This class recording… taught by James on February 17, 2021… supplements to two part series of on Asset Protection from Brian.

Here is a summary of the 10 asset protection tips for real estate investors:

1. Asset Protection BEFORE There’s a Problem
2. Meet With Your Attorney About Your Situation
3. Maximize Auto Insurance, Property Insurance and Large Umbrella Policy
4. Use Licensed and Insured Contractors
5. Use a Property Manager
6. Don’t Arbitrarily Create LLCs in Other States
7. Don’t Assume Adversaries Are Incompetent/Dumb
8. Understand the Tax Implications
9. Weigh Ease of Operations versus Asset Protection
10. Use Business Entities When Appropriate

Get Bespoke Legal Advice

• Your situation is unique… this is NOT one size fits all
• Don’t take advice from free articles, free classes (like this one), podcast episodes, forum discussions
• Everything that I tell you may be 100% WRONG FOR YOU and YOUR SITUATION!
• I am NOT an attorney, CPA, insurance agent
• I am a real estate broker but…
• Get educated so you can have informed discussions with your advisers
• Be careful if you don’t understand your plan… don’t blindly implement

Default Buy-And-Hold Real Estate Investor

Default Buy-And-Hold Real Estate Investor – Multiple Properties

Buy-And-Hold Real Estate Investor with LLC

Buy-And-Hold Real Estate Investor with LLC – Multiple Properties

If A Tenant Sues And Wins… A Discussion

• Do they automatically get all your properties?
• If you have an LLC, do they automatically get that property?
• What really happens?
• What role does insurance play?
• Let’s look at a few examples

Asset Protection for Nomads

We have a detailed discussion about asset protection for Nomads.

Don't Assume Incompetence

Information technology is making it easier than ever to look up what you own. Don't assume that a trust is going to hide anything. At best it protects you from nosy neighbors.

Due on Sale/Due on Transfer Clauses

Risk Matrix

We can think of risk along two axes: one measuring the severity of the risk (how much money will it cost us if it happens) and the other measuring likelihood or frequency of occurrence (how often it happens).

The biggest danger for us is risk that happens very frequently and has severe repercussions.

The next two biggest dangers are risks that have medium severity or likelihood but the other measure is very high.

Insurance Premium As Proxy For Risk

• The business of insurance – how they make money
• Collect more premiums than they pay out
• If something is more likely to happen, charge more
• If something that happens is expensive when it does, charge more
• If something is not likely and/or not expensive, charge less
• The higher the cost of insuring something, the more “risky” it is for the insurance company (higher likelihood or severity)
• If you’re wondering how “risky” something is… consider getting insurance quotes
• Be careful of minimums (deductibles) and maximums
• Test the extremes (with quotes)

Cost/Value for Protection Examples

Next we look at the cost compared to the value of protection we receive for a variety of insurance products. These are examples… your cost and value will definitely be different for your unique situation.

Auto Insurance – Approximately $1,200 per year includes the following:

• Liability
• Bodily Injury:
• $1MM each person
• $1MM each accident
• Property Damage: $100K each accident
• Medical Payments: $50K each person
• Uninsured Motorists
• Bodily Injury:
• $1MM each person
• $1MM each accident

Rental Property – Approximately $1,200 per year includes the following:

Umbrella Insurance – Approximately $1,200 per year includes the following:

• $4 million
• Picks up where auto and property policies leave off for liability
• Devil is in the details (so read your actual policy and talk to your insurance broker), but typically covers…
• Lawsuit settlement from accidents in your covered home and properties
• Medical expenses or damages if a visitor is injured
• Damages you make to someone else’s property (car or home)
• Some judgments from defamation
• Does not typically cover: Business losses, contract disputes, personal belongings, criminal or intentional acts
• Remember, your umbrella is not the amount of your equity… it is the amount you want to insurance company to cover if you’re sued
• You’ll end up paying everything over this amount

Here's an example of a Contractor/Handyman's insurance costs:

• $9,500 per year general liability plus
• Almost $20,000 per year in workman’s comp/additional insurance
• In these examples… the insurance companies consider doing contractor/handyman work to be about “8 times risker” than just owning a rental property ($1,200 versus $9,500)
• Why are you doing any work on your properties?!

Here's an example of a Real Estate Broker:

• $206 per year for the individual (includes extra coverage)
• $202 per year for the company (includes extra coverage)

And here's an example of a Title Insurance policy: varies but maybe $2,000 – one-time fee (not yearly).

You Don’t Know What You Don’t Know

• Will something happen to you?
• What, exactly, will happen to you?
• If you knew when something would happen and what would happen, we could better defend against it.

Discuss Asset Protection Cost/Value

• Let’s say you have $100,000 in equity
• Assume you have maximized your property insurance, your auto insurance and have a solid umbrella policy
• Should you still create trusts, LLCs, etc?
• Discuss with your attorney, but here’s how I look at it
• What do trusts do?
• What do the LLCs do?
• What does insurance do?
• Extra expenses
• LLC tax return: +/- $500 per year
• Additional time with minutes and meetings
• Even if it is just $500 per year, what do you get from that?
• If someone sues you personally, does the LLC really help? How much?
• If someone sues your LLC, does the LLC really help? How much?
• Does this change with more equity?
• Does this change if you have partners?
• This is a personal risk/reward decision for each investor (and their advisers) and their unique situation

Stop Doing Stupid Stuff

• Don’t meet your employees at your home/properties
• Obvious ones like employees or contractors, but also “household workers, gardeners and even babysitters” (exclusion right from my insurance policy)
• If your handyman is not “in the business” with their own insurance, then they are your employee
• Mail stuff… try to avoid “dropping things off” or have people come pick stuff up
• Don’t rent out basement bedrooms without egress windows
• If something in your house becomes a known health/safety issue… have it fixed by a licensed, insured professional
• Don’t go outside and don’t stay cooped up in confined indoor spaces

Reflecting Back on Implementing An Asset Protection Plan For Real Estate Investors

And, we end the class with a reflection on what it has been like after implementing the asset protection plan Brian taught in the previous two classes: Asset Protection 1 of 2 and Asset Protection 2 of 2.

Additional Asset Protection Resources

Check out the other Asset Protection Classes for additional information.

The post 10 Asset Protection Tips for Real Estate Investors appeared first on Real Estate Financial Planner™.

Let's dive into the pros and cons of every real estate investing strategy… compared in this special one-time-only class taught by James on February 10, 2021.

Before I share with you the outline of the class, I want to mention that I could have opted to do either a qualitative comparison or a quantitative comparison of each strategy. I ultimately chose to do a qualitative comparison for this class. Perhaps I'll do a quantitative class in the future.

Real Estate Investing Strategies

What is a strategy? I've opted to define it as a unique combination of entry, holding period and exit.

