How to Make $1,000,000 Working Smarter, Fixer-Uppers part 1
How to Make $1,000,000 Working Smarter
Most people are too busy earning a living to make any serious money. I’m talking about the kind of money that can make you wealthy enough that financial problems will no longer be your biggest concern. Unfortunately, most folks simply don’t know what to do or how to begin. The reason for this lack of knowledge is that Making Money 101 is not taught in traditional places of learning. The fact is, most educators are still preaching the age-old proposition that hard work, long hours, and a steady job at the mill are your best guarantee for a happy life and financial success. The problem is that today few facts support this theory.
To begin with, working harder and longer hours has strict limitations. For example, suppose you have a job that pays $200 per day for a regular 40-hour workweek. No matter how hard you work or how many hours you work, you can’t possibly earn more than two or three times your normal paycheck.
Even if your employer would allow you to work another full 40-hour shift at double-time pay, it’s likely your earnings would only be about 2½ times your regular pay after tax deductions. I would agree it’s much better pay, but still pitifully short of what I would call serious money. To earn that, you need 10 or 20 times more income. Obviously, there are not enough hours in the week to earn this kind of money the old-fashioned way.
It is well within the reach of ordinary working-class folks, assuming they have the desire to learn, to become very successful and financially independent fixing up rundown houses. Earning a million dollars, if that should be your goal, is not an unreasonable target. Many achieve the goal in 10 to 15 years. Naturally, it goes without saying, you’ll earn every nickel you make, but there’s no limit to what your earnings can be. If your goal is to double your present income, that’s easy enough to do. If your sights are set on becoming a millionaire, I suggest you just keep on reading and find out exactly how it’s done.
White Picket Fences Provide Big Payback
One of the questions I’m most frequently asked at my seminars is “How much money can I make fixing up rundown houses the way you suggest?” Obviously, there’s no single answer, because everyone who invests in fixer-upper properties will do it differently, with some, like building contractors, even upgrading foundations, adding rooms, and revamping walls.
However, I’ve discovered that my biggest paydays come from repairing things that need fixing and cleaning up. Hauling away junk and painting nearly everything that shows is always a top money-maker—and rejuvenating dead or dying yards by planting new shrubs and lawns is quite inexpensive compared with the profits you’ll earn. As a finishing touch, to bring out the charm, I always like to add my signature improvement—a three-foot-high white picket fence enclosing the front yard. A white picket fence gives any house the “homey look” and, from a pure economics standpoint, fences will return $10 for every dollar you spend to build them.
That’s exactly what I did to my Hillcrest Cottage property, which you will be reading a lot more about as we go along. I sold Hillcrest and five small rental houses together in a single package installment sale. I earned as much money for just this one sale by itself, with only two years’ worth of fix-up work, as most people will earn during their entire working careers.
I never dreamed this would be possible, but let me assure you, it is. In fact, I’m still collecting payments to prove it. Let me show you why fixing rundown houses will beat the pants off working your life away down at the local sawmill. The chart below will help you see the big money difference between working for wages and working for yourself, like I do.
Fix-Up Profits vs. Wages at the Sawmill
As Figure 1-1 shows, working 40 years at the sawmill in my town will earn you $1,200,000. You will spend approximately 80,000 hours on the job (2,000 hours per year for 40 years). By dividing the total wages by the hours, you can see that sawmill workers average $15 per hour for working a lifetime at the sawmill. Naturally, income taxes will reduce their take-home pay.
By way of comparison, my Hillcrest sale earnings were $1,200,022, paid to me over a period of 26 years and one month. Obviously, I didn’t work anywhere near 80,000 hours to earn my money, since I owned the property for only two years before I sold it. I have calculated that my fix-up work took about two years from start to finish. However, not all of my regular workdays were spent at Hillcrest. I was also fixing up several other properties during the same period of time.
