CW 775 - The Future of the Mind by Michio Kaku & A Client Case Study of Fernando from Brazil Who Now Invests in American Real Estate

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com welcome to the Flashback Friday edition of the Creating wealth show with Jason Hartman. As he rapidly approaches 1000 episodes of this podcast, he has hand picked individual episodes that he feels is going to be good review for you to prepare you for the future by listening to the past. Let's dive in.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He, he's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Today we have another client case study. Yes, we have Fernando coming on with us today. This one's kind of long waited because he's been a client for about three years and I started bugging him maybe almost a year ago now to come on the show and he said I will, I will in time. And, and so he finally did it. So I'm really happy about that. And, and both David Porter and Fernando and the other guests that we've had client case studies that we've had on the show over the years have done just a great job investing and they've been very good managers of their portfolio and managers of their property managers. I just love what I do. One reason it is a great thing to do is because I learn so much from you. I learn so much from our clients and I look at it as a big part of my job is to kind of gather and assimilate all of this learning that I learned from our thousands of clients, thousands of transactions that they've done in building their portfolios and, and some of the best practices I really learn from them. You know, it's not like I made all this stuff up or figured all this stuff out. And so today, again, just like on the last episode, that's what we're going to do. We're going to learn from Fernando and learn about how he acquired 50 properties that are 70 units. So 70 doors or units in those 50 different properties. And I met him about three years ago shortly after he discovered the podcast. And we just had a game plan and went to it. And he's just been doing a great job. So you'll hear his story today. And he will also be at the Meet the Masters event. And I think I've talked him into speaking at the event as well and sharing some more of this detail with you. So that'll be a great thing. So you get some today on the podcast, but also, of course, ethemasters with so many of our other good things. And by the way, we just confirmed one of my own attorneys to speak at the event and he is coming. He'll be speaking on Sunday. He has just done a phenomenal job with IRA investing. He actually wrote the book on it, one of the best books on the topic about IRA investing and asset protection. He is speaking on Sunday at meet the masters January 11th. It's the 10th and the 11th. You're really going to like what he has to say as well as all of the other fantastic speakers. And I'm looking through a land contract deal that I'm actually doing myself. I've been looking through that for the past, oh, three days or so and kind of poking holes in it and looking for potential pitfalls, you know, kind of what, what are some of the possible problem areas? When we talked about all the stuff on the podcast several episodes ago where we talked about land contract investing, that was episode number 454. So I'm gonna bring that knowledge to you as well. And I sent an email to the seller of this land contract. It was really interesting yesterday, too, calculating my return because the face value of the land contract, I think on this deal it was 9%. The overall return, though, assuming the land contract performs as the contract has stated, looks like it will be around 14%. But if they default, the land contract deal could actually provide a better return. So, you know, it's just funny how things work when you set up and structure your deals properly, regardless of the scenario, you can win. You know, you can win if it goes well and if it goes seemingly what most people would be would consider to be poorly, you can actually win more. And, and we'll talk about that at Meet the Masters in in great detail. Remember, you're listening to Flashback Friday. Our new episodes are published every Monday and Wednesday, so be sure to register for that@jasonhartman.com we do have a few seats left, unbelievably, I thought they'd all be sold out by now. But we're doing this one kind of earlier than usual, so seats are left. Go to jasonhartman.com and take advantage of that. And we'll look forward to seeing you there. Now, before we get to Fernando's interview, I want to ask you, do you want to know an interesting fact, something I learned a few months ago I've been meaning to share with you. And it has very little to do with real estate, but it does have to do with the incredible gifts we've all been given.

I finished a book by Michio Kaku, and I know that's a tough name to pronounce. I want to get him on the show in the future. And he is just a really interesting futurist scientist, all kinds of things. And he's got many books out there. This one's called the Future of the Mind. And one of the amazing things I learned about what he says, and I believe it, it's probably very true, is the most amazing discovery ever, and that is the human mind. And can you believe it? You already own one of those free and clear, that amazingly powerful entity, the human mind. We all own one free and clear. Cool. Cool concept there, isn't it? So we own this great thing free and clear, and we own a bunch of other things, you know, in our body, free and clear, which is fantastic. But the eyes, wow. The eyes are really an extension of the brain, okay, because they're basically brain cells in the eyes. And the largest nerve from a sensory organ to the brain is the optic nerve. So, you know, most of our data and perception is visual. And, you know, I'm not. That's not from the book. That's just what I'm saying there. But. And from other readings and learnings I've done over the past. But here's the amazing thing from Mish Kaku's book, the Future of the Mind, the scientific quest to understand, enhance and empower the mind. Did you know that your eyes, you think you're seeing everything with your eyes, but you're actually not. Here's what I mean by it. All of our eyes actually have a small blind spot in them where you think you're seeing. We think. I should say we think we're seeing an entire picture of what we're looking at. But actually our mind is generating some of that. It is fake. We're not really seeing everything we think we're seeing. So here's what I mean. It is a physiological fact that the eye does not see everything in front of it. There's a Small blind spot in it. So what our brains do is they actually create that image out of what it saw when the eye moved into that area, you know, as it's moving around so quickly. And the brain actually creates that image on a computer. I think they call this rasterizing. How the computer will rasterize the image. That could be the wrong word, but I think that's the word. And put it up on the screen for us on the monitor for us to see it. Right. And amazingly, our eyes are not seeing everything that we perceive. A small portion of that in each of our eyes in our visual field is blind. It is not seeable. Our mind creates it. That if you just think about that one, that's a pretty amazing thing. So again, not much to do with income property investing there, but I just wanted to share it with you.

