CW 941 - Meet the Masters of Income Property 2018: Friday Wrap-up

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Welcome to meet the Masters 2018. We're glad to have you here. This is your Friday wrap up.

This chart is hugely significant. Why? It is what's called a mortgage sensitivity chart. This chart basically shows you how many people get knocked out of the market how many people get knocked out of the market based on the interest rate. This is major. Now, the Fed has stated publicly, this is not the same kind of Fed we had Federal Reserve under Alan Greenspan that was really opaque and Greenspan talked in code and you had to understand hieroglyphics and Farsi and Russian and every other language on earth to understand and interpret Alan Greenspan. This Fed is not like that. All right? And this Fed has said that they are going to raise rates at least, at least three times this year, maybe four. And then next year in 2019, they're going to raise rates two more times because they believe the economy is heating up too much. Okay, so what happened? Now, the Fed doesn't directly control mortgage rates, okay? But they definitely influence them. So look at what happens here. And let me just look over here. Whoa. Sorry.

Look what happens here when you have a $200,000 mortgage, okay? A decent number to consider, a first time buyer mortgage and these rates go up, okay? So if interest rates move higher, millions of potential single family home buyers will be unable to qualify for a mortgage loan based on their current income and they will likely. Rent Burns expects rates to hit 4.9%. Now, I know a lot of you are thinking, well, that's not that much higher than I already pay. It is because home, homeowner rates, owner occupant rates are much lower than investor rates, okay? As investors, we have to pay a premium for those mortgages. We all know that. So this is the sliding scale of how the homeownership rate just slides down when interest rates go up, you know, I've taught you all about the three, what I call the three dimensions of real estate. And the beautiful thing about real estate is you get to negotiate the deal all along, the life of the investment, right? You get to renegotiate it constantly. You buy it, and you buy that deal based on one thing and one scenario and the way that pro forma looks today. But then three years later, if interest rates are higher, you're renegotiating the deal. Why are you renegotiating the deal? Because there's a lot of upward pressure on rents. And when that upward pressure on rents happens, you get to adjust your strategy, okay? And maybe that decline in homeownership softens the market and people can't afford to buy, and so prices soften. Fine. Who cares? We invest for yield, not capital gains. If capital gains come, I can spend it as well as the next guy. It's great, but it's the icing on the cake. It's not the cake. The cake is the yield. Okay? That's what produces the return on investment. So either way, you win as long as you understand how to keep score. You know, how to do the math of investing. We'll go into that more this weekend, of course, and we've done it a lot in the past and on the podcast. And you adjust your strategy when interest rates are high, do not be afraid. When you see that homeownership rate declining, do not be afraid to really put upward pressure on your rents. And one tip that I again shared recently, by the way, where's Coco? Coco? Yeah. Is that. You know, I love animals. I've always had this love for furry little creatures. They're great, right? Okay. And, you know, but I've never seen one enhance the value of a property. Okay. For the owner of the investment property. So another way you can raise your rates is by simply charging pet rent. Okay? Maybe you don't raise the face rental amount, or maybe you do raise that. Maybe the rent's $1,000 a month, and you raise it to 1,040, but then you add 25 bucks a month. Pet rent. All of the institutional landlords charge pet rent. Why aren't single family homeowners doing that? Okay. This should be the norm, not the exception. It should be the normal thing. Okay? So, you know, people are usually more than happy to pay for their pets. So that's another thing to think about. You can raise your rates in more than one. In more than one way. All right.

All right. So we've got Dave, he's going to talk about Quad City properties. The question was demographics in the Quad Cities. So again, it's 70% homeownership, 30% rental, which is different. You know, as you guys know, most rental markets, it's almost flipped maybe 60, 40.

So it's a lot of blue collar. I mean, again, you've got large colleges, you've got a lot of.

Hospitals, you've got a lot of these construction jobs. Riverboat gambling actually started in the Quad City. So they just built a billion dollar casino over there. This new bridge they're putting in. Again, I think it's 4,000 jobs at prevailing wage. But then you have the high end. You have people actually do commute from Chicago. So you have at the north side, Bettendorf is the one city that's kind of the nicest spot. You got $400,000, $500,000 new construction as far as the eye can see. So it's driving that economy. Certainly, you know, with John Deere, you know, Iowa, it's kind of that hometown. So it's blue collar. I mean, it's the definition of blue collar. Our tenants are nurses, mechanics, just blue collar folks that don't fit the urban core demographic. We require in the Quad Cities, three and a half times rent, which is almost unheard of from any property manager.

Right.

