Investing Architect

Author: Erion Shehaj

  • How to retire in 7 years with real estate investing

    How to retire in 7 years with real estate investing

    Real estate investors’ goals vary in nature: Sometimes it’s about growing their portfolio’s value or income from it to a certain amount. In other cases though, it’s all about time. How can they achieve what they want (retirement, financial freedom, quit the job to stay home with the kids) in X number of years? How many assets do they need to purchase and what level of invested capital will be required? And most importantly, how do all the pieces fit together in a coherent strategy?

    Our Blueprint Investment Strategy can answer all these questions.

    As an example, let’s look at a case study. Say you have a married couple in their mid 40s with 3 kids who have a combined income of $150,000/year. Their goal is to retire in 7 years with an income from their investment portfolio of $75,000/year. Now you might ask: How are they retiring if they’re only earning half of their current income? True, but think about what their current income funds: Their retirement investments, college funds, additional savings etc. All things that go away when you actually, you know, retire. So in this case, they’ve figured out that their living expenses would be comfortably covered by this $75k goal.

    So let’s think this through. Each paid off property they will own at the end of 7 years, will produce about $11k/year in pre-tax income. So they will need to own about 7 debt free properties at the retirement finish line to accomplish their desired income. At an average of $30k of invested capital per property owned, that will require about a $200k investment to acquire a portfolio of properties worth about $980k. At acquisition, each of these assets should have a positive cashflow of about $4400/year that we could use to pay off their mortgages within a 7 year timeframe. If this investor were to use nothing but the positive cashflow to accelerate the payoff of mortgages, she could pay off the entire thing in 12.5 years. Since we’re trying to get there in just over half the time, we need to add more firepower to our cashflow to make the process burn faster. So, for this investor to retire in 7 years with an annual income of $75,000 he would have to invest an additional $1,300 each month to increase the rate of debt payoff.

    Usually this is the part where things get very quiet. Because it’s a cardinal sin for an investor to invest money monthly in their real estate portfolio, right? I mean, this should be an income producing strategy not an income spending strategy. Think about it this way. Your real estate investment portfolio is being used as a tool to achieve retirement. So let’s look at all the other tools you’ve been using for the same purpose. Mainly your 401(k). You invest about 14k each year in that thing don’t you? And it doesn’t even come close to producing $75k in annual income and over a million in asset value in 7 years. So explain to me, why is okay to invest that kind of money in an “invest and hope for the best” strategy that might get you to retirement at 65 but not in your real estate investing portfolio?

     

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  • What training for a marathon taught me about real estate investing

    What training for a marathon taught me about real estate investing

    On February 18, 2012 I ran the Livestrong Half marathon in Austin Texas. The training for this event took almost a year of early morning runs in Houston’s hot and humid summer weather. It was a transformative experience for me as I went from over 200lbs and getting winded just walking to the mailbox, to being fit and healthy again. But most importantly, in pushing myself to accomplish this goal that seemed larger than life when I started, I learned some valuable lessons about real estate investing that I wanted to share with you today.

    Lesson 1: Start with a plan then show up. No exceptions!

    No one gets a free pass when it comes to training for a marathon. Unless you’re a proven runner, your level of fitness is largely irrelevant. A fit person might need a shorter training plan but they have to train! Lack of training is a guarantee of failure regardless of  your fitness starting point. So you must lay out a long term plan – which days will you run and how long. And this plan is designed to get you closer to the ultimate goal of finishing the big race. But the plan doesn’t work if you don’t show up and execute. Especially on the days when you feel like turning on the other side and getting another couple of hours of sleep.

    Real estate investing is much the same say. Some people start with more capital some with less. Some with six figure incomes and some with less. But neither of those in and of itself will get you ready for the big event – retirement, financial freedom. You have to lay out a solid plan – what assets will you acquire, when and where. And how will you use those assets to get you ready for retirement? Then you have to show up and execute. If you don’t take the steps the plan calls for, it remains just an idea on a piece of paper. And everyone that’s ever taken a shower has an idea…

    Lesson 2: Your efforts follow your goals

    When I first discovered this, it was an epiphany. One day the training schedule called for a long 8 mile run. So when I went out that morning, I was mentally prepared for the distance. I would be halfway there at 4 miles then about 75% done at 6.5 then one final push to the finish. During that last mile and a half, I was so exhausted I couldn’t feel my legs and my heart was in my throat.  A few days later, it was a short 3 mile run which I thought would be a piece of cake. A funny thing happened during that last mile that day: I was just as exhausted and barely finished.

