Jorge Newbery, Founder and CEO, American Homeowner Preservation. On a mission to help Americans crushed by unaffordable debt. This Ex-Apartment investor talks about going $28 million dollars into the hole. This is quite honestly the most authentic and insightful interviews I have had this 2016… editing the podcast was like watching a freaking drama movie.
1) How much simple passive Cashflow are you making today and how are you doing it?
(You don’t need to give a number if you would like privacy. You can be vague such as halfway to quitting my job, cover my mortgage, Make 25% of my expenses, over $10k, although people like when people open up the kimono.)
My wife and I put extra money in AHP. It’s in the low seven figures.
2) What is your Han Solo moment – Han Solo and his buddy Chewbacca from Star Wars were cruising around the galaxy as lowlife smugglers but then cross paths with Luke and Leia and his life took a pivot point. Describe the resistance that was the catalyst for change.
Always been an entrepreneur. My last regular job was 25 years ago as branch manager of a mortgage company. Even then, most of my earnings came from commission, so the smarter I worked, the more I made.
Did you “burn the boats” or did you let it happen naturally – was there an internal (you decided to make a change on own – what was thought process?) or external trigger (ie got fired from your job)?
3) Worst life/business moment what did you do after? Lesson learned?
Shutdown of Woodland Meadows (my largest holding at 1100-units) and my subsequent financial collapse.
- The positive impact you can have on other lives is more important than accumulating cash. I use my Woodland Meadows experience to aid families struggling to avoid foreclosure. The best part is that AHP and our investors can also generate strong financial returns by doing so, which makes the effort sustainable and scalable.
- Some risks you cannot anticipate.
4) Current 2-week experiment and 6-month project? (90-180 day goal) A mark of a high performer is to put your ego aside and accept the help of others and mastermind maybe folks can help you by you asking.
- Next two weeks: complete improvements to ahpfund site in order to make investment process as easy and fast as possible.
- Next six months: execute marketing campaign to raise 50MM on ahpfund.com.
5) What is your simple passive Cashflow number? Now imagine you had 2x that amount… Describe your ideal day, detailed routine, and what projects you are working on.
Workout, work on higher-level growth of AHP (i.e. avoid getting involved in individual cases), spend time with friends and family.
6) Something that you have recently or thought about “burning your cash” on for time savings or an improvement in quantity of life.
Outsource/delegate more of what I do to experts, so I can focus on what I do best and free up my most precious possession: time.
7) Tony Robbins identifies two large concepts that we are continually struggling to gain perfection at: #1-Art of Fulfillment and #2-Science of Achievement. If you died tomorrow and I were to email this to your kids a couple decades later… this is what they would hear.
- What is your secret/hack for the “Science of Achievement?” How you do contribute back?
Stay positive and upbeat even during challenging times. Embrace difficult periods and endure – the effort often gets easier. Greatness is typically preceded by surviving difficult times.
- What is your secret/hack for the “Art of Fulfillment?” Any secret habits to share?
Strive for what you want, but allow yourself to be happy with what you have.
“My wife is officially is quitting her job at the end of this year. Thanks for helping us be able to do that. One of her friends had to go back to work 10-weeks after having their second kid because they need her income to pay the mortgage. It makes me cringe just thinking about that.” –Hui Deal Pipeline Club Member
The typical SimplePassiveCashflow tribe member asks a lot of questions.. Why do I have to work 40 years at my JOB? Why do the wealthy always get ahead? Why do I stay up late at night reading Quora?
Mainstream investing (401K, stocks, mutual funds, 529, IRA, or anything retail) is based on investing for appreciation. You know buy-low-sell-high …. usually based on factors wholly outside an investor’s control.
To one day (when you are grey and immobile) retire and live off your nest egg at 4% withdrawal rate.
We call this gambling than investing.
Buy-low-sell-high trading mentality encourages the churning of holdings … which generates commissions and short-term capital gain taxes. Which is another reason why we do not like commission based Financial Planners or Registered Agents.
In case you have not seen this whole financial world is an engineered system by Wall Street firms and the government which protects them, to prevent Main Street investors to building enough passive retirement income in you 30s/40s as opposed to your 70’s. The mainstream financial news never talks about yields (coming from cashflow – income minus expenses). Discussions focus in the context of share prices. It’s pattering you to think buy-low-sell-high. Churn and cha-ching for those executing transitions in the industry. And for most people who are confused and freeze that’s why there is a hidden asset management fee which is an above the line expense to you.
The secret… Is not about appreciation but cashflow. Creating multiple mini-pensions today as opposed to hoping and praying you have enough to deplete from during your dying days.
