The Millionaire Real Estate Investor

Small plans at best yield small results, and big plans at worst beat small plans. So, when I want big results, I need a big plan. The best outcomes—in any of life’s endeavors—are almost always the result of a big plan powered by persistent effort over time. (Location 312)

In terms of creating financial wealth—big money—one of the best ways I’ve seen, one that is truly accessible to anyone, is to invest in real estate. Real estate investing can be an awesome avenue to wealth. It can absolutely change your life and your family’s future. In fact, it can provide you with not only the minimums you need but also the maximums you deserve. This book is not about your minimums; it’s about your maximums—your maximum potential as an investor. (Location 315)

One book in particular, Unlimited Power, by Anthony Robbins, helped me both put a name to what I was looking for—modeling—and devise a process for finding those proven models. Simply put, if you look to the very best people in a field and study what they do, you often can repeat their success. The key is to learn how they achieved their goals and then understand why they did it that way. When you grasp these two things, you can start where they left off. Thus, I became a collector of success stories and models, and over time I discovered that every success story worth exploring had three fundamental parts: what a person thought he or she could do, how that person did it, and what that person accomplished. That process—think, plan, produce—soon became the basis for my personal success formula: Big Goals powered by Big Models lead to Big Success. Big Goals—Big Models—Big Success. (Location 483)

To move forward in life, everyone has to learn from mistakes. The only question is whose: yours or those of the great achievers who lived before you? (Location 500)

What we discovered is that these investors focus on three simple but incredibly dynamic forces at the heart of real estate investing. In fact, these three forces are at the core of all investing: Criteria, Terms, and Network. We’ve come to refer to them simply as CTN. They are for us the “Dynamic Trio of Investing.” CRITERIA: WHAT YOU BUY The first of the three is Criteria. Criteria describe what you buy. (Location 603)

Criteria are ultimately about identifying predictable value, and that is why they are the first area of focus for the Millionaire Real Estate Investor. (Location 616)

TERMS: HOW YOU BUY IT If Criteria define an opportunity, Terms define how you turn it into a deal. Once a property meets your Criteria, Terms determine its value to you both now and for the future. Terms are the negotiable aspects of a purchase, and they include everything from the offer price, down payment, and interest rate to conveyances, occupancy, and closing costs. Every investor we asked told us that Terms are where a great deal can be created from even the most modest Criteria. A skillful negotiation of Terms can lead to a better equity position, improved cash flow, and sometimes both. (Location 619)

Remember, you make your money going in, not going out. You buy right and let the market go to work for you as opposed to buying less than right and hoping the market will save you. Buying right means getting the right Terms. (Location 629)

NETWORK: WHO HELPS YOU The last member of the Dynamic Trio is Network. Your Network is who helps you in your investing. (Location 632)

The idea of the individual entrepreneurial investor beating the streets for deals is what comes to mind for most people. But again and again, throughout our research, investors referred to all the people who helped them succeed. They had relationships with people who sent them opportunities, mentored them, helped them buy and maintain their properties, and in many cases provided services that enabled them to do more while spending less time and effort. As a businessperson, I call this leverage: the fact that you can accomplish more with qualified help than you can accomplish alone. (Location 635)

The path of the Millionaire Real Estate Investor is a progression through four stages. First, you must learn to Think a Million (think like a Millionaire Real Estate Investor) before you make your first move. How you think matters. Whether this strikes you as a cliché or as a timeless truth, my experience has taught me that the bigger I think, the more I can accomplish. (Location 651)

The next step is to Buy a Million, in which you’ll get a thorough understanding of the best models for investing in real estate and, more fundamentally, an understanding of money: the ways it is made and the ways it can be lost. The goal is to equip you with the working models you need to purchase investment properties with a market value of a million dollars or more. (Location 655)

After you Buy a Million, you’ll set your sights on having an equity position of a million dollars or more in your properties. We call this stage Own a Million. This is when you will realize that the investing you have done has blossomed into a bona fide business. (Location 660)

The last stage of growth for a Millionaire Real Estate Investor is Receive a Million. Think of it as the summit, a place where only the best have gone. Receive a Million is when you are in a position to receive an annual income of a million dollars from your investments. (Location 668)

Your job is the venue where you can earn your initial investment capital, and a percentage of your wages must be dedicated to building up your investment stake. (Location 793)

Over time, each of those three areas can grow and your power as an investor will increase. (Location 995)

To me, the real nature of investing is always to invest in what you know and fully understand. Choose an area that you already know or one that greatly interests you and commit yourself to becoming an expert in it over time. (Location 1065)

Investing like a Millionaire Real Estate Investor isn’t about taking risks. It is about having sound criteria, the patience to find the right opportunity, and a willingness to take the correct action quickly. The best investors know this and are dedicated to following this formula. As a result, they are always minimizing their risk while maximizing their return. (Location 1096)

Proven models replace the need for years of experience. In fact, it’s a case of experience replacing experience—other people’s experience replacing the need for yours. With proven models you get the benefit of learning from the mistakes of other people without having to make them yourself. You also get to build on their successes. Models inform your activities, help you get the most out of your efforts, and accelerate you toward your goals. (Location 1865)

In our research and experience five key models stand out in the world of real estate investing: the Net Worth Model, the Financial Model, the Network Model, the Lead Generation Model, and the Acquisition Model. These five models represent the “best practices” of our Millionaire Real Estate Investors. (Location 1869)

Figure 1 Perspective is an amazing thing. (Location 1878)

They know that when a dollar leaves their hands, it begins a critical journey down a path of choices and decisions, and they know that those decisions are the key to building their financial wealth. The map they follow and the guide they trust on this journey are called the Path of Money. The Path of Money describes the ways money flows in and out of your life. (Location 1906)

Here is how the game is played. Once you have cash, the path presents you with four basic choices:     1. You can consume it by spending it.     2. You can save it by holding it.     3. You can share it by donating it.     4. You can grow it by investing it. (Location 1921)

Millionaires know that passive lending is mainly a money preservation strategy. The rates of return they can get from passive lending are comparatively low, because they usually are guaranteed and most of the borrowers will turn around and relend the money. When factored for inflation, passive lending usually does not lead to a significant increase in net worth. (Location 1935)

Millionaires know that active lending, in which they lend their money directly to businesses or individuals, can bring them higher rates of return than passive lending can. However, it will require them to be able to lend significant amounts of capital and that they typically will not get the benefit of appreciation. Institutions and mature individual investors are usually best suited to take this path. (Location 1937)

Asset ownership is on the other side of the path, and this is where big wealth is built. Millionaires know this and place most of their investment dollars here, buying and owning assets that can appreciate and give them cash flow. But when it comes to ownership, they know that the passive options (stocks for businesses and real estate investment trusts for real estate) usually don’t build great wealth without insider positioning or great wealth having been invested. As a result they usually head straight for active investing in businesses or real estate. Millionaire Real Estate Investors choose real estate. Why? Because they like the big upside, the small downside, and the personal control it offers. (Location 1940)

So we started buying houses 20 percent down, and financing them over 10- or 15-year payouts. We had 15 percent automatically deducted from our checks, and put into a money market account. When we had enough money, we would buy another house.” (Location 1959)

Build Your Work Network When I first got into the real estate business, I read an article on building a business that gave me direction and set me on a strong course. The advice boiled down to calling on industry professionals and asking them two questions:     1. “Who do you know that I should know?”     2. “What would you do if you were me?” It sounded so simple that I almost didn’t do it. However, since I was just getting started and needed to get moving, I was willing to do anything, and so I went ahead and did it. At first I wasn’t sure what I was doing, but then I started to see the wisdom in this approach. The first question was a pure Support Circle or Service Circle question. It was a networking question intended to open doors I would not have been able to open on my own. By calling someone up and saying, “I was told by a mutual acquaintance that you were the person to know in real estate investing, and I was wondering if I might drop by and meet you in the next few days.” With that question I was able to meet a lot of quality people and was soon on the inside track to building a great Work Network better and faster than I could have any other way. The second question was an Inner Circle question. If the suggestion someone gave me sounded halfway decent, I followed it. Then I went back and asked, “I did it, and here’s what happened. What would you suggest I do next?” Anyone who was willing to be in my Inner Circle would warm up to this, give me additional suggestions, and over time, if I wanted, begin to mentor me. The quality of their advice was a qualifying factor. The better the advice was, the harder I would try to move a person into my Inner Circle. (Location 2325)

