Afford Anything - Ultimate Beginner Guide to Real Estate Investing

Episode Date: January 28, 2016

#4: Paula shares a confession. Then she redeems herself by sharing her gross monthly income. (Yeah. Listen from the beginning). Full show notes at http://TheMoneyShow.co/04 There are a variety of ways to invest in real estate: Flipping houses Buy-and-hold Tax liens Wholesale Income-producing rental properties (commercial and residential) Paula loves residential rental properties. Ask yourself: Do you want capital appreciation or cash flow from rental income? Paula puts a few guidelines in place to determine if a property is right for her. First of all, the monthly rent needs to be at least 1% of the total acquisition price. Example: A $100,000 home would need to rent for $1,000 a month. Why? Because roughly half of the rent is gobbled up by operating overhead: Taxes, Insurance, property management, and repairs/maintenance Paula offers much more valuable information in this episode and on her blog, AffordAnything.com.   Learn more about your ad choices. Visit podcastchoices.com/adchoices

All right. I'm just going to do a quick test. Here, will you say something? Something. You're listening to the Paula and Jay Money show. We'd rather be at a bar with you right now, but this is the next best thing. It's Financial Freedom Time with Paula Pant and Jay Money. What's up, Paula, Pete? Oh, my goodness. So I, uh, all right, so here's a lesson on what not to do. The day that I don't know when this podcast is going to come out, but to all of you listeners out, there in listenerland, today is October 14, which means that if you're like me and you filed a tax extension, didn't file your taxes on April 15 like you should have, and instead filed a six-month extension, the extended tax deadline is tomorrow, October 15. And so if you are like me, you waited until the day before the extension deadline to actually get your shit in order. Yeah, and that's just, I mean, I am blown away just from me hearing that.

Hey, wondering why the sound quality kind of sucks? It's because we don't really know what we're doing, at least not yet. So if the sound quality bothers you, just skip ahead to episode like five or six where we figure it out. But if it doesn't bother you, stick around. We got some good stuff. Well, see, you're such a hustler that you didn't want to do the taxes because it's annoying, it doesn't pay, you have to pay probably, or figure it all out. So you waited to the end when presumably you're not doing any hustling today other than recording an awesome kick-ass show. I've been giving – I do have an accountant.

I've been giving him a heart attack for the past, like, couple of weeks. He at one point got to – he got to the point where he was just emailing me every other day, starting at about the beginning of October, being like, you need to send me your shit. Paula, send me your shit. Paula. Yeah, you would drive me crazy, too. I'm sure he's like a detailed like numbers person, obviously he has to be as an accountant. So that's like probably driving him up the wall. Yeah, yeah, exactly.

Like, I feel like I'm a pretty good accounting client in the fact that I can speak to him intelligently about taxes. You know, I, you know, I can talk to him about, like if he says form 5498, like, you know, like I know what that is. I don't have to be schooled on it. Like, I get it. I'm just the, I'm just so slow at getting this done. I'm focused on the hustle. and I'm focused on running my business, and I actually, in fairness, I've been slowly sending him documents for about the past week. It's just that today is like...

It's the showdown today. And I'm the annoying client that gets like 1099B and 1099 INT, like the interest in dividend and brokered forms from like a gazillion different institutions. Yes. So I'm like, here are a dozen 1099 interest forms, all of which report 40 bucks each. All of which are big problems to have. Oh, the guy probably hates me. Oh, my God. So this year, like every, like I do every year, this year I'm like, I promise this is going to be my last year like this. I promise next year I'm going to get it all done on time. And I'm going to close down a bunch of my accounts and consolidate and simplify. Yeah. And I make this pledge every year. And then every year it just doesn't happen. Yeah, you get on the simplifying. That'll make, oh, man, that'll make it so much easier. That's why did I condense. I mean, man, I had all these accounts all over.

over for investments. I just funneled it all through Vanguard one place, one, a couple of counts, and man, I made it easier. But I don't have stuff spread out. I'm not like into like real estate and all this stuff, which actually is the topic of today, not taxes. Although maybe, maybe the taxes, like that's actually one of my things, you know, for you, and we could talk about this later in the show, is how, you know, the taxes are affected by being a real estate kind of mogul, you know. But that's like one hurdle that I don't even like to, I mean, I hate thinking and doing taxes. I hate all those details with that stuff. I mean, clearly so do I. Yeah, yeah. So I imagine that's a big part of it, but stepping back a little bit like, like the thing that I, I guess,

admire about you and I know about you is you are good at real estate investing. Like that's like, that's probably like your special interest skills, right? If you had to pick everything, would you say that's up there. Jeez, well, that's quite a compliment. I guess so. I mean, I feel like I learned by trial and error and I threw a bunch of spaghetti at the wall and I, I failed more times than I succeeded, but I succeeded big enough that it made up for all those little failures along the way. Right, right. And for people that know, like Paula, like you are technically financially free. Like, you could live off of all the income that your real estate gives you every month. Yes, I could. I could. Yeah. And that, that,

So that's like the major goal like most people like. And I wouldn't be living like a rap star. You know, I mean, my real estate income is enough that I could live a comfortable middle class existence. You know, nothing fancy, but enough that I just don't have to worry about it. Do you want to tell the fine folks how much that is or give rough numbers? Yeah, I've actually been thinking about putting out monthly income reports. Oh, perfect. Yes, yes, we love it. So, yeah, that.

probably by the time this airs, that may have already come out. Okay. But gross income is $9,000 a month. Okay. And then net income, it varies month by month depending on, you know, if we have any repairs or not. Right. But if we don't have any repairs and we're just paying basic expenses, then the expenses are about $3,000 a month. So net income would be somewhere between $5,500 to $6,000 per month.

Nice. So let's just say, $5,000. $5,000 because it'll be easy to calculate and stuff goes wrong all the time. Yeah, exactly. So you're making $60,000, like, income, you know, which you could live off of if you wanted to for the rest of your life and theory as everyone keeps paying and stuff. And then not to mention you have like all the real estate itself if you wanted to turn around and sell could, you know, be millions of dollars probably.

I think the value of all of the real estate is about a little bit. A little over a million. Oh, I love this talk. I love numbers. Because it's so real, because then we can actually understand, like, what it looks like in real life. So that's why I may. I'm glad that I partnered with you on. Well, thank you.