Financially independent or the truly “wealthy” look at the world VERY differently than those in the corporate rate race or Wall Street fun-house.
For real estate investors, it’s all about acquiring streams of cash flow …
…. collecting contracts (leases) with people and businesses who work every day and send us a piece of piece of their production. It’s based off sound financials where you make more income than expenses and not off fake company evaluations and perceptions.
Although equity is nice when it happens we know REAL equity growth is driven by cash flow. More cash flow equals more equity. Cashflow is the oxegen to survive in order to partake in equity growth. And Cashflow today literally puts food on the table, gas in our cars, clothes on our bodies, shelter over our heads, and a nice vacation if we have extra.
The best part is that we control multiple streams of income and essentially our own destiny as opposed to giving up control to a corporation that is dependent on the overall national and world markets.
As the Cashflow affords us the means to sustain, surplus cashflow and equity allow us to acquire even more cashflowing assets. It’s a virtuous cycle of compounding wealth. But the good kind.
Sign up for the mailing list and join the free web course “Journey to Simple Passive Cashflow.”
Preview of what is to come in my jump start to cashflow guide that encompasses all the lessons in the past few years…
Week #1 – Introduction to the “Journey to Simple Passive Cashflow”
Week #2 – Seeing the Matrix – You will know why the middle class is shrinking and what you can do to continue your same standard of living
Week #3 – About Me – Learn about my background and why I have the formula for high paid working professionals to escape the rat race
Week #4 – Real Estate Investing from a 30,000 foot view part 1 – You will understand real estate investing and all the options. We will cut through the noise and identify what are the best options for the high paid professional
Week #5 – Real Estate Investing from a 30,000 foot view Part 2 – Continuation with the addition of downloadable tools
Week #6 – A free special gift
Week #7 – Fundamentals – You will get to know the basics of what every investor needs to know without reading a gazillion books or going through hours of boring podcasts
Week #8 – In-Field Experience – A guide to effectively network and build your investor circle
Week #9 – 2018 Trends – The Fundamentals don’t change but the market climate changes so here is the latest market report and things to be on the lookout for
Week #10 – Buying a Rental Property Part 1: Acquisition – Start shopping for deals and refine your criteria to be able to spot out your next addition to your growing portfolio
Week #11 – Buying a Rental Property Part 2: Lending – You can’t buy anything and use leverage effectively if you don’t know the basics of using the bank to your advantage.
Week #12 – Buying a Rental Property Part 3: Operation – Congratulations you are a rental property owner but that’s only half the battle. Now we focus on managing the manager so we can optimize our returns.
Week #13 – Buying a Rental Property Part 4: Mentorship/Networking – You net worth is your network. Don’t be that guy who repels help and good ideas and the last person to hear of the latest trends or work with bad vendors.
Week #14 – Half-Way Point! – Build your portfolio with the end in mind and with a holistic approach
Week #15 – Syndications + Apartments Part 1 – Understand why most sophisticated investors scale up to larger investments
Week #16 – Syndications + Apartments Part 2 – Find out how you can get access to deals once only accessible to the wealthy within the country club
Week #17 – Investor Mindset – Once you get started you realize that the possibilities are endless (I know it sounds cheesy but some people sign the front of the checks and some people sign the back)
Week #18 – Productivity – Following up mindset the limiting factor might be the fact that you suck at getting things done. Here are some of the best tips to increasing your output and having more time to do what you want to do.
Week #19 – Taxes – You will learn what you will need to know to prevent legal chrn from a lawyer who does not know what they are doing
Week #20 – HELOCS/Refinancing – A great way to find lazy money to put to cashflowing rental real estate
Week #21 – 1031 Exchanges – Don’t be fooled but this talked about tax strategy. It is often not what cutting edge investors use.
Week #22 – QRPs – Got funds locked up in retirement funds? Lets free that lazy equity!
Week #23 – Life Insurance Banking – Its called life insurance but its use by the wealthy to bank from yourself and avoid taxes.
Week #24 – Other Financial Hacks – Other secrets I pick up by hanging out with wealthy people
Week #25 – Covering your assets – You will learn some ways to build legal protections around your financial empire
Week #26 – Conclusion – Pulling together the basic and advanced topics for you
This is the stuff you don’t hear talked about from co-workers!
Most so-called financial planners don’t even have a clue – although they are probably a nice guy.
These are the secrets of the uber-wealthy and specific mentorship groups that I have spent over $40,000 to learn over the past few years.
All too often I see hard-working people with good jobs struggling to get by.
