TMBA 339: Can You Invest in Property if You Don't Have Much Money?

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On today’s episode, Dan and Ian are speaking with Paula Pant.

A while ago, when Dan was experimenting with renting a place on AirBNB, he stumbled upon Paula’s blog at AffordAnything.com.

On this site Paula Pant shares, with complete transparency, her business model for property investment, including an outline of how she created a real estate portfolio  that now provides her with a healthy monthly cash flow.

You’ll also hear some of Paula tips, including the ‘1% rule’ that she applies before making any new purchase, and some of the mistakes that she made along the way.

Transcript

Listen to this week’s show and learn:

  • What made Paula realize that real estate was the path to her location-independence. (3:49)
  • Paula’s definition of financial freedom. (7:05)
  • How much time Paula spends per month on her properties. (7:35)
  • What “The 1% Rule” is and how Paula uses it to make decisions on property investments. (14:44)
  • Where an entrepreneur with money in the bank should get started if they are interested in real estate. (22:28)

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Thanks for listening to our show! We’ll be back next Thursday morning 8AM EST.

Cheers,

Dan & Ian

Published on 06.02.16
  • http://www.marcoschwartz.com/ Marco Schwartz

    Hey guys, loved the podcast! I really like your current series of episodes about investing.

    However, I imagined you would have spoken about real estate crowdfunding, which is way to invest in real estate with little money (usually from $1000), while keeping the investment 100% passive. I actually have a good chunk of my own portfolio in real estate crowdfunding, and I am documenting the whole process at: http://thedigitallandlord.com/. If anybody here would like to discuss about it I’m be happy to!

  • http://www.seo-911.com/ Chad Eisenhart

    I have been a long time listener to the show. I used to invest in real estate, I still hold 24 units. I am just not buying anymore. I made this worksheet to help me evaluate properties quickly. https://docs.google.com/spreadsheets/d/16fz1jcQX3_-dqUu_wKTBYtqRPM3MnuCTQfHvdRJY_iI/edit#gid=1749195308

    Like Paula I also focused mostly on cash flow. The worksheet calculates a variety of points and scenarios. Including CAP rate as your Paula mentioned. Seller financing is another option, not every buyer needs their cash upfront.

    One thing I would suggest people do is work with a mortgage broker. All lenders are not created equal. Although I would consider myself thrifty (cheap), paying a little extra for a good mortgage broker was probably worth the expense. She knew who to shop to loans to and how to paint my situation in a positive light.

  • http://www.mylandscapeguide.com/ Elliott Hallum

    Great episode Dan and Ian…

    I disagree with one comment Paula made about assessing real estate value.

    When you want to invest in a particular area and are assessing value, please DO NOT use internet websites like Zillow’s Zestimate. They’re just algorithms. (One exception would be to use public record websites and actual sale prices.)

    My suggestion…

    Find a hungry Realtor or real estate professional in the area. They have MLS tools for assessing value. They will do your market research for free because they want you as a recurring client.

    In the USA, value is determined by appraisers. Realtors are trained to “comp” property based on what appraisers use… Comparable Sales within 1 mile radius and similar homes sold in the past 6 months.

    Hope this helps. Real estate is an excellent vehicle to grow wealth!

  • Dev

    Chad,

    The spreadsheet is really impressive, thanks for sharing.

    Just curious– what are some of the reasons you stopped doing new deals? Was this because the expected annual ROI decreased, as the real-estate prices in the US experienced a certain level of recovery in the last several years?

    Thanks!
    Dev

  • http://www.funnelengine.com Richard Patey

    Another great episode and again perfect timing as looking to buy my first house here in UK.

    Seems as if there are two wealth building factors at play here (please correct me if this is wrong):

    First is the 7% annual capital gain that Ian mentioned (back of napkin) from increasing value of portfolio and the mortgage being paid off.

    Secondly is the cashflow from rental income being greater than mortgage payment.

    With the 1% rule that Paula mentioned she will be generating at least $12k pa from a $100k purchase. Being leveraged at say 70% LTV at an interest rate of 4% over 20 years is ~ $600/m in mortgage payments. That would leave $400/m profit for $4800 pa which is an additional 4.8% yield.

    In total, investing in this way can create over 10% a year.

    Assuming the above is correct, why wouldn’t you want to put your money to work in something that can produce over twice the return of index funds?

    Cheers!

  • http://www.seo-911.com/ Chad Eisenhart

    Like Elliot mentioned in another comment. Zillow and others are okay, but I would not take them for solid information. What matters is the appraisals. Yeah if do not like the appraisal you can try for another, but it will cost you, and you are still rolling the dice and it does not matter how much money you put into a deal it is worth what the other like properties are selling for.

    The reason I stopped: it was a combination of getting the stress of getting refinanced on one place, then another appraisal came back lower than expected so I had to front that shortfall. Then I got a couple more places after that. I decided I got a little uneasy with my debt load. As Paula mentioned, it depends what your risk tolerance is. And I reached my risk level.

    If you are buying for cash flow and long term hold, I really did not care what overall prices where doing, in fact I wanted them to stay low, it made buying more affordable.

  • http://www.seo-911.com/ Chad Eisenhart

    You still have a lot of other expenses that eat into that $400/m profit. Insurance, repairs, taxes, utilities, licences, vacancy.

    With real estate, you most often did not front the $100k purchase, maybe you put in $10k so if you really made $400 a month that is a 48% ROI.

    I would agree in 20 years after you own the place outright, there may be something better (more profitable) you could do with that $100,000 asset. However by then it most likely would be kicking off pretty stable, consistent returns, that you are familiar with and do not have to put to much thought into.

