Real Estate 040: Why Invest In Real Estate?

If you have stumbled upon my blog, I am assuming you are looking for ways to start saving money, increase your income, or find ways to create additional streams of passive income (cash flow). I love to read business, self-help books, and the more I read these books, blogs, and success stories, the more I realized that over 90% of these people built their wealth through real estate (the other 10% were a mix of entrepreneurs, celebrities, athletes, and employees who struck gold w/ start-up company stocks). For me, real estate is great not only because it is a tangible, hard asset, but it provides a basic human need - a roof over your head. 

There are a couple additional reasons why I like real estate as investments (not your primary residence, which I will discuss this in another blog post):

1. Leverage
If you have read the book Rich Dad Poor Dad, by Robert Kiyosaki, you will be familiar with the term "other people's money" or OPM. This is a fundamental concept shared in Rich Dad Poor Dad where by using good debt, or OPM, you can significantly increase your return on investment (ROI). For example, most real estate conventional mortgages will allow you to put down as low as 5% cash (with good credit and income, of course) for the purchase of your home. That means 95% of the home is financed by the bank. Now, this is a very simple illustration, and there are many different things to consider when choosing the amount of downpayment (i.e. Private Mortgage Insurance (PMI), interest rate, mortgage payment, etc.). However, by using leverage, you are able to preserve your hard earned capital for other future investments. 

Example:
Purchase Price: $500,000
Downpayment: 20% ($100,000)
LTV: 80% ($400,000)

You cannot pay $20 dollars for an apple stock worth $100 and have the bank finance $80 (Not speaking about futures, options, margins, which is a whole different ball game). In a place like California where I live, real estate prices for a single family residence is so high (average $450,000) that without proper leverage, it would take me 10+ years to save enough money to buy a piece of real estate, let alone buy multiple. By using other people's money intelligently and analyzing the risk-reward, you can slowly build a portfolio that is leveraged and bring in cash flow for you every month.

Note: Other people's money can be anything from: Bank Financing, Private Lenders, Hard Money Lenders, Friends and Family, Home Equity Line of Credit (HELOC), and more.

2. Diversification
You may have heard the term, don't put all your eggs in one basket. This would have been good advice to the Enron employees who put their life savings, retirement funds, and other monies into the Company Stock which eventually plummeted to zero in the wake of the greatest accounting scandal that has rocked Corporate America. Although this is an extreme example, I personally am not comfortable having my retirement funds solely in the stock market. Although we have seen large gains (20%+ for my mutual funds during 2017 alone), I also know that these are all time highs, and this rise can't go on forever. I have diversified within my retirement account mutual funds to have a mix of cash, equity, bonds, U.S./International, REITs, however, if done carefully, tangible real estate properties will also be a great hedge against inflation as well as a means of diversification. Not only can you diversify in the type of properties: Single Family, Multi Family, Apartments, Commercial Buildings, but also in different markets like the West, Midwest, South, and Eastern states in the U.S.

3. Appreciation
Living in California, I have seen the tremendous appreciation that properties in my backyard have undergone in a short period of time. I was exposed to real estate during my parent's purchase of their primary residence back in 2012. Single Family homes with a typical 3 bed 2 bath around 1200-1600 sq ft were around $300-$350K in a decent B class neighborhood with an average school - places where you wouldn't mind raising a family. Looking at recent comps on Zillow or Redfin, I was shocked to see that these same homes that I walked through during 2012 are now selling for 500K or more, which equates to an annual return of 8.5% or total return of a whopping 56.3%!!! (Let me know if you find a mutual fund you can use leverage AND get those kind of returns!).

Now granted, I like to refer to the post Great Recession as the "golden years" roughly 2010-2014 where you can pretty much throw a dart in the U.S. housing market and come out ahead with massive appreciation (some markets more than others - coastal vs. linear). However, I personally don't rely on "appreciation" when I am analyzing real estate properties because it is like gambling. During the height of the housing boom in 2004-2006, people were drunk with appreciation until it all came crashing down, as such, I focus more on cash flow. That is, money in my pocket every month after all expenses (mortgage, insurance, tax, maintenance, vacancy, and property management have been paid).