These are the same people who are forced to take stressful promotions at work, commuting in the car for a couple hours a day (hopefully listening to the SimplePassiveCashflow.com podcast), going home to the home they think they own but in reality, they are just a slave to the mortgage company.
These “good citizens” are victims of an engineered system to keep then investing in 401Ks, mutual funds, and stocks.
This financial system is setup where the insiders are stealing the majority of your returns (and you take all the risk – to learn more about this go to SimplePassiveCashflow.com/FP).
After over 2,000 calls (Now available to Hui Deal Pipeline Club members) between 2016-2018, I have found that most people Major in the minor things…
For example if you are trying to clear space in you iPhone. #FirstWorldProblem
You are wasting your time with this…
When you should be spending time on this…
And don’t get me started with mentorship. Most people are worried about how much the shovel costs when they are trying to dig a hole.
I am trying to lead folks out of financial entrapent! Lets get out of the rat race together!
Welcome to the website and join the club!
****UPDATED 7/2018 w/ Quick Start List!!!****
Welcome if you are new! And welcome back… here is what I have been working on…
1 ) Just closed my second syndication in my own name. If you want access to these opportunities they are only available to folks with a pre-existing relationship. So sign up for my Hui Deal Pipeline Club and setup a time to chat.
Hui Deal Pipe Club acquisition stats (Estate-2016)- Acquired over $90M dollars of total real estate and $8 million dollars of funds raised.
4) I stopped looking for deals… I only hunt the hunters to partner with if the deal makes sense. Not to sound high and mighty but after doing this podcast thing for a few years I have reached “critical mass” for social capital and deals are now coming my way. There are about twenty deals I get from brokers in my email everyday and a few syndication deals that are pitched to me every month.
Goal: Turn “C” and “B” class properties, 60-300 units (stabilized with value-add opportunity) with at least 75% LTV/25 year amortization. We plan to hold 3-6 years and sell when we have doubled our investors’ money. Utilize Non-Recourse debt for extra security.
Seeking MFH at least 60 – 250 units.
1. Value-add component: typically 85-90% occupancy for non-recourse loan & discount based on condition or motivated seller
2. Price: $1,500,000 – $9,000,000, per unit cost under $55K.
3. Location: secondary and tertiary markets
4. Class: D/C/B Property in a B/A neighborhood
Current holdings as of co-owner of MFPE Investments LLC (1400+ units in OK, LA, IA, TX, and WA)
“I read a book called, “The Millionaire Next Door” and it explained why my pain points were motivating for me, and how I channeled that frustration into something productive…the desire to make my family proud and ‘come up’ in life and pull my family into a better socioeconomic situation, and to ‘have what others have but i never could’ but somewhere along the way, I learned quickly that the ‘having of stuff’ is not what brings happiness so I dont pursue the shiniest of immaterial things… just the MED…. minimum effective dose of what I truly want which is surround myself with a few quality people and necessary things to subsist on than a bunch of trendy new things and fads that will fall off eventually” . –Hui Deal Pipeline Club Member
Networking with other Buy-Hold investors I discovered 2 things:
1) Passive investors are hard to spot out among the typically ‘active’ RE crowd that are majority at most local REIA meetings. Trading best practices was very difficult and I got lost in the fix and flipper group think mentally too.
Always consider the source of your advise.. I think we can all agree that going to your mom/dad for financial advice may or may not be the best place to go.. Sure they may be retired but consider the path the took to get there with different circumstances.. In 2015, I started to realize that going to my local Real Estate investing group was probably not the best place for me to go.. I started to pay a lot more to get into more qualified groups and conferences and I found that mostly everyone were real investors and not just Wantrepreneurs.. I got even more focused and as an engineer still working the day job I sought out groups with other investors who were primarily working professionals (doctors, lawyers, accountants, engineers).. A lot of these people were a little older than me which helped me find my highest and best use as an investor but gave me a high-level view of how to put together a holistic life plan.. An example of this happened the other day when I asked my guy at the Mercedes dealership what other people do with their leases do at the expiration of their contract.. Notice I would not ask that at the Honda dealership because people there don’t lease their cars.. By the way I don’t know why you would want to buy a card…. I did the math.. The takeaway is find people who are similar to your pedigree in terms of time/money/knowledge/network and use those as role models.. Grant Cardone has a saying “who’s got my money” which I think is misinterpreted as a war cry to get out there and make money.. I take it as a subtle hint to find those who have what you want and they “type” of money (active or passive).