MAINTAIN YOUR WORK NETWORK However, once you have someone in one of your circles, you’re far from done. You don’t just want to build a Work Network—you want to maintain it for the rest of your investing life. Maintaining your Network is about building solid relationships and a reputation people can trust. (Location 2343)

The simple one-two-three plan for maintaining solid relationships goes like this: Call Them—Mail Them—See Them. Each step represents a unique way to contact your Work Network, or what we sometimes refer to in lead generation as a “touch.” Figure 25 First, call them every month. Find out how they are doing, share how you’re doing, and talk about real estate investing. Just two or three calls a day will allow you to touch virtually everyone in your Work Network every month. Second, mail them something of interest and value every month. Create a mailing list of your Work Network members in your contact database (see the section on the Lead Generation Model, page 198) and send them a news article, an interesting story, or advice on real estate investing. Include a handwritten note. One mailing a month is all it will take. Third, for the people in your Inner Circle, see them every month and do one additional thing: Pay them a personal visit each month. Breakfast, lunch, dinner, or just a cup of coffee will do. Your goal is to tell them what you’re doing, review your Net Worth Worksheet with them, and ask for their advice and guidance. You probably will have no more than three to five true mentors, so this is a matter of only one or two meetings a week. (Location 2351)

Figure 28 THE FOUR KEY AREAS OF YOUR LEAD GENERATION MODEL The Millionaire Real Estate Investor’s Lead Generation Model is built around four core questions:     1. What am I looking for?     2. Who can help me find it?     3. How will I find the property or the people connected to it?     4. Which properties are the real opportunities? (Location 2408)

QUESTION 1: WHAT AM I LOOKING FOR? Your Lead Generation Model is driven by your Criteria—the economic and physical details of a property that would best meet your investing goals. As Millionaire Real Estate Investor George Meidoff put it, “Your Criteria form the operational base from which you make all your investment decisions.” Your Criteria provide you with as precise a picture as possible of your ideal investment property, and the clearer that picture is, the better the odds are that you’ll recognize it when you see it. Knowing exactly what you’re looking for helps you sift through large numbers of leads efficiently and has the added benefit of helping you make offers quickly and confidently once you find a match. (Location 2416)

There are seven major categories you must make decisions about to define your investment property Criteria: Location, Type, Economic, Condition, Construction, Features, and Amenities. The first three—Location, Type, and Economic—are foundational and are the most important. Let’s take a look at those three. (Location 2458)

1. Location The first area where Millionaire Real Estate Investors narrow their search is location. Picking a geographic area not only keeps the process manageable and affordable, it also allows you to become an expert quickly. It’s about focus. It’s about specializing in a neighborhood, subdivision, or area of town until you have a clear understanding of all the factors that determine local property values and rental rates. (Location 2462)

Obviously, you need to start with a great country that allows for and supports property ownership. From there you take a great city that isn’t completely overbuilt and has growing economic prospects, and start looking for real estate. You’re looking for desirable and emerging neighborhoods or communities. Historically, these tend to be the areas close to work, retail, and recreational centers that either have established reputations for great quality of life and great schools or are emerging.10 Transitional neighborhoods on the rise can be ideal for investors. It can be very hard to find opportunities in established neighborhoods because everyone wants to live there and so prices tend to get pushed up. But in transitional neighborhoods homes are often overlooked and undervalued. Within a great neighborhood location becomes even more precise; you’re looking for the best streets and lots. It’s fairly intuitive. People like privacy but also like access. A house in a small cove often brings a higher rent or sales price than does a similar house on an adjoining but highly trafficked street. (Location 2474)

Don’t forget the zoning. Some of the best deals I’ve done, and many of those our investors shared with us, hinged on zoning issues. Lots that are zoned commercial or multifamily, even those adjacent to or near yours, can affect value favorably or unfavorably depending on conditions. (Location 2484)

You can acquire houses, condos, and apartments individually or buy them in bunches by purchasing duplexes, triplexes, fourplexes, and even larger condo and apartment complexes. The conventional wisdom is that single-family homes offer the most reliable demand and appreciation while multifamily properties offer the best opportunities for cash flow. On the surface this plays out. In most markets, the majority of buyers want to own a home, and so this demand tends to keep prices moving upward over time. Also, by and large, the market for single-family homes is set by noninvestors. These individuals are buying a home, and emotional factors play into their willingness to buy at a certain price. Multifamily properties, in contrast, are bought and sold largely by investors, and this means that their prices are determined dispassionately by the value of the rents they represent.12 However, rents appreciate over time at almost the same pace as home appreciation.13 Thus, by default, both single-family and multifamily properties go up in price over time. The two tend to be countercyclical. When housing is affordable, rents go down and vacancies go up; this means houses are appreciating in value while rental properties and rents decline. But when housing becomes less affordable, the opposite tends to be true: Vacancies go down, and rents rise. Neither option—single-family or multifamily—is intrinsically better than the other. They both offer strong benefits to an investor over time. (Location 2502)

You have to understand current market prices for property sales and current market rental rates to know what your Economic Criteria should be. Your Economic Criteria break down into four distinct parts:     1. The price range in which you want to buy     2. The discount you will require     3. The cash flow you expect to receive     4. The appreciation you hope to make Basically, the price you pay (after your discount) will go a long way toward determining your cash flow and appreciation. If we add the two issues of hassle (the time and work involved in dealing with typical tenants for that price range) and liquidity (how quickly you might be able to sell the property) to cash flow and appreciation, we get four broad categories we must consider in determining the price range in which we might want to buy. In the final analysis it’s best to build your Economic Criteria toward the middle of the market. The chart just below shows how the four broad factors—cash flow, appreciation, hassle, and liquidity—tend to work at various price points. Our research shows that the best combination of these four factors—the sweet spot, if you will—lies on the low end of the middle of any market. That’s where the great deals are found and made. Cash flow can be best at the low end of the market, but these properties can represent the most work for investors, don’t tend to appreciate as well, and aren’t as liquid. High-end properties tend to appreciate well, but their cash flow is usually the worst. It takes longer to sell them, and so their liquidity factor is low, and because of the expectations of typical high-end renters and buyers, they can represent a hassle for the investor. Especially in the beginning, we’d advise taking the solid cash flow, strong appreciation, and low hassle offered by midmarket properties. It’s about identifying these “bread and butter” properties in your chosen location. (Location 2522)

In general, it’s best to be where the largest market is, and generally speaking, the majority of renters and buyers will be in the average-priced properties. In this market segment larger numbers of renters and buyers can increase demand and drive appreciation. You’re playing the averages to have the greatest odds for success. (Location 2539)

Millionaires look for properties they believe will appreciate at above-average rates and then buy them at a discount. The discount is important because it represents built-in profit and equity; it’s how you make your money going in. Successful investors label this their “margin of safety” and consider any investment without it to be speculative. Experienced investors assign a value to the work of acquiring an investment property either as a percentage or as a dollar value. For example, they may not acquire a property if they can’t reasonably expect 20 to 30 percent (or $20,000 to $30,000 for higher price points) of built-in profit by buying it at a discount. Others set the bar higher or lower depending on their personal financial goals. How much cash flow you seek works the same way. How much monthly cash flow do you need to achieve from a property to make it worth your while? For some a single dollar is enough (they don’t currently need the income or are focused on appreciation); others won’t accept less than $200 or more each month per rental unit. (Location 2569)

“When we started out, we decided our basic formula was to put down 20 percent cash, buy at least 10 percent below market value, and cash flow of a minimum of $200 a month after taxes, insurance, principal and interest, and property management fees. And it had to do that on a 15-year payout.” (Location 2580)

