Investor Panel: How To Be Successful in Real Estate – Video 1 & 2
Video 1 Transcript
Kathy: I want to start with Wes because we just did a radio show. How many of you are Real Wealth Show listeners? Do we have some listeners? I’m so glad because we get to do some things on there that we don’t do in the webinars or even at these meetings, I get to interview a lot of people. I think everybody on here has been on the show sharing your short stories, and yours isn’t up yet.
Wes: That’s true.
Kathy: Yes. You spent some time on the show talking about your strategy and how you came up with that, if you would share that again?
Wes: You asked me what I thought was really important in all these, and I said that I think you need to know what your strategy is going in, before you make your purchase, because what you buy is dependent on where you’re trying to go with it. For example, I was a small business owner, and I retired and sold my business because I had this chunk of money that I needed to do something with that I got from selling my business.
My income went from something to nothing overnight. I don’t have any income now, which is fine because I don’t want to work right now.
Kathy: Because you also get a chunk of money.
Wes: My strategy is to maximize income because I’ve worked all my life and I’ve saved money in IRAs and different things, but the less of that I can touch the better off I’m going to be over time. In a perfect world, I wouldn’t have to touch anything that I’ve worked for up to this point, and would be able to live off income that I could get from what I’ve got.
That’s what I was trying to do and that’s what I am trying to do- maximize income, because otherwise, I have to tap my principle, and I would just does not to do that or do it as little as possible, maybe that can get passed on to my kids someday if I’m lucky.
I started about a year-and-a-half ago with this chunk of money. I came to some of these seminars and I learned some things. It all made sense to me. I have no experience in USA but I couldn’t find anything wrong with it, and so I started. I started by buying three houses, and now I have 10 houses. I still have a little bit of money left. I think I can get about two or three more.
Once I have those all in place, I intend to be very minimally involved with this then. That’s the way it’s worked out for me in the last year-and-a-half. Basically, all I have to do is collect the money.
Kathy: You had a very specific strategy in what you were looking for, so it’s really easy for you to determine the market and the type of property you weren’t necessarily interested in. It was mainly single family homes, right?
Kathy: So not multi-family. One thing I want to make sure is really clear is there are a lot of options. You could do private lending, you can do commercial, you can do apartments, or you can do tax liens or flips. It’s easy to get destructed and to jump into something that you don’t really know that well.
The best advice when you’re starting is to hone in on one thing and get really good at it. That’s what you did; you were so specific. If you would share exactly what those parameters were that made it so easy to say, “These are the work. Great team, great team, great market, it doesn’t work though. I’m looking for this.” What was it?
Wes: I’ve talked to other investors, and everybody has their own comfort level. There are some people who just buy stuff straight on the scene, they don’t know anything about it, and they just trust, and then there’s other people that go to the opposite extreme and they research forever, and they get stuck. I’m in the middle of that.
My level of comfort was I wanted to go meet the property teams in these other cities. I wanted them to show me the neighborhoods. I wanted to see that they had a real office with people working in it. I wanted to see how their management wing was operating. I got to know them a little bit and they got to know me a little bit and know what I was looking for.
Once I get to that level of familiarity, some of my homes I picked out one by one when I was visiting these places. Other ones, I bought site unseen, based on pictures and based on their performance, but only because I knew the team.
Ben: And you’ve been to that market?
Wes: I’ve been there and seen it, because there was a couple of markets that I looked at, two of them, that I absolutely would not buy anything there. I wasn’t interested, and I wouldn’t know that had I not gone to look at it.
Kathy: Interestingly enough, those two markets have been some people’s favorite, so everybody has their strategy. It could have been that the time that he was there, there wasn’t anything good. Another point I want to make clear is that real estate is not a commodity. It’s not oil and gas, gold and silver; it’s different every single transaction, every single one, even if it’s on the same street, it’s different.
You could say, “I have the most wonderful experience in Pittsburgh,” and you could say, “I didn’t,” and why, because you had two different properties. Maybe you didn’t do the same, and I’m not picking on Pittsburgh, I don’t know if that was one of the places that you’re talking about, but then there are other people who absolutely love it.
Wes: The problems that I had were not with the cities. I would go back and purchase a property in those two citie. What I wasn’t happy with was the people that I got put in touch with. I don’t know if that was me, or that was them, but the point was I didn’t feel comfortable in both situations, and there’s other choices. You’ve got to feel good about what’s going in.
My strategy is to maximize income. That’s what I need at this point in my life. If the homes appreciate in value, that’s just gravy, but that’s not what I’m looking for. 20 years ago, when I was in my peak-earning years, I didn’t need any more income because I already made enough money, so my strategy 20 years ago would have been completely different. I would have thought of ways to defer the income now and try to build more equity, and just try to purchase homes that had a greater appreciation potentially, whereas for me, at my age, that was secondary.
Kathy: Okay, thank you. All right, who wants to go next? I guess it’s you, Walt.
Walt: I’ll be next.
Kathy: All right, strategy.
Walt: Strategy, very similar to Wes.
The very first thing I did is, I’ll admit, I was not a real estate investor until 2011. I actually started 2010 and started working with properties in the Bay Area. I bought some properties in the Bay Area. At the same time I purchased those properties, I came to some of the RealWealth sessions.
In coming to the sessions, I’ll be candid, I spent a year-and-a-half coming to the sessions and sitting in webinars before I even considered making an investment through Real Wealth- a lot of due diligence, same as Wes communicated.
What I ended up doing is, my strategy was two-fold. One was purchasing properties in the Bay Area, which I knew had upside potential in terms of appreciation. In 2009/2010, if you weren’t in the market, it was a great time to be in the market because things were cheap, people were giving away houses, the banks were giving away houses, and we were fortunate, my wife and I, to make those purchases.
Then what I did is, then at the same time, looking at that component, the other strategy was, how do we generate income in the future? One of the things that caught my eye was one of the presentations that Missy presented, and I was in attendance there, and she had a 10-year-old plan. If you haven’t spoken to her, I highly recommend you speak to her regarding obtaining your plan. So we went down that route, that change of plan; not necessarily buying as many properties and she indicated in her marketplace, but using that concept we went forward in 2011 and started looking at things.
We actually made our first rule of purchases last year. In fact, this month was the first month that I’ve sent the work anniversary order of our properties. We were purchasing 11 properties last year in six-month period.
