Today I have a special treat for you. I recently met a fellow investor, named Michael H., and I am excited to talk to him about all of the good things and all of the not-so-good things that have happened to him in his real estate business. We can learn a lot from other investors: how they invest, the mistakes they’ve made, the wins they’ve experienced, the good things, and the bad things.

I am going to talk to Michael about how he has built his business from scratch and how he has worked with other investors to buy big, multi-unit apartment complexes. Michael is a great investor and we are going to learn a lot from him! Michael H. He is the founder of FinanciallyAlert.com where he shows how to become financially free and independent of a job.

 

Michael Posts All His Financials

 

Michael Quit His Job at 36 Years Old

After building a tech company, he sold it to an east coast company and now lives his life free of a job.

Since quitting his job, he has been investing his money in many ways. Real estate, Stocks, Funds, Etc.

He started investing in 2010. Looking in Arizona, Nevada, Texas and other areas, he bought his first property in Las Vegas.

 

Tell me a little bit about yourself.

  • Michael lives in San Diego. He moved there about 20 years ago for college and he loves to fish.
  • He has a wife and two kids, and most of his family lives in Los Angeles.
  • As a family, they love traveling, eating, and spending time together. His daughter is six years old and his son is four years old.

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What got you started in real estate and how long ago was that?

The first property Michael bought was in 2010.

When Michael was growing up, he had a couple of uncles that did pretty well for themselves. This was before the term FIRE (Financial Independence Retire Early) was available. His uncles didn’t work at a job, but they invested in real estate.

One uncle was doing commercial real estate and another was doing single-family homes and apartments. That caught Michael’s attention at a young age.

When Michael finished college, he didn’t know what he wanted to do. He didn’t feel comfortable pursuing real estate at that point, even though that was one of his greater goals.

Michael went into IT (Information Technology), mostly because he was a gamer back in college and he used to tear apart computers. He worked for a company for about a year and a half, right before the dot com crash. After 9-11, the company he was working for collapsed.

During the chaos of layoffs, he decided not to stick around. He talked to some co-workers and they decided to start their own IT support company. They ran that company for about 10 years before deciding to sell the business.

Along the way, Michael was saving money and slowly investing in real estate, because he wanted to try to diversify his income streams.

 

What was it like selling a technology company? Were there any lessons learned?

Selling a business is similar to real estate. The business is worth whatever someone is willing to pay for it.

There are a lot of different strategies to sell a business. Michael and his partners had received a couple of offers and then he marketed the company to find a couple more offers.

Like real estate, depending on the market, you can sometimes create that demand.

 

Did you buy your first property while you owned your business or was it after you sold the business?

In 2010, Michael was about nine or ten years into owning the IT support business. He wanted to purchase his first real estate income property in 2005, but at that time the market was going a little crazy — property taxes were high and rents were not keeping up with property values relative to making a cash flow deal.

Michael waited five more years, watched the market crash, and decided to get into real estate in 2010.

During the market crash and afterwards, everyone was saying not to invest in properties. You have to ignore the noise and trust the numbers. You want to buy when people are selling and sell when people are buying.

 

Where was your first property and how much did you pay for it? Tell us a little about it.

Initially, Michael started looking for properties around the general San Diego area. Most people were investing for appreciation and he quickly found that none of the properties cash flowed.

He wanted a cash flow property, because he didn’t want to gamble with his money.

Michael started looking in different areas, such as Phoenix, Las Vegas, Dallas, Austin, Oklahoma City, Florida, and a couple of other places.

He flew out to a few of these places to get a feel for the areas. They were all decent areas, but ultimately, he landed in Las Vegas, because it is pretty close to where he lives. He liked that he could take a quick, inexpensive plane ride to get there if needed and he was familiar with the area.

 

Were you fine with having a property manager?

Michael wanted to have a property manager from the get-go. He realized after running a business that if he wanted to scale, he would need a team behind him.

Michael did some property management for some family-run properties in college, and he didn’t want to do that again.

 

How did you find it, how much was it, and what was the rent? Tell us a little about the numbers and how you found it.

There was one area in the southwest part of Las Vegas that was active and being built out. There was a lot of new development going up. Michael did not want a fixer-upper, because he was still running his business at the time and he wanted something simple that he could buy and hand over to a property manager.

In 2008, this area had really grown, but when the crash hit, building dropped off.

Eventually, Michael traveled to Las Vegas, hired an agent, started visiting properties, and started making offers. It took about 15 offers before one was finally accepted.