You know what, Jay, I remember the first time that you and I met, which was in Schaumburg, Illinois in 2011. FinCon, number one. FinCon, number one. We went to some, like, little diner. It was like you and me and maybe like four or five other people. Okay. And the entire table started talking about home buying and real estate. And everyone around the table was like, oh, yeah, I bought my home for such and such.

You know, like every single person, we were just going around. And everyone was like, oh, I bought my home for 270,000 at a 4.3% interest rate. And, you know, because we're all financial bloggers. So we're all really comfortable sharing that openly. And plus, I mean, the home value at least, not your interest rate, but your home values is public information anyway. You can always look that up. So that I'm particularly comfortable sharing home value, like purchase price because that's public record. Yeah.

Well, and you're your real person. You know, you can look at J. Money and get a whole bunch of rap stars and living the good life, you know. I remember you actually commented at the time. You were like, I love that people are talking to numbers. Yeah, yeah. Well, and it's different too. Like, so some people in real life will talk, but then to spread it across the internet and all of our two listeners right now, right? Like, that's even different, you know, because now it's out there, which I, which I love.

Obviously, I disclose my net worth every single month. And it's like my favorite thing to do, you know, I'm going to, like, win the lottery or do something that earns millions of dollars. So it's like 400,000, a million and 400,000 like the next month or something. But then, like, my wife would probably make me stop doing it. And then it's, like, weird. And I don't know. But that would be a good problem to have. Just like your tax stuff.

But, you know, I think what I like that you. disclosure, like actually, after I started reading your net worth reports, that was a big part of what inspired me to start tracking my net worth. I started doing that in 2011. Oh, perfect. That is awesome. I didn't know that. Yeah. And have you noticed, like, like, just knowing generally where your money is, that it's like, every month going forward, it's like, like, you can make decisions easier and you kind of get the overall picture? Or how does that make that? So I track it twice a year, like once in the summer and once in the, once around. New Year's and once at the heat of the summer is like the two times that I sit down. And what I do is I actually

manually go through every single account. Like, you know, I know that you can link your accounts to to mint or to personal capital or whatever. You know, like, I know that you can do that stuff. But almost as a meditation or like as a practice, I will log into every single account, record those numbers, put them on a spreadsheet. And then I go through and I look up the value of every single one of my homes on three different websites, Zillotrulia and HomeSnap. Nice. And I record the estimated value of the home from all three of those sites and then take the average.

Okay. That's a good way to do it. Yeah. Yeah. And then I go to Kelly Blue Book and I look up the value of the cars. And so I go and it takes me probably about between one to two hours, which is why I only do it twice a year. Yeah.

No, but that's good that you're manual. So I do it manual too. I don't use mentor anything because I like to like deal. the burn or the rush if it's going up or down, right? Like you feel it more. Yeah, yeah, exactly. And it gives you that time to like really reflect on every single number. Like that's why I call it a meditation because it's it's like a yeah, it just gives by slowing it down, it really gives you time to spend mentally with every single account. Yeah, no, I agree. I mean, net worth is like, it's probably like the one thing that I did that really just changed my whole mindset. Because

The nice thing is it covers both areas too, right? Like the bad stuff and the good stuff, the debt, you know, and the assets. And so if you're like big and like if you have a ton of debt, most people don't want to run their network because like the number is obviously negative, right? But the nice thing is like every month in theory as long as you're working on it, like the number is getting better. And if you're earning more, if you're like a hardcore hustler like you are, right? Like in all the money's coming in like that affects it too. So you can hit the network like in both angles, expenses and income. So, you know, and, you know, I mean, like stock market goes up and down and crazy, which changes

it. But for the most part, you can tell really fast how you're doing, you know, by running your net worth that month or the previous three months or whatever. And you can tell if you're slacking or if you're doing good, which I'm like. Okay, so going back to like the real estate stuff, like for me, so to give my background a little bit, like I bought a house in 2008 at the peak, when I should have, like, $360,000 on a win, no money down, right? Like, I just, like, went all out there because everyone was buying homes and, you know, I thought I needed to also.

So we lived in there for a few years. Finally, I got out and now it's a rental property. But only by default. Like, I can't, like, we're underwater, so I can't sell it. And, you know, and I'll actually, I'll have to pay money if I sell it, right? Right. So you're the accidental landlord. Yeah, okay.

So I'm the accidental landlord. So I'm learning by necessity and just because, like, I have to, but I don't enjoy it whatsoever. But I also don't enjoy home ownership to begin. with, you know, and so, like, I would imagine if, like, you were saying, hey, let's look into buying real estate because that's one of the ways to grow your wealth, right? And most millionaires, billionaires, right? Real estate is in the top, you know, top three, right? Like, what would be real estate, owning businesses or building businesses and then, like, stock stuff, right, investing. So, so I choose the investing route. Since there's no physical thing, I just dump the

money in and I don't have to do anything. I'm lazy and it's all passive in theory, right? The real estate part, emotionally, mentally and physically, it's really like mind-boggling to me. I guess let's back at, like, what do you look for? Like, if you were the new, like, you were Paula, you know, 13.0, like, you knew everything and you wanted to go out and buy your first investment property, right? So, like, all the newbies out there that have never done it that are interested, like, what would you tell them, you know, to look for from starting out before they get into it and get all crazy and read all the books and all that kind of stuff? All right. So, first of all, okay, when we talk about real estate, we're talking about a very broad topic that has a lot of,

there are a lot of different ways to make money in real estate, right? So you could flip houses, you could buy and hold, you know, rental properties, you could invest in tax liens, you could become a wholesaler. There are so many different things that you could do. So the first thing I would say is narrow your focus and just pick one of those strategies. And for me, that was rental properties. So I don't flip houses. I don't invest in tax liens. I don't wholesale. I don't blah, blah, blah, blah, blah. Just because each one of those is a different skill set, right? It would be like, like, picking stocks or going to an index fund or buying bonds. Like, they're all different kinds, but usually like pick one or something. Yeah, yeah. Or like, I guess the other

