We Bought House #5. Here’s a Behind-the-Scenes Look — Including the Numbers.

Moderation is not my strong suit.

I don’t just eat one chocolate-chip cookie — I either eat zero, or I eat the whole batch. I don’t just travel for a weekend — I either stay at home, or I hit the road for weeks/months/years.

And apparently, I can’t just buy one or two houses. Afford Anything Tribe, I’d like to introduce you to House #5, which is Rental Unit #7 in my ever-growing passive income portfolio.

In this article, I’ll share the no-holds-barred, behind-the-scenes story:

  • How I found this house.
  • Why I choose this area.
  • The NUMBERS! Yes, you nosy people — all $$ will be revealed. :-)

But first … check out the pictures.

Click Display Images in your email program to see this picture - rental unit #7 in Atlanta

The outside of the house … not too shabby!

atlanta rental property

Selfie! Because the first thing you do when you buy a new house is take a selfie, right?

cage your air conditioner - real estate investing lesson

Ah, now that’s home security …

rental property investing in atlanta - house 5 - the kitchen

The stainless steel stove is a nice touch, and the cabinets in are decent shape. Planning to add a dishwasher, though.

rental property investing in atlanta - house 5 - the bathroom

Thank goodness the tile and sink top are a neutral white color. Might swap the faucet for a modern chrome color.

rental property investing in atlanta - house 5 - the master bath

The so-called “master” half-bathroom is small but in good condition.

Can you read this? If so, click Display Images in your email program

Another selfie!! Will takes a pic in the bathroom mirror.

rental property investing in atlanta - house 5 - the living room

Ah, good ol’ windows on two adjacent walls. Add some curtains and you’ll have a pretty nice room.

rental property investing in atlanta - house 5 - the bedroom

How on earth do you snap an interesting picture of an empty bedroom?

totally irrelvant cat photo

Completely irrelevant cat photo. Because the Internet needs more cat photos.

It started with this blog.

People who blog about money tend to know each other. We hang out and swap stories about our websites, usually over strong margaritas.

So about two years ago, I had dinner with a blogger named Lauren Bowling, who (at the time) had just launched a site called L Bee and the Money Tree.

(When we met, she immediately blurted out: “I thought you’d be taller!”)

Lauren was getting started in real estate investing. She and her fiancé purchased a fixer-upper in an “improving” neighborhood. Their plan: Remodel the home, live there for 5+ years, and enjoy equity gains as the rest of their neighborhood slowly beautified.

At least, that was the theory.

Instead, they broke up. Ouch.

But Lauren is a strong lady. She kept the house, oversaw a major renovation by herself, and — about a year ago — invited me to her “housewarming” party to celebrate its official unveiling.

As I drove past the ramshackle buildings that dotted the road to her first investment house, I’ll admit: My knee-jerk reaction was, “OMG Lauren, are you f***ing crazy?!”

Her neighborhood — at first blush — doesn’t seem like a place where you’d want to invest.

You can tell a lot about a neighborhood by the types of businesses located there. In cushy middle-class neighborhoods, you’ll see Starbucks, CostCo and Panera Bread.

In respectable working-class communities, you’ll see little “bodega”-style food marts, beauty salons, thrift stores, and the occasional used tire yard or emissions-testing station.

But Lauren’s neighborhood? Several storefronts were boarded up; vacant. Uh-oh. That’s not a good sign.

But any good investor looks at a neighborhood not for what it currently is, but for what it’s on track to becoming. Formerly-vacant buildings are beginning to fill. The area is turning around.

Lauren saw its potential — and urged me to develop my vision, as well.

I was dubious — (all investors should nurture healthy skepticism) — but I started digging for information. And the more I dug, the more I began to conclude that she was right.

How to Evaluate a Neighborhood

Lauren’s neighborhood is still a tad outside my comfort zone (she’s a very early adopter), but a nearby section of Atlanta, called West End / Adair Park, definitely suited my style.

