Discover the art of long-term asset-building in real estate, with tips on managing cash wisely and building equity. Our beginner’s guide to real estate investing gives practical examples of why you should be viewing real estate as a long-term asset-building strategy rather than a quick income source. We advise investors to prepare for unexpected expenses, maintain reserve accounts, and focus on building equity. What questions should new real estate investors ask? Including, why they should invest, how to use available cash wisely, and when to consider using home equity loans to expand their real estate portfolio.
Brett
0:00:43 – Welcome to It’s 5 O’Clock Somewhere Real Estate Podcast where we’re just a couple guys sitting around shooting the crap about real estate. We’re not experts. We actually know what we’re talking about. We’ve been doing this a very long time. So hopefully we can give you some good insight. I want to also mention Title Assurance and Escrow is a continuing sponsor of this podcast. Title Assurance and Escrow is in Cordova, 901-737-3332. Call and ask for Chris or April. They do all of our closings. It’s funny, you get to a point where I could get another place to say, hey, we’ll do yours for free. And I’m like, nope, because I’ve been through the nightmare of title attorneys and closings and just, it just turns into a, can I say, okay. Anyway, Title Assurance and Escrow, are our go-to people. If you’re doing any business in Memphis, actually in Tennessee, give them a call. If you need any assistance with title work, closings, escrows, whatever. I think today we’re going to talk about a beginner’s guide to investing in real estate. I’ve been at this long enough to know that everyone starts from somewhere. I’ve got old school investors that have been around for years doing it. I’ve got guys that have been at it for four or five years, and I’ve got young kids, and I call them kids, I guess they are to me, but young guys, professionals, that are just getting started, that haven’t purchased their first home. And I’ve helped a lot of those get started and most of them are still buying today and have built nice portfolios. So I think what I want to do is start off giving an example of one of my clients. His name is Kevin. I’ll keep his last name out of it just so he doesn’t get inundated with phone calls and girls throwing marriage proposals at him and stuff like that. But he came to me in 2021 so right after COVID year after COVID after the virus mysteriously vanished He came to me and I think he had 70 or 80 thousand dollars that he had built up over time Which he didn’t need nearly that much to get started. He could have gotten started with 20,000 So we talked and his entire goal was cash flow. They wanted to take that $80,000 and turn it into cash flow and he mentioned eventually quit my job. And that’s when I put the brakes on and said, Kevin, you can’t, don’t even get that out of your mind right now. Because in investment in real estate, you’re investing in an asset, just like you’re investing in the stock market, just like you’re investing in a business, right, that’s going to produce income, profitability, but you want to go from this from an asset perspective. And it took him and I, I would say a good month of talking every couple of days to get him to understand that what he learned in that seminar where they told him, take your money, go out, buy four houses, BRR them, take that cash, buy four more, BRR them, take that cash, buy four, I mean they made it sound like it’s just, you know, in five years I can have a hundred houses and be a millionaire. In an unrealistic world, yes, that formula is doable and it works, but every home is going to have maintenance issues. Every home is going to have expenses. One out of ten of your properties, your tenant is not going to pay on time. You’re going to have to evict them. There’s always going to be something that is going to cost you more. So while an investment looks good on paper, you have to look at the reality of that. And if you look at this investment as a reality, the reality of the numbers itself, that could be and get away from this pie in the sky stuff that they told you to put on paper and this is how it’s going to work. Has anything in this world ever worked the way someone told you it’s going to. No, it doesn’t. So you have to go into this with that perspective. You have to hope for the best, prepare for the worst. And if you prepare for the worst, and preparing for the worst, or the worst case scenario is still a good solid asset investment, then you can’t go wrong. I tell young guys all the time, most guys that I meet later on in life tell me they used to be real estate investors, but they lost everything. Nine out of 10 times, it’s because they would spend that cash that they had coming in. You know, they’d go buy a new car. They quit their job and get a part-time job and decide they’re going to be real estate investors, mainly full-time. They didn’t build reserve accounts. They didn’t do anything they needed to do to ensure the longevity of that business. So anyway, let’s get back to Kevin. We took Kevin’s 75 or $80,000 and we bought one property. The first property we bought was we bought it from one of my builders who buys or rehabs and puts a tenant in place. And I think he spent $90,000 for that property. He’s currently getting about $11,095 a month in rent. So that ended up being an outstanding investment because he’s getting 13 maybe 14 percent growth which is outstanding and out of that 75 or 80,000 he’s put down 25 percent. Then he didn’t do anything for a couple months. Three or four months went by. I think he wanted to understand how this worked. When he got ready to go for a second one the first thing he told me he goes Brett you’re right because I didn’t anticipate the unexpected but I see the unexpected it happens. So in his next purchase, the way he formulated his purchase and what he was expecting changed. Now he was using a, let me ask you Jeff, do you know what the average percentage you should use for expenses on a rental property if you’re taking out a mortgage, your taxes, insurance and all that?
