Want out of the Rat Race? Don’t Start out Buying for Cash Flow

Start with your Goals

Many new investors tell me that they want to get out of the rat race. Build up enough passive income to quit their job, or flat out retire. I’m right there with them! One thing I always suggest with new investors that I meet with is that they outline clear goals for their investing. There are a variety of reasons why I think this is important, but today I would like to focus on the importance of picking investments today that will benefit you most down the line.

Cash Flow may not be King

For all of the Rich Dad, Poor Dad readers you will know that a common strategy pitched for each one of these solutions is to buy rental units that bring in cash flow. For every unit that cash flows, you get closer to your goal of getting out of the "rat race" and living off of passive income. All you have to do is keep adding units. While I believe that this is a viable investing strategy, and one that I held when I was getting started, I no longer think that this is the most efficient way to invest for future cash flow.

Take Cues from Cash Flow 101!

I don't mean to throw Robert Kiyosaki under the bus here, in fact if we were to corner him right now I'm pretty sure he would agree with me. Along with reading his book, Rich Dad, Poor Dad, I have also played his game, cash flow 101. I will describe it for anyone that has not played it. You start out as a rat with a career that is handed to you - like “Doctor, Lawyer, Janitor, Police Officer, etc.” In this game, you run around a tiny wheel, called the “rat race” and are given a pay check, required to pay bills and “doodads” and also given opportunities to buy “big deals” and “small deals.” When you buy a new deal, you can add any passive income that deal generates to your balance sheet. Once the passive income on your balance sheet is greater than your expenses, you are out of the rat race, and you don’t have to rely on your job any more!

Spoiler Alert! Here’s How to Win

Here’s a tip for anyone that plays the game. If you keep picking up small deals that bring in a little bit of cash flow ($100-200 per month) and hold them, hoping they’ll add up over time, you will be hurting by the time everyone else is out of the rat race. The way to win the game is to pick up small deals that appreciate quickly (e.g. buy a 3 bed, 2 bath single family home for $90,000), and flip them for a massive profit (sell for $150,000 just a few turns later.) You can also make these big capital gains deals in stocks, precious coins, and bootstrapped business startups. Once you have amassed $50,000 or more from capital gains off of these "small deals," you can start looking at the “big deals.” That’s where you find apartment complexes that bring in $1,000+ per month of passive income after all expenses. Take a look at your own balance sheet. Do you have a balance sheet? You ought to make one! How many deals that cash flow $100-200 are you going to need in order to quit your job and live exclusively on passive income? Contrast that with investing for equity growth at the beginning, and repositioning your portfolio every 10 years to fit your goals at the time.

Conclusion

I think that it is important to begin with the end in mind. Make sure that the moves you are making will get you to where you want to be! Think 5, 10, 50 years down the road, and make sure that the deals you are looking for today fit with that future you envision. Take this example from Cash Flow 101 and apply it to your own life, with your own finances and market. I’m interested to hear your thoughts! Please share them in the comment section below!

#1: Closing Costs

Many Millennials don't even know about closing costs! Listen in to hear more. This is from my podcast feed at http://feeds.feedburner.com/SkylerSmithRealtor

Mobile Homes and Investing

Yesterday I had a conversation with a girl who runs a mobile home park. She's selling off one of the more run down homes in the park to replace it with a new one, to rent out. The home will need to be moved, and doesn't really need much more than paint and carpet, though new siding could do wonders for it.

I think that mobile homes are a very interesting investment, though I don't own any yet. Rent for a mobile home inside of a park isn't much cheaper than it is for a similarly sized home, yet a mobile home typically costs much less than a traditionally built home on a foundation.

This is the only mobile home park I know of in Cache Valley that rents their units out, most parks are exclusively owner occupied (they require that residents own the home they live in, and they make their money in rent for the lot.) I'm sure that management becomes a lot easier if you don't have to worry about filling homes with tenants, but the business model of a park that can make money both off of lot rents and also renting out homes really intrigues me.

I don't know - I do want to use mobile homes to leverage a land purchase, but I want to investigate the rent market more, that seems like it could be a risky move. I'd maybe consider renting out a unit like that while renting the lot it sits on, just because the exposure would be very minimal. More to come if that idea goes anywhere.

How to Get Started Investing in Real Estate

One of the best ways to get started in real estate that I have found, is to maximize your leverage with the bank using an owner occupied loan.

This is a technique that is used often by people who are buying their own houses to live in. The bank usually only requires between 3% and 5% at a minimum of cash down payment in order to buy your own home. They do require that you live in that home for a specified amount of time, often only a year or more. One thing that is often overlooked though, is that those same banks are willing to loan with the same low money down options on a duplex, triplex, or four unit building. Remember though, you will actually have to live in the unit for at least the required amount of time.

Normally, a bank will require 20% to 30% down on a loan for an investment property. That money can be borrowed, and as you expand your portfolio you'll want to use those options, but getting started with only 3-5% down is extremely attractive compared to this. In some ways it can improve the return on investment greatly. If you don't have your own home to live in yet, this is an excellent way to get started.

This is how I got started, and it worked out really well for me. I bought a 4-plex for $150,000, put only $6,000 down. Closing costs were wrapped into the loan, so I didn't have to put anything else down. After paying the mortgage and all expenses, I was getting $150 per unit per month in passive income. If your expenses aren't unusually high, you will recoup your initial investment in the first year with those kinds of numbers.