• Creative Financing
• Owner Financing (including Richard Roop's The Ultimate Strategy)
• Wrap Financing including Pre-Foreclosures
• Loan Assumption
• Rent-To-Own/Lease-Option Family
• Agreement-For-Deed Family
• Subject To including pre-foreclosures
• Buy and Hold
• Quick Turn/Flip
• Nomad
• House Hacking
• BRRR and BRRRR
• Wholesaling
• Wholetailing
• Option-Auction
• Short Sales and Foreclosures including both auctions and from the MLS
• Tax Liens and Tax Deeds
• Partnerships and Syndications

When categorizing each strategy, I opted to break them down into three main categories with some sub-categories.

• Entry
• Channel
• Financing
• Hold
• Active/Passive
• Duration
• Exit
• Channel
• Financing

Channels are the source of where you find or sell deals.

Financing is how you finance the deal when you buy or how your buyer finances the deal when you sell (depending on whether we're talking about entry or exit).

Financing When Buying

We have several classes on financing, but here's a breakdown of the different types of financing for a wide range of real estate investing strategies.

• Cash (or Second-Order Cash Equivalent)
• Traditional Owner-Occupant
• Traditional Non-Owner-Occupant
• Creative Financing
• Owner Financing
• Wrap Financing
• Loan Assumption
• Rent-To-Own family
• Agreement-For-Deed family
• Subject To
• Partner
• Cash (or Second-Order Cash Equivalent)
• Traditional Financing
• No Financing Required
• Hard Money (including Transactional Funding)
• Private Money

I think many of these are self-explanatory, but Second-Order Cash Equivalent is not. Second-Order Cash Equivalent is accessing cash by using another asset. For example, doing cash out refinance on another free and clear rental property to buy a new property for cash. Or, using the margin feature of your stock portfolio to borrow against your own investments to pay cash for a fix and flip.

Entry

Let's look at the sources of deals (channels) and the financing when buying first.

Channels When Buying

I use an analogy with finding alligators to describe finding deals.

You could… in theory… find a recently released alligator in the New York sewer system. However, if you're really wanting to find alligators you might want to look in Florida. Even more specifically, you might want to look in the Everglades.

Similarly, if you're looking for a specific type of creative financing… like buying properties “subject to” the existing financing… you might be able to… in theory… find one in the MLS (like the alligator in the sewer), but you're much more likely to find one by marketing for motivated sellers. And, more specifically… marketing to sellers that have little or no equity in neighborhoods you want to acquire properties in (like the Everglades part of our analogy).

Here are the channels for finding deals.

• Multiple Listing Service (MLS) including Foreclosures and Short Sales
• For Sale By Owner
• Actively Marketed FSBOs
• Hidden FSBOs
• Marketing
• Networking
• Wholesalers
• Tax Lien/Tax Lien Sales
• Auctions
• Foreclosure
• IRS and other government organizations

Holding

I discuss whether you're being mostly active or passive when holding the properties.

For example, you could actively be improving the property with a fix and flip by doing repairs and upgrades. Or, you could be living in the property and doing improvements while you live there… like a live-in BRRR.

Or, you could be actively collecting income from the property by renting it. Or, you could be collecting seller financing payments by offering the property to your buyer with owner financing.

Alternatively to actively holding the property, you might have an option on a property and are not collecting rent or improving the property while you have an equitable interest with your option.

Next, I discussed your holding duration.

This could be just while the property is under contract like in the case of you wholesaling.

Or, you could choose to buy the property with the intention of never selling it… holding it forever.

Or, it could be anywhere in between from 3-6 months on a flip to 3-5 years on a sandwich lease-option or 10 years with a long-term buy-and-hold.

Selling

Let's talk about the channels for selling your property and the financing your buyer may use when buying it from you.

Financing When Selling

• Traditional Financing (Cash)
  • Owner Occupant/Non-Owner-Occupant
  • Buyer(s) and/or family/partners
• Hard and private money
• Creative Financing
• Owner Financing
• Wrap Financing
• Loan Assumption
• Rent-To-Own family
• Agreement-For-Deed family
• Subject To

Channels When Selling

What channels are we using with various real estate investing strategies when we go to exit our investment?

• Selling Through Others
• Multiple Listing Service/Real Estate Brokers
• Wholesalers
• For Sale By Owner
• Actively Marketed FSBO
• Hidden FSBO
• Unsolicited offers
• Networking
• Rent-To-Own family
• Auction
• Ignoring “losses” like natural disasters, lawsuits, bankruptcy, foreclosure, divorce, etc.

Creative Financing FAQs Matrix

Due to going over time, I was not able to cover everything I wanted to in this class outline. One thing I was not able to get to is the Creative Financing FAQs Matrix, but you can get more info on that in The Ultimate Guide to Creative Financing.

The post Pros and Cons of Every Real Estate Investing Strategy Compared appeared first on Real Estate Financial Planner™.

Find out how to determine rent comps and interpret them to determine what a property is likely to rent for in this special one-time-only class taught by James on February 3, 2021.

Below you'll find an outline of what was taught in the class. But, first…

Warning

• I don’t do my own property management
• I do not typically do my own rent comps… I typically call my property manager
• Rent is not an exact number and determining fair market rent is NOT an exact science
• We often start marketing early at a higher number and drop rent based on number of inquiries
• We are focused on long-term rentals (not short-term rentals)
• Ultimately, the rent you’re going to get is based on what a tenant is willing to pay in the marketplace based on supply and demand.

Easy, Basic and Advanced Rent Comps

• I will cover some advanced, overly-complicated strategies for comparing rental properties to attempt to determine what a property may rent for
• You could think of this… in many ways… like doing an “appraisal” for rentals
• I’m going to start with this to help you understand the more basic strategy…
• Most of you will ultimately opt not to use most of this advanced stuff
• A more basic method is to use a service that gathers up similar rentals, does some math and spits out a range of rents
• You can remove ones that are obviously not good comparables
• Will cover how to do this
• The easiest method is to call your property manager and ask them (that’s what I typically do)
• Not something you can/should do unless you’re planning to hire the property manager
• Can they be off? Absolutely!

Why Comparables To Determine Rents

• What will a property rent for?
• If you’re buying the property as an investment (now or in the future… like as a Nomad), what kind of rent are you likely to get?
• What do you use when analyzing deals with The World’s Greatest Real Estate Deal Analysis Spreadsheet?
• If the property is currently rented… are those rents “real” and likely to renew at the same rate?
• How do you know what a property will rent for?
• Look at recent properties that were recently for rent to see if the property you’re considering has similar characteristics and is likely to have similar rents
• Compare apples to apples not apples to oranges
• If you had identical properties in every way, you might expect them to rent for identical prices
• Different properties may not be “comparable” and therefore may rent for different prices
• What makes “properties” comparable?

Property Info Comparable Rent Data

This section of this class is based, in part, on the Comparable Sales classes I've taught in the past.

