The house pictured above is in Montgomery, Alabama. I have never seen this house in real life. I have never been to Montgomery, although I am sure it is lovely.
The odds are good that you, too, have never been to Montgomery and have also never seen this house.
Even if you have been to Montgomery, the odds are very much against you happening to have seen this house.
Heck, even if you live in Montgomery, you still very unlikely to have seen this house.
None of this is surprising.
What is surprising is that my pal Rich, the owner of this house and the author of today’s guest post, has also never seen this house. Rich has mastered making real estate investing truly passive.
Time was, I fooled around with real estate myself. For the most part, I did pretty well. Although my first purchase was a self inflicted wound. Only now, decades later, can I see the humor in it.
But whether I was hemorrhaging cash or minting it, it always took time and effort. Less an investment than an investment/job hybrid. Too much like work for my taste.
This experience has made me very skeptical of most real estate investing books, articles and podcasts. They always seem just too easy, risk free and sure. Not my experience, or that of the real estate investors I’ve known.
Still, for those who take the time to learn and understand the craft, there is no question that there is money to be made. Maybe even passively.
I met Rich when he attended Chautauqua several years ago. We became friends.
Back in September of 2018, I heard him on the ChooseFI podcast, and that reminded me I had been meaning to ask him to write this guest post. How, exactly, I wanted him to tell us, has he made real estate totally passive?
Passive enough he owns houses he has never seen, let alone set foot in.
Passive enough that he runs his empire from anywhere in the world he happens to be stationed.
Bear in mind, we are not talking about one or two or half a dozen houses managed by imposing on local friends and family. We are talking about 20, 14 of which were bought sight unseen.
Yeah, I wanted to know more too.
Oh, and by the way Rich, please share your actual numbers.
“Sure,” he said. “Why not?”
Throughout this post I’ll scatter more pictures of some of Rich’s houses. Here’s the tale of how he acquired, owns and manages them…
Truly Passive Real Estate Investing
Rich’s First House
There is something I love about the FI community and investing in index funds.
How easy it is.
It doesn’t get any more passive than index funds. All you do is set it, and forget it. Go VTSAX!
That’s what is so tuff about real estate.
Who wants to take a phone call and fix a busted water pipe in a middle of the night?
Or a deal with a difficult tenant?
Who wants to worry about supervising a complicated project when you buy a property that needs a lot of work?
Plus some people lose a lot of money in real estate!
That’s not passive investing!
I think the reason JL asked me to write a guest post is because of my experience dealing with problems like these.
It’s been quite a bit different than his. He’s done real estate, and it wasn’t always fun.
I’ve been in the military the past 18 years, moving every one to three years, and I’ve spent a majority of that time overseas.
In that time, I’ve built up a substantial real estate portfolio that is completely paid off (only the FIRE crowd would think that’s cool) and professionally managed.
The interesting thing about all of this is how I’ve set up my systems.
For me, real estate investing takes no work.
I mean like NONE.
Even when I buy properties from overseas that need significant remodeling I’ve set up systems to have all the rehab performed and managed for me by people I trust.
MY EMPIRE EXPLAINED
I’m just calling it an empire because it makes me sound cool. It’s not really an empire…
Yet.
I currently own 20 single family homes as long term rentals, all in Montgomery, Alabama.
They are all paid off, which I know I mentioned earlier, but I’m mentioning it again because it’s unusual in the real estate investment world.
Real estate investors think I’m insane for not using leverage to get-rich-quick.
On this blog, and in the FIRE community, I think debt-free real estate makes a lot of sense. I can’t be foreclosed on, and I can’t go bankrupt. I have very little risk.
Suffice it to say, I have amazing peace of mind as I approach a military retirement in the summer of 2020.
BACKGROUND
Rich’s Second House
I arrived in Montgomery, Alabama in 2013 for a 10-month assignment to attend a military school. During that time I purchased six houses with cash. I then moved to Germany for three years, and then Korea for two years. While in Germany and Korea, I purchased 14 more houses in cash, all sight unseen. I haven’t been back to Montgomery once since I left.
I purchased these houses for prices ranging from $30k-$65k, and the average house now is worth about $75k.
While there is some work involved with finding and purchasing the houses, I was able to do this all on the internet, mostly at Zillow.com.
Once the houses are bought, with my systems in place, there is virtually no more work to be done. These houses provide pure passive income.
Now, let’s get into the nuts and bolts.
THE MANAGEMENT COMPANY
The key to successful passive real estate investing, whether you live next door to the property or in China, is to have a trustworthy, efficient management company. This is easier said than done.
The most important issue is trust. You need to know the company you are dealing with is trustworthy.
Thoroughly vet the management company and make sure they are going to be a good fit for a real estate investor. This is best done before you purchase the home, but it can be done at any point in the process.
