Three Stages of Real Estate Investing

FN Intro/Outro: 00:00:02

Welcome to the Freedom Nation podcast with Jeff Kikel. On this show, Jeff shares his expertise in financial and retirement planning from a different perspective, planning for your Freedom Day, which is the first day that you wake up and have enough income or assets and do not have to go to work that day. Learn how to calculate what you need, how to generate income sources, and listen to interviews from others who've done it themselves, get ready to experience your own Freedom Day.

Jeff Kikel: 00:00:37

Hello, Freedom Nation. It's Jeff here once again. And today we're going to talk about one of my favorite topics to talk about is real estate, we're going to talk about it for those of you that are maybe new to real estate, and you're trying to figure out where you fit into that mix. We'll talk about it with those of you that maybe have been around for a while you've been investing, you may be saved a little bit of money. And you want to figure out how you can best get into real estate with having a little bit of money to work with. And last but not least, we're going to focus on you know, those of you that maybe have saved a lot of money, and you're wanting to get into real estate and you've got more money that you can put away and get involved. So there's there's three different kind of stages to this. Now, for those of you that are watching us on YouTube, these will be broken into three separate shows. So make sure you go and check that. For those of you that are listening on podcast, we're gonna go through all three at one time. So let's go ahead and get started. The first option, you know, if you are just getting started, and you really don't have a whole lot of money to get started, or you're not really willing to take whatever savings you have and get started in real estate, there are still ways for you to start as a real estate investor, probably one of the easiest of those is to do what's called House hacking. What is house hacking? Well, house hacking is just simply this, you go out and buy a house, you might buy a house little bit bigger than what you need personally. And then you rent out a room in your house. And a lot of instances, if you can rent enough of that house out, that person is probably the rent on that, that room or side of the house, maybe enough to actually cover your mortgage on there. Now one of the greatest parts about this is once again, I said you can start with low or no money. If you decide to do house hacking and you're buying a house, you can use the FHA Federal Housing Authority loans, which typically allow you to get in for as little as 3.5%. So even with the inflated real estate prices in the country right now. And of course, with higher interest rates, you can get in with very little money to start and then have someone else carry the burden mostly of your mortgage by paying you rent. This has been a strategy, it's been used by people all over the world. I would say this is another strategy that can also be used as a short term rental. Let's say you have a side of your house that kind of is almost a little bit separate. You can easily rent out that room, rent out a suite on that side of the house, and use it as a short term rental especially or if you're in an area where lots of people want to come to town. I'll give you an example. I live in Austin. Austin has events throughout the year like South by Southwest, the f1 weeks we have NASCAR coming to town. So there is always somebody coming through here and a short term rental strategy works pretty well in this market. The other side of the coin is you could also use this as a mid term rental. This is a concept that we'll talk about in a little bit later as well. But mid term rentals. One of the ones or one of the strategies we use is to do midterm rentals with traveling nurses that, you know most often they work on 13 week contracts. So it's a mid term rental, you're going to have them in for you know, roughly three months at a time. So you're not constantly burning through burning through burning through people. They're wonderful tenants, they don't really complain all they want is a quiet place to come that safe. And most of the time they're working so they don't have much time to do anything else. So they're happy to just come in be great tenants and leave so it's a wonderful strategy. They also get paid really well and they get paid a stipend to stay. So they also pay the rent which is wonderful. option two is wholesaling. Now, this is something that in my case we came to a little bit later in the game, we had done more traditional rentals and flips. Prior to kind of after I got to my freedom day and had more time to focus on real estate, I started to do a lot of research into it. I came across a really good resource for learning about wholesaling, I will include that in the link. It's a gentleman name, it's a group called all in, they specialize in wholesaling. And they also do some training around wholesaling. And I learned everything I could about this, because when I was in the process of transitioning and selling my business, I was waiting on that money to come in, I really wanted to get involved in real estate more. So wholesaling really worked well for me, because wholesaling, you're not really putting up any money. Now, you may put up some money for advertising to draw in the leads. But as far as the, you know, the actual transaction that happens, you actually are not involved in the transaction beyond the fact that you are putting the card or the property under contract with the ability to assign that to someone else. And then you're matching that deal up with some the end buyer, who's