There's.

Because I just keep thinking about how fascinating that idea is that our mind literally generates the image to fill in the blind spot. Wow. And you own that free and clear already. Amazing, right? Amazing. Sometimes we gotta really appreciate that, you know, Thanksgiving wasn't that long ago and talk about something to be thankful for. The most amazing computer that can outdo any computer that has ever been created. We already own one of those. Free and clear. Pretty darn cool. Well, hey, let's get to our interview. Our client case study with Fernando and you'll hear about how he acquired his 50 properties and they total 70 units because he's got some plexus in there. Here we go. Hey, I want to do a case study with one of our clients and I've been asking him to come on the show for a while and he has said he's not ready yet. But then to my delight I saw that he requested a time to be on the show and that is someone I've talked about before. And he was on just briefly a couple of months ago when we were at a conference. And that is Fernando. Fernando, welcome. How are you?

I'm doing great, Jason, thanks. Thanks for having the time to talk with me.

Well, it's good to have you on and you've got quite an impressive story and I think the clients will really, the listeners and clients of ours will really benefit from hearing your story. So. So thank you for sharing it. Maybe we'll go back and kind of take a big high level overview here of how you became interested in real estate and maybe even in your childhood growing up in another country, talking about what you saw in terms of inflation and parents, business and so forth, and will lead right up to the present day and how you built your portfolio. So, sure. Does that sound good?

Yep. Sounds like you plan.

So you grew up in Brazil, right?

Right, Yeah. I was born in Sao Paulo, Brazil, in the late 60s. Although my parents are from European descent, I lived in Brazil. I was there in my childhood. And as a teenager.

I actually lived through a period in Brazil where high inflation was really making its mark. There was a lot of people that were hurt by inflation in Brazil, and some people that were making quite a bit of money with inflation. At the time, we had annual rates that were over 100%. So it was kind of an interesting time.

So inflation rates of over 100% annually, that is just crippling. I mean, what a way to just destroy people's savings, destroy their stock investments.

Most people living there, even at a young age, myself, understood that money left unused, either in the bank or even in their wallet, would lose its purchase power literally on a daily basis. Prices would be nothing for prices to go up by 10, 20, 30% at a shot. I even remember living through a change of currency where the government decided or decreed that we would be using a new currency, and they had to remove three zeros from the old currency because it was getting out of hand. You'd pay 1000 crusaders at the time for a pack of gum. It was that bad.

Unbelievable. Yeah. So the currency was a crusader crusader at the time, Cruise. Okay, and so a thousand of those for a pack of gum. But what was it before? I mean, give us a comparison of how we should relate to that.

Well, it went from being a thousand to one. They took three zeros out of the currency and created a new currency with a new name. And so that, you know, it became more sane, you wouldn't be carrying millions of currency with you. It would just carry a lot less.

It was amazing. My father at the time, he was a shopkeeper. He owned a bakery deli, and I used to help him by working there. I was a kid and teenager at the time, and I remember vendors coming in just to stock up and sell goods like cheese and ham. And they would tell him that, by the way, Mr. Aries, the prices just went up by 20%. My father, he would have to pay. Pay for these products with money from his previous sales. But due to inflation, all these price hikes, he had to come up with this new 20% money to pay for products that he hasn't sold yet. He was just getting into the business. I saw this cycle repeating itself numerous times. It was just sad to see he was getting to a point where the net effect of in his business is he would never catch up. He was always behind the curve, always trying to come up with new money to pay for the basic goods that he needed. He got to a point where he, as he needed more and more money, he started borrowing money. And get this, Jason. At a rate of 5% a month.

5% interest per month. So when you compound that, I mean that's. That's just insane. Wow. Yeah.

I took a look at some of his. I did a spreadsheet with him back when.

When I went back to Brazil to visit after living in the US and it just made no sense. It was absolutely crazy to live like that. But on the flip side, this is an example of my dad who was really struggling with inflation. But I had an uncle who was. It's always an uncle.

I know, it's always. That's so funny because I recently listened to the interview that I did with my aunt Joan and of course, you know, Uncle John, but he wasn't there. But I did it with Aunt Joan. And it's always a rich uncle. Right?

Yeah, I don't know how that works. But anyway, I had an uncle and he, he was actually a business partner, my father, and they owned a butcher shop and they owned various different things. And he lived in Brazil through. Through the same time period, went through the same inflationary issues. But there was one crucial difference. He managed during that time to buy a couple of commercial buildings and rent them out.

Just a rem. You're listening to Flashback Friday. Our new episodes are published every Monday and every Wednesday.

