Getting Started

Most long term investing strategies have one element in common: They all require hope and faith. The basic premise goes something like this: You will feed your 401k/IRA/mutual fund account regularly for 40+ years and then hope and believe that at retirement your nest egg will be sufficient to avoid Walmart employment at 65.

Don’t get me wrong – you will periodically receive detailed statements about your account balances and positions throughout the four decades. But those balances and statements aren’t worth the soft paper they’re written on the moment a 2008 type recession ravages your portfolio by 40%! The fact remains that despite the informative statements, your retirement plan hinges in part on your hope that the timing of recessions and market corrections will be kind to you. The problem with that plan is that recessions happen with painful regularity! You can pretty much count on one affecting you right around the time you get ready to retire.

But what about the fact that the market always bounces back up within a few years? Merely bouncing back may not be enough – if your retirement accounts had $100 before going down by 40%, you’re left with $60 and now require a 67% bounce to get back to your $100.

But you don’t have to take my word for it – just look at the facts. The average 401(k) at the end of 2012 had $75,900 in it and that’s an all time high! Let’s not stop there but instead let’s assume you’re not an average investor and I’m off by 100% – can you retire with a nest egg of $150,000? Don’t answer that.

Now contrast that with what our Blueprint real estate investing strategy for retirement offers. You invest your hard earned, even harder saved capital and purchase several high quality properties in a well crafted portfolio. Depending on your investing timeframe, approximately four to five years later one of those properties is debt free. Three years and some change after that blessed news, the second mortgage is paid off. And so forth in a beautiful chain that builds the capital that will lead you to retirement. I call these events “performance benchmarks” because they provide you with solid irrefutable proof that your plan is working long before you reach retirement. You don’t have to rely on just hope anymore. You will have assets that you own free and clear to assure you that you’re headed in the right direction. I believe this is one of the most important advantages our Blueprint real estate investing strategy offers over other long term investing.

Every real estate market brings its own unique set of challenges for real estate investors. Back in 2005-06, the foreclosure wave hadn’t quite made it to shore yet, but it was giving its first signals. Long term real estate investors could purchase investment properties with as little as 10% down on a conventional mortgage but interest rates were just under 7%. Fast forward a couple of years (2008-10) and the recession was in full swing, foreclosure deals were a dime a dozen and Bernanke’s quantitative easing (a mouthful, isn’t it?) had slashed rates to record lows. But there was “blood on the streets”, the end of the world was surely coming and no one was sure their job would still be there next week. These days, the Houston real estate market is hot, rents are increasing every year, vacancies are low to nonexistent and investment property interest rates are in the low to mid 4s. But at the same time, strong demand from owner occupant buyers coupled with disadvantageous “first look periods” and lower foreclosure inventories are making it increasingly harder to find and acquire investment properties. As any real estate investor who’s actively looking will tell you, competition is pretty brutal right now. Frustrated investors are throwing prudence to the wind and overbidding on properties just to “buy the damned thing”. And those that aren’t, are starting to get cynical and conclude that this real estate investing thing doesn’t really work.

So how does one find investment properties in a high demand Seller’s market?

You change your approach. The definition of insanity is doing the same thing over and over and expecting a different result. So if your search criteria and market conditions remain the same, your results cannot be different. I’ll share a geek story with you to illustrate my point: In college, I’d often work on a math equation and have issues solving it. I’d go over it over and over again making the same mistake every time. Then, I’d ask a classmate to review my work and when she’d look at it with fresh eyes, the mistake would be spotted immediately. So that’s my advice: Take a look at your property selection criteria with “fresh eyes”. Many real estate investors will look for properties under a certain price range and not even know why. They’ve just been told that I order to succeed at investing in real estate you have to buy cheap. Or they will chase Bigfoot and look for properties that are selling at 60 cents on the dollar less repairs like that investing book told them. As a result, you have a large number of investors chasing the same properties, driving up prices and not even getting that precious equity they bought the property to get in the first place.