The Condition of the property is the fourth principal area of your Criteria (see part two of the Criteria Worksheet on the facing page). Answers to the following questions can have a significant impact on your profit or loss: Figure 36     1. How much cash will you need to make any repairs?     2. How long will it take to put the property in rentable or sellable condition?     3. For big projects, how much risk is involved? Ideally, you want to find a discounted property that needs no repair, but that is quite rare. Generally, discounts come from fixing other people’s problems. The seller doesn’t have the cash, the time, or the inclination to handle the repairs himself or herself and then put the property up for sale at a higher asking price. That’s where the investor comes in. While we’ll discuss this in detail in the section on the Acquisition Model, a general rule is that the more repairs a property requires, the greater the discount is. Major cosmetic repairs such as updating kitchens, bathrooms, and appliances can net investors big returns if they are willing to tackle them. Structural repairs such as fixing a bad foundation bring the biggest discounts but also entail risk. When you start moving or adding walls, there are often unpleasant discoveries (finding dated or dangerous wiring) or collateral damage (broken pipes) that will cost you time and profits. We recommend that beginning investors start with properties that will require only minor repairs unless they have significant construction experience. (Location 2584)

The fifth principal area of your Criteria is Construction. This is an important consideration for real estate investors because a property’s construction often has a big impact on maintenance and expenses. Roofs have to be replaced, siding has to be repaired, and septic tanks need periodic treatment. These are all costs that will affect net cash flow if you plan to hold the property or your selling price if potential buyers are sensitive to these issues. Millionaire Real Estate Investors Jimmy and Linda McKissack only buy homes with brick exteriors because they knows that that’s what people in their Denton, Texas, market want. They also understand that solid construction is more affordable to maintain over time. Features and Amenities are the final principal areas of your Criteria. Features include such basics as the number of stories, bedrooms, bathrooms, and living areas a property has. Consider important features in your target area to be prerequisites for any property you purchase. If all the properties in your target location have two-car garages, your properties should too. Anything less and you’ll probably have to discount the rent or price. Amenities are the unexpected extras a property may have. You may not include any of them in your Criteria, but you should always bear them in mind. A property that’s missing a key feature may still be worthwhile if the amenities offset this deficit. For example, the two-car garage may have been converted to an extra bedroom that might be just as attractive to a prospective renter or buyer. Think of features as your minimums and amenities as your maximums. (Location 2606)

Your All Properties Bulletin Your completed Criteria Worksheet has a second and equally important function beyond building your Criteria. Once completed, the form provides a template for your All Properties Bulletin (APB). Your APB is a script. It’s the basic description of the real estate investment for which you’ll be prospecting and marketing (lead generating). For example, if you pulled out only the categories you completed, your APB might go something like this: “I need your help. I’m looking for two-bedroom, two-bathroom duplexes priced between $125,000 and $150,000. Ideally, I’d like them to be close to downtown off Opportunity Square or on the main bus line in Overlook Hills. I don’t mind some cosmetic repairs, but nothing serious. I prefer brick construction if possible, and it would be great if there was a privacy fence. Please let me know if you see any properties that meet that description.” (Location 2627)

QUESTION 2: WHO CAN HELP ME FIND IT? Now that you know what you want, it’s time to take the logical next step in the Lead Generation Model of the Millionaire Real Estate Investor: It’s time to identify the people who can connect you to the properties that meet your Criteria. The chart below illustrates how the process works. This section of the Lead Generation Model is about the who of lead generating for investment opportunities. (Location 2645)

You can divide the people you may want to contact to generate leads for real estate investment properties into three distinct groups: Owners, Intermediaries, and members of your Leads Network. Millionaires sometimes call them sellers, gatekeepers, and referrers. Together, these three groups represent all the people who can connect you to investment real estate. Chosen specifically on the basis of who they are or what they do professionally, they can represent the exact group you will want to lead-generate to when looking for properties that meet your Criteria. (Location 2657)

Prospecting is about seeking opportunity. It’s the process of personally calling and contacting targeted people you Haven’t Met or people in your Leads Network to share your Criteria and ask for investment leads. You’re sharing your APB and asking if anyone has seen properties that match it. It’s also the process of researching neighborhoods, papers, the Internet, and public databases for properties. But whether you’re calling people, meeting them face to face, or researching alone, the challenge is that prospecting is always limited by the hours you can give it. This is why Millionaires utilize marketing in their lead generation. (Location 2698)

It’s important to remember that two fundamental forces—economic and personal—are constantly at work creating great real estate investment opportunities. Economic forces tend to affect the market as a whole. These forces include factors such as changing interest rates, job growth or recession, overbuilding or undersupply, and area revitalization. Personal forces are very specific to the owner and the property the owner represents. Personal forces, both positive and negative, include relocations, marriage or divorce, bankruptcy or good fortune, and even death or family growth. Millionaire Real Estate Investors never focus on only one but instead lead-generate for both properties that meet their criteria and sellers who are motivated to sell. Here’s how this plays out with your prospecting and marketing. With prospecting you tend to be referred to or find properties that match your Criteria. The next step is to locate the seller and see if he or she is motivated to sell at your terms. Marketing tends to work in the opposite direction—it tends to attract motivated sellers. The next necessary step for the investor is to inspect the seller’s property to see if it matches his or her Criteria. It may sound oversimplified, but you generally will be prospecting for properties and marketing for motivated sellers. (Location 2707)

When we surveyed our Millionaire Real Estate Investors, we asked for the top five ways they found real estate opportunities. The results are displayed in Figure 40, below. Clearly, these successful investors relied on their Leads Networks to send them opportunities. They built their Leads Networks purposefully and prospected and marketed to them relentlessly. You’ll notice that we chose to break out real estate agents even though they are actually one of the groups of people you’ll be Networking with (the number one category). They simply constituted too large a subset of this category to remain anonymous. Together, the two categories—networking and working with real estate agents—account for as much as 60 percent of the lead generation results our Millionaire Real Estate Investors achieved. When you add in driving or walking in neighborhoods, culling leads from the newspapers or running ads in them, and tracking foreclosure properties, you approach 86 percent of all leads being generated by just five sources. These are the five we suggest you focus on. (Location 2721)

Build a Database and Work It The engine that drives all successful long-term lead generation programs is a contact database. The contacts in it are the fuel. Your job as the investor is to fuel the engine (put contacts in the database) and drive your lead generation program forward. The interesting thing is that the quality of your results is more a matter of the quality of your fuel (contacts) than a product of your driving skill (prospecting and marketing ability). What goes in has a direct effect on what comes out. The chart below, “The Lead Generation Database Model,” explains how you can use your database to generate leads. Your database will be built from two groups—people you Haven’t Met and people you have Met. If you haven’t met them, they are targeted sellers who live in a geographic area in which you’d like to own property or are a particular type of seller who may need to sell (FSBOs, expireds, absentees, landlords, builders, etc). You will record their contact information in your database and then categorize them for easy reference (e.g., “Local Absentee Owner Mailing List” or “Multiple Property Owner Mailing List”). Once they are in the database, you can contact them (prospect and market) with appropriate messages to encourage them to consider calling you when they are ready to sell. If you have met these individuals, you record them in your database and categorize them in your Work Network, your Leads Network, or both. Then, as with your Haven’t Met group, you will prospect and market to them with appropriate messages to encourage them to consider contacting you if they know of a property or a seller who might constitute an investment opportunity. (Location 2730)

Your database doesn’t have to be an expensive software package. The vast majority of our Millionaire Real Estate Investors used Microsoft Outlook as their primary database. They used this simple, ubiquitous program to its fullest extent, adding detailed notes to their contacts and creating categories (both are basic functions of the program) to keep records of previous interactions and prioritize their contacts. Just under 10 percent of the investors we surveyed used more than one database. In almost every case they used Outlook to build their databases and later, as their investing grew, incorporated one of the powerful specialized contact management programs to help them track their prospecting and marketing efforts. The graph in the chart below details the databases our investors used. (Location 2765)

