Yes, that IS a fire-spitting dragon sitting on top of your F.U.Wall
How to Create True, Real, Untouchable Financial Freedom through Real Estate by Building Recurring, Repeatable, and Scalable Cashflow!
Daniil lives in Richmond, VA with his wife and 2 young children. He is majorly unemployable, loves talking about himself in 3rd person and adding new bricks to his F.U.Wall.
Part I: The "WHY":
I want to introduce you to one of the most important concepts that you’ll come across anytime soon. It’s important both for you and your family. It’s important for your security. It’s important for your prosperity. And most importantly it’s important for your freedom. Your freedom from working a job you hate, your freedom from spending sleepless nights worrying about paying bills, your freedom from waking up every day and dreading having to do things that you hate doing, your freedom from continuing to live knowing you’re not pursuing your true calling because you’re stuck struggling to provide for you and your family. Your freedom from leading an unfulfilled life and dying with regrets.
I call this the “Fuck You Wall”. If you’re the type to get offended by my language then you probably don’t belong here. Because building a Fuck You Wall is not for the faint-hearted. It requires blood, sweat, tears and a good amount of patience. It requires hard work, determination, and perseverance. It requires hearing the word “no” many times before you ever hear a “yes”. It requires what we call in the good ol’ US of A: “hustle”. Continue reading our comprehensive guide to learn how to reach financial freedom through various real estate options.
And maybe, instead of being offended by my occasional F-bomb, you should be offended by some other things:
And speaking of walls, let’s get this out of the way: this has nothing to do with a physical wall, like a border wall. This is being written by an immigrant. An immigrant that came here (legally, though), fought like hell to build this wall for himself and his family, and is thankful and proud to live in this country. But this “Fuck You Wall” can be built anywhere, whether you live in Morocco, Australia, or the north freaking pole.
For the sake of brevity, going forward, we’ll refer to this as “the FU Wall”. And “FU Wall” can stand for some other things that are more palatable to you wussies that cringe at cusswords:
The Financially Unstoppable Wall
The Financially Untouchable Wall
Because that’s what this is. You’ll see…
And before we get any further, one more thing: this is a long education piece. We will go deep into a number of concepts and topics here that are vital for your future prosperity, independence and freedom. But in today’s world of instant gratification, 20-second Facebook videos, and Snapchat, most people have the attention span of a cocker spaniel on acid. So if you’re one of such people, again, you probably don’t belong here. Building an “FU Wall” will require you to become a master of your craft. It will require you to “get rich slow”.
So why is this such an important topic and why is it hugely vital you take the time to read this, bookmark this, and come back to it time and time again until you’re actually putting these concepts to work?
Let’s talk about that first:
Here’s how 99.7% of Americans (and it’s probably worse outside of the US) live their lives:
Go to work, get a paycheck, spend the entire paycheck on rent, mortgage, bills, etc. Wait until next payday. Rinse and repeat. God forbid they get fired or miss a paycheck. It’s a full on crisis if that happens. A recent survey by the Fed showed that 40% of adult American’s can’t cover a $400 emergency expense! That’s straight up crazy. And scary. And sad.
Now, maybe you’re reading this and you are further ahead than the average Joe. You have a solid job and career and some savings. Bad news though! A job NEVER means security. What if you get fired or laid off? What if there’s a recession and you can’t get another job quickly? How long will those savings cover your bills before you’re starting a GoFundMe campaign online or begging for change on the corner?
Millennials are particularly screwed but they're not the only ones. If you have student loan debt, credit card debt, car loans, a big house mortgage you're struggling to pay, things are only going to get worse unless you find a way to build your own F.U. Wall. Article link
By the way, I mentioned GoFundMe above, which is a crowdfunding platform where people get to ask other people for money. Your #1 goal in life should be to NEVER have to create a GoFundMe campaign for any reason, ever. Seriously. And no, I am not saying you shouldn't donate to other causes or people. The whole point is to be financially well off so that you can be VERY charitable! I am saying you need to get to the point of financial freedom where YOU never have to ask other people for money for any reason!