analogy would be if you're quote unquote a computer guy, like, okay, what does that mean? Does that mean that you're really good at fixing hardware? Does it mean that you are good at designing websites, you know, user interface? Are you like these are, yeah, they're all computers, but they're incredibly different skill sets. Okay. You know? And you specialize in, you know? I specialize in rental properties. And the reason for that is because my goal is to create passive income. And rental properties are the best at passive income. Flipping, like, as an example, if you wanted to flip houses, the advantage to that is that you take the same basic amount of money and you redeploy it again and again and again, right? You put it in a house, you flip that house, then you get that money

back, and then you can reinvest that money. Right. So you can keep taking that same starting point of money and investing it again and again and again. But it's a heck of a lot of work. It's not passive. It's super active. Okay. Right. And so flipping is a job. Whereas rent properties, it's not really a job. In the beginning, it's a lot of work. Setting up those initial conditions takes a lot of upfront work, but then you work hard now so that later you can just kick back and reap the benefits throughout the rest of your life. Okay. And so that was what appealed to me. I was like, I'm willing to hustle like really hard for like a couple of years so that for the rest of my life, I can just kick back and enjoy the proceeds of that.

Sounds awesome in theory. Well, you already do anything. So, yeah, so anyway, so the first piece of advice that I would give to anyone who says I want to be in real estate is what kind of real estate do you want to be in? And if your answer is rental properties, I can help you there. Okay, so I'm coming to you and I say, Paula, I'm Jay Money. I suck it, home stuff. I want to learn. I want to buy my first rental property.

I don't know what I'm doing. you know, I want to buy like a condo or a single family home or, you know, what do I need to do here in beginning? All right. So the first thing that you want to do, and I'm going to make the assumption that you want to be in residential rental rather than say like offices or warehouses or. Yeah. I mean, that seems to be, that's easier for like a new person to start, would you say?

Like, where's the easiest part for, okay, all right. Yeah, that's the easiest. Number one, it's the easiest for getting funding, especially if you're new and you don't have a track record yet. Okay. And then number two, I just feel like, especially for beginners, it's mentally the easiest to wrap your head around. Let's go at that then, yes. Yeah. Okay.

Assuming that you want residential rental, mentally, the thing that I want people to understand, like if you take nothing else away from this episode, is that you don't buy rental properties for capital appreciation. You buy them for monthly cash flow. And so what I mean by that is that there are two ways that you would make money. on a rental property. One is that the value of the property itself goes up, and the other is that you get money in your pocket every month. A lot of people, especially people who are new to real estate, like to focus on the value of those properties going up. That is not where your head should be. That should be icing on the cake. If that happens, it's icing on the cake. Because historically, properties tend to rise at the rate of inflation.

Unless it's 2010 and we're at the bottom of the market, don't count on getting a whole bunch of appreciation from your properties. Count on your property keeping pace with inflation and nothing else. So the money is going to come from that monthly cash flow. Okay, so number one, I ask myself, do I want cash flow? Is that important to me? And the answer, of course, is yes, I want money coming in every month. And so great, Paula.

I'm sold. Now, what do we do? Okay. So the next thing that you'd want to do is start looking at properties, really. Okay. I hear from a lot of readers who are like, well, I live in Washington, D.C. or I live in... Oh, yeah. It's expensive as balls here. Yes. I'm in D.C. area. You can buy a door for like $100,000 here. Crazy. Yeah. I hear these people. So if that's your case, then here's what I'd recommend. First of all, I would challenge your, I would challenge that assumption.

I would challenge that limiting belief. And just take a moment to ask yourself, is that really true or am I only looking at the neighborhoods that I myself would personally want to live in? Like my, what I always tell people is, where do? Every, every city, every town, every community has janitors. We have people who work baristas at Starbucks and managers at McDonald's and people who work at TSA at the airport and airport bag. Aga-Chantlers, what are the communities where those people live? You know, what are the communities where the people who make less than $50,000 a year is their household income, where do they live? Because they're in every community, you know, even if you live in Aspen, Colorado, there's a service town called Basalt where people live.

You know, the people work in Aspen. Interesting. Because Aspen needs to take out the trash. Right, right, right, right. That's fascinating. So start by asking yourself that question and looking at those communities. Because what I hear from a lot of upper middle class people or middle class people is like, well, you know, anything that's not like a fancy house with a three-car garage is a dangerous community. Really? Really? You're telling me that like freaking every single person who works as an airport baggage handler lives in the ghetto.

Like I'm sorry. I thought some limiting. I actually was a TSA agent for a little bit. I worked at the airline, so that's like talking to me too. Are you serious? Yeah, I used to work at the airlines. Yeah, making like $8 an hour or something. Hell yeah. I had no idea.

I didn't live in the ghettos. No, I lived in Manhattan, and I had like 10 billion roommates that shared a rant. But anyways, yeah, that's fascinating. Oh, wow. I'm TSA pre-check. I'm a low-risk traveler. All right, all right. Okay, so that's interesting.

interesting. So yeah, so like I assume if I'm going to go buy a rental property, then everyone's like me and what I find nice or in a good era or whatever they're going to find, you know, like so you're saying like it's not, the house isn't for you. It's purely business, obviously. So you want wherever the best business transactions are, right? And you're saying like that kind of range, people who make $50,000 and less. Like that's a good starting point to kind of earn and grow and there's more room for I guess like making money, I guess. Yeah, yeah. So, I mean, generally speaking, rental properties are roughly classified as class A, class B, and class C properties. Class A properties are, and there's no, like, textbook definition, you know, it's very subjective.

But class A properties are luxury apartments, you know, like those places that are new construction and they're nice and they've got stainless steel appliances and they've got granite countertops. Okay. You know, and you tend to get the type of renters who are like, oh, I just grab up. graduated from, you know, I'm a pharmacist and I make $150,000 a year. I'm not ready to buy yet because I just graduated or because I just moved here or because I, for whatever reason, those are Class A properties. And typically, you'll make the lowest returns on those properties, but you'll also have the best qualified tenants. Okay. That makes sense. Class C properties. We're going to skip class B for a minute.

Okay. Class C properties are like the ghetto. Okay. And then class B is in between. Okay. So it's kind of like ordering a stake. You know, you're like, oh, well done, rare, and then medium is somewhere in between. Okay.

