Epic Real Estate Investing - How to Earn Passive Income from Real Estate | 1025

Episode Date: May 21, 2020

In today’s episode, Matt comments on an article titled “How to Earn Passive Income through Real Estate” by Chris Hogan, a number one national best selling author, a dynamic speaker, and a financial expert.  Tune in and find out why Matt disagrees with the points made in the article, what are the actual key things you want to keep in focus in order to flourish your real estate investing, and why you should choose your mentors wisely!   Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Success in real estate has nothing to do with shiny objects. It has everything to do with mastering the basics. The three pillars of real estate investing. Attract, convert, exit. Matt Terrio has been helping real estate investors do just that for more than a decade now. If you want to make money in real estate, keep listening. If you want it faster, visit R-E-I-Aase.com.

Here's Matt. All righty, hello and welcome to the epic real estate investing show. And today we're going to talk about earning passive income from real estate. And the main thing we're going to focus on is what Dave Ramsey has to say about it. You know, I used to do this all the time on the podcast. I used to go through articles. I used to go through forums. I used to go through it and just read what people were saying and the type of advice that was being doled out.

And I just kind of pull out the BS and just kind of. shine a spotlight on it. And I had a themed intro for this segment a while back when I used to do this. And for the life of me, I couldn't remember what it was or what I actually called it. So after a very grueling search through years and years and years of MP3 files, I finally found it. In a world where the Internet has made experts of us all and provided us a platform to share that expertise. We must guard the information we consume like never before. For what we think about, comes about.

There is now a man on a mission to protect you from stinking thinking. It's time for Matt. Shreds the Threads. So today I found this article on Dave Ramsey.com. And I'll read it to you loosely. And it's actually not written by Dave. It's written by Mr. Chris Hogan. And I believe Chris Hogan has his own podcast underneath the Dave Ramsey brand.

He is a number one national bestselling author, dynamic speaker, and financial expert for more than a decade. Hogan has served at Ramsey Solutions, spreading a message of hope to audiences across the country as a financial coach and Ramsey personality. Yes, so I was right. I think I have seen this podcast. Hogan challenges and equips people to take control of their money and reach their financial goals through national TV appearances, the Chris Hogan show, and live events across the nation. His second book, Everyday Millionaires, How Ordinary People Built Extraordinary Wealth and How You Can Do. Forgive my laugh, you'll understand in a minute. But it's based on the largest study of millionaires ever conducted.

You can follow Chris Hogan on Twitter and Instagram at Chris Hogan 360 and online at chrishogan360.com. or Facebook at facebook.com forward slash Chris Hogan 360. So if you like what Chris has to say, then that's how you can find him. All right. So I've heard of Chris. As I mentioned, I think I've seen his podcast on the podcast charts. So that's about to the extent. So I'll admit that I've never listened to it or have I read anything by him.

So today is a first. All right. So I'll go ahead and I'll read his article. And it starts like this. The article is how to earn passive income. through real estate. So naturally it caught my attention. So it starts like this.

If you like me, you'd always like to bring in a little extra money on the side, right? Making money outside your day job can give your net worth a boost, not to mention give you some extra peace of mind. Maybe you've also heard about passive income and that renting out a property is a popular way to do it. But before you jump in, feet first, there are a few things you need to know when it comes to rental real estate as a source of passive income. Let's break it all down.

How to earn passive income from rental property. properties. First, let's get the record straight on passive income. Passive income is money you earn from a source that doesn't take a lot of effort from you to earn. It could be investments in stocks or bonds or income from real estate, just to name a few. In general, passive income is great. It can boost your retirement savings, help you retire early, or simply help you reach your wealth building goals faster. Now, there are lots of ways to invest in real estate, but let's take a closer look in particular at owning rental properties and why it's such a popular way to earn a passive income. Rental properties can be a great source of passive income once you get a rental

up and running. I mentioned that because it'll take some effort at the start, especially if you need to make some updates at the get-go to make it rent-ready. So it's not completely passive, but it can provide a monthly income flow without you having to participate in any kind of daily work. All right. So for the article, so far so good. I'm on board. Unlike what I hear. All right. So it goes on. How much to spend? Now, hear me out on this. If you're looking to buy a property to rent and you're brand new to the rental game, think modest, stable, and middle of the road. Don't get fancy with your first rental. Plan to pay cash for the place you want to rent out. Going hundreds of thousands of dollars into debt in order to invest in real estate is never a good idea. If you can buy something that's priced at about 70% of what it's worth in the current market. You're trying to make money on. the investment, if at all possible. Where to buy? Okay, in general, homes and areas with good schools and a good reputation tend to appreciate