You’ll also be building your reputation by the way you respond to their referrals. You want to be known as an investor who respects the referrer by being decisive and prepared and who, when appropriate, rewards the referrer. When someone sends you a lead that matches your Criteria, show your gratitude. This can be as simple as a handwritten note or a small gift or as substantive as a finder’s fee or a piece of the action. Always remember that these individuals are moving you along the path to financial wealth, and you should not look a gift horse in the mouth. Be grateful and express that gratitude in no uncertain terms. You also have to be decisive and prepared. When you are handed an opportunity that matches your Criteria, you need to be mentally and financially prepared to leap into action. There is no better way to discourage referrers than to sit on or squander the leads they give you. Build a reputation as an investor who rewards leads and is great to work with. (Location 2782)

In the world of real estate investing marketing is all about attracting motivated sellers. It’s a game of problems and solutions. Like the “We Buy Ugly Homes” billboards, you want your marketing to announce to the world that you’re an investor and are prepared to solve someone’s problem. People have situations that sometimes translate into a need to sell their property and sell it quickly. Maybe the property was inherited and needs more repairs than the owner wants to deal with. Maybe the owner’s job or family situation has changed and he needs to move quickly to a larger or smaller home. The owner’s problem could arise from a positive circumstance such as a new job opportunity in another town or a negative circumstance such as a company going out of business that has left her short on cash. Regardless of the circumstances, you must realize that you are not the cause of those situations. You are not the problem. You do, however, represent a possible solution if the seller is willing and able to meet your Terms. (Location 2840)

You want to help, but you’re an investor, and by definition your goal is to remove risk from the transaction. You have to get an appropriate discount or Terms on the property, or you can’t do the deal. I even encourage you to let the seller know you’re an investor and do not plan to live in the property. It’s an investment, and although you’d love to help out, it must meet your strict Criteria and Terms. The rest is up to the seller. You have plenty to offer in this type of situation: you’re a willing and reliable buyer who is prepared to act quickly and solve the problem. The solution you offer may not be exactly what the seller wants, but it may be the best option he or she has. (Location 2856)

A few obtained courthouse or publicly available lists of out-of-town property owners, local landlords, and even, in one case, minority owners in companies that held real estate. However, no matter which approach was used, these groups were all sent carefully tailored messages designed to announce a solution to their potential problems and attract motivated sellers. For example, out-of-town homeowners were sent messages that highlighted the problems of managing a property long-distance, such as screening renters, managing maintenance contractors, and dealing with routine upkeep. All those things can present challenges to out-of-town owners. If your marketing represents you as someone who can solve this problem, maybe two or three out of every hundred people you mail to will inquire about your Terms. That’s when the opportunity to make a deal shows up. (Location 2864)

You buy properties. pay cash, and can close quickly. These are the three things someone with a property problem hopes to find—a quick cash solution to his or her troubles. By the way, when investors advertise that they pay cash, they aren’t talking about a suitcase of money. They mean that they have set up lines of credit and quick private financing so that in a matter of days or even hours they can have a cashier’s check ready for closing. That’s what they mean when they say they will pay cash for properties. It’s about how quickly you can supply “good as cash” funds to pay for a property. (Location 2870)

Investors live for the hunt, the thrill of the chase. They are as attached to the process of searching for investment opportunities as they are to the act of buying them. They are shoppers, not buyers. In our interviews with Millionaire Real Estate Investors, the way they talked about their investments made this very clear. They were as proud of the effort they made in finding a deal and making it happen as they were of the profit they made. These investors understand that being a shopper instead of a buyer yields two significant advantages. First, they get to enjoy the part of investing they do the most—the ongoing quest for great opportunities. Investing is cyclic. There are times of plenty and times of scarcity, but because they are shoppers, abundance never leads to recklessness and scarcity never leads to impatience. That leads to the second great advantage of this posture: It protects them. These investors never feel the urge to compromise their standards. (Location 2916)

They treat every potential deal with a healthy dose of skepticism. They see properties first as suspects, and only after a thorough examination will they consider them prospects. It’s the qualification process. The property must meet their Criteria, and the seller must meet their Terms. Nothing else will do. They believe it is as great a day when they say no as it is when they say yes. While a buyer never leaves the store empty-handed, a shopper will do so happily. Shoppers understand that it is far better to lose a good one than buy a bad one. Most people think buying is investing, but they’re wrong. Buying doesn’t make you an investor any more than buying groceries makes you a chef. Making decisions on the basis of sound investment Criteria and Terms makes you an investor. (Location 2925)

Law 3: Timing Matters—Be the First or Last Person to Make an Offer An essential component of finding a seller who will meet your Terms is timing. If at all possible, you want to try to represent the seller’s first or last chance to sell. You’re looking for the advantage of an uncompetitive environment. When other investors are vying for the same property, the very nature of competitive offers can make it difficult to achieve your Terms. (Location 2934)

For every 30 properties they found that met their basic Criteria and were worth investigating (suspects), about 10 warranted serious investigation (prospects). Of those 10, only about 3 were worth making an offer on. And because their Terms were as strict as their Criteria, only one of those offers turned into a done deal. Call it the “30:10:3:1 lead generation ratio” for experienced investors. Figure 50 Beginning investors probably will have to look at three to five times as many properties (90 to 150) to find legitimate prospects. Why so many? Millionaire investor George Meidhof says that it’s about “developing the knowledge you need to make good decisions.” Your Criteria are developed and refined through the process of looking at properties—lots of them—that meet your basic standards. Over time, your sense of what constitutes a great opportunity becomes more precise and the numbers start to turn in your favor. With clear Criteria your marketing and prospecting will yield increasingly qualified leads. Whatever your personal lead generation ratio is, one thing is certain: Lead generation for real estate investments is a numbers game. If you cast a wide net, your chances of netting a winner will improve. (Location 2953)

How do millionaires make money? It’s simple: They make their money going in. By following the Acquisition Model and buying right, they virtually guarantee the success of their investments. That is what you want to do: You want to learn to follow the Acquisition Model of the Millionaire Real Estate Investor. If you can purchase property with enough profit built in, you will have ensured, at the time you buy, that your investments will make you money. This is important because once you begin to make real estate acquisitions, your performance will be recorded permanently and forever—no replays or do-overs. If you stick to the Acquisition Model, you won’t need any. (Location 2996)

If you have been persistent in your efforts, you can be more confident in investing your money; your patience will have paid off. Many would-be investors do not get this. They are so eager to be real estate investors that they just hop in and buy something. They attempt acquisitions before they know enough to buy wisely or safely. They put their money in play too soon and put themselves at risk. (Location 3001)

The last and possibly best way to build cash flow and equity is to Buy, Improve, & Hold. This looks just like Buy & Hold, but because improvements must or can be made, there is an opportunity for an additional upside in terms of higher rents and better equity buildup. Some improvements will be physical, in the sense that you repair the property or add features or amenities. You can also improve it through zoning or use (such as converting residential zoning to commercial or apartments to condos). Because some of your physical improvements may be classified as capital improvements by the IRS, they may effectively reduce the taxes you pay on the cash flow you earn from the property. (Location 3081)

And if you are going to Buy, Improve, & Sell, there are even more numbers you need to know and understand. Your numbers have to be accurate going in. You are making a series of predictions, all of which have to turn out pretty much as forecast for the deal to be a success. You better be right or you better have built in a serious margin for error. The Terms Worksheet for the Buy & Sell (on the next page) allows you to do this in as systematic a way as possible. It is your checklist for making a good investment: Each transaction is unique, and you will have to deal with its quirks on a very short-term basis. With Buy & Sell you need the ability to assess the situation as it unfolds and respond quickly to the contingencies. (Location 3100)

“Based on my experience of working with hundreds of real estate investors across the nation, my advice about the Buy, Improve & Sell strategy is: One, stick to your buying Criteria—resist the pressure to buy an overpriced property especially when you’ve gone a very long time without buying something. Two, don’t underestimate the repair cost. If they’ve shot themselves in the foot because they bought it too high, many investors will drive the final nail in the coffin by wrongly assuming that “it just needs paint and carpet.’” (Location 3132)

