Our Basic Strategy
How We Make Money In Real Estate
- Cash Flow: This is what I typically think of when it comes to making money in real estate. Let’s say I owe $600/month in my mortgage. However, I rent out my house for $1,500. I’d make $800/month profit. That’s an example of cash flow.
- While we’re at it, John mentions leverage. Leverage is pretty much the amount you borrowed on a property = less cash flow. For example, I want to pay 15% down. I’d get less cash flow overall since my monthly payment is going to be higher.
- Principle Paydown: Principle paydown is self-explanatory. Principle is the amount you owe on a house before interest. The more you pay down your house, the more money you get overall. The reason why this is great is because if you have tenants, you’re paying off the loan without paying out of pocket.
- Depreciation: Depreciation is how the house ages over time. You can deduct it on your taxes when tax season comes up. You can deduct structural damage as a loss, which decreases your taxes owed.
- Appreciation: Specifically leveraged appreciation. This is the property value going up over time.
Buy Properties that have Good Cash Flow
Why do we need properties with good cash flow? Because it’s easier for us to make payments on the house and therefore, we get higher leveraged appreciation.
What’s important is high cash flow, low prices. I think I’ve found a few real estate assets in Sedalia which fits what John is stating.
Get Long Term Fixed Loans to Reduce Risk
We don’t want to do interest only loans, variable interest rate – no, the basic strategy is to do a very stable loan. This is usually a 30 year fixed loan. A big reason why we do this loan is because we want to reduce risk as much as possible, especially during market crashes and similar conditions.
Utilize Leverage to Grow Wealth in the Long Term
The big thing we want to do is to utilize leverage to put down as little as possible to net a little money or break even… and the long-term strategy is that over many years is that property value goes up. The goal is to get a ridiculous return rate.
However, if you want more cash flow, pay off a higher down payment (ie. 20%). If you want more leverage, pay lower down payment (10%).
If possible, try and buy a property every year.
Create Passive Income By Utilizing Management
A lot of people think real estate investment is a lot of work and maintenance. However, we can turn it into a mostly passive income if we use property management. Is is strongly recommended you do NOT manage your own property.
In John’s experience, he has to deal with property managers MAYBE once or twice a month. Even then, it’s usually a quick email or quick phone call.
Convert Leverage to Cashflow For Passive Income
What we inevitably want to do is convert leverage to cash flow for passive income. Eventually, once we get enough net worth, we want to convert these net worth properties to cash flow. We can do this in a few ways: A 1031 Exchange, sell the property and take capital gains, pay off the principle, etc.
However, for most people, it’s going to be the long-term strategy to get the cash flow from.
The reason why John says this, is because once you pay off properties, you’re still going to get a nice cash flow from rental income.
What Kind of Returns Can We Get on Real Estate
Most people think real estate investment is high risk. It’s not. People don’t go over the math as to why real estate investment is so good. Let’s go over it now:
You buy a property for $100k. You put 10% down. If your property goes up 3.5% per year, the amount of money you’re going to make off that profit is going to significantly outweigh the amount you put down.
Getting Started (take personal notes)
Identify Your Criteria
First and foremost, I need to find out how much I have in my bank account to invest. That is the most critical thing. If you have $20K and if you’re looking at a $200K house, you have to invest at least $20K for 10% down. But realistically, you’re going to have closing costs and other expenses.
IMPORTANT: I want to have $15K to invest starting off. This means I need to find a home that is $60K-$70K and putting down 15%-20%.
John recommends talking to a mortgage broker and look at the options. See what percentage down I could do.
For example, I could call a mortgage loan (ie. HomeReady or Home Possible) and see if I can put down 10% and let them cover the rest. I will have to do more research on them, though.
Next, find out what type of property I’m looking for. Do I want to buy a single family house? Do I want to buy a condo? John personally doesn’t care. I, on the other hand, want to start with the most common property type, which is single family house.
When John rents out a house, he prefers the bigger the deal, the better it is. His reason for that is because it takes a lot of work to buy properties. To find them -> to negotiate the deal -> to get a loan on that, etc.
For example, let’s say John has 100K to invest. He would not want to do 5 deals where he’s putting 20% or 20K down for each one. That’s too much time and effort. Instead, he’d rather take that 100K he has to invest and see if he can find one or two deals. To John, that makes much more sense.
Let’s look over the criteria again: How much money do I have to invest? What is the price of the property? What is the property type?
If John had to meet with a real estate investor he’d say, “Hey, I’m looking for a property I can put down 5,000 – 10,000 dollars. I’m looking for single family properties only. And I want them to be in decent neighborhoods, not in crappy areas.”
Remember: If something is too good to be true, it probably is.
IMPORTANT: Rely on real estate investors – NOT WEBSITES – to find properties you’re looking for.
Identify a Market
The next step after I’ve defined my criteria is to identify a market. As far as John’s preferences, he prefers investing in a local market, but remote is totally fine. This is particularly true if you’re in a big city – they’re just too expensive!
IMPORTANT: After going through a few websites, I’ve determined the best market to be Memphis, TN, Montgomery, AL and Birmingham, AL and. I’ll be buying my first property over there. They’re incredibly low price.
What I’m going to be looking for when I’m browsing markets is looking for properties close to the 1% rule. What’s the 1% rule? The rent is 1% of the purchase price. For example, if I buy a house that is 70K, the rent is $700.
Everything John is saying isn’t scientific. One thing he recommends is to STOP OVERANALYZING THINGS.
It doesn’t matter if I get the absolute best deals or not. Why? Because we’re making money off of the leverage appreciation that’s a pretty steady number we can count on over a long period of time.
Contact a Real Estate Agent
The next step after identifying a market is to contact a real estate agent. Note: This may not happen immediately since I want to save 15K before I do so.
In the market I identified, look for real estate agents in the city. If I can find a real estate agent that specializes in investment properties, that’s probably even better. However, before I do so, look at their reviews.
IMPORTANT: When I contact a real estate agent, tell them what my criteria is. “Hey, I’m a remote investor looking for properties. Since I’m starting off, I’m looking for a price point at about 50,000 – 70,000. And for a down payment something I can put down for 10,000 dollars. I’m looking for single family properties only. And I want them to be in decent neighborhoods, not in crappy areas.”
This shouldn’t be hard considering I’m investing in either Memphis or Alabama.
Be sure to ask for daily emails listing properties with my criteria provided.
To-do: Hold off on this course until I have 13K saved up. Once that happens, head back to the course and start calling real estate agents.