2) Passive investing is often boring since this is not a get rich quick method of building wealth and uneventful (if things are going well there aren’t too many cool stories).
This podcast and blog are meant to distill content just to the golden nuggets for the passive Real Estate Investor. I plan to go beyond the newbie tips that clutter the internet and cocktail parties because lets’ face it, as a passive investor your time should be spent on things that you love to do and those who are important to you (not trolling real estate internet forums or making makeshift plumbing repairs on your property).
As I get more experienced, I recognize that there are a lot quicker ways to make a lot of money in Real Estate such as apartment investing, flipping high-end properties, or development but for the time being I have a full-time job that is alright and until that changes this is the path that I have zeroed in on. So if you are like me, join me on this train and if you don’t like your job and want to quit you can get on board too we will wake you up when it’s your time to escape the rat-race.
Real Estate has empowered me financially I wanted to give back to the investor community.
“Overwhelmed by the amount of stuff is on SimplePassiveCashflow.com? Don’t know where the heck to start? Text the word “simple” to 314-665-1767 for the curated course to get you up to speed on the past two years of content.”
My Motivation For Creating this Site:
1) Begin with the end in mind and decide now what you want your obituary to read. We are only here on this earth for a finite period. I like this picture because this is what will probably be on the welcome table at my funeral. I hope you can make it! Rich Cohen wrote that there are four rungs of being remembered after death: “newly dead; dead but remembered; dead and all those who knew you dead; dead and all those who knew those who knew you dead.” In terms of YOU…All that matters is what happens when you’re alive. Your legacy will offer you no pleasure after you’ve passed so live how you dream but know that there are some unconventional paths that you have to take (like buying cashflowing rentals not in your home state). And for myself…fame will do you no favors for me once I die but at least people can use SimplePassiveCashflow.com to get out of the rat race. And if that does not get your going listen to the wisdom of Frank Ostaseski.
2) Create a repository of information where my unborn children or others can reference with some context into what I was thinking. Similar to Seattle Seahawk, Marshawn Lynch’s “Beast-Mode”, I have tried to live my life in “Legacy-Mode”. And I really want to have a real book!
Why a Podcast?
I jumped on the podcast ban-wagon in 2007 while I was working on the road when I did not have a friend near me. It got me into Crossfit in 2008, Paleo in 2009, Real estate investing in 2010, intermittent fasting in 2013, internet marketing in 2015, and led to meeting and creating friendships with a lot of you because we are aligned on the same wavelength. Yes… The phrase “we met on the internet” is totally acceptable! Obviously, a few of these interests have come and gone but in the macro sense, podcasts have instilled a lifelong interest and ability to learn.
Vinney Chopra calls it Automobile University.
When you ask a kindergartner how do you make money? Why don’t they say “invest in cashflowing real estate?” Because their parents don’t have a clue!
3) While I am alive I want to teach/empower others to fish for themselves. In real estate, we use leverage and by teaching others, I am leveraging other people to achieve their financial goals in hopes that they will pay it forward. I poke fun at MLMs a lot but I would like to create a pyramid scheme of philanthropy.
What is the change that you want to make in the world even if its a 1% move in the needle? Financial education – people have such struggle so much to make ends meet.
I was baptized on Easter 2016 and searched for a way to give back. I want to help others but I struggle with giving money away because I know I can grow my money much faster and I am much more frugal than any philanthropic organization. Bill Gates gave back only after he amassed a fortune. Tithing as you go along has a smaller cumulative impact. My end game is to give away my wealth to rightful causes via a Charitable Remainder Trust.
4) I hope my blog/podcast will help families realize the powerful wealth-building effects of real estate so they can spend their time on more important, instead of working long hours and worrying about their financial troubles. There are a lot of successful families with good jobs (teachers/engineers/programmers/finance) yet they struggle to make ends meet financially. It is their kiddos who ultimately get the short end of the stick. (Cool graphs on this subject) Being a Latch-Key Child growing up, both my parents had to work and I was left home alone after school to fiddle with my thumbs.
With Real Estate you are able to grow your wealth exponentially faster than the conventional 401K’s and stock investing, therefore you are able to escape the dogma of working 50+ hour weeks at a job that is unfulfilling. And if you are one of the lucky ones who happen to do what you enjoy… well good for you 😛
Money is not everything but it is important because it gives you the freedom to live life on your terms. And we are being misled by the Wall Street institutions and prevailing dogma. Don’t listen to your financial advisor who gets paid based on commissions.