4. Cash Flow
This is actually my top reason of why I invest in real estate, but naturally found itself here after appreciation. As mentioned previously, appreciation is "icing on the cake", but not my main focus. My main focus is to ensure that the property that I am investing in creates positive cash flow after all expenses are paid, and if it appreciates over time (hopefully outpacing inflation), then great! On the flip side, if there is another housing price correction and prices go down 15-20%, I am not that concerned, because although my rent may go down, I would have created enough cushion to make sure that the property is cash flowing and making money until housing prices go back in 6-10 years, just like it did in 2008-2016. In addition, if an investor was to take into account monthly cash flow + appreciation of rental properties, the total return on investment would be significantly higher than the average return of a S&P 500 mutual fund during the same period.

Cash flow will vary depending on the purchase price, down payment, interest rate, rental income, and other expenses/reserves. You want to be conservative during your analysis as there will always be unforeseen expenses, and being overly optimistic will set you up for a big disappointment.

5. Depreciation (Tax Savings) and Loan Pay Down
By using IRS rules, you can significantly reduce your tax liability through your investment properties. It should not be a surprise to you that some of the wealthiest people make more money but pay less taxes that the average middle or lower class using these methods. If you have an investment property, you can deduct all mortgage interest, property taxes, insurance, maintenance, repairs, and other fees (flying out to the Midwest to check on your rental property? expense it!). 

Depreciation is a powerful tool in which you can depreciate the value of your investment property over 27.5 years. Using the example above (Purchase Price: $500,000 - land value $100,000 = building $400,000), you can annually expense $14,545 each year. If you rental income was $3,000/month or $36,000/year, your taxable income would immediately be reduced by depreciation (We will later cover how depreciation will lower your tax basis, and how savvy investors use 1031 exchange to continually defer taxes and build wealth).

Loan Paydown is also another side benefit of owning rental properties. My strategy with real estate is buy and hold rentals. From running numbers and speaking with multiple investors, you will not be able to make money from real estate properties if you sell in less than 5 years simply because of transaction costs (i.e. agent commissions, escrow, title, etc.) unless you are buying 15-20% below market value, doing value add rehabs aiming for forced appreciation, or the market appreciates significantly during that period. With buy and hold rentals, if you do a careful analysis, you will make cash flow monthly, and benefit from the tenant paying down your mortgage debt every month that property is being leased. Please make sure you do your due diligence and talk to your CPA/Attorney/Financial Advisor before making any investment decision. 

Good Luck!

Real Estate 039: My interview with Jump Into Real Estate

Hey Everyone!

I’ve been working hard on my podcast and getting awesome content for you guys (be on the lookout for interviews with J Scott from BiggerPockets Business, Marco Santarelli, Bill Manassero, and Al Williamson, to name a few). It seems like we’ve had alot of new members subscribe to the podcast and blog so I wanted to do something different and share an interview I had with one of my good friends Tyler Jahnke, Jump In Real Estate about my background, how I got started in real estate, and much much more. Hope you enjoy!

Jump In Real Estate #JumpIn Stories Interview – Bo Kim

• Bo, tell us a little about yourself.

Hey guys! My name is Bo, and I was born in South Korea. My family and I immigrated to New Zealand when I was 5 and subsequently came to the USA when I was 11 (I wish I kept my British Accent, my Real Estate negotiations would be so much easier!). 

I grew up in Southern California all through high school and college where I received my Bachelors in Business Administration and Accounting. As a result, I currently work as a Senior Consultant for a mid-sized CPA firm and I have been working in this industry for about 6 years.

Aside from work I love to travel with my wife, eat good food, and read a ton of books (mostly non-fiction business/self-help/real estate related). 

• Where do you invest?

I currently invest in the markets of Indianapolis, IN, Little Rock, AR, and Kansas City, MO.

• Why did you jump into real estate?

I grew up with a very traditional way of thinking of going to college, getting good grades, and finding a job where I can climb up the corporate ladder for 30-40 years and hope for a lush retirement. However, seeing my dad and aunt start and maintain a business for over 10+ years starting from scratch and at times helping them both with their businesses, made me realize that I had the blood of an entrepreneur. I wasn’t entirely sure so I went to school for accounting to learn the language of business and get better at reading the numbers/financials.

