How to find financial freedom through real estate

First off you need to know why people say real estate is the path to financial freedom.  Let’s talk about passive income and get an understanding of what that is.  Passive income means income that you earn by not directly trading your time for it.

For example, people that own land next to the interstate.  They rent a small spot of that land to a sign company for them to place a sign on the property.  The sign company then goes out and finds companies that want to place an ad on that billboard.  So, let’s say the sign company goes to a local golf store and makes a deal to let them advertise on one of their billboards for $1500 per month.  Golf store pays sign company $1500 per month and sign company pays landowner say $500 to rent the land that sign sits on.

That income to the landowner is completely passive income, that money was made while they slept.

Not everybody owns land on an interstate, and furthermore most people who do in fact own land on an interstate don’t get sign companies to approach them to put signs up.

So, the next thing we must do to make passive income is to go out and find the opportunities ourselves.

There are 3 key elements to survival, these are water, food, & shelter.  It has always been our strategy to focus on the shelter portion.  People will always need a place to live.

Therefore, it has always been our strategy here at 3000 Capital to focus on multi-family housing.  With multi-family housing the opportunities are endless.

Next, there are a few different ways to go about investing in real estate.

You need to decide if you want to take on the three t’s yourself (toilets, termites & tenants) or you can have a property management company take care of it, most property managers charge 10% of the rent collected for management.

Now once you have made that decision, next you need to decide how many units are you looking for and how much do you want to invest.

I am going to lay this out in a few different scenarios below:

Scenario 1

Let’s say you decide to buy quad-plex for $550,000 that brings in $6400 per month, and you are going to manage it yourself.

Purchase Price – $550,000

20% down = $110,000

Loan = $440,000, 25-year note

6% interest rate (commercial rates are almost always more than 30-year fixed rates)

Monthly Payment = $2834.93 x 12 = $34,019.16

3 t’s annual expenses = $25,000

Annual Insurance = $5000

Annual Property Taxes = $5000

 

Annual Income = 6,400 x 12 = $76,800

Expenses + Payment = $69,019.16

Net Income = $7780.84

So, the way this is figured is like this; so, you invested $110,000 into the deal and you are getting back in cash annually $7780.84.  So, you divide $7780.84 by your initial investment of $110,000 and you would come up with .07 or 7%.

So, your $110,000 investment is making a cash-on-cash return of 7% just from the rents.

Not too bad, making 7% on your money in a lot of respects is very good.  However, this is not passive income.  Because you chose to manage this yourself, it is keeping it from being passive income, which remember is money you make while you sleep.  So, in scenario 2 let’s make this income completely passive.

Scenario 2

Pulling from the same property and number in scenario 1 we are going to simply add a property manager to the mix, this will effectively make your money completely passive.  When hiring a property manager, they generally have the contacts and the abilities to get issues fixed a little quicker than you might on your own.  But for the purposes of our example, we are going to leave all the expenses and everything the same we are only going to add in a property manager fee.  To be true to what most managers charge for a smaller unit management we are going to use the 10% figure.

Annual Income = $76,800

Property Manager Fee = $7680

Expenses & Payment = $69019.16

Net Income = $100.84

And with the addition of a property manager, we are now down to almost a wash, we have profited $100.84

Not a very good return on our investment of $110,000, roughly .01% or 1/10 of a percent.

So how do we invest our $110,000 and make a decent return on our money?

Scenario 3

The answer to that question is what we here at 3000 Capital have been helping people since we were founded.  So here is how this works.

We go and place a contract on a 150-unit apartment complex, let’s say that we can purchase the 150 units for the purchase price is $15,000,000.  The same rules apply to us when we are purchasing property, we must put down 20% which is $3,000,000.

So, let’s look at this.

Purchase Price $15,000,000

Down Payment $3,000,000

Financed amount is $12,000,000

Now before we go any further, here is the trick.  The $3,000,000 down payment is collected by our company by investors who like yourself have $110,000 to invest in real estate.  So, let’s run through this math.  In general, we keep our preferred return interest rate paid to our investors at 8% so the cost of our down payment money is 8%.  One other thing you need to know is in general we invest in this portion alongside our investors, the only time this doesn’t happen is if we have a run on a good deal where more people want in than we have room for (which yes happens) we will not push on outside investor out to place our capital.  But in general, we are in the deal right along side you.  So on with the deal.

Purchase Price $15,000,000

Down Payment $3,000,000

Payment on $3,000,000 which a portion of is to you is $240,000 annually

Financed amount is $12,000,000

5% (this size loan will be privileged to a smaller interest rate) 25 years

Payment is $77,316.17 x 12 = $927,794.04

A couple things to note here, we are going to charge the same amount of taxes on this property on a per unit basis, however we are going to be taking all other expenses at 75% because with our experience and our dedicated staff we have been able to narrow expenses to maximize our investors returns.  Also, our property management generally runs in the 4% range due to the size of our portfolio and or dedication to the good people that help us manage.

So, let’s tally expenses;

Preferred Return to investors payment = $240,000

Bank Payment = $927,794.04

Annual Taxes

Annual Insurance

Annual Expenses ($6250 per unit from above / 2 = $3125 per unit)

$3125 x 150 = $468,750

4% property management fee = $1600/mo. per unit = $2,880,000 x 4% = $115,200

 

So here are the totals, I also have a surprise for you in the end, so make sure you keep reading.

 

Rental income = $2,880,000

Payment to investors at 8% = $240,000

Bank Payment = $927,794.04

Expenses = $703,125

Taxes = $187,500

Insurance = $140,625

Management = $115,200

Net Income = $565,755.96

So, in the above example you have received an 8% return on your investment to start.  Remember earlier when I said I had a surprise? OK well that $565,755.96 that is left, you might be wondering what happens with that?  So, part of that is our fees for putting together the deal, managing the managers and using our relationships in the business to make things happen.  However, 70% of that generally comes back to our investors.  The only time this change is when we hit certain performance hurdles and such, but for the purposes of our example we are going to return 70% of that to our investors on a pro-rata share.  So, for this example we are going to use your $110,000 investment and figure what your portion of that would be.

So, we raised $3,000,000 and your part was $110,000 or 3.7% of our total raise.  So, on top of your 8% that you made initially, you are also going to be getting 3.7% of 70% of what’s left.

Here’s what that looks like:

$565,755.96 x 70% = $396,029.17

Your part looks like this = $396,029.17 x 3.7% = $14,653.08

Invested = $110,000

8% = $8,800

Split = $14,653.08

Total Return = $23,453.08 or 21.3%

And the best part about this return is the fact that it was completely passive, so while you were sitting at home in your recliner, playing golf, working at the office or whatever it was you were doing this money was made without any direct attention from yourself.  As these things move forward and the business plan is implemented as you discussed your operator you will be returned your initial investment for your to do something else with.

Show me a stock somewhere or a fund somewhere that returns those kinds of numbers.  Now keep in mind that not all deals look like this on paper.  This really is a perfect scenario that you should take with a little caution, but let’s even say I missed it by ½ that is still greater than a 10% return on your money and again that is for doing nothing other than walking to your mailbox to get your check.