I’m going to give you my idea of what this vetting should look like.
You are going to ask the property management company for references. The best reference to get from a management company is from other investors. If they have a track record of working with investors, and they are satisfied customers, this is a good sign. If they’ve never worked with investors and/or don’t give you any references, that’s a potential issue.
Another reference to ask for is current tenants. Speaking to people who live in their homes as tenants or “customers” can be very telling. How good are they with answering service calls, taking payments, dealing with disputes, etc.
Talk to all of the references they provide you, but these people have likely been coached to say nice things. You need to also develop new references through these people who haven’t been coached, and don’t know they will be called. These are called developed references. This is how you get the real story.
You ask the people the management company gave you as references if they know anyone else you can talk to who has worked with this property management company in the past. This way you are developing the reference yourself instead of getting it directly from the property management company.
Also do a bunch of online research to include social media and better business bureau, to see what else you can dig up.
TEST DRIVE
Also, I like to approach the company as a renter. Use their website posing as a renter and see how it operates. Call the company and see the process for setting up the showing of a property.
Send an email and see how promptly they respond to your inquiry. I encourage you or a friend to actually go to the showing and see how they do. This is all very important and telling in how effective they’ll be.
FINE TUNING
This advice applies not only to management companies, but to all aspects of real estate, and business for that manner. It’s often neglected and key to success. Once you hire a management company, it’s likely you’ll notice things they are doing or not doing that you don’t like.
You need to clearly tell them what you expect and give them a chance to fix it. I had lots of tweaks like this with my management company over the first several months, and a smaller amount as time went by, but it’s always a constant effort to improve and keep things well oiled.
In cases where they are falling short, and not able to fix their behavior, make it clear you are planning on ending the relationship. When the time comes, switch to a different company. Don’t waste time with a bad management company. This same advice applies to everyone else on my “dream team”.
REHAB PROJECTS
Here’s where I’ve done something different than most real estate investors.
One of the key things that’s allowed me to be truly passive in my long distance real estate investing is the deal I’ve struck with my management company.
Usually when I find properties to buy, they are distressed and need a lot of work before they will be ready to move into. Most management companies expect to receive a rental property in move-in ready condition.
I worked out a deal where my management company is deeply involved in the entire purchase process. While overseas, I buy properties that are in need of a lot of work. The management company finds the contractors and supervises the rehab on these large projects for me.
The key to making money is real estate is buying houses cheap enough to make a good return on investment (ROI), and being able to buy distressed properties while I’m overseas is key to my success.
I’ve found that when I tried to arrange for this type of rehab on my own, even when I lived in Montgomery, I was being charged higher prices than the management company was getting when they arranged it.
Even though they are charging me a 10% fee on top of their cost, I’m still saving money. They have contacts I don’t. I’m tapping into their expertise, and I don’t lift a finger!
When I find a property I want to make an offer on, even once my real estate agent has sent us pictures and approved it, I get my management company’s approval before I make an offer.
They are the ones who know what neighborhoods are best, which have problems, and which floor plans are popular (and not popular) with tenants. I rely on this to avoid buying lemons, and it’s been golden for me.
Here’s more info on finding a great management company.
THE INVESTOR SAVVY REAL ESTATE AGENT
Another key member of my team is a real estate agent who knows how to work with investors.
Real estate agents are in the business of making money from getting a commission on the sale of properties. Most agents have not worked closely with investors, and they don’t understand the unique needs we have.
Furthermore, the incentives of real estate agents and investors are not aligned. Real estate agents want to make a sale quickly and spend the least amount of time as possible with each client. Investors need their real estate agents to make multiple low-ball offers on properties over a long period of time before anything gets accepted.
The typical real estate agent will feel like an investor is a waste of their time. Too needy and greedy.
I had to find an investor-friendly real estate agent who understood my unique needs. I need someone who will:
- Make multiple low-ball offers without complaining
- Not question or second-guess low-ball offers
- Gladly visit multiple properties and take extra pictures and video
- Understand the types of properties I’m looking for as an investor
- Answer phone calls and emails promptly
- Bring me deals
THE HOME PURCHASING PROCESS
My wife uses Zillow.com to view properties. It pretty much has all the info available on the multiple listing service (MLS). This is the information that used to only be available to real estate agents before the days of Zillow and Trulia. We use this info to make multiple low-ball offers, through our real estate agent, on pretty much any property that meets our criteria. We then sit back and wait for bites.
Our real estate agent checks the properties for us. In many cases, if there aren’t enough pictures on a listing, he’ll take additional pictures.
If one of our offers gets accepted (this is rare), or at least gets a counteroffer that is close (more common), then we start the next step in the process. We have the management company go over to the house with the realtor and give us their take of the property. They will likely take pictures as well, and send us a detailed email explaining if we should proceed with the negotiation and purchase or not.