Through working 6+ years in the industry, I realized that there were trends in successful companies as well as high net worth individuals who invested their money, especially in real estate. 

After I got married, I quickly saved up a downpayment and bought my first primary residence. I “house hacked” and rented one of the rooms that allowed me to reduce my mortgage to levels close to my apartment lease payments.

I soon had a lightbulb moment and wanted to create more passive income through real estate, but I knew Southern California was not a cash flowing market. As such, I started my journey of researching, buying, and holding out of state rental properties for the long term!

• What’s your investing strategy?

My strategy is buy and hold real estate for cash flow. Not wholesaling, not flipping, just simply buy and hold. Based on 2 years of my experience investing in real estate, I see A LOT of wholesalers and flippers who make great money in real estate, much higher than the average W2 worker. However, when I talk to them, I realize they mostly say the same thing, they want to purchase buy and hold rentals, but they have to continuously flip for their income. They have created another job for themselves. As much as it is tempting to make a $15-25K profit on a flip, I BRRRR it and keep the equity for myself and for cash flow.

• Why do you invest outside of your local market?

I invest out of state for a couple reasons: 1) California is not a great cash flow market. The rent to value ratios here can be anywhere from 0.3-0.5 if you’re lucky. I did the math and in most cases Id barely break even if I purchased a $400K townhouse/condo that rents for $2,000 factoring in all expenses, debt service and maintenance/vacancy reserves. 

Not to mention CA is a very tenant friendly state, as such I have had friends with non-paying tenants file bankruptcy and cause them 6-7 months of losses. Imagine paying 6-7 months of mortgages, utilities, and legal fees on a $400K property! Ouch.

Lastly, I invest out of state as the price points at $80-100K allow me to sleep easier at night. If I make a “mistake” on a $80-100K purchase, its nowhere near as painful as a $400-500K property. The potential upside may not be as high (appreciation), but I am in it for cash flow.

• What’s the first step you took to invest in long-distance real estate?

The first thing I did was purchase a half dozen books on investing. I love to read so I bought: Book on Rental Property Investing, Millionaire REI, ABCs of REI, Long Distance REI, Retire Early with REI, and Raising Private Capital. Then I started to attend my local REI meetups (Tip: Go to meetup.com and you will find atleast a dozen meetups in major metropolitan areas) and network with other experienced or novice real estate investors. 

I also signed up for a free BiggerPockets.com membership and messaged local investors and bought them coffee or lunch to pick their brain on real estate investing. Atleast 30-40% took me up on my offer and about 5 of them I talk to regularly about real estate investing. 

(Tangent: One of my friends told me a trick where you should spend 1/3 of your time with those who are a couple levels above you and where you want to be (mentors), 1/3 of your time with those on the same path as you (colleagues to help motivate and keep you accountable), and 1/3 of your time with those who are coming up behind you to give back, reinforce what you have learned by sharing your knowledge, and be thankful for the help you have received along the way.)

• What’s been your worst moment as a real estate investor? (please touch on a very specific moment or story if possible)

My worst moment would be when I trusted the wrong people and ended up losing about $5,000 on my first deal. The property itself was okay, as I recently got it appraised for $7K above purchase, however, Management was terrible and they placed an unqualified tenant who was eventually evicted and caused some major damage and stole all appliances. Further, this Property Manager did not winterize the property during the colder months causing a pipe to burst and damage the electrical and furnace in the basement. 

• What’s your greatest takeaway from that moment?

Like Ronald Reagan said, “trust, but verify.” I should have talked to a couple more investors where I would have found out they grew a bad reputation. However, I was blinded by the cash flow and fell in love with the property and ignored my gut. 

Overall, it was a good lesson learned as I quickly flew over to the market, built new relationships and now have a strong team in place. Your first one is always the worst, whats important is that you take action before you fall into analysis paralysis.

• How has real estate changed your life?

Real Estate has definitely changed me in more ways than one. Most importantly, I have created pretty good cash flow (averaging a net of $3K/month) during the past year which has relieved me of my burden of “needing” to climb the corporate ladder for more safety and pay.