I remember that he used to live upstairs. It was a two story building, one of them. He lived upstairs and rented the lower side of the building to a business. And the rents would keep up with inflation. As a matter of fact, he would raise the prices of rents higher than inflation at times because the. The steps were quite big. It would be 20 to 30 to 40% change in price hikes. You can definitely put a little bit more towards your rent increase and go ahead of inflation. So he was able to make money and save enough money and ended up purchasing a small business in Europe. Move away from Brazil. Before hyperinflation really took off in the 80s, it went from hundreds to thousands of percent a year. It just became insane. He basically left Brazil and was able to continue with a decent life in Europe. And it really stayed with me that learning that the way to get ahead and to get wealthy was what my uncle did essentially.

That is just amazing when you were a kid and you saw this type of inflation, I mean, you talked about what it did to your dad's business and how it put him just behind the eight ball forever where he was just always trying to catch up. How did you feel, how did other people feel around you that you knew? I mean, that's just, I mean to see this kind of ravaging of the currency devaluation firsthand is just gotta be just amazing. I mean it just changes your whole psychology.

Doesn't does and it doesn't because when you're living in a situation like that on a day to day basis, you just adapt. And you know, as a kid I thought that that's how the world was. You know, it was just prices kept going up and if you don't keep up and if you, you know, if you don't do the right moves, you, you, you're gonna fall behind. And it's just, it's just the life that you live and you don't put too much thought into it. It's just catching up, trying to survive. But the net effect is a lot of people worked very hard and saw their life savings just going down, being eaten up by inflation.

It would encourage people to spend sooner rather than later, I would assume. I mean, you know, that's really bad for an economy when you don't have a way to encourage people to save money and you don't reward them to save money. Because if you don't have capital formation, that really limits progress. Big things are done with capital formation. They're not done if you don't form capital.

There was very little credit available at the time. Like I said, money was so crazy, the inflation was so high, the credit was virtually non existent. So you saw a lot of hard money loans at these crazy rates and people just being desperate, trying to catch up and most never did.

That would be a very dangerous time to be a lender. Because one of the things I teach is how inflation transfers wealth from lenders to borrowers and borrowers are enriched by inflation and lenders are hurt. Amazingly, we don't have more inflation in the US which is, I don't know how long they can keep defying gravity, Fernando, but they, for the past year, they seem to be doing it pretty well. Before that, you know, for the last couple of years we've had some real inflation and you know, the government statistics are always understating it. Which by the way, back to Brazil, I don't even know if you paid attention to it. Certainly as a teenager I didn't but did you notice anything about the way the government acted, or did they understate inflation like we do here in the US or, you know, was there any awareness of that?

I don't think that they had. It was so obvious that I don't think that there was any way to, to play these games. You know, it's just so high that people see it every day that, you know, it's crazy and it doesn't really matter if it's 130 or 150% a year.

It's still just really, really high, period.

Exactly.

Amazing. Okay, so what got you interested in real estate investing? When did that first happen?

Well, as I said, you know, I was, I was learning as a child what inflation would do, and I saw how real estate helped my uncle, and, you know, basically.

I guess I have to take a step back and give you a little bit of background of some of the deep realizations that I had while working that led me to real estate in a more direct way.

As I was working in corporate America a few years ago, I went through, I guess, awakening a deep realization that I was not going to become financially independent at the rate that I was going. My investments were basically tied to the stock market, and honestly, they were mostly treading water.

I tried to make it big, becoming financially independent from stock options by working on startups. And I had two tries, two different startups that I worked for, but it didn't quite work out. I didn't make enough money to make me financially independent, but instead it was certainly enough to trigger a huge tax payment to Uncle Sam. I saw the 40 to 50% of my earnings being taken up by taxes. Literally. There was hundreds of thousands of dollars in taxes to the federal government, State of California, for the years where I got lucky enough to have options that were above water that I actually made money on.

Stock options.

Stock options, right.

And we should say that you're an engineer, a chip designer, you live in Santa Cruz, and so you, your career has been spent in the Silicon Valley area.

Right, Right. Let me give you a little bit of background there. I came to the U.S. i guess, for, permanently in 1984. I was an exchange student through the Rotary Club, it's a service club. And I went to live in New York State. I attended high school there. And when I was in high school, I played soccer and I caught the eye of a soccer coach. There was a nearby State University of New York campus, and the soccer coach offered me a small scholarship to study electrical engineering, computer graphics at the State University of New York. And after I graduated I was offered a job with a company that no longer exists. It was called Digital Equipment Corporation. And at the time it was a huge company. I think IBM was the biggest one in the 80s and digital was second, although like 15 times smaller than IBM is a big difference. But it was a great company, it had top technology. And I ended up going to work near Boston, Massachusetts, actually Hudson, Massachusetts to design computer chips. I don't know if you recall their Vex line of computers. And then I went on to work on their alpha computer chip line. This all with Digital equipment corporation. In 1993, Digital decided to open a design center in Palo Alto, California. This is when I moved to California, moved to Palo Alto at the end of 1993 there was a design center that Digital opened up in Palo Alto. They were actually designing chips for a project that Apple was developing called the Newton. You might have heard of that.

I do remember that flop. You do.

But you know, if Apple didn't have the Newton flop, we probably, we might not have the iPhone if you ask me. But anyway, it was a predecessor.

It was kind of a PDA and a personal assignment. It had some handwriting recognition software, but it was just before its time and it was a commercial disappointment to say the least.