• Same or very similar area or location
• Similar style of property
• Mobile homes, manufactured, stick built, condo, townhome, SFH, multi-family
• Same or very similar beds/baths
• Similar condition
• Similar year built
• Similar square footage
• Prefer comparing Above Grade Finished Square Footage (AGFSF) to AGFSF
• Make adjustments for unfinished basements
• Make adjustments for slight differences in square footage by using rent per square foot
• Similar lot size and zoning of lot
• Similar extras and amenities like parking

Most Important Factors for Rent Comps

If I had to prioritize the most important rent comp factors, I'd say they are:

1. Location of Property
2. Type of Property
3. Bed and Baths
4. Size of Property
5. Condition

Finding Comparable Rent Comps

• Previously rented comps versus currently “for rent” comps
• Reality versus Fantasy Land
• What are you actively competing against?
• Harder to push rent when there are 10 other identical properties to choose from
• Rented as close to current date as possible
• Want to look at both
• Want to see about half a dozen
• Same number of beds and baths (ideally)

Where To Look For Rent Comps

• Sites like Zillow and CraigsList
• You could check these sites EVERY day, print out ones that would be good comps to properties you own (or may own in the future) and keep them organized, or…
• Aggregation services like Rentometer and MyRentCoach
• Pay to order reports from services like RentRange
• Property managers
• In my project management software, I try to remember to write down what clients tell me they got for rent and when

Proximity

• As close to subject property as possible
• Same neighborhood or subdivision
• Nearby comparable neighborhood or subdivision – if similar
• Radius around property
• By same zip code – BE CAREFUL
• By same city – BE CAREFUL

Property Type or Style

• Single family home, condo, townhome, small multi-family (duplex, triplex, fourplex), apartment/commercial
• Stick built, manufactured home
• Ranch, raised ranch
• Bi-level or tri-level
• Brick, siding

Square Footage

• Square footage +/- 10% to 20%
• Or, determine a rent per square foot of your best comparable rentals
• Remove high and low, especially if they’re outliers
• Use average to determine value of your subject property based on the average
• Some websites can also provide average rent per square foot to do quick estimates

Age of Property

• Recently built properties
• Few years on either side
• Property built in 2008 – may use 2005 to 2011
• Couple decades old
• Use about a decade
• Property built in 1990 – may use 1985-1995
• Many decades old
• Use a decade or two newer as an upper range and include all properties older
• Property built in 1942 – may use 1960 or older

Narrow The Net

If you have too few, expand the net. If you have too many comps, narrow the net to get a reasonable number.

• Beds/Baths
• Garages
• Square feet
• Proximity
• Age
• Type, style, amenities
• Recency “for rent”

Your Current Competition: Actively For Rent

• What’s for rent right now?
• If someone is looking for a rental, what else could they choose besides your property?
• Buyer’s Eyes
• Same or very similar criteria for what’s been rented
• CraigsList and Zillow are likely some of your better sources for finding these

Asking Rent Versus What It Rented For

• Be careful: asking rent is not what it necessarily rented for
• Could be slightly higher with pet rents and other increases
• Could be slightly less if there is a lot of supply and lower demand
• Or, a landlord with a big heart
• What is the trend?
• Are you coming out of the off-season into peak season?
• Are you heading out of peak season into off-season?
• Some aggregator websites give you this data over a period of time

Warning: Lack Of Comparable Rents

If you are not finding properties that are similar that have rented or been marketed for rent… be very, very careful.

Consider being more conservative when analyzing properties.

Value of Upgrades

• If a seller pays $10,000 to put a new roof on the property, is the house going to rent for more? Probably not. May be worth a little more… but likely won’t rent for any more.
• How about new windows?
• As a renter, given the choice between two properties that are otherwise identical, would you pay more for one that has new windows? Maybe if utilities are going to be lower, but how much more are you willing to pay for that? Not much in most cases.
• Minimum requirements and expectations for a house. Already included in the expected rent value from comparable rentals

Market Based Rent Adjustments

• Be careful to make sure the adjustments you make are founded in market data or give yourself time to adjust rent down
• A swimming pool might only add a very small additional rental value to a property if there is no market data to support additional value for pools
• You might find someone who does assign it extra market value
• But if you don’t, give yourself time to adjust the rent down to get it rented

Rent Comp Examples

At this point in the class I walk folks through a property I own and what each of the major sources of rent comps have to say about rent. We cover:

• Zillow (and Roofstock which seems to use Zillow data)
• MyRentCoach
• Rentometer
• RentRange
• My Property Manager’s Renewal Rent

I show a sample screen shot or report for each and we discuss how to interpret the data in detail.

My Property Manager's Process

I sent an email asking my property manager what she does for rent comps and if she'd like it if I suggested clients in Northern Colorado contact her for rent comps. Here is her reply and contact info.

Rent Comps For New Construction

For some new construction neighborhoods, it can be incredibly difficult to find appropriate rent comps. Might need to:

• Go outside the immediate geographic area AND/OR
• Use less similar properties

Using Purchase Payment To Set Rent

Should you use the monthly payment from your financing (or even their financing) to set a rent price?

For tenants, this is likely not a reasonable way to set rent.

HOWEVER, for tenant-buyers (who will be buying the property), I think you can use this as another data point for determining what you should be able to collect monthly for a property. If the payment, when they buy it is going to be $X and they can’t afford $X, then… by definition… they can’t afford the property.

Will you always be able to get this number? No.

But, it might help you get the higher end of the rent range if this number pulls it up.

Tips When Analyzing Properties

If you're using The World's Greatest Real Estate Deal Analysis Spreadsheet to analyze your properties, then Brendon's section for rent and price sensitivity will be especially helpful.

• Enter in your best guess about what it may rent for
• Consider using the rent range to help you test your rent sensitivity in rent sensitivity table

The post The Ultimate Guide to Rent Comps appeared first on Real Estate Financial Planner™.

In this brief, one-time-only class taught by James and Jassen on January 29, 2021 they discuss what the tax deduction is and what you need to do to be able to get it.

According to the IRS:

“The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates of which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS.”

So, you must log… on average… 21 hours per MONTH… of work done on your rental properties. This is PER PROPERTY… UNLESS you decide to group all your properties together as one enterprise as we discuss in the video.

Watch the short video and download the free Excel spreadsheet log here:

To get the details straight from the IRS, check out https://www.irs.gov/pub/irs-drop/n-19-07.pdf

Real Estate Investing Classes

Interested in learning more about real estate investing? Check out the list of real estate investing classes and we have a bunch of classes on bookkeeping, accounting and taxes for buy-and-hold real estate investors, house hackers and Nomads.

The post Download Free Log for Qualified Business Income Deduction with Rental Property appeared first on Real Estate Financial Planner™.

This was a special one-time-only class taught by James on January 27, 2021.

Real Estate Investing Classes

Interested in learning more about real estate investing? Check out the list of real estate investing classes.