    Most of the limits we think we have are not physical but mental. Your real estate investing efforts and your intensity in executing them will follow the goals you set for yourself. So don’t sell yourself short. If retirement and financial freedom is what you seek, don’t settle for “buying a couple of rentals”. If you want  a couple of million in net worth and six figures in annual income don’t strive for “some extra income”. First your mind, then your plan, than your actions.

    Lesson 3: There will be doubt and resistance

    I’d love to tell you that during my marathon training, I was 100% unwavering, eyes on the prize but I’d be lying. Actually on a pretty regular basis my mind would try to sabotage my efforts through rationalization. In one instance, I was trying to run 10 miles – a 2 mile increase from my previous high. Needless to say, when the ninth mile started, I was spent. I thought I would just shut down all of a sudden like a PC but I kept trying to push forward as the goal was just in sight. And right at that moment, this thought would come one that said: Hey, if you stop now, you’re still increasing your highest mileage by 1 mile. That’s pretty good, right? Just stop, you’ve done enough for today etc etc

    Same story with real estate investing. I get phone calls from clients all the time, questioning if the plan they’re implementing is actually going to get them to retirement. Doubts are a part of human nature – we’re hard wired to question ourselves and to present resistance to forward movement. We prefer what’s comfortable. But in real estate investing, “comfortable” means sitting on the same spot you were 5 years ago with no forward progress. When the doubts seep in, it’s not time to stop. It’s a signal to push forward harder and execute your plan.
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  • Successful real estate investors begin with the end in mind

    Successful real estate investors begin with the end in mind

    Most real estate investors  that do it wrong, do it backwards.

    They acquire a portfolio of cheap inferior properties in inferior locations with inferior schools and amenities. Then they try to figure out a way to place top notch tenants in them that will sign long term leases, will pay on time and will treat the property like they own it. And when time comes to sell the properties they acquired, then they try to figure out a way to sell them for maximum dollar.

    That’s trying to fit a square peg in a round hole.

    Stephen R. Covey said it beautifully in 7 Habits: Effective and successful people begin with the end in mind. So what does that mean in the real estate investing context?

    You begin by thinking about the type of portfolio you would like to own. Think about it as a legacy. What type of properties you would like to pass on to your children or your loved ones? Where would they be located and what characteristics would they have? Next,  what kind of tenants would you love to have in your properties? Take it one further. These types of tenants you described, what are they looking for in a rental property? Think about the location, schools, upgrades and overall condition of the homes they seek.

    Then acquire properties that fit that description by paying a fair price for them. Begin with the end in mind because the assets you acquire pick the tenants you will have and the price you will fetch when you sell. It’s both a simple and powerful concept.

     

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  • How to create a six figure income with real estate investing

    How to create a six figure income with real estate investing

    Have you ever thought about what your life would look like if you could create a six figure annual income from your long term real estate investments? Today’s post is about how the investments we plan and execute today could get you there at some point in the near future.

    The math of creating a six figure income from your real estate investments is quite simple. Essentially, there are two, very different routes to get there:

    The Blueprint Method we advocate involves fewer properties and much lower risk. The concept is simple but it requires a solid plan and the discipline to execute it. Look at it this way: each free and clear property in your portfolio produces an income of $11,000/year. In order to generate an annual income of $100k you would need to own 9 such properties. But you don’t have the capital to acquire 9 properties with cash today to produce that kind of income. Thing is, you don’t need to. We advise our clients to purchase quality assets with 20-25% down and then use the positive cashflow they produce to aggressively pay down the mortgages one at at time with focused intensity. For a more empirical illustration download the detailed analysis of this domino strategy on a portfolio of nine single family homes. In that example, the entire portfolio worth over $1.25M becomes free and clear in 12 years and produces a six figure annual income before taxes. Can your IRA or 401(k) match that kind of performance? Not only that but the speed of reaching your goal is completely up to you and how aggressive you want to be. In comparison to the Perpetual Leverage Method below this strategy involves significantly less risk for two reasons. First, the number of mortgages you undertake is less than half. Second, these mortgages get paid off quickly in 12-27 months instead of lingering in your portfolio for 30 years. The management issue is resolved as well: Any investor can easily manage 9 properties using management strategies we teach. And finally, conventional loan guidelines allow for any investor to take out up to 9 mortgages so you won’t be locked out of financing using this method.