I realized that being safe is dangerous, and taking calculated risks is the safer bet. I also realized that not many people know what they are talking about when they give advice, so you have to take a hard look at them and ask yourself if you would trade places with the person giving you advice. Not only talking about monetary things, but does that person seem fulfilled with their health, relationships, spiritually, and mentally. If not, don’t give up on your dreams or your desire to buy real estate, start a business, or create passive income because “Uncle Jack tried it in 2008 and lost all of his money.” It’s not what you know, but what you think you know that can hurt your growth.

• If you could learn any real estate related skill right now, what would it be?

I would love to learn how to become a better marketer, negotiator, and capital fundraiser (doesn’t everyone, right? Ha). One of my mentors told me that “you have to ALWAYS be marketing (generating leads) and raising capital. It doesn’t matter if you don’t have a deal yet, or it doesn’t matter if you don’t have 10, 50, 100 units. Those two things are the lifeline of any business and you have to get better at it each day.”

I took this to heart even when I only had 3 properties, and on my 4th one I raised private money, and my 5th-11th property have all been off market deals (wholesalers, direct-to-owner marketing, broker relationships, and through social media).

• If you had an extra $100,000 what would you do with it?

I would buy a duplex nearby where I live with 5% down, so that I can make my current primary a rental property. Even in an expensive market like Los Angeles, if you pick the right neighborhood and financing options, you can make the properties cash flow (e.g. 5% conventional financing househack). It may not be for everyone or for extremely expensive markets like SF or NY, but my primary residence has appreciated $70K since I bought it in 2017 and it was purchased with only 5% down (roughly $30K). I have realized major tax benefits, pride of ownership, rental income (house hack), appreciation, and debt paydown. Buy a tri or fourplex if you can.

• What’s the best book you’ve read recently? Why?

Maxout by Ed Mylett. (I wrote a book review about it here)

The book is based on mindset, and not specifically, but I believe that 80% of anyone’s success begins with our thoughts. That’s why successful people shield what information they consume as they become thoughts, habits, and result in being our identity. Ed talks about creating positive habits, goal setting and developing a “will to win.” It definitely gets you pumped up to go out and life a “MAX OUT” life. I had the pleasure of hearing him speak at a real estate conference in San Diego and he has definitely inspired me to work 110% every single day as I am not creating something just for myself and my wife, but something for both our families and future generations to benefit from.

Favorite Book Quote: “The average person has 75,000 thoughts every day, and 91% are exactly the same as the day before. It isn't hard to see why so many people stay in the exact spot in life as it relates to relationships, careers, finance, fitness, etc. Do you ever think about what you think about? Thoughts are like magnets; they draw to you that which you think about regularly. They also create the filters you see the world through. If you want real change, you must first change what you are thinking about.”

• What’s your end goal?

My 5 year goal is to create $15K a month in passive cash flow. I currently started a blog at www.biggercashflow.com and also release weekly episodes on my Bigger Cash Flow podcast as I always wanted to be a personal financial advisor. I think I may grow this passionate out in some shape or form where I can help other people like me create passive income and chase what really matters to them.

I had a quick conversation with my coworkers where I asked them, if money was no object (i.e. lets say you have $10K month in passive income far exceeding your expenses), what would you be doing right now? Initially, they gave me blank stares as nobody had asked them this question before, but eventually I got answers such as DJ, producer, blogger, full-time traveler, and actor.  This made me realize that we may be trading up our dreams and passions for a paycheck to work in a cubicle building out someone else’s dream life. If I choose to work in that W2 job because I love it every single day, that is different, but for the many of us that may not feel that way, I think passive income is the answer.

• What’s your greatest piece of real estate advice?

My advice would be to educate yourself (podcasts, audiobooks, REI meetups, pay a mentor if you have to – it all depends on everyone’s goals, resources, and ability), and take action, no matter how small, by your 3rd month.

This can be in the form of underwriting 10 deals a week, making 5 offers, or buying a turnkey property. You may be wondering “what if all 5 offers get accepted?” that means your offer was too high. Making many offers may scare you, but make them at the right prices where if all of them were to be accepted, you’ll find a capital partner in no time.