As a great time in history to be alive with general peace and technological convinced, I see a silent war being waged upon the shrinking Middle Class. This is the Civil Rights movement of my time. In a way, people are having a Stockholm Syndrome with Wall Street profiteers being the captors. Let’s work together to redirect money from the Wall-Street casinos and corrupt financial institutions…To help the endangered ‘Middle Class’ savers find safer, more profitable investments in Main Street opportunities benefiting local communities.
“I wanted to say thank you to all of the Simple Passive Cashflow listeners. The content has been all over the place from Turnkey Rentals to Turkey Rentals and now to syndications and private placements. The feedback from some of you is that it has been a bit of a roller coaster or “Korean Drama” to follow the websites content. To memorialize the past and de-cuttler the past two years of content I have created a FREE web course to get you up to speed by texting the word “simple” to 314-665-1767.”
Why this podcast/website/syndicating deals is the perfect storm:
1) I don’t have kids. After learning about hundreds of listens situations via free calls I hear that this sorta complicates things… 😛
2) I am an ISTJ (introversion, sensing, thinking, judgment abbreviation used in the publications of the Myers–Briggs Type Indicator). I don’t really know what the last three manifest in my life but I am a recovering introvert – a side hobby is this group I started to help others get out of their shell. I believe an introvert has nothing to do if you like people or if you are loud and annoying. Your affinity is determined where you derive your energy. Going to the day job and working with you know “others” was really tiring for me. The weirdest thing is that when I talk to others over the phone or in-person I get so excited and sometimes a little too passionate. That’s how I knew I was on to something. I’ll say it many times but what really fires me up is redirecting money from the Wall-Street casinos and corrupt financial institutions…To help the endangered ‘Middle Class’ savers find safer, more profitable investments in Main Street opportunities benefiting local communities. And it would be awesome to help out people in Hawaii where I now live where so many struggles with finances. I’m not looking to change the world just a portion of it.
“I started the Hui Deal Pipeline Club because I want to see each of you get to your goals financially so you can focus on what is really important to you. There are other fundraisers out there that will train their investors down to 10-15% IRRs on crappy deals and do “deals to do deals” or to pick up acquisition fees. Between investing alongside you folks and wanted to grow my track record the right way with the best product I know you guys will keep coming back and bring your friends.”
“Are you absolutely bored at social gatherings because everyone is super passionate about their JOB and too shameful to get naked and talk about their finances? Been drinking the SimplePassiveCashflow Latte (got your own coffee parcel) and feeling a little lonely? Re-engage your friends having them text the word “simple” to 314-665-1767 to begin the Free web course “The Journey to Simple Passive Cashflow” so they can get back up to speed with financial independence and investing. Remember if you don’t tell them now about it who are you going to have mid-day lunches with when everyone else is still at the day-job.”
- The Basics
- The Rent-To-Value Ratio
- How much is wall street (Stocks/Mutual Fund) stealing from you
- Hidden Ways You Make Money in Real Estate
- Video – How I make 35% on rental real estate
- Why Rental Real Estate and not the Stock Market
- Podcast #5 – How Mom & Pop Investors Fail – ROE – Return On Equity Metric
- Podcast #9 – Essential Real Estate Books And Business Books
- The Real Cashflow Quadrant
- TurnKey Rentals
- About Me
- Best Podcasts:
- Podcast #17 – Serial Entrepreneur: Dr. Buck Joffery of ‘WealthFormula Podcast’
- Podcast#31 – Hacking Life Insurance for Tax Free Double Dipping
- Podcast #34 – Jorge Newbery goes $28 million into the hole and the fight to get back to even
- I would recommend using the Command-F button and seaching in this spreadsheet to find what you like: Master Spreadsheet of Every Simplepassivecashflow Podcast Link
- Click here to be added to my deal flow list and be put on alert when good deals come our way.
- MOSTLY PLEASE SHOW YOUR ALOHA WITH AN ITUNES REVIEW!!! Subscribe to the Podcasts: itunes – GooglePlay – Stitcher
- And new Youtube Channel!
- Please do me a favour and share with your friends. Because you can change someone’s life.
“I started the Hui Deal Pipeline Club because I want to see each of you get to your goals financially so you can focus on what is really important to you. There are other fundraisers out there that will train their investors down to 10-15% IRRs on crappy deals and do “deals to do deals” or to pick up acquisition fees. Between investing alongside you folks and wanted to grow my track record the right way with the best product I know you guys will keep coming back and bring your friends.
SimplePassiveCashflow.com is for working professionals who are looking for diversification and better returns outside of traditional investments such as mutual funds and stocks. The Hui Deal Pipeline Club is a free investor club where I filter investments and underwrite the numbers and partners myself. Unlike other investor lists and groups, my investors have personal access to me and know that I personally have skin in the game investing alongside with my investors.