    The Perpetual Leverage Method involves more properties and higher risk. Say you acquire a property that produces $4,000 in annual income after operating expenses and mortgage payments by putting 20% down. If you want $100k in annual income using this method, you have to own 25 such properties producing the same income each. I call it the perpetual leverage method because it involves keeping the properties leveraged for 30 years according to the original loan terms and using cashflow to create the passive income. There are three major downsides to this method. First, the risk to the investor rises with each loan added to the portfolio and since the loans are being paid off on 30 year schedule, the risk is virtually unchanged, throughout three decades. Second, managing 25 homes is not easy and not for everyone. You would think this would allow you to be financially free and quit your job when in reality you’re just changed jobs and became a property manager. Last but not least, acquiring 25 properties is difficult due to loan guidelines that restrict the number of properties with a mortgage any one investor can own.

    The next question then inevitably becomes: If it is so simple, why isn’t everyone doing it? Because math isn’t the real issue. It’s a planning, commitment and discipline issue. In order for our Blueprint strategy to work, you have to start with a solid plan, you have to be committed to it long term and finally you have to execute it. Twelve years might sound like a long time from now, but think about where you were 12 years ago. You might’ve started your 401(k) and IRA 12 years ago. Is there 1.2 Million in there now and is it producing six figures a year for you? It’s time to take charge of your future. That life you would live if you were financially free is within reach in a few years but only if you push Start now.

     

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  • Why investing in condominiums does not work in the Houston market

    Why investing in condominiums does not work in the Houston market

    In most real estate markets across the US, condominiums are the poster child investment property of choice. The reasons are obvious: They are small, easy to rent, usually well located and priced lower than their single family counterparts. So when our out of town clients come to Houston to view investment properties, the question never fails to arise: What about condos? What follows are three strong reasons why investing in condos in the Houston market does not make sense.

    Higher operating costs hurt or eliminate cashflow

    The primary reason why investing in condos does not make sense in the Houston market is their higher operating costs relative to the income they produce. Here’s what I mean in a simple example. Let’s compare two properties: The first is a single family home in a suburb of Houston and the second a Galleria condominium  both priced at $135k. Let’s assume that they both rent out for $1200/mo to level the playing field. The single family home will have operating costs of about 40% of the incoming rent or $480/mo which covers property taxes, insurance, annual HOA dues etc. In comparison, the condo will have operating costs of about 60% or $720/mo. The reason: Houston condos typically have $300 per month  in maintenance fees. Put a different way, a condo that costs $135k has similar costs to a $160-170k single family home. What does this mean? If you were to invest in the condo by putting 20% down, your positive cashflow would be wiped out by those higher costs and you would have a break even property at best. In contrast, if you invested in the single family home, there would be $3600-4000  annual positive cashflow – a 10-12% cash on cash return on your invested capital.

    When you take cashflow off the picture, appreciation is all that’s left

    So if your investment property isn’t producing positive cashflow then where will that return you hope for come from? All that’s left is appreciation. In other words, you would purchase an investment property that pays it’s own bills while waiting for its value to go up as your tenant pays your mortgage. Small problem with that plan: Houston has never been a high appreciation market. Even in the peak of the market, we were barely scraping 5% annual price growth. And besides, have you seen what happened to markets that did have that steroidal appreciation? I’ll take Florida condos for a third of the price, Alex. An investment plan that relies solely on your property appreciating in value in Houston Texas is two rungs above buying a Texas Two Step lotto ticket on the sound investment scale.

    But what about location, location, location?

    Condos have proven to be sound investments when they allow the real estate investor to acquire property in a sought after location and the tide of popularity of that location has made values across the board rise. Example: If you want to live in the city, chances are you can’t afford a single family home but a condo will get you all the benefits of that location at a much lower price tag. The Houston market is different in that it’s very de-centralized. Houstonians don’t mind commuting for 35-45 minutes each way if that means they can have all the space and amenities that a great home can offer. Certainly there’s a subculture of people that would never live outside of the Inner Loop, but that’s not the majority. Most people would rather live in the suburbs where schools and amenities are better and work Downtown or in the Galleria. This commuter culture results in a lack of land shortage that is a necessary ingredient for value appreciation. For instance, if you want to live in Manhattan, you have to pay the price as they’ve run out of land long ago. In contrast, in Houston you could get twice or three times the size of home if you just go out 15-20 miles. And if you don’t mind the drive, it’s a no brainer. And it’s bad news for condos as investment properties.