How were we able to do it? I did a podcast with Kathy last October. I’ll share with you what we ended up doing. We sold a property that we had purchased in 2011, last year in May, and with proceeds from that purchase we were able to buy five properties in Cincinnati, no cash out of pocket whatsoever. In fact, with this whole process, we’ve driven all this through just refinancing our house.
We never paid with any cash out of our pocket to buy any of the properties we have, it’s all being funded through income from properties. That was our strategy, and that’s the way we’re rolling with it. That was our strategy and that’s the pace we’re on, and we have this 10-year plan. Once we get to the 10-year plan, it’s kind of like do what we want, “Do we want to work or not want to work?”
Ben: Can you tell us where the 11 are, you said Indianapolis?
Walt: Indianapolis and in Ohio, those are two markets. We also have markets in the Bay Area.
Kathy: The strategy initially was to just take advantage of the opportunity in California-
Kathy: -then once those prices went up, exchange those for higher cash flow properties–
Walt: We actually exchanged just one property. That was a condominium that we had purchased in Walnut Creek, and we purchased five homes in Cincinnati.
Kathy: One condo in Walnut Creek, you bought five homes? That’s amazing. You got the one creek property for a steal at the time.
Walt: Yes, it was a steal.
Kathy: Yes, good for you, fantastic. Wayne and Denel, who is going to go first? I’m not giving last names for asset protection reasons, by the way.
Wayne: I agree with you, Kathy, with anything strategy is important. You wouldn’t expect to win in sports unless you knew the rule of the game. You wouldn’t expect to win consistently unless you had a coach to help you win. If you want to think of it like that, you have access to resources here to coach you to get in the game, and that’s how we started.
Well, Denel gave a lot of information, let me just say that. We came to one of the sessions here, and Missy was speaking also. She talked about her strategy of 10 houses in 12 years, totally paid for, and it just clicked.
Actually, we were going to invest with another vendor, but then after we listened to Missy, we were both very comfortable with investing with her — I don’t know how to explain it. We wanted to be hands off. We didn’t want to be messing with investments because we had a property that we originally lived in, it was in another state. It was a condo.
I was in the military at the time, so I was overseas and we continued to manage them from overseas, and one of our tenants almost burned our place down. She unscrewed the light fixture and the wires were sitting there hanging and stuff. I knew I didn’t want any of that.
Talk about sleepless nights. You’re on the other side of the globe, trying to fix this stuff on the phone, and it was just a bad deal. So, we decided we initially were going to go forward with letting the properties pay for themselves; leverage them, using a Fannie Mae or Freddie Mac loan, and leverage out, and then just let them pay off, let the renters pay it off. It sounded like a great idea until we started getting — one of us is a crazy-maker and likes to buy stuff, and I started buying–
Kathy: Which one — you?
Kathy: Denel is a researcher and you were the frenzy buyer?
Kathy: Every family has got Clayton Dyer on it, right?
Wayne: Someone has to tip the tables upside down. It might as well be me-
Kathy: Me too. Thank you.
Wayne: -until it starts getting messy. We understand there’s a balance in life, so we’re working on that. We bought these properties, and it’s been really simple putting these in. As we bought more and more, we realized that, “Hey, our strategies are changing.” We went from–
Kathy: What was the initial strategy?
Wayne: Just for retirement fund.
Denel: Actually, kind of the initial strategy too, was basically not to do what we were already doing because it wasn’t working, and we just were letting everything run on it’s own. Once we got to California we realized the finances of the more tax is coming out, we have the military tax deductions exempts, all these things that we just took for granted, so we really started looking at, we said, “Okay,” that’s strategy step, number one, “Don’t do what we’re doing now,” so then we found investing in real estate on google, and then Google led us to RealWealth and this whole thing, and then we started going to sessions.
We learned there was passive income, and it was something that works. It sounded like a really good team. We can hand it off to them, and they, with their expertise, just plug into an existing system. That was really a simplistic strategy, step number one, two and three from there, and then once we figure that out, we move forward.
Wayne: See, I got a retirement plan through the military, but Denel didn’t have one. I realized, by the way, we exited the military, that that would be passed on to Denel alone, so I started having trouble sleeping at night to be honest. I did.
We started looking at what was out there that can create cash flow at a reasonable amount of risk, and it was real estate and RealWealth. We liked the idea of being able to leverage experts that have already been pre-screened because life is messy. You’re always going to have stuff that’s going to surprise you, but at least you don’t have to be surprised from people who are experts, or you hope, I should just say that they’ve been pre-screened and are ethical and won’t change their current behavior. I think that’s fair to say.
Based on the steady state that we saw, these people seemed ethical, people we want to work with. As our cash flow began to increase, we came with the realization that one of us wouldn’t have to work anymore, and that was Denel. That’s when our strategy started to shift because then we started looking, and we’re like, “Well, if we pay off these loans, we lose these write-offs,” because there’s the interest that you would do.
We decided, “Well, why not just take cash flow from the properties and let that cash flow buy more properties?” And we think of it as your baby’s giving babies; it’s like grandchildren [00:18:00] if you will, and we’re about to have our first grand-house next month or so. We are expecting, so we’re pretty excited.
Kathy: Great, wonderful. Ben?
Kathy: Your strategy, when you started– give us a little bit of your history because you were investing part before the RealWealth?
Ben: I’ve been in real estate on the side for about 26 years while toiling endlessly in the hotel audio-visual field, and initially just bought a condo in Oakland that I rented out, and then I got a house in Walnut, Creek that I lived in and then converted to a rental.
Actually before that, when I got out of college, it was too expensive around California. I’m 47, this is like in 1989 or something. I moved to Arizona in 1992, and you could buy a house in Arizona under the VA program, although I wasn’t a veteran, you didn’t need to qualify, which I couldn’t as an out of college-employed kid. It required 10% down, and the house was about $70,000. I scraped up $7,000, plus maybe $1,000 too for closing costs, you could buy a house in Arizona, do not even have to qualify. I mean, this was then, they don’t do that now. I know.
They had their big boom in Boston. That was a Boston cycle. I got two houses there, and then ended up starting to do fix and flips, and adapt for a while, so I’ve had the bug for a long time.