But let's move on....Maybe you’re even further ahead. You’re an entrepreneur! Maybe you wholesale houses. Maybe you fix or flip. If you’re on our Rehab Valuator email list and client base, then this is very likely. Congrats! You’ve found a set of balls (or lady-balls), said goodbye to the safety of a reliable paycheck and embarked on the road less traveled – entrepreneurship! But what happens if you stop doing deals next month? What happens if the market shifts (and it will)? What happens if you lose money on your next flip or it doesn’t sell quickly? Can you cover unforeseen expenses? Can you survive the next 6 months without any new deals or sales?
If you have an “FU Wall”, you can. If you have an “FU Wall” you have reliable, recurring, steady income coming in month after month even if you choose to sit on your couch all day and watch Fresh Prince of Bel Air reruns (hell yeah!). You have enough income coming in not only to cover all your monthly living expenses, but enough to put additional money aside. Enough to reinvest money into liquid assets, real estate, or other businesses. Enough money coming in to protect you against unforeseen expenses and emergencies.
Medical emergency? FU, here’s the money!
College tuition? FU, here’s gobs of money (that you’ll never get back)!
Boss being a dick? FU, I quit!
Wife lost her job? Fuck year! Great! let’s go on vacation!
Kid needs expensive braces? Quick, little Debby – get behind our FU Wall and let’s give the orthodontist a call!
Little Johny has a drug addiction? Here’s some money for rehab. Let’s go to Malibu!
It’s called the “FU Wall” because you and your family can stand behind this wall and say “FU” to all of life’s problems without losing your marbles or taking a hit in your quality of life.
This wall can withstand shocks, earthquakes and hurricanes and can safeguard you in situations where most people would get swept up in a flood (enough nature channel references? I think so….)
And once you have built a wall where you are not just comfortably bringing in money to cover all your expenses and emergencies but also money that you can reinvest, it becomes a self-driving machine where your wealth snowballs! More on this later…
Here’s the important part and pay close attention here:
- This wall for most people, including you, doesn’t require huge sums of money coming in. We are talking $4k, $5k, $8k a month in steady reliable income. This, for most, is enough to cover their monthly nut and have money left over to set aside or reinvest.
- Magical things happen when you have this wall built. Being able to pay your bills and sleep soundly at night is just the beginning. The obvious side effect, of course, is that you don’t have to work. You don’t have to go to a job. And you don’t have to do new real estate deals if you don’t want to or if the market shifts against you.
But let’s move past security on the Hierarchy of Needs chart. The magic happens as you cross the “all my needs are taken care of” threshold because now you can move into the Self-Actualization phase. Not only can you pursue a business or career that you’re truly passionate about but you can start making long-term, smart, strategic moves. Not just short-term moves to make sure your next bill gets paid. Those are 2 different worlds.
So what ends up happening is that right after you get to the point where you don’t have to work anymore to pay bills or have to build your business beyond what you’ve already done, you now have the ability to grow faster than ever. Get it? When you stop chasing short term money, more money that ever ends up coming in! It’s just like anything in life: when you stop chasing something, you’re way more likely to get it.
Part II: The "WHAT":
So now that you understand the “Why”, let’s talk about the “What” – what this wall actually consists of – the foundation, the bricks and the mortar! (See where I am going yet? 😉
While there are many tactics and actual sources of where the cashflow can come from, there are 2 key rule2:
Rule #1: It has to be recurring, residual, repeatable, reliable cashflow. You have to have reasonable expectation that this money will come in next month, and the month after, even if you do nothing or very little (refer back to watching Fresh Prince of Bel Air reruns all day).
So this automatically disqualifies a job (because you can get fired or quit), and house flipping (because you have to flip another house to get paid again), and any business where you rely on one-time sales or revenue.
The income stream has to be recurring and locked in.
Do something once and get paid forever (or at least a very long time).
Rule #2: You have to have a way to make this at least somewhat “passive”, meaning you can put systems, processes, and/or employees in place to oversee this business or revenue stream without your constantly, daily involvement. After all, if you gotta take little Johnny to rehab in Malibu, you wan to be able to enjoy the scenery for a while (see above).
So…the best way I know how to do this (and have done it) is with rental properties. Sure you’ll hear real estate gurus and marketers yell from the rooftops: “No tenants, no toilets – don’t buy rentals. Flip houses instead!”. And yes, dealing with toilets and maintenance calls isn’t sexy.
But you know what’s sexy, though? What’s really sexy? In a life-changing kind of way?