We require a. I think it's a 600 credit score. Obviously, we do a background check. They have any felonies. Our banks tell us these people could be buying houses and they could rent. That's three times income, right?

Yes.

If, you know, rents a thousand, they have to have 3,500. And that's unusual. Most property managers, I think, are two and a half, maybe 3,3500 in income to rent a house, to be able to rent that. So that's, that's the demographic.

Let's just hear more from our friend Pat Donahoe.

Prussian system also influenced our Social Security system and the nature of retirement. Prussian system. The objective was to get old people who are physically incapable of providing value out of the way. So younger, more agile, they can lift more rocks that they could take their place. That was the foundation of retirement. Now, the reason why I say this is because in my experience, I've had the privilege of meeting thousands of people and this is the common behavior that I see, which is it's very difficult for people to critically think. It's easy for them to be recipients of advice and be told what to do and subsequently do it. Also, I look at retirement and I'VE seen a lot of people exit the rat race, but they forget that there is a fast track.

And because of that, this financial freedom is not really freedom at all. It's moving from one jail cell to another, maybe with a 10 minute recess.

The nature of, I would say us as human beings isn't to become financially free and stop.

We are wired to provide value to others. That's the nature of income. The idea Behind Cash Flow 101, if you really dig into the books and dig into the philosophy, it's not to exit the rat race. If that was the objective, then they would not have put that second layer on top of it.

Okay, so how do you do that? When I learned this, it changed everything. Changed everything. It changed my business, it changed my life, it changed my relationships, helped me get over just a lot of my insecurities.

And totally revolution my family's life as well. I might use. Might use this board for a second. So this is a human. Oh, we can go back. This is a human capital. Human capital statement. So what's a SO financial statement? Most of you guys in here who've played cash flow 101 especially know what a financial statement is, right? So you have, you have income and then you have expenses. And then on your balance sheet you have assets and liabilities. So income, how do you define income? Money that you get paid, right? Expenses, money you pay others. Assets. What's a true asset?

Puts money in your pocket. That's the typical rich dad definition. But an asset is something that has value that you can sell and receive something else in return. And then a liability is something that you owe to. To others. Okay, Pretty simple. Is everyone following me with just a simple financial statement? Okay, because it's really important to understand this if you're gonna understand the human capital statement. Now, the human capital statement is what I call the mirror. And it's a mirror because you can look at income in a completely different way. What that means is income, it's money that you're paid, but it's also value that you create.

Liabilities, or I'm sorry, expenses, is money you pay others, but it's also money that you pay to others for them to do a service for you. Okay? An asset, right, is your ability to put money in your pocket based on who you are, your experience, your training, your expertise. For Tim, it was his experience as a copywriter, his experience in being able to run a business of his experience in understanding financial concepts, which he built as one of his human capital assets, which allowed him to Take that, become a freelancer and provide value based on that experience.

Okay? And then a liability is the expertise of others. Now, this is hard, and I might. Jason, might not like when I say this, but I think the most expensive property manager in this room, okay, is Jason Hartman. Because Jason Hartman doesn't do all. He doesn't hire a property manager. He does it himself. Does it himself. But Jason, as you guys all know, is one of the most gifted people I know, talented, has a ton of wisdom, and he's exchanging his time to call up tenants and deal with problems. Okay? So that is where a liability. That is a liability, I would argue. But there are others that have those businesses that have those expertise that it's totally worth paying so that you can focus on your highest and best use of time and talents. Okay? So the human capital statement, I would say this is essentially how you discover your dream. You get out of the rat race. But I think at the same time, you can also build your human capital statement, and I think you can get out of the rat race sooner. I think you can accomplish and achieve your dream even sooner.

All right, lender panel, come on up. My name is Julia McCarthy. My name is Spencer. I'm a real estate investor. I'm based in Savannah, Georgia. Question that I always get, and I've been in real estate investing for decades, long time now. And the question I always get from a lot of my listeners and my subscribers is back. I want to say maybe like 10 years ago, maybe 15 years ago. And this is also how I started, is I started getting loans with 0% down for investment properties, and I've gotten a lot of those, and that's kind of how I got started. Do these loans still exist these days? Because I get that question a lot. Not just zero down, but also putting the closing costs into the loan. Does that even still exist these days?