typically a real estate investor looking to get into a property, hopefully low enough that they can make rentals make sense in that case, or fix and flip the property and get it to that point. You're that middleman in the transaction, and you receive what's called a finder's fee, depends on the size of the property depends on the size of the deal, how much you make there, but you know, I typically try and target $10,000 minimum in those deals. So you know, it might mean that I'm only involved in that transaction from putting it under contract to assigning it for the cash buyer, who's going to come in and buy it, I might only hold that for 10 to 20 days maximum in that process. While I'm looking for the you know, to get the deal done. Typically, these go to cash buyers, who are, you know, real estate investor, so the transactions closed pretty quickly. The last idea that I would say in this no or low money down world is real estate partnerships. Real Estate partnerships are wonderful. A lot of times you will run across people who have money, they don't really want to do all the work that it takes to find so doctors, lawyers, professionals, business owners, who are who have money, they invest in real estate, they enjoy investing in real estate, it's just they might not have the time or the inclination to go out and hustle and find that property. So this is a situation where you can go out, you know, what I would do is start networking and groups of Realtors, do a Google search in your home area. See if you can find some real estate clubs, real estate organizations. Another wonderful resource and one of my favorites to go to is bigger pockets.com www dot bigger pockets.com. They have a fantastic website where you can put your own profile up there. There's different groups, you can join into groups that are local to your area, network with other real estate investors learn from them ask questions of the group, there's trainings that are available on there, it's just a multitude of things that are available on bigger pockets. But the best part about it is the the real estate, you know, working with other real estate investors and getting to know other real estate investors, this is a great opportunity that if you go out and you start to find a property and you don't have a huge downpayment, those relationships that you've made, you can easily then come back, you know, you put the property under contract that might cost you $1,000 For the option, you know with a you basically put a little bit of a phrase into that contract that says you know this is contingent upon the approval of my business partner and a and an inspection of the property that gives you an out if someone or you know if you if you can't find someone to work with, but then you start working your network and bigger pockets or the local real estate groups, whatever it takes for you to get involved. Most of the times when I do a part ownership deal with someone, I do most of the upfront work in that partnership. So I'm going to do finding the property, I'm going to probably, you know, manage the property or work with the property manager,

Jeff Kikel: 00:10:15

You know, my partner is going to put the money up. In those cases they're not, they're not going to have any active participation in the property or the deal. A lot of times they provide the credit as well, so that I don't tie up all my credit on a certain number of properties. Doing this is infinitely scalable. And then how we divide out the profits is my partner's always get back first. Let's say when we sell the property, they get back their investment. First off, first and foremost, that comes out whatever's left, which is the profit, we typically split 5050. And you will find people all day long that will do deals like this, you just need to start getting out there and networking and finding those folks. So that's the three main ways that you would invest, or you know that you could do real estate, if you don't have a whole lot of money to start with. So now, let's transition to the next section, which is you maybe have a little bit of money, you know, you may be that person that says okay, well, I've saved up a little bit of money, I have enough for a downpayment to where I can buy a piece of property, and I'm ready to do some rentals. So what I would say is, when you talk about rent, rentals, there's a couple of ways you can do this, if you don't have a lot of money to get started, there are always opportunities, if you look out there, you know, just go to any local real estate source. That could be your, you know, easily it could be like your local newspaper online, there's always going to be rent to own opportunities, and what we mean by rent to own. So that person owns the property. And they are looking for a renter, who would like to buy this property at some time in the future, maybe you're not ready to buy it, you're not sure yet. And maybe you are someone that okay, my credits, not great yet, I don't have enough for the downpayment. But I can get into a rent to own situation, that gets me in the property, and I now have control over the property. Now that could be a situation where I rent to own it, and I now move into that property, and do the the house hacking way of doing things. I could, as long as that the the lease allows me to do this, I could sublease this to someone else for a little bit higher price, to where now I I'm asking enough rental to cover my mortgage and whatever I have to pay extra in the rent to own situation. And I now control that property. And I make a little bit of a spread between what my renter is paying and what I have. I could also that might be in the long term rental strategy. If