It is now time to avoid over-improving the property and put it on the resale market fast, cash in on your profit margin, and move on to the next investment. “Beginners often make the mistake of fixing a property as though they were going to move into it. That’s the wrong way to do it.” (Location 3178)

Buy & Hold is just as much a numbers game as Buy & Sell is, but you’re letting the results happen over a longer, more predictable period of time. Doing it right at the beginning—making your money going in—is just as critical here, and there is a process to follow to help make this happen: a preinvestment checklist. We call it the Term Worksheet: Buy & Hold (see the chart on the next page). Just as with Buy & Sell, there is a purchase terms section and an operating terms section. The four subsections of the operating terms guide you in estimating and calculating the numbers that will be placed in the purchase terms section. This will determine what you can offer for the property and what you will accept. Once again, these terms are financial, and you must become a master of the financial terms that make a real estate investment work. For openers, you must have an accurate figure for the current market value of the property as well as some well-supported evidence that home price appreciation will continue for that price range in that area. Next, you must establish your Discount/Profit Margin up front. This is your basic foundation for “buy it right.” The margin we recommend is at least 20 percent, more if you can get it. Just as with Buy & Sell, for investments over about $150,000, you’ll want to pick a dollar amount ($20,000 to $25,000 is the typical range) since this percentage will be hard to attain in middle and high-end properties. Purchasing the property with this margin gives you security and often means that you will achieve positive net cash flow from the very beginning. (Location 3201)

You will have to determine the current monthly rental rates in your local area for the type of property you are considering. That’s what you put on the line for Gross Rental Income. While many longtime investors use a 1 percent rule of thumb (you will get as your monthly rent an amount equal to 1 percent of the property’s market value), if you must guess, we recommend a more conservative ratio of 0.8 percent. Instead of counting on a $100,000 home to rent for $1,000 per month, you conservatively use $800 for your rental estimation. (Location 3227)

Having established your best projection for Gross Rental Income, you must allow for vacancies: times when the property is unoccupied and you are not receiving rental income. We have used 6 to 8 percent (or about three to four weeks annually) as a Vacancy factor in our model, but you will have to determine this locally and take into account current rental market conditions. When you subtract your Vacancy factor from the Gross Rental Income, you have your Net Rental Income. From that you will subtract all your Expenses (your monthly operating costs), which will leave you with your Net Operating Income (NOI). (Location 3236)

With your Net Operating Income and Principal and Interest subworksheets completed, you’re now able to plug in the final pieces of your purchase terms at the top. This is where you are considering four things at once: the best purchase price, what kind of loan to use, how the seller might provide additional help with the financing, and whether you want to do this deal. If the Terms Worksheet shows you that the numbers will work with conventional (15-year or 30-year) financing, you will be willing to make an offer. If the seller is unwilling to meet these terms or if you need additional, low-cost owner financing to make it work and the seller is not willing to do that, you will not be able to accept the deal. With your options exhausted, you will, with no attachment to this property, move on in your Criteria-based lead generation. If the seller agrees to what you have offered (based on your thorough analysis of the numbers on the Terms Worksheet), you have a deal and will make the investment. (Location 3261)

All that remains is to get into action—informed, purposeful action. There are two very practical steps to take—first, to understand value, and second, to get perspective—before you explore your acquisition strategies. By that we mean you must study your target marketplace and know the prices for properties that meet your criteria and know the trends of those prices. Is the market appreciating? At what rate? What makes you think it will continue to appreciate? What are the economic and demographic forces driving the prices both in the area and in specific neighborhoods? In addition, you will need to study rental rates. What are the expected rental rates for the properties that meet your criteria? Are they going up, going down, or staying flat? What has been the trend over time, and what is predicted? What are renters looking for that might allow for higher rental rates? Figure 60 As you look at more and more properties, check what they are selling for, and learn what rental rates they are getting, you will build confidence as an investor and be able to calculate the numbers you will put in your terms worksheets accurately. This will empower you to identify the best investment opportunities, make intelligent offers, and “buy it right” when you acquire a property. You eventually will become a value expert for your type of investment properties in your targeted areas. The second step is to get perspective on where you are on your path as an investor. You will have three choices for your primary short-term strategy: Buy & Live, Buy & Sell, and Buy & Hold. If you are just beginning and have little or no capital to invest, your best bet is Buy & Live. This means you will treat your own residence as an investment. You will buy it like an investment with the added advantage of being able to get the kinds of financing and minimum down payments that are available to owner-occupant buyers. You can add your own sweat equity while you are living in the house and thereby increase its value. In the future you can move on to another residence (also purchased using an investor mindset) and sell the first one for a profit or hold it for equity buildup and cash flow. Many investors have used this financially sound strategy of buying, living, moving, and holding. (Location 3341)

2 In Appendix A we’ve provided a full-size form as well as a worksheet for completing it. Look for downloadable forms on www.KellerINK.com. 3 A full-size version of the Sample Personal Budget Worksheet and subworksheets for various line items are provided in Appendix A. 4 In Appendix B we’ve provided a full-sized blank form. Look for downloadable worksheets on www.KellerINK.com. (Location 3432)

Dealing with complexity is an inefficient and unnecessary waste of time, attention and mental energy. There is never any justification for things being complex when they could be simple. (Location 3470)

But let me be very clear about one thing. You already have covered everything you need to know to become a net worth Millionaire Real Estate Investor with a million dollars in equity in your investments. It’s all in the Financial Model, the Lead Generation Model, and the Acquisition Model. If you follow those models, you won’t go wrong and inevitably will become an Own a Million real estate investor. Here you will be shifting your focus to a Buy & Hold investment strategy. (Location 3492)

THE SEVENTEEN ISSUES OF OWN A MILLION With that wisdom in hand, let’s focus on the 17 issues you are likely to encounter in the Own a Million stage of your financial wealth-building journey. They fall in to five principal areas: Criteria, Terms, Network, Money, and You. Figure 2 (Location 3515)

ISSUE 1: STICK OR SWITCH Once you’ve begun to acquire good, basic residential real estate investments, don’t let your need for greed, speed, or novelty take you off track. Don’t cash out too quickly even if you’d like to have the money right now. Don’t begin to take risks because someone says you can get rich faster with other kinds of investments. Don’t change your Criteria simply because you’re bored with looking at the same kinds of opportunities and deals again and again. Repetition is the mother of mastery—and of skill. When you connect to the results you are achieving the activities you are repeating, you’ll get excited about the activities. The power is in the repetition. Here’s the basic wisdom: Pick a niche to get rich. Learn the niche, master the niche, and eventually own the niche. Stick to it and maximize your financial growth from it. Your Criteria will define your niche: It may be geographic, or a type of property. It usually will be focused on a price range and the condition of the property. It also may involve a type of financing or a particular clientele of renters. Once you have that niche and you’re getting good results, stick with it; ride it for all it’s worth. (Location 3526)

You already know that you must be able to determine market values and rental values accurately. In your target area you will track these two factors continuously and be able to apply them to any particular property. But you also will want to follow the local trends that affect those values. You will keep track of business growth, new construction, zoning changes, highway construction, recreational development, and any other factors that might indicate increased population, employment, and housing demand. Millionaire Real Estate Investors are students and observers. That is how they become confident about predicting average time on the market for property sales, future home sale prices, vacancy rates, and the likelihood of continued price and rent appreciation. When they factor appreciation into their acquisition evaluations, they aren’t guessing or being hopeful. They know because they take the time and make the effort to become experts in that type of property, in that price range, in that kind of condition, in that location. They know their Criteria in great detail, and they do enough research to know whether a property is worth pursuing or a deal worth doing. Many of them even keep their own databases of real estate activities, listings, rents, and recent closings. (Location 3552)

I have come to see learning as having four stages: understanding, knowledge, wisdom, and power. Understanding means you are aware of something; you get it mentally. Knowledge means you have studied it and see how you could do it. Wisdom means you have experienced it and know how it works. Power means it has become a part of you and you do it habitually. You are now unconsciously competent. There is no difference between you and what you know. It is reflexive; you act on it virtually without thinking about it. You make it look simple. (Location 3566)