But I worked for Digital in that project through 1995 and that's when I tried my luck with a startup. Being in Silicon Valley, I had to try at least one startup and I knew that this was, was one way to become financially independent. So I tried going to work for a company called NextGen in 1995. NextGen, it was basically designing computer chip CPUs. It was a competitor of intel along with many other companies that actually struggled quite a bit since intel was a virtual monopoly for the PC world at the time. So NextGen was bought by Intel Advanced Micro Devices, which is a much bigger company and is also a competitor of Intel. And they paid quite a bit for the startup that I was in. They paid $1 billion in 1996. And even though that was a great price, bottom line for me is I made very little money on the deal. I think I made less than 100,000. I didn't have enough shares and I didn't have enough vesting.

And the government took all the money in taxes, right?

Yeah, they took a lot of it in taxes. And I was really, I was really lucky in a way, but unlucky to not really make money out of the deal. So I worked for amd. Since they bought the startup, I Worked for AMD as a chip designer From I think 96 to 2004. And during that time we went through the dot com bubble and AMD stock actually reached its peak. It was over 40 bucks riding that bubble. But overall for the time that I worked at amd, it was about eight years. During these eight years I was able to make a few hundred thousand dollars from stock options and I put some of it away as investments in the stock market. I worked after AMD for another startup. Since the first one didn't really get me to financial independence. I went to another startup called PA Semi. And PA Semi was a stand up that produced a line of power efficient CPUs and this was quite revolutionary at the time. And it was to be used for gaming consoles and routers, Internet routers and that sort of thing. And I worked there for them through 2004. What I do remember, even though I didn't quite make it big with the startups, is the work in the startup was very demanding.

I was having some difficulty seeing enough of my kids and family during the times I was working in a startup. It was quite difficult.

Fast forward a little bit if you would, to your work at Apple and how that came about and then how you got interested in real estate.

So Psammia was acquired by Apple in 2008. They paid almost 300 million for the deal. And honestly for the four years that I worked there at the startup, I made about 350,000 probably from the sale, but the government again took over 100,000 in taxes.

The interesting thing is in California, the money that I made, the net money that I made from all of these years was not enough to even put down as a down payment for a decent house. Houses in Silicon Valley, a million dollars is common for a house here. And I couldn't even put it down for enough down for a down payment. It was pretty sad. But Apple did offer me a nice package as I joined them. But it required a four year vesting period. You have to wait for your stock options to vest and restricted stocks to vest. So you had to put your time through in order to reap any rewards. I work for Apple as a senior manager again doing chip design, doing program management and working on their intellectual property hardware.

Yeah, so we're, we're, so now you're working at Apple and Apple, you know, Apple makes great products. Obviously we all love them or most people do, but you know, that's hard work, isn't it?

It was hard work. And you know, as I, as I mentioned earlier, I was going through some.

Enlightenment or realization internally and becoming disillusioned with, with how fast I was progressing towards financial independence and especially my stock market investments. I went through the subprime and the financial crisis 2007 through 2009. That really took a dent on my savings. I remember paying thousands of dollars for a financial analyst and an investment counselor at Charles Schwab and Morgan Stanley. But my returns were absolutely terrible.

It was just welcome to Wall Street.

Depending on.

How I measure and which account I used, I lost 20 to 40% of my savings that my investments that I have worked on for many years, that would mean that they would have to go up by 40 to 80% for me just to be back up to where I was. It was just sad.

You just don't get anywhere. You just spin your wheels on Wall street and with stock investments because even if you make a return on the deal, the government takes so much of the gain. It's just not a tax favored investment income property is the most tax favored investment in America. So how did you get interested? I mean, what did you do? You started searching for podcasts or what was your start?

Oh, yeah, sure. So it was kind of an interesting story. Before I got to the podcast. In things 2011, I was watching late night TV at a lake in New York State and I was there with my American family and I saw a program.

From a TV network called America Auction Network, AAN tv. And they were selling newer homes in southwestern Florida in Lee County. This is where Fort Myers, Cape Coral, Lehigh Acres are, you probably know. And these new homes, homes that were built in 2006, 2007, and they were $60,000, $70,000 and they're being rented out for $750, $850 a month. These were nice, three bedroom, two bath, two car garage, 1500 square feet and higher. They were renovated, ready to rent. The guys that were selling them on the network were showing returns on investments ROIs of.

I just could not believe it. I could not believe the amount the prices for these and the returns that you could get. It was just a completely new idea for me. Although there were some caveats. You had to pay cash for the houses. It had to close within a couple weeks. There were no contingency on inspections and so on. I think the network also made 10% off the sale, but. But still, it was a great deal for me. Living in Silicon Valley, as I mentioned, it's not uncommon for you to find a house cost a million dollars that needs some work. And these homes in Florida were being sold in their entirety for less than a typical down payment for me. Well, I studied it quite a bit.

I put a spreadsheet together, I analyzed and compared different properties that are being sold on the network for months. And I thought about going to Florida during this time. And I think I spent about three months doing this, just kind of trying to get over my fear of actually purchasing something in a market that I wasn't familiar with. But I did decide to go to Florida and buy properties. This was early 2012. I ended up buying a couple properties in Collier county, not in Lee County. I found a real estate agent who was a colleague of a colleague. And the agent knew some contractors, handyman that could.

Yeah, so here it's all fragmented and you're just bouncing around.