The post Over-Simplified Financial Independence with Real Estate appeared first on Real Estate Financial Planner™.

We go over a detailed checklist to maximize your rental property income and to reduce your rental property expenses in this special class by James.

Watch the video, or listen to the podcast and download the PDF How to Improve Cash Flow checklist to run through it for each property you own.

Download Checklist

As part of preparing for this class, I created a three page PDF checklist to be used with the presentation.

Download How to Improve Cash Flow Checklist

If you have suggestions for improving the checklist (things we missed, better order or formatting, etc), please do let me know via email or via comment below.

This class was taught on January 20, 2021 via webinar.

Maximize Income

Based on James' Maximum Cash Flow Guarantee.

• Can I “subdivide” my property into multiple units to increase rent? Rent upstairs/downstairs separately?
• Can I rent by the bed/bedroom?
• Can I rent parts separately like garage, community pool, RV parking, RV in backyard as vacation rental?
• Can I add services/utilities like high-speed interest for an extra fee?
• Can I offer the property to a tenant-buyer on a lease-option, lease-purchase or agreement-for-deed to increase income and reduce maintenance?
• Can I charge pet rent?
• Can I charge fence rent? New carpet rent? Or, extra rent for something else the tenant desires I install?
• Can I tier rent by credit score and/or security deposit?
• Can I change the term of the rental agreement? Daily, weekly versus Monthly?
• Can I charge weekly or bi-weekly instead of monthly?
• Can I include done-for-you services like lawn care, snow removal or house cleaning for an extra fee?
• Can I convert my property to a duplex, triplex or fourplex or more?
• Can I rent the property furnished to get more rent?
• Can I start marketing earlier and start at a higher, more aggressive rent to test market prices?
• Can I charge a fee for autopay? Or, can I charge a fee for not being on autopay?
• Can I schedule my leases to end during peak rental seasons?
• Can I target more profitable rental niches (like corporate rentals)?
• Can I offer a discount for on-time or early rent (instead of late payments)?
• Can I add solar panels and include electric in base rent?
• Can I bill-back for HOA services and utilities (like non-potable water)?
• Can I get paying roommates for Nomad property you are living in?
• Can I require 60-90 days notice for out-going tenant to not renew?
• Can I improve landscaping and curb appeal to get higher rent? Paint, add/improve shutters, lawn care, mailbox, property address numbers, lighting?
• Can I make sure the property is appropriately prepared for showings (well lit, smells good, repairs done, clean, neat)?
• Am I maximizing exposure when marketing for tenants?
• Do I have professional-grade photos, 3D tour, and video when marketing property?
• Have I mastered the sales skills required for phone selling my property to tenants/tenant-buyers and in-person salesmanship to maximize what I can get for rentals and minimize vacancy?

Minimize Expenses

Based on James' Lowest Monthly Payment Guarantee and the class Strategies to Get the Lowest Monthly Payment When Buying – 2020 Edition.

Minimize Monthly Payments With Your Lender

• Can you put more down to reduce the amount you are borrowing?
• Can you put more down to improve your interest rate (lower LTV)?
• Can I pick a loan with lower closing costs (especially if you are financing the closing costs)?
• Can you put more down to eliminate/reduce Private Mortgage Insurance (PMI)?
• Can you pay for PMI in one, up-front, lump-sum payment instead of monthly?
• Has my equity increased enough to request the removal of PMI?
• Can you get Seller Concessions from the seller to buy down interest rate and/or cover closing costs?
• Can I change the loan term to reduce my payments?
• Can I get an Interest only loan?
• Can I get a negative amortizing loan?
• Can I change the loan term to reduce my interest rate?
• Can I get an adjustable-rate-mortgage (ARM) to lower my interest rate?
• Can I get the seller to carry back some owner financing to lower my loan-to-value with the primary lender and reduce my interest rate?
• Can I improve my credit score to get a better interest rate?
• Can I setup automatic payments to get a better interest rate?
• Can I get a better interest rate if I have additional accounts/more money deposited with the lender?
• Can I lock/float down my interest rate?
• Can I add a friend/family member to the loan to get a better interest rate?
• Can I remove a weak borrower to get a better interest rate?
• Can I partner with someone to get better loan terms?
• Can I find another lender with better fees/rates?
• Have rates dropped enough for me to refinance and get a better rate?
• Is my loan old enough where I would be willing to refinance the extend the term (and maybe get a better interest rate) to lower my monthly payment?

Strategies If You Own Other Property

• Can I do a ‘cash out’ refinance on another property to buy/refi this property?
• Does it make sense to ‘cash out’ refi another property to put a larger amount down on this property?
• Should I do a ‘rate and term’ refi to get an overall better monthly payment before financing this property?

Searching For Homes

• Can you search for properties where the seller is willing to include seller concessions?
• Can I search for less expensive homes?

Making Offers

• Can I offer less to reduce my purchase price?
• Can I ask for seller concessions to buy down my interest rate?
• Is the seller’s loan assumable and have better interest rates than I can get now?
• Would the seller consider wrap financing and would that be better terms than I can get now?
• Can I buy the property ‘subject to’ the existing financing (more appropriately wrap financing)?
• Can I buy the home on an installment land contract and get better terms?
• Can I get private financing with better terms from family/friends?
• Can I pay cash for closing costs to keep my monthly payment lower than if I financed them?
• Can I buy properties that do not require “rent ready”/fix up costs and use that money as down payment or to buy down interest rate instead?

Owning and Managing Properties

• Can I correct incorrect information with the county assessor about the condition or characteristics of my property?
• Can I contest property taxes when appropriate to keep my property taxes minimized?
• Can I vote appropriately for changes in taxes that affect property taxes?
• Can I manage the property myself and still keep up with the latest laws, best practices and compliance issues?
• Can I shop around to get a high-quality property manager with reasonable fees?
• Can I maintain my property to minimize time between tenants?
• Can I insist my property manager utilize best practices (marketing early, raising rents with each lease renewal, et cetera)?
• Can I review my property management statements carefully for mistakes?
• Can I raise my property insurance deductible and take on more of the property insurance risk personally?
• Can I add/remove people from my property insurance policy to improve the rate I am getting?
• Can I evaluate the exact property insurance coverages to make sure you have an appropriate level of coverage?
• Can I compare insurance rates to keep insurance premiums competitive?
• Can I make sure tenants/tenant-buyers have renter’s insurance?
• Can I get a discount paying for HOA, insurance or other bills in advance?
• Can I sign up for autopay on utilities to avoid any per bill fees charged by utility providers?
• Can I use quality replacement maintenance materials to lower the overall cost of maintenance over time?

Real Estate Investing Classes

Interested in learning more about real estate investing? Check out the list of real estate investing classes.

The post How to Improve Cash Flow Workshop appeared first on Real Estate Financial Planner™.