Here’s a step by step plan to re-evaluate your investing goals and property selection criteria:

1. Start with having clear, written, well-defined and specific investing goals.

To quote Zig Ziglar, you won’t be successful in life as a wandering generality – you must become a meaningful specific. Even the best map in the world can’t help you if you don’t know where you’re trying to go. “I just want some extra income” or “I just want to start with a house and see where it goes” are to be frank, vague and mediocre goals that will yield equally mediocre and vague results.
“I want to retire in 12 years and need $75k in annual income to achieve that goal” or “I want to increase my capital base to $1M in the next 8 years” or “My kids will go to college in 11 years and that will cost 225k”. That’s what I mean by specific: it has time limit, an amount and a “why” associated with it.

2. Next, create a real estate investing Blueprint to achieve those goals

This Blueprint will address the all important questions: How many assets will you need to acquire, where, how and what strategy will you follow from now on to hit those goals in step 1. This is the most important step and I can help you with it.

3. Once the plan is in place, determine investment property selection criteria

Now that your goals are specific and you have a plan to accomplish them, you will focus on which properties will help you best achieve those goals versus “how much equity am I getting here”. Don’t get me wrong, equity may play a part in your plan but it won’t be your end all, be all selection criterion that is now disqualifying excellent properties from your consideration. If you could purchase a portfolio of properties at a fair price that would allow you to retire with the income you need, or build your net worth to the level you want, or pay for those college expenses, why wouldn’t you? Because some one size fits all investing “bible” told you so? Don’t kid yourself and keep your focus on what matters most: your retirement, your wealth, your kids education.

4. Acquire the assets and build your portfolio

Now that you’ve taken a fresh look and allowed yourself to get out of the corner you painted yourself into, you will notice something amazing happen: More investment opportunities, less completion and more assets in your portfolio. Patience will still be required as the current market conditions will affect property availability here as well. But it won’t be the lost cause of throwing tens of offers at the wall to see what sticks.

I know that my answer on how to find investment properties in a hot real estate market will probably disappoint those of you who read this post hoping that I would reveal a “secret list of properties, unknown to the general public that you can have access to today for just $39.95”. But unlike those useless gimmicks, the plan I’m talking about actually works. And isn’t that the point of this whole thing?

Picture going into your investment advisor’s office to talk about your impending retirement, 15 years from now. You proceed to tell her that what you’d really like to accomplish is to quadruple your investment AND draw a six figure income at retirement. Now picture her chuckling and you being dressed down to more realistic expectations. When you think about it, most other investment vehicles consider the growth of your capital and the income derived from it to be mutually exclusive. If you want income, you have to purchase dividend yielding stocks or mutual funds which tend to experience minimal growth. Or if you are trying to grow your capital, the securities that provide it don’t yield any income. That’s life after all: You can’t have the cake and eat it too. Right?

Except, there is an asset class that can provide strong capital growth and enough tax sheltered income at retirement. So the purpose of this post is to show you exactly how to have the cake and eat it too with real estate investing. Hint: It’s all about timing.

In a previous post, I have discussed how to create a six figure income with real estate investing. It’s one of our most popular reads on the blog, so if you have not yet read it, I strongly recommend it. But in a nutshell, it shows you how the acquisition of 9 well located, quality single family homes combined with a disciplined domino strategy leads to a free and clear real estate portfolio worth about $1.2M in a 12 year timeframe. At your retirement point, this portfolio would yield about $100k in annual income. The cash investment required to acquire such a portfolio would be in the $270-$300k territory.

So we invest $300k and turn it into $1.2M – that’s increasing your capital to four times the size it was when you started. And in twelve years time, that yield $100k in annual retirement income. How’s that for having the cake and eating it too?

So where’s the magic? As i hinted before, it’s all about the timing. Most long term real estate investors want to build cash flow but they need it at retirement, not right now. That is to say, they don’t need the cash flow from their properties to pay current monthly bills or subsidize their current income. Therefore, we recommend that between the starting point and their retirement point, the investor stay focused on capital growth. In other words, use cash flow produced from tenant paid rents to grow your capital by aggressively paying down mortgages till they’re free and clear. And when they’re free and clear, they will produce more income since no portion of incoming rents have to go to banks as mortgage payments. That results in the investor being able to draw a great income from their properties while still holding on to free and clear assets (their grown capital).

