There are countless reasons for individuals to begin investing in real estate. The most common reason that I hear from my students is they want to start earning passive income with the hope of leaving their jobs. This article is written for all those investors who yearn to become full time investors and jettison the 9-5 traffic fighting (thanks Alex Becker for that phrase) lifestyle. Let me create a framework that you can follow to achieve financial freedom.
1. Focus on a goal.
2. Choose an asset that produces passive income.
3. Begin your specialized education.
4. Create a team capable of managing asset while working full time.
5. Decide whether to self manage or hire professional management.
6. Consider a partner.
7. Focus on buying for cash flow.
When Jake & I bought our first property, the goal was to supplement our current income. I think the both of us had no idea what the future had in store for us. We were both working full time, Jake as a pharmaceutical representative and I owned a restaurant. We chose multifamily specifically because we both had full time jobs, and a multifamily would be easier and less time consuming to manage. We were naïve to the other benefits of multifamily, such as the economies of scale and the ability to scale the business quickly.
It turns out that self-managing the property and working at a job was feasible. The property was twenty-five units, and the decision to self manage was crucial to our success. We were thrown in the trenches, learning the business and creating the systems that we are currently utilizing. Selecting an asset that produces passive income was one of the main factors that allowed Jake to “retire” from the corporate world eighteen months after our initial purchase. The fix and flip model was not viable for our goals. We were looking for an investment vehicle, not another job to replace our current occupations.
The power of partnerships is often overlooked when individuals are considering investing in real estate. Most of us were taught to work by ourselves, not to trust anyone and to be solely responsible for our future. These myths were shattered for me once Jake & I entered our partnership. What benefits does a partnership create? First of all, it is much easier to secure financing with more than one person signing a guarantee for bank financing. Two balance sheets are stronger than one, and secondly, you will be able to pursue larger deals with a partner.
The third advantage is that each partner will have his or her own specific skill set. One partner’s strength may lie in underwriting, while the other may be a master negotiator. Our skills compliment each other, and we are able to focus on our strengths to create superior results. Have you ever heard two minds are better than one? There is a power when two people look at a problem, and bring a different perspective and solution to the problem.
The fourth advantage may not appear obvious, but many people fail in life because they lack this benefit: accountability. Most people are willing to do more for others than they are for themselves. If Jake needs me to perform a task, consider it done, and vice versa. The lack of accountability leads investors to doubt themselves and not make that extra phone call or visit to a potential deal. When a problem arises, we have someone to talk to. The profession of coaching has exploded because people are in need of the accountability to follow through on their actions.
The next step is to focus on cash flow. I would like for you to read an article that we wrote about the buying process: A Road-map For Buying Your Next Property. Our objective when we began was to create passive income, so we focused our efforts on acquiring assets that produced cash flow every month. We were not concerned with capital appreciation, although our excellent management drove up the net operating income and the appreciation was forced. The forced appreciation was the icing on the cake.
What assets were we targeting? We gravitated towards C properties that were catering to blue collar workers. These assets could be purchased at a higher cap rate and were cash flowing much better than the A and B properties. We ended up calling our strategy “Buying Mom and Pop properties”.