Behind the Scenes of a Real Estate Deal


The anatomy of a
deal, our next round of rental real estate purchases. That’s today’s show. Let’s dive into it. Hey everyone, I’m
Clayton Morris. I’m Natalie Morris. And welcome to the team. This is the show
where we focus on buy and hold real estate for
the purposes of creating passive income and legacy
wealth for you and your family. And we’ve looked back at a few
of our more popular episodes over the past couple
of years, and some of those episodes
that have been popular have been the ones where we
talked about simply putting together our next purchases,
some of our next deals that Natalie and I are,
in our personal life, are going to actually
acquire and add to our rental portfolio. And so that’s what we thought
we would do on today’s episode. And the impetus for
all of that, actually, was over the past
month you came to me after speaking with
our accounting team over at provision, and
what did you say to me? Oh, this is what they said. They said, OK, you guys
your taxable income is going to be pretty high this
year for a couple of reasons. So you need to make sure you
focus on acquiring real estate. And I was like, oh, great that’s
all Clayton needs to hear. Yes, let’s go. Right. That’s what he wants to
do all day, every day. But this year our
tax rate will be high if we don’t acquire real estate. Like I said, for a
few reasons, we’re in the highest income
bracket for taxes. But also Clayton
has quit his day job so we have a 401(k) to
rollover into an IRA, which was what we were going to do. But that 401(k) is not a Roth. It’s a regular IRA, and I know. That was just a decision
he made 10 years ago when he wasn’t really
familiar with the distinction. So what is the
distinction first of all? Because that I wish I
could go back in time. If I could turn back time. Is that Cher? You should be
wearing– yeah, you need to be wearing that
Cher outfit with sheer v down the crotch if you’re
going to sing that. Could you see her nipples
through that shirt? I think so. There’s your Halloween
costume, my friend. And they could share
a Halloween costume. That would frighten
the children. Can you imagine showing up
to the kindergarten social? Hey, everybody. What are you? I’m naked Cher. Yeah. So what is the
difference between a Roth and a traditional 401(k)? OK, it has to do with the
money that you put into it. So you make money,
you put that money into your taxable account– your Roth or your traditional. If you have a
traditional account, the money you put
in there is pretax. So that money has not been
taxed by the government. It comes straight out of the
lump sum of your paycheck before any taxes are
taken out of the paycheck. So then when you
take that money out, you owe taxes on it, whereas
if you choose a Roth, you are putting in post
tax contribution dollars. So your money has been taxed. And then you put that
money into the account. So then when you withdraw
it at 59 and 1/2, you don’t ever pay
taxes on it again. Now the kind of bunk of it all
is that, when you withdraw, you’re taxed on the
crop, not the seed. I don’t want that
because I intend for that crop to be huge. I want to be taxed on
the seed, and then I want to grow a huge crop
and take it out tax free. So I’m not down with
the traditional account. So we had to take the
lump sum of that 401(k). And I was trying to
work out the math because most of our
investment deals, the real estate that we own,
makes a minimum of 11%, 12%. Net. Right. But let’s say we took that
money and we lent it out to a friend or another investor
at 8%, an 8% note or whatever. Conservatively, if I took that
money– it’s around $320,000– and I make 8% for the next 19
years until Clayton turns 59, then that money is
worth $1.8 million at the end of 19 years of
investing it at that rate. So do I want to pay taxes
right now on converting that into a Roth account
on $300,000 or do I want to pay taxes
on $1.8 million? Well, it’s going to hurt this
year to take that tax hit, but I want to pay that now
because I don’t want a tax bill on $1.8 million if I can
succeed in growing that crop. So that’s why we are going to
have a big tax hit this year. So our accountant’s
like, well, in order to offset that, you have
to buy at least $2 million worth of property. And Clayton was like, let’s go. Giddy up. Let’s do it. Let’s find a way to do it. And there are a number
of different ways to buy real estate–
obviously, cash on hand. You’ve got a 401(k). You’ve got different
ways of financing, maybe delayed financing. So you purchase a property and
then you pull money back out. On the back side, we
have a lot of investors that work with us that do that. But this time
today we actually– and we don’t ever invest
in the state of New Jersey, and that’s not something
that we normally do. But we’ve got a large
acquisitions team. And we actually had something
that came across my desk a few weeks ago right
as this whole discussion from our accounting
team at provision was talking about this. And I said, hey, let’s
take a look at this. And it was actually something