And then the way that people talk is like, you know, you can get medium rare or you can get medium well. Same deal. Like you can get class B plus or B minus. Okay. Like, so you'll hear real estate investors talking about that too. And again, there's no objective. definition in the same way that there's no way that a stake is objectively medium rare versus rare, you know, sort of a matter of interpretation. Yeah, no, but that's a good way to describe it.

And out of, so how many places, how many pieces of residential real estate do you, so I have a total of seven units. Seven units, okay. Yeah, you measure units by, like, if you were to own, say, an apartment building that has 10 units in it, you would call that 10 units, even though it's just one building. Okay. I got it. So how, okay, so, so I guess out of all your, so you have seven units, how many properties? Is that a good way to say? Yeah, how many buildings? How many buildings? Yeah. So that's across five buildings. Okay. So I have one, four single family homes and then one triplex. Triplex. Okay. And all these are these medium well, mediums? Rare. Like I'm trying to get a good sense of what market you're dabbling in here.

I'm pretty across the board. So the triplex is Class A. Class A all the way. Oh, wow. Okay. The one thing about it that is not, that it's not new construction. It's actually very old. It was built in 1910.

But it's super luxury, you know, it was like, it's that like historic nice. Oh, yeah, I like that. That's my kind. Yeah, yeah. So, you know, it's super hard. wood floor, stainless appliances. It rents to like super well-qualified people. Okay.

Yeah, so those three units are Class A. Okay. And then I've got two units that are pretty Class C. You know, they're in Section 8 neighborhoods. So Section 8 housing is government subsidized housing. Okay. So three units are Class A, two units are Class C, and then the other two are Class B.

So I'm very spread. I'm very diversified across that range. Okay. And where did you start out? Like, did you start at Class A or C or B or kind of move around? And then where is, would you recommend a beginner start out if you can? So I started with the Class A with the Triplex. That was my first one. Okay. And that was only because in terms of getting financing, one of the easiest ways to do it is buy a home as a primary resident, buy a multi-unit. home as a primary residence, move into one of the units and rent out the other two. Ah, smooth. And so that was what I did.

My first home, instead of buying a home for myself as my own primary residence, I bought a triplex, moved into a unit with roommates and then rented out the other two. And so the rent from those other two units plus the rent coming in from the roommates who shared my unit, all of that rent combined, not only completely covered all of the cost, but also spit out even additional extra money that I could redeploy into more real estate investing. Right. It was all that by design from when, like, you didn't buy the house and later was like, oh, I think I could make money by running them out.

Like you strategically went this way. Yeah, it was all by design. I actually wasn't even planning on buying a house at all. And I was renting in a triplex that was across the street from the one that I ended up buying. And I noticed the for sale sign in the yard. And so on a whim, I just kind of like went over and looked at it and ran the numbers and was like, hey, why not, you know, I already know that I like this neighborhood. I want to live here. Why not just buy that house and move into one of the unit?

And I actually moved all of my roommates over with me. That's awesome. Our entire unit just moved across the street. So you started out comfortable in the area, comfortable with the roommates, got a good deal. But you're also paying attention and obviously saw it as an opportunity. and then you jumped on it. Because I'd imagine, like, triplexes are a lot more, at least somewhat more expensive than just like a normal house and oral people would start with. So it was $225,000.

Wow, that's it? Oh, my gosh. I hate you. Oh, my Lord. Oh, and so that was, that actually reminds me, the next thing that I would say is for people who live in expensive areas, specifically the northeastern section of the U.S. and Southern California. or maybe California in general, or the West Coast. If people who live on the coasts,

if you do live in an expensive area, step one is check your assumptions. But step two is if you check your assumptions and you find that, like, no, everything here is legitimately expensive, invest somewhere else. The entire Midwest and the entire southeast, for example, like basically every, the interior of the country, you've got some really freaking good deals.

Right, right. Well, I mean, yeah. And I imagine, though, like, like, A, that's, like, scarier and it's more, like, work. It seems like, like, I'm just playing, like, this is how I feel, right? I'm like, no way in hell I'd ever do that because I don't want to go travel there and then manage it. And maybe I'll get a property manager. What is something great? Like, there's all these, like, crazy scary things that come up, right?

Which I guess goes down to, like, how bad you actually, like, want to do this and learn. So that, of course, plays in. So let's say then I want, like, a medium stake. I just want, like, the middle somewhere. because I'm not risky enough for the lower part, but I'm also like, don't think I can play ball with a typical one. So I want,

let's say I have like 200,000 that I want for like a medium home, you know, or a single family home or something. And I start looking, then what am I looking for? Like, I always try all these weird, like ratios and it should rent, you know,

for this percent if it is good or this person is bad and what the average expenses are. Like, oh, and I know it like varies. Like generally speaking, like what am I getting myself in? to. Yeah. My minimum criteria, and I use this just to eliminate properties right off the bat. Okay. At the very least, the gross monthly rent must be at least one percent of your total acquisition price. So for every $100,000 worth of home, it's got a rent for at least $1,000.

Interesting. Okay. I'm like making notes. This is like our podcast. Like, I'm sure we got to type this up somewhere because this is the stuff I need to know. anyone needs to know. It's all at afford anything.com. Yeah. Oh, it's at heart and hustle. Dot, whatever we get. You're diverting all the readers. Just listeners. No readers, listeners. Okay, so one percent. So, okay, so if I have a $200,000, I want to spend, you know, which is probably more than you might want to. Let's actually just say I have $100,000, just so it's easy. Okay. You've got $100,000. And we're just for the sake of simplicity, we're going to assume that purchase plus any initial up front repairs needed to make it habitable.

Okay. You know, plus like a little bit for closing costs. We'll say that comes to $100,000. Okay. The place has got to rent for at least $1,000 a month. At least $1,000. And if it was $2,000, then $2,000. So like going back to like my townhouse that I bought for $360,000.

It's got a rent for at least $3,600 a month. Yeah, you know how much it rents for? Not even $1,700. So I'm off by like $2,000 to give you a little. idea, right? But obviously it wasn't like a plan strategy and all that kind of stuff. But this is good because this tells me like, A, like no rental, no investor is going to have interest in my house because they're like, they're never going to get the rent out of it, right? Which is good to know if I, I'm thinking of selling or I'm not sure what I'm doing yet. But anyways, that's good to know. All right. So 1%. All right. So far so good.