better than lower-priced properties, like apartments or condos, look for properties in a solid neighborhood where real estate prices have been increasing over the years. It'll also attract the kinds of renters you need, responsible tenants who are less likely to damage the place or be unpredictable when it comes to paying you rent. rentals that are close to public transportation or major highways into town are usually popular with renters. Keep your eye out for any big companies moving to parts of a city to open offices or other factories. Local is usually best for your first rental property so you can keep a close eye on your investment. You don't want your first rental to be out of state in a place where you can't regularly check on the condition of the property.

If that's the case, you would need someone else to manage it. More on that in a minute. but if you choose a city with a good rental market and job growth along with reasonable state taxes, it can pay off in certain situations. What to buy? I tell people that first you need to decide what you want to get out of the rental. Do you want an apartment with regular renters and money coming in for a long period of time, or do you want a house that you plan to sell for a profit within a few years? Buying foreclosures can be a good way to get a good deal on a property if you're thinking about selling pretty soon after buying and renovating. However, you generally want to avoid money pits and fixer uppers when you're planning to rent a place. You want something that's attractive and almost move in ready, not a huge project to take on during the front end of the deal.

If you don't plan to manage the property yourself, a property agent will handle almost everything for you from collecting the rent to dealing with repairs and complaints and even evictions. You'll pay a commission to the agent, but it takes the stress off you if you're too busy to deal with these issues. always talk to a real estate agent about how much rent you should charge so you're not expecting too much. And be sure the rent coming in each month adequately covers expenses like maintenance, HOA fees, and homeowners insurance. Otherwise, you won't make any money. Happy tenants are easier tenants. If you do happen to manage the place yourself, do the right thing and contact your tenants every few months to make sure they don't have any concerns.

A simple email will usually work. don't call them every week and make unannounced visits. You should honor their privacy, but let them know you're available if they have any issues. Before tenants move in, make sure the hot water and heating and cooling systems work well. If your rental is a house, get a professional home inspection

before you rent it out to fix any urgent repairs. All right, we're almost done. When should you consider investing in a rental property? Okay? I really want you to hear me loud and clear people. That's what he wrote. I really want you to hear me loud and clear people. You should be debt,

free before you think about buying a place to rent. You should also have a fully funded emergency fund, which means three to six months of expenses covered. Having an emergency fund when you're a landlord is especially important because of unpredictable events like repairs, missed rent or periods in between renters. And like I said earlier, being able to pay in cash is key to funding any real estate deal. You know what I'm going to say here. You should also be investing 15% of your monthly income into retirement accounts, such as 401Ks and IRAs and still be able to keep this up once you've bought your rental. No source of passive income is worth it if it puts you into debt or cuts into any of your other financial goals. And it concludes with, get help from a professional.

Okay, if you're still wondering if a rental investment is right for you and you're not sure where to invest, then you need the help of a good real estate agent to guide you. This is too big of a decision to make a loan. And these guys are pros when it comes to the local market and all the details of buying and selling. Take my advice and get connected with an endorsed local provider in your area who you can trust. Find a real estate agent today and there's a live link there to click. All righty. So I've got some notes that I wrote. Right here. If we go back up to and he puts this in bold letters, plan to pay cash for the plan. place you want to rent out. Going hundreds of thousands of dollars into debt in order to invest,

and invest is in quotes, in real estate is never and never is accented, a good idea. So the plan to pay cash part, I can't, nor ever will I be on board with that. And here's why. People are attracted to real estate because of the riches and wealth that promises, as it's proven to do so since people have been buying real estate. Real estate has produced more wealth than anything else on the planet. And no one can argue that. But if you pay cash for your property, you have removed the biggest wealth creator real estate brings to the table.