it's allowed in the lease. Once again, you need to make sure this is allowed in the lease, I might be able to use this property as a short term rental. So someone else owns the property, I take over as the master lease, so to speak on that property. And then I turn around and I turn it into a short term rental, great way to make a lot of profits because typically short term rentals are very profitable now, because of 2021 2022. Everybody decided to get into that world. And they're starting to be more and more regulations. So you want to make sure you do a little bit of research about the potential rents that you would get as a short term rental, go to Airbnb find out kind of what other properties are, are renting for, and then kind of go through that and figure out and there's some wonderful calculators on bigger pockets that can help you figure out profitability of a short term rental to see if this even makes sense. The other strategy that you could use is a mid term rental strategy very much the way we've talked about it before using it with traveling nurses, so there's a couple things in that world that you need to understand with traveling nurses, especially either short term rentals or mid term rentals like this with traveling nurses, you're going to have to put up money to furnish the place and it needs to be furnished nicely. So you need to build that into your budget that it might cost you three to $4,000 you know to go to IKEA and buy some really nice furniture that you can use or you know find furniture whether or it's on the, you know, on Facebook marketplace or wherever that is. But you're going to need to furnish that property because that's what people want. And that's where they want to come. Now, a lot of people then ask me, well, where the heck am I going to find all these traveling nurses? Do I have to, you know, advertise for that? Well, no, there's really two places you can go. One is Airbnb, everybody's familiar with Airbnb. What you typically would do on Airbnb, though, is instead of saying that is a short term rental, or available for short term rental, what you want to do is put in there that it's a minimum of 30 day stay, that knocks out all your short term rentals. And it's going to be your longer term rentals. That's where you're either going to be able to find people that are traveling nomads, so maybe somebody that you know, is the kind of a digital nomad, they live all over the world, they rent a property for at least 30 days, maybe more, they want to furnish property that's got internet and all the bills paid and everything else. So all they have to do is just literally write a check to you for the property. Traveling nurses, the best way to find them. Airbnb is one way. The other one, and this is probably the best place is a site called www dot furnished finder.com. That site is where all the traveling nurses go, you need to learn a little bit about the site, you need to have really good photos taken. If you're going to do this, make sure it's laid out nicely, because that's what somebody's looking at. And you know, about 85% of nurses are female. So think about that when you're decorating a property, you don't want to make it too overly girly. But you also don't want to make it look like a man cave, either. It needs to be something that's visually pleasing, looks like a place where they can spend, you know, basically three months. The second strategy was something that I learned from one of the founders of BiggerPockets. Brandon Turner is what's called the burr strategy. So you've heard of fixing and flipping probably a lot of times, fixing and flipping can be a bit of a risky gamble. Because you've got to be right on a couple of things. One, you've got to be right on the price that you're paying for the property. And you also have to be right on the amount of work that it's going to take to fix it up to where you can flip that property. And you also have to count on the market being good at the other end of that being so think of somebody that's been in the fix and flip business, and 2021, they were looking like a hero 2022 The Fed starts raising rates, house prices are still way up. So you're paying up for a property. But now you're paying 789 percent for a mortgage, or your somebody else who's buying it is paying 789 percent for a mortgage. And that put a lot of pause out there. And people had to start discounting their property. So imagine if you didn't get the buy price, right? Maybe it costs a little bit more to fix up than you were planning on and then all of a sudden, it's not selling for anywhere near what you had planned on it to be selling for. This is a problem. You know, this is a major problem, the burr strategy, which stands for buy rehab, rent, refinance, and repeat. So that strategy is a little bit more conservative by nature, it follows along the lines of fix and flip. But the difference is you are actually putting in a long term renter, long term or mid term renter, that would be what I look for. So you gotta buy right, you still need to understand that you're buying the property correctly. Once again, if you go to bigger pockets, there's a wonderful calculators to kind of help you figure this stuff out a little bit, plus a multitude of calculators online calculators that will help you figure out replayer the the fix up costs, and that rehab cost to make sure that you're buying it at the right price that you know when you get a mortgage on it, that you be able to make money from the rentals of the property. So a lot of things you need to look at, am I buying it right? Do I know what my rehab costs are gonna be? What's my finance, you know, how much am I financing and what's the mortgage payment? And