The property was about $120,000 and rented for about $1,150 at the time, and it was a three bedroom, two bath home, about 1,600 square feet.

 

Do you feel like it is a necessity to fly out and actually be there or would you be able to call up an agent to look for you and send you pictures? Do you feel risky enough to invest in an area without flying there?

At this point, Michael would feel comfortable investing in a new area without flying there. Since he was so new to real estate, he wanted to get his hands dirty. He had a low risk tolerance when he first started and he didn’t want to just jump into something.

With real estate, it is easy to get analysis paralysis, where you just analyze something to death and never pull the trigger.

Michael has suffered from that. It was good that he waited for the crash, but it took him five years to find his first deal.

 

What went through your head during your first deal? Walk us through any roadblocks. How did you get past analysis paralysis? Was your wife onboard?

Thankfully, Michael’s wife was onboard from the get-go. They have been together since college and she always knew he was entrepreneurial and wanted to invest in real estate. However, she didn’t want anything to do with it. She came out and looked at some properties, but she didn’t really care.

The first property he purchased was penciled out to have about $200 to $300 of positive cash flow.

Michael is a details guy, but when the escrow was going through on his first property, he realized he missed reading a whole section of the Homeowner’s Association (HOA) disclosure about rental exclusions.

His first rental property ended up becoming a second home, because he wasn’t allowed to rent it out.

 

Read the Fine Print

Michael’s first rental property he bought in 2010 was a part of a Home Owners Association (HOA). In all of his research and number crunching, he missed one key thing.

The HOA he was a part of, which you must agree to the HOA agreement when you buy the home, had a major stipulation in the fine print.

In the HOA Contract, no property can be leased as a rental. So Michael’s first property he bought to become a rental BUT he was bared from leasing his property to any tenants.

He was fortunate enough to sell his house 6 months later. Even though this happened, it didn’t stop him from continuing to invest. He bought a similar house across the street that was in a different HOA that did allow leasing to tenants. The property is still rented and he makes passive income from it every month.


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You saw the document beforehand?

Michael did have the document beforehand. Consider that there are possibilities beyond what you think are there. Take the extra time or find a coach or a mentor who can help you insure everything is up to snuff.

One reason he missed the exclusion is that he went into purchasing the property as a second home, because he wanted a lower interest rate, knowing he was going to flip it to become a rental. He didn’t focus on the basics.

Most HOAs do not have a rental exclusion. If you will be purchasing a property with an HOA, make sure to read every single line item.

 

How did you get out of this property and what did you do afterward? 

Michael was seeing people online rent out their properties in this area, and he assumed he could do the same thing.

It was a very expensive lesson upfront because he couldn’t rent it out, he was paying the mortgage out of his pocket, and he was living in a different state.

Ultimately, the market appreciated since 2010, and Michael was able to get his money back, simply from appreciation.

Michael ended up buying a property across the street in a different community that had the same numbers and the house was the same size and same price as the first one. It was exactly as he projected in cash flow as the first house and he still holds the property today. All of the due diligence he did for the first property transferred to the next one.

The lesson: Even if you screw up along the way, big or small, don’t get discouraged. Keep pushing forward and being persistent. Over time you will be able to do well.

 

Are you currently buying more properties? If you are, where are you with buying?

Recently, Michael has not been very active with single-family homes, because he has been home the last few years with his kids and he has not been actively looking.

Since he has been home, he decided to start blogging and looking for deals at night. He stumbled upon crowd-funding real estate investing, which is a way for people to pool their money and purchase a property so you can get fractional ownership in a deal.

Michael started doing crowd funding through a company called RealtyShares and he did about 10. About three or four years ago, they would go into high net-worth areas and find deals on homes in Beverly Hills and Brentwood that were about 50 or 60 years old.

Knock them down, put up new mansions, and sell them at crazy appreciating prices. Michael was getting about 18 percent returns. Those deals have since dried up.

Recently, Michael has been sitting on the sidelines watching the market go up. He has invested in some syndications and last year he invested in some apartments in San Antonio (about 180 units) with some other people.

Syndication is when you have an active investor who is finding the deal and running the property day to day. Passive investors give money to a company and they get all of the upsides of owning the property.

 

Syndication for Buying Multi-Unit Properties

After buying some single family homes, Michael turned to multi-family homes.

Being an investor, he decided to become a passive investor where he invests his money with a number of other investors. All the passive investors invest their money together and become a larger down payment.

With more money for a down payment, they are able to buy a larger apartment complex.