Yeah, exactly. Yeah. I actually had my dad go down to Florida for three weeks to get the house ready for rental. He helped fix it up. It was a hodgepodge of items that I had to go through. And as of today, I self manage, I still have the property, I self manage it and there was definitely not turnkey. And I had quite a bit of difficulty finding support services around that area.

That's exactly what I found. And so many of our clients have found, Fernando, is that there's just, you know, there just wasn't any way to properly and prudently invest on a nationwide basis.

So after that, you know, this was in early 2012, this is when I found your podcast. I found the Creating wealth podcast with, with you and I got to give you a little bit of background. I've always loved podcasts, so I searched and I listened to many different financial and real estate related podcasts and especially a lot of these. In early 2012, as I was getting into buying properties, I had bought a couple properties in Florida. But honestly, almost all the podcasts and webinars and education out there had very little content that could make a difference in my life. There was just lots of talk about the current real estate market and interest rates and a bunch of guesses on where things are headed. It was actually a real bore. It was just very repetitive. There were some that were offering flipping, how to buy cheap and do rehabs, but honestly, they sounded like a lot of work.

That is a lot of work.

Yeah. Most of them require you to be present in the city where the properties were. You had to scrub newspapers and county auctions to find the right deal, the right property, and then you got to go find the contractors to fix them up. I remember one of them. It taught you how to become something called a bird dog. You probably know that term.

It was just so much work. I think what I was learning from that process is, despite what they were telling you, being a bird dog or a flipper, it's not as quick and easy for the novice guy that really doesn't know the area or the contractors to get economies of scale so you wouldn't become the next Donald Trump doing this. I think most of the successful ones, they spent years or maybe decades working around real estate and they developed their instincts about what properties to buy and so on. So I didn't think it was that easy.

So, Fernando, you started looking for podcasts out there and tell the listeners what you found.

Well, I basically found Creating wealth podcast by searching itunes and immediately I resonated with your message. The great return on investment.

Significant reduction in taxes, steady income that could eventually replace my corporate job income. Also, what I found very powerful is along with that message, I was impressed by the high caliber of your guests. And I remember listening to economists, investors, lawyers, authors, basically people who could present their expertise and allow me to judge their response against your message. So as an example, when you talk about inflation, your ideas about inflation going up over the next few years, I could vet that message against your guests and be sure that what you were saying made sense. And that was very powerful to me.

Oh, that's an interesting point. So in other words, you didn't have to just take my word for it. You heard the guest, you know, say it. I mean, assuming they agreed, I certainly don't always agree with the guest or they don't always agree with me, but.

Right, not necessarily agree, but, but understanding their reasoning and seeing how that compares against your reasoning. And if I was to follow your plan for financial independence, would it, would it work according to the experts and not just you? So it basically allowed me to solidify my understanding of the various facets of real estate, income investment and the multi dimensions that it has and listen to these top notch experts. So it was just clear that after I listened to the first few episodes, this is in early 2012, I went back and I downloaded probably one year's worth of podcasts and I went on a listening spree. I was gobbling up every podcast that I could get my hands on. And at that point I knew I was ready to sit down with you and come up with an exact plan on how to achieve my financial independence.

Good, good. So you took a trip to Phoenix just kind of on your own, right? I mean, I know that you talked with a couple of our local market specialists in Phoenix at the time. And then you had contacted me and asked if we could meet. And I remember, I remember our first meeting together. I just walked down from my. My apartment and met you at a little bar there called Canteen or Cantina. And we, we just had a beer and a bite to eat, right? Yeah.

And you brought Coco with you, if I remember.

Yeah, well, no, actually, I think that was puppy. I had puppy back then. And yeah, you did meet my old dog. So there you go on that meeting.

Yeah, so that meeting was really key because at that time I had put together what I called my Independence Day plan spreadsheet. And this was a lot of my thoughts into what it would take, how much money it would take, how many properties I would have to have in order to replace my corporate income. The goal to me was clear that I wanted within a year to be financially independent. And, and that would mean that again, I would have to have enough rental income to match my corporate income. I wanted to quit my corporate job and have the choice of live anywhere that I wanted. If I wanted to live in California, I could stay, or if I want to relocate, I could stay because I was not tied to an office.

Yeah, I love that you called it Financial Independence Day. And you were so organized. I mean, we went over kind of your different assets that you could use. I know that you sold a bunch of your Apple stock and purchased income properties with it. And, you know, we talked about the possibility of using home equity and all of the different things. And then you just started, you know, after you had that Financial Independence Day outline, which was a great guide, you were, you were extremely organized. Then you started acquiring properties. Right. Where, where did you, where did you start? I can't remember.

Yeah, we talked about buying in Dallas, Atlanta, Phoenix, St. Louis. We made a plan. And at the time, there were different lenders that were offering incentives for different markets. So we made a plan and I ended up going to Atlanta first. The idea was really to try to use up my conventional financing spots. As you probably know, there's a limit of 10.

Conventional financing loans that you can have under your name. And Those are the 30 year fixed interest rate mortgages that are just great. So we try to use those 10 spots in Atlanta and get those done and out of the way so I could purchase more properties with commercial financing after that point.

Right, okay. So Atlanta was the first market then, Right?