Let’s work together to redirect money from the Wall-Street casinos and corrupt financial institutions…To help the endangered ‘Middle Class’ savers find safer, more profitable investments in Main Street opportunities benefiting local communities.”
“Start Here”Continue reading
One of those things were… “We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it,” The speculation is $550 billion in new infrastructure projects across the country was a central theme in his campaign.
Here is the meat of this post – maps of major infrastructure.
George Ross: Trump’s Lawyer
Chris Myles explains the downside to using Helocs to pay off mortgages & a teaser on life insurance
Why financial advisors are from the evil Empire, why you may not want to just invest in real estate – even though its the best;)
Erica tells her story of how she was eating lunch and walked from the job to eventually build a thriving coaching business.
11 Not So Obvious 1031 Exchange Strategies
My promise to my readers: No click bait here on SimplePassiveCashflow.com – all the tips will be provided on the SAME page, so relax! For real estate investors at some point, you are going to need to do a 1031 exchange. Having just done two of them, I wanted to share my experience before I forget it (since its sort of a pain in the butt and people forget painful things). Hopefully, it will help you create a game plan going in.
So no investor is left behind, a 1031 exchange is a way to defer your capital gains from a sale of real property. This is one of the advantages of real estate as compared to stocks or other assets. I am no lawyer or CPA, but basically, you have 180 days from the sale of your first/subject property to exchange into “like kind” investments using the proceeds (sale price minus existing mortgage and sales costs). This transaction needs to be done via an intermediary/custodian who sets up an escrow to create the paper trail for your upcoming taxes. This process is something you don’t want to DIY because if you screw up, you are going have to pay taxes on the proceeds, plus all that depreciation (recapture) you benefited from. Oh and one more kicker… once you sell the subject property you have 45 days to create a list that identifies all potential replacement properties, but more on that in a bit.
So now that the newbies have caught up there are the tips:
1) Have properties ready to go: This means having a purchase and sale agreement signed and having completed the negotiation before the subject property (the home you are exchanging/selling) closes. As the close date for the sale of your subject property gets closer (~2 weeks) and especially if it’s a slam-dunk transaction (i.e., the buyer is bringing cash to close/no financing), you might want to take the risk and execute those purchase and sale contracts sooner. Note that this is a bit shady to your agent because if complications do arise then you will have to cancel your contract and no one will like you L
2) Don’t screw around. Get your inspections done as a soon as possible. Knowing if you are going to move forward or abort the purchase of a property is super important. Remember other than the 180 day time limit the other properties on you 45-day list could be bought by other investors.
3) Work with a real estate attorney who has experience with a 1031 Exchange: Policies regarding 1031s will vary from year to year with changes in the Tax Code. Once you sell your property, you will also need someone to hold your funds in escrow, because you are not able to take possession of the funds. If you do take possession of the funds from the sale of your property, the 1031 exchange won’t work anymore. But good thing you found that lawyer that will do this all full service for you.
Rumor has it that the silly escrow rule was created when some guy took the proceeds from the sale of his property to Las Vegas and blew all his money on rocks and hookers. After that, the Government was like, “These people are idiots, we can’t let this happen.” So that guy ruined it for everyone, and now we have to all follow this arduous process.
Pick that lawyer and have all of the contractual details worked out before the subject property goes under contract to sell. Expect to pay $500-$1200 plus additional fees for each property you acquire. Talk to your lawyer and get educated about all the rules, such as the 200% rule, 45-day list, 180-day rule, what is eligible to write off, and get them to sign off on your plan. Remember these guys know how to do 1031s, and it’s ultimately your job to get the big picture right. That’s why you’re the boss.
4) The All-Important 45-Day Rule: As mentioned earlier you need to create a list of potential properties that you can acquire before the 45th day after the sale of your subject property. The rules change on these 1031s all the time (see disclaimer below) but I was only able to identify up to 200% of the subject property’s value which for me was eight properties for $800k, since the subject property sold for about $400k. (I don’t know where this rule came from, but it was probably conceived by Vegas, hookers, and rocks) What I would do about 10 days prior to the deadline of your 45-day list, send out an email blast to all your agents, turnkey providers, long lost wholesalers (you know the folks you exchange info and you never hear from again like an ex-college classmate) and basically do a roll call for all properties. This is a time to call (not email/text) to explain your situation. Set broad constraints, and specify that you need X properties from each provider that you will buy X of them. This will let the sellers know that you are serious, and they may move mountains for you and bump you up in the priority line. This may also eliminate the silly negotiation process and get you the best pricing. The beauty of doing this is that you are creating a competitive bid format and will ultimately fill up your 45-day-list with the best candidates.
