Welcome to my November 2015 progress report!

As I go through the process of quitting my job with passive income ideas I update you all with the important things that went on each month and how I am progressing. With all the passive income ideas that I employ, I will be able to quit my job in July of 2016.

Do What is Most Important First

Being an entrepreneur, it’s easy to get distracted because of the many business ideas that you may have, but you need to stay focused on what is your bread-and-butter. The bread-and-butter is the business that will provide for you when you quit your job and for me that is real estate. For the month of November, I found myself intentionally focusing on growing my real estate business and less on the online businesses. My online businesses have the potential to make a lot of money but at this point only making hundreds of dollars a month will not help me quit my job. Doing online businesses seem to me like it is a lot of work for very little return at the moment because online businesses take time to build.

My main goal is to quit my job in August 2016 and real estate is my vehicle to accomplish that goal. I found myself spending too much time trying to find ways to increase the traffic to my websites, convert visitors into subscribers, and creating new content to help people quit their job with passive income. This in itself is not a bad thing but I realized that these were detracting from my main business of real estate rental properties.

With the economy as it is right now, it is hard to find good properties that are very profitable. I have been working toward starting an entirely new location for my rental properties in Phoenix Arizona. For the last 3 to 4 months I have been looking for single family homes and apartment complexes there. As it turns out is a very hot market there are very few deals for a buy-and-hold investor. The apartment complexes and single family homes are being sold for a ridiculous amount of money and enough to where an investor would not make any money.

Finding a New Market for Rentals

After looking in Phoenix AZ for 4 months, I decided to use my Rental Property Investing Rule of Thumb for finding a new market.  Using the .01% rule of thumb for finding an investment, Houston TX has a great inventory of properties that can become rentals.  The properties that are selling for $110,000, can rent for $1200 a month.  These are good numbers for buy and hold investors.

When you are looking at new areas or even in your own area, use the Rental Property Investing Rule of Thumb to quickly find out if the property is worth spending time on.  If you find that the properties break the .01% rule, you can move onto the next property and not waist your precious time analyzing a deal that will never work.  Using Zillow.com, you are able to quickly scan through property after property until you find a property that is worth investing in because you will get positive cash flow from the property.

Houston Texas – My New Area to Invest

Another area that I have been looking into for a long time is Houston Texas. I have been looking at the area for over two years now and decided to change my location from Phoenix Arizona to Houston Texas. The reason why is in Phoenix, properties are selling for $180,000 but would only rent for $1200 a month. In Houston Texas, I’ve seen many houses that $110,000 but rent for $1200 a month. Taking the 1% rule of thumb into account, this is a very good area to invest in.

Purchase price: $110,000
Monthly Rent: $1200

Monthly Expenses
5% – 30 year mortgage payment: $590
Insurance: $85
Property Manager: $110
Property Taxes: $150

Total Income: $1200
Total Expenses: $935
Total Net Income: $265

As you can see this new area looks very appealing to me. So in the month of November, I started looking for properties on the MLS (multiple listing service). As I have shared in the past, there are other ways to find good deals on properties and one would great way is wholesalers. Wholesalers find properties, get them under contract for a low price, and sell them to investors for a profit. When I first started looking into Houston as a potential new market for me, I reached out to as many wholesalers as I could find to get on their buyers list so they would bring me properties to invest in. This is a great way to find good deals because these wholesalers do all the work to find a property and it’s up to you to run the numbers to see if the deal is worth your investing.

My Adjusted Goal

One of my goals before I quit my job was to purchase a single family home in Phoenix Arizona as a rental but that has now changed to buying one in Houston Texas.  The price to rent ratio is too high in this area and I would lose money each month.

In November I found a property from a whole seller list and looked at the numbers. Lets ball it by it's street name Bammel Timbers.  The owners were selling the house for a $165,000 and I looked the property up on Zillow.com and the estimate given there was $234,000! So this was a very good sign to start off with on top of the even better sign that this property you would rent for $2000 a month. As I have explained in the past, there are five different ways for an investor to make money in real estate and this property screamed of a fantastic deal.

Not just because the numbers look fantastic doesn’t mean you jump in a whole hog. You still need to do your due diligence and make sure that the property is actually a make money.

Here’s a list of the things that you need to look out for and verify for yourself in the due diligence process:

1. After Repair Value (ARV)
2. Repairs Needed and the Costs
3. What a listing agent would list the property for if you were to flip the property
4. What the high, middle, and low, rental amount would be for the property

The crucial thing is to be sure that you get more than one opinion on each of these estimates.  A big mistake would be to take numbers that Zillow.com gives you as if they are completely accurate.  Make sure that you get at least 2 quotes for each of the items listed above so you can be sure you are not getting in over your head.

1st Houston Property Under Contract

On November 25th, I put Bammel Timbers under contract for $151,000.  I talked the seller down from his asking price quite a bit. The sellers listed the property on the MLS 6 months prior for $177,000 but were unable to sell it because of the septic tank issues.  The entire system needed to be replaced which they quoted $9,000 to do the job.  Not taking their word for it, I got my own quotes from 2 different companies and found the entire cost would be $14,500.  So I put this into my numbers.  I used the septic tank issues to my benefit and negotiated the price to be much lower than they were asking.

Here is my negotiating process and how I got the seller to come down in price almost 10%!

1. The first conversation I had with the seller got him to come down $5000.  All I asked was, “Are you flexible on the price” and the seller dropped the price by $5000 on the first call.
2. 5 days later, I put in an offer for the property for $150,000 cash with $10,000 to be returned to me after closing for the cost of the septic tank replacement.  (I'll explain why in a bit).
3. The seller countered back with $155,000 cash with no money held for the septic tank.
4. After finding out the septic tank was going to be more expensive than they quoted when they were selling the property, I told them the costs were too much for that price and they needed to come down or I couldn't do the deal. They offer $152,000 cash and I accepted the offer.  I signed the contract and locked it in.
5. I took the 5 days to do my inspections and found that the foundation needed to be repaired as well.  This would cost $3000 more to get the property rent ready so I contacted the seller asking them to pay half of the repair costs.  He said they could not do that but they could reduce the price by $1000!

Now, from the original asking price of $165,000, I got them down to $151,000 + $10,000 to be returned to me after closing on the property.

The reason why I wanted the cost of the septic tank in the purchase price is that I am buying this property for cash and will refinance the property and take cash out to purchase the next home.  The lender I am using will refinance the property for 75% of the value of the home up to 100% of the purchase price + closing costs.  I believe the property will appraise for $220,000 or more so I will get my purchase price plus closing costs plus the cost to update the septic tank back to me when I refinance.  I will be able to own this property with $0 of my own money in the deal once it is refinanced!

I have two property managers telling me that Bammel Timbers will rent for $1800-$2300 a month.

Bammel Timbers

Here are the numbers:
Purchase price: $151,000
Monthly Rent: $2000

Monthly Expenses = $1336
4.75% – 30 year mortgage payment: $860
Insurance: $85
Property Manager: $80
Property Taxes: $311

Total Income: $2000
Total Expenses: $1336
Total Net Income (gain): $664

Next Steps

Bammel Timbers will take about 2 months to get the septic tank repaired and rented.  This will be a long process but the numbers look so good that I would be crazy if I backed out of the deal.  The property has the potential to rent for $2300 which will make the monthly cash flow almost $1000!  Realistically, the property will rent for around $2000 and I am good with these numbers.  Even better that I will pull all my money out and have no money of my own in the deal.

Once the septic tank is done, I will rent out the property and finish the refi.

Then, it is onto the next property! 🙂

Let me know how you are doing with your passive income!  I'd love to hear.