What if you earn $30,000 more per year after you get your degree than the person who doesn't go to college and you decide to invest the full $30,000 per year extra?

We tackle the age-old question: Go to College or Skip It to Invest in Real Estate in this special class by James.

This class was taught on January 13, 2021 via webinar.

Tammy had sent over an article, Is This The End of College As We Know It, and James decided to do some math to see if the extra earning power of a college degree was worthwhile.

Assumed Cost of College

For this class, I looked up the cost to attend our local Colorado State University.

I ended up rounding down and estimating college was $25,000 per year including tuition, books, supplies, fees, room, board and other expenses.

Difference in Salary for College Grad Versus High School Grad

How much more does the college grad make than the high school grad?

I ended up rounded down and estimated that the college grad earns $30,000 more per year than a high school graduate investing in real estate.

Furthermore, I assumed that the college grad invested the full $30,000 difference each year and both lived on a $50,000 per year income.

Setting Up The Comparison

For the comparison, here's what I assumed is the same:

• Family has saved up $100K for either college or investing
• Both kids receive the full $100K upon leaving high school
• Both invest it in the stock market (or equivalent) and earn 8% (until they spend it)
• Financial Independence = Replace $50K/year Passive Income
• Cash Flow (after all expenses on rentals) +
• 4% Safe Withdrawal Rate of Money in Stocks

Plus, the properties are the same.

• This property is a Nomad property that you live in until you buy your next owner-occupant property. When you buy your next Nomad™ property, this one becomes a rental.
• This property uses dynamic rules to determine when we buy/sell it in the scenario.
• Account for down payment, income and expenses for this property: All-In-One Account
• $350,000 property value and purchase price and it goes up at a rate of 3% per year.
• 5% of purchase price for down payment.
• 1% of purchase price in closing costs at time of purchase.
• No seller concessions.
• 2.75% is the mortgage interest rate with a term of 360 month mortgage term.
• Private Mortgage Insurance (PMI) at a rate of 0.5% of the initial loan balance until the loan-to-value drops below 80%.
• $2,100 per month in rent but rent increases at a rate of 3% per year.
• 3% of the monthly income is the assumed vacancy rate.
• 10% of the monthly income is the assumed maintenance rate.
• 1% of the value of the property each year is the assumed property taxes rate. Based on the initial value of $350,000 that's about $3,500 per year in property taxes at the start and it changes as the property value changes.
• 0.4% of the value of the property each year is the assumed property insurance rate. Based on the initial value of $350,000 that's about $1,400 per year in insurance costs at the start and it changes as the property value changes.
• This is a residential property and 15% of purchase price is considered the value of the land (when doing our depreciation calculation).
• All properties are self-managed.

Is This An Amazing, Unrealistic Property?

Nope. Clients have bought several properties like this in the last year.

Here's the Cash Flow Power Meter for it.

Over time, it looks like this:

And, here's the Return in Dollars Quadrant for the property.

Financing Tangent

Then, in the class I went off on a side tangent about financing with an updated version of my loan type comparisons.

And, I show the estimated monthly payment for the table above in a variety of new forms.

Or, just the owner-occupant loans:

Or, just the non-owner-occupant (investor) loans:

Or, finally, a comparison of all the non-owner-occupant loans with just the 5% down owner-occupant options as well.

If we looked at each of these loan options (from the table above) in terms of the return quadrant's components of return but in a table, here's what we get.

By the way, you can see this same information for your own portfolio (and even future purchases) by entering your own stuff in the Real Estate Financial Planner software.

Continuing, if we take the same info in the Return in Dollars Plus Reserves table and created a chart of it, you get the following.

Since, we're comparing different loans buying the same property, the appreciation and Cash Flow from Depreciation will remain unchanged. So, we can eliminate those two (and the total) from the chart to eliminate some noise.

But, if we are varying the down payment, is it really appropriate to compare getting one cash flow with nothing down versus getting another cash flow with 40% down? Not really.

It would be better if we took the amount of return and divided by the amount we put down (or in this case the equity in the property) to get a feel for what our return on equity was. That's this next table.

And, taking that table and showing it on a chart for easier comparison, we get the following Return on Equity Plus Reserves chart.

And, that was the end of my tangent on financing. Back to the focus of the presentation: real estate investing or college.

What's Different

So, we've talked about what is the same between going to college and investing in real estate instead. What's different?

For going to college, I assumed:

• College costs $25,000 per year – assume this includes room and board too
• Earns $80K per year after college – adjusts with inflation
• Saves/invests $30K of their $80K income per year
• Buys house to live in after college
• Higher income, likely higher income tax – may mean slightly worse standard of living

For investing in real estate instead of going to college, I assumed:

• No cost for college
• Earns $50K per year immediately – saves/invests $0 of $50K income per year
• Buys house to live in immediately as Nomad and keeps buying until they have 10 properties total (9 rentals and 1 to live in)
• Lower income (and depreciation), likely lower income tax – may mean slightly better standard of living

Comparison Charts

The following are some charts comparing the two  Scenarios.

How much True Cash Flow does the real estate investor make? Here's a chart.

And, if you're thinking in terms of today's dollars (non-inflated), here's the same True Cash Flow chart in inflation-adjusted dollars.

These are not the most amazing cash-flowing properites. How much negative cash flow did the real estate investor need to endure with this strategy? Here's a chart.

One of the benefits the real estate investor has over the college graduate is that they get to start earning high rates of return earlier by purchasing rental properties.

Here are a few examples of that with charts showing the Return on Equity for a variety of components.

How much are all the properties the real estate investor is buying worth?

But those are inflated values. What if we adjust for inflation and show the property values in today's dollars? Queue new chart.

What if we exclude the properties they're living in and just look at the value of the rentals?

But how much did the real estate investor have to invest—including any negative cash flow—to acquire that many rentals?

How much equity does each have in the properties they own (including rentals and owner-occupant properties)?

And, what about the same equity chart above, but adjusted for inflation back to today's dollars?

But, how much money do they have in their “bank account” or investment account?

It is hard to see what is going on in the chart above early in the  Scenario, so let's look at a zoomed in version of just the first 10 years.

And, here's the first 20 years.

And here's how the two compare when we just look at their ending account balance in year 40.

How about how much equity they have if they were to sell the properties with a real estate broker?

That's in inflated dollars. How much “Sell With Agent” equity do they have if we adjust back for inflation to today's dollars?

That was equity if they sold with an agent. How much equity do they have for cash flow refinances instead?

If we adjust for inflation?

Net worth takes into account account balances and equity. Here's the net worth comparison.

That was in inflated, future dollars. How about net worth in today's dollars?

And, here's an easier way to see how net worth compares in year 40, adjusted for inflation.

Sure, the real estate investor has some good net worth, but they had to take on some real estate debt to do it. How much was the total amount in mortgage balances?

Next, let's dig a bit into the income (paychecks) coming in at various points of time.