5) Have a Backup Plan: When soliciting for your 45-day-list, you may also want to ask for properties that aren’t ready to be sold yet but “are in the pipeline.” For example, these are the properties that have just been picked up by the seller from an auction or those where a wholesaler is in discussion with the first seller, and the rehab has not begun. Fast forward a couple months, and suppose a few properties on your 45-day-list fall through due to a bad inspection, you are going to need to go back to your list and if you had properties that were ready to be sold at that time of the 45-day-list creation, a lot of them will be sold by then. In summary, this is where adding in the sleeper picks or prospects makes building your list complicated. You need to really meditate with a “Simple Passive Cashflow Latte” and think of every angle.
6) Your 1031 facilitator, gets paid when you do a 1031 exchange. Your lender gets paid when you refinance. Your Bank gets paid when you set up a HELOC. Each are a tool and every situation is unique. Is a 1031 really your best option? Sorry if this point is a bit late in the conversation, but I am assuming you are reading this article before showing up to the Toga Party with your loin cloth.
7) Do your own research on a “Reverse 1031 exchange”. It’s a bit more expensive but might be the right tool for the job, however, it is not for the situation where you are trading one property for many. Personally, I think it’s a tool for a really unique situation and it’s not worth discussing, but I’m sure a Lawyer will want to tell you all about it at their $300/per hour billable rate.
8) Get Everyone on the Same Page: Have a good old-fashioned, conference call to get your lender and 1031 facilitator on the same page. Isn’t it great to be the leader of a conference call for something meaningful this time? Funny Video. But what is not funny is getting that call from the lender who uses the underwriter as an excuse for why you can’t get a loan a couple weeks before the close. That phone call is totally avoidable with proper communication upfront to ensure you can qualify for the loans with the proper debt to income (DTI) requirements and Cash Reserves. As of June 2016, you need six months of PITI for your first four loans, but loans #4-10 need six months for ALL properties. When I was trying to close loan #10, I needed about $33,000 dollars of cash reserves just sitting there ($550x6x10). This makes an optimizer like myself really irritated. Luckily you can use ~100% of 401k or Roth accounts. Just a last month they allowed you to only count 70% so you can see how that rules change. Also in terms of cash reserves, make sure you have consulted with your lender about the required amount of time you need to season the funds in your bank account.
Also depending on your 1031 facilitator, you might be able to talk them into paying the appraisal fees out of the 1031 funds instead of out of pocket. I got my lender to reverse the charges and bill the appraisal fee at closing. Unfortunately, the home inspector will likely want to be paid via cold hard cash because he (Let’s be honest…it’s always a guy) is running a good old-fashioned cash business. Just kidding, he takes credit card too. Did I mention that you should relax through this 1031 ordeal? Now, is the time for yourself to enjoy an Old-Fashion or other alcoholic beverage, you are almost done.
9) Use It Or Lose It: As you are getting to the end of your 1031 timeline and utilizing most of the 1031 funds, you are going to have to decide to use it all or leave some money unutilized. Typically you will have to pay taxes on the remaining (this remaining is called “the boot”). You are going to be faced with decisions to pick up properties that are less than desirable or walk from the deal (and pay the taxes on the unutilized funds). Case in point, say the last property needs $30K to close the deal but the seller is dragging their feet with final punch list repairs that came from the inspection. The seller is refusing to replace the roof because the roof is 15 years old and has a few good years left. Therefore, the seller does not want to pay $10K to fix it per your request. Let’s do the math, if you walk from the deal you pay ~25% of the $30k due to tax implications of not utilizing the funds and pay the government almost $8k. Armed with this information, it would be logical to suggest that the seller pays half of the roof costs ($5k) as it is a good business decision for you to make this concession and not pay the taxes on the boot (5K<8K). This is a simple example, but this is how the decision needs to be analyzed. Also, keep in mind, information is power. If the seller knew that you were in the late stages of your 1031 and you did not have any other potential 1031 properties to go after on your 45-day-list or nearing the 180-day deadline you would be at their mercy. But that’s negotiation, which can be a fancy 52-card game of BS.
10) Just take it day by day: It is not easy, but it’s simple…LOL. This is where you are glad you picked an investor focused lender who has done these things before instead of the neighborhood big bank. Again make sure you keep the line of communication open with your lender (every few days) to avoid large surprises.