Jeff
0:06:16 – The average reserve you would need?
Brett
0:06:18 – No, the average percentage of your gross rent will go to expenses.
Jeff
0:06:23 – 10%?
Brett
0:06:26 – I wish. Wow. If that was the case, we’d be billionaires. No, the average in most investors, most seasoned investors have a formula they use. It’s anywhere from 50 to 80%. So if you’re getting $1,000 a month in rent, most seasoned investors will say, well, I’m immediately going to write off 500 of that, right? My net cash, my NOI is only going to be $500. I’m going to take 50% of that right off the top. Some investors go up to 80% because they build in what they call a reserve account. They put a portion of that aside for repairs and all these other things. The average investor that’s smart and has a good portfolio banks on about $200 to $250 per house clean cash flow after all expenses.
Jeff
0:07:06 – Put every bit of it in reserve. Pack it away. You don’t need the money. You have a day job.
Brett
0:07:12 – In Kevin’s case, on that second house, that’s how he did it. That’s how he formulated it. On his second purchase, we purchased another one from Tom, the builder, and I think we bought that one around $115, something like that. He started off at $1,100 a month rent, so he was below the 1%, but he’s currently at $1,250 now. So he’s now exceeded the 1%. And both of those properties have gone up in value about 7% or 8% in equity. So now he’s got two properties that are cash flowing over 1%. He’s now still has $45,000 sitting in the bank, cash. And on his third project, I think we did similar to the same thing. Anyway, long story short, he’s got three properties. He’s producing about $3,500 a month gross. He’s probably putting $600 or $700 a month cash free and clear in the bank that’s after his mortgage after his taxes after his management After his portion he puts in a reserve account for maintenance and repairs He’s putting six or seven bucks in his pocket now as he well think no But that’s an extra six or seven hundred dollars that he can use for something else what he’s doing which I thought is very smart He takes that 750 breaks it in threes and pays it toward the principal. So he’s paying down his loans faster. As soon as interest rates come down, he’ll probably refi those on the balances, pull out what cash he has, take that $40,000 he’s got sitting in the bank or whatever he’s added to it, add that together and then go out and buy five or six homes at one time. Because now he’s got three that he’s learned what he’s looking for, how to formulate it, how to make it work. So I’m guessing by the end of mid next year, he’ll probably have 10 rental properties. Now he’s well on his way to having great asset wealth and good income.
Jeff
0:08:59 – And he started three years ago, two, three years ago with a $25,000 investment.