I don’t exactly remember how I stumbled across RealWealth, I think KSFO on the radio, I believe. One Sunday, I’m driving home depot and there you were on the radio. I learned about Pittsburgh, took a trip out to Cleveland and Pittsburgh in one trip, and then Cincinnati in another trip, and just ended up buying three houses in Cincinnati by converting an IRA because in my company that I no longer worked for my IRA was being cleaved in half in 2008 in the stock market, and it was slowly climbing back, and I was just sick of it.
I thought, “Okay, let’s just roll it over to get property” because the properties that I had had been steadily appreciating; not very much, this is in Arizona, so they went up slowly. Meanwhile, like we’ve all experienced, in the 2008 roller coaster stock market, real estate went down there too, it depends on where you were. I ended up having one in Cleveland, one in Pittsburgh, three in Cincinnati, and I still have one in Arizona. I’m slowly building up.
Kathy: So you didn’t necessarily have a strategy to begin with?
Ben: Not as much of a strategy as I would like to have, and not nearly as much of a strategy that I coach and counsel people and we tried to come up with. I have a strategy now, which is my standard example that I use for everybody, you mentioned it. You buy a $100,000 house in Cincinnati, San Antonio, Houston, Dallas, any of Chicago, or any of our cities. Let’s just use a $100,000 house as basic example, and you put $20,000 or 20% down, so now you’ve got an $80,000 loan.
Your costs are probably going to be about $650 a month, that’s principal, interest, taxes, insurance, and management. This is generally speaking; this isn’t an accurate example; so 1,000 coming in, 650 going out.
The first three, four months, don’t spend that money, let it build up into a next reserve for the inevitable insurance deductible or a tenant vacancy. Once you do that three or four months of reserves, start paying it down in advance. Every time I run the scenarios where there’s one house or 10 houses, it seems like it takes about 12 years just like Wayne mentioned as an example, but after 11 to 12 years they’re all paid off assuming you use positive cash flow to pay out number one, number two and number three and then they start falling like dominoes, each domino quicker than the last one.
My goal is to have 15 of these little money-spinning boxes scattered around the country, maybe two or maybe three markets using that map. The other example I always use is, $1,000 house is giving you 350 positive cash flow now. Once you pay off the loan in 12 years that $350 becomes $750, the logic being $1,000 for rent, $250 for taxes, insurance and management, but there’s no P9 anymore so that $350 becomes $750, so I just do the math from there; 10 X $750 by that 10 properties would be $7,500 a month of passive income or $90,000 a year. My goal is 15, which pushes than $90,000 up to $135,000, so I’m about halfway there.
I walk through that with those who are interested and get to that the strategy session, and then you can kind of see the wide role, the longer payout, everyone is like, “Wow,” because once your down payment is done you don’t really have to put any more money into it, ever. I mean, assuming you have reserves, because things will come up but the reserves we’ll take care of those things, and we still have a 12-year plan.
Kathy: Great, thank you. I just want to address one thing you said, Wayne, which was that people don’t change or that you trust these people and people don’t tend to change?
They do. The people you work with haven’t. They are still churning out the same quality they have in the past. This is something we’re going to talk about in the next section, or the section after– due diligence, which is certainly present in the beginning, everybody thinks of due diligence is all the work you do ahead of time in preparation for purchasing that property, but there’s also due diligence that needs to happen afterwards.
What we have found in this business, and there’s probably people in the room that have experienced it, is that people do change, sometimes. It could be that life has happened and things have happened that changed the circumstances for that person and that could impact the quality of their services. You went to Cleveland– well, you could go on and on and on about that situation, but we have, and I know there’s people in the room myself included, who purchase properties from this guy in Cleveland.
Cleveland’s one of my favorite markets but he had some personal things going on and the property management company imploded, and we had to react quickly and that’s why you’re not seeing that person on our website anymore.
The value that we have at RealWealth is communication, and sharing with each other when things like that happen, because our goal is to work on being better by recognizing these things more quickly.
In this case, we don’t really know quite what happened, but something happened with the property manager and people stopped getting their rent on time. It could be that a lot of times, smaller property management companies don’t necessarily know how to manage their staff and their teams; they overspend and suddenly their cash flows poor, so you’re starting to see the rent comes slower.
Kathy: You’re going to notice. The way we’re improving as a company is seeing that sooner. We’re so happy to let you know that next month, we’re going to bring our newest employee to meet you who is a Black Belt Six Sigma. Do you know what that is? I didn’t either. I just stared at them blankly and said, “Good for you. How does that help us? Are you going to fight some of these guys? That would be good.”
It turns out, it’s a very high level, high training force systems. He is out in Ohio, so he’s very close, within an hour’s drive, from the different markets that we are really excited about. He is going to be overseeing their systems on going.
This was a big expense for us, but we are so excited to be able to not be reactive anymore, because it’s been like, “Okay, the first time we get a complaint, let’s go out there and see it,” but we want to be before that.
Kathy: Proactive, where Tim is going in and looking at their systems and auditing to make sure that these property managers aren’t getting behind, and that they’re not over hiring, and so forth.
I just wanted to address that because we’re going to talk about due diligence. The wonderful thing about real estate is that you have so many protective factors there that even if a person does change, you can protect yourself in advance. I just don’t want anybody going in blindly saying, “This is a good person. Wayne said they’re great so I’m just going to trust them blindly.” I just want to make that clear.
Ben: Sometimes people become victims of their own success. Things are going gangbusters, they’re buying and renting the property and they have happy people and they’re happy, then they get bigger and they get bigger, and they don’t know how to hire and so they don’t. They think they can handle it and they can’t, and services go down, and everyone’s in denial a little bit.
So with Tim, he’ll spot those things in advance by asking how they’re developing the system, asking set questions and then Tim can go back through his recorder and just keep an aggregate score.
How that translates is when Aristotle or other investment counselor and myself are talking to people, we might tend to steer people a little bit away, from property teams that are suffering in one area or another or maybe not quite up to par. We’ll ratchet back on those markets that maybe have a couple of Achille’s heals that we’ve developed proactively or recognized proactively.
Kathy: Yes. The best part of that is that Tim is going to these systems and work with all of our teams to help create best practices, and look at it more as, “Yes, we’re overseeing that. That’s the goal. We want to be making sure they’re doing their job.” Instead of treating it more like a bully kind of way, it’s more like, “We wanted you to succeed. Here’s what Lizzy is doing that is working time, after time, after time, how can we take those systems and bring them to everybody else?”