then what's the the rents from around the area? Okay, do all those work out? Is this a deal I want to look at? Or is this a deal I want to pass off and go on to something else? There are hundreds of 1000s of real estate deals available to you and you don't have to take the first deal. I will tell you for every one property I buy, I probably look through 100 to 200 different deals, especially in markets like Austin i i do this all over the country. And I look at markets all over the country. And a lot of times I buy these without actually ever stepping foot into a property, I work with a team locally, that does all the work and everything else. But you know, if you're starting out, you want to probably do something local to your area. And the Austin area has been massively overinflated for the last several years. And it's very difficult to one, find a property like this. So you typically have to find one that is really beat up, come in offer low enough to where it makes sense, rehab costs have been higher with the pandemic, and, you know, prior shortages of materials, everything else, it's been a bit challenging, I would say, to get that rehab costs within a reasonable range, and then rents now the one good thing is rents have been going up all over the city. So that's been okay. I mean, you know, you knew you could pretty much support it. Once again, this is another strategy we use with midterm rentals and traveling nurses. So often I'm looking for properties that are, you know, in areas close to a hospital, which may or may not be great for most rental properties, smaller properties I can get into that may not necessarily be one's attractive to other real estate investors, I've even looked at ones that are, you know, two bedroom, maybe small three bedroom, and it still works, because it's larger than an apartment, it's certainly larger than the hotel room. And a traveling nurse is really excited to do that. So you really need to understand your end market and what you're looking for, and then look for the types of properties and the locations that that's fitting for, you know, if you target families with kids, well, where do you want to buy, you want to get close to schools, you want to be in a place where it's easy access to schools and groceries and you know, everything else related to to having a family. The last area is real estate investment trusts. You know, this is an area that, you know, I think real estate investment trusts are an area, both private real estate investment trusts and ones that are traded on the markets are wonderful areas where you don't really have to do anything. Now understand with REITs. Most of the other properties that we've been talking about, there are some tax benefits for an investor. Wholesaling is one exclusion to this, there is no advantage from a tax standpoint, it's all taxable, everything you do. But in the case of most other investments, you have depreciation, you know, you have amortization on the the mortgage loans, meaning if somebody's paying your mortgage for you, that's reducing the balance every month. So that's called amortization. So that's another way you make money, because it reduces your debt. In this case, with REITs, there really is no benefit to them. They're ideally held if you have some type of a retirement account, there are tons and tons of refunds, there are REIT private REITs that are available. These are things the publicly traded ones, I would say typically they're going to have a little bit higher income level to them than let's say a dividend paying stock fund, or even a bond fund at this point because bonds had been, although prices have or yields have gone up, the prices of them gone down. So real returns in the bond market had been kind of negative real estate investment trusts, typically over time, because property appreciates, so there's a value of appreciation. But they're also required to distribute 90% of their income, meaning the income that they make, they have to distribute otherwise they'd have to pay taxes on it. So that means it's a taxable distribution directly to you with no depreciation on the property. So you know if you can put it in some type of a tax deferred vehicle like an IRA inside of a 401k, anything like that, even potentially an annuity, those real estate funds can actually reduce it. If you have a little bit of money to work with and you can get into a private REIT. So something outside of the the typical brokerage sold, you know, US market type of a REIT. These are private REITs where you can actually get in be part of that fund. Typically those pay a little bit better. They're going to be up in the 10 to 11% range and gives you a lot of opportunity there. Another couple of years. areas that I would consider, if you're looking in this same kind of area and the read area, there's a couple of opportunities on the internet now one specifically is ground floor.com. And once again, look down in the show notes, and there's a link that will take you directly to ground floor. If you follow that link, you I believe get $50 credited to you if you set up an account with them. So that's, you know, it's a benefit for going there. Ground Floor invests in basically provides peer to peer loans, for properties that are doing rehabs fix and flips, fix and rent, you know, bursts strategies, this is provided by ground floor, they, they find the people, they put together the deals, you can come in and micro invest in those deals, you're investing in debt. Most often those deals, you can choose your risk level. And the risk level, you know, it's the it's like an A through D risk level. A's are typically around 10%, total return Ds are around 14 to 15% total return.