  • Austin

    Excellent episode, as per usual. Long-time listener, first time poster.

    If you guys are interested in a passive way to get into real estate it could be via NNN acquisitions. I’m a commercial mortgage broker and a good portion of my clients own a Walgreens, CVS, or Rite Aid store in their portfolio. They get a monthly check from the company and don’t have to worry about any of the hassle that goes into managing a property.

    Thanks again for the work you do!

    -Austin

    PS – If you’re interested, I’ll post a link to more info about CRE (commercial real estate) investing. Didn’t want to come off as spamy on my first post to y’alls site. Thanks again!

  • http://www.enkosiafrica.com Jordi Casinos

    Episodes are getting more and more interesting, away from business entrepreneurship but also part of our daily routines. Where to invest?

    I agree with Ian, or partially do. At that level, Paula’s approach is the equivalent of the young guy who wants to make $1000 and live the life in a SEA beach. For those who want more, your business is the way to invest (or should be, still struggling there), unless major capital appreciation can be guaranteed.

    If you just want to get by, Paula’s (or my good friend’s in Barcelona) approach is low key/low cashflow with a very large level of resources invested in a market too dependant in banks, markets and governments not turning it into a bloody mess, and there is nothing you can do about that. Are we back in Kiyosaki’s Arizona? Isn’t that train long gone?

  • Rich

    That was an excellent podcast! I’m first time to your podcast, followed Paula here. I’ve been a long-time reader of hers. Her website is amazing and inspired me to start a blog.

    I think I lean more towards you guys when it comes to avoiding debt. While I love real estate for the cash flow, and don’t focus on appreciation as much (agree with Paula, can’t control that), I have found a way to invest in real estate debt-free. I don’t grow as fast as I probably could, but I love not dealing with mortgages. You also have much less risk. When you buy a house with cash, you only sign like two documents!!

    Also, you cash flow a lot more and faster with no mortgage.

    I have several properties now, and with no mortgage, the amount of money coming in snowballs quickly, and purchases the next house.

    I love how technically proficient Paula is at analyzing the properties using a wide variety of formulas. That’s where i struggle. I’m too impatient.

    Also, my two cents on how to evaluate a property. I’ve found, groomed, and I would even say trained several people that help me evaluate properties (especially since I’m in the military, and continue to buy properties while overseas). My real estate agent, management company, and inspector are all part of evaluating the properties I plan on buying. The tricky part is finding people you can trust.

    Rich
    http://www.richonmoney.com

  • http://firedupdigital.com/ Maciej Godlewski

    Nice episode, guys. You sound like grownups talking about real estate investing. :)
    A great resource is the BiggerPockets forum. They also have a podcast so they might be good guests for a future episode.

  • http://taylorpearson.me/ Taylor Pearson

    Also, enjoying the investing series. Listening to this and a lot of Ferriss’s podcast it’s struck me how important worldview is. I.e. I’ve heard a bunch of people Ferriss has interviewed elsewhere but because there’s substantial world view overlap, I get a lot more from his and your perspective.

    With all the investing stuff, the main thing I keep coming back to is time as the scarce asset. Venkat did a talk on “do investors matter?” where he borrowed a lot from Andreesen – https://www.youtube.com/watch?v=bNLhxr_MtcE. One of the things that stuck out is that investors, like everything else, fall along the powerlaw curve. Very few make the vast majority of the returns and so really good investors are doing it full time or have a huge accumulated body of knowledge. If you think about time as the fundamentally scarce thing and ask where you can invest that, stuff like real estate and public markets seem less attractive.

    It seems like we spend all this time building assets (skillsets, businesses, teams) and then most investing talk about starting from scratch. Really thinking about leveraging existing assets more. Ferriss is still the most impressive to me. He parlayed his business into successful books which got him proprietary deal flow.

    I wonder if there’s a similar play with lifestyle businesses where you leverage existing assets instead of starting from scratch?

    Private markets where you have prorpietary info and/or deal flow seems more attractive.

    That being said, probably have to diversify at some point

  • http://www.tropicalmba.com/ Dan Andrews

    very interesting Taylor, thanks for the link. The powerlaw curve thing is sobering too, agree that the parlay seems like the smart move.

  • http://www.tropicalmba.com/ Dan Andrews

    thanks Maciej! We’re certainly not trying to be grownups! :)

  • http://www.tropicalmba.com/ Dan Andrews

    Hey Rich thanks for listening and glad you enjoyed the episode.

  • http://www.tropicalmba.com/ Dan Andrews

    ha thanks for sharing Jordi!

  • http://www.tropicalmba.com/ Dan Andrews

    hey Austin thanks for dropping by, I think bossman would be interested in CRE ideas

  • http://www.tropicalmba.com/ Dan Andrews

    hey Elliott thanks for listening and great suggestion, agree, bossman mentioned this as well.

  • http://www.tropicalmba.com/ Dan Andrews

    wow thanks for sharing Chad.

  • http://www.tropicalmba.com/ Dan Andrews

    interesting Marco, thanks for that we’ll check it out

  • http://www.riverstonerecap.com Austin

    Does the bossman have a budget? He’ll need to put down a bit more than he would for an entrepreneurmobile.

    If he’s interested in some more info, here’s my website: http://www.riverstonerecap.com. I’d be happy to give him a few CRE investing options to think about.

    Keep up the excellent work!

  • http://www.tropicalmba.com/ Dan Andrews

    haha it would be a tough sell! :) I’ll point this link out to him thanks.

  • kim

    I have been trying to make a dollar on my own and I am having such a hard time!! I hope that I will be able to solve that problem one day if I listen to you dilligently!!

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