Worker’s Age in Years Term in Years Average Wages per Year Total Wages
21 to 25 5 $21,000 $105,000
26 to 30 5 $23,000 $115,000
31 to 35 5 $26,000 $130,000
36 to 40 5 $28,500 $142,500
41 to 45 5 $31,000 $155,000
46 to 50 5 $33,500 $167,500
51 to 55 5 $37,000 $185,000
55 to 60 5 $40,000 $200,000
Totals 40 $1,200,000
Figure 1-1. Typical wages for sawmill worker—40 Years
Assuming that I had worked two full years at 2,000 hours per year, you can see rather quickly that my hourly rate of pay would be a little over $300 per hour. That’s 20 times more earnings than the mill worker. Plus, I spent only two years of my life to earn the same amount of money it will take a mill worker 40 years to earn.
For the sake of comparison, I’ve shown you what the average sawmill worker in my hometown can expect to earn working 40 hours a week for the next 40 years. That’s assuming the mill stays open. I don’t believe there’s any question which career you’d choose if you knew about fixing houses the way I do it. If there were some way the mill worker could increase his hourly pay to $300, like I earned fixing my Hillcrest property, he’d take home $24,000,000 in wages by the time his 40-year career was over.
My point is this: we all get exactly the same number of hours in a workday, the same number of days in a week, and so forth. The big difference between folks who earn modest wages and those who make millions is how they spend their time.
Making Serious Money Requires Extra Helpers: Compounding and Leveraging
Obviously, there’s no way you can earn $300 an hour working at the sawmill. In order to make big money, you must spend your working hours doing the kind of things where your earnings can be tax-sheltered and leveraged. With the assistance of leveraged real estate and compound earnings, you can far exceed the limitations of a regular paycheck. Leverage and compounding will be your silent but powerful helpers when you fix up rundown properties like my Hillcrest Cottages. Probably the best news I can pass along is that there’s absolutely no dollar limit on how much you can earn doing this. The sky’s the limit.
Where Does All the Money Come From?
Many book writers seem to be very vague on this point. Some will tell you, “If you’ll just follow the formulas in my book, the profits will take care of themselves.” To me, that’s simply not clear enough. I insist on knowing
where the money is coming from, so I’ll know exactly where to concentrate my efforts. Let me take the mystery out of the money. Profits and paydays come from three primary sources in this business. Naturally there are variations and combinations, such as selling partial payments on seller carryback notes and payments received from partnership buy-ins. We’ll discuss these later.
Three Major Sources of Money Coming In
Monthly Rental Income—net cash flow
Property Sales
a. Cash money from escrow at closing
b. Seller carryback financing: monthly installment payments
(receivables)
3. Borrowing
a. Seller subordination at the time of purchase
b. Equity loans during period of ownership
We’ll discuss each of these sources in much more detail. But first, let me tell you how important I feel it is to have all three sources available as options at all times.
A Profitable Selling Plan Requires Proper Timing
Buying and selling fixer houses is not seasonal work, nor is it a fad. It works well anytime and it can be an extremely profitable business when you do it right. Many investors get very good at fix-up, but fall dreadfully short when it comes to developing a good management plan and marketing strategy. Some still make money, but not nearly as much as they could with decent planning. Giving away hard-earned profits is not good business, so you must make plans to avoid it. There’s a time to sell and a time to hold on. Cash flow is what allows you to hold on until the right time to sell. That’s why it’s so critical. Proper timing is very important for making big money in real estate. It’s something like a surfboarder waiting to catch the biggest wave.
In real estate, we call this “selling during an up cycle.” Ideally, you should plan for selling properties when great multitudes of buyers are out shopping for them. When buyers outnumber available properties, it drives up the selling prices. That’s called a seller’s market. This is the time to sell for the highest price and with the most favorable terms for you.
When you have sufficient monthly cash flow coming in from rentals, you’re in the best position to wait for exactly the right time (up cycles) to make your sales. That’s worth big bucks, even though it means you must learn landlording while you wait. Landlording and property management will take time to learn, but the benefits will far exceed the troubles of learning—I will guarantee you that.
Monthly Rental Income Keeps You Green and Growing
Most important to real estate wealth building is the steady flow of green cash. That means money you can depend on coming in monthly to pay the bills. Novice investors who think only of profits from selling often overlook cash flow. Borrowing the words of the famous hamburger millionaire, Ray Kroc, founder of McDonald’s Corporation, it’s most important to stay “green and growing.” Staying green means having enough income to pay all the bills. Net cash flow from rents is your best guarantee for staying green.