Being able to leave for Europe for a month or two at a time while your portfolio puts $20k, $30k, or more into your bank account on auto-pilot. Courtesy of…wait for it..you guessed it: your tenants! (and an awesome property manager)
And before you think this is impossible, remember: it does not take a lot of “units” or “doors”. This little 4 unit building alone puts $2k of clean net monthly cashflow into my pocket. That’s after all expenses are paid, including mortgage, taxes, insurance, maintenance reserves, and 8% to my property management company.
$2k/month. That’s $24k a year, and it’s mostly tax free because of a magic thing called “depreciation”. So this is an equivalent to me having on a pre-tax basis a $40k/year job! This building is literally like me going to work every day making $40k/year except it does it for me!
Read that last part again. Having this quad-plex is equivalent to having a $40k/year job! You can go to work and grind it out every day for 8-10 hours a day for $40k/year or you can just have a building like this do it for you while you focus on whatever you want, like collecting butterflies or sitting on your front porch and yelling at the neighborhood kids to get off your lawn!
Which one would you prefer?
Just so that you understand the numbers, here’s how they stack out exactly on this 4-unit (this was a new construction project I finished 2 years ago):
Now, you may say to me: “All this sounds great, but...:
"What if your tenants leave?"
"What if they destroy your property?"
"What if the real estate market crashes?"
"Won’t your portfolio suffer? Won’t that monthly income of yours take a big hit? Is this truly a solid FU Wall built on a rock-hard foundation or is this flimsy?”
Great questions! I am glad you’re paying attention!
Here are my answers. And mind you, I don’t claim I have all the right answers or that what I do is the only way for you to do this. Not at all. There are many ways to build this and many ways to create an income portfolio that doesn’t involve rentals, and many ways to build a rental portfolio other than what I do. I am just one guy who found what works great for him.
But here’s why I feel confident hiding behind this FU Wall even in a toughest storm:
When the real estate market crashes, my rentals will continue performing.
A “real estate crash” usually entails sales prices of homes going down along with sales volume. More sellers than buyers. But that doesn’t necessarily spell doom for your rental portfolio. As a matter of fact, during the last crash in 2008, rents in a lot of markets stayed flat and even grew! As did the demand. The rent growth my market has seen since 2008 has been nothing short of explosive. If you owned rentals back in 2008-2009 and they were performing just ok, you're drowning in cashflow right now. When people stop buying houses, they still need a place to live so they rent. In a housing crash, I actually expect my rental portfolio to stay 100% occupied (as it currently is). Now, of course, you need to look at the market you’re in. Is there an oversupply of rentals right now? Is it being overbuilt? Be smart about where you buy. Location, quality of product, and barriers to entry in your market all matter.
On that same point, most of the rentals I acquire and build are in a market with very little vacant land.
That means there are massive barriers to entry to some big apartment developer to add a thousand new units. It’s a captive market. And that's important. You want to be in areas where ideally you can't go into over-supply quickly.
Most of my product is high quality, very attractive, easy to rent.
Everything in my rental portfolio is either a full, gut renovation or new construction. As you can tell from pictures above, all of our "product" is fairly high end. Great floorplans, big closets, large bedrooms, granite countertops, nice flooring, etc. This "product" attracts high quality tenants, with 100% rent collection, and no vacancies. Easy to lease, easy to keep leased and easy to manage because great product attracts great tenants.
I have room to cut rents and still cashflow.
If the worst happens and rent deflation occurs, I have room to decrease our rents across the board and still maintain a healthy cashflow. Knowing your numbers is important! You should always be thinking about your downside!
We have an in-house management company that manages all of my rentals.
This means I have full quality control over every single tenant interaction, maintenance call, and overall experience. This is very important. Not to say anything bad about 3rd party property managers, but it’s kind of a crapshoot in terms of what you get.
For those reasons, I choose to maintain full control and manage in house. After your annual rent roll surpasses $750,000 (or about 50 units at $1200/month), you can afford to carve off an 8% management fee and pay a full time property manager $60k salary. When I reached this level and was able to hire a full-time person, it was a complete gamechanger for my business.
I am not over-leveraged.
Unlike a lot of overzealous investors, I watch my leverage like a hawk. The quickest way to get in trouble is to borrow more money than you should. I maintain a high equity position in my projects (more on equity later).