This neighborhood used to be thriving, I discovered, but it fell during the 1970’s and 80’s and experienced ensuing blight. Here’s a crime map: “Red” indicates high-crime-risk; “Green” shows low-crime-risk. As you can see, I’m looking for houses in the “Yellow” zone.

atlanta crime map - real estate investing

Image courtesy Trulia.com/local

This area is now seeing a slow-but-steady revitalization.

Jobs and Business - It’s close to the airport and features easy public transit access, meaning that many airport workers (TSA officials, baggage handlers, etc.) live here. The surrounding area also holds other service jobs (manufacturing, delivery, etc.) which also keep this neighborhood alive. One strong vote of confidence: Ace Hardware opened a location here. (Hardware stores are an especially strong sign of neighborhood development — by definition, they’re the first type of business than a re-developing area needs.)

Transit - The Atlanta Beltline is a planned 33-mile loop of multi-use cycling/walking/jogging trails alongside 22-miles of light-rail tracks. Once complete, the Beltline will link the city’s neighborhoods together, improving accessibility and reducing Atlanta’s car-dependence. Fortunately, the Beltline runs directly through this neighborhood. In fact, a 2.4-mile section of the Beltline has already opened here. That’s a huge +1 for this neighborhood.

Greenspace – This neighborhood opened a new park in 2008, alongside the Beltline. Why does this matter? It’s good for home-price stability, quality of life, and it’s a symptom of smart urban planning.

Infrastructure – The local authorities recently invested $2 million in new sidewalks, streetlights, trees, and other neighborhood improvements. Awesomesauce.

Artists - Atlanta’s “what’s happening” magazine, Creative Loafing, called this area the “Best Neighborhood for Artists” — another strong sign that the area is improving. (Tip: Follow the artists.)

What Are Other Investors Doing?

Signs point to neighborhood improvement, so Step Two is to start chatting with other local investors.

I met one person who purchased a home in this neighborhood for $25,000 in spring 2013. He invested about $100,000 into renovating it, listed it for $192,000 in spring 2014 — and received multiple offers. :-)

This tells me two things:

  • The underlying land is cheap …
  • … yet people want to live here.

That’s a perfect combination.

Why? Land is overhead. I don’t make money from the land; I make money from the building. The less I need to spend on the underlying lot, the more I can put into updating the cabinets / countertops / appliances. Cheap Land + Consumer Demand = Happy Investor.

Meanwhile, on the corporate builder/developer scene, this neighborhood just opened its first condo — “SkyLofts” — in a former abandoned Sears parking lot, and the units are selling quickly. Another +1 for the neighborhood, as it reflects growing demand.

Three Crucial Concepts About Real Estate Investing

Okay, so I’ve identified a neighborhood that’s (potentially) improving, and I’ve met other investors who are profiting nicely in this area. But why should I buy a house there? How does “Theory A” lead to “Conclusion B”?

Let me take a step back for a second, and quickly explain three critical concepts:

1) Risk is Tied to Reward

If you buy stocks, you carry more risk than someone who buys bonds. You also enjoy the potential for bigger rewards.

That’s simple enough, right? But it doesn’t end there. WITHIN the niche category of “U.S. stocks,” some investments are riskier/reward-ier than others.

A large company like Coca-Cola or Nike probably won’t collapse — but it also probably won’t experience double-digit growth. It’s low-risk, low-reward. Likewise, a tiny startup company might flop. Or it might become the next Tesla Motors. More risk, more (potential) reward.

Risk is tied to reward, both across categories as well as within categories.

Are you still with me? Okay, let’s apply this to rental properties:

An established neighborhood features:

  • Low turnover
  • Low vacancies
  • Stable values
  • Low-risk, low-reward.

An emerging neighborhood features:

  • High-turnover
  • High-vacancies
  • Volatile values
  • High-risk, high-reward.

And that leads us to the next point —

2) Judge Your “Risk-Adjusted Return”

Occasionally, I’ll get an email from a reader saying: “You’re only getting X percent returns? Ha! I get Y percent returns!”

But that information alone is meaningless. Investors need to judge reward in the context of risk.

The stock/bond market is an obvious example: Getting 10 percent returns from your Enron stock is different than getting 10 percent from a U.S. government bond — it’s not “the same” 10 percent. If you’re comparing two investments with different risk profiles, X does NOT equal X.