11) A 1031 Exchange is Not for Beginners: If you have not purchased a rental property before I would try to buy one outside of a 1031 to test the agent, lender, market, and especially yourself. The 1031 is going to require you to have many plates spinning at once. It is best to first figure out the nuances with a simple one-off transaction.
Which property class or property value range would be best to put on the buying list?
This is ultimately up to your investing strategy and criteria. For me to tell you what is the best is irresponsible and against what I believe, because you should understand the macro (not micro) concepts for yourself and make your own best individual strategy. With that disclaimer out of the way, I originally went (my personal strategy changes over time) after B/B+ properties that rented for at least $1000 per month and had at least 3 bed and 2 bath. This strategy evolves as my portfolio grows. #1stWorldInvestorProblems. Some things to think of when finding your strategy/criteria include:
- Although I fully intend to hold on to these properties indefinitely for cashflow, I recognize that things change, and perhaps I might want to trade in one “goose that lays the golden egg” for two or three “geese that lay the golden egg” or one “big ass goose that yea you get the point.” To say, “My properties are generating cashflow” is a fallacy. Instead, you have to evaluate what the numbers say on the bottom of the spreadsheet and compare the two situations you are evaluating. You should always be making moves to optimize your return, assuming it warrants the transaction costs.
- I was using Fannie Mae loans, which are those sweet government subsidized 30-year fixed loans. At the time of this writing (5/2016) the most one person can have is 10 to their name (If you are smart also 10 in your married partner’s name too). Your plan might be to only get one or two homes and sail off into the sunset, but your plan might change and you have to change your plan for the “if” in life. To acquire a conventional Fannie/Freddie non-owner occupied property requires 20-25% down payment. There are also lender costs, which I typically estimate at $5000 +/- $1000. Parts of the lender costs are variable, such as an origination loan (basically it’s their fee to have to deal with you and headaches you cause them). Origination fees are typically a certain percentage (~1%) of the final loan, but the rate varies from lender to lender, so this is something you are comparing. Other parts of the lender costs are fixed costs such as inspection costs, credit reports, and appraisal fees. It is these fixed costs that are the same whether you buy a $40K property or a $140K property. This is one reason I personally went after a more expensive property.
- By buying 50K properties that rent for $800 you’re like “Hey that’s awesome that’s a 1.6+% Rent to Value Ratio”. But I suggest reading my article about the nuances of the RV Ratio and property classes. I promise you there is a graph and I’ll show you where I think where the cool kids are investing on the class spectrum. Remember the goal is to maximize the profit, which is the rent minus expenses (and the mortgage if you finance the property). Folks get wrapped around all these metrics, but do not forget the goal.
- This is totally my strategy, but please think for yourself: When I was getting started I went for the higher priced properties (Not the A properties cause there is no cashflow in there). I went for properties that rent for 1100 that I could get for 100K. I would say these were B+ properties (Note: do not take the seller’s definition). My strategy was to find low hassle properties that had better tenants and properties that I could easily liquidate because they were close to the median home. There is a bit contradiction here because yes, they were safer in terms of tenant quality and exit strategy, but the cashflow buffer was less, so I had less ability to lower rents in a market downturn. Now that I have a stronger base in terms of teams, money, and knowledge I try to go for more C properties because I feel I have the experience and risk tolerance for it (although I stated that these could be safer in terms of the buffer in the cashflow).
Goal: I am selling my home for 600k, and I want to invest out of state for cash flow at $200/month per door.
I think that the per door $200 assumption is in line. There is a difference if you are buying $60K properties or $120K properties but either way, I think you will be beating the averages of the stock market, and that is why I do what I do. One day I will make a video showing the math on the hidden benefits of owning rental real estate.
This is how it is going to work if you choose to sell and do a 1031 exchange. First, you sell the home for $600k (~10% will go to commissions, etc.), so you are left with $540K. This is how much you have to acquire, or there are tax penalties. Therefore, if you are looking at $90K properties, you are going to need to pick up 6 of them. Your cash in your 1031 will be $540k minus your remaining mortgage. You can bring cash out of pocket to make up any shortcomings. Check out this article for more info on some 1031 issues and strategies.
SPC Git Er’ Done Action Plan:
- If you’re not doing a 1031… You will need to do one in the future or you are just being silly by hoarding that equity. Today think about the possibility of this exit strategy as you purchase properties. For example, a lot of people talk about buying duplexes, triplexes, and quads, but when it’s time to sell, there is a fraction of possible buyers. And those possible buyers are all investors who are looking to get a deal.