Today on the Investing for Freedom podcast Mike continues the series on how he and his wife Kara got into real estate and some of their earlier deals. He explains why they got into real estate, not wanting to be 65 years old, and still trying to figure out how to retire. Mike and Kara really wanted passive income, so they set a goal to invest in two income-producing properties a year for 10 years.
[MIKE AYALA] Thank you for joining me on the investing for freedom podcast. Today we’re going to continue the series that we’ve been doing on how we got into real estate and some of our early deals. And the reason why I’ve been doing this, I just really wanted to inspire everybody. There’s nothing special about me or Kara or anything else. We didn’t know what we didn’t know. We just knew we wanted something. What did we really want, we didn’t want to be 65 years old and still trying to figure out how to retire. So what we really wanted to be passive income. So we decided two income-producing properties a year for 10 years. That was our goal. And then why did we want it? Again, Just, so we’re not 65, 70 years old and still working. What are you going to do to get it, two income-producing properties a year for 10 years?
[MIKE AYALA] And the real reason why I wanted to do this little series, not to brag any of that, but we just set our intentions and we opened our mindset and we just started moving and deals just started coming. And then the other thing, a lot of people will say, well, it takes money to make money. And yes, it gets easier and easier if you have money to make more money because you’re compounding that money. And so, yeah, it moves faster. It grows faster, but the reality is it doesn’t take money to make money. It takes intention, it takes purpose, it takes desire, it takes focus. And then there’s the 3 D’s that we’re constantly talking about; death divorce, and don’t want them.
[MIKE AYALA] Today’s going to be a really interesting story because not only did we buy a building, but we also simultaneously bought a business all with seller financing. And the reason why I think this is so interesting, it was definitely a case of didn’t want them. It was definitely a case of divorce. Nobody died, they’re still alive. But the owner was also sick. And so even though it wasn’t death it, it kind of ties into that web. And so, when you find a situation where an owner doesn’t want it, there’s a divorce going on, there’s a death in the family, or there’s some sort of sickness, there’s potential opportunity for all parties. And again, I want to make sure that I’m very clear on this. We never need to feel guilty about solving somebody else’s problem. This was a complete win-win. So here’s the backstory.
[MIKE AYALA] So my first company was a plumbing and heating company and through various customers and clients, we were constantly getting pushed toward general contracting. We would go in and replace a bathtub and the customer would be like, well, who’s going to fix my sheet rock. Who’s going to do the flooring. Who’s going to do the cabinetry. Sorry, we don’t do any of that. A lot of our customers, one of the things that we were known for, I always said in business, I wanted to answer the phone, set the appointment be the first to show up, give the customer an estimate and get the job done before our competitors even answered the phone or called back. Because a lot of times, service businesses don’t even answer their phone. And even when they do schedule the appointment, a lot of times they don’t show up when they say they’re going to. And so that was always my goal. And, through that process, customers would push us to get into general contracting. So I hired a friend of mine who was a plumber, but he was a general contractor by trade. He had done general contracting with his dad for 30 years. And then when his dad passed away, he decided to go do something else and became a plumber. So I hired my friend, his name was Orien, and we started working together. He came on as a plumber, but then as we started getting pushed into this general contracting phase, and we had some large industrial clients too, that were pushing us toward general contracting, we had these maintenance agreements and we would move walls and they’d want us to put in doors and etc., etc.
[MIKE AYALA] So long story short Orien went and got general contractors licensed for our company. We became a general contractor. Well through this process we had done a lot of work for a kitchen and bathroom modeling company called Elko cabinet, where they did custom kitchens. They did custom cabinetry. They did commercial cabinetry, did a lot of work with this guy over the years, had gotten to know him really well. He was one of our best clients. I walk into his office one day. He had a job that he wanted me to look at as on the plumbing side. And I walk in one day and he said, Hey, I really see your advertising. You’re really stepping it up on the remodel side. You’ve got your contractor’s license. He’s like, why don’t you buy me out? And I’m like, seriously? And he’s like, yeah, I’m tired. And he was tired. He’d been at it for a long time, built a great relationship. I think he was in business for 30, 33 years I believe when we bought the business from him, I can’t remember exact timeline. So he was serious as could be. And I said, well let’s talk about it. And so he said, well, let me get with my accountant and I’ll get back to you. So he comes back, put the deal together. Basically it was $800,000 for the building.