Simple answer is no. Complicated answer is the money we use in most cases belongs to somebody else. So if I went to you and say, hey, how about you put up 100% of the capital to get this person's business up off the ground, but you don't get any of the cash flow, they're just gonna pay you, say, 5% of your 100% in 12 installments every year, and you just leave them alone as long as they're paying, would that be a good deal for you? Probably not even at this point right now where you can do as little as 15% down and somebody else will put up the capital for you, and it can be a Pension fund, somebody's pension is paying for this. A lot of times, I know CalPERS puts a lot of money into these pools. So they are saying, hey, if we're gonna put our money up for this, and we just went through a crash and we know that this is a cyclical thing, and now we're already another 10 years into that cycle. We want to have a little bit of skin in that game to protect us from losing on that side. Because if they're going to put up 80% or 85% of the capital for your business, it's just to help them out. And that's what keeps the money flowing. Because if it went back to zero percent, I don't know that we get much money to work with anymore.

That's a good answer. So my next question and what, wait a second, I do want to say about that, if you talk to Patrick and Gary about using the insurance as a component, it gets more interesting. I just want to encourage you to talk to them about that. So my next question would be, then, what is then the lowest amount that people can expect to pay as a down payment? Because we see 25%, sometimes we see 10%, sometimes we see 5%. And there's still this thing floating around of the 20%, 80% financing thing that some people have gotten into a couple years ago. Does that still exist?

To answer that, I guess specifically to investment properties.

Yes, specifically.

So Freddie Mag will allow you to do 15% down with mortgage insurance. So that's pretty much the minimum for a single family home investment property. The rate on it might be a little bit elevated over and above maybe your 20% down with no MI. And again, with 25% down, you see just a better interest rate with that down payment as opposed to 20 or maybe 15. But to answer the question, 15% down will be the minimum for what we're discussing.

So, Matt from California. So in a situation where you have.

A spouse with no income.

Would you.

Agree that the first 10 loans should be in one person's name?

And then what happens at 10? Is there a way to get your.

Spouse who doesn't have a W2?

No, I think you have to get a new spouse with income.

That was my answer.

She works or make that one go to work.

I'd like to point out something with regard to that. It's a great question with regard to some of the strategies that you guys employ with one spouse maybe maxing out their 10 financed homes and then trying to have another spouse finance 10 properties as well. Clearly, as Jason mentioned both spouses need to be employed for us to qualify for the mortgages. But as it relates to source of funds and down payment for each individual spouse, while the funds may come from a joint account, those funds do need to be seasoned in that account for one spouse to use have access to those funds for down payment.

And how long do they need to season?

3 months, typically 2 months, 60 days. But for example, in that question, it's like if Matt, you liquidated money from your 401k and put it into your joint account for your wife to use, that money would need to be seasoned because a spouse cannot give a gift is not allowed for financing on an investment property. So that money that you would liquidate would be regarded as a spousal gift. Therefore needs to be seasoned before we could document that money for your spouse to go ahead and acquire the property.

Let me comment a little bit on the seasoning thing real quick here. The reason we go about the 60 day seasoning because we have to look at a 60 day window, right? Everybody says you gotta season it 60 days. It's really slightly longer than that. Because if I'm looking at two statement periods and I'm seeing a deposit in there, we have to ask about it. But if it's before those two statement periods that we're looking at, we don't have to ask because we don't know that's kind of how that whole seasoning thing really works. Then one scenario you're asking with the, that I actually several times I've seen this throughout my career is an individual buys 10 finance properties or while he's buying these properties, let's say he forms his LLC to manage his properties. This is where the property manager sent him the money for his, for his rents. And then he filtered into his company. He hired his wife as his sole employee who would deposit those checks. Then his wife would write the checks to pay the payments. And as the sole employee of his company now had received a W2 receiving somewhere in the range of about $15,000 a year. Not sexy, not a lot of money. But she did not have any debt. She had two credit cards, about $25 a month payment on each one because she was just buying groceries and paying it off.

So the basic idea is you can hire relatives.

Ultimately that's what ended up happening in this scenario. And she ended up buying tents. By the time it's all done, this particular couple has 43 properties. So there's ways to do everything. You just got to sit down with the right People to engineer and work with you on it, not just dial any bank and say I want a loan.

Shannon, did you have a comment?

So I have a program for you. We talked about it on the podcast that I did with Jason and it's called the Investor Cash Flow Loan and it's specifically perfect for your wife. They look at the property and not her income. So as long as the property cash flows, then they will finance that property. This particular lender only needs seasoning of 30 days of assets.

So as long as the money's moved.

To an account that has her name on it for 30 days, then that's fine.

That's pretty great. One thing also, and I have a feeling this is going to work just fine. But if that non working spouse has investment income or alimony, for example, you know that would qualify, right? Yeah.

Hi, I'm Scott from Washington, D.C. florida.

Has to be the weirdest insurance market I've ever seen. How do you help people get insurance.