Many real estate investors that I talk with look back on their first couple of buy and hold deals as sometimes the best investments they've ever made, because they were able to use this creative strategy to get their foot in the door with relatively very little money down. If your family situation allows you to move into an investment unit like this, do it!

Low Dollar Land Banking in Northern Utah

The US dollar continues to fall, and regardless who holds the blame, it’s a problem that any saver will need to address. Saving large sums of money in a bank account, or under the mattress, or in the back yard can be terrible, as the hard earned money you put away every month is slowly whittled away by inflation year after year.

My goal is to get millennials excited about real estate. Between a bad job market and crushing student debt, it’s an asset class that is tough for millennials to afford. I would argue though, it’s also an asset class that’s tough for millennials not to afford (cue trombone slide.)

We say that the dollar is falling, but we need to remember, it’s falling compared to what? Prices are all relative. The dollar is falling  in value compared to gas, bread, milk, and just about everything we spend our money on. What causes this type of inflation? Generally, the excessive printing of money, which inflates the money supply. The trick is then, to hold your assets in a commodity that will not lose its value over time. We can see very easily that the dollar loses its value over time. Why do people keep dollars? Well, they can’t go bad like milk and cheese, so they're a better savings tool than those. Storing up wheat is not a bad idea, but it’s hard to get off your hands when you’re ready to “cash in” and spend your wealth on something else. I know some who are waiting for the zombie apocalypse and have stored their wealth in ammunition and blankets. That’s a cool and fun idea, but I choose to store up my wealth in real estate. In general, I prefer to buy up apartments that are ready to be rented out, but there are many ways to bank on real estate. Today I’d like to focus on using land to preserve the wealth you bring in from your career. Raw land is a very viable savings vehicle which rises against inflation and can be a very effective personal bank if used correctly.

Example: Bear Lake, a recreational area in Northern Utah currently has a lot of land for sale, with many cabin lots listing between $15,000 and $17,000. It is not unreasonable for a millennial to save up enough for that type of investment, or even to qualify for a loan to acquire the property. In Bear Lake, you could set up your very own land bank, with which you could easily short the dollar. The dollar value of most land is likely to rise at the very least along with the rate of inflation, because the dollar’s value is sinking *compared to* land. (Let’s not even consider the fact that all of this land is ready for development and the development of neighboring lots will likely cause values to rise.) Taxes are about $150 per year, and some of these lots have a $20 HOA fee to maintain roads and stub out utilities, but that could very easily be offset by renting out a tiny house or small cabin on the property. We’re talking something •very• simple, you wouldn’t even need one on a foundation to get started. Rent it out a half dozen nights a year and you cover all of your costs, and stay in it with friends and family all you like! I love vacations, but what’s more enjoyable than a vacation home that pays you to be there?

I mentioned earlier the problem of liquidity. If you’re storing most of your wealth in land or real estate, many would think it hard to access that wealth without selling off the whole asset. Many banks are willing to lend you money if it’s backed up by an asset you own outright. So if you need to buy a new car or make some other large purchase, you could borrow on a home equity credit line, sometimes called HECL or HELOC. Interest rates are usually lower for this type of credit line, and if you did indeed put that little cabin on your land, you could use the income from renting the cabin out to make the payment for you! I can’t be the only one tired of seeing .01% interest from a savings account. I prefer an asset where I have more control. I prefer to be the bank, at least whenever I can.

Deal Analysis Update

That condo I posed about last month still hasn't sold. The auction has ended twice now and I was once the second highest bider, and the highest the second time around. It looks like the reserve price is $45k, which is still a good deal for that property.

The only real issue is if there's meth in the home. After I went through, it looked pretty good inside, and it wouldn't take much to get it up to retail quality.

The auction is active again this week, and I'm thinking about bidding up to the $45k mark this time around. Hopefully they haven't changed the reserve price, I'm surprised nobody has snatched it up yet!

Deal Analysis - 2/25/15

Deal Analysis

$49,000 Condo on west side of Logan. ARV $55-60,000.

Price drop on this condo today! It was previously at $54,180 and will show up on my alerts tomorrow morning, but I happened to see it pop up tonight while looking at some other properties. Been casually watching this one, it's a bank owned "REO" and has dropped in price over the last couple of months. I think that with this new price drop it'll go pretty fast - there is very little inventory in Cache Valley right now compared to the normal level. Pretty much nothing is listed below $50,000 - but distressed properties have been taking a heavy hit lately. Seems like a lot of owner occupants are buying at the moment.

The Plan:

I placed a bid of $36,000 on this tonight, which is the opening bid. I think I can make this work if the pictures on the listing are accurate. I'll think about bidding more, but need to see the property first.

Fix & Flip?

Seems to be the quickest option. It's a great time to sell, I would want to make about $10,000 after everything. Not the most glamorous way to make a living, but this would be my first flip, and you've got to start somewhere.

Fix & Rent?

Depending on how high the option goes, this is my number one choice. The price is so low that the barrier to entry is also low. I'm not thinking of holding this for much appreciation above current ARV, but this will probably rent for 550-600, so it makes for a good cash flow property. I would buy with cash, there is a potential that I could get a line of credit secured by the equity later on down the line. This would pay better as a bank account than any FDIC insured nonsense. This could be my version of land banking, folks!

Photo cred to my pals at WFRMLS