That’s why you need to understand investments within their risk framework.

In traditional stock-investing, this is referred to as “risk-adjusted return,” and analysts have devised all kinds of fancy algorithms to try to understand it.

You don’t need a finance degree, though — you just need to understand this broad concept, and apply it to your own personal choices.

And that brings us to our last point —

3) Diversify Your Holdings

If you have a 401k or IRA, you should split your money between some combination of U.S. stocks, international stocks, bonds, and cash.

I mean, duh. That’s basic.

The same applies to real estate investing. If you’re going to own a handful of rental properties, you should diversify enough so that you’ve spread your bets, but not so much that you lose track of what you’re doing.

For example: I specialize in residential rental properties in metro Atlanta. That’s niche.

  • I don’t flip houses.
  • I don’t own retail space, offices, warehouses or mobile home parks.
  • I don’t invest outside of metro Atlanta.

Am I missing out on plenty of great opportunities? Of course. But I can’t become an expert at everything, so I’ve narrowed my niche to a very specific property type and location.

I can’t do everything. I do ONE thing, and I do it well.

However, WITHIN that niche, I diversify. My properties are located in across the city, in neighborhoods that range from “trendy” to “suburban,” from “established” to “emerging.”

Here’s a map of my property locations:

atlanta real estate investing map - click Display Images in your email to see this

Why This House?

Back to my original question: Why did I buy this house?

To diversify my holdings.

Most of my rental properties fall towards the conservative side of the risk-reward spectrum. I own properties in stable, well-established neighborhoods.

As a result, most of my properties (only) meet the One Percent Rule. They rarely exceed it. And they almost never double or triple it (with the exception of House #2).

But in the same way that an investor might put a small fraction of their portfolio in “frontier markets” like Ghana or Albania, I decided to put a small fraction of my portfolio into a “frontier neighborhood.”

And that leads us to House #5 / Rental Unit #7 —

  • Stats: 4-Bedroom, 1.5-Bath
  • Size: 1,625 square feet
  • Style: Suburban Ranch House
  • Condition: Good
  • Built: 1972

Last Sold: $140,000 in October 2009

Foreclosure or Short Sale?: Of course! Everything I buy is a foreclosure, short sale or distressed sale. (That’s where you snag the best deals, y’all!) This house was a short sale, just like House #1 (my first investment). Houses #2 and #4 were foreclosures, and House #3 was a distressed sale / motivated seller.

UPDATE JAN 13, 2015: I’ve updated these numbers to reflect the actual (ballpark) repair costs. We replaced the kitchen cabinets and countertops, bath vanities, carpet/padding, installed gutters and added a new A/C. We theoretically could have deferred the kitchen/bath upgrade for a few more years, but we decided not to procrastinate. Better property = better tenants. :-)

What did I pay for this?

  • Purchase Price: $46,000
  • Repairs Needed: $15,000
  • “Total” Acquisition Cost: $61,000

What does that gross?

  • Rental Income: $800 – $1,000 per month
  • Does it Meet the One Percent Rule? Obviously.

What does that net?

  • Mortgage: — (Paid-in-Cash)
  • Taxes: $67.41 per month ($809/year) based on 2013 tax records
  • Insurance: $58.33 per month ($700/year) estimated
  • Vacancy: $75 per month ($900/year) at 92 percent occupancy, $900/mo rent
  • Management: $90 per month ($1,080/year) at 10 percent fee, $900/mo rent
  • Repairs/Maintenance: $50 per month ($600/year) based on “one percent of purchase price” rule-of-thumb
  • Total Expenses: $340.74 per month

Cash Flow: $459.26 — $659.26 per month, or $5,511.12 — $7,911.12 per year

Cap Rate:

  • $5,511.12 / $61,000 = 9.03 percent
  • $7,911.12 / $61,000 = 12.96 percent

WTF does that mean?

In a nutshell:

  • The “cap rate” (the “return on investment”) is between 9 to 13 percent. WAHOO!!!!!!!
  • The “cash flow” (the $$ in my bank account) is $5,500 – $8,000 per year.