from one of my accounts managers from one of our
acquisitions team members that said, look, there’s
a portfolio of properties. We’ve got a tired
landlord here that wants to unload his package of
properties that he owns, and it just so happens that
it’s in the state of New Jersey. And so immediately alarm
bells go off for me right because we
live in New Jersey. New Jersey is expensive. I don’t own anything here
except our primary residence, and taxes are incredibly high. And it’s not terribly friendly. It’s a landlord
friendly state, meaning like evictions can
take longer if you don’t know what you’re doing. So there was a
couple of variables. It was like beep, beep,
beep, alarm bells going off. But once I started to dive a
little deeper into the numbers and realized that actually
some of this guy’s portfolio is actually pretty attractive. And I thought the
barrier to entry was going to cost us like
$400,000 per property or something. So I was like, I’m not going
even look at these things. But then as I started
looking at the package, he had like I don’t know– he
a couple of dozen properties. Some of them were large
multiuse and stuff that doesn’t interest me,
having like a storefront. And I’m not interested
in commercial stuff. But some of them were
residential properties. Mixed use. Mixed use. I’ve never had luck with
mixed use properties. It’s not something
where you’ve got like a storefront and a house,
like an apartment upstairs. I have a lot of
investors that just don’t know what to do with those. They’re not terribly
attractive to investors. So anyway, I looked at a
portion of this portfolio, and I was like, well, actually
this is pretty interesting. And we thought maybe we could
get some financing on this, put together like a package,
and pick these properties up and add them to our
personal portfolio. And that would take
a huge chunk out of that tax hit
that our accounting team had asked us to look at. So we sort of run
in the numbers, and we’re pretty
close to pulling the trigger on this thing. Right, and so that’s
why we thought it would be fun to do like
an anatomy of the deal type podcast because
it’s like deal porn. Everyone likes to
hear about the deals. If you listen to other
real estate podcasts, I feel like the first
thing they always ask these investors is tell
us about your first deal because you want to
know, where did you find that, what were the numbers. It’s super inspiring. So even though this is
not something that– it’s not it turn key
really because we found it we found it ourselves through
a relationship that we have. We don’t have a
team in this town. So we’re going to have to
go and interview contractors ourselves. We’re going to have
to find a new property manager because the owner
had been managing them. We’re going to have to put a lot
of elbow grease into this deal. So it’s not turnkey. It’s just something
that we wanted to share with you because we
like to share with you how we’re growing our
wealth portfolio, and I think people
appreciate that stuff. So OK, let’s talk
about the deal. Are you ready? Yeah, let’s dive into
some of the numbers. And then I do want to talk
about the property management piece of all of this. That’s my biggest concern. And so we’ll get
there in a moment. But let’s talk about just
some of the numbers on these. OK, so this came in a package. We got this long
Excel spreadsheet, and I was like what is this. And I wasn’t quite sure how– it was just a big
old sheet of numbers. And when I started
to dissect it, I realized it came actually with
an explanatory word document where it talked about
where these came from, why this person
wanted to sell them, and what had been the
history of these properties. So they had been military
housing built. I think that– I’m looking here
if says year built. They’re not more
than 40 years old. And they’re small
military housing. There are not any more. They’re open for civilians. But this guy picked
them up I think back in the early 70s or late 60s
and has been managing them ever since. And they’ve been great for him. He owns over 40 of them,
but he’s selling them now in packages of five duplexes. So what we will be buying
is [INAUDIBLE] total in packages of five. He doesn’t want to
sell them one by one. He doesn’t want to
go through a realtor and pay commission on
like 40 properties. He just wants to
get rid of them. And he even wrote this
cute little note, like, why am I selling this. Probably I’m an idiot for it. They’ve been great
investments for me, but I want to retire in
Florida or whatever’s left of Florida now
after this weekend. Hopefully, he still
wants to sell them. But hopefully he’s got a great– this is his great
retirement plan. He’s had these buy and hold
real estate for over 40 years. They’ve done great for him. They’ve been the way
that he supports himself, and now he can
walk away from it. He is ready to be done. He’s a great success story. Right, so a couple
of questions here. For us, like you
and I, we don’t ever plan on selling our properties. But there’s a lot of questions
