Discovering what life is about

Real Estate Investor Interview

Real Estate Investor Interview
September 28th, 2007 by Jon Waraas


I am very excited to show everyone the interview that me and Wes Mahler did tonight. Wes is web entrepreneur/realest investor that I have known for some time now. I'm not into real estate as much as Wes, but I love to talk with him (asking him questions mostly) about real estate. Just talking with him on msn has tough me a lot, like ways to take out loans if you already have a lot of loans out (you will read this in the interview).

Wes owns and operates a few websites that make money monthly through subscriptions, he is also starting a web 2.0 company with a great business model. He also has my favorite kinda dog, the husky. You can read more about him on his blog here. So without further ado, here is the interview..

How long have you been investing and what attracted you to become an investor?

I've been I investing on a real level when I was a sophomore in high school. Why I wanted to become an investor, I wanted to make some money. But seriously, I think one of four books I actually read in high school was Rich Dad, Poor Dad, he talked about purchasing passive residual assets that will pay you for the rest of your life, and I got it. That one book changed my whole future objections and I wanted to become an investor, as in the book, "I don't work for money, my money works for me."

How did you get started investing?

I began the journey of becoming an investor on a serious level [with real money at stake] as a sophomore in high school; I remember my mother and I purchased a very expensive day trading software at one of those seminars you try to buy stuff. We bought the $3,000 software package on a VISA, and I began a day trading stocks [real money] in HS, I'd wakeup at 6:30am in the morning PST, trade stocks and then arrive to school at around 8am, sometimes making $100 before class started, and not to often loosing more than $100 before I even got to school. It was great fun, this is probably one of the earliest, most serious investing I started doing, after doing day trading for some time, I got good, I ended up loosing a good amount of my money.

Tell us about your first deal.

My first real big investment deal other than the stocks would have to be the purchase of my first real estate investment. In high school I always knew I wanted to purchase a property, and was waiting for ever until I could start building my credit score, so when I turned 18 I got my first credit card, and when I turned 20 years old, as a sophomore in college I had over a 740+ score, with no debt with a solid credit history which aided me in getting a loan for my first house.

Tip: Lenders wouldn't just like to see a high credit score, they want to see a high credit score across multiple different trade lines, also known as line of credit. Example of a trade line is a credit card, or a car loan, a mortgage, any debt of line of credit you have. So to be a stronger borrower, it is good to have 3+ trade lines with a good score, and a 1-year or longer history on each of those trade lines.

Well my first deal took awhile to put together, I first got pre-qualified for a loan, [I ended up going through 3 mortgage brokers], I looked at over a 100 houses, made offer on about 10 buildings, got accepted on about 3, and purchased 1 building. That is the good formula, look at 100, make offers on 10, get accepted on 3, and we only buy one. Buying a building is a numbers game, sooner or later you will hit, don't just jump on the first house you see, that is the sign of an amateur real estate investor ("I just bought the first house I saw"), no that is a losers strategy.

But lets break to the point, after working 6 months on trying to find a property, I finally found one. And the way to make purchase on investment real estate, rentals you got to buy where your cash flow makes sense on a monthly basis. That is by calculating your NOI, there is a lot of stuff I can get into, but you can determine at what sales price will this property break even, or cash flow if I purchase it at a certain price. And then what you do is only make offers on properties at an offer price that will either break even or cash flow. A lot of people invest into negative cash flow properties, most of them are amateur investors, [yes you may get appreciation, amortization, and depreciation], but why would you ever invest your money into something that costs you money every month.

- The difference in trying to build a portfolio of negative vs. positive cash flow properties. Lets just look at it like this. If you purchase a property that had a negative $200 /month negative cash flow, just how many of those properties could you pickup?
- You would only be able to pickup so many because they are costing you money. I mean once u had a couple you'd be negative a lot of money every month, you could only support so many if they cost you money every month.
- Now, what if you bought a positive cash flow property, how many of those would you be able to buy? Infinite, because they all pay you money.

So on my first deal I worked very hard to get a positive cash flow and I succeeded only after several months. I purchased my first property playing the numbers game, later in the process all I did was figured out "at what price must I purchase this property to make it positive cash flow." And then I threw out theses offers only at the price the building would make a positive cash flow.

