Turn 3 Properties Into 6 or More in 5 Years With Your IRA

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I am a strong believer of investing in under market value real estate property with all cash and owner financing them. When you buy distressed properties with all cash and finance them to qualified buyers, there is one overwhelming advantage with these below market value investments:

  • You have no mortgage on your property investment, so if the property is ever vacant for any reason, you do not have overwhelming financial pressure bearing on you. Over leveraged real estate investors were a major factor in the real estate meltdown five years ago.

Of course, on the other side of the ledger, you cannot purchase as many distressed sale properties as you could if you leveraged your capital and use 20% down conventional financing. This is always a valid concern for people with limited capital to invest in the best San Antonio investment property.

Still I would like to illustrate how the smart and patient investor can take three fixer upper homes and turn it into 6 and possibly more in 5 years, assuming you have no additional cash to invest after the initial investments. The illustration below assumes you owner finance the houses, so you do not have any maintenance costs. This is our tried and true positive cash flow model!

That $275,000 in Your IRA

I run across many aspiring investors that have savings and IRA assets of $275,000 or so. In current market conditions in San Antonio TX, that $275,000 can fund approximately three solid distressed sale properties in cash. Let’s illustrate with three houses we have right now:

  • Property 1 – 262 Bogle St., 78207: $50,000 + $30,000 rehab = $84,500 investment + $2500 closing costs, $2000 commissions = $89,000 total investment.

Total Owner Finance Cash Flow Per Year: $8940 ($745 per month after tax/ins.)

  • Property 2 – 109 Llano, 78223: $29,900 + $40,000 rehab = $69,900 investment + $2100 closing costs, $2000 commissions = $74,000 total investment.

Total Owner Finance Cash Flow Per Year: $9,000 ($750 per month after tax/ins.)

  • Property 3 – 1027 Sams Dr., 78221: $59,900 + $40,000 rehab = $109,000 investment + $3000 closing costs, $3000 commissions = $115,000 total investment.

Total Owner Finance Cash Flow Per Year: $12,000 ($1095 per month after tax/ins.)

Total Income from 3 Properties Per Year: $29,940

The next step would be to bank that positive cash flow from your three properties for up to five years. At the five year mark, you will have approximately $149,700 in your tax deferred IRA.

At this point, how many property investments you can buy depends upon the state of the San Antonio real estate market. Right now, the prices are higher because unemployment is lower, and more rehab is necessary to sell the houses. However, there is a high probability that in the next five years, there will be a substantial downturn in real estate prices.

In the last crash from 2008-11, the price of my distressed houses dropped from $50,000 median to $30,000 median. I was able to purchase many more homes during the downturn.

If the prices go down to approximately $35,000 per property plus $10,000 in rehab (possible in a slower economy given people simply want any house to live in), you could buy at least 3 more houses, and possibly 4. With three more houses, you would have approximately $45,000 in total cash flow from your grand total of six houses!

If the prices stay the same five years from now (which in my 15 year experience is very unlikely), you could purchase at worst two more properties, with a total cash flow from your five properties of $40,000 or so.

In either case, that cash can be banked in your IRA to buy more of the best San Antonio investment property whenever market conditions warrant buying more.

I am waiting until the next downturn to take my banked cash flow from my current portfolio to buy at least another 20 houses. You can and should do the same thing!

 

 

 

 

 

Converting My Rentals to Owner Finance Was the Best Decision Ever

Before the market crash, I owned more than 100 rental properties. Like many investors, I once thought that owning rental properties was the only way to make money in real estate investing.

What I found was, I always was dealing with some sort of problem with the distressed property. It didn’t matter that I had property managers. When you own 100 houses, you always have to deal with a repair, a late bill, a vacancy, paperwork and so on.

I also found it was hard to know what my cash flow on each house was each month. Writing checks for new water heaters and fridges gets old fast!

It was around 2009 that one of my mentors talked to me about how he had retired with millions in real estate: He only owner finances his fixer upper homes.

Rather than being a landlord responsible for property upkeep and repairs, there are more efficient ways to generate monthly cash flow.

Be the Bank!

Think about your own house. Each month you send an electronic payment (or check) to your mortgage company or bank. Your bank doesn’t have to maintain the property – you do. Since you are buying the property from the bank on terms, it is naturally to your benefit to maintain the property. The bank knows that statistically, homeowners are much more likely to keep their houses in good repair than renters. That’s what makes holding mortgage notes so attractive.