The chart above shows each getting cost-of-living adjustments for inflation. The chart below shows paychecks if we adjust back for inflation to today's dollars.

How much is each saving? Let's start first with the real estate investor skipping college.

And, here's the college graduate's savings rate.

And, let's look at the total amount saved for both on the same chart.

And, if we adjust the total amount saved for inflation and show it is inflation-adjusted dollars.

What about personal expenses?

If we adjust personal expenses for inflation?

The Reveal

So, who achieves financial independence faster?

Looks like the real estate investor has a significantly faster pace to achieve financial independence.

But, additionally, check out just how much more than their goal (dotted red line at 100%) they each achieved.

Comparing Risks of Each Plan

But, which is more risky? One way to measure risk is to look at how much total debt they have compared to their net worth.

And, another way we look at risk is how many months of reserves they have.

It might be hard to see the first 15 years or so in the chart above, so let's zoom in and take a look at that period.

Can The Real Estate Investor Qualify For Mortgages?!

With an income of $50,000 per year, can the real estate investor qualify for ten 5% down payment loans? It is super close.

An Alternative Way Of Thinking About This

When you go to college, you invest $100K to earn $30K more per year in income.

When you skip college to invest in real estate, you invest $100K to earn the following with a property…

…but remember, you're getting 4 of these properties!

So, you're getting 4 times those numbers per year.

Nomad Unfair Advantage?

When we compared skipping college to invest in real estate to someone going to college, we assumed the real estate investor invested using the Nomad real estate investing strategy and the college graduate invested in a home to live in and then stocks.

Is the Nomad real estate investing strategy an unfair advantage? What if our college graduate Nomads after finishing college? Is that better?

They acquire 10 properties in both cases.

They get the same great returns from owning real estate, but the college graduate is staggered out by a little more than 4 years.

And they also enjoy similar True Cash Flow, but also delayed by a few years.

If we adjust for inflation, Total True Cash Flow looks like this.

Eventually—since they're buying the same properties—they have 10 properties worth the same exact amount in total.

If we adjust that chart for inflation, we see they eventually both own about $3.5 million in real estate.

The college graduate ends up with high mortgage payments (because they waited and bought slightly more expensive properties).

Here are the comparative mortgage balances.

How much did each need to invest—including negative cash flow—to acquire the 10 properties (9 rentals and the 1 owner-occupant)?

What about account balances?

It is hard to see what is happening with the account balances early on, so here's a zoom of the first 20 years.

How quickly do they achieve the goal of financial independence now that they're both Nomading?

It helps a lot…

And, similarly they can now enjoy a higher standard of living as well.

And much better net worth, but still not quite as good as skipping college to invest in real estate.

Here's a quick comparison of net worth, adjusted for inflation in year 40 between the three  Scenarios.

But how about risk? A little riskier for the college graduate?

If we zoom in to see the first 15 years, we can see more about what is happening with reserves.

Looking at the Total Debt to Net Worth chart to estimate a measure of risk, we can see that going to college keeps with a higher risk and for a longer period of time.

Can the college graduate afford the mortgages? Yes. Much easier than skipping college and investing in real estate.

Real Estate Investor – No Roommates

For our original assumptions, the real estate investor that skipped college got roommates for the first 4 years at $500 per roommmate per month ($1,000 per month total).

What if they don't get roommates?

And they still enjoy a very high standard of living.

And, finally, comparing net worth for the 4  Scenarios.

Not Discussed

While we did cover 4  Scenarios, there are a number of things we did not cover.

For example, we did not discuss paying off properties early including selling properties and using the equity to pay off other propreties.

We did not discuss doing cash out refinances to retire early while we are waiting for the other properties to improve cash flow when we reach true financial independence.

Nor did we discuss coasting into retirement.

And, our assumptions were static. 3% appreciation, rent appreciation and 8% return in the stock market. We did not discuss modeling variability in returns. Nor did we do any  Monte Carlo simulations.

We did the basic  Scenarios and did not venture into advanced strategies.

If you decide this is your investing strategy, I'd strongly encourage you pursue these advanced options to better understand the pros and cons before implementing.

Change My Assumptions

As I mentioned in the class, you're definitely going to want to change my assumptions and run these  Scenarios again yourself with your own assumptions.

Rather than starting over from scratch entering in the details, copy any of my examples into your account and just modify.

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Copy  Scenario into my Real Estate Financial Planner™ Software

Go To College with 2  Accounts, 1 Property, 7 Rules, 16 Goals
Or, read the detailed, computer-generated, narrated  Blueprint™.

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Copy  Scenario into my Real Estate Financial Planner™ Software

Go To College - Nomad After with 2  Accounts, 1 Property, 7 Rules, 16 Goals
Or, read the detailed, computer-generated, narrated  Blueprint™.

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Copy  Scenario into my Real Estate Financial Planner™ Software

Invest in Real Estate with 2  Accounts, 1 Property, 4 Rules, 16 Goals
Or, read the detailed, computer-generated, narrated  Blueprint™.

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Copy  Scenario into my Real Estate Financial Planner™ Software

Invest in Real Estate - No Roommates First 4 Years with 2  Accounts, 1 Property, 3 Rules, 16 Goals
Or, read the detailed, computer-generated, narrated  Blueprint™.

Real Estate Investing Classes

Interested in learning more about real estate investing? Check out the list of real estate investing classes.

The post Go to College or Skip It to Invest in Real Estate appeared first on Real Estate Financial Planner™.

This class was taught on January 6, 2021 by James and IRS Enrolled Agent, Jassen Bowman via webinar.

Here are the rental property tax deductions covered:

1. Above the line versus below the line and a discussion of standard deduction versus itemizing your deductions
2. The tax free sale of a primary residence including how this often confusing for new Nomads, the 2 out of 5 year rule and more.
3. House hacking and roommates and how to calculate the percentage of your property you're using as a rental
4. Depreciation, how it works and some real estate investing rules of thumb
5. Depreciation recapture and how that works (it is different than what I thought heading into the webinar)
6. Accelerating depreciation through cost segregation
7. Deducting repairs and maintenance including some safe harbor provisions
8. Deducting utilities and dealing with billback and including utilities in rent
9. Home office deduction and how to calculate the percentage
10. Real estate investing related travel
11. Business meals
12. Closing costs
13. Property management costs and fees
14. Insurance premiums
15. Mortgage interest
16. Accounting, legal and other professional fees
17. Losses from casualty and theft
18. Property taxes
19. Trade tools required for your to be a real estate investor
20. License, registration fees and taxes
21. Business entity pass-through deduction and related discussions
• We created a Rental Property Log for you to log your hours to qualify for the safe harbor provision. Download it and use it to stay compliant.
22. And, we have a bunch of related bookkeeping and accounting classes for real estate investors for you as well.

Real Estate Investing Classes

Interested in learning more about real estate investing? Check out the list of real estate investing classes.