So I threw out like 5-10 offers, just low offers, to just various properties, and to see if any of them hit. The one I ended up purchasing was a listed [5 bedroom, 2bath], was actually legally only a 2 bedroom [note: a lot of properties list they have a lot of bedrooms, but most of the bedrooms aren't legal bedrooms, be sure to check to make sure a 5bedroom listed on the mls, is really a 5bedrooms recorded on the county records.

- They were asking $239,500 for the property, I threw out an offer for $210,000, and seller pay $4,000 in closing.
- They countered at $235,000 and wouldn't pay anything in closing
- I countered back at $223,000 and say seller pay $4,000 in closing
- They countered back at $239,500 [their original asking price].

At that point I stopped negotiation, they were countering what they were asking for, so it was stupid for me to continue. So I started making offers on other buildings instead. It is important to note, that many of the properties I was throwing offers on, I had NEVER seen, [this is only for a little bit more experienced investors], but I throw out offers, and only if they accept my offer would I then go check out the place. Why even look at an investment if you can't purchase it at a price that it will make sense on the cash flow. Thus throwing several offers at buildings you've never seen in person, and if they accept at a sales price that will give you a positive cash flow, then go take look, that's my new way of investing, no need to waste my time looking at stuff if they won't accept my offers.

[I should note, newbie buyers should look at many properties before doing this approach, at the time I had looked at over 100 properties and once u look at so many you can see what will generally be good on paper, the year of the house and everything without going to see it, first time buyers should see at least 100 houses before they even make an offer].

Anyways, a month later they ended up accepting my offer at around $2223,000 and they pay $4,000 in closing. In the end, I purchased the house with a 10% down; the sales price was $223,000. The house appraised for $239,000,

The best know this: In real estate you make money when you BUY, not when you sell, as a good investor you should making money immediately when you BUY the property, you should be buying right BELOW retail, good investors don't pay retail.

That was the biggest chunk of change I made in one deal, an extra $20,000 in equity because I purchased right, here where the stats on the house. I had just turned 20 years old at the time, had no job, and my loan was right off my credit score 740+ with multiple trade lines.

- No doc loan
- 30yr fix, @ 6.25%, no points, no pre-pays
- Sale price, $223,000 [seller paid $4,000 in closing], appraised at $239,000.
- Mortgage + Taxes + Insurance + Mortgage Insurance = $1555/month.
- Debt to Equity Ratio, 90%/10%.
- Down payment: $22,000ish

Tip: If you are using a down payment, lenders want to see the down payment money seasoned. Seasoned money is money that has been sitting for while, for example, lenders want to see the down payment you are going to used be seasoned for 2 months, so that means funds sitting around for two months. So make sure, that you down payment money is seasoned in an account for 2 months, or more. [you can also count sometimes other liquidable assets, like stocks and mutual funds].

The house is located in Portland, OR. Portland has appreciated roughly 13% ish for the last 5 years, if it appreciates another 10% this year, the building will be worth an extra $22,000 in one year. As the real estate owner you keep the appreciation, if just in one year if I earn $22,000 in appreciation equity growth, my ROI off my initial down payment is close to 100%. [Don't get how I got 100% ROI in one year? Stay with us, we'll teach you leverage.]

So I got this building it makes me money via appreciation, depreciation, amortization, and cash flow. The mortgage is $1555/month and I have it rented out at $1625/month. That is my first deal, I'm pre-qualified to buy another house, and working on putting together one as we speak, the goal is three by the end of the year. You can actually see my house online at http://wesmahler.com/wes-house

What types of real estate investments are your expertise?

Rental property is my expertise, and will be my expertise forever I believe is rental properties. There are a lot of ways to make money in real estate, but there is so many ways to make money, so we just need to find out how we want to make our money. So I have my decision and I'm just going to long-term rental properties that cash flow, place property managers in them and never sell them is my goal.

Why this slow growth buy and hold? Well #1, I hate flipping properties, not only is it the most highly taxed but I don't work for one-time commissions. I'd rather own the house for 50 years and make money for 50 years, instead of working my butt off to make some change one time, and then have a job flipping properties. [nothing against flippers, I'm just not interested in one-time deals, I want residuals, all I work on is residual payment investments, flipping isn't residual.]

My Strategy: My whole wealth building philosophies is generating excess profits in C Corporations and then invest the profits long-term real estate rental properties. More specifically make a lot of money on the Internet aggressively, and then invest into passive real estate investments.

