On this episode of the Investing for Freedom podcast, Mike tells the bullshit stories being told about real estate investment. Mike warns us you’re going to need way more properties than you think to your goal of being able to leave your W2. Mike also warns us that real estate investment isn’t truly passive and there is a hell of a lot of work involved, especially when you’re starting.
“The reality is you’re going to do a lot of work. There’s no passive investing involved in it at all. ”
0:00 – Intro
1:07 – People want to get into real estate to get out of their W2 job
1:59 – What’s that number going to take to get out of the rat race
2:43 – A lot of people don’t sit down and do the maths
3:02 – Rent should be 1% of the house price
4:07 – People think it’s passive and people think you’re going to clear a lot of money
4:48 – The only way you’re going to get the returns is if you put in all your own cash
5:08 – if you want to hit $4,000 goal you need 30-40 homes
6:17 – BS story number 2 is that it’s passive
7:10 – You need to look for deals and manage properties, especially the first 10
7:36 – Finding a turnkey investment company is one way to be truly passive
8:07 – Find a property management company and tell them you want to buy homes over the following years
8:43 – You could invest in a group like Mike’s
9:21 – You’re going to have to do a lot of work
Thank you for joining me on the Investing For Freedom podcast. Today, I’m going to have a small discussion with you around passive investing. And the question that I want to pose is what is passive investing?
Found myself lately in a lot of conversations about this. And I think there’s like a, you know, there’s a bullshit story around real estate. And there’s a bullshit story around passive investing. You know, so many people think that passive investing is something that it isn’t. And you know, I’ve had conversations recently where, you know, basically people are saying that they want to get into real estate because they want to quit their job. They want to leave their W2 job. They don’t want to have to be in their business all day every day. And I get that, a hundred percent. You may have heard this story before, but when Kara and I first started investing in real estate, we were working with a company called BDR and one of the coaches at an annual business planning session, it’s a three-day session. They call it a profit launch. One of the coaches asked the question you know, what is it that you really want out of life? Like, what are your personal goals? What are your ambitions? And he made the statement. He said that if your business isn’t helping you achieve your personal goals, you really just own a job.
And so again, I’ve been having this conversation a lot lately with people around wanting to free themselves up from their business, or eventually get to the place where they can quit their W2. And my question always comes back to the same thing. What’s that number that it’s going to take in order to, as Robert Kiyosaki would say, get out of the rat race and, you know, to where your passive income is as much or more than your expenses. And so, you know, this is obvious, but you can do one of two things. You can either increase your passive income or you can decrease your expenses or a combination of both.
And so let’s say hypothetically, that number is $4,000. Well, this is where we start getting into the conversation and people are like, well, yeah, you know, I want to buy you know, five homes. My goal is five homes or 10 homes. And like really? So five homes is going to get you a $4,000 a month of passive income. Yeah, Yeah.
I think a lot of times, you know, people don’t sit down and do the math and this is where the bullshit story comes in. You know, I think we think that every single house that we buy is going to average us $400 to $500 or I’ve even had people tell me recently that they think that they’re going to make a $1,000 on every rental that they buy.
Well there’s an old ratio, an old number it’s called the 1% rule where basically you should be charging 1% rent. The rent should be 1% of what the purchase price is. So if you buy a $300,000 house, the rent is going to be $3,000. Well, we’re in a really unique and interesting time, because that 1% ratio is kind of gone out the window. I haven’t seen very many deals like that for a long time, which is one of the reasons why we’re bullish on manufactured housing, because we can, we can get you know three bedroom, two bath single-wide, although it’s even hard to get that right now. I mean, Clayton Homes is out 12 months to get a home right now if you can even get on the list.
Any way you can get a, you know, a $40,000, $50,000 home, a three bedroom, two bath home for $40,000 or $50,000. And, you know, the rents on that are $500, $600, $700 a month, plus lot rent, whatever that ends up being. So there is still some areas where the 1% rule, you know, could potentially apply, but for the most part, it’s out the window.
And so again, the bullshit story about real estate is, you know, people think number one, that it’s passive and they think number two, that, you know, they’re going to clear a whole bunch of income. And here’s the thing. If you went and bought a house for $300,000 and you paid cash for it, maybe, you know, maybe you will clear a substantial sum and get to that $4,000 number with, you know, 5 homes or 10 homes or whatever. But the reality is, most people are utilizing debt when they’re acquiring assets, which as you know, I’m a proponent of because leverage in debt helps us to go further and faster. And plus you don’t have to put as much of your own cash in, and you get the depreciation, the tax benefits.
I’m not here to debate whether you should or shouldn’t put debt on an asset, but the only way that you’re going to get the kind of numbers that I’ve been hearing from people lately is if you’re going to go in all cash on a home. And, you know, again, whether that’s a good idea or a bad idea is a conversation for another day.