that come up often times when you’re learning like
the wholesaling business, you’re getting involved in
real estate for the first time, it’s like why would a
seller sell the properties. If you ever go to a real
estate investment meeting and you talk to some of the
old investors in the room, a common thing
that they’ll say– if you ask them what’s
your biggest regret, overwhelmingly
the biggest regret is that they wish
they hadn’t sold the property that they sold. They wish that they would
have held onto that property and not sold it. I mean, there’s part of
me that’s like, well, dude if they’re so great for you,
just get a property manager and still move to Florida. you Hopefully he doesn’t
listen to this podcast. He’ll be like, I am
going to do that. In France, wherever it is. I think he’s in
Europe right now. He’s living the life, this guy. Yeah, let’s talk about
that a little bit more because he didn’t manage them. He managed them
himself, which I always think is a problem because
now all of the onus is on him. He’s a tired landlord. He’s tired of being a landlord,
which is something that you and I never wanted to be. I never wanted to be a landlord. I want my property
management teams to deal with all of that stuff. So that’s going to be the
trickiest piece of all of this for us. You want to be a regular
lord like on Game of Thrones. Exactly, I don’t want
to be a landlord. And so he’s exhausted from it. I mean, he’s just tired of
managing all these properties. But so then the idea
is that you want to hold these properties
for the rest of your life and be able to hand them
down to your family. And sometimes in
those situations, you’ll find these guys
who’ll say, you know what– I have heard it many, many,
many, many, many times from people. They’re say, you know what, my
kids just aren’t interested. My kids just aren’t
interesting in dealing with these properties. But in their mind, they’re
probably thinking, hey, I’ve seen dad manage these
properties himself for years. I’m not interested in that. I live in California. I want to focus on my software
business, my startup in Silicon Valley. I don’t want to be managing
these properties back in New Jersey like dad did. But that’s because he didn’t
have a property management team in place. He didn’t make them
attractive in that way, and he’s now wanting to
unload these properties now. There’s like big
tax implications for him wanting to unload
these properties the way that he kind of was maybe
thinking about unloading them, which is if he sells
them all at once, he’s going to take a huge
tax hit on these properties. The capital gains on him
selling these properties is going to be enormous. So when we approached
him, we actually found that he was amenable
to doing seller financing. If you want to go back to our
episode on seller financing, I think you should because
then you can really understand why a
seller like this would want to use seller
financing instead of doing it all at once and selling the
properties simultaneously. By doing seller financing,
he can spread out his capital gains hit
over a number of years. So if we do like a
10 year note with him or a 15 year note with
him or a 30 year note, he’ll spread out his taxable
burden over those many years because it’s not all at once. Does that make sense? And then he’s got some
great cash to live on. He’s still got cash flow. So this was episode 151– what is seller financing–
we did way back in May. You can look that
up if you’d like. So he wrote actually
in his cute little note about why am I selling these. He said owner is available or
interested in seller financing if you would like. Now he just decided
to package these up and put one price
on each of them. So he sort of values each of
them at $75,000 per duplex, and he’s selling them in
a package like I said– or no, $75,000 per unit. So he’s selling them in packages
of 10 each worth $750,000. Did I say that right? $75,000 times 10 is 750. So that’s what he wants, 750. And he wrote owner is willing
to finance $420,000 of it. So you’re going to
have to put down– we we’re going to have to come
out of pocket more than 20% that you would put
on your primary home, more than even 30% that you
might get an investment deal. He’s only willing to
finance a portion of it. So he wants to walk away
with some cash, around 330 per package. So he will pay
taxes on that cash, but then he’s
willing to do a note. So then of course my questions
were, what kind of note. I like seller financing
because then my rent is financing the note. I’ve got a little
bit of cash flow. In 10 years, I own this. I got a lot of cash flow. So I went to the
acquisitions person. I said, OK, I’m interested. What’s the deal with the note? And they said he wants to do
only a 10 year amortized note– so not an interest only note,
an amortized note, meaning after 10 years I own it. Now 10 years is a short term
for a loan of this size. So that means my payment
is going to be pretty high. It’s $4,455 a month. That is doable though
because these properties are cash flowing no
less than $900 per unit. In fact, most of