I consider flipping property aggressive real estate investing, a lot of hands on. I'm an aggressive Internet entrepreneur and I just want passive real estate. So people always ask why don't I flip, or sell, or do something to [pretty much it is always get a quick change], I don't want that crap, give me something passive and I'll make my money on the Internet. Aggressive Internet and invest money into long-term passive real estate investments.

Are you ever going to experiment with foreclosed properties?

For the reason above, no I won't touch foreclosure properties; I'll just keep buying long-term rental properties.

What about raw land?

Also won't do law land, or developing, because it is not in my current wealth building philosophy. It is not that there is no money to be made here; it is just not what I do.

On your current deal you are setting up you talked about putting the loan under your partners name? What are the advantages of that?

Yeah so once you get so many properties in your name it becomes increasingly difficult to purchase another house. Once you get like 5, 10, 15, 20 properties with loans, they going to make it harder for you to get more loans. That's why you have to get creative, and either get loans in a company name, your spouses name, even your children's names, and then in my case in my friends name.

So I have one house, and buying another one in a different city, in Corvallis. It's going to be hard pressed for me to try to purchase another house in Portland like 5 months later and I have 2 houses? That will look fishy or what, they are already wondering about why I would be purchasing a house in Corvallis.

So if you have a buddy who has a good job, or a good credit score it is likely you can do the loan in his or her name. You can still be on the title but if you have buddy help out you can get in another house. You can only get so many loans so we need to get creative on how are we going to get the lenders to lend us money.

Tip: As previously stated if someone gets a loan they have to have the downpayment money seasoned in their account for 2 months, so you should collect your funds in your friend's checking account before getting the loan to seasoned the notes.

Also note: it is advised that you DO NOT directly give your friend the money, this isn't really looked good upon and can ruin the deal, what needs to be done is the money that will be put in his name needs to be gifted from a family member because that looks ok from the lenders. So the way to transfer money to your friends account is to give it to their parents or someone in the family, and then have the family gift it to your friend. So then your friend has gifted funds that are seasoning.

If you had $10,000 to purchase an investment property, how would you invest it?

If I had $10,000 liquid right now to purchase an investment and I was a first time home buyer, I would go get a FHA loan [a first time home buyers] loan, and I would try to get pre-approved for a 5% down payment, or even a 3% down payment. And purchase a single-family house and rent it out with a property manager.

Why use a property manager when you can do it yourself? You like doing everything yourself? The sophisticated investor has other people do the work for them, you want to start beginning the process of replacing yourself and having people do work for you WHENEVER possible. The only reason I'd maybe recommend managing it yourself is to learn it, and then have someone else do the work for you. Property management is blue-collar work; it doesn't pay that much, pay someone else to do your grunt work. We are investors here, not employees, two completely different mind sets, if you have read the Cashflow Quadrants you'll know what I mean.

But that's what I'd do a single-family house, rent it out, and get a property management company in there. You want to start the process of being a business owner, not a self-employed employee of your own property. The biggest mistakes start with the little mess-ups of doing it wrong, and not realizing it.

What is your long-term goal with real estate?

I have 100% completely decided what exactly my long-term goal with real estate. But it is pretty much to buy at least 1 house a year, long-term, never sell, start out with houses and then move up into apartment buildings, then commercial buildings, and then have them pay a large cash flow every month when I'm older and start paying them off.

The secret to wealth is found in the game of monopoly, four green houses, and then one red hotel.

Warning: Paid off houses are very dangerous, the reason they are dangerous is because they are very highly at risk to asset protection. This isn't about asset protection, but a house, 100% paid off, guess what when you get sued [sooner or later, on avg people have 5 lawsuits], a 100% paid off house is a easy target. Once you are rich [let me define my definition of rich]. Affluent is $100,000 + a year in income, rich is $1,000,000 + a year in income, ultra rich is $1,000,000 a month. But once you are rich, you should be investing into asset protection, study it, here is one tip: The best asset protection is people not being able to find your assets at all. If they can't find it, they can't try to sue you for it.

For our readers, how do you make money off of rental propertys?

In real estate you make money 4 ways:

- Appreciation: value of your house going up
- Depreciation, "phantom cash": - is tax writes
- Amortization: - paying off the mortgage
- Cash flow: - rental income

Real estate is such a good passive investment, if all u did was work at McDonalds and saved money for down payments you could be rich after awhile.