For these kinds of homes? We just have a really good insurance broker and I hear that a lot. But remember.

Each area of Florida is ranked differently. So we don't buy, we buy at least five miles inland. So that takes a whole risk factor off. We don't buy in flood zones. That takes a whole factor off. I don't carry hurricane insurance, our insurance agent will call it. I carry a different type of insurance that should cover your landlord and wind needs. So it hasn't been. There's a big difference between getting insurance in Jacksonville, Florida than there is in Miami. So our houses, on average of the old construction, probably about $60 a month and about the same for the new construction. So it's not as big a deal as you would think. The question was, were any of the properties in, in Jacksonville affected? So our new construction, zero damage. The only damage that I had was on a few of the barrier islands where I own some personal property and vacation rental property, but that's it. We buy at least five miles inland and Ocala was untouched in that last hurricane.

So why Memphis? Memphis is a perennial market for investors. Many of you own homes in properties in Memphis. And I think it's because we're so predictable and it comes from our workforce. You know, I help investors buy, renovate and manage great properties, but my passion is providing quality, clean, safe homes for the workforce. And what makes up our workforce is that we're a logistics town. We ship everything out of Memphis. So we're an aerotropolis, which means we have the world's largest air Cargo hub. With FedEx, we have two major interstate systems, 40 that goes east to west, from coast to coast across America, coming straight through Memphis. And Interstate 55 from Chicago to New Orleans, going north to south rail. We have five of the seven Class 1 railroads in the nation that come right to Memphis. And then lastly the Mississippi River. So we have two inland ports where goods are brought up the Mississippi river and dropped off in Memphis. And this is the new Interstate 69. It's called the NAFTA superhighway which has been built from Canada to Mexico, coming straight through Memphis.

This is Nike's 3.8 million square foot facility. Now we don't make any Nike gear in Memphis, but we ship all of it. So every shoe, every piece of apparel, all the bags and equipment come out of this building. So they're made offshore, brought to Memphis and from Memphis shipped to North America. And earlier I mentioned St. Jude. So this is the jewel of Memphis. They're saving babies from pediatric atria cancer. Wow, what an amazing place. But they're a huge employer and right now they're investing $9 billion, 7 and 2, $9 billion into the city of Memphis. That's bringing a lot of jobs, it's bringing a lot of investors into town to provide housing for the people that.

Are going to work there.

Here are some of our major employers and.

The ones based in Memphis. International Paper, FedEx, St. Jude, Autozone, all those aren't real high paying jobs, those workforce jobs. So this is a map of Memphis and I've got more copies in the back if you guys want to stop by the booth and go over this. I'd love to break down the different areas that we buy in today. I'd like to focus on three different areas.

So I had a practice out in the hallway with some of the guys. Raleigh Springs, this is where the new Nike factory that I just showed you a picture. So Raleigh Springs is a great rental market year after year after year. The closer you are to the east in Raleigh, the higher end it is. If you jump over the line into Bartlett, you're in an A neighborhood, B neighborhood, C neighborhood as you get over here to Nike. And then a lot of people know this is a no go zone. So we don't buy there. Then we have Whitehaven. Now a lot of people know Whitehaven because that's where Elvis lived, Graceland. Has anybody been to Graceland? You can admit it. All right, so Elvis's neighborhood, Graceland or Whitehaven is a great area for us. Matter of fact, we're building brand New homes there right now. So I'll show you more about that. And then we have Hickory Hill. So Hickory Hill, you can see it's flanked by the world's largest air cargo hub with FedEx and then FedEx corporate to the east. So FedEx corporate is eight, six story buildings where the executives work for FedEx. FedEx employs 35,000 people in Memphis, so it's a big deal to be in between the two largest employers for FedEx here. And it's just north of Warren Buffett's new intermodal unit where the trains bring in containers and offload them, put them on a truck and send them out to America. $280 million intermodal unit built by Warren Buffett right here. So you can imagine Hickory Hill is a very good market for us. We mine all of our data and this is every property that we've bought and sold there in the past 18 months. So if we were to dig into a certain area on here, I can tell you what every house, what it sold for, what it rented for. And this is where we get what we call our target rents. So we don't go to a third party source. We have an internal database where we know exactly what it's going to rent for before we buy it.