Right, exactly. Yeah. I bought several properties in Atlanta by October 2012, then a few more by November 2012.

In Phoenix we looked at some houses. I ended up making a couple of offers, but we didn't purchase any. The inventory was already getting pretty low in Phoenix at that time.

Phoenix doesn't work anymore so well. So you know, but there will be a time when it's probably will soften a little bit or the rents will catch up. Either one, you know, it's just a, it's just a question of either one. It can happen and once they do then you know, you'll be in good shape to be buying there again. Possibly, you know, so. Yeah. Okay, good.

And then I went to St. Louis, St. Robert in Missouri. As you know, the St. Louis, the specialty there were the multi, you know, the duplexes, the two, you know, two unit and four unit buildings. The older buildings, you know, built 100 years ago. I bought several of those also in 2012 and I bought new construction plexus in St. Robert near the military school and base. And that was completed by January of 2013.

After that I bought a few properties in Austin, Texas also in 2013. I ended up buying a couple of properties in Dallas as well. I started using my IRA money for that. I open up a self directed ira. After going to one of your Meet the Masters weekends I learned about self directed IRAs and I opened up one in July 2012 and I bought a couple properties under, under the IRA as well.

So tell us what you know, some of your biggest challenges were in investing in these different properties. I mean you would, you went to a lot of the markets and really you were of kind hard at this. I mean you, you, you were not, oh yeah, you were not unambitious here. I mean you really jumped in and you did it. I mean, I gotta tell you, I was impressed.

It's funny, people talk about being lucky and you know how great your life is at any point. But what they don't look at is how hard, how many hours you put in and how much thought you put in into into the planning. Now I was lucky in that I was able to sell some of my Apple stock during the time that happened to be going up in a strong clip. So I was able to reap the benefits from that and put into the real estate. But the challenges were I had a clear plan. As you remember from my financial independence, my Independence Day spreadsheet. I had a clear goal of becoming independent within a year and it was very difficult to accomplish that within that time period. Mostly because of what I call mortgage sequencing.

It's one thing to have the money and be ready to buy a lot of properties and try to achieve a goal. But in reality, you have providers that might not have many properties available at any one time. It might be that they only have one or two crews that are doing rehabs at one time. So they just don't have enough inventory. Even if they have the inventory, they might run into snags where it takes longer to finish the rehab. One particular property, and you can't buy what you thought you could buy at the time you wanted to buy.

The interesting aspect of mortgage sequencing, because of what I just described, is this. The banks, they want to take a financial snapshot of the applicant prior to close of escrow. They want to know where you are financially. They don't want any new contracts, any change to your financial picture during the 30 or 45 days prior to close of escrow once you open a contract. In essence, that meant that I couldn't just go down to Dallas, for example, and make an offer to buy a couple houses with one lender and then go to Atlanta and make an offer in a couple of houses from another lender. You know, the lenders, they all want to know about each other. I was at the time, I wasn't lucky enough to work with a single lender that could take a holistic approach to my plan and do it across the US and tell me, okay, I get what you want to do. Let's put a grand plan together. It was kind of an ad hoc type type of approach.

What's interesting, I want to comment on something you said a moment ago, too, is you talked about how the different local market specialists wouldn't have enough properties for you to buy. And by the way, just tell the listeners, how many properties do you have now? And we're just talking income properties, not your own home. Are you at 57 properties now?

I got about 50 properties.

50.

About 70 doors. There's about 12 plexus.

Right, okay, so you have some plexes. So how many doors total?

70.

70 doors. Okay, so 70 units and 50 properties. All right, good. And so one of the challenges you had is that they just wouldn't have properties for you to acquire. And, and this, by the way, is why Wall street has a very difficult time being in our business, which is great because it keeps them out. The institutional investors find it frustrating, okay? And, you know, they want to just be able to go and deploy, you know, a billion dollars with a mouse click and a due diligence report, you know, and it just. They just can't do it. In our Business. Can they not? Very easily, at least.

Yeah. So, as I was saying, I really had a tough time.

Hitting my goals. Within one year.

I frequently got into a spot where I was getting. Purchasing two or three properties, and they're all being rehabbed, getting ready for tenants and what the banks. If I was getting the close of all properties to be done at the same time, the banks would want to make me wait until all properties were ready for their appraisal, until we could close on all of them. So if you had one that had troubles rehabbing, it would delay the purchase of all the others. It would then push out the timeline for all the eventual purchases. Bottom line is I had to wait longer for my.

Financial Independence Day date, and it got pushed out from one year to two years.

Right, Right. So it took twice as long. It took two years rather than one year to get to financial independence. And.

How did you feel about that? I mean, it was just a problem of being able to get the properties right. You just couldn't acquire the properties fast enough.

Yeah, it couldn't be done fast enough. I had to sequence my conventional financing backed by Fannie Freddie early on, and only after those were done, I could move on to commercial and portfolio lending. So even though opportunities were presenting themselves for. For commercial lending, I had to first get my conventional loans done because those are so much better terms than everything else. So it just has. The point is there is a sequence that you have to follow, and it doesn't just happen the way you want it to happen, even though you might have. I had great credit score, almost 800. I had 787 credit score, a great job, paying over $200,000 a year. I mean, I had no problems getting credit financing for. For these properties, but it just doesn't happen as fast as I thought it would.

