Replace Your Income With Wholesale Real Estate
- Written by Candice Elliott
Natali Morris mentioned her real estate investments and we wanted to learn more. Today Clayton Morris joins us to explain real estate wholesaling.
We were intrigued when Natali talked about buying a rental property for $10,000 and wanted to understand the process. Today her husband Clayton is here to give us more detail. Clayton started doing wholesale real estate investing as a side thing.
When friends and family heard how well he was doing, they started asking for advice. And then friends of friends of friends. At that point, Clayton decided to start a business to help others take advantage of this investment strategy.
Have you ever wanted to do something and started researching it? And the more you learned, the less able you felt to actually do it? That’s analysis paralysis. There is nothing wrong with educating yourself before making a decision but unless you eventually take the plunge, all you’ve done is waste a lot of time.
Fundamental Principles Of Real Estate Investing
Part of the reason for the housing crisis is that people were ignoring certain rules. Banks were giving mortgages to people who didn’t have jobs! They have out $800,000 mortgages to people making working class money. And then acted surprised when it all blew up.
In his book The Millionaire Real Estate Investor, Gary Keller describes some of these principles; don’t over-leverage yourself, make sure you are getting at least $100 over what you pay to the bank every month and, expect a minimum 12% return on investment when buying a house free and clear. It’s important to do the math and proper research when choosing an investment property.
There are many things to consider when evaluating a potential investment but the number one measure is to be sure it is cash flow positive. You can create an epic spreadsheet or use tools like Simple Wealth to help you calculate cash flow, appreciation and make data-driven decisions.
Fear Of Money
Did you grow up hearing things like “Money doesn’t grow on trees,” “We’re not the Rockefellers.” There is a lot of stigma around money and many people never realize that you can earn more money than just what you get in your paycheck.
Clayton grew up in such a family and it took him a long time to lose that fear. He’s come a long way. He plans to eventually own 300 properties and a goal for 2016 is to buy two a month!
Wholesale Real Estate Investing
The kind of homes you buy when you’re buying wholesale are not on MLS. The first property Clayton bought this way was a lucky bit of fate. His neighbor died and her home needed a lot of work. Her family did not live locally and didn’t feel like getting the house to a point where a real estate agent would show it.
Clayton offered to buy the home as is and the family was happy to be rid of it. These are the only kinds of properties he invests in now, mostly three bedroom one or two baths, single-family homes.
This isn’t house flipping. This is buy and hold investing. The homes are not rehabbed and then sold, they’re rehabbed and then rented. If you flip a house, you will be hit with a huge capital gains bill, 35%.
Sending direct mail inquiries to absentee and inherited property owners is one way to find properties. It sounds morbid but you can troll the obits and contact the family of the deceased. You can also contact estate lawyers who may be willing to pass your information on to clients.
Buying Through An LLC
Clayton buys his properties through an LLC and you know how valuable they are from the episode we did with Natali. The tax benefits are substantial. You can deduct all expenses related to the properties and only pay taxes on your net earnings. Buying through an LLC will also limit your personal liability.
Buying Through A Self-Directed IRA
Natali discussed this strategy with us. Currently, the family has only three properties in self-directed IRA’s. It’s a great strategy if you just want the cash from rental income to grow in the IRA. All the expenses for the property can come out of it and the rent can go into it but you can’t touch that money until you reach age 59 1/2 which means you can’t use it to invest in other properties. You can’t write off expenses like travel to visit the property or depreciation.
Buy, Own, Cash Flow A Million
This is a strategy from the Gary Keller book mentioned above. Buy a million means building up a net worth and equity position so you can leverage that to buy a million in property.
Own a million means using the income from the million you bought to pay off loans as fast as you can so you will own a million outright.
Now you pay attention to cash flow so that you’re cash flowing a million, those properties are generating a million dollars. To avoid getting hit with a big tax bill, many people just keep buying and buying.
Many of Clayton’s clients buy property using private money. It’s a way for investors to make a fast return on their investment. Often the buyers continue buying because their private money investors keep investing. Clayton is going to start leveraging private money to speed up the goal of owning 300 properties.
If you’re looking for private money, attend REIM (Real Estate Investor) meetups in your area. You can meet wholesale real estate investors, house flippers, real estate agents, private and hard money lenders looking to make connections. Susan Lyons in her book titled Getting the Money gives you very specific information on how to do this, down to the correct verbiage so you don’t seem desperate.
Your freedom number is the amount of money you need to make via passive income each month to cover all of your expenses. This is the formula:
-Look at your last 6 months of expenses excluding Christmas and get an average. For our example, we’ll use $4500.
-Pad that number by adding 10% to give yourself some wiggle room. Now we’re at $5000.
-Now calculate how many rental properties would it take to generate that padded number. Most of the properties Clayton’s clients buy rent for between $600-900 per month. Those houses generally sell for between $29-40,000.
-You’re netting around $550-600 on each property after your expenses.
-Take the average of what you’re netting on a house per month. We’ll use $700. So we subtract 40% for vacancy and repairs; $700 x .6 = $420 per month.
-Take your expenses of $5,000 and divide by $420 to get 11.9. Round to 12 and that is how many cash flowing rental properties you need to cover all of your expenses. So your freedom number is 12.
If you can get your first rental property free and clear, you can leverage the equity to buy the next and then continue doing that over and over. You use the houses as collateral. You’re not buying at the retail level, you’re doing it at wholesale real estate prices so you don’t need hundreds of thousands of dollars to get started.
How To Get Started
You don’t have to be a millionaire to start wholesale real estate investing. Sit down and calculate your freedom number. Now break your goal into smaller chunks, a three or five-year plan of how you can get those properties.
Find a way to buy your first one. Go to some real estate meetups and look for private money. Go to a small, local bank for a loan. Our advice to tap your 401(k) was controversial but that doesn’t mean it’s not a good decision for some people. Andrew has done it and Clayton and Natali have done it.
Set up an LLC to house your rental property business so you’re getting the tax benefits we discussed earlier. And then you continue the process until you reach your freedom number.
Between the episode with Natali and this one with Clayton, I think we’ve all learned a lot. I know a few people in the Community have decided to set up LLC’s for themselves to reap the tax benefits and I’m sure a few of you are googling “wholesale real estate investing” right now.
Dogfish Head 75 Minute IPA: An IPA brewed with maple syrup.
Clayton Morris: Go here to calculate your freedom number.
LMM Community: Join the money revolution.