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real estate wholesaling

Replace Your Income With Wholesale Real Estate

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.

Analysis Paralysis

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.

Private Money

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.

Freedom Number

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.

Leveraging

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.

Show Notes

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.

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16 responses to “Replace Your Income With Wholesale Real Estate”

  1. Daniel says:

    You know, I am a firm believer in real estate investing. As a married man now, I cannot make investments without my wife getting on board with it. I could I suppose, but that would not be good for my marriage. She is leery of real estate, which is fine. We have one rental (my first condo) and it doesn’t cash flow very much so her only thoughts on rentals is not a very good one.

    We have probably about half the cash required to get into another property and I think we have enough equity and/or assets to pull from with our home and retirement stockpiles to get into another one now. That idea scares her or for some reason makes her not interested. I figure I’ll just wait until we have all the cash necessary to make another move in real estate.

    My question is this regarding real estate. If it really is such a good investment, why are more people not doing it? Why isn’t this post filled with comments? Why would it be difficult for me to show my wife the power of the equity in our home? Is it really just because people don’t have the cash to make the deal?

    I will say this, analysis paralysis is a real thing.

    I also am very interested in a follow up to the HELOC podcast. You keep talking about it in the podcast, but I am still confused and not quite sold on the plan as it was laid out. Keep rocking!

    • Hey Daniel, I’m in a similar boat with Laura. We need to be on the same page before we move on something. Things were easier when I was single but Laura adds so much to the value of what we do I’d rather debate it out than just move forward. Plus, she often has very good reasons to be leery.

      To answer your question, I think the biggest reason most people don’t do real estate investing is because of the up front capital needed. It’s not cheap and most people don’t even invest to begin with.

      The second biggest reason is people don’t understand the underlying math or get stuck in a situation like you where cashflow generally sucks. Allison has taught us a lot on this in the Community and even provided her spreadsheet for evaluating properties (everyone in my office no uses it). Most places are a shitty deal and not worth the time.

      If you could 1) gather capital confidently and 2) choose investments confidently than I don’t think paralysis would be a thing. There are some core fundamentals that we’ll be covering this year in episodes we have planned and I think beyond those you should be able to just pick up and begin. This is of course with a management company in mind – all of our conversations will be focused on that as an assumption. Not sure it’s our place to dive in to property management. Perhaps towards the end of the topic.

      In terms of the HELOC, we are working on an epic resource there but it’s a bit harder to nail down the math and details – hence why it’s not readily available on the internet. Head to the show notes of that episode to dive in a bit deeper but basically it comes down to Average Daily Balance and making more on your cash than letting it sit idly in a checking account. Of course, what you’re using leverage for needs to be worth it as well.

      Hope that helps!

  2. TechyourFriend says:

    Listened to this the other night. The information from the Morris’ is so amazing. It is exactly what I have been wanting to do. I found myself wanting more!!! When you guys closed the episode I was wishing this was a 3 hours episode. These past several podcasts have gotten me thinking about what my next step should be. I am like many, that I want to learn and to do, and I am not afraid of hard work, but I need a mentor to walk me through the first 3 steps (or properties). Not someone to do the work, but someone to help shine light on the next step. Keep this coming. As Daniel below stated, “analysis paralysis is a real thing”, as well as having to be able to show the benefit to your significant other while also trying to break the mold on how to think about money. The last part is harder than it sounds.

    Guys keep it coming. I wish we could hear the rest of the conversations you have before and after the podcasts. I know you think they might be more focused on your personal situation, but understand that many of us are in the same boat and your questions and answers would help us a lot.

    • Thanks for the awesome comment, sorry for being so slow to respond. Sometimes I feel like I’m trying to toast bread with a flashlight ;)

      We do try and get as much meat into the episodes as possible. Thomas can attest that if a guest even starts explaining details I cut them off and ask them to tell me in the episode. I want to learn fresh on the air with everyone. We just try and vet guests based on past work and how interesting they are to chat with.

      I agree Analysis Paralysis is a thing and it’s something we’ll be covering. There are a few ways around and like anything meaningful, it involves work. It’s also important to not that if there wasn’t risk involved than it wouldn’t be investing, everyone would be doing it and the returns would be shit.

      There will be mistakes and not everything will work out and your job is to be as educated as possible so you can avoid common pitfalls and as much as possible turn those lemons into lemonade. Resourcefulness wins the day.

      For what it’s worth, we have more conversations with our guests, deeper ones around the episode and other things in Rich Tips, the Community member only podcast. We don’t push it hard at all because we don’t roll that way but I do think the episodes are pretty awesome.

  3. Matt Ward says:

    Can you guys clarify the LLC/IRA topic please? When you want to use a self directed IRA to invest in real estate, should you be investing in the RE directly, or using IRA $ to invest in an LLC (which you own) which then does the investing? Thanks!

    • Absolutely, I’ve added it to our shortlist of episode ideas! I’m equally interested.

      We’ll be diving into LLCs in a more general sense as well. How to start them efficiently and how to structure them so you pay less in taxes. For example, most people opt for a pass-through entity but structured correctly a LLC earning $100k a year can save you over $6k in taxes if it’s an S-Corp and only made up of your family. Pretty interesting and nerdy stuff ;)

  4. I love the style of the podcast because as I’m taking notes about how to improve my finances I can add to my beer selection list as well. Thanks for keeping it real, you guys are hitting the mark where other podcasts fear to venture!

    • Thanks dude – appreciate the kind words! I love my beer so don’t expect that to be going away anytime soon.

      Maybe they wont venture to cover the more detailed topics but that doesn’t stop them from trying to copy things like our podcast description, beer chat, etc… It’s the sincerest form form of flattery ;)

  5. Phil Ebiner says:

    Where are these $40k houses?

    • Not in the public market. Often they are sales solicited directly to owners of properties in difficult situations. For example, someone dies and a home is left to the family in terrible condition.

      A wholesaler will take it off their hands for cheap – as is. Then they bring in their contractors and flip the property. The wholesaler just makes a cut and never actually owns the place – they just secure a contract to buy for X days while they find an investor. You only get deals like these if you know a good wholesaler.

  6. iQuake™ says:

    Would you recommend getting into real estate investing if you currently don’t own a home? I am currently renting a town home.

  7. itismeap says:

    Curious to know has anyone followed up with Clayton and gone through with a purchase? Curious to know how the whole process/experience was…..

  8. William Liberto says:

    I used to be a lavish spender and nonchalant about my credit scores until one day, reality gave me a swift kick in the rear. I grew weary of renting, so I decided to pursue the proverbial American Dream and purchase a home. I contacted the loan officer and applied but got declined. That night I found a Home magazine in my former apartment, i read one woman’s comment on how a guy fixed her credit scores and she was approved for a home loan in 4 days. I never doubted so i contacted the same guy to fix my scores and to my surprise he did excellently. I moved into my new home last week and my FICO score is still at 750 with a clean credit history. Believe me,this dude is the real deal plus his services are fast, affordable and accurate.You should contact him to fix your scores and for credit advice at his email address below https://uploads.disquscdn.com/images/406c15dce499ab69392cacb83230a49dbcf8ef21d5d7bd2a0bae84b5a2aec702.png

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