them are over $1,000. The lowest one actually here
is $815, but the rest of them are all in the $900s. So this property, this
set that we’re looking at, this one set of 10, is cash
flowing $9,561 per month. And they laid out what are
the property taxes, what are the insurance
rates, and then what are the utilities that
the owner is responsible for. So he gave us all of these
averages of expenses. So I know that the annual
expenses are $22,800. So if I divide that by
12, I get $2,700 a month. OK, so can I afford that then? $9,500 cash flow minus
$2,700 in expenses, and $4,500 in a debt service. Still, cash flow is $2,300. So yes, I can do that. Those numbers work for me. Now obviously, we wanted to do a
little digging on the internet. Do these look nice? Does this look like
what it says it is? We did some due diligence to
verify that this was true. But at these numbers,
yes This works. What did we figure out
was our cap rate on that? It was 18. No, no it was 19%. 19%. Yeah, it’s 19% ROY. That’s not a deal
you walk away from. Yeah, now– so some things
to consider on a duplex. We mostly own single family. So duplexes are attractive
if you can find them. The thing is with duplexes
is that you’re always going to have a higher
vacancy rate when you start dealing with
multifamilies as opposed to single families. Without a doubt you are. You’re going to have
a higher vacancy rate. People are more transient in
duplexes, triplexes, quads, etc. and on and on and
on because there’s a mental thing about
having your own property, a single family residence. And I just know this
from our numbers. I can tell you, across the
board, across the country, it doesn’t matter
where you are, you’re going to have higher
vacancy rates when you have multifamilies. It’s just a part of the deal. So how can we mitigate that? So when you look
at that cap rate, yes, that sounds exciting. People get excited about
a cap rate like that. Now what if one of the units is
vacant on a more regular basis? So then your cap rate
is going to go down. It’s going to look more like
a single family residence, and it’s going to
actually be a little bit below what a normal single
family residence might– the ROY. If you’re at a 12% net,
it’s going to be below that. If you split that in two,
you’re looking at below like 10% return. Yeah, but we still
budgeted for that. We still budget for one
to two months of vacancy. So and they have leases on
every single one of them. So I know, for at least
the time that we close, we will have fully rented units. Well, so we think. Now here’s the rub. You and I are just talking
about this openly here. I mean, because we
haven’t done the deal yet. The deal is not complete. We’re putting it all together. And look, with all
of our experience in inherited tenants– I mean, look. Let’s be honest. Inherited tenants can be a
bit of a nightmare sometimes. If we acquire properties in our
different markets, inherited tenants, they can
sometimes be good. Sometimes they can be bad. And the problem is– My sister’s inherited tenant
just stabbed her boyfriend in her unit. This is not a property
she got from us. No, no, no. This was in Idaho. This was in Idaho. She found this herself. She did some great
wholesale legwork. And then she was,
like, I’ll don’t know about these
tenants I’m inheriting. And then, yeah. One of them was stabs somebody. That’s not a high quality
tenant with stabbing. When you get somebody that
stabs the other tenant, that’s probably not a good one. We shouldn’t be laughing. I know. But this is part
of the business. People want to get so
panicked about real estate. Look, if you’re a real
estate investor, guess what. You’re going to have an
eviction at some point. If you’ve got 30
properties, guess what. You’re going to
have an eviction. If you don’t have
an eviction, then I don’t know what you’re
doing because you’ve got to be in this game. You’re going to
have these issues. You’re going to
have a gutter that’s going to come off your house. You’re going to get a
health code violation letter in the mail. You’re going to
have an eviction. Hopefully, you don’t
have a stabbing. But you’re going to have
these issues at some point. So as a business, you’ve got
to try to mitigate as many of these things as you
can or surround yourself with a great team that
will do it for you. So anyway, inherited tenants– they could be a
pain in the butt. And if we buy a package
of properties in one of our markets, and
we’ve got to go in and do a full rehab on
the property and we have some that have inherited
tenants in the property, sometimes we want to try to keep
those tenants in the property. But we want to put them now
under our regime, so to speak. We want to get our
property management team to get new, fresh leases
signed on them because we don’t know what kind of
history they had with some previous landlord. They might not have even
been paying for three months. So great, I’m
inheriting a tenant. Have they been paying? Like I don’t even know the
history of this tenant. So yes, it’s one thing to have– I mean, we’ve heard