Asking and Listening It’s not just the formal or institutional sources of information that matter. It’s the locals at the café and the retirees shooting the breeze on the porch. There’s a wealth of useful local information that comes from the spittin’ and whittlin’ and the neighborhood gossip. Don’t overlook it, underestimate it, or prejudge it. You want access to that kind of unpublished insider information. It can give you an advantage in finding hidden opportunities, avoiding unknown dangers, and negotiating from strength. What these people know can make you wealthy. Locals know who may need to sell and why (death, divorce, lost jobs, family changes, etc.). They know the history of a property and its neighborhood (fires, floods, repairs, crime, etc.). They may know people who would like to rent the property, help you maintain it, and even keep an eye on it for you. Remember that all real estate is local. It is tied to the community and what is happening in the community. The principles for real estate investing may be universal, but the conditions are always local. You must know your niche intellectually, experientially, and socially. Your knowledge, your experience, and your relationships are what can make you a financially wealthy expert. (Location 3578)

If all you owned were single-family houses, you would have one management unit for each rental unit. But when you acquire a duplex, you now have two rental units in one management unit. In a fourplex you have four rentals in one management unit, and in an apartment building there can be many rentals within just one management unit. This trend toward multiunit properties makes sense for at least two reasons: simplicity of management and limitation of losses. (Location 3594)

Since each building will require both property management and leasing services, it is usually easier and more efficient to have fewer of them. Handling one large apartment building with a hundred rental units is easier than managing and leasing a hundred separate single-family houses. Thus, consolidating management costs can increase the profitability (net cash flow) of the investment. The second reason for doing this is that it can limit potential losses on individual management units. If you have one vacant apartment in a 20-unit building, you are still receiving 95 percent of your rental income from that property. You’re unlikely to go into default on your debt service, and you probably still will have positive cash flow. When your single-family rental house is vacant, you don’t have any income from that property, and that presents a big problem for that management unit. If you own 20 single-family homes, your total income loss is the same (just 5 percent) as it is in the 20-unit building, but you may incur more hassle and paperwork as you move cash flow from other properties to protect your vacant home, especially if you’ve got your homes separated into different legal entities. (Location 3598)

Multiunit properties also can increase your ratio of rents to value. This means that you are receiving more monthly income for each dollar’s worth of market value of the property. You can see this easily with a duplex, triplex, or fourplex. In most areas, based on our research, you will be able to get between 0.7 percent and 1 percent of the property’s value as a monthly rent. In our Acquisition Model we recommended using 0.8 percent. As you’ll recall, this means that if the property has a market value of $100,000, you can expect to rent it for $800 per month. Typically, you will find that the rental income from a duplex (with two rental units) is greater. It won’t be double, but it is usually 25 to 50 percent more. Thus, if the $100,000 property is a duplex, you may have two units that each rent for $600, thereby getting you a total of $1,200 per month (1.2 percent). The downside of large multifamily buildings is that they may not get the same level of appreciation in value that is possible for single-family properties. Also, there is a more limited market for those who will or can buy them. If you sell, it will be to other investors, and they will base their offers strictly on your cash flow numbers. No emotional… (Location 3610)

As you acquire and operate your income properties, you now know where to focus your efforts to improve your Terms. Depending on whether your current goals concern maximizing the cash flow from your properties or the ROI of your investments, let these numbers direct your focus. If you want increased cash flow, do these three things:     1. Get higher rents, for a 62% increase over the standard model.     2. Reduce expenses, for a 41% increase over the standard model.     3. Invest in areas where rents are appreciating, for a 37% increase over the standard model. If your goal is to maximize ROI, do these three things:     1. Invest in areas where values are appreciating, for a 53% increase over the standard model.     2. Get higher rents, for a 18% increase over the standard model.     3. Reduce expenses, for a 12% increase over the standard model. Investing in areas with strong rent or value appreciation is really about Criteria. The two areas impacted by Terms that have a strong impact on both cash flow and ROI are higher rents and reduced expenses (see the chart below). (Location 3656)

ISSUE 4: CONTROL THE PROPERTY AND NEGOTIATE EVERYTHING In real estate, as in almost everything in life, the advantage goes to the one in control. Putting a property under contract even before all the details are worked out gets you into the driver’s seat. And that’s where you need to be. When you find an opportunity that looks good, always think about quickly getting it under contract. The contract gives you control and will always have clauses that allow you to exit the deal if your due diligence (inspections, conveyances, zoning research, etc.) shows that you need to get out. In some cases you might need to invest in an option or a nonrefundable deposit, but this may be a small consideration in return for the advantage of controlling the sale. If you determine that you do not want the property, you can still sell and assign your contract to another investor and be paid for it. Figure 7 Here is some advice from our Millionaire Real Estate Investors: Negotiate everything and anything. You do this when you make your initial offer and later with counteroffers. Of course, you will be sure to get your price with your discount, but in many ways that is only the beginning. Look at the property and see what could be conveyed with the sale. Valuable conveyances might include the washer and dryer, the drapes or blinds, the gas grill, some of the furniture. When appropriate, ask for needed repairs or for the seller to cover part or all of your closing costs. You never know what you can get until you ask. Think outside the box; think outside the house! (Location 3674)

The key is to find out what is important to the sellers. Offer them what they want and then ask for what you want. If it doesn’t work, it doesn’t work. Find out what will. Great negotiators are great investigators. They know that every transaction needs to be a win-win. You need to make it a win for you for sure, but also look for the best way to make it a win for the other party. Always be curious; always ask. Find out what is important to the seller and know what is important to you. Negotiate everything and anything. (Location 3696)

Creative financing is the way around these binds. It also can help you get into properties with less of your own money used as a down payment and lower your monthly debt service. Thus, you will want to master such concepts as:     1. Owner financing—where the seller carries the mortgage for you.     2. Assumptions—taking responsibility for the seller’s mortgage when this is allowed by the seller’s mortgage lender.     3. Wraps—where the owner offers you a new loan while keeping and paying down their original loan (the new loan “wraps” the original).     4. Lease options—Leasing the property from the seller until you have the equity or cash to buy it.     5. Private seconds—where you obtain a second loan to cover your down payment on a primary mortgage loan.     6. Syndications—where you involve other investors and partners in your acquisitions. Millionaire investors use all the tools in their toolbox to get the deal done. The chart on the facing page illustrates how the numbers might work in a scenario where the investor attempts to take ownership of a $100,000 property through creative financing. You’ll note that conventional financing (column 1) is included as a point of reference for these creative variations. (Location 3711)

Your ability to borrow the money will go through three stages: Credit, Equity, and Cash Flow. At first lenders will look to your creditworthiness as reflected in your credit score. Therefore, having little or no credit card debt, paying your bills on time, and having a history of paying back loans (mortgage, auto, student, etc.) in a timely, responsible way will contribute to a strong credit rating. It also matters that you have some savings available for down payments. (Location 3728)

At some point you will need credibility as well as a credit rating. The lender will need to see that you have made wise investments. The first measure of this will be your equity position in the properties you own. Sometimes you can access this money by getting a home equity loan and using it to make your down payment. In fact, you may become your own “lender of choice”—The interest rate is right, the approvals are easy, and you have all the control. (Location 3733)

Finally, particularly for larger multifamily acquisitions, the amount of the loan will be based strictly on the Cash Flow of the property. An institutional lender will require a detailed analysis based on recent and verifiable financial reports of the rental income, expenses, vacancies, and net cash flow of the property. Those lenders are looking to minimize their risks, and so they will be very cautious when considering a large loan on an income property. Your track record and reputation will be as important as the specific numbers on the building. At this stage of your investing you are likely to be the major factor in people’s willingness to lend you money. (Location 3741)

there are three things you can do to maximize your Net Operating Income: increase gross rental income, control expenses, and minimize vacancies. (Location 3751)