Brett
0:09:04 – $25,000 investment, yeah. When I tell these young guys, you’ve got to be smart, be patient, take your time, all right? You don’t need to be a millionaire tomorrow, nor are you going to be a millionaire tomorrow. But if you want to be a multi-millionaire 20 years from now, be smart, take your time, work a formula that works for you. And I can teach you that formula. I’ve been fired by investors before simply because I refused. I told them, what you’re doing isn’t going to work. You’re not going to achieve what you’re trying to achieve. And they tell me, oh, no, no, I went and saw Bill so-and-so in California. He did a seminar and he showed me how to, and I’m like, that’s great. But if it works so well, then why is Bill selling it to you? Because if I had a million dollar idea, I certainly wouldn’t be sharing it with anybody. What would I be doing? I’d be out making millions of dollars for myself. So if someone offers to sell you their idea, it’s because the idea doesn’t work. At least it doesn’t work the way they want you to believe it works. Yeah, Kevin is a perfect example of a young guy who’s 28, 29 years old, who’s got his first three properties. He’s going to parlay those three probably into about 10 by this time next year. Then probably the following year, he’ll probably roll those 10, maybe parlay that into 15. And eventually, he’s going to end up with a very large portfolio of properties. He’s also not unrealistic. He doesn’t have unrealistic expectations. He knows something’s gonna break. He knows shit’s gonna go wrong, right? SOL, it’s gonna happen. That’s part of it. And he’s prepared for that because he’s got his eyes on the long game. He now finally sees the picture, wow, if I have 30 properties worth $150,000 a piece, I’ve got five and a half million dollars worth of asset wealth paid for in 20 years. That’s what he’s got his eyes on. And that’s how you should look at investing in real estate. Safe place to park your money, get the cash flow out of your mind, take every dime you make on it, put back in the principal, pay it down as soon as possible because everything you pay down on it is asset wealth, right? It’s leverage. Not to mention if it’s a rental property and you keep it occupied, the tenant’s paying your mortgage, the tenant’s paying your interest, the tenant’s paying into your retirement account basically. So I want young investors, if you’re listening, to take that aspect, look at it from that perspective.
Jeff
0:11:18 – Yeah, don’t look at it as a revenue stream. This is a long-term, look at it as a retirement plan. This is a long-term investment strategy for you to retire.
Brett
0:11:28 – No one became millionaires overnight. I mean, most of the millionaires I know, it took them 20, 30 years to get there. And it was smart investing, it was hard work, it was saving, it was reinvesting. It takes time to get there. There are a couple of goons in the world that daddy left them a bunch of money and they became millionaires or billionaires or whatever. There are a few people like Zuckerberg and what’s his name with Amazon who created a business that just blew up. That doesn’t happen to 99.9% of the population of this planet. The real millionaires that have worked for it will tell you that they appreciate that way more than if daddy gave it to me. So get away from the cash flow, get the asset wealth building. Now I want to give you another scenario. I won’t give you this guy’s name because it’s a different name and somebody might be like, I know him. Anyway, so I’ve got a guy, 30 years old, married, couple of kids, and had done well in his business, had worked and saved about $180,000. I heard our podcast, called me, and we talked a lot over a month period of time, and he finally said, okay, I’m ready to pull the trigger. So he bought two new constructions at one time, put down $50,000, bought two brand new construction homes with a one-year warranty, rented both of them out at $1,500 and $1,595, exceeded the 1%. Then turned right around and took another 60,000 and we bought three properties from Tom. And then found one on the internet he sent me that we purchased. So he’s got seven properties that he’s picked up in six months. I cautioned him about buying that many that fast because he’s a new investor. And I told him, I said, they’re just alligators in the water that you’re not going to see. I can’t predict, no one can predict. You need to understand the system. Our last conversation, which is a couple of days ago, he said, you’re right. I should have waited. I should have bought the two, got them rented, then bought two more, got those rented, you know, and let them cash flow before I purchased the next bat. But he was in such a hurry to buy seven against my advice. And I told him, I said, well, I told you to take your time, but you don’t need to be in a hurry. So he ended up with seven properties, four of which stayed vacant for 90 days because they weren’t completed yet. But he was in such a hurry to close them, but they weren’t done yet. MHA couldn’t inspect them. Tenants couldn’t move in. And he had to pay the mortgage on those properties for three months without any cash flow. Now if he had taken my advice and bought the two new bills and got them rended, well, he’s making 200 bucks a month off the two houses, the mortgage is paid, taxes are paid, management’s paid, then you take and you buy the next two. The problem he ends up with is he can’t keep up with it all, right? Like he’s emailing the management company, I mean, what’s vacant, what do I have rented? He couldn’t keep up with it all. He had too much information coming in at once. He’s going to end up with 20 properties in the next couple of years. His goal is to have 50 properties and have an asset block worth millions of dollars down the road. He’s not buying it for cash flow. The cash flow for him is strictly to cover the mortgage and taxes and insurance and maintenance. He doesn’t need the income. The kid makes a lot of money. But when you’ve got an $8,000 a month note to cover and you’re only bringing in $2,000 in payments out that he hasn’t recouped yet. So that is another example of why you should take your time, buy your first property, spend a little time with it, understand the type of tenants, the cash flow, your expenses that are going to be coming out. Plan for the unexpected, put reserve account money aside, and you’ll do well. And 20 years from now, hopefully I’m still alive, you can call me up and say, Brett, thanks for the advice. I’m now a millionaire. I finally achieved my goal.