The post Rental Property Tax Deductions appeared first on Real Estate Financial Planner™.

Here are the 9 nastiest Nomad mistakes.

This class was taught on December 16, 2020 by James via webinar.

Here are the mistakes covered:

1. Wrong Financing
2. Wrong Property Type (SFH, Condos, Duplex, Triplex, Fourplex)
3. Wrong Property (Location, Layouts, Obsolescence, Cap Ex)
4. Refinancing Errors
5. Wrong Team (Agent, Lender, Inspector, Property Manager)
6. Shiny Object Syndrome (and not starting soon enough, flipping, wholesaling when you should Nomad in parallel at the beginning, losing motivation and stalling)
7. Not Optimizing Cash Flow (Income, Expenses, Leases including Timing)
8. Analysis Paralysis
9. Unrealistic Expectations
10. Under Capitalized (Reserves)

Real Estate Investing Classes

Want more classes? Look at the list of free real estate investing classes.

The post 9 Nastiest Nomad™ Mistakes appeared first on Real Estate Financial Planner™.

Nomads

This class was taught on December 9, 2020 via webinar.

Here's what I taught in the class.

What Is Nomad

Since this class is about the Nomad investing strategy, I took a moment to go over what Nomad is:

Next, I share a quote from general George S Patton on fear and acting through fear.

“The time to take counsel of your fears is before you make an important battle decision. That's the time to listen to every fear you can imagine! When you have collected all the facts and fears and made your decision, turn off all your fears and go ahead!”

─ George S Patton

Problems

If you're walking down the street and you notice your shoe has become untied, you just bend over and tie your shoe.

If you go into your refrigerator and you notice you're out of milk, you just go buy more milk.

For most of us, these are simple solvable problems. Ones we can address with little or no fuss.

I might suggest a goal should be to make more of your problems solvable with little or no fuss.

You know your furnace will need new filters regularly. Budget and plan for it. Then, replace them when they need replacing.

Your furnace will need to be serviced. Budget and plan for that too. Do it when it needs doing.

Similarly, you know the furnace will need to be replaced. Budget for that. When it happens just do it with little or no fuss.

Many real estate “problems” are things you should reasonable expect to happen. You should plan for them by keeping adequate reserves.

Dan Sullivan, founder of Strategic Coach, says:

Strive to be able to solve any real estate problem that is likely to come up as easily and stress-free as tying your shoes or replacing milk.

Plan for Capital Expenses

You know that you're going to need to replace a roof and gutters on your rental property. You know you'll need to paint the interior and exertior. ACs and furnaces need maintenance and to, eventually be replaced. Appliances stop working and need repair or replacement.

Brian, in his deal analysis spreadsheet, gives you a section to estimate and plan for capital expenses. Use it by adjusting the numbers based on your property and current prices.

If you're not already planning for regular maintenance on your property, you really need to.

Likewise, if you're not already planning for capital expenses, you really need to budget and plan for those as well.

Reserves for Real Estate Investors

You need reserves.

It may be obvious, but I'll say it: to get reserves you need to save money.

You can save money by reducing expenses and/or increasing income. You should do both.

Do this with both your personal income and expenses as well as your business income and expenses.

All the content we have (including classes) on improving cash flow and reducing expenses applies here. Implement everything that is appropriate for your situation.

Better Modeling of Reserves in the Real Estate Financial Financial Planner

In anticipation of this class we added some new and improved ability to model keeping reserves when buying properties with the Real Estate Financial Planner™ software.

Previously, with the  Buy  Property When  Account Has Down Payment rule, you could enter in the minimum amount of money you needed to have in your account (plus the total amount required to close on and purchase the property) for the rule to be triggered.

You could say, I want to have $10K (inflation adjusted) in my account plus the down payment and closing costs before buying a property.

Now, you can still set a dollar amount for the account, but you have three additional options in addition to any amount you set in the account.

You can require a user-defined number of months of reserves for the property you're about to buy too. This allows you require you have 6 months or 12 months (or any number you specify) of reserves before being able to buy the property.

And, you can require a user-defined number of months of reserves for personal expenses before being able to buy the property. This determines your personal expenses (from  Rules) and allows you to specify you need 3, 6 or whatever number of months of reserves of your personal expenses before being able to buy another property.

And, finally, you can also set the number of months of reserves for all other properties you already own that is required to buy the next property.

All of these are cumulative. It will add the minimum account balance, months of reserves for this property, months of reserves for personal expenses and months of reserves for other properties… all in addition to the closing costs and down payment required to buy the property before allowing you to buy a property.

Months of Reserves

Plus, as you model your different real estate investing strategies, you can compare how many months of reserves you have for different plans.

Considering buying more properties? How does that impact your reserves? Considering selling properties? Compare it to other plans and see how that impacts your reserves.

This  Chart is available for all  Scenarios.

Return in Dollars Quadrant for Typical Northern Colorado Nomad

I was not willing to reteach the entire Everything You Learned About Deal Analysis is Wrong – ROIQ+R class where I explained in detail the new quadrants, but I did take some time go over a few quadrants for a $400K Nomad property with $2,200 per month in rent. This is a representative example of what you can currently purchase in Northern Colorado.

The following shows the raw dollars of return for buying this property as a Nomad in year 1.

You can see these quadrants for any property that you're analyzing with the Real Estate Financial Planner™ software at the bottom of the edit page for the property.

Return on Investment Quadrant for Typical Northern Colorado Nomad

If we take each return and divide by the total amount required to purchase the property (closing costs and down payment), we can see the return on investment for each area (and the total in the center).

RIDQ+R6 and ROIQ+R6 for Typical Northern Colorado Nomad

If we account for keeping 6 months of reserves and calculate the return in dollars and return on investment, that becomes the Return in Dollars Quadrant + 6 Months Reserves and Return on Investment Quadrant + 6 Months Reserves respectively. We abbreviate those as RIDQ+R6 and ROIQ+R6.

Here's what it looks like for this property.

First, the RIDQ+R6:

And, the ROIQ+R6:

12 Months of Reserves, The ROIQ+R12

What if you kept 12 months of reserves instead of 6 months? That's the ROIQ+R12 shown here:

Not Unique to Nomad

While we've been discussing the importance of reserves and how you need to save for both the expected (and the unexpected), these expenses are not unique to Nomad.

You could put 0% down with a VA Loan or USDA loan, 3.5% down with a FHA loan, or the most common 5% down with conventional financing as a Nomad. Or, you could put 15% down, 20% down, 25% down or more as a non-owner-occupant investment property.

Regardless of which you choose, we still set aside money for things like vacancies, property management, maintenance and capital expenses when we analyze deals.

Furthermore, these numbers don't vary with the amount you put down. Vacancy allowance is the same whether you put nothing down or 50% down. Same with property management, maintenance and capital expenses.

Where some folks might get confused is that with Nomad, you may be choosing to “finance” part of your down payment.

