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This article is part three in a four part series on Getting Started Investing In Real Estate (to read part one, click here or to read part two click here) I first explored the importance of gaining an educational foundation before anything else in real estate. Next, I explained the necessity of creating a plan so you are not wandering like the Old Testament Hebrews in the desert. Today, it’s time to formulate the criteria for the house you will be searching for.

What Your First Investment Should Look Like

Your first purchase should be your own home. However, in the words of Robert Kiyosaki and his Rich Dad Poor Dad book, “Your home is not an asset. It is a liability”.  In other words, a typical home – while it may increase in value over time – is not an investment.  It will usually end up taking money out of your pocket, not putting money into it.  That’s not to say it isn’t important, but how can you combine the need for shelter with an investment that makes sense?

Simply, don’t follow the blind masses and go search for that perfect home with the white picket fence that pushes the bounds of what you can afford.  You will have plenty of life ahead of you for that home and much more if you desire.  However, if you want to build a solid foundation for using real estate to fund your life adventures, you need to buy the correct house that is an asset to you and fits with your investment plan.

What should I buy?

I recommend that you look into a small multifamily building such as a duplex, triplex, or 4-plex.

Why?

A small multifamily property has several distinct reasons for making it the ideal first purchase.

  1. Easy To Finance: Multifamily properties with 2-4 units are as easy to finance as single-family homes. You can get into a home for around 3.5% down payment and ask the bank to pay the closing costs. If the property is already filled with tenants, you will also receive the security deposits from the existing tenants when you take over.
  2. Easy to Gain Experience: Multifamily properties will get your feet wet in the landlord business. I’m not saying you need to be the one fixing toilets at 3 a.m. (see my 5 Tips for Hassle-Free Tenant Management). However, the experience you gain from these small units will translate into a lifetime of headache saving skills.
  3. Easy to Cashflow: When starting out in Real Estate, your goal should be to get your cashflow as high as possible. This means the money that goes out in bills must be much less than the money coming in. As landlord – you get to keep the difference. This is cashflow.  Multifamily homes are generally much easier to get good positive cashflow on, thus they are the perfect tool to get you out of your day job and on with your life.
  4. Less Competition:  Small multifamily houses are outside the radar to most home buyers, so the law of supply and demand is on your side in getting a killer deal. Less competition = a better deal for you.

Are you going to fail miserably if you go out and buy a typical single family home as your first purchase? No. However, the financial benefits of a multifamily home will put you far ahead in your investing career and set you up for a higher likelihood of success. Tomorrow’s post will be the last in this series and will focus on the actual steps to purchase your first home.

Leave a comment below and then click here to go to part four in this series “Getting Started Investing in Real Estate”

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

This article is part two in a four part series on Getting Started Investing In Real Estate (to read part one, click here).  Last time I discussed the important of building upon a solid foundation before jumping into the investing game.  I cannot stress enough the value of getting a firm grasp on real estate fundamentals before buying your first property.  However, you don’t want to live in a perpetual state of learning forever. Education is only as good as the results it produces. It’s time to make a detailed plan on how to put that education into action.

Many investors skip step two and instead just jump right into buying their first property. This is not only a decision that will cause years of aimless wandering and untold headaches, but also marital stress, wasted money, and financial bankruptcy. Do not skip step two. Instead, grab some paper and a pen and lets get started. Yes, literally go grab that pen and paper. I’ll be here when you get back.  Five years from now you will thank me.

Defining Your Goal:

Answer for yourself the following question:

How much money would you need to live comfortably if you didn’t have a job? _________

The answer to this question is your minimum monthly income.  This is the amount of money you need to quit your job and begin living life on your terms.  To define your investment plan, you need to divide this number by 100 (more on why later). This is your minimum number of units you will need to obtain.  For example, if I needed $5000 a month to live comfortably (the average US Household makes around $4250 per month), I would divide $5000 by 100 to discover I need 50 units to live comfortably. This number is now my minimum number of units.

Write out the following statement on your paper: 

My Investment Goal is to Produce __________ in monthly passive cashflow by purchasing _______ units over the next _______ years.

This is your goal. It is Specific, Measurable, Attainable, Relevant, and Timely (SMART).

Defining Your Criteria:

Why do we divide by 100?  This is the minimum amount of positive cashflow per unit you need each month in order to justify a potential property.  This is your most basic criteria when determining what separates a “good deal” from a “bad deal”.  Does the property produce $100 per month in income after all expenses are paid out?  This includes the percentage set aside for when the unit is vacant, in need of repairs, evictions are required, etc.

For example, one of my properties is a triplex (three units). The total monthly payment on the mortgage is just under $500 per month including taxes and insurance.  Other expenses (such as a 5% vacancy rate, repairs, lawn care, property management, etc) add an additional $300 per month in expenses for total expenses of $800 per month. Total income on this property is around $1300 per month, leaving $500 per month in positive cashflow. This equates to $166.66 per unit per month in cashflow. Does it meet my minimum requirement? In the words of my Minnesota heritage, “Ya, sure, ya betcha!”.