What other simple tips here you got? So that's my minimum starting. Oh, and I want to explain why that is a rule. Okay. There's a very broad rule of thumb called the 50% rule, which states that roughly half of your rent is going to get gobbled up by, like, operating overhead. Like your taxes, insurance, property management, repairs, maintenance, blah, blah,

and it won't necessarily be 50% every single month, you know, like there might be some months, because that's the nature of repairs and maintenance, right? Like over a 10-year span, which is 120 months, 119 of those months, you don't have to pay a dime for the roof. And then one of those months, you pay $20,000 to put on your roof on. Oh, far. Yes. You know? So, like, it may not shake out that way every single month, but over the long term, that this rule of thumb states that about half of your rent is going to get gabbled up by operating overhead.

And of course, like, you know, you can poke some holes into that theory because obviously, like, rent and operating costs are independent variables, you know. If you're in, like, a landlord's market and rents shoot up, that doesn't necessarily mean that your operating overhead is going to shoot up as well. So, I mean, which is why it shouldn't be taken as, like, mathematical fact. But just for, like, back of the envelope planning purposes, that's an easy rule of thumb. Yeah, and I would imagine, like, your triflex, right, only has one roof, not three. three, so your ratio is pretty damn good there, I would imagine. Exactly. Well, I mean, sort of.

It varies. Like, on one hand, yeah, the triplex has one roof instead of three and, you know, one set of gutters instead of three. So I can consolidate some of that overhead. Yeah. On the other hand, you know, for my single family homes, I don't pay the water bill. The tenants do. Oh, interesting.

Okay. Yeah. And like for the single family homes, I don't mow the lawn. I make the tenants do that. Whereas for the triplex, I have to take, I pay the water. water bill, I take care of the lawn. I, you know. Okay. So it kind of balances out. Okay. Yeah. At least in the city of Atlanta where water is really expensive. Okay. So 100,000, 1,000, 1%. So now you're looking for rents, rentals that you can get a thousand or more. Yeah. Oh. Yeah. Sorry, real quick. So the reason

for that 1% rule, okay, so if you're making 1% a month, then you're making 12% a year, right? Okay. You follow me far. Yeah. And if half of that gets gobbled up by operating overhead, you're left with 6% a year. Huh. That's like a good average in like the stock market. I think what is it 7 or whatever? So basically you are at with that kind of a property, you are getting, you're functionally buying a stock that has a 6% dividend pay out. Huh. And then if the value of that stock, say, keeps pace with inflation, so it rises by another 3% a year, then your total payout is 9% per year. That's the rate at which that's growing. Wow.

Functionally, it's like you have a stock that's growing at 9% a year, 6% of which is a dividend, and 3% of which is capital appreciation. Well, and the house, you're not paying more for the house as the years go by, right? because it's like fixed mortgage probably. So whereas like if the stock goes up in five years, you're paying more to get that dividend, you're paying the same and then less over time for a higher dividend. Sort of. I have that right or now? Kind of.

The principle in the interest, if you have a fixed rate mortgage, then the principal and the interest on the house stay the same. Yeah. But property taxes, insurance, repairs, maintenance, management, any landlord covered utilities, all of that's going to go up. Okay. So that being said, you adjust the rents at the rate. of inflation to kind of offset some of that. So you kind of end up breaking even there.

Okay. Fair enough. All right. So 100,000. 1% is 1,000. And then my next question was going to be, what is like average expenses? But 50%, so you would say on average is like $500 expense a month in this example that we're using? Yeah. So that's operating overhead and that does not include debt servicing. So that's another thing that you would also have to pay for. And the reason for that, And this confuses a lot of beginners, so I just want to be... Yeah, I'm already confused. So when you're evaluating a property, initially evaluate it as though you're paying cash for it in order to determine whether or not it's a good rental.

And then once you've evaluated it on those terms, then you add in any kind of debt servicing. So then you add in the terms of the mortgage. And the reason for that is because you want to first ask yourself, is this property a good investment? And you don't want to conflate that with how good are the terms of this loan? And the way that I kind of explain this to people, like, let's take this to some logical extremes here. I don't know if you could hear that. My cell phone just went off. Yeah.

So probably a tenant saying you need to do something. I see, I'm buying all the horrible things so I don't have, makes me not want to get one. Most of my tenants don't have my phone number. Smart. And we'll get to that in a minute. Property management all the way. What was I saying? Oh, you're going to give us an example.

Okay, so the reason for that, so let's just take this to some absurd extremes in order to illustrate why. Like if you had a mortgage with a zero percent interest rate, it's going to make a lot of houses look good. And if you had a mortgage at a 99% interest rate, it's going to make everything look bad. Right. But that doesn't mean that the property itself is a good or a bad deal. It means that your 99% mortgage is a bad deal and you need a different more lender. Yeah. Well, and same with buying a car or buying anything, right?

Like you get financing all of a sudden you're mentally all, you're like, oh, wow, I can afford this. I got 0%. I can buy these rings and this bling and blah, blah, blah. So yeah, no, that makes total sense. Yeah, it's smart. Yeah, exactly, exactly. Okay. That's a perfect analogy.

Like, when you're buying a car, first you decide what car you want, and then you look at the financing, right? So same thing for a house. And the dealers always want to talk about financing and, oh, what kind of monthly payment do you want, right? And then they go and make it all sexy, even though it's really not. Like, oh, you're only paying $50 a month for this Corvette. Awesome. Yeah, but you're thinking like 150 years.

Right. It's not awesome. So this 1,000 is already from just operating expenses. is down to 500 cash flow, right? And then you also have to pay for the financing unless you really did. If you didn't get straight up, then you pocket $500 a month in theory, right? Yeah, exactly. And then the financing.

So a mortgage is, there are four elements to a mortgage, principal interest, taxes and insurance, P-I-T-I. What a pity. Within that operating overhead, within that $500, we include taxes and insurance because those are eternal and they stay with you forever, so they're part of your operating overhead. Okay, well, that's good. So far. We don't include principle and interest because that's part of the debt servicing.

