Episode 113 - How I got my start in rental real estate
I realize that it takes time to build up wealth, but you gotta start somewhere. Although I had years of business experience before I bought my first rental property, none of that experience actually yielded real wealth. It wasn’t until I spoke with another business owner I was friends with, and realized he bought his own commercial building that he operated in, that I realized the building was where the money was. Like McDonalds, it wasn’t about the burgers. It was about the real estate. That began my start in rental real estate investing, and it worked out pretty good for me.
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Money falls through our fingers like sand.
You work hard, you earn, your spend, you have nothing left.
This is not just a 9-5 worker’s paradigm. It is also the same for small business owners.
The “entrepreneur” that everyone talks about is fiction for 99% of those that pursue it.
Most don’t understand money.
The 3 parts of business – operations, marketing & finance
Yet who actually has the wealth? It is the finance people.
The thing is that most entrepeneurs might have a great idea, but are fools with money. They don’t know how to keep the money they earn – they just keep re-investing it back into their idea, until their idea fails and they bankrupt with debt.
Or the other option is that they work for the rest of their lives to be slaves to their ideas. Most business owners just created a job for themselves.
But the one thing they do have (as is also the case with workers) is that they have cashflow.
Now let’s define cashflow.
So if you have this relatively large amount of money coming in and going out, the secret is to be able to tap as much from it.
What is your largest expense? For a business it is probably rent & payroll. For an individual, it is probably a mortgage.
What if you were your own property company and you paid yourself for the use of the real estate?
That’s where I started.
But it wasn’t until I read Rich Dad/Poor Dad that I had all of my theories validated.
I realized I wasn’t going to be wealthy just working hard all the time.
I had to find a way to generate wealth outside of where I spent my time.
That’s how I came up with the concept of “Smart Income”.
I also realized that unlike buying stocks or bonds, etc. I could get into real estate using other people’s money – Banks.
I needed access to bank financing, but if I put down 20% of the purchase price with my own money, the bank funded the rest and the tenants would pay for the mortgage.
Yet I would still own 100% of the title and get the appreciation on the entire thing. And 3% tax depreciation as well.
If you sold something for a lot of money, what would you do with the money?
- Probably invest it in something
So if you already had the investment (RRE), why would you sell it?
That’s where I turned my focus to the rents.
If the rents were generating such a substantial amount of money, the secret here had to be to ride out the debt payment.
That way I would get 100% of the money coming to me.
And if I had multiple rental properties, I would get a lot of money coming to me eventually.
The key was to pay them off quickly.
That meant 15 yr mortgages. I could therefore define my “working career” as 15 years. Now I can leverage one against the other to buy more, and speed this up a bit, but ultimately I would get to a point where I didn’t need to buy anymore – I’d just sit on them and let them “cook”.
The younger age you do that, the more likely you have wealth that pays you.
If you leave it until you are 50, then you won’t get much of a pay off.
So I started when I was about 35. I had properties before, but they were houses I lived in.
My wife & I used the idea of rental real estate as a way to pay for our daughter’s college. As I learned later on, that was a stupid idea. I wasn’t going to sell a going concern to pay for a college education, but by the time we needed it, we had amassed dozens of properties, and the rental cashflow was enough to cover all the costs.
Most people think that real estate is about asset valuations.
That’s not the case. You don’t care about that. You care about owning something that you will have someone else pay off for you.
While you go on with your life.
Those that dutifily put away money in their 401K programs are giving up all control to Wall Street to treat them right. Some take a shitty job because it has a “pension” only to find that they change the pension program sometime in the future.
The idea of amassing a large amount of cash, and then drawing down against it for the rest of your life, works if you are 60+ yrs old. But it doesn’t work safely if you are younger. You can’t determine the future – markets go up and down, one day you can safely draw down 4% - the next it is 2%. - or 0%
Costs go up but your money doesn’t stretch. Inflation is a bitch.
When you eventually die, your money is taxed and much of it goes to the govt.
But what we forget is that real estate (if maintained) typically outlasts our lives.
It gives you a legacy that you can pass down to your kids. It is dynastic wealth.
But the biggest gift is that if you are patient and get through the pay off on the mortgage balance, it will pay you back forever.
Rents are pegged to inflation.
You can borrow against the equity if you need cash.
You can give it to a property manager to take care of it.
Or you can sell it, pay the taxes & agent commissions, and walk about with the cash. Lots of cash.
It is the ultimate form of smart income.
The key is that you start. That means you need to be able to keep some of what you earn by getting frugal, and direct that money into your down payments.
The excuses I hear about real estate
- Property prices are too expensive
- Interest rates are too high
- My credit score is too low
- I don’t have enough money to save for a down payment
If you want something enough, you can easily strategize to get past these things.
Let’s destroy all of these
So the key here is a choice you have to make. It is a long choice. Nothing comes easily and nothing comes quickly. Short term gains are typically short term in enjoyment.
But real estate is a lifetime of wealth.
Why is it that the richest people in the world have a huge amount of their net worth in real estate?
The queen of England, the lords & ladies, etc.
It has been like this forever.
You have the choice of whether you want a piece of this action. It doesn’t matter if you have a degree, even finished high school.
It is about choice & positioning.