The Simplest Way I Know To Start Real Estate Investing!

person holding silver keys

If I could go back in time and talk to my 24 year-old self, I would tell him to take his vitamins, get plenty of sleep, don’t date girls based solely on looks, and…….buy a duplex! My focus as a real estate investor is on accumulating rental property and not flipping,  so duplexes are right up my alley.

As a rental property investor, I do not buy single door, a.k.a single family, homes as rentals! Why? Because if your tenant moves out you have 0% occupancy. I agree with Grant Cardone when he says “Single Door- No More”.

The number one question/excuse I hear from folks is how do you get started investing in real estate if you don’t have a lot of money. In this article I will lay out the simplest strategy that I know of. It’s a strategy that nearly everyone can do.

Let’s go back to my 24 year-old self. Imagine if instead of buying a single family house to live in, I instead purchased a duplex. Single family “starter” homes were going for around $100,000 in my market at the time. These were your standard 3 bedroom, 2 bath ranch homes, usually sitting on a 1/3 acre lot.

At the time you could find duplexes for anywhere from $125,000- $150,000. Interest rates were around 7% on 30 year mortgages. So with that said, a 30 year mortgage on a $100,000 single family was $665. A $150,000 duplex would have been $997. This is assuming no money down (which back then was very possible). Let’s assume taxes and insurance were another $150 per month for the single family and $200 per month for the duplex.

This brings the total monthly payment to $815 for the single family and $1197 for the duplex.

I would have purchased the duplex in an LLC and rented one side for $700 per month and paid myself rent of $700 for the other side. When I say “pay myself rent”, that means I would have written a check to my LLC that owned the duplex and deposited it into a bank account just for the LLC.

So, let’s compare the two… I own a single family home that I live in and I pay $815 per month. Or I own a duplex and pay only $700 per month. The $700 I pay along with the $700 my tenant pays goes towards the mortgage, taxes, and insurance, which was $1197 per month.

So in one example I pay $815 per month and I build a little equity on a $100,000 property, OR I pay $700 for a $150,000 property and also net $203 at the end of the month AND build a little equity. If I lost you, let me recap. I pay $700, the tenant in the other side pays $700, for a total of $1400. The mortgage, taxes, and insurance are $1197 per month, which is where the net of $203 comes from.

After 5 years, assuming I don’t raise the rent, I would have $12, 180 in my LLC’s bank account. For those of you who hate math, let me show how I came up with that number. $203 per month cash flow x 12 months x 5 years= $12,180.

Okay okay… yes I know, this is assuming 100% occupancy and isn’t taking into account any expenses that may arise. So let’s take half out to account for those things. Now you have $6,090.

But keep in mind that I am only paying $700 per month versus $815. So there would be personal savings also.

At 24 years old I was making $30,000 per year, so if I saved 10% of that I would be saving $3,000 per year. In 5 years that would be $15,000. In total, if you include the $6,090 in my LLC account, I would have over $21,000 cash  after 5 years and still own the duplex.

Five years later I’m 29 years old. I meet the girl of my dreams and we get married. If she’s really the girl of my dreams, then she understands the value of owning rental property…

So, we buy another duplex, live in one side and rent out the other. Now I have 4 units total and my wife and I are only occupying 1 unit. We continue to cash flow and store our cash in the LLC’s bank account. Pretty soon we buy another duplex.

At some point in our mid 30’s we grow tired of living in a duplex and decide to buy a single family home to raise our kids. But by this point we own 6 units and we are making somewhere around $600-$900 per month cash flow.

How different would most people’s lives be if they owned 3 duplexes in their mid 30’s? Sure, there’s the hassle of managing them, but at some point you could (and should) hire that done.

Well ,this isn’t the path I took. I instead bought a single family home and lived in it. I did successfully flip it for a nice little profit and I went on to buy rentals after that. It wasn’t a bad way to do it, but for most folks flipping isn’t easy. You have to buy the property at a discount, fix it up without spending too much, and then hope it sells at a decent price. It worked for me and it has worked for others, but it involves a lot more risk.

Therefore, I would tell anyone who is just getting started in life and wants to own property to buy a duplex! This strategy works for nearly everyone. The key is to pay yourself for where you live, don’t over-spend personally, and don’t buy junk properties. If you do those three things, then this strategy should work. Of course there is always risk with anything and I can’t make you any guarantees that this will for sure work for you… But it’s the simplest strategy that I know of to accumulate rental property!

 

How Siberian Tigers and Diarrhea Made Me Money!

 

Man suffering from stomach pain

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I know this sounds crazy, but these two things made me money the past 2 years. A lot of money in fact. Okay, so maybe this is a bit of an exaggeration… but not really.

Let’s start with the Tigers. In 2013 Lumber Liquidators (LL) was fined for illegally sourcing lumber from a protected forest in eastern Russia that was home to the Siberian Tiger. Lumber Liquidator’s was fined $13 million dollars and received a lot of bad publicity over the deal.