Jeff Kikel: 00:26:16

There is really no movement in these because they're not publicly traded, what you're waiting for is you're loaning money into a deal and you're waiting for that person to complete the project. And then from there, they you know, they refinance the property or they sell the property, they pay off the debt that's on the property, when that happens, you get your funds returned with the, with the dividend attached to it or with the interest attached to it, you have the opportunity at that point to then reinvest more into those pooled investments, great, great, great ways to to make money and not really have to get involved in real estate. The other one is called fund rise. Once again, look down below in the show notes. And you'll find a link to go to that Fundrise, I believe also offers 50 bucks to salt your account, all of these things can be started with very, very, very little money. And Fundrise is what's considered an E REIT. So you're basically investing in different pools of commercial and residential investments, you know, we're you're not buying one individual property, or you're not investing in, you know, kind of this innocuous publicly traded fund, you're investing in very specific pools of properties, you get to see exactly what's in those pools. And you can, you know, depending on how much you invest, there's more opportunities for different types of pools. As you invest more and more money with them, it's another opportunity to effectively not have a whole lot of work. Typical returns are in that 10% range to with fund rise, there's opportunities on both ground floor and fund rise, also to invest in the companies themselves, and IPOs of the companies themselves. So lots of opportunities to make money on the real estate side with not a whole lot of work. So now let's say you get a little bit of experience under your belt, you've got a little bit more sizable amount of money to work with. You know, this is where I would say and this is where most people try and go first. This is where I would say that you go once you've had some experience is traditional rental properties, you go out there you might find a bespoke off the rack property that doesn't really need a lot of work. It's an great area, it fits your profile for your end renter, and you buy that property, you know, you put the downpayment down. And now you're off to the races you find a renter and you go, this can be a short term strategy, a medium term strategy or a long term strategy. You know, the biggest thing is you it requires a larger investment. So what that means is your return on investment may not be as high as it is and some of the other investments. But it can also be pretty easy. And there's effectively four ways that you make money in this type of a transaction. The first and foremost is the purchase and the sale. You know, your there's going to be some kind of appreciation and value of that property over time. But you also make money from the rentals. You also make money from the amortization. Why? Because everybody, somebody's paying your mortgage every month and it's reducing your mortgage balance. So that means you make money because you're reducing your debt meaning you have higher amount of equity effectively every month your equity automatically increases if the if the property didn't move at all in price. So that's three ways of making money, the final way of making money and especially if you're somebody who Who has a higher income is that you get the advantage of depreciation. Depreciation is effectively a tax strategy that is available to real estate investors. And that allows you to take a depreciation because assuming you're buying a property, although it might appreciate in value because of the market, all the stuff inside and the building is depreciating, or it's slowly breaking down over time. So there's a IRS strategy for how much you can deduct each year of the value of the property that gets put against, it's a tax deduction against earnings. So it can offset what you're making in the form of your rents on the property. So net net, you have this in hand, depreciation doesn't take anything out of your pocket, all it does is it just reduces your taxes. If it covers what you make, or what you're making on the properties, you know, earnings from rents, then that can be applied to other income that you're making. So for someone who has a relatively high income, this can also be a wonderful tax deduction for them. Because in the eyes of the IRS, they might be losing money on this property, even though they're taking in positive cash flow every month. So that's, you know, that's a great way to get started. The second is commercial real estate. So commercial real estate requires considerable amounts of more of money. But you don't have to necessarily clean toilets, most of the time, the people that rent from you in a commercial property, are responsible for maintaining their own property, you write that into their lease that they have to maintain the equipment there, they have to get things fixed, we're not going to come out and clean toilets for you all that type of stuff. Typically, commercial rental, or commercial renters are pretty easygoing, they're not like your typical renter who is going to tear the place up, they typically take care of the properties because these are places of business in most cases. All right. Last Last Last one, which is if you have a significant pool of money to work with, you can get into what's called a syndication or a real estate fund. These typically invest in things like apartment complexes, maybe commercial buildings, they're gonna go in, acquire a property, let's say an apartment complex, do a little fix and flip or do a little fix on the property, they acquire the property improve it, and then they can slowly raise the rents on that over time. So you as a real estate investor, are coming in getting part of that pool, you're not going to have to do anything other than that you become a truly passive investor, you're hiring that team to go in, fix up the property, raise the rents, and then in most cases, they will start to distribute out, you know, as they earn, as they earn income on the property, they're going to start to distribute property out, distribute dividends out of that, once they sell the property that, you know, the fun will kick back, all that you've put into it plus, you know, whatever appreciation and profitability that's happened. So it's another way for people that have a little bit more experience or have more money, and don't necessarily want to get into the nitty gritty of investing in real estate, it's a great way to do it. So there you have it, you know, three different ways, if you have no money, if you have some money, or if you have a lot of money, or a significant chunk of money, three different ways with a bunch of different methods to really build your real estate portfolio. In my case, I started kind of at that rental property mode, because that's really what I knew. And I've expanded out into several of these other areas, finding them actually easier and less capital intensive for me over time, and I would invite you to explore out we'll be doing more of this type of stuff on both the podcast and the YouTube channels. So make sure that you are subscribers to both and if you need any help, certainly feel free to give us some comments please please please subscribe and share this with somebody that you love that might need a little bit of help or be looking doing something like this. So thanks a lot and we will see you back here the very next time.