10 investors with $30,000 would be $300,000 to be invested in a property.

Now they are able to purchase a property worth more than $1,500,000.

 

Can you tell us a little bit about your syndication and how that process went?

With the syndication, Michael put in about $30,000 and it gave him a fractional ownership of the property, which gives him a Schedule K-1 at the end of the year and the tax benefits.

He is paid a preferred share of about 7% quarterly. The idea is to hold the property for five years.

They are doing some fix ups so they can raise the rents. Once the rents are raised, they have the opportunity to sell the property at a profit. At that point, he would get a property share.

This is a passive type of investment.

 

When you say preferred shares of the company, what does preferred mean as opposed to non-preferred?

Preferred shares are paid first. When the company collects the rent, they pay expenses first, then preferred investors, and then the other group. The other group could include the operator/manager of the syndication.

If you are the passive investor, you don’t want any conflict of interest with the operator, so they make sure you are paid out first.

 

How much of the entire deal did that $30,000 buy you and how many other investors are there total?

The property was about $10 million. The number of investors was not disclosed, but Michael assumes it was about 40 or 50.

Michael doesn’t know who the other investors are because there are so many of them.

 

 

Would syndication be something you would continue doing or would you rather be a more active investor where you buy your own properties? Is this just another tool in your tool belt?

Syndication is just another tool in the tool belt. Michael focused on syndication, because he is home with his kids during the daytime. However, his son is going to kindergarten next year and if there is a downturn in the next few years, he will definitely pursue a more active role to get more physical properties.

Syndication is pretty conservative and safe, but there is a limited appreciation upside.

If he had the time, Michael would favor the individual, single-family home or multi-units that he could buy and own outright versus a passive investment.Check out his site where he lists out everything for you to see how he is investing.

 

What is your favorite thing about rental properties? What do you love about them and what are you encouraged by when you buy them?

Real estate can take a lot of time up front, but when you find a deal, you typically know when it is a deal and you make the money up front.

If you buy it properly, it will pay you for life and you can ride it out through different cycles. You can hold it indefinitely or you can sell it at the peak of the market.

You have the ability to pre-load the investment and not wait for the cycles of the real estate market. You can make a difference, improve the property, get creative with financing, etc.

How did you buy your first property? Did you use cash or did you take out a mortgage? How did you go about building your business?

The first couple of properties were purchased through traditional financing. Michael was still working for the business and he applied for financing through places like Bank of America and Wells Fargo.

When you do your first deal, you don’t have any history of real estate investing and the bank will want to make sure you are going to be okay, so they will ask for more things to make sure you are financially sound. After the first one, you can show them numbers for the property you are buying and use that to offset some of the risk.

Michael didn’t get beyond traditional financing. If he did, he could have used hard-money lenders. There is a ton of money out there from people looking for deals. You can partner with others to get money for the deals.

Once you have a few properties, it is easier to get financing from investors. Prior to that, you can use seller financing, FHA loans, hard money lenders, blanket loans, etc. You can get started in many different ways.

 

Do you have any other lessons you’ve learned throughout this process that you could share?

If you are on edge and you aren’t quite sure when to get your feet wet, taking the time to learn about real estate beforehand is the key. Understand the numbers first and then execute.

Condition your mind so you are ready.

 

If you were to start over from scratch and you had $1,000 or $2,000 to your name and no properties, but you had experience, what would you do to build a rental property business?

The great thing is that you don’t lose the knowledge.

Michael would do some freelance IT work, just to get some cash flow back into his pocket and stabilize himself and his family. After that, he would start saving to rebuild capital and watch the real estate market so he’s ready to strike when the time is right.

It is easier to buy a house with cash than find financing and go through that process. When you are looking at saving money, you are investing in your future, because you can buy more properties. You need to be saving, so you can build your business faster.

The trick to doing this is, as you are growing your career, keep your lifestyle stagnant so you can save your pay increases. You will not miss the money you are saving.

Help your kids to see the value of money. It will help them realize life is not free.

If you feel like you have enough to give and share with God and other people, you will feel that much wealthier in your own life. There is a switch in your brain and you are actually able to accumulate more wealth when you give. When you are out there giving, you are more able to receive.

How can people reach you and see what you are doing and working on?

 

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Go to www.masterpassiveincome.com/freecourse, to learn more about my free course and to sign up. This will help you get started investing in real estate properties. It will show you the great things that are in store for you, when you start investing your money in real estate.


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WARNING! Always Read the Fine Print When Investing In Real Estate

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