In over 25 years of experience in the real estate industry (and the property investment business in particular), I’ve discovered that there are many options to help investors purchase properties and create passive income. One of the most important is to have a strategy in place before you even look for a property. Each individual investor or investment fund should have its own strategy. It must include at the very least:
the rate of Return On Investment (ROI) they’re looking for,
whether commercial or residential,
the Loan To Value rate (LTV),
area and specific locations,
type of tenants,
the anticipated capital gain,
exit strategy (long or short term).
You cannot modify/adopt a strategy that does not exist.
After you’ve established your personal strategy; how are you going to find the properties you wish to invest in? Where will you look? Are you going to use a local real estate agent (which is highly recommended) or do it on your own? If a property needs repair, you will also need to find local repair or construction crews. If it’s a “buy and hold” strategy, you need to look for a local professional property management company.
My overall corporate strategy was crystal clear. I want to help investors create long term, passive income. My intention was and still is to this day, to enable these investors to live off these properties. The day they decide to retire, their properties need to produce sufficient income to allow them to maintain their desired lifestyle, without the need to work.
Another critical goal is to give people a means out of the “rat race”. To help them attain and maintain freedom and independence. I wish to give my clients the option to not need to work for anybody else and rely on a limited salary and hope they won’t get laid off. Establish an alternative to constantly being in a position where you are forced to live from paycheck to paycheck.
There’s a question I ask people in the seminars and the workshops I hold, “taking into consideration the price increase of properties in the last 20 years, and assuming you’d had the means and the knowledge back then, would you rather buy one home paying 100% cash or buy 5 homes with leverage?”
Most people will say “5 homes”. Yet, the majority have no clue how to get started, much less buy their first investment property.
As discussed in a previous chapter, the combination of leverage (mortgage loans, etc.) or what I call OPM (Other People’s Money) and the appreciation of the purchased properties will result in a much higher capital gain rate and ultimately a much higher build-up of equity. Therefore, you might as well use the most leverage possible. Always keep in mind that you want to be as sure as possible that these properties will be able to provide positive cash flow and that you will absolutely be able to service the debt.
By using leverage, you also enjoy a higher ROI. In most cases, the interest rate will be much lower than the return on investment coming from the rental.
Lastly, keep in mind that using the interest component of the mortgage payment (which consists partly of principal and mostly interest payments) as a tax deduction is an incredible benefit all by itself.
I believe that the richest people on earth’s key to success is to use the method of leveraging the most they can and finding ways to eliminate as much tax as possible by the use innovative, legal strategies.
It may not be possible to own only one property that can produce sufficient income to sustain the lifestyle you are looking forward to. So, it is highly recommended that you plan to purchase more than one. It’s very important that you don’t have all your eggs in one basket. Diversify as far as locations. You may want to have properties in different cities and even different states.
How do you create a portfolio of properties? How do you plan for that?
First, you use leverage as much as possible and second, you need to keep saving money on a monthly basis. That’s the way to do it, especially if you don’t have ready access to personal or family wealth. In time, your very first property will accumulate equity. You can then sell it and use the profits to buy more affordable properties, or refinance the property using the equity to buy more properties without any infusion of cash.
Another way to build up your portfolio is to use the same method I used in 2010-11 in Detroit Michigan. In that project, our investors provided the money and we put our time, knowledge and experience (sweat equity). We shared the profits.
Another popular method, of the many that we can use to build up a portfolio, (especially when you don’t have enough money to put down) is the wholesale approach. Knock on people’s doors and ask them if they are interested in selling their property. If they are tenants, try to obtain the owner's contact information. Some of these properties are behind on their mortgage payments. The owners might be desperate to sell. You essentially assist them to get rid of a heavy burden and perhaps even avoid foreclosure. You negotiate the deal, sign a contract and then transfer that contract to some other investors for a fee.
Bottom line, you must explore every and any possibility. Use your mind, you’ve got to be creative. Find the way to buy one and then another property. You will make some mistakes along the way, don’t let that discourage you. Keep on that route, stay the course. It leads to success and financial freedom.