Ben: Yes. It’s non-adversarial, we’re working with them.
Kathy: Yes, trying to help them to be successful as well.
Video 2 Transcript
Kathy: All right. The question is financing. You all had different ways, or I should say acquisitions is probably a better way to say it. People sometimes use cash, people use self-directed IRAs, private money, conventional loans. You would just let us know how you were able to get started and acquire.
Wayne: We had a little cash that we started first but more than that, we sold our house in Virginia. Our condo in Virginia and we didn’t even 1031 it and we took a loss. Even after everything settled out, we still came out ahead. We’ve already gotten back the money that we lost in cash flow. We bought it at the top of the market, we sold-
Kathy: At the bottom. You said that your strategy is different
Wayne: Yes. We’re working on it.
Wayne: There was enough cash flow there to make things work. We own the place out right which is another reason why our ROI was 3%. That’s a lot of money to tie up and not make money from, right? That’s what where we’re going and that was our strategy to start making money.
Kathy: The first properties you bought, it was from selling the not so lucrative property in Virginia.
Kathy: You didn’t exchange it. You just sold it at a loss. How many properties were you able to buy? Did you use that money as down payment?
Denel: I don’t know. Actually, we bundled that. We have this another cash with the bank. We just looked at everything and put it all together. That was the big chunk of it. We just went out to as many houses as we can get starting off. Our first signing with a mobile notary and a coffee shop was on 6 houses.
Kathy: Six first purchased. To put on the record, I do not recommend that, as your first. Six closings in one sitting.
Denel: Six closings, yes.
Kathy: Wow. Okay.
Wayne: There’s a little background in that though.
Kathy: Rich and I did that too just so you know.
Wayne: It was not crazy spender’s fault, though.
Kathy: It was definitely the crazy spender’s fault.
Wayne: Yes. We worked together on that one. I was on my way exiting the military. We were stationed in Japan at the time. On the way out the door, my wife bought me a book on real estate investing. Some of the takeaways from the book were cash flow properties aren’t necessarily property you want to live in but it’s a good quality product that you’re providing something for people that they need. You may not want to live there but people do want to live there, as long as it’s a nice place. That was a different concept for me to grasp.
Then I started looking at the market because she was giving me information. As I started analyzing, I’m like, “Oh my gosh. We’re going to miss this opportunity.” I was like, the best place to build a hamburger stand is when you have a bunch of hungry people and I’m like, “Man, I can’t wait to get back to the states. We need to do something.”
I was concerned we’re going to miss this opportunity just because I think it’s the only time in history where both prices and interest rates dropped down really, really low at the same time. I may be wrong on that. Don’t quote me. But from my knowledge, I could never remember being like that so I got to know this is one of those opportunities that won’t last forever. We were a little bit more eager than maybe the average payer when it comes to that market.
Kathy: Okay. You were able to buy five at first and then subsequently, the properties you bought were from the cash flow and loans?
Wayne: Not yet. I mean, this is our first.
Kathy: Or that you were expecting?
Wayne: Right, we were expecting but we didn’t pull that money. We re-purposed the money as it came in. We definitely moved it out. We made sure we had our buckets. Once we got our buckets in place to protect us from stuff that just happens in life. They say 3,000 – 5,000 per property. More or less. That’s it. It’s kind of simple.
Kathy: Okay. Great. How about you, Walt?
Walt: Again, Initially we started with refinancing our house, putting money out of that, using that as a means of a down payment for properties here in the bay area.
Kathy: So, You needed to cash out, finance or an equity line.
Walt: Yes. Not an equity line. We potentially wanted to do a cash out. Did that and
then from there purchase some properties- got some other loans, conventional loans for the properties that we purchased in Indianapolis and Ohio. Again, at the Ohio property, it was a 1031 exchange. It’s all a bit complex, 1031 exchanges but the bottom line is I take the cash that we had from our sale and put that all into purchases of the five properties in Ohio. We ended up with a 50% down on five properties and loans of only 50%. We had actually a very high cash flow as a result. That’s not normal. Normally, we’ll buy a property at 20% – 25% down but that’s the way that we usually estate.
Kathy: Okay, great. Anybody new to RealWealth you might not know that you can get conventional loans, you can get up to 10 loans per person through Fannie and Freddie. I’m assuming that’s what you meant, Wayne. Separately?
Wayne: Yes. Actually we came to a point where we weren’t sure about getting rid of our property that we had here in the area because we were both on that note and then we sold it. That opened it up and now we could purchase another property with that.
Walt: I wanted to share one experience that we had that you shouldn’t do. That is if you have a trust and you want to buy a property with a trust and you’re on a trust with your partner, or a husband, or wife, or whatever- that’s considered two people on one loan. So, when you’re buying in, to Kathy’s point, you can get 10 per person, so you got to make sure you get set up properly. We made the mistake of buying some properties with a trust and found out that that’s considered two loans or two names on that one loan. It takes you out of the ability of getting 20 properties within two partners. I’m just saying that before you get a loan or you’re buying something, talk to the adviser you get the loan from. Make sure you have it under the right terminology.
Kathy: If you’re concerned at all about– California law, it’s 50/50 anyway, but you can add your spouse on the title but you have to cover up to-
Walt: But don’t do it on your loan.
Kathy: Don’t put your spouse on the loan. Okay, Wes. Financing.
Kathy: We have already gone over a little bit though.
Wes: To best accomplish my business plan, which is to maximize income that’s flowing from these properties, I did that most effectively by mortgaging them as much as I could. I think it’s a really simple concept, but I’ll just say it anyway because it might be useful if you don’t know it, but if you have a hundred thousand dollars to invest and you buy a house for a hundred thousand dollars and you paid cash because you don’t want to worry about having to make payments from it, you maybe get a thousand dollars a month in rent.
But if you take that same hundred thousand and you buy five houses for a hundred thousand each and you put down only 20% on each one of them, you spent the same amount of money out of pocket but now you’re getting $5,000 a month. That’s why it makes sense to me to use the bank’s money. The banks paying 4/5 for this but I get all the profit.