Financing Down Payment

Nomad is designed to let you invest with adequate reserves without producing 20%/25% down and 6-12 months of reserves.

Instead, you can invest with 0%/3.5%/5% down and 6-12 months of reserves if you are OK with “financing” the rest of your down payment.

Here's an example with a $400K property.

If you bought a property as a Nomad, you might need $20K in down payment + $14K in reserves + closing costs. That might equal about $39K.

For that property you might have a True Cash Flow of -$243/year or about -$20/month.

Or, if you bought a property with 20% down payment, you might need $80K as down payment + $13.5K in reserves + closing costs. That's about $98.5K.

True Cash Flow for the 20% down payment purchase of the same property might be about $829/year or about $69/month.

As a third option, you might consider putting 25% down. That would be about $100K in down payment + $12.5K in reserves + closing costs. That's about $117.5K total required to invest.

True Cash Flow on the 25% purchase might be about $2,894/year or about $241/month.

As you can see with the numbers above, the Nomad purchase requires you be willing to “finance your down payment”.

The difference in monthly cash flow between the Nomad purchase and the 20% down payment purchase is $89/month.

So, instead of putting $59,500 more down to get to 20% down, you choose to spend $89 per month more.

How long can you pay $89 per month before you've put out $59,500? Turns out you could pay $89/month for 668 months (that’s 55 years) to produce the same $59,500.

So, instead of putting $59,500 more down, you're choosing to “pay” $89 per month.

You still get the other returns: debt paydown (which is actually a little better with Nomad with a higher loan balance and better interest rate), tax benefits of depreciation and appreciation.

Plus, rents will very likely increase well before 668 months so you're really not even paying the $89 per month for anywhere near the 668 months.

Nomad is Not Permission To Be Stupid

I softened the language in the presentation, but this is really what it should have said: Nomad is not permission for you to be stupid.

Just because Nomad allows you to acquire properties with lower down payments and better interest rates does not mean you can use it to invest without reserves. Investing without reserves is stupid.

Nomad, with its lower down payment, should make it easier for you to invest with reserves. With a lower down payment requirement, it is easier for you to save up reserves before investing.

Having reserves to handle expected “problems”… ones you know you're going to see like vacancy, reductions in rents and price, maintenance, capital expenses… is not only prudent but should also be expected. Remember the Dan Sullivan quote above?

So, it begs the question… how can we boost your reserves when Nomading to make sure you have enough reserves so that you don't have a problem?

Lease-Options

One strategy that could be used to generate reserves is lease-options. While I mention some things related to lease-options here, you really should check out the full series of lease-option classes to learn more about them.

I explained how the traditional Nomad strategy works above visually with an image. Here's how doing lease-options with Nomad looks.

Sitting down with lunch with Daryl Stolte (who taught the class on using Lines of Credit for real estate investing) we were discussing Nomads and the risks to Nomads.

Specifically the riskiest part of the plan for many Nomads is early on when they have the highest debt to net worth, the lowest cash flow and the lowest reserves. I told him that I have a solution for that: lease-options.

So, I refer to this strategy as the Stolte Method (since I came up with it while discussing it with Daryl).

Here's basically how it works: implement your desired strategy (for example Nomad). However, instead of converting the first property to a rental, convert the first property to a lease-option to a tenant-buyer.

Benefits of Stolte Method and Lease-Options

The first benefit of using lease-options when Nomading is that you get an option fee when tenant-buyer moves in. This immediately boosts reserves.

The second benefit is that the tenant-buyer has ownership mentality and is likely to take better care of property. This could lead to possibly lower maintenance costs.

Another benefit? You're likely to get the top end of the rent range. That means better cash flow. Better cash flow means you can save more for reserves.

Let's walk through what it might look like if the tenant-buyer purchases the property from you in year 4. You lived in the property for 1 year then offered it to a tenant-buyer. They occupied the property for 3 years before buying it from you.

If you sell it to the tenant-buyer, you have no closing costs because your agreement has them paying for closing costs when they buy.

You have no sales costs or commissions because you're not using a real estate agent to sell the property. Instead you are offering the property “For Sale By Owner” to the tenant-buyer after they've rented it for 3 years.

You have 4 years of appreciation and debt-paydown on the property.

If we assume you have 3% per year in appreciation, that might be about 12% from appreciation. Add in an estimate for debt paydown and you're likely to gross about $100K combined between the two.

You must pay long-term capital gains (15%) on the profit above your purchase price. Plus, you need to pay depreciation recapture (25%) on the tax benefits of depreciation that you had while you rented the property. Between long-term capital gains and depreciation recapture, that might cost you about $16K combined.

That means you're likely to net about $80K from the sale to the tenant-buyer at the end of year 4. Whatever you received from the option fee when the tenant-buyer moved in was an advance on this amount. So, the amount you get at the end of year 4 is really about $80K minus whatever you already received from upfront option fee. So, if you got $5K as an option fee upfront when the tenant-buyer moved in, you really are seeing about $75K at the time of sale. You had the $5K (that you could use as reserves) three years prior.

What would $80K mean to your reserves? I think for many Nomads that would be a significant boost to your reserves.

This is an example of you doing it once, but you could repeat this more than once with additional properties if you desired.

Just realize that you're selling properties and that does not lead to long-term passive wealth building. So, you may want to replace properties you sell to tenant-buyers with new properties. This may requires additional moving if you're Nomading to acquire them.

Over-Simplified Stolte Method Math

Here's some over-simplified math on what the Stolte Method may look like for a Nomad utilizing it.

If the typical expenses on a $400K rental property are $2K per month, then 6 months reserves is equal to $12K reserves per property.

If you sell a $400K property today on a lease-option (a la the Stolte Method) and net $80K in about 4 years.

$80K/$12K per property = reserves for about 6.5 properties.

For many folks, 6 free and clear properties is enough to achieve financial independence.

So, you could fully fund your reserves using the Stolte Method once.

Doing it a second time, could fund 3-4 down payments for Nomad purchases. That's based on $80K from one sale via the Stotle Method divided by $20K down payment per property.

Doing the Stolte Method 3 times could fund your reserves and down payments for 6 properties.

WARNING: In my mind, this is extremely aggressive and vastly over-simplified plan.

More Info On The Stole Method

Realize that the Stolte Method really is a simplified version of the How to Acquire a Multi-Milli­on Dollar Real Estate Portfolio Starting with Just $3,000 classes I've taught previously. There's even a full book on the strategy I wrote as well (which is really just a written out version of the class).

If you're interested in implementing the Stolte Method, you may want to really study those classes and all the material on lease-options.

Warning: The Dangers and Risks of Real Estate Investing

Toward the end of the class, I asked the attendees if they'd rather I continue with teaching some key excerpts from a previous class I taught called Warning – The Dangers and Risks of Real Estate Investing or just make the previous recording available (for a limited time).

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