Richard
0:15:20 – If there were three to five questions that you wish new investors knew to ask, what would those be?
Brett
0:15:27 – Hmm. Only three to five? I would say the first one I wish they would ask, and probably the most important one, is why should I invest? And there’s no simple answer to that because if everybody in America was exactly the same and made the exact same amount of money, had the exact same credit score and the same mindset, that’d be a simple answer. My answer back to them is why do you want to buy? What are your goals? What are you looking for? What’s your expectation on return of investment? And I always ask this question back, what’s your squeal point? And they’re like, what do you mean squeal point? How much pain can you deal with? Because that tells me a lot about this buyer. Am I going to have to put him in a B neighborhood with low expected returns simply because it’s safer? Or is this guy willing to jump off a small cliff into some deep water and just kind of get a good return and have good potential, but deal with a few bumps here and there? So that’s number one. Why should I invest in Memphis? That’s one that I wish they would always ask or why should invest at all? By time most of them get to me. They’ve already decided they’re gonna be the next guru in real estate Because of what Bill told him at seminar, so they don’t ever ask me that question I try to insert that in the conversation, but sometimes it doesn’t get there Here’s the next one. I’ve got a hundred thousand dollars cash Should I buy one house or should I use that and get a loan and buy five houses? Immediate answer, use that cash and buy five houses, period. Because if you’re going at it from an asset wealth position and not at it from a cash flow position, then what difference does it make if you only make $100 a house? You’ve still got $500,000 worth of property that you own that is producing a profit, not a huge profit, but producing a profit, but is also growing year in and year out. Let’s see, number three. That’s a tough question, Richard, because there’s so many.
Richard
0:17:24 – I love tough questions.
Brett
0:17:27 – That’s because you’re a British wanker. Let’s see here. Jeff, what question would you ask as a new investor?
Jeff
0:17:34 – Well, you’ve already answered that question. I’ve got $100,000. What should I do? Buy one house? Buy five houses? I guess another question would be, and you elaborated on this a little earlier, is let’s say I do have $100,000. I put 20% down on five houses, build equity for a few years. Can I do HELOC, home equity loans? Can I pull money out of the equity in that house and use it to buy more houses?