Yep, that's. That's true. This is a fragmented business, and you gotta. You gotta dive in. So let's talk about more of the challenges. You know, you talked about some challenges in acquiring the properties, Fernando, but what about managing them? You know, how difficult is it? And, you know, I just want you to share kind of some of the pitfalls and the challenges and then some of the good sides, too, to give people an accurate picture of this. Sure.

There's bumps in the road. It's not rosy as you might think. It's not a passive investment. You have to be involved. As I was purchasing properties in Atlanta, the property manager that was indicated by the local market specialist, by the provider in Atlanta was becoming overwhelmed. She just had too many properties that were coming her way, too many clients that were coming her way, and she didn't have enough of a software backbone to her business to handle all these properties. And it became so bad that it got to a point where I fired her, and I got involved with a new property management company. I had to transfer all my leases over and make sure that the tenants were aware of it. So that took quite a bit of time to go through. As a matter of fact, the very first home I purchased in Atlanta.

We.

Had to evict the tenant. This was my first taste of my financial Independence Day plan. Started out with a big bump, and it took a while, over three months to get that ironed out, mostly because the property manager was getting overwhelmed and just could not handle it properly, wasn't on top of things.

Okay, all right, so you got that squared away. And that took some time. What else? What other challenges?

Challenges in rehabbing in St. Louis was a perfect example. The rehabs in St. Louis are extensive, and you're basically looking at these hundred old properties that needed to be gutted and have new plumbing, new electrical. Sometimes they had to remove bad plaster jobs and had to put Sheetrock and sometimes had to repair the framing. It was. It was just a big rehab. It was not a cosmetic type of job. These took a lot longer than planned.

Both because of this and also because the provider was also getting overwhelmed with too many clients.

And just trying to do too many things at one time. Just didn't have enough contractors and all the resources to. To address all of these clients. It's interesting that in the boom times, there's.

We had some real challenges in St. Louis. That was one of our most challenging markets for a time, and they've mostly ironed themselves out now, but it took some time, that's for sure. Oddly, though, Fernando, as many challenges as we had in St. Louis, people benefited from them most of the time because, well, they had huge construction delays, and people were anxious. Anxious to invest. The market was going up. And so, you know, even though it was kind of disappointing to some, really, overall, it had a pretty big financial benefit in a lot of cases.

Yeah, if you look at the building prices now, they definitely have gone up. So it's quite interesting.

So with these 50 properties and 70 units that you have, you're really good at keeping track of things. I mean, you're an engineer, you're a chip designer. Designer. So what. What kind of gains have you made and what kind of returns have you had?

Well, I was just looking at this recently and you know, when I, when I set out to do my replace, when I set out to replace my corporate income with, with, with my rental income, I took a snapshot in the beginning of this year. And my corporate income, after everything taken into account, all my expenses, all of the normal items that you would see from just working regularly, I would come up with about 8,500 monthly of net corporate income. My net income from real estate rentals is now closer to 10,000.

But the difference is you have a huge tax advantage on the rental properties.

Right, right. This is already 15 to 20% more than my corporate income. And I do have equity building in all of these properties and I do have the tax benefits going to these properties. The nice thing about taxes when I look at my situation is I'm getting to a point where I have over 150,000 in depreciation every year. And what this means is I can make this much in cash flow income before I need to pay taxes on the rental income.

Okay, so say that again. So the depreciation for the few that don't know is the most wonderful tax benefit in America. I mean, it is. When you say depreciation, that's a good thing the way we're talking about it now because that's what the IRS calls it. But the property could double in value, could appreciate in real life. But according to your tax return, you're getting a big deduction as though you're losing money. So it's a great thing because it's, it doesn't make any sense in a way. And that's what's wonderful about it. Okay, so say that again. What are those numbers?

Yeah, so I have over $150,000 in depreciation expenses, tax benefits as a tax.

Benefit, depreciation tax benefits.

And what this means is I can make this much, I can make up to 150,000 in cash flow before I show any income and therefore need to pay taxes on the rental income because I can deduct that 150 straight from my income. So it's just wonderful. It's just a great tax benefit.

Have you calculated your return on investment? You're pretty good at using property tracker and keeping track of things. What does that look like?

Well, I don't have the actual numbers in front of me, but it took a while. I started in 2012. 2012, actually, 2011. But 2012 is when I got gained a lot of traction with you and the properties took a while to get to perform. It took a while for the rehabs to be done, et cetera, et cetera. So my cash flow was very little, was like 5,000 or something like that. It was not very much. This is the real cash flow where I take a lot of the noise out of the equation. In 2013, it was much better. The yearly cash flow was 60,000 as the properties came to perform. And for 2014, the projection is about 120,000. And that's where I come to the comparison of being able to replace my corporate income. When you look at taxes that you're paying with your corporate income, you realize that you don't need nearly as much rental income to get to the same point because of the tax benefits. So, you know, things will only get better.