My mentor taught me that I could be the bank for people who do not have the credit history to qualify for a regular mortgage loan. I carry the loan on the distressed property for 30 years just like the bank, and the new owner of the house simply pays me a mortgage payment each month that includes taxes and insurance.

My mentor told me, why should you spend $10s of thousands on rehabbing a property when you can have the end buyer do most of it? Owner finance investment property is smart.

The end buyer usually has a vested interest in maintaining their property, as they own it.

How a Typical Owner Finance Property Deal Looks:

$62,000 cash purchase, $10,000 rehab, 50 DOM, sold for $89,900 owner finance, $937 per month, 12.3% ROI.

This 3 BR 1.5 bath property investment with positive cash flow north of downtown San Antonio TX is in a heavily revitalizing area. It was bought by the investor for $62,000.

The under market value property only needed approximately $10,000 of rehab, including new flooring, paint in and out, and minor foundation work.

The total project cost to the investor for this under market value property was $72,000.

Within 50 days of the completion of rehab, it was sold with owner financing with the following terms:

  • $5000 down
  • $89,900 final price
  • 10% interest
  • 30 year note
  • $937/month PITI positive cash flow
  • Cap rate 12.3%

After I converted most of my under market value properties to owner finance, most of my worries about my properties disappeared. The owner maintains it and I simply enjoy the monthly cash flow from each property into my bank account.

Most people don’t seem to ever consider owner financing their property investment, probably because they don’t know about it.

The keys to success in owner finance property are simple:

  • Carefully documenting the income of the potential buyer and verifying their work history
  • Follow the Dodd Frank law, which mandates that you must collect proof of their income and document their work history.
  • You can have a Texas licensed loan originator do this for you for a $750 or so fee (we have one on staff).

The bottom line on owner finance investment property  is you enjoy cash flow without maintenance and the buyer enjoys buying their own home at last – a true win-win for everyone.

2513 W Poplar St, San Antonio, Texas 78207

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  • Address: 2513 W Poplar St, San Antonio, Texas 78207
  • Description: Fixer upper home, great opportunity to own cash flow property, Booming Texas Market, 3 beds, 1 bath, 1000 sqft.
  • Estimated Repairs on Distressed Property Sale:10K, includes interior texture/paint, new HVAC, minor flooring, minor foundation, plumbing/electrical up to code. Max ARV 79K with owner financing, Price: 45K cash.
    Exit Strategy: Owner Finance for positive cash flow with 10K repairs: 5k down, $800 monthly P/I, 30 year amortization, 10% interest, Price: 79K, can sell note after 1 year.
  • Positive Cash Flow: $700 per month with no maintenance. Consider this investment in property!

5 Ways to Use Real Estate Investing To Achieve Your Financial Freedom

This article is now on Inman News.

Takeaways:

  • Find an inexpensive, stable real estate market and become a local property expert.
  • Find private investors and a mentor who has done more than 500 deals to help you learn.
  • Owner-financed real estate is always profitable.

I financially retired at 28 with $22,000 per month in real estate investment positive cash flow. I still work today, but only because I choose to do so.

I developed this positive cash flow, but not through family connections or wealth. Growing up, my family was very poor in a small Texas town. We often had to choose between buying food or paying the electric bill.

Still, I built a sizable portfolio of distressed, single-family homes in Texas — all owned in cash. It has always been an excellent investment in property for me.

I did it. And you too can become a distressed property expert, or in whichever real estate investment area you choose. Here’s how:

1. Find an inexpensive, stable real estate market

When I started in real estate in 2001, I was in college in Boston. I couldn’t buy a doghouse with the $25,000 I had from the stock market.

So, I flew back to Texas after graduation. I gave Austin a shot — I couldn’t buy a treehouse in Austin.

Then I looked south to San Antonio and liked what I saw:

  • $30,000 houses.
  • Lots of blue-collar workers.
  • Diverse and healthy job market, not just oil and gas.

This is a very good city for fixer upper homes under market value. I bought my first house for $25,000, rehabbed it for $5,000 and made 10 percent annually by renting it out. That was the beginning.

Lesson learned: Avoid real estate markets with high entry costs if your capital is limited. Lower-cost cities are much easier for beginners to invest, especially in distressed sales.
Avoid real estate markets with high entry costs if your capital is limited.