Another victory for the Financial Independence // Passive Income Brigade. This house offers uber-strong cash flow, a ridiculously awesome return, PLUS the potential for long-term equity gains (which is pure icing on the cake.)

Happy dance!!!!!

And with that …

FAQ’s:

Q: Is that literally the exact amount you’ll earn?

A: No, I’m not going to have precisely $600.00 in repairs annually, nor will I have exactly 92.00 percent occupancy. This is an educated estimate based on prior years’ tax records, current insurance rates, the maintenance history of my other properties, and an analysis of other rentals in the same neighborhood. In reality, real estate earnings will fluctuate every year — that’s why you should be prepared for a range. (Also, note that vacancy/management estimates are based on $900/mo rent.)

Q: How in the $%#&(&!@ did you pay cash for a house??

A: Will and I live on one person’s income, and save the other’s.

In 2012, we earned roughly the same amount, so we saved about 50 percent of our income. In 2013, my earnings outpaced his, which meant that we saved 77 percent of our income. My business continues to boom in 2014, and again, all of my income goes into savings (and taxes).

This goes back to the mantra I keep repeating on this blog: Mind the Gap between your income and spending. The more you earn, the easier it is to save.

Q: That’s all well-and-good that you can live on one person’s income (and therefore buy a house in cash), but that’s not realistic for most of us. Most of us NEED two incomes to survive.

A: First of all, that’s false. The median U.S. household has 2.5 people and 1.3 incomes, according to the Census Bureau. In other words: The median American lives on one income per two people.

If millions of people can do it, why can’t you? Don’t take that as an affront; embrace it as a challenge. :-)

Second of all, are you really “minding the gap?” Be honest with yourself. Are you really optimizing? Here’s what Will and I do:

  • We live with roommates.
  • We drive used cars.
  • We don’t buy fancy clothes / jewelry / furniture.
  • We don’t have cable TV.
  • We choose to live in cities that have a reasonable cost-of-living.
  • We either work-from-home (me) or live-close-to-work (him).
  • We “self-insure” (buy cheap insurance with a high deductible; keep a huge emergency fund).
  • We save tens of thousands on taxes by maxing out our 401k, IRA and HSA accounts.
  • We’ve both always, always, always had a side hustle. We’ve never had “just” one job.

So … lather, rinse, repeat, and you’ll eventually amass $50,000 in cash. Invest it, then re-invest the profits, and you’ll create a self-sustaining cycle.

Q: But I don’t want to buy a used car / cut my cable / live with roommates.

A: That’s a choice. You can afford anything, but not everything. You can choose to spend thousands buying a new car or keeping your guest room vacant — but that choice demands trade-offs.

Be deliberate about those trade-offs. Never confuse “I can’t” with “I choose not to.”

.

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How to Create Sustainable Wealth and Avoid Death-by-Cubicle!

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how to avoid wasting your life in a cubicleThe last time I went to a tropical island, the showers only ran for 4 hours per day. If you missed that window, you had to wait 20 hours.

If you wanted to “flush” the toilet, you’d have to carry a bucket of ocean water to your bathroom.

This was a necessity. Freshwater was delivered by boat, and it needed to get strictly rationed. If you wanted enough for drinking and cooking, you needed to budget.

People elsewhere in the world, though, have become accustomed to luxuries like unfettered access to showers and toilets. They’ll demand this luxury at any cost, even if their wallets and the environment can’t support it.

Until recently, that was the case in Aruba.

To satisfy demand, Aruba coverts saltwater into drinking water. The process is called “desalination,” and this 70-square-mile island (about the size of Washington, D.C.) is home to the world’s second-largest desalination plant.

But desalination requires a ton of energy. And that’s just the tip of the iceberg when it comes to Aruba’s energy consumption.

Teriyaki potato chips

To keep people happy, Aruba imports cheddar cheese, Oreo cookies and some curious flavors of potato chips. (Teriyaki-flavored potato chips? Really?) It keeps its roadways well-maintained, offers strong public transportation, and spends a substantial amount of its GDP educating its local children.

(Aruba also imports designer clothes and handbags, which baffles me. Why ship that stuff down to the Caribbean, just so tourists can carry it back to Europe and the U.S.?)