Lack of cash flow is the biggest problem I have with trying to mix investing with speculation. Speculators are all too often willing to tolerate short-term difficulties, like little or no cash flow, in the hopes that they’ll soon strike it rich from a big sale. More often than not, the big sale never happens and the speculator goes bankrupt or out of business.
It’s for this reason that I strongly recommend owning and operating keeper rental units. By doing so, you’ll always have cash flow generators to pay the bills. I also strongly recommend that cash flow rental units be your very first investment. It’s most important to make investments that produce cash flow as quickly as possible. Cash flow must always be your number-one goal if you intend to stay in business and earn big profits doing this stuff.
Lump-Sum Cash vs. Monthly Payments
Whoever said, “Cash is king,” was absolutely right. I would never disagree with that. However, there are many ways to skin a cat—and there are many ways to become wealthy without waiting around for large cash payments. It’s well known that cash sales made without proper consideration of taxes or a plan for reinvesting can often cause a loss of capital. The loss of capital for any investor, especially in the early stages, can result in a serious growth problem. You could even end up going backwards—or, worse yet, going broke.
I’ve sold properties for thousands of dollars above the going market prices, because I’ve given excellent terms to buyers. When you consider those extra dollars earning two or three times more interest for me than most banks earn from their loans, it’s easy to see why carryback paper is very good for your financial health. Obviously, notes don’t appreciate, so you’ll need to keep real estate in order to keep growing. A good balanced diet of rental houses and carryback notes with occasional equity borrowing sprinkled in provides a well-nourished investment program with a guaranteed monthly cash flow.
It Doesn’t Cost a Ton of Money to Begin
I intend to show you that fixing rundown houses and small apartment buildings can earn you lots of money with very little up-front cash invest-ed—sometimes none at all—when you learn to buy properties the way I teach you.
All of my early purchases had to meet two important investment criteria:
They had to be properties that I could acquire with minimum cash down payments—no more than 10% of the purchase price and sometimes less, whenever I could convince the seller. This first rule is not nearly so difficult as you might imagine, once you get targeted on the right type of properties.
The properties had to generate positive cash flow within six months to a year after I acquired them. This doesn’t mean positive cash flow on paper. It means that green “foldin’ money” I can stuff in my pockets every month, after I pay all the property expenses.
My goal was to acquire properties that would start producing earnings quickly, so I could quit my regular 9-5 job to invest in real estate full-time. If you learn to invest my way, but still wish to continue working at your regular job, rather than changing careers, that is perfectly all right. I’m sure the extra money you earn will prove you made a wise decision.
Fixers Are the Perfect Place to Start
The simple explanation is that fixers are easy to purchase and they offer the best potential to earn quick profits without having to wait for appreciation to help you.
The reason that fixing rundown houses offers such a high potential for making big profits is because investors can purchase them for only a fraction of what they’re worth fixed up. Fixer properties also offer do-it-yourself investors a unique opportunity to substitute their personal handyper-son skills in lieu of a normal cash down payment. Often this means a 20%-40% cash savings right up front. By quickly adding value—primarily from fixing and cleaning—they can transform ugly, rundown properties into attractive houses that renters and buyers are willing to pay big dollars for. Transforming ugly ducklings into beautiful swans is not complicated or scientific, and it pays handsomely once you get the hang of it.
With fixer-uppers buyers can enjoy the biggest profits with the least amount of risk and have almost total control over their investments. The primary reason is that sellers are forced to make more concessions in order to sell rundown real estate.
The “Adding Value” Strategy and Why Properties Must Have Potential
There are many different investment strategies for making money in real estate, but almost all of them depend on future appreciation for the lion’s share of profit making. Appreciation is worth big bucks when you’re fortunate enough to own properties during inflationary times. However, when you own real estate during a stagnant economy, you need a technique that makes money without appreciation—if you intend to stay in business very long. Let me tell you about my strategy where profits are not totally dependent on appreciation or even a growing economy. I call it the “adding value” strategy. In order to use this strategy, the property must have the potential for improvement.