And I'm talking about leverage. Leverage is the primary factor that separates. Not the only factor, the primary factor, though, that separates real estate from all other investment opportunities that are available to the average person. And Chris, he goes on to write, going hundreds of thousands of dollars into debt in order to invest in real estate is never a good idea. First, he's operating from the assumption that all debt is bad, which is a terrible assumption that does not universally apply. It's just inaccurate. If debt pays you more than it costs you, then that is good.

debt. I mean, if Apple, they've got more cash in the bank than just about any company, they are so stinking cash rich, it's sickening. So why do they continue to borrow? Because they understand the power and the advantages of leverage. Second, he puts the word invest in quotes when referring to real estate like you're not investing in real estate if you're using debt to do it, which is ridiculous, as it's how the best and most successful real estate investors do it. And I underline investors do it. And the third thing that's really been on my radar with financial advisors and experts

over the last few years is when they use words like always or never or nobody and everybody because he says it's never a good idea to invest in real estate using debt. And he highlights never. And then he ridicules invest by putting it in quotes. Well, it's never a good idea to tell anybody that it's never a good idea. I would gladly and happily take on the challenge of creating a list of people. I would challenge Chris Hogan to this today. If he ever listens to my podcast, maybe if one of you know him, you can let him in on this.

But I would gladly and happily challenge him to creating a list of people that succeeded investing with debt versus those that did not use debt. and compare who has traveled the furthest, who has accomplished the most. It would be no comparison. And yes, I would even take that challenge in comparing. Let's just, okay, let's just assume everybody used debt, and let's take a list of the winners and a list of the losers and see who came out the best and whose list would be longer.

And I'm specifically speaking of investors. I'm not speaking of speculators. I'm not talking about people that took out debt hoping that the property was going to appreciate and that was their exit strategy. Those aren't investors. Those are speculators. And he's talking about investors as well because the article is about creating passive income from real estate.

So that is an investment. Those are investors. All right. So that was just two sentences. Just two sentences out of this whole article that got me all riled up. But there's more. So let's read further. Where to buy.

So he says, okay, in general, homes and areas. with good schools and a good reputation tend to appreciate better than lower priced properties like apartments or condos. Look for properties in a solid neighborhood where real estate prices have been increasing over the years. I don't disagree with this, but you can always tell a non-real estate investor in their advice. And that's when they bring up appreciation as the deciding factor of whether to invest or not. Appreciation, it's the icing on the cake. It is not the cake. It is not the cake. And when people are talking about it like it's the cake, it says a signal right away. I know they're not a real estate investor because we don't have control over appreciation.

So don't make your decisions based on it. You can't time or control the market and the market is what controls the appreciation. So don't try. There are other factors of real estate. You can time and control, however. So focus on those. And if you focus on those and appreciation doesn't happen, you're still going to be in good shape. And if you focus on those and appreciation does happen, you're going to be an even better shape. Okay, then he goes on and says, local is usually best for your first rental property

so you can keep a close eye on your investment. You don't want your first rental to be out of state in a place where you can't regularly check on the condition of the property. Now, I don't agree with this, but I'm not going to argue it either. I mean, this is a very small fish to fry in this grease fire of an article. All right. So when he goes on to talk about what to buy, he says, I tell people that first, you need to decide what you want to get out of the rental. Do you want an apartment with regular

renters and money coming in for a longer period of time, or do you want a house that you plan to sell for a profit within a few years? Here again, I'm not going to argue this. You should know what you want out of an investment before you get into it. But I will say this. If you're buying with the intent of selling it for a profit in the future, just make sure that. you cash flow while you wait because you may have to wait a while because you can't control when it will be worth more than what you bought it for. So then he talks about more on what to buy. Buying foreclosures can be a good way to get a good deal on a property if you're thinking about selling pretty soon after buying and renovating. Again, it's a strategy based on speculation.

Buying a foreclosure and selling it does not create passive income so it doesn't even belong in this article. And there's a key point of him talking about foreclosures. They sound really good like you're going to get a deal there. And they can be. But where do you find foreclosures? The average person can't find them on their own. So as we move down further in the article, he writes, and listen for the key word here, always talk to a real estate agent. And then he writes, and be sure the rent coming in each month adequately covers expenses like maintenance, HOA fees, and homeowners insurance. Well, no, duh. You have to be able to pay for that for this to produce a passive income.

Always talk to a real estate agent is the scary part here. Anytime you hear, always, never, nobody, everybody, your ears should perk up for the hidden agenda. And I'll read on a little bit, and it's going to show up for you. So he goes on, happy tenants are easier tenants. If you do happen to manage the place yourself, do the right thing and contact your tenants every few months to make sure they don't have any concerns. Well, one of the quicker ways to remove the passive out of passive income is to stay in consistent communication with your tenants.

