still make 10-12% ROI. Not bad when you are doing no maintenance on the property :).

 

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After I bought my 30th investment property in 2008, I considered myself financially retired with more than $20,000 per month in cash flow.

I didn’t arrive at financial retirement at such a young age due to my family wealth. I grew up poor in a dusty, small town in south Texas, and my folks sometimes chose between paying the electric bill or buying groceries that week. Most of my families still are blue collar $12 an hour laborers – mechanics, electricians, plumbers.

After college, I wasn’t any better off than they were. Saddled with $40,000 of college debt, I set my sights on real estate investing in San Antonio, Texas.

Over the next 10 years, I learned three important habits that enabled my real estate portfolio to multiply from one house, to five, to 10, 20 and more.

Whatever your industry – real estate, music, aerospace or textiles – your chances of retiring years before your friends or family will soar if you do these things:

#1 You Work Tirelessly

To be successful in any field, there is no substitute for applying maximum amounts of effort during every waking moment. Many high-performing CEOs report that they wake up at approximately 6:15 am, and often clock 18-hour days.

I am here to tell you that those CEOs are dead on the money. In my first five years in real estate investing, I clocked more 18 hour days than I can remember.

Most days were packed with calling dozens and sometimes more than 100 people, looking for capital to borrow to buy more houses. I never gave up. Sometimes I would have to talk to a chain of 10 people before I found the person who had $50,000 to lend at 10%.

Lesson: Be the first one in your office and the last one out. Work while your competitors are sleeping.

#2 You Reject Popular Thinking

As John Maxwell writes in his best seller How Successful People Think, high achievers think differently. Specifically, they reject popular thinking and go against the grain. Sometimes it may be uncomfortable, and that’s ok.

In my case, I completely reject the notion that real estate investors should buy nice houses in nice neighborhoods.

Local investors in my city know me as the ‘junk house guy.’ I buy for cash flow and for price. Condition of the asset is mostly irrelevant. I also only owner finance my houses, instead of renting, so I minimize my upfront repair and ongoing maintenance costs.
I see the value in investments that many others fail to see, and I developed a business model that took full advantage of this fact.

Here are two examples of how I have reaped six figure profits in a year on deals that other investors rejected:

#1: $15,000 Junk House Made Me $14,000

I once bought a junker 3 bedroom house for $15,000 that no one else wanted. A month later, I sold it for $20,000 to another investor for a $5000 profit. He then sold that house with owner financing at a 12% profit per year, and he’s bought three other houses from me since. I’ve made about $3000 on each of those deals. Bottom line: $14,000 profit on a house the conventional investors rejected.

#2: I Bought a Tiny, 1 Bedroom ‘Rejects’ and Made 11% ROI

I often buy 1 bedroom, 1 bath houses. These are houses that virtually no other investor in my city wants. I buy them 30% under market value or more, and then I add one or two bedrooms. Then, I sell it owner finance with $3000 down to a blue collar worker with a steady job. I make 11% or 12% a year on those deals.

Lesson: Reject conventional thinking. Embrace opportunities that others run from and don’t see. It can make you millions of dollars.

#3 You Surround Yourself With Positive, Focused People

Noted positive psychology researcher Barbara Frederickson performed fascinating research that showed the benefits of positive thinking on our brains. In her study, she created five research subject groups, and showed each one different film clips

The first two groups viewed movie clips that generated positive feelings and emotions, such as happy couples with their children. Group 3 saw images that were neutral – this was the control group.

The last two groups saw film clips that created negative feelings and emotions: people arguing, children crying etc. Afterwards, each group was asked to imagine themselves in a situation where they would have feelings similar to the clips they saw. They were asked to write down what they would have done.

Research subjects who saw negative things wrote the fewest answers. Subjects who saw happy and positive images wrote down many more responses.
Her research showed that when we experience positive feelings – joy, happiness, optimism, love – we open ourselves up to more of life’s possibilities. Positive emotions open your mind to more possibilities.

I agree with Frederickson’s findings.

When I first entered real estate, I was 23 years-old. I had college debt and little money. My goal was to make $1000 per week. Back then, that was mind-blowing money to me.

As I got deeper into real estate, I found experienced real estate investors who mentored me. They had much bigger goals. They wanted to make $10,000 a week, $20,000 a week. $50,000 a week!

These mentors were extremely positive, encouraging, and focused on becoming wealthy. I saw them reaching their goals with joy and enthusiasm, I realized that I could do it, as well. They also taught me to reinvest most of my real estate profits into more houses. That reinvesting made my portfolio grow much faster.

They also urged me to become an expert in the local real estate market and in negotiating under market value deals. I spent years studying my neighborhoods and today, I can usually know the value of a house in my zip codes without comps.

They taught me to be patient in building wealth. That is, focus on making small profits on multiple deals, not home run profits on one deal. I learned from my positive mentors how to flip houses and make $5000 per deal. I’d then do 50 houses in a year and make $250,000. That’s serious money here in Texas.

Lesson: Mingle with positive, goal-oriented people, and their positive emotions, energy and ideas will rub off on you.

No matter your station in life, you can apply these lessons to your benefit. And they can lead to incredible happiness and wealth. Just remember to pass on these positive habits to others, so they can reap the harvest, as well.

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Many of our investors were able to buy cheap investment properties in  San Antonio for cash and owner financing them. They have no landlording or maintenance expenses. This saves a lot of stress and money.

Mahy of our investors can buy all cash, but not everyone can or wants to do that. That’s ok!

The good news is that you can build a massive real estate portfolio in affordable houses with 20% down conventional financing! And if you still have your day job, that’s fine. You can use that steady W-2 income to get conventional financing and buy an entire block of affordable houses!

Then, with that cash flow, you can retire if you like :). Or, you can continue to have a blast in real estate investing, our investors do!

Here’s how to use 20% financing to build your portfolio of affordable houses:
Step 1

Buy an affordable home in decent condition that you can obtain conventional financing on. In my city, I recommend houses in the $50,000 – $60,000 range such as this one. It’s inexpensive, but in livable condition.

Ideally, buy three of these houses at once so you can turbo charge your cash flow growth.
Step 2

Get the houses with 30 year mortgages and put 20% down. That’s $11,000 per house.

So, you have three $44,000 mortgages at ~5%. That’s $236 per month for each mortgage. Taxes and insurance on each property is $140, so your monthly payment is $376 per house.

Rehab on each house will be approximately $5000, completed in three weeks or less.
Step 3

Find a well-qualified, owner finance buyer for the house (I can help you with this in my city). I prefer this strategy to renting the house out. This saves repair costs and property management headaches.

The buyer has to be qualified with a good job, steady income, bank statements, W-2s and pay stubs.

Monthly cash flow from your buyer is $800.

After you pay your mortgages and tax/insurance, you have monthly cash flow of approximately $425 per month per house.
Cash-on-Cash Return Year 1:
32% per property.

In year two, it’s 46%.
Step 4

Your monthly cash flow on those three houses is $1275 per month. After a year, you can take your $15,000 in cash flow and buy another house and do the same thing.

Most of my investors with an income of over $100,000 per year are able to use this model to get to $5000 monthly cash flow after three years. They buy at least two houses per year.

Some take as long as five years, but most investors with a decent full time job and good credit can use this system.