2. Find private money

I had my first property in San Antonio, but the bank account read zero. Sound familiar? Now what?

I spent much of the next two years making 200 calls a week searching for private cash. Also, I went to many real estate meetings and always asked around for capital.

It wasn’t easy, but after all of that, I found a few investors who loaned me over $200,000 at 7-8 percent. I used that capital over the next five years to build a large portfolio of distressed properties for positive cash flow.

Lesson learned: Be ready and able to make hundreds of phone calls and knock on many doors to find private capital.

3. Become a local market expert

In the early years, I swung a hammer and did many rehabs myself. Doing the work myself taught me to understand the little houses I invest in and what they are worth. I became a distressed property expert.

I learned what a rehab should cost precisely (depending on the part of town). Also, I learned never to spend too much on a rehab. Overspending is a mortal sin of real estate investing, and it derails many investing careers.

Simultaneously, I became a licensed Realtor, and spent many long hours studying the local market in the MLS. I became a true expert on my local real estate market, especially in the blue-collar neighborhoods where I buy.

Being an expert has enabled me to buy houses usually at least 20 percent under market value in any real estate market in my city.

Lesson learned: Learn your local market so you can get houses well under market value. Can’t find them in a hot market? OK, then go to a dozen real estate meetings in the next three months, and find an expert real estate investor who can help you find those deals.

Offer to help them with their business — anything from making calls to hanging bandit signs — in exchange for helping you find under-market-value deals.
Find an expert investor to help you find deals, and offer to help the investor with business.

4. Find a good real estate mentor

Starting in real estate investing without a mentor is like playing tennis without a racket. Every single rookie investor should work with an experienced, successful investor mentor who has done hundreds of deals and succeeded in boom and bust real estate markets. I found several in distressed sales.

I found my mentors at city real estate meetings. I also went to real estate events in other cities. I got connected to some of the most successful residential investors in the country simply by networking.

Lesson learned: Find a mentor who has been in the business for 10 years, has done 500 or more deals, and has made profits in the most recent real estate downturn. That’s someone you want to work with.
Find a mentor who has 10 years experience, 500+ deals and profited during the downturn.

5. Invest for cash flow with owner financing

In 2005, one of my successful mentors taught me that rental real estate often is profitable, but done right, owner-financed real estate is always profitable.

I stopped rehabbing and renting my properties that year, and changed to owner-finance only.

Now, I buy a house for cash, do $5,000-$10,000 in rehab and then resell the property with owner financing to a carefully selected buyer.

This model has no ongoing maintenance or property management costs. Each house puts $500-$700 a month into my bank account, and I don’t have to do a thing.

Every one of my investment properties has positive cash flow, and was bought solely for monthly cash flow from owner financing. I never buy for appreciation.

Lesson learned: Think about investing strategies other than renting out houses. Owner financing is much less stressful, and the cash flow is more stable.
Owner financing is much less stressful, and the cash flow is more stable.

Following those five essential tips is what allowed me to retire at age 28, and you can do it, too.

Why Daring to Be Unpopular in Investing Pays Off

This article now appears on Inman News.

Key Takeaways

  • The ‘herd mentality’ in investing leads to subpar results.
  • Buying an ugly house, in the right area, can be a fantastic investing opportunity, but don’t overpay for your rehab, or your profits will evaporate.
  • Buy real estate property under market value in revitalizing areas, regardless of its current appearance.
  • Positive cash flow often comes from the most unattractive houses (on the surface at sale)

A friend of John C. Maxwell, author of the book “Thinking For a Change,” observed: “The problem with popular thinking in business is that it doesn’t require you to think at all.” Most of us don’t want to do the tough work of thinking.

It’s much easier to just follow the herd in investing and hope they thought it all through. That’s why so few of us are ever rich and successful.
It’s much easier to just follow the herd in investing and hope they thought it all through.

Look at the stock market. The herd instinct of many conventional investment managers and their clients encourages them to invest in index funds, exchange traded funds and government bonds.

Popular thinking says that type of stock market investing is safe. Blindly following the crowd isn’t thinking, which is why it usually brings average results.
Unpopular investing in the stock market

However, two contrarian investment managers in New York City named Martin and Ari Sass reject this popular thinking in stock investments. Instead, they conduct deep, forensic research of companies to determine the few with the strongest management that meet a stringent criteria.