Part III: The "HOW":
So now that you understand the WHAT, let’s talk about HOW you can reach financial freedom through real estate. This is where things get really interesting and this is probably the part you should be paying very careful attention to! This, of course, is not meant to be a full blown real estate investing course, but I am going to point you in the right direction and also give you links to some pretty in-depth training videos that have been super popular with our subscribers and software clients.
If your goal is to build a rental portfolio, then you need to answer 2 main questions to get started:
- Buy turnkey, buy/rehab or build new? Big differences between these strategies.
- How will you finance it? Where will you get equity and debt from? You may not have 2 pennies to scrape together right now so the entire concept here seems out of reach. I’ll go over some financing options below and how you can get in the game creatively with no money down.
Then, of course, there are going to be additional questions, not limited to:
- Which market? I suggest start in your own backyard
- How will you find deals?
- Who will manage these properties? You? 3rd Party Management? In-house?
So let’s tackle the “2 Main Questions” first:
Buy Turnkey? Rehab? Build New?
In anything that you do, generally the more difficulty something requires, the bigger the payoff is.
Option 1: “Turnkey”:
Turnkey means you’re buying a property that is either ready to be leased out or already has tenants in it. As a matter of fact, there are companies across the US that specialize in selling these types of properties to investors. Typically these investors have full time jobs and are looking to create a side income or retirement. These companies typically buy houses at a discount, rehab them, put tenants in place, sell the property at a profit to an investor, and then turn around and provide property management for a fee. The investor uses their savings or a retirement account such as a self-directed IRA to fund the property.
The nice thing about this strategy is that as an investor, in theory, you have to do very little. Thus the term “turnkey”.
The downsides are:
- You are not getting a big discount (if any) vs. today’s market value of the property. So very little to no equity other than the equity you bring in (downpayment)
- You have to put a downpayment in and typically leave that money tied up for a long time.
- Your cash on cash returns are usually decent but nothing to write home about (5% to 10% annual yields).
Analyzing turnkey rental deals isn't generally very hard. I would focus on a few factors:
- Cash on Cash return. Whether you're buying all-cash or financing, I would aim for a minimum of 8-10% first year Cash on Cash
- Equity. Again, I would aim to get a discount vs. today's market value to make sure that you have some built in equity from the get go (this means equity in addition to cash you're putting down). This will give you cushion to downside, should market go down.
Option 2: “Rehab/Rent”
– this is how I got started and how most investors get started in building up rentals. Buy a cheap house, rehab it, and lease it out. The benefit of this strategy is if you’re buying houses in need of repair, you can typically get a bigger discount on them and build “sweat equity”.
There is a variation of this strategy that is literally one of the THE most powerful wealth building strategies I’ve ever encountered and it’s called BRRRR: Buy, Rehab, Rent, Refi, Repeat. This is how I got started. This is how I built up the first $6 mil or so of my portfolio.
And the idea is pretty simple:
- Find a discounted house in need of repairs (you can do this with apartment buildings also)
- Rehab it to make it tenant-ready
- Lease it out
- Go to a local bank or whoever will do your permanent financing and get the property reappraised at a higher value
- Refinance out an amount high enough to pay off your full investment (or your short-term loan if you borrowed money).
- Now you have your entire original investment back ready to deploy into the next deal! And you have a property that cashflows with no money tied up!
Here’s a simplified numerical example. If you really want to see the nuts and bolts of this strategy, check out the 2 trainings below:
- Buy a house for $50,000
- Renovate for $20,000
- Put $5,000 of closing costs, holding costs and financing costs into it for a total cost basis of $75,000
- Lease it out for $1100/month
- House now appraises for $100,000.
- Your 80% loan gets you back your full $75,000 invested plus a $5,000 profit!
HERE ARE TWO IN-DEPTH TRAINING VIDEOS ON BRRRR
Option 3: Building New Construction Rentals:
Building new is what my business has evolved into over last 4-5 years. Rehabs are great but they are also a pain and come with a certain level of unpredictability. You're doing troubleshooting rather than executing a specific plan. You never really know what you're going to find when you open up the walls and that makes predicting costs harder.
With new construction, there are some very real benefits you should consider:
- You get to design a project from scratch. That means you have full control of layouts, closet sizes, bedroom sizes, flow, etc.