In summary, you don’t have to be great to start, but you have to START to be great. So JUMP IN REAL ESTATE!

Good luck!

Real Estate 038: Self Management vs. Hiring a Third-Party Property Manager

It’s been a while since I've written a blog post, mainly due to focusing more on acquisitions, managing the rehab, and stabilizing my portfolio. A question I receive often from my readers is whether or not they should hire a property manager (PM) or self-manager their properties. So I decided to reflect on my past two years of rental property ownership and share my thoughts below.

Should I self-manager or hire a property manager?

Investors understand the importance of buying below market in good locations with enough cash flow to pay its debts, expenses, and whether market cycles. However, all of these assumptions and proformas are only on paper, and a rental property is only good as its executed properly. Like Gary Keller describes in part 3 of his book "Millionaire Real Estate Investor", owning a million, landlords must keep the property in good condition (no slumlording) as well as find quality tenants to live in your rentals. A subset of those two functions is understanding the local markets (e.g. landlord laws, market rents, tenant demographics) as well as efficiencies of a sole proprietor vs leveraging a team (e.g. contractor discounts through volume, bookkeeping, and other administrative functions).

Hiring a Third-Party Property Manager

I have made a conscious decision on day one to hire a third party property manager to manage my rental properties and here are the reasons why:

• Cost efficiency: Each property manager is different, but based on the number of doors they manager (e.g. 100 -> 1000), they may work with designated teams of handyman, or even have in-house contractors that save you time and money when dealing with rent ready repairs and/or maintenance calls.

• Scalability: In addition to maintenance repairs, the process of searching for tenants, marketing, answering calls, collecting rents and bookkeeping takes time and effort. You may be able to handle the administrative functions easily when you are at a handful of single family properties, but as you scale up to 10, 20, 50 doors, you may end up finding yourself becoming overwhelmed with the tasks at hand.

• Liability protection: With my properties, the leases are between the tenant and the property management company, and the property management companies carry legal liability insurance in case there are issues that arise during showings, open houses, and maintenance visits. Furthermore, experienced PMs should be able to advise their clients on understanding local laws and regulations that can be a potential liability.

• Increased profit: You may have heard the advertisement "We've seen a thing or two, so we know how to deal with these claims". Its spoken from a large insurance company who have been in the industry for many years and have dealt with issues and challenges day in and day out. Unless you are fully confident in your ability to manage rental properties with maximum efficiencies, you may be leaving money on the table. For example, not pricing your rental rates appropriately, not using the right lease agreement, and understanding what type of rehab is needed for what tenant demographic and type of property. If you are paying your PM $100/door, but through reduced maintenance, longer term tenants, and increased rental rates you are able to recoup even half of that ($50/month), isn't it worth saving yourself hours of labor you can use to buy more cash flowing assets?
  

Self Managing your Rentals

Although I have made a personal choice to let a third party PM to manage my rental properties, there may be exceptions where others may choose to manage their own rental properties. Here are some of the scenarios I have found with other fellow investors who choose to self-manage their rentals:

• Active Real Estate Investor: There are folks who choose to be a real estate investor full-time and have the bandwidth to screen tenants, handle maintenance calls/repairs, and maintain the bookkeeping.

• Close proximity: If you invest locally in your backyard (generally <1 hour away), it may be easier for an investor to tour with prospective tenants, handle emergency issues, and keep a close eye on the property.

• Low number of rentals: If you are not looking to scale to a large portfolio, it may be easier to self manage your properties from both a economic and time-commitment perspective.

• Real World Education: It may not be a "cheap" education, but it may be worthwhile to see first hand how rental property management operates. Especially if you are a newbie investor just starting out, it may be possible to self-manage for a couple years (or months) and then hand it off to a third party PM if it does not work out. However, its important to note that sometimes bad PM work may be harder to unravel than starting from ground zero.
  

In summary, I plan to continue using my third party PMs for all of my rental properties for the aforementioned reasons above. I have rental properties in three different cities, mostly over 2,000 miles away, and do not have the bandwidth to find tenants, field maintenance calls, and do the bookkeeping. As it is with any professional services such as CPAs and Attorneys, my mantra is "you get what you pay for".

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!