Let your property managers do that on your behalf. If you want to avoid all of the horror stories you've heard about landlords and tenants, this is a key first step in doing just that. So let your property managers do that for you. And unlike the experts that write these articles, this advice right here, this is coming from someone, that I'm sharing with you is this is coming from me who has owned and operated hundreds of rentals and even more tenants. So now the when. When should you consider investing in a rental

property? Okay, I really want you to hear me loud and clear here, people. You should be debt-free before you think about buying a place to rent. Again, making the assumption that all debt is bad is going to keep you in financial mediocrity at best. The wealthiest and most successful, people in our society, do not follow this advice. And if you want to be wealthy and successful, too, you should probably not follow the advice either. You should do what the wealthiest and most successful people do. They leverage. They create good debt, debt that pays them more than it cost them to use the debt. And he talks about an emergency fund, which I agree with. You should have an emergency fund to account for unpredictable events like the repairs and the missed rent periods and

and that type of stuff for sure. And then he goes on. And like I said earlier, being able to pay in cash is key to funding any real estate deal. Then he says, you know what I'm going to say here? So obviously he has said this before in other articles and probably his podcast and his TV show. He says, you should also be investing 15% of your monthly income into retirement accounts such as 401Ks and IRAs and still be able to keep this up once you've bought your rental. So he doesn't want you to sacrifice. your 401k and your IRA contributions for buying a rental.

And I've talked ad nauseum about this. And the bottom line is, most people don't make enough money to save enough money for a 401k or an IRA to pan out as a primary investment strategy. And that's what he's positioning them as, the primary and priority of your investing. Don't fall for this. The stats show it doesn't pan out for most people. And per the Department of Health and Human Services, most people, that's defined as 95%. That's pretty much all people.

95% of today's 65-year-olds. That's what the stats show. Then he goes on to write, no source of passive income is worth it if it puts you into debt or cuts into any of your other financial goals. This sentence right here, no source of passive income is worth it. if it puts you into debt or cuts into any of your other financial goals. So all debt is bad and your financial goal should be 401k driven exclusively. I mean, if your financial goal is to just barely squeak by in your golden years,

then he's got a point. But if living life to the fullest during your most active years of life, while you're still young enough to enjoy it as the goal, this is all terrible advice to follow. passive income is the financial goal. It's the financial goal if you chose the 401K as well. The strategy there is to put enough money in that 401k, so it turns out a residual income,

a passive income in your retirement years. That is the goal. And if passive income is your goal, you're not going to make it as fast as you can if you place saving in a 401k or an IRA as the priority. And in Chris's logic, no investment strategy is worth it if it cuts into your financial goals. So you can tell I've got a big opinion on this.

But I'm going to take my opinion out of it. I'm going to completely remove my opinion. And I'm just going to look at the stats. I'm just going to look at the mass. How many 401k millionaires can you name that are under the age of 30? How many 20-something millionaires do you know that made their millions by investing in a 401 I'll help you out. None.

You know why? Because it's impossible to do. You can't contribute enough annually to make that happen. This year, they just increased your maximum contribution to $19,000 a year. So let's say you started working at the age of 18. Let's say you found a great job right out of high school and you were able to make the maximum annual contribution right out of high school. And so say you're 30 today, so you started 12 years ago, and let's just keep the maximum

contribution to $19,000, even though you couldn't do that. I'm going to give you the benefit of the doubt on everything. So let's say you contributed $19,000 a year, and let's say you had a rock star of a 401k planner or coordinator or strategist. I'm not sure what the 401k person is called. But let's just say you had a rock star heading that up for you and leading that for you. so you averaged a 10% return for 12 years. That is definitely rock star status in the financial world.

So by your 30th birthday, what will your 401K balance be right now? $446,000. So almost a half a million. With the max contribution, you didn't sway from that for 12 years and you got a 10% annual return. So you made it halfway almost. But wait. I have a 100% employer match. And if you did,

congrats for having a job like that and a generous boss like that. And if you did, you'd still be less than a million dollars, $894,000 to be exact. So that's pretty close, right? So it's almost possible. But let's look at the actual stats.

Let's look at the numbers. The average balance, of someone's 401k at the age of 30 today, and I cited three different sources and went to Fidelity, wallet nerd, and I think some other financial institution. It doesn't matter. There's relatively the same number. The average balance of someone's 401k at the age of 30 years old is $11,800.