Brett
0:18:02 – That’s a pretty standard question that I do get a lot and I’m like, sure, it’s your money. Right. I mean, now would you borrow money from yourself at a higher interest rate than you’re currently paying? No. But if interest rates drop two points, then you can re-find, get a lower payment and draw cash out to reinvest. Absolutely. Do it all day long. And we’ve got lenders that we work with that we’ve interviewed here on the podcast that do that and specialize in that. I know I answered that question for you. So what would be another question if you could think of a new question of a new investor? One that I wish they would ask, and this is not me floating our own boat, but why should I hire you? I wish they’d ask that question because I could talk to them 30 minutes for why they should hire us to be their agents here in Memphis. The purpose is that we know what we’re doing. We’ve been doing this a long time. The team concept and the system that Glenn Green started developing, and him and I invested five years and over $100,000 into, it works. And our system’s pretty easy. Priority one in our system is work ethic. Our phones are always on seven days a week. We’re always available to our investors, Japanese investors, Australian investors. If they want to call me on lunchtime, it’s 2 a.m. here, I get up and answer the phone. I was just on the phone with an Israeli investor last week. He called me, I don’t know what time it was for him, but it was midnight for me. So we made sure that our team is always available whenever we’re needed. And we’re a combination of these. So we take you from helping you determine what kind of investment property you want, what market to go into. We then help you find those properties, we then inspect those properties, we hook you up with the inspectors, we take care of the contractors, we get the deal closed with the title company, Title Assurance and Escrow, and then we help you migrate over to one of our management companies that we have available. And then from that point, it’s not over for us. I went out last night and showed a house for an investor. We’re still involved with your asset as long as you own it and as long as you want us to be. So that’s why you hire us because I can tell you right now there’s not an agent in town that does that. And we get a lot of referrals or a lot of new investors from investors that have fired their agents because they’re just lazy, don’t answer the phone, and they’re just trying to pitch them a house for a check.
Richard
0:20:18 – Well, let me pose you this question, which would be mine as a beginner investor.
Brett
0:20:23 – Yes, Britain did lose the war.
Richard
0:20:25 – Getting into investing and you know somebody who has a modest income, they don’t have much cash lying around and taking on board what you’ve said already about having a reserve fund to be ready for those incidents that are going to happen with a rental property. How much money do I realistically need as cash to get started?
Brett
0:20:46 – For one house, just to buy your first rental property?
Richard
0:20:48 – I’ll leave it open if you want to split it.
Brett
0:20:51 – Well, let’s say you want to buy your first rental property and you’ve got $23,000, right, that you’ve worked the last five years and saved up. You can buy a rental property. And if you’re smart about it, you can grow that portfolio very quickly from that one purchase and reinvest your equities smart, wisely, and not have to continue to build these large cash reserves to buy more property. So in that instance, I’d tell you to put 20% down and put $3,000 in a reserve account for that first house. That’s probably a little more than you need, but I’d rather you be safe than sorry. Buy that first home, let it roll for 12 months, collect your couple hundred dollars a month in profit, put that $200, $300 a month in your reserve account. That builds you up. Now you’re at $6,700. And then if you haven’t been able to accumulate any more money for another down payment, then keep renting the house. Keep paying either down on the equity of that house or take those funds and put it in your reserve account that you eventually can use as your next down payment. My opinion would be you take every dime you make, pay down that principal as fast as possible. And as soon as it makes financial sense, refi, pull that 20% out plus any other additional equity you’ve got or a portion of that 20% and then roll that into your second house. Then once you get to your third home, you will have enough equity that you can use as collateral to go out and now buy two or three homes, right? That’s the key is get your first home started. That creates that foundation that you’re going to use to continue to build on that portfolio block and continue to add to it and add to it and add to it. Where a lot of young guys make mistakes is they take that $200 or $300 a month and they go spend it on beer or they go buy new tires for their four-wheel drive truck or whatever they do, whatever they have to with it, and they don’t pay into their asset, right? If you’re going to open up a 401k retirement account, it does you no good if you don’t pay into it. If you’re making money, extra money, you pay that extra money in your 401k. Same thing with real estate. Take your extra cash flow, pour it into real estate. Jeff?
Jeff
0:22:51 – One hundred percent.
Brett
0:22:53 – Jeff, man of many words. My name is Brett Bernard. We’re with the Stamps Real Estate Company Investment Division. We’re an investment team that does nothing but specialize in working with old school, middle school, and brand new kindergarten investors. We have investors around the world that we help buy and sell, and we’d love to work with you. My number is 901-692-7401. Jeff?
Jeff
0:23:16 – 901-570-0654
Brett
0:23:21 – And don’t forget, Title Assurance and Escrow, is one of our main sponsors of this podcast. It’s the reason why you’re listening today. Thanks for listening to us today.