- You get to build a fully energy efficient product, which is very important for tenant retention.
- The construction process is predictable and scalable. Much more so than rehabbing. Once you have a good set of architectural plans, you can hand them off to a GC or if you're the GC, you can hand it off to subs and they can follow the plans. Foundation guy knows what to do. Framer knows exactly what to do. On commercial projects, you'll have mechanical, electrical and plumbing drawings that you hand off to tradesmen and they run with it. Etc.
- You get to build something that will (in an ideal world) be maintenance free for many years to come. And in running a stress free property management business and portfolio, this is KEY! All the landlording horror stories you hear are from people who bought shitty product and didn't improve it. Constant maintenance calls will not only eat away at your bottom line but will also piss off your tenants to no end and ruin your reputation.
- With #4 in mind, tenants LOVE to live in new construction. We often lease out our entire projects while the drywall is going up! That's how much people want to be the first to live in a place. It's pretty incredible.
It's not, of course, all roses and sunshine, so there are some "cons" that are worth mentioning:
- The learning curve here is steeper than rehabbing. First of all, you need to learn zoning and how that dictates what can be built on a certain piece of land. Secondly, there are new utilities and foundations - something that you may not necessarily deal with when you're rehabbing. But once you're "out of the ground", meaning your foundation is done, everything else is a breeze!
- Building new, these days, isn't cheap. So your initial sweat equity may be lower than on cheap rehabs you pick up. My target is usually 15-20% sweat equity in the beginning. If I can hit that, it's a win! I also have a certain cash on cash I want to hit in the first year (usually min of 10%).
So let's talk about these investing rules. Because if you don't have a good set of investing criteria, you'll be dead in the water before you even start!
Buying at market value is for amateurs. It's how amateurs invest (look at the stock market) and it's how amateurs get burned when the market crashes. One of by far the best things about real estate investing is that you can buy below market value. Or you can buy something, rehab it and have it be worth more than what you invested (50+30 = 100). Or you can buy land, build on it, and have the new building be worth more than total of what you put it!
The value you create is the "sweat equity". In the equation (50 + 30 = 100), the 20 difference is the sweat equity you created. That's your compensation for doing all the hard work! It also protects you against the market shifting down!
In my rehabs, I aim for at least 20% sweat equity when I am done. In my new builds, I target a minimum of 15%. The more the better, obviously.
No Deferred Maintenance for 5 Years
Biggest mistake I see investors make is not rehabbing sufficiently to save money. You think you got a great deal and you have great cashflow, but then your cashflow gets eated away at every single month with maintenance calls! That's why I like BRRRR (see above). You can do a thorough renovation now, refinance, get your money out, and have a great product where you won't hear from your tenants for 5 years except on the 1st of the month!
Year 1 Cash on Cash
When I invest in rentals, I look at my metrics for Day 1 of operations - not some fairy tales of what may happen in 5 or 10 years. So I want equity from Day 1. And I want cashflow NOW! There is an absolute $/unit that I look for ($250 or higher) and then I look at my cash on cash return in situations where I leave money tied up in a deal long term. I want my money to earn me a minimum of 10% in the first year. Then this # will grow (see the Flip vs. Rent training link below).
HERE ARE SOME ADDITIONAL TRAININGS FOR YOU:
How to Value Commercial Properties, including ARV Calcs
How to Buy with Seller Financing
How to Structure the Rehab Loan and Proposal
How to Utilize Various Rehab Incentive Programs
Locating Land and Doing Due Diligence
6-Unit Apartment Case Study
Project Design and Deal Analysis
Project Management Made Easy
How to Find Infill Lots to Build on
How to Value the Land to Buy Right
Project Design and Steps
Financial Analysis and Obtaining Financing
4 Hidden Benefits to Owning Long Term
How You Can Leave Massive $ on Table by Selling Early
How to determine your initial profit from a house flip or potential rental income from a rehab project
A framework for figuring out exactly which real estate assets you should flip/sell and which ones you need to rent out and keep for long-term wealth accumulation.
A custom Flip vs. Rent Calculator You Can Download!
FINANCING: WHERE TO GET DEBT AND EQUITY
Ok, now let's tackle financing: where to get the cash and the loans! I am going to go over pretty detailed content here on how to get started!
WHAT TO DO NEXT?
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