Okay. So out of that $100,000 mortgage, you just took. No, let's say like, for this kind of property, is it still like, you know, 20% down and you finance 80? Or is it different because it's a rental and not like a home that you're living in? Well, what's like an average? If you're getting traditional bank financing, then, and you're buying it as an investment property, then typically a bank is going to want 30. percent down and they'll charge you one additional percent for in interest rate.

Good night. All right. So if I want a $100,000 house, I need to have $30,000 in cash no matter what. Yeah. The other option, though, especially if you're a beginner, there are a couple of things you could do. Number one, you could buy a multi-unit, like what I did when I started. I bought a multi-unit property, moved into one of the units and then rented out the others. And that way it still qualifies as a primary residence and you can buy it as a primary residence and and it's it's totally legit like bank as long as the the building is four units or fewer okay then it qualifies as residential rather than commercial so you can buy it as your own primary residence get the better financing get a better chance of approval you need less money down blah blah blah blah blah

The other thing that you could do, particularly if you're a beginner, is buy that single family home, move into it for a year, like one to two years, and then move out and move into a different home. Ah, yes, yes, yes. And turn that into a rental. I actually know a couple that made a shitload of money doing this. They, every, like, couple of years, they would just move house to house to house. Yeah. And they had the string of primary residences that they turned into rental properties behind them. Wow.

Wow. And once it's finance and even if it changes later to rental after some amount of years, at least you don't want to worry about as much because you've already got it all financed. Yeah. I mean, look at your house, J. Yeah. I did that, buy. Yeah.

I left. I pay to leave. But yeah, you bought it as a primary residence. You got the financing and the down payment as though it was a primary residence. And then you left and you turned it into a rental property. What a great deal. Oh, gosh. I mean, there's so many like variables.

I'm wrapping my head around. Like, is it not going to say just as easy? But is it in the, if you're smart enough to have extra money and smart to go into rental property owning and do all this stuff, could you like getting a duplex or triplex versus? versus a single family home or condo. Is it roughly the same in easiness, I guess, is a question? Is there any major problems with doing that, like, as a beginner? I mean, you obviously did, but you're, I put you in, like, this super smart level with this stuff. So, like, go down to, like, an average person.

Oh, you flatter me, Jamie. You give me way too much credit. Either way, either that, you're a good actress. I don't know, but I'm going to skip it. The first one. I mean, let's see. So in terms of easiness, there are a couple of variables at play. Number one, what type of neighborhood would those properties be in?

Like, are we talking Class A, Class B, Class C? Because Class A is going to be the easiest. You're going to get the lowest returns, but it's going to be the easiest. And, oh, and by the way, if you're going into Class C, I would demand at least 1.5% if not 2%. Okay, good to know. Because it's riskier. Yeah, because it's riskier. So if you're going to go into a riskier investment, you've got to demand a risk premium.

You've got to demand a higher reward. Okay. So let's stick with the medium one, the B, class B. So let's assume that you can get a class B property that is either a multi-unit or a single family and you're trying to decide which of those two you want. That is a eternal source of debate in the real estate community. It's very common to hear people say, oh, multi-units are better because that way, if you have a vacancy in one of the units, you still have income coming in from the other units.

so your income is more diversified, right? If you have a single family home and that home is vacant and that's your only rental property, then your vacancy is 100% of your portfolio. Whereas if you have a triplex and one of the units is vacant, then that unit is only 33% of your portfolio. So that's the argument that you'll typically hear in favor of multi-unit properties. I kind of disagree with that argument because, you know, you can get four single family homes and, you know, it's, what is the difference between having four single family homes versus a quadruplex?

Now, I mean, I'm being facetious when I ask. Yeah, right. Obviously, there's a difference in terms of now I have four roofs and I have four lawns and I have four sets of gutters and I have four things of window, banks of windows, you know. Right. So, yeah, obviously there are those differences. But again, like I said, I also don't pay the water bill and I don't take care of the lawn maintenance and I don't do this. don't do that and blah, blah, blah, blah, blah. And permitting from the city is easier on my single family homes than it is on my triplex.

I personally don't believe that there is a clear winner between those two. And that's a controversial statement because you'll hear a lot of real estate investors who are gung-ho about multi-units. If everything else was equal, I personally would go for a multi-unit. But the reason that I started with a multi-and-then went into single-family homes is because, I was searching and searching and searching for great deals on multi-units, and I couldn't find them, but I kept finding these single-family homes that were just awesome deals. Right. You know, and part of that might just be volume.

There are more single-family homes than there are multi-units. So, you know, statistically speaking, within that mix, you're going to have more of those good deals somewhere in, buried somewhere in there. So that was what I did. Like every time I've bought a house, I've done it by looking for a house. a multi, not finding the numbers I want, and then finding a single family home that just blew me out of the water with how good of a deal it was. Yeah. So that's interesting. It's interesting that you don't see it as a clear winner when that's what you always shoot for yourself, but I like it. And you, right, like with real estate, just with like stocks or with, you know, let's say even

jobs you take, right? When opportunities arise, sometimes you switch your plan and you go for it if it's going to get you to the end go faster. Exactly. So you, you don't really care what kind of properties you own as long as they're all like paying and you're making a good income and you're building your your portfolio over time. Exactly. Okay. And just to throw in one more thing, if, and I recommend if you're going to be a real rental property investor that your strategy is buy and hold, you know, and so hold on to it for a long time. But if you do want to sell the property, single family homes are easier to sell. Okay. You can sell those to owner occupants. You can sell those to either investors or owner occupants, so your pool of potential buyers is a lot bigger.

Yes. Whereas multifamilies, you're only going to sell those to investors. We're looking for good deals. Yeah. And so investors are going to evaluate the property based on math rather than on emotion. Yeah. The heart versus the hustle. Exactly.

Exactly. Whereas, like, you know, a primary owner occupant is going to use emotion. in making that buying decision. And so you can play that to your advantage. You can make the home, you can stage it and put like fresh baked cookies and folded towels in the bathroom and scented candles and make it really nice and drive up the value of it just by doing that. You could never do that if you're catering to investors. Right. Yeah.