“But I could never find a deal this good!” Depending on where you live in the country, this minimum criteria may be easy or difficult to obtain. In my area of Western Washington State, this number is easily attainable and often times investors require $200 per month cashflow. If you live in an area where prices are significantly higher (such as Southern California, Seattle, Boston, Chicago, or other major metropolitan areas) you can still find properties that meet this criteria. You will just need to search harder, make more offers, and look outside the city a little further.

This is it. Of course, your investment plan will grow as you determine more and more of what you are interested (or not interested) in. Do you like two-bedroom apartments or studios? Do you like new construction or remodeling? Do you want to manage your own properties or hire a property manager? These are important questions, but broken down to it’s most basic parts, your goal is to produce enough income to free yourself. Its your job to now make your plan a reality.  Its time to purchase your first property.

Leave me a comment below and then click here to read part three of “Getting Started Investing in Real Estate.”

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Investing in Real Estate at a young age requires a different approach, style, and skillset than investing at an older age. However, the principles behind sound investing do not change whether you are twenty or eighty.  This article is part one of a four part series on how to begin investing in real estate at a young age. If you only read one article – let it be this one.

My brother recently received his tax rebate check of over $1000 and asked me, “I want to invest this money – how should I start?”.

He expected me to tell him the secret to buying a house with a minimal down payment or a hot new tip on investing in gold (which I am adamantly opposed to, but that is topic for another post). Instead, I told him to use that $1000 to gain education.  No, I don’t mean college or a cheesy seminar with a so-called “guru”.  In fact, I suggested he use his money to take a week off work and spend a week at the beach reading books.

Education is the first step to any investment dream and congratulations, by reading this blog you have already taken that first step.

There are numerous ways to learn how to invest, most which are free.  The technique you use to learn greatly depends on your learning style.  The following is a list of just a few. I encourage you to check out as many as you can to determine your favorite way to learn.

  • Books – This learning method goes without saying, but I would like to emphasize the power of public libraries in gaining free education.  This technique resonates most with my personal learning style. During the first year after I decided to get into real estate investing at twenty-one years old, I checked out every book in my library’s regional collection dealing with real estate investing – well over a hundred – and read each one cover to cover.
  • Blogs – These are an amazing source of information, written by people living in the trenches of real estate. Websites such as http://www.BiggerPockets.com offer hundreds and hundreds of articles, forums, and blog posts teaching every conceivable aspect of real estate investing.
  • Mentors – If I were to go back and start over, I would have started earlier with this technique. People love to share what they know, and seasoned real estate investors are no difference.  Get to know who the major players in your town (ask any real estate agent or join your local real estate investment club) and offer to take them to coffee. It is amazing the number of pitfalls and regrets you will avoid by simply learning from those who have been there. In addition – these contacts you make will help you in more ways than one in developing you into a world class investor.
  • Podcasts – A recent innovation in the real estate investor world, there have been a number of great Podcasts that have emerged in the last few years. My current favorite is the Real Estate Guys Radio show. If you have an iPod or Iphone, you can listen to over a HUNDRED hour long shows covering a wide variety of real estate topics whenever you want – for free.

What are your favorite inexpensive or free ways to learn?

Leave me a comment below and then click here to read part two of “Getting Started Investing In Real Estate.”

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

 

Management of Tenants can be tough work if you don’t manage properly. Here are 5 of my favorite tips in minimizing the work it takes to manage your tenants.

 
1.) Do Proper Maintenance.

Don’t be a slumlord. When things are broken, fix them. Not just because it will make your tenant happy and paying (it will), but it will keep up the value of your investment and keep you from larger hassles. Real Life Example: A tenant called once about a slow draining toilet. Rather than fixing the issue, I proceeded to put that on the bottom of my priority list, right below “fix global warming” and “find my missing sock”.

Bad idea.

Tenants don’ think like us. We think “broken toilet, stop using”. What do tenants think? “Hmmm… the toilet stopped draining… so… um… lets smoke some week and continue using.”. Three weeks later, I get a second call. The toilet has not been draining since the first call, but the tenants CONTINUED TOUSE THE TOILET EVERYDAY. They only called the second time because it began to overflow.

You cannot imagine the smell.

That day I learned three significant lessons:

1.) I will never fix another toilet again (perhaps the best choice I’d ever made)

2.) I will always address maintenance issues promptly and

3.) A toilet filled with human feces weighs too much to successfully dump upside down in the bathtub without losing 90% down the front of my body.

 

2.) Have A Policy To Refer To.

Just as the above tip involves having a “higher authority” to refer to, it is also wise to have a “policy” to refer to. That late fee that can’t be waived? Sorry, it’s our policy. You want a maintenance guy to come fix your  at 8:30 on a friday night? Sorry, our policy states that non-emergencies are only dealt with monday through friday, 9-5. Customer Service departments have used this technique for years, and with good reason. People will tend to argue with anything you say, but if its part of a policy, arguments tend to end there.

 

3.) Never Give In (if You Give A Mouse A Cookie).

One of my favorite books growing up was called “If You Give a Mouse a Cookie”, which teaches kids not to give change to the poor because they will only want your Playstation next (or something to that effect). Tenants are that mouse. If you waive that late fee one time, they will be late again. If you allow them to park one car on blocks in their front yard, soon you will be the proud owner of the towns new scrap yard. Tenants will take what they can get. Set a line, stick to it, and don’t give in.