Fortunately, Aruban officials recognized how energy-intensive the island’s lifestyle has become. But they also recognized a concurrent reality: People don’t want to pare back on their lifestyle. People love Oreo cookies and curiously-flavored potato chips.

So instead of sacrificing its quality of life, Aruba decided to make that lifestyle sustainable. In the midst of the last recession, Aruba unveiled an ambitious plan to become the world’s first economy to run entirely on sustainable energy.

In 2009, Aruba built a wind farm that generates about 20 percent of its total energy. It’s on-track to run 100 percent on renewable energy by the year 2020.

Protect Your Most Precious Limited Resource: Time

Sustainability isn’t just a national issue, it’s a personal one. A country’s leaders can tackle waste at the macro-level. But what about waste within our own lives?

How can you create a sustainable life?

I’m not (just) talking about recycling your beer cans. I’m talking about creating multiple self-renewing sources of income.

It doesn’t make sense to ship coal and freshwater to a remote island. That requires too much ongoing effort. It’s much more sensible to build a sustainable solution.

protect your time

Similarly, it doesn’t make sense to wake up to a beeping alarm, drink stale coffee, battle rush-hour traffic, sit in a grey cubicle under flickering florescent lighting, and then battle even worse traffic back home.

It’s downright ludicrous to endure this agony year after year, until your eyes strain from the computer screen, your back hurts from your corporate-issued chair, and your face gets etched with frown lines.

Sustainable wealth is much more sensible.

Rental properties create sustainable wealth. So do stock dividends, interest, royalties, and businesses that someone else manages.

In short: Investing creates sustainability.

Investing is our ONLY antidote to the hamster wheel. It’s our ticket out.

Learn as much about investing as you can. Hustle, earn more, and apply all that extra money towards your investments. Buy some index funds. Put a down payment on a rental property. Build a small online business, then hire a VA to manage it.

Make just $10 in passive income per year. C’mon, just $10 per year. Anyone can do that.

Done? Okay, great. Now double it.

And double it again.

And again.

You see where I’m going with this …

This is sustainability at the personal level. This is freedom from paycheck dependence. This is how you can maintain an awesome lifestyle without polluting your most valuable (and limited) resource: your time.

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P.S. The island in my introduction (with the 4-hour showering window and the ocean-bucket toilets) is Seraya Island, off the coast of Flores, Indonesia. It’s one of my favorite places on earth.

P.P.S. I should take a moment to mention that Aruba does a LOT of things right. Their crime rate is close to zero. They have fewer than 30 traffic fatalities a year. They have 96 percent literacy, 94 percent employment, and many Arubans speak four languages: Dutch, Spanish, English and Papiamento. There’s a lot we can learn from their example.

Forget the Steak. Create Your Own Sizzle.

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Forget the Steak. Create Your Own Sizzle.There’s a little nugget of wisdom that people in the advertising industry whisper among themselves:

“Sell the Sizzle, Not the Steak.”

That advertising motto is crucial in their efforts to squeeze more money out of customers. (No disrespect. That’s their job, and they do it well.) But what do they mean by that?

Steak — A commodity. It’s a slab of dead cow meat.
Sizzle — The fun, the friends, the merriment. You want to hear the sizzle of your warm meal as it comes out of the kitchen on a blustery winter night. You want a cute server to deliver it to your table while your best friend regales you with a hilarious story that makes you burst into hearty laughter. You want, just for a moment, to forget about your headaches and relax.

We don’t want a slab of dead cow. We want the sizzle. Advertising’s job is to get us to conflate the two ideas. They want us to associate the restaurant’s brand name with positive emotions. With laughter. With relaxation. With the beautiful, fleeting joy of being alive.

You don’t have to spend $14.99 to find the bliss of life.

When you find yourself wanting steak — create your own sizzle instead.

Here’s what I mean:

The sizzle, as you know, is free. Every cliche says so. Money can’t buy happiness.” “The best things in life are free.” Our society pays lip-service to these ideals, and deep down, most people believe that the platitudes are true.

But most people don’t live their lives accordingly.