In March of 2015, 60 Minutes ran a story on excessive formaldehyde in laminate flooring sold by Lumber Liquidators. LL had traded well over $100 at one point, but after the second story emerged, LL started dropping. As the company became embattled in legal fights and fines, investors fled.

The stock touched down somewhere around $10 per share at one point. I started buying it in January 2016 when it was around $15 per share. I sold PUT options on the stock each month and collected premium, occasionally being assigned the shares whenever the stock would dip in response to more bad headlines.

Why did I buy LL stock? Because although they had goofed up, I believed there was still a good company underneath. I believed that as time went on and LL paid their legal fines, folks would forget as they often do and move on to whatever the new hot topic was.

As Benjamin Graham once said “In the short term, the market is a voting machine. In the long-term it is a weighing machine”. Graham was stating that the market often reacts to news and events and the stock prices suffer. In the long-run, however, the fundamentals of the business drive the stock price.

LL eventually went up to $40 per share just last Fall and has since cooled down a bit. I sold my shares when they hit $27.50 so I left some money on the table,but I still made a significant profit on this company!

Okay, and now for diarrhea… I love Chipotle Mexican Grill (CMG)! I eat there a few times per month. Not only is it tasty, but they use fresh ingredients. I love the story of Chipotle and it’s founder Steve Ells. But Chipotle, just like Lumber Liquidators, has had their fair share of drama.

Over the last few years, Chipotle has been in the news for having several food-borne illness incidents with its customers. The news has driven the stock down. I started buying it last July (2017) and kept buying it up as recently as a few months ago. I own it at an average price of $288 per share. Today the stock is trading over $450 per share.

Just like in the case of LL, I believed there was still a good company underneath the broken stock price. Why did I think that? Well, one thing I noticed was that every time I went to a Chipotle the line was out the door. Obviously I did more analysis than just that, but my point is that there was still a good company there.

I could have been wrong about LL and CMG. I could have lost my entire investment. And by the way, this blog post is not recommending that you go buy stock in these companies! I am in no way your investment advisor!

The point I want you to take away from all of this is that there are some opportunities to make big gains off of beaten up companies that still have some life in them. The hard part is knowing if it’s something they can recover from or if it’s something that will ultimately lead the company to ruin. As investors you need to spend some time learning to read financial statements and company reports such as 10-K’s and 10-Q’s. These reports will be valuable tools in helping you to decide if a stock still has a good company underneath it.

 

The Right Mindset!

adult alone bracelet casual

This morning I recorded my weekly podcast on stock market investing with my good friend D-Dub. We do this every Friday morning and I truly enjoy it! First off, I always enjoy talking with D-Dub because our goals and interests are closely aligned. Secondly, we like to give each other a hard time, which is always fun.

We usually answer at least one question towards the last half of the podcast. This morning the question came to D-Dub and it was “how do you stay in the right mindset?” We both give our takes on the question and since this question came to D-Dub, he answered first.

I should probably explain that our podcast is not scripted at all! We want to keep it as close to a real conversation as possible. So, often times I will listen to an episode and think “man I wish I would have said ….” This morning’s question was one of those moments.

Getting into the right mindset is critical if you want to be an investor… or at least a successful one. You need to recognize that if you become an active investor you are embarking on a journey that most don’t dare to take. It doesn’t matter if you are investing in stocks or rental property, you must learn to think different!

You will fail at some point. Accept it and expect it. In fact…. you should fail! Failing is how you learn! I believe that if you learn then you really haven’t failed at all. I have purchased stocks and lost 50% of my money. On a couple of occasions I have lost all my money! By the way, I average over 30% annually  in my stock trading account EVEN with those losses!

But every time I lose I learn and I get a little better. Learning to accept and embrace failure requires you to have a strong mindset. Here are my top tips for getting into the right mindset:

  1. Stay positive and avoid negativity If you hang out with negative people you will become negative yourself. Period end of story. Don’t think you will be different or that you will lift the negative person up and they will become positive… sorry to have to tell you this, but 99.99% of the time it won’t happen! Surround yourself with positive people and work hard to keep positive thoughts in your head!
  2. Take care of your soulI’m not going to get religious on you, but you do need to take care of the most sacred inner part of yourself. You need to have a positive relationship with the universe. I pray and meditate to accomplish this. I’m not pushing my beliefs on you, but you do need to explore this for yourself. Whatever it is that you do, whatever it is that works for you, make sure your spirit is in a good place.
  3. Create a dream-board-  Goals push me to do more each day and week. I need something that I am aiming for to keep my activity high, so I created a dream-board which consists of things that I would like to achieve. Some things are materialistic and some aren’t. At the bottom, I wrote down action steps that I need to take daily/weekly if I ever want to make my dream-board a reality.
  4. Read and listen to podcasts- Find some good books that motivate you! I also highly recommend listening to some good podcasts that both teach you and inspire you!
  5. Have Fun- Don’t forget to have fun!!! Laugh out loud several times a day. Watch funny movies. Be silly. Take vacations. Find a hobby….. Life is too short to not have some fun. Don’t get so caught up chasing your dreams that you forget to enjoy this crazy short life!