This investing style has led them to better returns with less risk — to the tune of now having $7.5 billion in assets under management for Fortune 500 firms and high-net-worth individuals. And note that both men started with no money and no Wall Street contacts. Daring to be unpopular in stock investing can achieve incredible results.
Unique thinking in real estate investing

Similarly, daring to be unpopular in real estate investing can yield spectacular results that few investors achieve. In my San Antonio, Texas, real estate investing career, which spans 15 years, I have made several million dollars by embracing unpopular thinking.

In short, I buy what other investors sprint away from.

Most real estate investors in my city chase 5 percent returns on rentals in $200,000 pretty houses or $40,000 returns on flips. Not me. I love making $5,000 on a deal when I do an occasional flip. Usually, I buy ugly, distressed houses from $25,000 to $70,000 in blue-collar neighborhoods that some investors would never consider.
Junk houses

Falling-apart house in the right area? I’ll take it. A burned house? No problem. Holes in the roof? Great. Foundation issue? Love it. Dirt floor? Of course — sold. A two-bedroom? Yes. A one-bedroom? Heck yes — I’ll convert it to a two- or three-bedroom for $5,000.

No one wants these deals, so I get a fantastic price, and most of the fixes and rehab are easy and inexpensive for my wholesale-priced construction company to complete. I can have a positive cash flow deal in 90-120 days.

In most cases, I buy in up-and coming-areas. So when I owner-finance these distressed houses after a partial rehab to carefully screened buyers, they sell quickly. It’s now a quite pretty house in a revitalizing area that is near downtown.

For me, the investor, owner finance means that I have zero maintenance costs. I make long-term cash flow in the 10 percent to 15 percent per year range on every one of my deals without fail.
For me, the investor, owner finance means that I have zero maintenance costs.

Popular thinking rejects my model, naturally:

  • That area has high crime. It’s too dangerous.
  • My $25,000 real estate investing seminar said “never buy ugly stuff.”
  • Those houses are falling apart and too expensive to fix.
  • You can’t resell a two-bedroom, one-bath.
  • You’ll never find a good, paying occupant for those houses.
  • That house should be demolished.

I love that conventional real estate investors are too lazy to do their own thinking. That means more great deals for my investors and me.

Here is a typical property that I buy:

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This distressed property sale home is only $24,000, and it’s a located in 78207, where the city of San Antonio has poured tens of millions of dollars into revitalization: parks, running and walking trails, picnic areas, shopping plazas, green space and more. It’s only about two miles from downtown. It’s currently ugly and just sat there. I snatched up this distressed property sale.

Next door and across the street are owner-occupied houses worth $80,000 to$100,000. When this ‘junk house’ is fixed up and resold, it will quickly gain in value.

But no one wants my junk house because of its current state:

Living_Dining Kitchen

Conventional thinking cannot see beyond the surface ugliness in the property investment, but by engaging my brain, I see the obvious: Because of the neighborhood and the revitalizing nearby, this deal is a fantastic investor opportunity.

This house only needs $19,000 in repairs completed in 30 days or less (my construction company cost; retail cost would be $30,000 or more):

  • Electrical update
  • New flooring (float new floor over that minor foundation issue after it’s repaired)
  • Clean out
  • Update bath and kitchen with tile and granite
  • New light fixtures
  • Paint in and out
  • Finish second bedroom

After-repair value will be approximately $60,000 to $65,000 (I always run neighborhood comps). On an owner-financed note, this house will return approximately 10 percent per year to the investor — with no maintenance costs. With the pretty homes next door and the parks, running trails, shopping and downtown so close, this house will resell in 30 to 90 days.

However, because the house is ugly, and most investors learned to never buy ugly houses at their real estate investing seminar, they will miss out on a great deal. It is deals like this one that have made me wealthy beyond my dreams.

And it’s mostly due to the fact that I ignore popular thinking, and I dare to be unpopular.

So should you:

  • When investing in real estate, think about rejecting the conventional wisdom.
  • Buy an ugly house under market value in an up-and-coming area.
  • Do the necessary repairs to resell it, but don’t overpay on the rehab.
  • Consider owner-financing the property to a well-qualified buyer.

And you could have yourself a fantastic long-term investment that the non-thinking herd will never enjoy.