If we are advised to proceed, we continue negotiating a cash purchase. We offer to close in 10 days, which sellers love. This often gets us a better discount.
Once our offer is accepted, we immediately schedule an inspection of the house. I also use the same inspector, someone I know and trust. We will get a detailed report with lots of pictures. At the same time, I ask my fire insurance company to go look at the house. He will also perform a detailed inspection and give a report of what I will need to fix before he will insure the property.
Keep in mind, at this point, I’ve had 4 different people I know and trust carefully look at this property for me.
- Real estate agent
- Management Company
- Inspector
- Insurance Company
Yes, I haven’t seen it myself, but I’ve got professionals doing that for me, and I have lots of photos!
Using the property inspection report, I negotiate with the seller to get the price down lower.
My management company sends me a document to electronically sign so they can put the utilities in their name and manage the property for me.
I call my bank using Skype and wire transfer the money to my attorney in Montgomery for the closing.
The property closes and my attorney sends me one or two documents to sign electronically.
When you pay cash for a property, there’s often only one document to sign. It’s so easy!
THE 1% AND 50% RULES
Rich’s Third House
In order to have an idea how my investments in Montgomery compare to say VTSAX or other investments, I want to explain the 1% and 50% rules to you, and then tell you roughly what I paid for my properties and how much I’m getting in rent.
The 1% rule in real estate means you should be able to rent a property out for at least 1% of the acquisition price.
Acquisition price is the purchase price plus the price of getting it move-in ready.
Example. Purchase price $90,000. Fix-up price $10,000. Acquisition price $100,000.
According to the 1% rule, you should be able to rent this property out for at least $1000 a month for it to be a good candidate for purchase as a rental property. This is just a guideline, more complicated math should be done before you actually purchase.
The 50% rule in real estate tells you that approximately 50% of what you collect in rent will go to expenses. This is much higher than most people realize. Here in our example, we bought a house for $100,000, the rent is $1000, and 50% of that, or $500 a month, will go to expenses.
Without nerding out too much, I’ll tell you that a house that satisfies the 1% rule with 50% of rent going to expenses makes an ROI of approximately 6%.
The first house I ever bought in Montgomery in 2013 was for $30,000. I spent $15,000 fixing it up. It rents for $850.
The second house I bought for $45,000 move-in ready. It rents for $900.
My third house was a short sale that I purchased for $37,000. $6,000 in repairs. It rents out for $900.
In all of these examples I have not just satisfied the 1% rule, but it’s closer to 2%. My ROI is probably above 10% on these houses, even after management fees.
I own 20 houses debt free, but 16 are in an LLC, and 4 are in Roth IRAs.
To make the math simple, I’ll be conservative and say my average house is renting for $850 a month, and 50% of that is going to expenses.
Since I don’t want to touch my IRAs for a while, I’ll leave that out of the calculation.
Applying the 50% rule means $425 a month in expenses and $425 a month income X 16 in LLC = $6800 a month or $81,600 a year profit.
In reality, that is about what I actually make, although it fluctuates widely by month. This month I made only $3000 because a tenant that was evicted did a lot of damage to a property, but there are months my income is over $10,000.
It’s been about a year since we’ve purchased a house. When you take purchasing houses out of the equation, my real estate portfolio is virtually zero work. It’s all done by my management company. It’s taken time to get to the point where they know when to call me and not call me, but we’ve got it down to a science now.
When I first started using this company and I was still in the local area, they were asking me questions about every little detail on each property.
I realized quickly they had great judgement, wanted to save me money, and had my best interest at heart. Eventually we got to the point where now they make most of the decisions for me, unless it is something very expensive.
If I answer one email a month about my 20 houses, I’m surprised. All I do is wait for a big, fat check to come at the end of the month, and wrestle with taxes in March or April each year.
I’ll be honest, without mortgages, the tax bill on my rental income can be pretty ugly.
I guess that’s not a bad problem to have!
If you want to understand more about how I do real estate, read my blog page entitled The Complete Guide to Real Estate Investing.
I’d love to answer any real estate related questions you have in the comments section below.
But if you ask me who my management company is, I’ll have to stab you in the face!
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New Podcast
Doug Nordman of The Military Guide, Jane and myself had a blast being interviewed for this episode of the What’s Up Next podcast:
How to Raise Financially Responsible Children
Some fun outtakes at the end, too.
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Old Post
Seems I’m seeing a lot of press on Social Security these days, most of it scary. I wrote this post back in 2013. My views remain the same.
Social Security: How secure and when to take it
Here’s an absolutely awesome holiday idea:
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Think you have free will? Think again.