Rundown properties with fix-up potential and properties that are poorly managed are the best candidates for adding the most value quickly.
Rundown apartments or junky houses that rent for $600 per month in a $750 marketplace are perfect examples of an opportunity for adding value. To start with, I would probably be willing to pay about six times the gross rents for houses renting at 25% below market value.
Let’s say we have eight units renting for $600 per month, for a total of $4,800 per month, or $57,600 annually. My purchase offer would be six times $57,600, or $345,600.
The value of a property that commands top market rents of $750 per month doesn’t stay valued at six times gross (as when it’s under-rented). Instead the value will increase to something like eight times the gross rents when the property is fixed up and looks good. As you will see, that can represent a big value difference. Eight units renting for $750 a month equals a total of $6,000 per month or $72,000 annually. Eight times $72,000 equals a new value of $576,000.
When you learn to acquire under-performing properties like this example, you can quickly make yourself $230,400 richer. Suppose it takes you a year or so to complete the work. It still beats working for $15 an hour at the sawmill, don’t you agree?
Limited Handyperson Skills Are All You Need
Plus, starting out with an ugly or problem property provides you with an opportunity to learn what you can and cannot do. If you purchase a house or small apartment building that’s already rundown, ask yourself this question: “How can I possibly make it worse?” Even with very limited skills, your efforts are still likely to make some worthwhile improvements. If you don’t do things exactly right the first time, so what! Who cares! No one but you will probably even notice. Simply do it over again until you get it right.
Doing ordinary cleanup work, which almost everyone can do fairly well, is likely to result in a major upgrading. Most certainly it will improve the looks. When you tackle the more sophisticated improvements or repairs, take your time. Read a book or two and look at the how-to pictures. I promise, you’ll be pleasantly surprised to find out how many things you can actually do if you make the effort.
Less Competition Always Equals Better Bargains
When you set your sights on acquiring rundown properties and poorly managed real estate, you are automatically putting yourself in the “profit mode” right from the start. That’s because there’s far less competition. Most buyers are turned off by properties that are ugly or rundown and have management problems. This means there are fewer buyers for these investments. Naturally, less competition allows you to control the purchase price and terms—especially when no one else is making offers when you are. There have been many occasions where my offer to purchase a rundown property was the only offer. Obviously, sellers are receptive to most any reasonable offer under these circumstances, if they’re really serious about ridding themselves of their problem.
The following profit-making terms and conditions are generally always available to buyers of problem properties:
Low purchase price (20%-40% below fixed-up market value)
Minimum cash down payment required
Liberal seller financing for all or most of the mortgage debt
Opportunity to increase income quickly (under-performing properties)
Chance to reduce operating expenses and improve the bottom line immediately
Cash flow improved quickly by eliminating deadbeat tenants Let me explain why these six terms and conditions are worth big bucks to investors who have the skill and know-how to fix the problems.
1. Low Purchase Price
Obviously when you can purchase a rundown property for 20%-40% under the potential market value, you are building in a sizable profit to start with. It also means your debt service (financing) will be much less than for comparable non-fixer properties and most likely can be held to 50% or less of the gross income. If you can acquire properties with 10%-15% down payments (high leverage) and keep the monthly payments less than 50% of the gross income, you’ll be in the positive cash flow mode right from the outset.
2. Minimum Cash Down Payment
Sellers of fix-up real estate and properties with management problems are in no position to hold out for normal down payments, if they expect to sell their problems. I have seldom paid more than 15% down for any property. Also, many of my down payments have been for less cash because they were “lemonade down payments.” Lemonade down payments are part sugar—which is the cash—and part lemon—which is something else of value, like my old ski boat or used camping trailer. Even junk furniture stored in the garage will work sometimes.
For example, my offer on a $100,000 fixer property might be 15% down—consisting of $5,000 cash and $10,000 worth of ski boat, motor, and equipment. Chances are, my boat setup would not sell for a nickel more than $5,000 through the classifieds, but to a motivated property seller, a value of $10,000 seems reasonable. Besides, how many “burned-out” property owners are boat appraisers? For the best results, execute this plan during hot, sunny months—near a lake, if possible.