We have to eat something. Steak, tofu, beans — we have to put calories in our mouth every day. Preferably delicious and healthy calories, and preferably in the company of family and friends. We’re not anti-social hermits, and we’re not willing to sacrifice our health for the sake of saving a few bucks.

That’s fine. Eat the damn steak. Or tofu. Or whatever you want to eat. Invite your buddies over and grill out in your backyard. Because that’s also where laughter and joy take place. That’s where the sizzle happens.

You can create your own sizzle. You don’t need to buy it.

Here’s a mindset exercise that might help:

Next time you watch a restaurant commercial, imagine eating that meal alone, in a hurry, while on a conference call with an abusive boss. Not as much fun, right? That means you don’t really want what they’re selling. You don’t want the $14.99 meal. You want the sizzle, and you can create that elsewhere.

Here’s another example. Sorry, fellas, this one is girly:

When I see a cute dress, I’m tempted to buy it. But it’s not the dress I want. I want the feelings associated with the dress: fun, free, beautiful, confident.

The problem is that no $32.99 dress can buy that. What will really achieve the feeling of “fun and free?” Breaking away from the cubicle. Taking a vacation without putting in a formal request.

What will really make me feel “beautiful and confident?” Toned legs. Strong arms. Skin that glows as a result of nutrition, water and plenty of sleep. And no dress, no matter how flattering, can compensate for a lack of time spent leading a healthy life.

So I tell myself, “Forget the dress. Work on your abs.” Don’t spend money on superfluous commodities. Use your money to buy time. And use that time to create the sizzle.






Thanks to Jakeprzespo for today’s photo.

How One House Throws $5,000 a Year at Me

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Remember when we bought House #3? It’s now rented! Let’s see if this deal is hot or not.

Excuse Me, Did You Say House #3?

As long-time Afford Anything readers know, Will and I bought our third rental property in May. It’s a 3-bed, 1.5-bath single-family home in a good school district in Atlanta. The asking price was $125,000, and we snagged it for $94,000.

This needed the fewest repairs of any of our houses. Here are the “before” pictures. As you can see, the scope of work was small. Knock out a wall or two; bust up some concrete steps; install a skylight. Voila – instant awesome!

Check out the “after” photos, below.

Rental Property - Nice Living Room

We’ve painted the walls, refinished the floors, and spruced up the entryway.

 

Rental Property - Kitchen Photo

The former owners remodeled the kitchen, so these new cabinets and countertop were included. Score!

 

Rental House - kitchen skylight

Remember that skylight we were installing in the kitchen? Here it is!

 

Rental Property - Kitchen

Here’s the dining area. It’s a little narrow, but it works.

 

Rental house - new paint and refinished floors

You’d be amazed at how a few plants can help with staging.

The total cost of the renovations came to $6,000, which means our “total purchase price” (purchase plus upfront repairs) was a solid $100,000.

It now rents for $1,295 per month. Passive cash, baby! Right away, we see that this passes the One Percent Rule with flying colors.

(The One Percent Rule states that the monthly rent should be at least one percent of the purchase price. Move the decimal point two spaces left. If the monthly rent isn’t at least that high, buy a different rental.)

But let’s dig down deeper. How do those numbers check out?

What’s the Cap Rate?

First, let’s find the “capitalization rate,” or cap rate. This measures the net return that the house provides, excluding your financing arrangement.

Why examine this? Because it shows you the strength/weakness of the deal itself, in a vacuum. Remember, ANYTHING can be cash-flow positive if you buy it with cash. That doesn’t mean it’s a good deal.

The “cap rate” helps you examine the quality of the underlying deal. Once you decide whether or not the investment is worth pursuing, you can calculate how different cash/financing scenarios will affect your passive income.

How do you find the cap rate? It’s easy: Just divide the house’s price by its net income.

Gross Income: $15,540 per year

Expenses:
Management – 10 percent of rent – $1,554/year
Taxes – $1,100/year (includes trash service)
General Repair/Maintenance Fund – 1 percent of purchase price – $940/year
Utilities – The tenant pays everything! That’s one huge benefit of renting out a single-family home, as opposed to a multi-unit building. (In contrast, we pay $300+ per month to cover the tenants’ water bills in our three-unit building.)
Yard Work – The tenant handles it!