Yeah. So let's just talk about that for a moment. I want to make sure people understand that. I mean, if you have $10,000 a month in tax free income, depending on where you live and what your tax brackets are, of course, you know, that's about $6,000 per month at your corporate job. Right. You know, so you're really, you're really. If you have 10. I should say that the other way. If you have $10,000 in income, income from your job, you're really only keeping about 6,000 of that. These are very rough numbers. Okay. And they do depend on where you are. You can earn 6,000 in rental income if you're able to take all those depreciation tax benefits and actually earn more. I mean, you know, it's incredible. It's just an incredible thing. Taxes are the single largest expense in anybody's life and we've got to learn about them.

We've got to manage and position our investments so that we can benefit in this way rather than being hurt by it.

That's exactly it. It's interesting that I have, you know, you gave your exact example. I can give you my exact example where my gross income with a corporate income was 18,000amonth. And this is gross, but my net income was, as I mentioned before, 8500. When I look at real estate, my total income is 10,000amonth, but my net income is about 10,000amonth because I get the depreciation to write off.

The income that comes in the comparison at the end of the day is in favor of the real estate rental income. It's so much more powerful because taxes are such a big hit on your finances.

Yeah, they sure are. It's amazingly important. Important thing. It's amazingly important. Okay, good. Well, just wrapping up here, Fernando, what else would you like people to know. What else should they know about real estate investing?

Oh, there's a lot to know. I'm always learning. I think it's, I think there's, there's different things you can do with real estate there. There are opportunities for using your self directed IRA for some aspects of real estate that provide short term returns that I'm interested in getting into, such as land contracts and notes and that sort of thing. So that's definitely something for people to think about to tap into their IRA savings. The other point that I want to make is for people that are thinking about buying many properties, financing is very, very important. Try to get as much financing as possible with the low interest rates that we have now. You know, I financed over 80% of my properties and pretty soon I'll try to do refinancing on some of the ones that I paid cash for. Your returns are just leveraged by so much. When you get appreciation of 3,6% multiplying by that leverage that financing allows you, it really makes your total income be much, much higher than anything else you can do.

Yeah, it sure does. And did you buy into that idea initially, Fernando? Because it's kind of counterintuitive for many people. You know, they think that, oh, I'm too conservative, I don't want to take on debt. You know, I want to own the properties free and clear, kind of that old school mentality. And you know, once you come around to the fact that the most conservative thing to do, sort of ironically is to have as much financing or as much debt as possible on the properties and the riskiest thing is to own them all free and clear, which is counterintuitive. Right. Did you buy into that right away or did take some time?

I used to have that same line of thought, the old line of thought that I wanted to pay off a lot of my investments. But from my learning over the last three years in my real life examples, I would like to leverage as much as possible and push all of that.

Equity into the lender. And leverage is probably one of the most powerful aspects of real estate income. So I'm definitely strongly on the side of leverage. As much as you can, especially with the current rates that we have.

Yeah, yeah, good. And just to wrap the story up, what happened? I mean, you achieved your Financial Freedom Day and you retired from Apple. And when did you retire from Apple? In May.

May, May 2004, a few months.

2014.

2014.

It's only 10 years, give or take. You know, it's funny because I Heard something, someone talking on the radio and they kept talking about 2004 and I kept yelling at the radio the other day, it's 2014 you're talking about. And you did the same thing. We don't realize it's later than we think.

Exactly. We went o', clock. We go back 10 years. Yeah. So I retired and I immediately went to Brazil for three months, spend time on the beach with my family.

And you took the summer off?

I took the summer off.

You saw the World cup and all that?

Saw the World cup in Brazil. We had a great time. Just. I could never even dream of taking that much time off when I was working for any of the tech companies, any of the tech companies that I worked for before.

So we spent time there. I came back and I absolutely love the freedom of owning my time. And if I wanted to go to a conference, which I have done with you, even I can do that. I really have the choice. I don't need to worry about asking permission to go on vacation or how long I'm going to be out for. And interesting enough, after being retired from corporate America, there are lots of opportunities for me to get involved in. I've been helping quite a bit of people with their plans, being a coach and investment counselor and trying to answer questions for people that work with me at Apple and colleagues that want to do a similar plan as I have done. So it's just been incredible.

Yeah, yeah. Good, good for you. That's so good to hear. What a great story and thank you so much for sharing it with all our listeners today. I really appreciate it. And you know, what's next for you? You gonna buy more properties? I know you're looking at notes and land contracts and I'm really excited about doing more in that world too. I've dabbled in it for many, many years, but I, I want to do it in a bigger way and it's not as good as the real estate. It's better to own the actual property, but for simplicity's sake and ease, you know, owning the paper is my second favorite, you know.

Yeah, no, I think my plan right now is, is, is for me to. I've got enough properties that I need help in managing the managers and just, just some of the day to day tasks. So I'm not going to be buying more if I can't get more help to take care of them. I do want to get into contracts and notes. I do have a few properties that would lend themselves nicely.

To land contracts. One of them has an issue with the hoa and I would rather do a land contract with it. Also with my self directed ira, I have plenty of opportunities to buy notes. I think it lends itself very nicely to the short term income that notes provide. There's not as many tax benefits as you do with rental income, so I do want to get into that as well. So those are the next few steps that I'm planning on doing.

Good. Good stuff. Well, Fernando, thank you so much for sharing this today and keep up the good work. You are doing an awesome job as an investor and it's just really, it's really gratifying and great to hear your story. So thank you.

Thanks to you.

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