They know what's going on. They know the deal. Yeah. So that makes sense. So depending on opportunity, depending on what you're comfortable with, you know, and also obviously, depending on where you're. you want to live. So if you do go the smooth, strategic route of living in it first and then running it out, you're obviously going to have to be okay living in a triplex or a single family condo or house depending on just what you want to live in, right? Unless you're strictly like a math person and

none of the rest matters, which there are a lot of people like that. You know, more power too. You're probably going to make more money that way. So, okay, that makes sense. Yeah. And you know, and I do hear from some readers who are like, well, I can't live in a duplex. I have kids. And I'm like, why? Wait till the kids come, but yes. I know. I mean, when I was a kid, like, we lived in an apartment for a while. Like, what is wrong with being a kid living in not a single family home? Yeah. No, I don't think it's a matter of the kids. I think it's a matter of the parents what they're comfortable with. Like, for me, I would live in a condo. I would live at my parents' house if I could with me and my two kids, two boys and my life, but my life would never do. Like,

she wants space and I don't need space. So a lot of this is still, personal preference, at least if you're going, you're going to live in it first thing. You know, look at New York City. That's like a city of eight million where the vast majority of children do not live in big single family homes with like, and they all turn out okay. They do. You know, look at San Francisco or Rio de Janeiro or like any major city. Right.

As a kid who like grew up without a lot of money and like lived in an apartment for a while, I just, I don't, I don't really get that. Yeah, yeah. That's totally fair. One podcast will talk about kids and money and then we can go into it. All right, so back to this original example, $100,000. I need 1%. So it needs to rent at least for $1,000 or more.

Half of that's gone out the window from just stupid, you know, stuff breaking and taxes and all this kind of stuff. And then I also have, if I'm putting, let's say, $30,000 down because I'm not going to live in it. I need a finance 70,000. I don't know what kind of average finance. I mean, how much, like, is that like $200 a month, $300 a month? Like, what can we be using this example here to just whittle this down a little bit more to get a better understanding? I'm going to jump on the Internet right now and run this through a mortgage calculator.

Let's say mortgage amount is $100,000. Well, let's see, $70,000 in your mortgage amount. Yeah. At, let's say, a 4% interest rate. Sure. Over a 30-year term, that is $334. in monthly payments. Let's say $300.

Yeah. So now you're $1,000. Someone gave you a check for $1,000. You get $200 of it. You get $200 of it. That's pretty good, actually. Oh, yeah. Yeah, that's a pretty good return.

Because remember, that mortgage that you're paying, that $300, a portion of that is also going towards building your equity, building your principal. Right. So let's say, like, just to make it easy, which isn't the case in the beginning. But let's say $100 of that is your principal. So in theory, you're making $300 a month, $200 cash and $100 towards principal payoff. Yeah, something like that. Okay.

Yeah, I don't know why I guess in my head I was just assuming I'd have a mortgage of $700, so I'm already negative. But you're right, the mortgage is only $300. So I guess the question becomes, am I willing to give up $100,000 either in cash? Actually, that would be better because I didn't be $500. But let's say, like, am I giving up $100,000 of potential money? to make $200 a month or $300 a month and more over time, is that worth it? Or so the way I look at it is like, I don't want to go through all that hassle.

I'm going to invest this $100,000 into like the stock market, right? Into an index total vanguard fund. And then, you know, what am I comfortable with? What does that look like? Those are obviously like a whole other set of variables. So backing up a minute, if you invested in an index fund, you could only invest. cash. I mean, I'm assuming you're not buying on margin. Yeah, that's true. So, I'm only at 30,000. So, yeah, in that comparison, yeah, it's, it's, would I invest that 30,000 in an index fund,

or would I invest that 30,000 towards the down payment on a house? Yeah, I think the house is looking a little better. Damn you, Paula. I'm trying to convince myself not to want to go down this route, but mathematically it makes sense. And then again, it's, of course, where does that fit in with your lifestyle and personality, right? The heart and the hustle. Man, this thing. keeps coming up. It's true. Like, I, like, well, and that brings us, I know we're kind of going long time here on the call. But this is, I mean, I'm literally learning, like, 50% of everything from you right now.

Like, no one's ever told me any of this stuff. Right. And I'm in blogging, and I, you know, I've had people guest posts about this stuff on my site. So I like this personally. Hopefully other people are getting, I liking it too. But the other two main questions I have for you, for me, which is something for me, So I'm becoming like minimalist over time and I like simple and I like not thinking and worrying. Yeah.

And obviously, anytime you invest, you're going to have to deal with being comfortable with risk, right? And it's not going to be as simple because you're adding a big crazy thing into the mix. But, you know, my two pain points emotionally are, A, like, I don't want to think about and worry about all these properties scattered around the city that can burn up any day. Like all this crazy stuff can happen. Right. dying it like out like who knows right that people die in them all the time that freaks me out you know yeah and then two like how am i physically managing logistically all the properties all the property manager stuff all the money coming in like and i know these are two big questions but you

people have obviously figured out a way to do this to make it streamlined so it's just a matter of figuring out the plan first and you know the emotional stuff you just have to get used to i guess yeah yeah yeah i mean well let me frame me it this way. So I'm netting, I mean, roughly about $60,000 a year after expenses. If you want to be conservative, let's say, let's call it 50. Okay. How much time and hassle would it take me to make $50,000 a year? Damn, yeah. Okay. Way better. Right. All right, that's a great question. What do I have to do to make $50,000? Right. And is that less annoying or more annoying than buying a couple properties and then letting it hum in the background. Exactly. And again, yours,

I guess the nice thing is if I made 50 grand by Washington cars or consulting or whatever, I have to do 50 grand every single year to keep it up for the rest of my life versus you get it somewhat passively for the rest of your life. So that's a big tradeoff too. You only have to hustle once for the rest of your life versus every year, unless you're doing stock stuff again. Yeah. Huh. I like that. That's a good way to put it. Have I convinced you, Jay Money? Are you going to be... Yeah, a little bit. One last thing while we're on this topic.

And we can talk about this in other shows, but the property manager is up. So, like, I have a property manager that puts me a whole more. It's like 150 a month. But like to me, like they deal with all the problems. Any time there is, unless it's really major, they call me, which like you never get a good call from like a property manager. Yeah, they're never calling to say happy birthday. Yeah, exactly. So that's a way to ease like the somewhat. painful parts if you're willing to lose a little cash. So in your example of making 200 a month, if you had a property manager that charge will say 100 a month. Oh, no, no, that includes the property.