Total Expenses: $3,594 per year

NET Income (Income after Expenses): $11,946 per year. Yeah baby!

Right off the bat, I can see that this is a sweet deal. I’m netting almost $12,000 a year for a $100,000 house. That’s roughly 12 percent.

Crunch the numbers, and the cap rate is $11,946/$100,000 = 0.1194, or 11.94 percent.

I don’t know about you, but I think a near-12 percent return is pretty stellar. It’s not as sweet as the 17.8 percent return I’m getting on House #2, but hey, you can’t strike gold every time. ☺

So How Much Cash Goes In Your Pocket Each Month?

Okay, now we know the cap rate. How much passive income are we collecting?

We have a private loan in which we’re making interest-only payments at 7 percent. (Hold your horses! I know this might create chaos in the comments section. I’ll explain why we choose this below.)

Let’s look again at the numbers.

Net Income: $11,946 per year
Financing Payments: $7,000 per year
CASH FLOW after debt service: $4,946 per year! Wahoo!!

We’re getting $5,000 in passive income each year from this house! That’s one huge step closer to financial freedom.

Why did we get the financing that we did? Look again at the numbers. Look carefully. How much money did we pay out-of-pocket for this investment?

Zero. Zip. Zilch. Nada.

Without spending a dime of our own money, we set up a deal in which we receive about $5,000 in passive income per year. That’s AFTER paying a property manager to do the actual work, plus setting aside a “rainy day” fund for long-term maintenance and repairs.

In other words, we borrowed at 7 percent and used the money to snag an investment that pays 12 percent. This practice is called “arbitrage,” which might be my favorite word in the English language. ☺

“Why get interest-only financing?”
It gives us the most flexibility. We’re earning $5,000 a year in passive income, with no money down.

We can choose – CHOOSE – to use that $5,000 to pay down the principal on the house. (There is no pre-payment penalty). We can use the money to buy another house. Heck, we can blow it on champagne and strippers, if we wanted. It’s our choice.

“What are you doing with that money?
First we’ll buy a few more rental units. Then we’ll start paying down the loans. In other words, we’re reinvesting the profits back into the business.

“Are you disciplined enough to re-invest that money?”
DUH!! If you’re not, get out of the game!

“Why not just borrow from a bank?”
I’d love to. But banks are sick of us.

“Are you worried that you’re over-leveraged?”
Nope. We use cash frequently, and we have kick-ass equity. We bought House #2 in cash. We paid for repairs on House #1, Unit B with cash. Relative to many real estate investors, we’re quite conservative.

“You allot $1,554 for paying a property manager. Why not manage it yourself?”
I do.

“Then why do you include a ‘management’ line-item?”
Because I pay myself for my time.

The management fee is active income I pay myself for the time I spend managing the property. It’s a radically different beast than the passive income I earn from the investment.

Rookie real estate investors conflate ‘paying themselves’ with ‘profit.’ You can’t pay yourself $0, pay someone else a a fair wage, and make an apples-to-apples comparison.

Every investment must allow me to make a profit after paying myself. That way, I can remove myself from the equation and the numbers will stay the same. Remember, the goal is financial freedom, not a lifetime job.

“Are you talking to yourself, in the form of italicized questions?”
Uh, yeah.

“In public? On a blog?”
Uh, yeah.

“You’re a dork.”
That’s not a question.

“You just proved my point.”
Whatever.





How Passive Income Is Like Gardening

Fall is here: leaves are turning red, stores are stocked with Halloween candy, and it’s chilly enough to wear sweaters at night.

This means it’s harvest season, and my garden is in full swing. I have so much basil, tomato and mint that I can’t help but think about — passive income.how gardening is like money and passive income is like the harvest

Yes, I just compared passive income to vegetables.

I know, you think I’m nuts. I’ve gone fruity! (Haha. Pun totally intended.) But hear me out:

The Hard Work Happens Upfront

Planting a garden is a pain-in-the-butt. Here’s what happens:

I sprout the seeds in a starter tray, which I mist twice a day. Then I hunt down 40 cheap planters and fill them with soil and compost.

