Saving for Financial Freedom

How does an investor go about creating the financial support needed to invest in real estate? 

Many gurus will tell you that it is possible to invest in real estate without using your own credit or cash. This is true, and it is possible, but you must be prepared to work very hard, find the right partner(s) or investor(s), the funds you use may be expensive, and your returns will generally be lower than investors who have more cash readily available.

If you decide to start with wholesaling, as many new investors do, be prepared to spend some money on prospecting, whether that is for a direct mail campaign, bandit signs, or gas spent driving around. This is a business activity that may also require a laptop computer, a smart phone with a camera and internet access. All of these things cost money that you will need upfront.

If you are going after hard money or a conventional mortgage, you will be required to put some money down (“skin in the game”). Even sellers willing to carry a contract will usually want to see some cash paid up front. It is possible to find borrowed funds with 0% down, but again, this limits the investor’s options for both purchase and exit strategies.

Whatever your acquisition strategy, it is good to generate and maintain enough cash reserves to sustain you during lean times. Finding the funds is only one part of your strategy for creating financial freedom. Another important part is living a lifestyle that allows you to generate a sufficient cash cushion for both emergencies and investment.

As you set goals for the New Year, it is a great time to take stock of your financial state and net worth. To create more cash reserves, are there lifestyle changes that will help you get where you need to go in the short-term?

Here are a few examples.

Primary Residence. 

Can you turn your primary residence into an asset, rather than a liability? Can you reduce your living costs for shelter to zero? Can you structure your living arrangements so that your rent, mortgage, insurance, taxes and utilities are paid by other people?

I do this by renting out short-term furnished room rentals in the house where I live – which I do not own. I own other properties, but not the house where I live. I have no mortgage to worry about, pay for no repairs, and do no yard maintenance. My rent and all my utilities are covered by the tenants to whom I rent rooms. I live for free, sometimes even make money, from my primary residence. I can come and go as I please, and there is always someone to take out the garbage, take in the mail, or meet the repairman. I have an intentional community of self-selected housemates who fill a significant part of my social network.

Not everyone wants to live this way, and as a licensed real estate professional, I have a huge advantage in understanding local laws, regulations and best practices in property management. But many other investors accomplish the same thing financially by living in a duplex, triplex, 4-plex or apartment building, where they collect more rent than the expenses it costs to live there. Plus, should they ever decide to sell, they benefit from the capital gains tax exclusion for a primary residence.

Transportation. 

 How long is your commute to work? 

Mine is approximately twenty feet from my bedroom to my home office. Location makes a big difference in saving money. The closer you live to work, the less money you will spend on gas, parking and tolls.

Better yet, find alternative ways of commuting that save the cost and hassle of driving (or owning!) a car. I ride my electric bicycle whenever and wherever I can, saving the use of my car for long-distance trips, heavy loads or bad weather. I save thousands of dollars in transportation costs this way. At the same time, I get healthy exercise, save the planet by not polluting, and enjoy the scenery.

Food Costs.  

How often do you eat out? Chances are you can save more money, eat better and stay healthier by preparing more meals at home. 

I often host business meetings at my home office, where I can offer guests snacks, tea or coffee which is less expensive and less time-consuming than going out to a coffee shop. This is not appropriate for all meetings, but it works well for most.

It doesn't hurt to examine your diet as well, and see where you can cut out sweets, alcohol or other toxins that hurt both your health and your pocketbook.

The bottom line: Look for lifestyle changes this year that allow you to put away more cash for the things that are important to you in getting your financial house in order.

Job Hunting.
You need more income coming in?
There are plenty of low-cost opportunities to start your own business, whether that is in real estate or in another line of work. Don’t wait for someone else to provide for you – consider where you can make a difference now and fill a need.

Keep searching for work in your chosen field, but don’t neglect the opportunities to benefit from multiple streams of income. Network marketing and franchises are great starter businesses for the new entrepreneur in that they are generally low-cost to buy in, and offer training and systems for success. Owning a business provides numerous tax benefits, as well as income. Keep your options (and your mind!) open to possibilities.

Happy Investing!

Lessons from a Successful Entrepreneur

"Systems are key...."
"Don't work with partners."
"Learn the business first, then hire people to do it for you."
"Find some good mentors."
"The only problem is, I work too hard."

I had the pleasure of spending some time these past two days with Patrick Grace of Grace Realty in Kansas City, MO. My good friend and fellow investor David Tamburello had brought Pat up to meet with Seattle investors, after having spent the past 1 1/2 years investing in KC with him. I can see why David is so jazzed about partnering with Pat Grace, as much as he is excited about the emerging market of KC.

Pat Grace owns a "vertically-integrated" system of real estate companies focused on meeting the needs of real estate investors. Along the way, he rehabilitates beautiful old houses, provides affordable housing and jobs in his local Hispanic community, transforming neighborhoods and lives. And at the same time, he makes some good money. Pretty awesome work for a real estate investor!

Pat started out in real estate ten years ago, becoming a broker and opening his own real estate company in a room in his house. He then worked for a mortgage company for 1 1/2 years, learning all about the money side of things and figuring out how to gain access to the banks, funding and REO properties.

"Wendy, ya gotta stay close to the money...."

Then he opened his own mortgage company. As both a lender and an agent working with investors, he saw the profits that were being made in rehabbing old houses. He opened his own construction company, and learned on the job how to do construction. He uses licensed electricians and plumbers, but for the bulk of his work, employs many of his Hispanic tenants to do everything else involved in construction.

He kept buying and selling properties for himself and other investors. Suddenly, he had a lot of properties to manage-and who was going to do that?

So Pat opened a property management company. "That's the hardest business so far; the profit margins are small, there's a lot of requirements and paperwork, but it's part of our service to investors."

Pat operates on the philosophy that he is building long-term relationships with his clients. He intentionally keeps his fees low, and focuses on building repeat business over time. The guy is street-smart and business-savvy.

Oh, and it doesn't hurt that his wife is Hispanic, fluent in Spanish, and involved in the business too. Pat no longer has a real estate license, because his wife is the broker in the real estate company and oversees the property management company.

"I have two main jobs, Wendy: find the investors, and find the properties."

Pleasure meeting you, Pat! You are an inspiration, and I suspect there will be some more Seattle investment dollars flowing your way....