stories here on the podcast from experts I’ve had on who
bought a 100 unit apartment complex. And I forget the
guests’ name who told me he bought this big
apartment complex in Arkansas or something. And he was a guest
on our show, and he said they had faked all
of the tenant ledgers. So he went on this
syndication deal, bought this big
apartment complex, thought he was getting all
these great inherited tenants, and it turns out he had a
bunch of fake tenant ledgers. And so he had to go through
and unpack all that stuff. So it’s one thing– And also we have this
sweet, little man who is writing this
letter about selling them. But he’s managed
them himself, and I don’t know how he vetted these
tenants, whereas my property manager’s are
taking credit checks and doing background
histories and driver’s license records and all of that stuff. I don’t know if this sweet,
little dude did that. I have no idea. Yeah, exactly. So you don’t know, and you
also don’t the market rent. Chances are he’s probably
lower than the market rent. So now that puts us in
an interesting quandary because, on the
one hand, we want to keep these tenants in the
property, on the other hand, maybe we could get
to $200 more per unit now than we might otherwise
be able to because he was well below market rent. And that’s what you’ll find with
a lot of these tired landlords. I’ll talk to them on the phone. They’ll say, I’ve had these
tenants in there for eight years, and they’ve been great. And I’ve never raised the
rent, and they’ve been great and they pay on time. And that’s great. But you’re also now 400– in New Jersey, rents can
be like $2,500 a month. Now you’re $400
below market value on the rent in this property. So on the one
hand, that’s great, and it’s sweet that you’ve
been so kind to these tenants. On the other hand, you
might be losing money because you’re not keeping
up with the market rent. So some things that
we need to consider as we look at these tenants and
go over this tenant ledgers, see what their history is,
what kind of background check did he do, to your point
with our property management companies, they’re doing
a full background check, they’re doing a
credit check, they’re checking with
previous landlords, they’re doing all
of this vetting to make sure that they
are a good tenant as best as they can. We don’t know what he’s
done with these guys. Yeah, exactly. I will tell you, that’s
my biggest concern. So yes, it is attractive that
these properties are rented. That’s fine. I’d almost rather have them be
vacant to be honest with you because then we can start
fresh with our own tenants. So I’m just putting
it out there. I know that they can
be a pain in the butt. I’m going to tell you right now. Well, let’s have a little
more faith in people. I do have faith in people,
but it’s also a business. And I know enough of
getting inherited tenants that, yes, you want to bring
them under our umbrella and they might say that’s great. But we need you to come down the
office and sign this new lease and get this up and running,
and you may find out that– guess what– they haven’t
been paying the previous owner. The previous owners
ditched down. I got these 10 properties I now
need to rehab, and that’s fine and I’m going to do that. I’d almost rather kick the
tenant out of the property if they’ve not been paying and
I can’t get them under our roof so to speak and getting them
signing our paperwork so that we can now get them on
a fresh, new system of paying on time on first of the month. Oh my god. You’re such a slave driver. Well, I don’t want people– You want to get paid for
your rental properties. Here’s the thing. You will find that
there are tenants that the relationship they’ve
had with the previous landlord, this little, sweet old
guy, might be that they bring in $100 every week. He brings in $100,
and that’s fine. And we have tenants like
that, who they get paid and so they bring in
$100 over the course of the month, every week. And they make up their
whole rent payment by the time they get to
the end of the month. That’s fine, and you can
work with tenants on a case by case basis if you like. And we do. There are certain tenants that
we have that relationship with. But I don’t want people
to bring in bags of change into the office and dropping
it– here’s all I’ve got. You’ve got to make
sure that everything’s on the up and up is
all I’m saying now. You are lord. I am. You’re a star lord. OK, well, so after we
submitted these questions and told the person who
was facilitating the deal– we said, yes, we
definitely are interested, send us a purchase
agreement, and I want to do some
seller financing, he wrote back and said,
actually, now there may be multiple
offers and the seller may not be interested
and seller financing. He may just choose the ones
that are easiest for him. So can you close without it? OK, that means I have to
come up with $750,000 then, and I don’t have that
in my back pocket. Do you? No. So that would make it a
little bit more challenging. Actually, let me see
what I’ve got here. I’ve got my money clip. How much cash do I