$11,800. Their total balance doesn't even equal that maximum. annual contribution. And by the time they reach the age of 60, when they can finally access it, the average balance is $195,000. Oh, we'll just round it up, $200,000 at the age of 60. And this is the primary investing strategy that Chris and Dave and the other people that work for him, I'm sure, and countless others like him who don't work for him, this is what

they recommend. This is the primary investing strategy. Whatever you do, do not sacrifice your 401k contribution. That was in the article. Don't buy a rental property if you're going to sacrifice that. And this is who people are going to take passive income advice from, from someone that recommends a primary investing strategy that doesn't generate passive income. Oh, but it does when you reach the age of 60, right? So let's just. just say at the age of 60, you had the average balance. Let's say you're going to take out $4,000 per year. I'm going to use $4,000 because that puts you right around the median household income in America. So you're just going to live at the median income. What's that? Four times 12,

it's at $48,000 a year. Okay. Well, you better not live past the age of 65. You can't live longer than five years because you're going to be broke. an investment plan that you spent a lifetime contributing to, the average person doesn't have enough to live longer than five years at the median income level. Now, how many real estate millionaires can you name under the age of 30? I'll give you three. Brad, Parker, and Corey.

I need to look no further than my own clients. And then if you look at Jeremiah, Josh, and Nathan, and there's three more that aren't under the age of 30, but they did make their million in less than two years. And that's not to brag, no. That's merely to point out, I didn't have to look very far, nor for very long.

I didn't have to think about it. And I certainly had something to do with it, but it's the vehicle that deserves the real credit, real estate. There's not another vehicle out there that allows the average person, that enables the average person, to accomplish something like that. And I'm not going to try and convince you that their results are typical. No, my point is, though, to demonstrate that they actually exist.

The other, the 401k millionaire under the age of 30, doesn't exist. It's impossible to do. So the article read goes on, get help from a professional. Okay, if you're still wondering if a rental investment is right for you and you're not sure where to invest, then you need the help of a good real estate agent to guide you. All right, so here we go. Ready? I warned you about this just a minute ago. This is too big of a decision to make a loan.

and these guys are pros when it comes to the local market and all the details of buying and selling. Take my advice and get connected with an endorsed local provider in your area who you can trust. Find a real estate agent today. Click here. So there's a link in the article to Ramsey's service in finding a real estate agent. This is his service. And this is the service Ramsey sells to real estate agents. So he can send them leads, people that just read his article, that are thinking of buying a rental.

property. You see, the goal of this article is to not give you advice is to drive leads to Ramsey's real estate agents so that they continue to pay Ramsey to receive those leads. Overall, what I don't like about this article, especially how it ends up, they assume you're not smart enough to take control of your own financial situation. They assume that you need to hire a professional. And in many areas of life, that could be good advice. And it probably is good advice in many areas. But when it comes to your finances, as important as a topic as this is to most people, doesn't it make sense to get involved and take control of your financial situation?

Rather than listening to someone that's more concerned about selling leads to real estate agents than they are in your financial well-being. See, Dave Ramsey isn't earning or generating passive income from real estate. He's generating passive income by selling your information to real estate agents. And what that means is you're taking real estate advice from someone that's obviously not a real estate expert. Do you really want to do that? He and Chris and his other members of his community or his company, they're generalists that are regurgitating advice that other generalists have regurgitated from other generalists. Sadly, the general population.

listens to generalists on important subjects like these. And they write off the experts that say anything to the contrary as nut jobs. People shy away from the too good to be true extreme. And they gladly sign up for that it's so horrible it couldn't possibly be false extreme. There's a lot of room in the middle to play. The stats show by giving it all up, all responsibility to financial advisors, most people aren't making it. And don't get mad.

it's just math. You see, you're not going to find someone that cares more about this, that cares more about your financial situation than you care about your financial situation. So if you really care about your financial situation, if it's really important to you, start participating in the management and the growth of it. If you want to be a wealthy speaker, author, and radio personality that makes money doling out financial advice that's failing the masses and that's generating leads for real estate Agents, then Chris Hogan and Dave Ramsey.

If that's what you want, I'm certain that they could teach you something about that. Their advice is not going to make you wealthy, however. But selling it might. Choose your mentors wisely. Thank you, experts. Please keep your heads in the clouds and your fingers on the keyboard. So Matt can continue to... Shred the threads.

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