It’s one of those things that’s almost too good to be true. It seems like if the bank’s putting up ⅘ of money that you should have to share it with them. They make all their money on that little percentage on their mortgages and you get to keep all of it because you keep all the cash flow and you get to keep any appreciation that happens in that property. Yet you only really own 20% or 25% of it. That’s my strategy, I don’t tie up a whole bunch of money just so that I can own something free and clear. You can get really good, high returns on the homes. The ten homes that I bought, I’m receiving at least I’m getting is 18% on one of them, but I have three of them that I’m getting over 30%, based on the down payment. If I put, just as an example $20,000 down on a property, and I’m getting 25%, that means that I’m making $5,000 a year on that $20,000. After only four years, I’ve paid off my down payment and everything after that is just free money. Interest rates are so low now that the little debt that you’re paying in interest, that’s not really worth worrying about. Take the money and do something with it.
Kathy: That could change quickly. There’s obviously a lot of different opinions on where interest rates are headed but in the past it could go up dramatically, up one point, one percentage every time they meet. Every 3-4 months, you could be seeing interest rate hike of 1%. It’s really easy to get comfortable with where we are I think it’s normal and there’s nothing normal about today’s interest rates. They are historically low.
Wes: What’s cool about it is you could lock them in for 30 years regardless of what they’re after.
Kathy: There’s no other country that does such a thing. If you read my blog, I got back from Australia and they would love to be you. They would love to be sitting in your seat right now with the opportunity to get US financing and they can’t. There’s no other country that would offer such a thing because it makes no financial sense. Would you lend somebody a $100,000 and not want it back for 30 years at 3% – 4%? Of course not. That is subsidized.
If you are an American citizen paying taxes, you’re basically paying for that either way, so you might as well take advantage and use it. It’s not going to be here forever. The same with these home prices. We’re saying today, $100,000 for properties. We’re using that as an average. We’ve got markets that are still in the $60,000, $70,000, $80,000 range. Rich and I started investing in 2004. Believe me, we weren’t buying $100,000 worth of properties. We were so excited when we began for $150,000.
Again, when you’ve been sitting in this environment for so long you think it’s normal. It’s really not. It’s time to move if you haven’t yet. I don’t want anyone jumping in and not knowing what you’re doing but when I say it’s time to move, I mean get informed. Get the education you need. Our website’s full of it. The room’s full of it. You’re full of it. Alright, Ben, Financing- Anything that’s different then?
Ben: I bought a couple of little cheaper houses, all cash, but most of them are financed with Fannie and Freddie or the ones I have in Cincinnati are through a traditional IRA. I had plenty of them. This is a couple years ago, where the banks were a little more nervous than they are now. I had to put 60% down on recourse financing, you guys would get through IRAs. They would only loan me 40% but still that’s better than 100%. It allowed me to get three instead of one and a half houses.
I got one house in an IRA, that’s a Roth and three that’s in a traditional. I’m kind of done with that unless I somehow turn them into more houses, which I’m trying to do and now, I’m going to focus on the Fannie and Freddie slots.
Kathy: Okay. For Rich and I, we were not in a position to get more loans and yet we had a family member, since this is recorded, I won’t say any more than that, who was too nervous about investing in real estate but wanted to be in it somehow. But at her age, it wasn’t maybe appropriate and so, I went to her and said, “How about you, instead of being in bonds, which to me is quite risky, how about we give you a much better return than bonds, and now your money is secured to something tangible? So you’re in real estate now but you don’t have to be a landlord. I’ll borrow the money, I’ll be the landlord and you’re going to get a much better return.”
She was so happy. I went way over. I didn’t need to pay this much but I paid her 8% because I love her and it’s helping her and we still cash flow.
Even if you can’t qualify for financing or you’re a past the 20 loans or you had a short sale of foreclosure or anything like that, but you have an opportunity to help someone else because from my perspective, I wonder I want. I didn’t want all of her money in Wall Street. Let’s just stick with it that way. This was a way to help diversify without there being a landlord. She gets a great return and I get a loan.
All right. Moving on to the third, this is probably going to take a little longer or maybe not, I don’t know. Third is due diligence and systems. Here we have a large array that property teams to work with, and we’re just one company. There’s some many companies out there. There’s real estate agents everywhere. There’s hundreds of cities in the US. What made you decide this team, this market, this company and what due diligence went into that? So Wes, we’ll start with you.
Wes: Well, I kind of already spoke to that.
Kathy: You did.
Wes: When I came to this, I literally knew nothing about real estate investments. I knew that it seemed like a smart thing to do but I didn’t know where to go or what to do. These guys have everything you need to know. I’ve not gotten one piece of information from another source beyond The RealWealth. Other people might feel the need for that but I feel like I got everything I need. I went to not very many, two or three seminars, I listened to what the philosophy was behind this thing and it made sense to me. I didn’t see anything wrong with it. Kathy asked me on the radio if there was one piece of advice I would give people. My one piece of advice is to be bold and don’t procrastinate because this is a unique point in time.
Interest rates are really low and there are some markets still left in the country where home prices haven’t really appreciated. Those two things are presenting a great opportunity that’s not gonna be there for that much longer. I would say, come to some of these lectures. Look at some of the recorded ones but there isn’t that much stuff to know and go to a city and meet some people. A couple of people, I’ve mentioned Misty. That’s a great place to start because everybody loves her and she just comes across as being so genuine and honest and she’ll walk you through the whole thing.
It’s easy. It’s not that hard. You got to get started. Buy one house and see what happens. I bet that within just like 2 or 3 months, you’ll already have enough experience to say, “Hey, this works. I’m ready to buy another one.”
Kathy: Great. Walt.
Walt: Strategy- I agree with a lot of what Wes just mentioned. Just to add on top of that some things I highly encourage is number one, first get yourself educated. Feel comfortable with what is being discussed. Definitely, listen to webinars that are recorded. If you can’t make Thursday at noon work, at least do it on weekends, on your free time. Take notes. Listen to what people have to say. You have a lot of commonalities through these sessions. That’s one piece I would say is to educate yourself.