 

4.)You Are Not The Owner (Higher Authority).

This is one of my favorite tip in dealing with tenants. You are not the owner. You simply work for “him”. This tip revolutionized the way we manage tenants and our own time. The landlord is always, and will always be, the “bad guy”. He’s the money grubbing guy who tries to steal christmas presents from kids and bathes in the torment of good, hardworking people. By introducing yourself as simple “the property manager,” you are given a “higher authority” by which to refer to.

Additionally, it also allows you time to think when a question is asked of you that you don’t know the answer to. “I’m sorry Mrs. Johnson, we asked the owners about you keeping that new litter of pitbulls (you moved in secretly,) but they just won’t allow it in your studio apartment”. Notice who the bad guy is? The owner. The real fun begins when the tenant begins trash talking the owner. Go ahead, join in.

5.) Get a Resident Manager.

Tip number 5 is indispensable if you are looking to hack real estate and use it as your ticket to wealth and freedom.

You need to let go.

A resident manager is someone who manages the day-to-day operations of your empire (i.e. toilet repair, complaining tenants, renting units) in exchange for reduced or free rent. Obviously, there is an economy of scale issue when dealing with this, as you would not need a manager to manage just one single family house. However, perhaps offering $50 a month to a tenant to answer phones and show units at any of your properties or $100 to get a unit prepped and filled would tickle a tenant pink and keep you lying on the beach in Maui. The point is: look for ways to outsource all the mundane, boring, filthy, and cumbersome tasks so you can focus on building your empire and saving the world.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

I’m in love with Logan.

Logan is a miniature chihuahua, weighing in at less than 2.5 lbs. Full grown, his entire body can fit in the palm of my hand. He belongs to a good friend and business partner of mine, and never ceases to cause every head in the room to turn when he jumps in the air, rolls over, “speaks”, or does any of his other special tricks. Thats the fun advantage dogs have over cats – their trainability.

Tenants, like Logan, need to also be trained.

Yeah, I said it. And honestly, it felt good to say. It may sound demeaning, but it is the difference between being successful in Real Estate and being miserable. Tenants are like wild animals but with cell phones, facebook, and lawyers. They need to be poked and prodded into submitting to will of the landlord.

How do you train a tenant? Despite the urge, not with a big stick. Tenants are trained the same way as Logan was: Show what good behavior is, reward good behavior, and apply punishment when it is not followed.

The easiest punishment for tenants are found in fees. Late fees, non-compliance fees, etc. Now, many landlords struggle with applying fee’s – especially when the tenant calls and says they can’t pay rent because “so-and-so” has this sickness or their vehicle broke down or they lost hours at work.

However, it is not the landlord’s job to be Santa.

You will find that when you’re policy is to not budge when it comes to rent, suddenly all those excuses disappear immediately. When I first started in Real Estate, I went through exactly this. Trying to be the nice guy screwed me over time and time again. As soon as I made the decision to enforce every fee, late payments dropped from almost a dozen a month down to none. Late fee’s are rare now, and when they occur, tenants don’t call and complain. They know the rules.

They are properly trained.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

 

Real Estate is my muse.

 

In Tim Ferris’ book “The 4-hour Workweek” he discusses the need for a “muse” in which to satisfy that little craving in our life called “money” without needing to fight rush hour, punch the time clock, or suck up to your sexist boss. (If you haven’t read my review yet or want to buy the book for yourself, click here). To quote The 4-hour Workweek:

 

Our goal is simple: to create an automated vehicle for generating
cash without consuming time. That’s it. I will call this vehicle a
“muse” whenever possible to separate it from the ambiguous term
“business,” which can refer to a lemonade stand or a Fortune 10 oil
conglomerate—our objective is more limited and thus requires a
more precise label.

 

For Ferris, it was an online business that sold nutritional supplements for weight lifters. For me, my muse is real estate.

 

A muse is simply a tool you use to generate income, that is not dependent on you working a 9-5 job to make it happen. In the investment world, we call that “passive income”, which comes to you passively (as opposed to “active income”, which – shocker – comes to you through active work). Stocks are passive income, but require large amounts of cash to begin with weak returns.

 

Real Estate, for most, is not a passive activity. Many investors are (literally) knee deep in crap half the time and saturated with headaches the other half. Buildings require work, tenants require training, and toilets will always need to be plunged.

 

But that won’t be you.

 

Hacking Real Estate is about using shortcuts, tips, techniques, and systems to turn a normally “active” investment into a “passive” muse. Its about making the choice to automate your investments. Its about making the choice to control your investments, not have them control you. Its about making the choice of how you want to live, rather than simply following the herd.

 

Your muse can be real estate, a supplement company, stocks, or an infinite number of other sources of income. The important thing is making your muse passive. This doesn’t mean you will never do any work to maintain it. It takes time, patience, and work to create a muse. But it does mean you make the continual and conscience choice to fine-tune your muse into a well oiled cashflow machine that will allow you to live the life you want.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

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