have on hand here? I have $60. That’s not going to buy
us a package of duplexes. That’s not going to get it. So what I have on speed
dial is this one lender that I like to work with. And they work with
real estate investment. We’ve talked many times
about private lending. And this is a company we
use called Lima Portfolio– Lima and Capital, rather. And when we closed a portfolio
deal with them last year, it was great. They had a 30 year amortized
note for, I want to say, it’s 7% is around what
we’ve got on that right now. Well, I called them
up and said, hey, what if I wanted to do
another one of these. And they said, you’ve
been a great customer, we definitely would
work with you again. Now we have a five one
arm, which is a five year adjustable rate mortgage. So it’s locked in for
five years at around 5%. And then after five years,
it adjusts to market value. Well, we worked so hard
to use the cash flow from these portfolio
deals to pay down the balance, the principal
balance on these loans that, heck, yeah, I’d
take five years at 5% because, by then,
five years later, I’m going to have used
most of this cash flow to pay down the note anyway. So either I would refinance
it or maybe market rates would be lower. By then, I can make a
plan, a good solid plan. But do I want five
years at 5% interest? Yes I do want that. So I ran those numbers to see
how I could qualify for that. And that would make
my payment much less because they would only
require a minimum of 30% down so I would need less
cash to come up with. I’d be financing a little bit
more, but the terms of the loan are 30 years. So my payment now is
in $2,000-$3,000 range. So that means those deals
cash flow even more. But there are a
couple of drawbacks. They make you get the most
expensive type of insurance on your properties
because they’re insuring the note
clearly, and they make you escrow your
taxes and insurance. So that’s kind of a pain. I don’t like doing that. I’d rather budget
for that myself. But the numbers still work. So this is another
way for us to do that. Right. A number of different ways
to skin a cat in this, right? We can actually– if we can
do the seller financing deal, great. That would be ideal. And if we can’t, then
let’s try to find out another way of doing this as a
package in putting all of this together and having to
come out of pocket this 25% down in order to do this. Great. The reason that these work
is because they’re already rehabbed. They’re already
rented, and the cost is going to be higher
than the properties that you and I normally
do, which is going to be in that 40 40 range. So they’re more expensive,
but we’re putting it out there because we need to
hit a certain number of cost anyway from our
accounting teams. So we’re not scared
about doing that, and at the end of the day, the
ROY just comes down to ROY. So again on the seller
financing piece– let’s go back to that real
quick before we wrap up. So the reason seller financing
is so attractive, not only for a seller– the reason the seller,
as I mentioned, finds it so attractive
is because they can mitigate their capital
gains burden by spreading out that thing over a 15 year
note to 20 year note, whatever they want to do with you. It’s also a
relationship between you and a seller, not
you and a bank. So all of the extra
things that you have to do– like, if we
went with this direction with this other private
lender, this bank, so to speak, this hedge
funds so to speak, there’s a lot of other things
we’d have to pay for in order to do that. There’s like– Yeah, it’s $600 per unit for
you to pay the inspection fee. Yeah, I mean that’s absurd. And that’s out of pocket right
even before you’ve been– I mean, you’ve been approved. But before you close, you have
to pay that inspection fee. Yeah, and that’s kind of a pain. So we’ve got to get approved. And then we pay for
that, and then– And the approval is
like bloodletting. They ask for a lot. Tons of paperwork. And with the seller,
they don’t care. As long as you can pay, they’re
not going to do much of that. The seller did ask– they said if you ask
for seller financing, we’ll ask for a credit check. And he wants some minimal
proof that you will– but he already knows,
these deals cash flow. So you’re going to pay me. And if you don’t, I
take this property back. Exactly. So for him, he’s in first
position on these mortgages. So he already knows these
properties are good. And so if he had
to foreclose on us or if we couldn’t
do the deal, he could then take back
ownership of these properties and they’d be cash flowing
again for him and his family. So that’s the benefit. Also the benefit of
seller self-financing, you don’t have to jump through
all these hoops and hurdles, like regulatory issues. It’s him selling the house. He’s going to use a mortgage
servicing company to maybe set up the note for us on
these different properties. Great. But here’s the other
great benefit for us as a buyer of seller financing. And I’ve done this before,
and this is probably my favorite piece of this. Yes, we’re setting up