Secondly, I agree with Wes and that is now is the time to do it. Don’t procrastinate. Once you make a decision, go with it. You don’t have to go hog wild. I also agree that maybe you do one home in the market and see what happens. But the things that are needed strategy-wise or I should say, really in terms of reference perspective is number one, I highly recommend you speak with somebody like Ben with what your strategy is. “Here’s what we’re thinking about, what do you think? What are some of the markets you’re recommending. Where’s the market high? Where’s the markets cold? What’s going on out there?” You have a one-on-one. If you can’t do a face-to-face, do a phone call but that way you have undivided attention with somebody that can listen to you. You have really an advisor’s voice.
If you’re uncomfortable, ask those questions. Once you get past that point, it’s the due diligence. You got to go up to the locations if you’re going to consider it. If you don’t buy there, you don’t have to pay the money for the flight, the hotel. Look at the property management, the company that you’re going to be dealing with and say the same thing. When I met Missy we spent the whole day together. I was ragged at the end of the day. We went to over 20 properties. She even said to me, “You know what, within two or three weeks, more than likely to get all these sold.”
Sure enough we had a couple of offers in, we could get any of them but the point was we at least knew what was in the market. We met with the management team, we met with everybody in the organization, I highly recommend that, it’s just like anything.
What you hear and what you see are one thing but you have to meet people face to face. You’ve got to make sure the chemistry is right. If the chemistry is not right, back off, get away. Not every property management company or Property Team out there is going to work for you. Some will work better than others. The other thing is I highly recommend that you get the names of investors in various marketplaces from RealWealth who are some of the investors that invest in this market. Call them up, speak to them, email. I met one gentleman in Australia. We did emails back and forth. We did Skype back and forth, and he told me what worked, what didn’t work.
But the point is educate yourself as much as possible so when you make the decision at least you can then say, “I’ve done all my homework.” It doesn’t end there. This is one of the things I really encourage everybody to take a note of, is that once you make a purchase it’s not done. You have to manage this. Okay? Period. You have to manage it. You can’t just walk away and think, “I’m going to my check or not and my ACH deposit.” No, you’ve got to manage it. You’ve got to make sure your statements are correct, you’ve got to make sure that the properties are being maintained.
One of the things that we do or at least I do is I go out and visit every property at least once a year. I go and I add it to where I go. I ask that they show me the inside of the property, the exterior of the property and I actually ask to meet the actual renter if they’re available and to introduce myself. I literally did this a couple of months ago, in Indianapolis. We went to one property and I asked the person I said “How are things?” “Well the toilet’s not working. It’s flooding here and we have this.” I go, “Have you spoken to anybody?” They said, “Well it’s getting hot.” It’s like one of those you’re afraid to say something.
But the fact that I was there I said, “I own this property, I want you to be happy. If you’re not happy, I’m not happy.” The woman just poured it out and told me the issues and we addressed them. What I’m just saying is that you can’t just sign up, buy a property and just think it’s going to take care of itself, it will not.
If you don’t manage it, people are going to have issues because it will crop up. This is not something you just walk away with. You just can’t assume it will take care of itself. It’s doing the reference checks. It’s checking out the property management company and see what they’re like. Also if you have issues, address them with the property management company.
I’ll be honest I’ve had issues. None of this has been perfect and I’ve worked with the property management companies to address those issues. Some have been taken care of and some haven’t but the point is you’ve got to be outspoken, you’ve got to be demanding of what you’re requirements are. They’ll work just as hard as you want them to work because they want you to be happy and you need more than happy. Those are some of the things I just encourage that you can take a look at and consider.
Kathy: Again as I said earlier I think property managers have things happening to them too. In this case I think I have already talked about, Henry’s mother is dying from cancer. He’s distracted. You have to stand on top of that. When we find these out and like I said we have somebody now helping us to be proactive here. That we have alternate wonderful property managers. They’re just, when they’re mom and pop type operations, great things happen. He was great and then he got distracted. He’ll be great again but he’s going through a hard time. All right. Thank you. It’s great.
Denel: For due diligence, I think there’s several steps. First is just understanding what real estate entails when you’re going to start, get involved with the nesting in. Understanding the tax advantages, the appreciations, depreciation and some of the associated tasks whether it’s going to be you or you’re going to delegate it out such as record keeping and reporting the taxes at the end of the year and just having a basic understanding of what that entails. Then once you’ve found answers to all these questions. “Yes, I can do this. This is passive, relatively passive.”
Then you move forward with real estate and you pick a team. You come to a few seminars, get on Real Wealth’s website, watch some of the recorded webinars there and just do a comparative analysis. Look at some of the different teams speaking. If you’re not sure about this one, compare it to two or three others. Just from there, solidify who you want to work with and pretty much make sure that it’s somebody that you can see yourself working with long-term and being able to pick up the phone and get your questions answered. Once you got to that point, I think that’s a good starting point.
Wayne: Just remember, investing is not about sticks and bricks, it’s about people. Who you pick is important. It’s almost as important as if you’re going to pick a mate because this person you’re going to be married to for the life of your investment. You better like this person. Liking the numbers is one thing but those numbers could change. You have a relationship that’s going to hold that together. From a due diligence standpoint, we took a lot of time. Although it looks like it was very quick. I was drinking through a fire hose. My wife was feeding me so much information so fast. I come home and she would just. It was brutal. It really was. I think I got a degree in getting beat up. I don’t know.
We had a lot of passionate conversations about what we did want to do, what we were comfortable with, what we weren’t comfortable with but we didn’t invest until we were both on the same plane. We had to agree because this is an investment we had to agree with. From the time we started, we knew nothing in December. By June, we were buying six houses. But just because that time frame look short to you, we probably condensed about a year’s worth of due diligence into that period of time. Don’t feel in a rush. Make sure you feel comfortable. We were comfortable.
Also, know what you’re investing in. Kathy, you said something. You said, “You invest in real estate, you’re not investing in a commodity unless you’re investing in North Dakota because then you’re investing in oil.” Right?
Wayne: That’s the oil industry. That’s all there is. Guess what, when the oil industry goes down I hope you’re ready for the storm. That’s why we have to do our due diligence. That’s why we have our reserves. After the end of every storm, there’s what? There’s calm. There’s sunshine, but you have got to get through the storm. That happened during, when the market fell apart 2008. Those people who rode it out, figured out how to make things happen in 2011 were pretty happy, weren’t they? We’re not playing checkers, we’re playing chess. You’ve got to look past your nose. You got to look past today’s ROI. You got to look past where you are today and where you’re going. That’s where the strategy is. I’m all about strategy. I’m all big time, a big picture guy. She’ll tell you. She’s definitely the detail that holds me back in and says, “Wait a minute, you’re a killer.”