It’s a truly beautiful thing. And don’t let the capital invested in the example scare you – this strategy works well with fewer properties, too. Besides, when you consider that just between the ages of 30 and 45 people can (and do) invest over $200k in their 401(k) only to see it decimated by market downturns, it doesn’t seem such an outlandish figure after all. But in the end, you need two vital ingredients to make this a reality for you: A Blueprint and laser focused discipline.

I can help you with both. Give me a call on my cell at 713-922-2702 and let’s talk about your goals and how to achieve them.

photo credit ulteriorepicure

Few things affect the results of a long term real estate investment strategy like turnover and vacancies. During the time a property is not leased it becomes an expense rather than an asset to the investor. Turnover has similar effects – every time an existing tenant leaves and a replacement is found, the investor incurs make ready and lease out expenses. If high turnover and vacancy cause investor returns to decrease, it follows that taking measures to minimize them as much as possible will increase and maximize investor returns. That sounds great – so how can we make it happen?

High turnover and vacancy have one common solution: Great tenants. So when you ask how do we reduce turnover and vacancies you are really asking, how do we find, screen and keep great tenants. The purpose of this post is to answer that question.

Finding great tenants requires three ingredients: Strong marketing, a great property and  clearly defined standards. You need strong marketing to let great tenants know that you have a great property they should consider and to make them fall in love with it. We list our properties for lease on the MLS and syndicate to every online site that has rental real estate like Zillow, Trulia, Hotpads etc. We take great care in listing our lease properties – we take plenty of photographs with professional equipment, write descriptive copy and portray the property in the best light.  In addition to that, we write an article (blog post) on our website to give it the exposure of 10k monthly visitors. Last but not least we run daily Craigslist ads to drive traffic to the property. But all the great marketing in the world couldn’t help you unless the property you acquired is up to snuff. Great tenants look for properties that have nice upgrades, good floor plans, neighborhood amenities and most importantly excellent schools.  And the condition of the property has to be immaculate: professionally cleaned, freshly painted, carpets shampooed, air filters replaced etc etc.  If your property doesn’t fit that profile, you made an acquisition mistake. Last but not least, you have to have a clear idea about what a great tenant is and you will have that idea when you have clearly defined criteria that the tenant must fulfill. From our lease listings as an example:

Looking for a good long term tenant with great rental history, good stable employment (2+ years) and income (Approx. $4700/month income to qualify salaried, not on commission) and no background check issues. Minimum two year lease. Credit score of at least 600 is required with rare exceptions

As you can see from that description, what defines a great tenant for us are rental history, employment stability, income sufficiency, clean background and long lease term. In that order. Credit is secondary for us and we would be willing to overlook it if the tenant fits all the other criteria. But do you see how well defined is the profile of the tenant we seek?

Screening great tenants is vital to insure that the applicant truly fits that well defined criteria we just discussed. As part of our standard screening we do the following:

1. Obtain and review rental history verification. Contact previous landlord, ask verifying questions and get an idea about what kind of tenants the applicants were.
2. Obtain income documentation (checkstubs and tax returns) and verify that it’s correct by requesting an employment verification.
3. Obtain and review credit report and background check.
4. Check references if any.
5. Run cross check verifications to make sure the information provided is correct – Is the landlord they’re listing on the application the owner of the property they were leasing or some family friend of the tenants?

Keeping great tenants is achieved by setting up the right expectations from the start, keeping communication lines open and showing care. Most disputes between Landlords and tenants stem from parties not being clear about what the other expects from them. We solve this issue by clearly defining expectations in the lease agreement and in the Rules and Regulations document and going over these expectations before the parties sign papers. Make it easy for the tenant to pay rent, submit a repair request and get repairs done in a timely fashion. Do what you said you were going to do. Keep lines of communication open at all times so wrinkles can be ironed out before they become problems. Finally, show that you care – about your property and the tenants. If a tenant sees that you don’t even care about your property, why should they? Schedule quarterly inspections of the property, provide air filters for replacement, make routine maintenance tune ups of your systems when they aren’t broken to extend their life and prevent unpleasant experiences for the tenants.

Finding, screening and keeping great tenants is the ultimate solution to the turnover and vacancy problem. Every time you manage to put a great tenant in one of your properties, you are actually putting money in your pocket and minimizing stress. So do it right, or hire pros who can.

Kevin Dooley via Compfight