Our millionaire investors consistently achieved higher-than-average rents. How do they do that? As a group they do five specific things to maximize rents (see illustration below.) First, they used rent escalators in their contracts so that the rent would increase year by year without question, negotiation, or notice. It would happen automatically, and the renters would know that they had preagreed to it; thus, it didn’t feel arbitrary. While this preset rent increase might not keep up with the actual rental trends, it at least meant that there was some increase even when the same renters were in place for a long time. Figure 12 Second, they made the kinds of improvements that were attractive to local renters and made their properties stand out. What they discovered was that within reason people will pay more if they believe they are getting more. Cosmetic improvements and certain amenities can make your rentals uniquely better than the competitions’s and bring more gross income. Remember from our earlier discussion that raising rents even a few tenths of a percent can have a big positive impact on your net cash flow and returns. “I put automatic 10% rent increases in the contract. Then at the first of the year, when I say the increase won’t actually be that high, the tenants are ecstatic because they think I’ve saved them some money.” Anna Mills Millionaire Real Estate Investor Toledo, OH Third, some of our investors specialized in government-subsidized housing called Section 8 subsidies. They knew which houses in which areas would qualify for the subsidies, and that allowed them to market this advantage and achieve premium rents. Their net positive cash flow became virtually automatic. (Location 3759)

The fourth method for increasing revenue was to gain other income from the tenants. Coin-operated laundry and fees for pets, storage, parking, and lawn care could all be additional sources of income. It was highly recommended to have the tenants take care of all their own utilities, with direct, personal responsibility for payment to the utility providers. Control Expenses Controlling operating expenses is a great way to increase your NOI and is only a matter of record keeping and attention to details. Many investors we interviewed set up well-organized systems of bookkeeping and cost accounting. Several set up their own property management businesses. Whether you do it yourself or have a management service do it for you, it is important to watch your expense trends and question anything that seems out of line. Rob Harrington from Boston says that he compares his costs sheets from month to month, notes the trends, and looks for unusual changes. Over the years he has discovered water leaks and faulty electrical units that if let go for a long enough period of time could have cost him hundreds and even thousands of dollars. If you have the right record-keeping system in place and set aside a regular time slot each month to do your review, he says, this will not take very much time and you will be paid well for doing it. Expenses saved are profits earned. (Location 3779)

equation. There are three moments of truth for improvements:     1. After you buy but before you rent     2. While you own and operate     3. Before you sell Repairs and improvements involve making cost-benefit calculations. The right improvements may allow you to get higher rents and a better price when you sell. The wrong improvements may accomplish neither. The right improvements may represent a great use of your cash flow. The wrong ones may not. Improvements are a tax-deductible expense, and the right ones can add value to your property, thereby increasing equity. The wrong ones are just deductions. There are four kinds of improvements:     1. Improvements that are necessary and add value, such as a new roof or flooring     2. Improvements that are unnecessary but add value, such as landscaping and cosmetic enhancements     3. Improvements that are necessary but don’t add value, such as plumbing repair, rewiring to code, and foundation work 4. Improvements that are unnecessary and don’t add value, such as adding expensive fixtures or amenities (Location 3792)

Reducing vacancies and the time it takes to rerent the property are also important ways to improve net operating income. The key is to anticipate vacancies and have a game plan to market the properties to new tenants. Get ahead of your vacancies—not behind them. When a unit goes vacant, be ready to rehab, clean, prep, and market it quickly. (Note: The more units you own, the more cost-effective it becomes to have staff or service providers perform this service for you.) While it may seem obvious that keeping your tenants for a long time reduces vacancies and is a good thing, Rob Harrington says that many landlords are so eager to raise rents that they may alienate good tenants. “Remember,” he points out, “it may take you a very long time, even at a higher rent, to make up for the lost income from a vacancy.” (Location 3807)

Millionaire Real Estate Investor Cathy Manchester took advantage of her strong equity position in a high-end vacation rental to use it as a “$250,000 equity line of credit.” She taps into this amazing cash resource regularly for short-term Buy, Improve & Sell investments and then quickly puts the money back into her home. (Location 3821)

Here are the four things you should do in your network as you grow your financial wealth:     1. Make associating with talent your number one priority.     2. Top-grade for ever-increasing leverage.     3. Always work from written proposals and contracts.     4. Protect your reputation and operate with confidence. (Location 3848)

Determine people’s natural behavior by asking behavior-based questions. Actually, if I’m hiring someone, I always use a behavioral assessment. The DISC test, for example, is a proven low-cost assessment that is widely available on the Internet. It can be taken online, with a report sent to you. An assessment will help you understand what people are good at and how they tend to act. (Location 3871)

Next, always check references and do second- and third-level reference checks. In other words, I ask each of the provided references who else I might talk with who could give me insight into this person. For example, the reference may know a neighbor who also used the contractor in question. When I am two or three levels away from the direct references, I usually get the whole picture: the person’s weaknesses as well as their strengths. Finally, probe for the track record from that person and from independent sources. I have found that a person usually continues to operate in the way he or she has before, with similar results. This is particularly true with important things such as attitude, work ethic, integrity and quality of work. Get to know people; make it your business. (Location 3881)

simply create understanding and agreement. In fact, they do much more: They also provide for misunderstanding and disagreement. Contracts outline not only what will happen and who will do what but also what will happen if they don’t. Good contracts provide for clear and straightforward consequences for default or breach and for a prescribed manner of dispute resolution (mediation and arbitration). In a sense, good written contracts cover contingencies so that if worse comes to worst, all parties know in advance what will happen. For me, contracts are agreements for disagreement. When everyone is in agreement, no one looks at the contract. It’s only when there is disagreement that it gets pulled out and gone over with a fine-tooth comb. As a rule, write agreements to resolve any possible disagreements as agreeably as possible. Do everything in writing. Get your bids in writing, get your proposals in writing, and work from written work orders and job descriptions. Even when it is not a purchase or sale of a property, any agreement you make with someone to do something for you or for you to do something for another person should be in writing. The costs, the fees, the specs, the plans, the options, the deadlines, the penalties, and the method for dispute resolution should all be there, in writing and signed by all parties. It’s a pay me now or pay me later deal. You do the tough negotiating and agreement reaching up front or pay with misunderstanding and contention later. I encourage you to be tough up front and get it in writing every time. (Location 3917)

Throughout your investing career, you want to be sure that your money is healthy or wealthy. I call this the Wise Money Rule: For me to be financially wealthy, my money must at least be healthy. After many years of business and investment experience, I’ve come to understand that there are four conditions of money: dead, safe, healthy, and wealthy. I began to understand this in my breakfasts with Michael. Whenever I would show him the money I had in the bank, he would say, “That’s just dead money, Gary; you can’t become financially independent with dead money.” He taught me that my money needed to be alive and working for me. How much additional money it was returning to me each year was crucially important. That was my return on investment, my ROI, and it was something I needed to measure and hold my invested money accountable for. Over the years, as I’ve become more financially educated, I came to define the four conditions in the following way:     1. Dead: money that earns interest below the inflation rate     2. Safe: money that earns interest at or just above the inflation rate     3. Healthy: money that earns interest that is well above the inflation rate     4. Wealthy: money that earns interest that is above that for healthy money To put this into more specific financial terms, in today’s economic market Dead Money would be earning 4 percent or less, Safe Money would be earning from 5 to 8 percent, Healthy Money would be earning from 9 to 12 percent, and Wealthy Money would be earning above 12 percent. Money earns wages just as people do, and for money to become wealthy, it must be paid high wages. The interest or return your money is earning tells you what it is getting paid as it works for you. Your money is gainfully employed or it isn’t. If it isn’t, it’s unemployed (dead). (Location 3966)

Therefore, in the fifteenth year of this investment your ROE is 11.9 percent. It is still healthy money, and that’s a good thing. However, it’s not working as hard for you as it once was. In fact, your ROE has been dropping since you made the investment. It was 16.7 percent in the first year and has been going down ever since. In the next few years it probably will drop to near 11 percent. What is happening, of course, is that as you increase your equity position in the investment, your rate of return on that equity decreases even though you continue to get appreciation, debt paydown, and cash flow. This phenomenon is what causes Millionaire Real Estate Investors to tap into their accrued equity, pull it out, and reinvest it for greater returns. They want their money, both earned and unearned, to work as hard as possible and get paid as much as it can. Therefore, they continue to leverage that equity back into additional real estate investments, always buying it right with clear Criteria and favorable Terms. (Location 4019)