[MIKE AYALA] So a little backstory. He had a commercial building that he had built in 1984. So we had the commercial building and the business. So he comes back with this deal and he said, I’ll sell the building to you for $800,000 and the business for $400,000. I’m like, great, nice building brick building, solid. Interestingly enough this was 2012 and he had an appraisal that he was working off of from, I want to say 2004. So it was an eight, nine-year-old appraisal that he was working off of. And it seemed like a good deal. That appraisal was $680,000, I think. And he was asking $800,000 for the building. So it seemed like a pretty good deal. Then the business was $400,000 and I said, well, Don, I don’t have a lot of cash. And he said, well, listen, just give me 10% down on both of them, we’ll put it into two separate notes, and I’ll carry the note at five and a quarter interest. Sorry. I had to think back. Five and a quarter interest. And I said, okay, that sounds like a good deal. Let me go run some analysis. I come back and I said, listen, Don this a little high, I’ll do 1.1 million for both. So $700,000 on the building, $400,000 on the business. He said, great, 10% down. Then as we started talking through it more, I started realizing, you know, his business had gone down quite a bit over the previous years as we started doing the due diligence on the business. The building was a home run, but the business was going to take some capital and investment. And he had a lot of inventory and equipment that was outdated. And as business owners we carry all this inventory on our books and a lot of it’s not usable. And so I come back to him and I said, Don, listen, in order to really get this business where it needs to go, I’m going to have to put a, $100,000, $150,000 into the business. I don’t know that I can really afford the 10% down. And he said, well, here’s what we’ll do. I’ll carry the down payment in a separate note, and we’ll focus on that first. And so you pay down the down payment as a higher payment. I think it was $8,000 a month. You pay down the $110,000 down payment, $8,000 a month. We’ll do no interest on that. And then as soon as that down payments paid off, then we’ll switch to the main loan. I’m like, okay. Yeah. Sounds like, I think we can make that work Don. And again, here’s the thing. We sometimes don’t understand that that was a win. This guy wanted out of this so bad. Number one, he was in the middle of a divorce. So his wife is obviously entitled to half of what they built together, which there’s not a lot of cashflow in just a business. And as the divorce is putting pressure on him, he’s also had MS at that point in time. And so he was really literally getting tired. You could see it in his business financials too. Cause it had gone from $900,000 a year to $600,000 to $480,000. So still had a lot of upside potential and opportunity, but you could really see that it was going downhill. This is the other thing that I want to point out.
[MIKE AYALA] He had tried listing his business. This was one of our negotiation tactics. When it came down to it, Don wanted to sell, but his wife, his ex-wife, there was some resistance there. And the thing that really had, the thing that really benefited us, they had tried to sell it through a broker out of salt Lake. And they had a couple of larger businesses that were interested, but as they had gone through the process, financial review, all the due diligence and this is an interesting statistic that we all need to pay attention to, because as you can tell from this story, not only is real estate an opportunity for seller financing businesses are an opportunity for seller financing.
[MIKE AYALA] Almost 80% of all businesses never actually sell, the owner just closes the doors. Because as was the case with this, they don’t want to fight. They don’t want to battle. They think it’s going to be a 9-month, 12-month, 18-month process. And sometimes it is, I went through a six or seven process with a company that was doing $8 billion a year in revenue that wanted to buy a percentage of our company seven, eight months of due diligence and all this stuff and then we get down to the final hour, final day and we’re like a million dollars apart on this deal. And so it’s frustrating. It drains you; it wears you out. So anyway, my point is, a big percentage of businesses. Almost 80% of businesses never actually sell, the owner just shuts it down. So there’s opportunity in real estate, as I’ve proven to you. And I’ve shared with you, these are real life stories of just little things we did, and hopefully they’re encouraging you.
[MIKE AYALA] But there is an opportunity to buy businesses as well on seller carry because almost 80% of businesses just shut their doors. So it’s you marrying your skillset opportunity, things you want with the same thing. What does that seller want? What do they really want? Why do they want it? What are they going to do to get it? Well, maybe they just want out, and maybe they’re going to carry the note for you in order to get out, whether it’s real estate, whether it’s business. So long story short on that deal, it worked out great. We still own that commercial building today, at cashflows about a $100,000 a year. There was some really interesting creative things that we did in that deal. Which I’m not going to really get into here, but if you’re interested, just shoot me an email at teamatinvestingforfreedom.com. Shoot me an email at firstname.lastname@example.org. And we can talk more about it, just put in the subject line, Hey, I want to have a phone call and talk more about your creative financing.
[MIKE AYALA] But anyway, the thing I really want to point out here, as I’ve said all along there’s just opportunity left and right. And sometimes what somebody else don’t want doesn’t want, that don’t want them is a great opportunity for you. This day and age that we live in right now, it is July of 2020, and with COVID and everything that’s going on. I want to throw out to you guys, I think that the opportunity, there’s still going to be opportunity in real estate, but I think the larger opportunity is going to be in buying businesses. So switch your mindset, start thinking about that. Here’s an opportunity that I’ve shared with you about how we got into a business, no money down seller financing. So it is possible. And there is shifts in cycles as we’ve talked about in business. And I think this is one of those cycles where it makes more sense to buy an existing customer list as long as the deal’s right than it does starting from scratch. And as you can see with seller financing, sometimes they just want out. And right now I think there’s a lot of businesses that are probably tired and struggling, and you could just be the answer to their problem. Same goes for real estate, have a great week.