    Bonus Reasons: Age and control issues

    Some additional concerns with condo investments are the age and the lack of control in certain circumstances. Let’s tackle them one at a time. For the most part, condos priced low enough to break even on the incoming rent tend to be built in the 1980s. Age may do great things to wine but all it does to investment properties is cause the operating costs to creep upward which makes rent increases a necessity. Besides, if you are a long term investor think about the age of the property 10-15 years from now. Is it smart to own a property that when you want to sell it will be hitting the half century mark? I know some out of towner’s eyebrows might be raised right now, but you should know that in Houston, 50 year old properties are considered “historic”! Last but not least, condos present some unique control issues. What happens when a hurricane damages a condominium’s roof? Well you might be hit with an unexpected “special assessment” bill from the homeowner’s association that’s trying to offset the large deductible on their master insurance policy. Oh, and what happens to your tenant when the roof is leaking profusely but the Landlord can’t fix it right away because she has to wait for the homeowner’s association to reach an agreement with the insurance adjuster? Like the title said: pretty much out of control.

    I’m a firm believer in taking what the market gives you when investing in real estate. And in Houston Texas the market gives you new (or 5 years old or less) single family homes in good neighborhoods with great schools between $125-$150k. Anything else, you’re sacrificing something you shouldn’t.

    Search Houston Investment Properties

    Side note: This analysis addresses condominiums as pure investments. If you’re looking into purchasing a condo as a residence, it may make sense as an investment because you have to consider the fact that you have a cost of living to contend with everywhere you go. 

     

  • The River and the Fish

    The River and the Fish

    Today I want to tell you a story.

    Once upon a time, there was a beautiful river nestled in the middle of a peaceful forest just a few miles away from the village. Only a select few weathered and experienced village fishermen knew that this river was chock full of fish: trout, bass, you name it. It was their secret – and they preferred to keep it that way. They could drive up there in the weekends knowing that they would come home with a great haul. One day, a news reporter from the city nearby did a story about the wonderful bounty in this river. “If you like fishing – she said – this is a “must try” place”. Soon after the story aired, the village fishermen that had been coming to the spot for years, were surprised to find hundreds of people fishing at the same spot. They soon came to the realization that their fishing trips would never be the same again. Eager folks started fighting over spots and arguing with each other. Instead of going home with the best fish this river had to offer, they started settling for what was left. Everyone went home unhappy. The End.

    Almost every real estate investor out there, long term or not, starts their investment property search by looking at bank owned foreclosures. The reasons are obvious. You are taught that to make an investment work you have to find a good deal – one that is priced well below the current market value. And if you want a great deal like that, foreclosures are the place to be. I understand that line of thinking and those motivations. But let me fill you in on what the reality of the bank foreclosure submarket is:

    1. EVERYONE is fishing in the foreclosure river. The “news story” on this has been out awhile and the demand has already skyrocketed. So what happens when demand is high and supply stays the same? Price goes up. Basic economics. If you don’t believe me, try to make an offer on 10 bank foreclosures in any city. I am willing to bet that 9 out of 10 properties will have multiple offers. This results in sales prices that are often higher than asking by as much as 10%. So that great deal you thought you were getting, is looking less and less shiny.
    2. Over 90% of foreclosure inventory is not investment grade. This may come as a shock to many, but the overwhelming majority of foreclosure properties aren’t good deals. They might be selling at market value even if they still need work to be in market condition, or discounted just enough to account for the rehab. Why would you pay market value and get a rehab project to boot.
    3. Investors’ selection is limited to leftovers. A large percentage (over 50%) of foreclosure properties in the market today are FannieMae/Freddie Mac or HUD owned. Because the government wants to promote home ownership, they usually have a “first look” or owner occupied exclusive period. That means, for the first 14-30 days these properties are on the market, only buyers that are planning on living in the homes are allowed to bid. Investors don’t even get a shot during this period. So really, the inventory you can go after is what the homeowners didn’t buy – or what’s left over.
    4. Banks aren’t known for their flexibility. Most banks (the eight that are left anyway 🙂 ) strictly refuse to contribute in ways that would help an investors rate of return tremendously. For instance, they will agree to lower the price by $2,000 but won’t agree to pay $2,000 in closing costs at the asking price. Same thing with home warranty costs. Pointless I know. This matters in the context of a portfolio made of several properties. The money you save on closing costs on your portfolio may give  you the capital  to purchase an additional property that increases the return and the cashflow you will enjoy once the strategy has been executed.

    So what’s my recommendation? Fish upstream. Remove the blinders that are arbitrarily making you pick a long term investment using a short term metric like built in equity. Open up your selection of properties to include new construction homes, retail sales as well as well taken care of foreclosures. Then make a selection based on which property you would rather hold in 10+ years.