Ben: Wayne, North Dakota has gone wrong.
Wayne: It has gone wrong but prices have dropped. If your workers can’t afford to pay rent, what do you do? What’s your strategy? What’s your countermeasure? If they can’t afford, you can ride it all the way to the bottom if you want. If you want, just not with your prices or-
Ben: Drop the price.
Wayne: Drop the prices because there’s so much margin in those properties when we purchased them. There’s no cash flowing. They’re not ridiculous anymore but that’s okay.
Ben: They’re still pretty good and dropping the price by $100 or $200 a month is better than having two months vacancy while you hold it for principal and lose way more.
Wayne: That’s right. We’re real estate investors. We need to have a strategy on what looks good and when things go bad, you better have a strategy. If you don’t have one, you need to be able to get with your people, scratch their head. You know who came up with the idea of dropping my prices? Wasn’t me. It was my manager who gave me a call. He said, “Hey Wayne, this is what’s going on.” He wasn’t going to do anything without my permission. I said, “Absolutely drop it. What do you think it’s that?” He came with one idea. I said, “You know what? Let’s try this first. Let’s make them say no once and then we can always drop it down.” I had a basement number and I had the number that I was at before. They did. The went for the number I offered.
Wayne: I made them happy because I gave– We like deals. I dropped the price that made them happy. They stayed. They were good renters. I retained good renters. That’s what this is all about. It’s about people again. Do you notice that? It’s not about sticks and bricks. It’s about people.
Kathy: That’s very good.
Ben: Then one thing I’d like to add, you mentioned it. Speaking of property management, Wayne was like, “It’s like picking a mate.” The good news is, you can divorce your property manager and the rules are all no fault. We can get out and find a new one and hopefully be happy with them. But we do our due diligence, we won’t have to do that.
Kathy: All right, Ben. Well, Ben has been very active in screening since he’s been with us for a year and has helped with RealWealth’s due diligence. Let’s start with your personal due diligence. Before you were here and when you were just buying through the network, why you chose those markets.
Ben: Well, my due diligence was not nearly as good as it should have been. I now realize that. I did a few things. I talked to a few people. I did not check references and go around and do some of the things I tell people to do now, that I do myself now. But I did a few things. I made sure that other investors liked who it was. I knew in the case of my Arizona properties, I knew that they were dipping down.
Just the idea that I could buy something that’s $78,000. It was 1993. For a 3 bedroom, 2 bath house in Tempe, Arizona. I only had to cough up $78,000 was really appealing to me. I went through a couple of seminars from the prospective real estate people. They’d come up here or I would go down there. I echo a lot of what Walt says. That chemistry is so important to me. I liked the people that I was listening to. My BS meter was not pegging which is always crucial. They seemed genuine. They knew what they were talking about. They had a track record. I just went with my gut feeling more so than I would today. Today, I would go with gut but also trust and verify. It turned out okay for the most part.
Kathy: Okay. I will just share my horror story then with you because we’ve seen this actually happen a lot. A lot with our Australians in particular who can because our Australian group is so trusting. They’re so, so very trusting that they have at times just literally said, “Hey I’ve got money. Can I just wire it to you if you find something?” The experience is amazing. Like I said, what has happened in the past is we might find a team that we really like. They pass all of our tests. Everything looks good. Then because they’ve got a good track record put in and then they’re getting busier. It could be that they’re just getting too busy to be able to pay attention to the detail like they used to. Or in some cases, we’ve actually found that it just got so easy because our investors were so trusting because of the track record that our investors stopped doing their work. And I’m one of them.
Even though I’ve seen this and so forth. One of our property teams is no longer on our list. This is really important. I cannot tell you how important this is. If somebody’s not on our list, please find out why. I can’t legally tell you names in a broadcast way, but you can call and ask us, “Why is this person not on the list? Or is there something I need to know?” If somebody’s been to one of our events more than six months ago before doing anything please check in with us because it might be that market shifted. We just had Virginia out. That’s a great market, but it sold out. Now the properties that they’re selling in Virginia are not necessarily port properties. They’re college properties and they’re not near the port. You might not realize that. Again, just check in with us because markets change so quickly and people change. With this one particular market–
Ben: It’s okay. Just say it for me.
Kathy: He told me it was a great deal. He told me it was in great shape and guess who didn’t get an inspection? Isn’t that awful because who would want to sell me a bad property? That’s a bad idea.
That’s such a bad idea but they did. They did. Just understand, if so many people trust me and say, “Hey, if Kathy invested there, it must be great.” I’m here to tell you that I invested and I got burned really badly. I’m saying this, this is only a few months ago. This is a new thing. I’m totally being authentic here and letting you know that somebody who has been in front of this group and has presented to you, not recently, sold me a property that has been red tagged and has been turned down. The one thing I want to let you know is that, one thing I did properly was the contract.
The contract described the state and condition it was supposed to be in, which it’s not. I wouldn’t have to be in this place telling you, that even in a situation like this, people can change. I don’t know what happened in his thinking. I don’t know if he didn’t check it himself, or if he didn’t do his due diligence. Whatever happened, Rich, my dear lovely husband, is now partners in a horrible property.
If that one step had not been missed– I can’t emphasize it enough. Even if you trust somebody, even if it’s your own family member, friend, in this case friend, and somebody who desperately wanted to be in front of you, that should have taken good care of me, didn’t. Just don’t trust anyone. Trust but verify and do your homework. Your homework includes, if you don’t get out there to see the property which would be first choice– Every property has a different feel. You just know. Somebody else might think a property’s fantastic and you go and see it, you’re like, “I don’t know.” It’s good idea to go see it. If you can’t, then you sure better send someone else. That’s easy to do. Inspectors are everywhere. There are associations for inspectors. We have a list of inspectors. It’s very easy. You could get someone to go walk through your property and look at it.
I tell everyone this. Then guess what, I didn’t do it. Here I am. It’s going to work out. It’s going to be okay. I tell you this because I can’t stress the importance of understanding that a handshake’s not enough. Not in real estate and not with someone that you trust. Actually, in this case, I bought from him before, it went great, that one property that’s really been performing well. It was really oversight on his part. In Kansas City, I had somebody who I think really genuinely wanted to take care of me, wanted me to brag in front of you about how great we were.