Fifteen-year loans act more like a forced savings program: You have to make the payments and therefore build equity more quickly. We observed that once they had a solid financial foundation (a good equity position), most of our Millionaire Real Estate Investors tended to favor shorter-term loans. However, they continued to refinance, take out the equity, and add more income properties to their investment portfolios. (Location 4042)

The first step has been to reduce the realized income on which you will pay taxes. The second step is to reduce capital gains taxes: the amount you pay the government when you realize a profit (gain) on the sale of a property. While this profit already is taxed at a rate below most income tax rates, you can delay paying it for a very long time. The two primary ways to do this are through IRAs and 1031 exchanges. You can use your Individual Retirement Account or other tax-deferred saving plans to make and hold your real estate investments. As long as you don’t take the money out of those accounts, you do not have to pay taxes even if you achieve large amounts of equity. You can, if you choose, take that money out later, when you need the income. (Location 4060)

In the end it’s the tax-deferred 1031 exchange that gets massive use by Millionaire Real Estate Investors. This program in the IRS tax code allows you to sell and buy properties without having to declare capital gains or pay those taxes. It’s a very straightforward procedure, but it takes some planning. First, you need to hire a 1031 Qualified Intermediary before you close on the sale of one of your properties. That person will act as your guide and escrow agent as you move through the sale of one property and the purchase of the next. After the sale of your “relinquished property” you have 45 days to identify the “replacement property” and a total of 180 days to close on that second property. You want to be looking for the replacement property before or during the marketing of the property you are selling. If you find a good opportunity, you can enter into a contract with a right to assign clause if your first property does not sell or with a 1031 clause in the purchase agreement if it does. (Location 4073)

Arguably, the most valuable asset anyone has is his or her time, and so it pays to value it, protect it and invest it wisely. In the game of real estate investing at the Own a Million level, this becomes vital. From start to finish the best use of your time will always be in generating leads, looking at real estate and in doing deals. At the Own a Million stage you’ll have two new issues that you would be wise to include on your short list. First, you’ll want to watch your finances with an eye toward maximizing your returns, which was described in the Money section. Second, you’ll be holding others accountable to keep your time free. (Location 4091)

In return for free or reduced rents these model tenants often will manage small multifamily properties on the owner’s behalf. Many single-family investors sidestep the issue through home warranties and lease agreements. For example, they purchase a warranty for their property that covers common repairs with a $50 deductible. They then write into the lease that all repairs are the tenant’s responsibility, along with the deductible. This can be marketed as a win for both the owner and the occupant, since the renter can call for any repairs at any time for a small out-of-pocket cost, while the owner doesn’t have to book repairs around the tenant’s schedule. (Location 4110)

Very early in your investment career you should meet with a qualified lawyer and estate planner with experience in real estate. Your network will be a good source of people to contact and interview. Once you find the right one or two people, ask all your questions, answer theirs, and make decisions. First, you want to make sure that you and your assets are protected from any liabilities that may arise from your ownership or your position as a landlord. This is the right time to be sure you have proper insurance in place. Second, you want to be sure that your estate is handled properly and that you have minimized the tax consequences for your family and heirs. You want to maximize the amount you can give (tax free) while you are alive as well as minimize the tax burdens on your estate. If you get to work on this early, it will inform some of your investment and acquisition decisions. (Location 4123)

Become the master of one approach, not the jack of all approaches or even many. Once you pick your primary investment strategy, learn it and begin to employ it. Don’t switch out of boredom or for the promise of some magical, no-one’s-ever-thought-of-this get-rich-quick scheme. Follow a proven path, use the fundamental models, and learn the ropes for yourself. Let any aggressiveness or sense of urgency drive you first to learn and then to stay tenaciously focused on working your chosen strategy. Master your niche before you ever consider a switch. (Location 4161)

Our goal with Own a Million was to touch on the complexity of investing without getting lost in it. Surprisingly, all this apparent complexity can remain simple if you keep the right perspective. All the complexity you will encounter in the real estate investment game boils down to trying to accomplish four simple things:     1. Getting in for less (little or no down payment)     2. Maximizing cash flow (increasing rents and reducing debt service and expenses)     3. Avoiding taxes (reducing or delaying them)     4. Increasing return on investment (and on equity) (Location 4183)

Your progress through the seven levels is essentially a progression from “I do it” to “We do it” to “They do it.” In the beginning you did everything and essentially paid yourself. As you developed your Work Network, you started contracting with others to leverage your time and profits. The moment your investment business began generating reliable income, those people had the option of bringing in full-time employees to grow it. This is the period when you’ll be working with people inside and outside your organization. (Location 4502)

If you want to be a Millionaire Real Estate Investor, you need a map that will get you there. You need a proven financial track to run on that accomplishes four things:     1. Establishes your financial base camp     2. Protects your future     3. Funds your future     4. Helps you stay the course (Location 4592)

The real key to freedom here lies in putting your payments on a fast path to owning your home free and clear. (Some might disagree with this advice, but as a real estate professional who has seen both sides of this argument, I say do it. Two extra payments a year on a 30-year mortgage pays off your home in 20 years! Do the math.) (Location 4626)

Third, protect your future by insuring it in key areas. You will need adequate disability insurance to protect a minimum lifestyle. You will need adequate life insurance to help support your family and pay any estate taxes. You will need the best affordable health insurance for you and your family. You will need adequate replacement value and liability insurance for your home, car, and personal property. If you get your insurance agent, accountant, and estate planning attorney together, you should be able to figure all this out in about an hour. Finally, create an estate plan. It must include simple but carefully considered entity planning, appropriate trusts and wills, and strategies to minimize or eliminate inheritance taxes and maximize creditor protection. The investment you make early on for the services of an excellent estate planning attorney will in the end make you money. (Location 4628)

School is never out for the successful. (Location 4654)

When an investment opportunity shows up, move quickly to control the property. Simply put, make an offer. Since your real estate contracts will have an evaluation option period, you haven’t committed to buy yet, but you have committed to try to buy. Begin the negotiation process by making an offer whose Terms make the property match your Criteria. Negotiate with the seller with the win-win goal of meeting his or her selling objectives while meeting your Criteria to invest. If you and the seller can agree, you’ve acquired a deal! (Location 4670)

The final stage of building your financial track is to create and sustain energy so that you can stay the course. Don’t worry about the economy or the market. Warren Buffett says he doesn’t. It’s your Criteria that matter, not the conditions that might create their availability. Stick to your plan and invest on the basis of your Criteria. The chart below lays out the specific approach you should take. You will need to devote about 10 hours a week to this wealth-building program. You can do a little each day, or you can do a week’s worth each weekend. The choice is yours. Just stay on course. (Location 4681)

Successful investing and wealth building is a process, not an event. It’s an endurance race, not a quick sprint, and you will need to create and store energy to run it. Burnout lurks behind every property you must go see and every seller you must interview and negotiate with. You cannot afford to let this happen to you. You must guard against weariness and distractions so that you can continue investing and enjoying it. It’s a long haul, and if you don’t stay the course, you will be shortchanging your investment plan and yourself. You’ll need an energy plan to become and remain a millionaire investor. (Location 4688)

Even though Beck is happy to manage what he has and leave acquisition to others, he still insists that nothing else even comes close to the benefits of real estate investing. With only a small percentage down or even nothing down, you get 100 percent control of a valuable asset. You get tax advantages. And of course you get someone else paying off the mortgage. (Location 4813)

“The worst thing you can do is learn continually without putting some of it into practice,” he says. “It’s called “analysis paralysis.’ Beginning investors get paralyzed by thinking they have to learn everything about every strategy. But you don’t. You just have to learn enough to get started.” (Location 4899)