In you blog post you talk about making 50% interest off of your real estate investments, how do you do that?

So what's good about real estate is it is highly leveragable, so you can get a ROI off the value of a house, but u could have purchased that house with a 10% down. It's sometimes hard to explain, but lets just look at a simple example of leverage, and how to use debt leverage in real estate investing to get a 50-100% ROI in just a fairly good market.

- Say we buy a house for $100,000, and we invest 10%, so we invested $10,000.
- So stop here, and look at what is going on. For my $10,000, I now own a $100,000 piece of real estate.
- Lets say this house goes up 10%, it is now worth $110,000.
- We now have an extra $10,000 in equity from sheer appreciation.
- So in one year, we made an extra $10,000.
- Our original investment was $10,000.
- So in this example, our $10,000 investment earned $10,000.
- What what? I don't get it?
- Ok, see, when we got appreciation, we didn't just get a 10% appreciation on our original investment, we got a 10% appreciation on our whole HOUSE, the house that the bank loaned us 90k for.
- So we get the appreciation off of the whole house, and if we bought that house with little money down. It makes our return on investment HIGH because we only invested a fraction of the cost of the house.
- See the borrowed money from the bank, used to purchase the house, MAGNIFIES your return on investment.

That is a simple example of leveraged appreciation growth.

What are your goals for your online company and your real estate investing?

My online web 2.0 company that I'm developing is going to be in the top alexa 10,000 sites, its going to be a residual product that people subscribe to monthly so I can take advantage of what I believe the best business model out there, a high-scalable residual service product based company. Originally my goal was to sell it out to Yahoo or Google and invest the millions into real estate buildings. But I believe now, I'd rather take it to bigger levels with employees and turn it into a 1-10 million gross sales company.

So then I'll have the online presence and then just buy abunch of real estate.

Are you ever going to get your real estate license?

I was actually going to be my license; I even paid $500 for the course and got 30% of the way through it. However, trying to be an investor with a real estate licensee isn't really the best thing. I originally wanted it because why not buy a house by yourself and you get the commission and just use that towards the down payment. You can do that, but there is a lot of things your going to regret doing if your getting a real estate license to be a real estate investor.

Being a Realtor you have to disclose a ton of information, when you try to buy a property yourself you have to disclose you're a professional. That hurts you because the other party is going to see you're a professional and probably trying to get a deal. Then you also your lead generation model [millionaire real estate investor book], will be slightly off, a lot of real estate agents won't want to send you leads because you have your own licensee. It is also a one-time commission; I don't really work for one-time commissions.

On-top of that, I have decided to move and follow my passion by building my web 2.0 company. I'm going to be moving to San Francisco one of the absolute best places to be for networking for a web 2.0 company. So my license was in Oregon, and I'm going to move to San Francisco, the most expensive real estate in the United States. Unfortunately it is so expensive I won't be buying any investments there, because its like 600k a unit, won't make any money on cash flow.

I almost purchased a property in Rochestor, New York but the other party flaked out on me, people think you got to buy where u live, [noobs]. No, live where you want to live, and invest where the numbers make sense.

Ok, is there anything else you would like to share with the rest of us?

All I can say is if the information you found is useful use it. People say knowledge is power, that is bull, knowledge is only potential power. Knowledge applied is power. If you liked this about real estate, take action, stop making excuses, stop setting goals and never hitting them, and make stuff get done. I see so many people who say they going to do things, and set goals for the summer or whatever, and then it passes and then they totally miss out. Little do they know every time they set a goal and don't hit it they throw off their psyche and it makes it harder to accomplish goals in the future.

All the information is in the books, I help people on facebook get into real estate investing, online, I go to real estate investment clubs, I work with a successful real estate investor, I read books about real estate investing, I have an ipod with over 200+ hours about real estate investing, I have friends who do real estate, read real estate, and I have videos on my ipod about real estate. I study it, a keyword for life change is study. If you like real estate from this, start diving into it, find clubs, talk with jon, talk with me, get some books, download some torrents, and rock it. Make it happen.

Thanks Wes.


Ref : http://www.jonwaraas.com/real-estate-invester-interview/

---
Categories : Finance    Themes : Real Estate
Share |
add a comment...

0 Comment

Leave a Comment