I’ve got this great deal, really, I think it was sincere. This time, I did go out and see it and I just didn’t like it.
Ben: Was it a long time ago?
Kathy: This was a long time ago. In that case, I just didn’t like it. If I had done an inspection, it probably would have been fine it probably would have rented well. There was just a weird layout and so forth. Again, you can get out there, great. I drive all the time. You can get out to these markets in three hours. You can do it all the same day. You can certainly do it on the weekend and it’s worth it. If you plan in advance, it can cost you $300 or $400. Just get out there and check it out, come back. If you can’t do that, you make sure somebody else does.
Ben: Can we tell horror stories without scaring people away?
Kathy: This wouldn’t be a horror story if I had done my homework. That’s all I’m saying, is just you don’t have to lose money if you follow the rules. That’s all I’m saying.
Ben: I just want to add one thing that I mentioned that I think is really important. I asked you if on a due diligence side and with inspections, and that is, if you’re working with an Property Team and the partner of the the management company and what not, you only have the independent inspector to look at the property and not the inspector they’re recommending. There’s a reason for it. You don’t know what the relationship of that inspector with that particular Property Team. The reason I say that is, what you don’t want to find out is, the inspection comes back looking great. Then you’re on the property and it’s raining and guess what, it’s flooding in the basement and they don’t have a sump pump.
What do you then do? Just because the inspector didn’t catch it, didn’t realize that the water was draining into the basement even though the drain pipes, I’m not saying that happened to me. But my point is that it’s kind of like do your due diligence, get an independent inspector to check the property and to catch this leaks. It’s like $300 to $400. We’re spending $100,000 it’s chump change, plus you’ll write it off anyways as part of the expense of the purchase. But it’s like anything.There’s other things that I have honestly say you can leveraged.
That is like with Missy. I got property insurance. She said “You know what? I can put you under my umbrella property because I get a huge discount.” And I did it. Because the property insurance is insurance, it’s a whole different thing, an inspector you’re inspecting a property that you’re buying, you’ve got to just do your homework. Again I’m kind of reinforcing, talk to other members that are in those areas, talk to them. Find out what’s working, what’s not working. What was the “I got you” or “I was surprised”, “I didn’t anticipate this”. But the inspector or inspection was like really this. If there’s anything to do, do that if you don’t do anything else.
Kathy: There’s two websites that have certified inspectors on them, you can get to them and see if they are independent. Sometimes the inspectors recommended to us by teams are good independent inspectors, license bonded all that and are required to follow the law. But we have seen sometimes companies not, certainly not our list but other companies that would have in the house inspectors who work for them. You’re not getting a really good general inspection.
Wes: The inspector always finds something, I have property teams that I would put at the very top of the list and they’re highly recommended, they do a great job with everything but the inspectors will still find things.
Ben: Which the Property Team will then cover–
Ben: Do it yourself.
Wes: You just would never know that stuff. Another thing that is a good safety valve that bailed me out of that situation once is the appraiser. I went under contract to buy two properties and everything looked fine to me. I was paying like $120,000 for each one of them.
But, when the appraisals came back, they only appraised for like $91,000. If I was buying something for $120 and it came back $118 I wouldn’t have worried about that, but it came back in the low 90’s. I’m living here, there’s other cities across the country. I don’t know what stuff sells for, that’s the appraisers job, that’s what they do. The bank doesn’t want to loan you money on something that’s not worth it, the builder who was selling me these two properties didn’t want to come down.
Kathy: You just bailed out.
Wes: Yes I walked away from it.
Ben: This was a new construction?
Wes: No it wasn’t, I’d say the building would be like [crosstalk].
Ben: You walked away?
Wes: Yes I walked away from it and it was easy to do. What I think this particular guy was doing was just milking the market. He wasn’t at all upset by the fact that I walked away from these two contracts. He just said, “You know, I know I’m going to sell these and I don’t have any reason to come down on my price.” That’s the problem with buying stuff sight unseen and not having a look at it, you don’t have anyway to know.
Kathy: That’s you’ve got a checklist for inspections, for appraisals, in this case it could be that it was a bad appraisal. Then that could mean maybe you go get another one, it could be that they really saw the value but the other properties were foreclosures. There’s a lot of reasons but the bottom line is at least you have the data and you can make a decision.
Ben: Usually I would probably advocate getting a second appraisal because before any fix and flips we had many deals just be torpedoed for really, really ridiculous reasons. Like they didn’t consider what I would think would be really basic things like, “We just renovated this house and you missed that comp and that comp but you used this foreclosure and this REO. That’s how you came in low. So, you would get another appraisal and it would be okay but sometimes you should walk away. Absolutely.
Kathy: If there is any question or if it creates distrust then you walk away. That is definitely a problem with appraisals these days is that appraisers make about half of what they used to because of new regulations- realtors are like, “Haha we know this.” Because government regulation has now taken half of what you pay in appraisal into an organization that monitors that all. Appraisers are getting half so they’re kind of in a lot of cases doing half the work.
We’ve seen appraisers literally not even go to the property or do comps that they just pull back really quickly and didn’t even check to see that one was underrated while one was renovated, one wasn’t. One was on a busy road, one wasn’t. It doesn’t necessarily mean that– in this case, the seller was like, “This is what the property is worth. If you don’t think so and the appraiser doesn’t think so, that’s fine. That’s fine with you to walk away. He felt it was the value.
Wes: The other thing I have and has also happened to me when I got a low appraisal. I knew right off the bat that it didn’t make sense. I was buying two identical houses in new construction but one was on the corner and one wasn’t on the corner. The guy went out to appraise them. He saw two houses look same and he give them the same value that I was paying $10,000 more for this corner one and the bank said they didn’t want to lend me the money I said,” What if I take the $10,000?” They still didn’t want to lend me the money. All he has to do is point out to the appraiser that they weren’t the same property and he had no problem changing it. That happens too.
Kathy: That’s what we’re here for is when you have questions that you’re sure about you just bring them to us and we’ll take a look. All right well we’re going to take a break. It’s been I think our brains only last 90 minutes or something like that so. We’ll take a break. 10 minute break. Be back in 10 minutes and we’ll do the second half. Thanks everyone.