When the seedlings are an inch high, I transplant them to containers. Feed them nutrients. Water them daily. Monitor for pests. Thin them as they grow.

Soon its clear I’ve bitten off more than I can chew – er, planted more than I can grow. I need more space. So I head across the street to the house that I own but rent out to tenants. I ask them if I can tear up a section of my own front yard and use it as a garden. (Side note: It feels surreal to ask permission to dig in my own yard. That’s landlord-ing for ya.)

Before I can dig, I need to chop down a tree. I have a small yard and the only place I can plant is completely shaded. So I spend a weekend sawing down the tree and hauling away the limbs. (Relax, earth lovers: it needed to be chopped down regardless; it posed a safety hazard. Trees in my neighborhood are famous for falling on houses.)

Then I have to till and aerate the soil. I listen to catcalls from the homeless guys who like to gather on the sidewalk in front of my house while I work. (I live in the city. This is normal.)

Next I head to the store and load my car with cow poop – er, “cow manure,” as polite society says. I dig trenches six inches deep, cover it with cow manure, and rake the soil back over it.

By this point, I resent these darn plants. This stupid project has taken at least 50 hours of my time.

Then I transfer each plant into the earth and cover it with mulch. The homeless guys watch and provide commentary. They’re like my personal sportscasters. Or paparazzi.

Now I need a fence. I buy some chicken wire, several stakes and zip ties. I find a shovel and a sledgehammer. It ain’t pretty, but it works. Then I check the price of tomato cages. Hmmm. $4 per cage, times 40 plants, equals – yikes. So I gather 40 sticks. Jab them into the ground. Tie the base of each plant to each stick.

I’m fed up with the plants now. I just wanted to grow some darn tomatoes. No one told me it would be this much work.

Passive Income Is Like the Fall Harvest

But then something magical happens. The hard work – the upfront work – is finished. There’s nothing left to do.
how a garden is like managing money

This lasts for months. My garden goes from being as demanding as a second job to being so passive I almost forget about it.

Now comes the harvest. I have hundreds of tomatoes. Hundreds and hundreds. Enough to feed the homeless guys. (They help themselves to it.)

You see, I do the tough work upfront – in the springtime, during the youth of the year. I maintain it throughout the summer, the adulthood of the year.

Now fall is here. It’s harvest time. And I have abundance.

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You Are Not Entitled to Retirement, Dude

Will you work during your sunset years?

If I had a dollar for every “retirement” book, article and website out there, I’d be a millionaire many times over.

Promoting the concept of “never work again!” has become a booming multi-million dollar industry, employing thousands of people (who are, no doubt, awaiting their own retirement).

Retirement is such a part of our cultural fabric that it’s viewed as a basic human right.

It’s the final chapter in the American Dream: a home, a family, a secure retirement.

But it hasn’t always been this way.

For much of American history, people simply worked until they were too sick to work anymore. The idea that a healthy person would voluntarily stop working — regardless of their age — was considered an extravagance privy only to the ultra-rich.

American culture changed after World War II. Retirement shifted from a luxury to a basic right, an entitlement of age. Corporate pensions, coupled with government Social Security, put retirement within reach of every American worker.

Now culture is shifting again.

Corporation pension funds shrink, Social Security bounces towards bankruptcy, life expectancy grows longer, and people in their 60’s and 70’s remain healthier and able to work.

Retirement is no longer an”entitlement.” It’s a “luxury.”

And it’s one that you might not get …

 … unless you grab it by the reins.

This is at the core of the Afford Anything Philosophy: freedom is yours, but ONLY if you’re a true rebelIf you’re part of the Conformist Masses, you’re out of luck. (Read that post to see what I’m talking about.)

Retirement is not a God-given right. With Social Security in question, pensions disappearing, and your own life expectancy growing, you cannot expect retirement on a silver platter. If you wait even to age 30 before you start planning for it, you’re behind the game.

You can’t depend on Social Security to be there for you. Hope for the best; plan for the worst.

Want to ditch the cubicle and live in financial freedom? Join the revolution.