So you need to replace $4,000 of your income. And here’s the thing, I mean, really at the end of the day, by the time you have vacancy, turnover, rent fluctuations over the course of a few years, really, if you’re going to hit a $4,000 number, you need to be planning on, you know, 30 to 40 homes. And that’s why so many people are chasing multi-family assets right now because you can buy a 300 or 400 unit apartment complex. And, you know, if you could get one of those as an individual investor, most people are teaming up, but if you could get one of those as an individual investor, you’re probably going to get out of the rat race immediately. The problem is it’s so hard finding deals. So that’s bullshit story number one.
Trust me, it’s going to take a lot more houses than you think it’s going to. So back to the story, you know, if your business isn’t helping you achieve your personal goals, you just own a job. Kara and I set a goal of two income producing properties a year for 10 years. And what my thinking around that was we would have 20 properties in our portfolio by the end of you know, 20 years or by the end of 10 years, and then 30 years later, which would actually be 40 because we started, you know, the tenure process of buying. So 40 years later when I was 65 years old I would have 20 homes paid for. And yeah, they would probably, you know, kick off $10,000, $15,000, whatever that number is a month, but it’s going to take a lot more houses than you think it’s going to, bullshit story number one.
Bullshit story two is it’s passive. I was reading an insider article and here’s what they say or define that passive investing is, “passive investing is a long-term strategy in which investors buy and hold a diversified mix of assets in an effort to match, not beat the market.” Obviously it’s interesting because anytime, you know, you guys can go read this article, but it’s literally just search business, insider, passive investing. But usually when you see something like insider rights, they’re talking about the market, passive investing, which is truly passive. You put your money in the market, you leave it there, you don’t have to worry about it. You don’t have to think about it, give it to a financial advisor. I’m not saying you should go do that or not do that again, conversation for another day.
But what I’m getting at is that real estate investing for the most part, this is story. Number two is not passive. You’re out looking for deals. You’re out trying to find the deals you’re managing the property. And I’ve said this so many times rentals are like employees, like 1 to 10 is really challenging because most of the time people are not passive in that zone. They’re very, very active. Once you get to 10, maybe you’ve got enough cash flow coming off that you feel comfortable giving it to a property manager. I would say to you that if you truly want to be a passive investor, there’s only a couple ways to actually do that.
Number one, go find a turnkey investment company. There’s plenty of them out there, hard to find deals right now. I’ve got a client that has bought four or five of them in the last few years, and they just backed out of one in Florida cause they just can’t get the numbers to make sense. So if you truly want to be passive, find a turnkey investment company, that’s a company that’ll find a you know, basically a flip, they’ll fix it. They’ll remodel it, they’ll put a permanent financing on it for you. You buy it from them and then they manage the property for you with a tenant in it. So that’s truly passive. You don’t really have to do anything. The other thing you could do is go find a property management company in your local market and say, Hey, look, I want to buy 2 or 10 or 15 or 20 homes over the next five years. And let them go find the homes for you. Or maybe one of the investors that they’re currently managing for, wants to sell their portfolio. Trust me, that property management company does not want to lose those homes, that inventory, if you will out of their portfolio. So they’re looking for other investors to sell that to.
So that’s another good passive way because they’ll find the deal for you. You just got to set up the financing, you have to buy it, and then you just leave it with them to manage. The bullshit story though, is that most people are not passive real estate investors. The other, you know, way to do it is invest with a group like ours. There’s plenty of multifamily, investment companies, storage, investment companies, all kinds of stuff.
If you put a $100,000 in a fund like we manage or again, there’s plenty of other options. If you put a $100,000 in that fund and you let that operator basically manage that money for you and let them do what they’re good at and you keep doing what you’re good at, that’s truly passive. Most people listening to this that are wanting to get into real estate, I think are going to learn a lesson that it’s not really actually that passive. And I’m just going to kind leave it at this. We’ll wrap it up.
The reality is you’re going to do a lot of work. There’s no passive investing involved in it at all. You’re going to have to go find deals. You’re going to have to manage deals. You’re going to have to call plumbers. You’re going to be on vacation and you’re going to be having to make phone calls. You’re going to have be evicting tenants and I’m not trying to be negative on real estate. I’m just trying to say that there’s a story. Being told that it’s light and easy and you know, you’re just going to make all this money and everything else. And I’m just telling you dig into it a little bit, count the costs, and understand what it’s going to take to get into it because it is a great industry. It is a great business, but the reality is you’re probably going to end up building out a real estate business and not a passive investment portfolio again, unless you hand it over to someone.
So you know, keep listening to this and there’s a lot of other good podcasts out there. The real estate guys do a really good job. Biggerpockets does a good job of, you know, really just helping us to understand what goes into buying and managing deals. So just wanted to throw that out there and let you know that I want to challenge your thinking around passive investing and it doesn’t make it right or wrong, but what is passive investing in? What isn’t it, and just be prepared for that.
So go out there and make it great. And you know, maybe just spend a little bit of time, and think about whether you really want to be a passive investor, or if you want to be an active investor, either way is fine. I like real estate. It’s just not really that passive, cheers.