Oh, that's done. Damn. That's even better. Okay. So the thing is, and I'm glad you brought this point up, always, always, always run the numbers as though you're paying a property manager. Okay. Even if you plan on managing it yourself, because you want to be able to, okay, so separate investor you from worker you, right? Like, this is, this is a classic mistake that new people make is people are like, well, if I just do all of the work myself, then my expenses are zero. Right. And that's not the case. Like, if I do the work myself, then management is zero, and repairs will cost only the amount of materials and zero for the labor. That's just not true. Run the numbers as though you're outsourcing every single component of it. And if you have the time,

and the interest or if you need the money or whatever, like if for whatever reason you choose to do the work yourself, that's fine. You can pay worker you for that active income. But keep investor you and worker you separate so that that way, worker you can quit at any time and then investor you can replace worker you with somebody else and the numbers stay the same.

Fascinating. I like that a lot. That's a great, great point. Man, you have all these crazy nuggets in your brain. You know, like, it's really amazing. Like, in, like, I have 45 minutes or whatever. Like, this is the stuff that I think people need to know before they just jump in because, like, everyone on TV is like, oh, I'm investing in all these million-dollar properties

and making a ton of money, right? But it does. It's all math. You're right. It's all about math. It's crazy. So, like, if people want to learn more about this, I see they go to afford-anything. dot com, which is your blog, and a lot of your posts are about entrepreneurship and real

estate. And, you know, you do like, you know, renting out rooms, you know, experiments with, you know, Airbnb. And you're always into like real estate stuff, right? Don't come to Budgetsarsexy.com and let's want like someone that hates it, which is fair, you know, there are people that don't like it. And then, you know, like, I just know bigger pockets.com. It's like, you know, we're friends with Josh who runs it and, you know, and they're all talking to all kinds of crazy properties. Would you say that's a good place for someone new to go to, to listen? Yeah, I love Bigger Pockets. It's a little overwhelming because for a few reasons. Number one, it's all kinds of investors with all kinds of risk profiles and all kinds of strategies and niches. So you'll find people,

so the real estate investing crowd is a little, you find some weirdos in there. Okay. Because the thing is, real estate is one of the few areas in which, you find some weirdos in there. the few areas in which the average person has access to very high leverage. And so as a result, you get these, like, people who are really into leveraging. I walked into this one, like, real estate networking group. There's this networking group that I would go to. And this guy comes in, and he's like, oh, you know, I just bought my first two rental properties, and I only put $600 down.

Wow. This other guy was like, why'd you put that much? And by leverage for normal people, that means debt. Like this guy could take out a million dollars of debt, but he only technically paid $600 out of pocket. Yeah, yeah, yeah, yeah. It's like, that's the one. I like bigger pockets. I'm very good friends with Josh and Brandon, the guys who run it.

But the one kind of caution that I would give people is be careful who your mentors are. Be careful who you listen to. There are many opinions and many strategies and many risks. and many risk profiles within the world of real estate investing. What I do is very specific, residential rental properties in a style that is very cautious about debt and leverage in mortgages. I don't, you know, I do take on mortgages, but I'm not like, wee, let's mortgage to the hill, no money down, woo! you know, like I'm not like excited about it. Okay.

So you have a balance between leverage and cash flow and everything. Like you're not going to like you'd rather have like your situation now versus double, but you have like $2 million in debt. Like that's two leverage. I could easily be much more leverage than I am. Yeah. Easily, easily. I know that I qualify.

I know that I could do it. But there's a reason I, two out of my five buildings I bought in cash. And I didn't have to do that. I could have leveraged into those, but I chose not to. And that's a very controversial decision because there are a lot of investors who would say, you're crazy for paying cash for a house. Why would you tie up your cash like that? You could easily chop up that money and spread it across 10 houses.

Right. And so that's why I say, be careful who your mentors are. What I do is one very specific strategy and one very specific kind of risk style. Well, that's the one that I'm going to trust so far. And where, like, so where can an, so bigger pockets is one place, your site, is there a site or blog that you think people, it will be a good place for people to start at, like, if they want to learn more? If you're interested in flipping houses, there's an excellent blog called one, two, three, flip.com, written by a friend of mine named Jay Scott. He's very good at what he does. But he's flipping specific, but I would, I would definitely recommend that for anybody who wants to go down that path.

Okay. Uh, rental properties. I guess my site and bigger pockets would be the two. Okay. So quick plug here. Sometime in the year 2016, knock on wood, I will be coming out with some kind of a real estate course. I don't know exactly when, but if you go to afford anything and if you look on some of my real estate specific posts, there's a separate email list where you can sign up for if you want to know more information about that. That's awesome.

And that's just going to be my brain dump of like everything. that I know about specifically residential rental properties in the United States. Okay, I like it. Well, if you ever want to partner up on an investment property, I'll just give you some money and then you can do all the work. That's how I like to do. Oh, man. This is good, Paula. Thank you for being like our first guest, even though like, I know, right? It was like an interview. Yeah. This is good because I'm good at certain things, but some things I just admire people. that can go these routes because I just it's not in me you know what I'm saying so I think it's important to like ask these questions and kind of explore what how you want to build your wealth

and what you know what you like or don't like right there's a million ways if you don't like real estate there's a million other ways you can invest money and become millions right and be happy for the rest of your life like there's plenty of other ways but this one is one of the most popular ones in the entire world you know so I'm glad that we went in there a little bit all right Paula well I think that's enough that was a lot lot of talk on real estate We'll put stuff in the show notes that go over like a lot of your, because you drop like nine or ten tips here. But, you know, obviously you can reach out to Paul anytime on their site or email, right? I'll cover something on the podcast.

But yeah, thanks for listening, guys. Yeah, thanks, everyone. Cool, we'll see you back soon. See ya. We'd like to thank our sponsors. Nobody! We don't have any sponsors, but we would like to thank you for listening because if you weren't, we'd just be talking to ourselves and that would be weird. If you liked us, please do the following three things.

Number one, subscribe to this show on iTunes. Number two, download as many episodes as you'd like. And number three, leave us an iTunes review. If you'd like to know more about us, check out themoneyshow.co. That's themoneyshow.C.O.