3. Seller Financing All or Part
Seller financing is the Cadillac of all financing when you learn to negotiate good terms like the following list:
Long-term payoff (15-30 years).
Low interest rates, 6%-9% range, today’s market.
No “due on sale” clause in note or mortgage.
No prepayment penalty in note or mortgage.
No late fee in note, unless the seller insists on having one.
No other restrictive terms or conditions, such as buyer agreeing to repave common roadway when holes or ruts appear. (This condition was actually one of the terms in a promissory note I assumed. It’s not really enforceable, however.)
Seller financing is better than FHA loans, GI loans, or any other type of institutional financing when you structure it properly. Naturally, fix-up property sales are perfect for this, because most banks simply won’t write loans for this type of real estate. Sellers must finance the sale themselves or they can’t sell in many cases. Motivated sellers who own properties that won’t qualify for bank financing have no choice other than carry back a mortgage or sell for cash (which is not too likely).
4. Opportunity to Increase Income Quickly by Adding
Value
Investment properties that are not producing the amount of income they should are truly “gold mine opportunities” for investors who can spot the problems and fix them. The reason this technique is so lucrative is that the purchase price is based on current income production, which is low (under-performing). This price will generally be much less than its fixed-up value. The key here is to be able to clearly understand what is wrong and have the knowledge to fix it. It takes several properties (practice) to get good at this, but when you do, it’s like taking candy from a baby.
When you have the ability to increase the income stream by whatever means you use, you will automatically increase the property value. This is the essence of my “adding value” strategy. It’s routine business for me to upgrade small, multiple-unit properties by doing physical cleanup and fix-up work. At the same time, I’m gradually moving in new tenants who are willing to pay higher rents for a clean, fixed-up apartment.
5. Chance to Reduce Operating Expenses and Improve
Bottom Line Immediately
Start-out investors will often rush out and purchase leveraged properties at retail prices. Next, they hire professional property managers to run them. It doesn’t take long before they learn a painful lesson about excessive expenses. To begin with, inexperienced investors and professional managers are almost the perfect recipe for bankruptcy. If there’s a single most important experience that every new investor needs, it’s the experience of operating his or her first investment property hands-on. This is the best way to learn firsthand how much things cost and where the biggest savings can be found. Most smaller income properties with a 50% or greater monthly debt service will not support hired services.
As a general rule, operating expenses for older fix-up properties— which include management, taxes, insurance, repairs, and maintenance— will cost anywhere between 45% and 60% of the total monthly income. It’s not uncommon to find new investors making mortgage payments (debt service) in excess of 60% of the total monthly income. It shouldn’t be very difficult to see there’s a serious problem here. The first rule is: Don’t do this. The second rule is: When you find properties with these kinds of financial problems, they may very well be excellent opportunities for ring-wise operators who know how to reduce the expenses. Also, you can often renegotiate high mortgage payments with private note-holders, once you are able to determine that they really don’t want the property back. Many will take lower payments instead.
6. Improve Cash Flow Quickly by Eliminating Deadbeat Tenants
Unruly tenants will often frighten potential buyers away from high-profit deals. Investors who will spend the time necessary to learn local landlord-tenant laws can put themselves in a money-making mode. Education is worth big bucks here—it arms you with the special know-how to handle tenant problems that often scare away most of your competition.
Many years ago I acquired a seven-unit property filled with hostile-looking bikers. The purchase price was about half of what I felt the value could be. The owner was even afraid to show me the property—he was scared to death of his own tenants. I simply filed eviction papers and had the marshal serve all the tenants. Several weeks later, all the bikers were seen rolling down the interstate only minutes ahead of the marshal, who had gone back out to evict them. All I had to do was clean up the jumbo mess they left in order to earn a handsome profit of almost $60,000. The evictions were hardly more than a short-term inconvenience for me, which unlocked the doors to long-term profits and cash flow. It’s a very worthwhile trade-off, believe me.
Real Estate X(c)
To be continued . . .
Fixer-Uppers part 2
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