So three questions to ask your turnkey partner. Do you own properties in the markets that you operate in? And how long have you been operating? I think that's really important. If you're going to somebody and want to buy a property, they didn't own anything, then they really don't have any skin in the game in the own market too. So. And how long they've been in that market? Because everybody here, one of the things they said was inventory. Everybody's having inventory problems. If you're still in the business, then you're running a good business. You have a big demand for what you have, but you don't have enough inventory for your clients. So everybody's going through these different markets. So another one guy here from Kansas City, and I'm sorry if he's in here, and I forgot your name, but he had a team that's been doing it for a long time. That's what you want to see. But if there's been a couple people follow us in the Little Rock that have no experience whatsoever, and they're going to struggle and their clients are going to struggle because while the cities are similar, the markets are different. There's not a cookie cutter approach that you open up the book and says, what I do in Memphis is going to work in Chicago. So the other thing you want to ask your turnkey provider is how much does your typical rehab cost? Because some of these turnkey providers, they say they're turnkey and they're putting in 10, 15 grand. I think James said something about 25 grand. What they put in ours, that's the minimum. If you're putting in a roof, an air conditioner and a furnace is $25,000. If you're putting anything less than you're going to have deferred maintenance down the road, you're going to have cash flow problems. So cutting corners will would certainly cost you. You spend money on the front end to make money on the back end, and then you provide in house management. I think that's critical because once we sell a property, it's not like, see you later, hope it works well for you. There's a connection back to it. If something goes wrong, they could come to me. You're married to, it's, you're developing a relationship. And that's what we're doing is developing relationships with our clients. And that's, you know, why we see so many people here. And that's why we love coming here, because we've developed great relationships with our clients.

When you break down homeownership rates, everybody asks about the millennials. The 35 and under is actually ticking up, but it's still the furthest below its pre recession peak in homeownership rate. So the millennials are not buying homes as quickly as they used to, but they are starting to come back a little bit. And we actually did a fun study. I didn't have time to pull it for this presentation, but if you look up, we looked in our data at the top names of home buyers in 2017 compared to 2016. What were the first names that saw the biggest increase in purchases of property? Does anybody have a guess on what the most popular first name was for buying property in terms of increase in purchasing? I'll give you a hint. It's a millennial name.

Anybody have a guess? What's that?

It was Dylan. And we looked, you know, if you go to babycenter.org Dylan was spiked in popularity right about 1992. Those people, if I'm doing my math right, are about 25 years old. We are seeing a spike in people with the first name of Dylan. And the other ones on the list are Lindsey, Austin, Alexandra, and Taylor. Okay, so all those names spiked in popularity as baby names back in the 1990s. So we are seeing Some evidence millennials are coming back. You can look that up if you want to see that report. Just Google top home buyer names in 2017.

What's interesting to me, and maybe this is because I'm in this age group, is that the so called. Have you guys heard the term boomerang buyers? Anybody heard that people who lost their homes during the foreclosure crisis, there was some expectation that eventually they would come back and become homeowners again. We're actually really not seeing that. If you look at the generation of Gen Xers, they're the only generation when you look at the census data where the homeownership rate is continuing to fall, it's not bouncing back at all and it's now at a new low. And so that's interesting. Those boomerang buyers are basically at this point, they're probably choosing to stay renters because there's probably been seven years that have passed. They can get some of that stuff off their credit history and become homeowners. So the market is ripe. This is for landlords like yourselves. And one of the things that we noticed in our data, this is our data now, is the homeownership tenure has almost doubled and there's a clear inflection point and that starts in the fourth quarter of 2008. And of course we know what happened in the fourth quarter of 2008. People started staying in their home, have started staying in their homes for longer. Part of that is forced because they didn't have the equity to sell. But part of it is there's lack of inventory. And so. And then part of it is that investors are buying homes and investors tend to keep the homes longer than owner occupants who move up. And so this is another sign that we're in a market that's different than the last housing boom. It is disproportionately driven by investors. We're seeing another sign of that in our data is in the last year, 28% of single family home purchases went to non owner occupied buyers. That's been progressively getting higher and higher. Homes purchased 10 to 15 years ago, only 25% of them are non owner occupied. Fifteen, you know, it goes down from there. So again, belaboring that point, we do want to point out though that it differs from market to market and markets are behaving a little bit differently. Places like Memphis, which is on here, which is the top line and was just talked about, we see over 50% of single family home purchases there are non owner occupied. And that's been trending up. Places like Birmingham, Alabama, Cleveland, Ohio are all trending up more non owner occupied purchases, whereas a place like Atlanta, it's interesting, we actually have seen that did go up in the wake of the Great Recession, but we're seeing it come down and that is shifting back a little bit more toward a more owner occupied market in Atlanta. And this is something to be aware of as you're buying. You know, in my mind you could be getting into some dangerous, dangerous territory if you're buying in an area that is very, very saturated with other investors. So that's my take on that.

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