like a five year note with him or a 10 year note. But what if in five years, we
have a big windfall of cash and we just feel
like paying this off? And we say, hey, Mr. Seller, we
were thinking about– we just got this lump sum
of cash, and we were thinking about,
instead of waiting till the note is wrapped
up, what if we could just pay this off right now? Here’s a lump payment
for you of $200,000, or here’s a lump payment
for you of this amount. Do you think he’s going to
say yes or he’s going to say, no, I want to wait another
eight years to get my money? No, he’ll say yes most likely. He’ll say yes. Now what did you just do? Well, you’ve now–
and you can even come to some sort of agreement. You could even say– Well, you’ve saved yourself
five years of interest or however long you’ve got. And a lot of times,
you can make a deal. You can say, look,
I can give you 95% of what I owe you right now. A lot of times they
want that, 80% even– depends on their situation. So I did that recently
with a property that we had in
Pennsylvania where we had seller financing
with this particular seller. They held the note. It was going to be, I
think, a five year note. I went to her about a year into
the deal, a year and a half into the deal, and I said
look, what if I could pay you 75% of what I owe you right
now and we call the deal done, and she said, yes, I’ll take it. You know why? Well, she was trying
to sell the note. We got someone who
called us and said we want to verify that you have
this note because she’s trying to sell it to a third party. And we’re like, no, no, no. We don’t want to
owe somebody else. We want to own it. Yeah, we want to sell it. And so we called her,
and she was able– I said, what is this person
going to pay for the note, and she told us. And I said great. What if I could pay
just a little bit more or the same amount or
something like that? Like, I’ll send you
a check tomorrow. And so I paid it off,
saved a boatload of money because we were able
to pay it off sooner. See, that’s the relationship you
can have with a seller in that regard because there’s
no bank involved. It’s human being to human being. And it’s a great to do
business if you can find it. So anyway, that’s what
this is all about. We’re trying to piece
this one together. Hopefully, we can
make it happen. We have this package,
and then we’re going to buy a bunch of other– I want to continue to buy
some of our new construction properties in Indianapolis. I’m excited about those. To round out our tax burden
right now with our team from provision, we
still need to acquire an additional
boatload of properties before the end of the year. Because our tax rate on
that will be like $150,000, which sucks because
there’s this whole– what you thought you were
getting when you signed up for this company
401(k) was like great, free matching and free
automated savings and tax protected savings account. But it’s not a tax
protected savings account. It’s going to be a heavily
taxed savings account. I feel like people think of
401(k) as a religious vessel, like you can’t touch it
and you can’t question it. But, man, that sucks, to learn
that the hard way– like, wait, I’m going to be
taxed on this withdrawal, on the whole crop? So, yeah, I don’t like that. And so we’re going
to do the best we can to mitigate that taxes. But we also do accept that
this is a taxable event because, when we transfer it
out of it’s infidelity right now into a self-directed IRA,
we’re transferring it as a Roth and that triggers a tax event. It doesn’t trigger, though,
the 10% penalty that you would get if you withdrew it. And I think there’s like a
transaction fee on top of that. So it just triggers a taxable
event at your current tax rate. There you go. So we’re piece this together. Anyway, this deal came across my
desk from my acquisitions team. I said, let’s take
a look at this. Normally, I’d be averse
to anything in New Jersey. But the numbers, the taxes were
low in this particular town. It’s not a big town. So there’s not a lot of
infrastructure and jobs. So that’s a little concerning. But we’re still in the early
stages of putting this deal together, and we’ll see. Maybe we actually walk
away from this thing. I mean, we don’t know yet,
but I’ve certainly walked away from a lot of deals in my life. So we’ll see. We’ll see how this
all comes together, and maybe everything
will line up. And once we see that
these tenants look good and the tenant ledgers
and all that good stuff that all comes together,
then we’ll go from there and we’ll pull the trigger. So this is a behind
the scenes right now of our next acquisition. There you go. So my wise closing words are you
have to know how to hold them and you have to know
how to fold down and also you have to
know when to walk away. That’s it. We don’t really need to run it. Did you pull those lyrics up
on your screen so that you– No, I had them right here. Yeah, right. And you kind of didn’t get them
accurate either, but that’s OK. What are you talking about? Well, no, I think you did. Yeah, you’re right. All right, Kenny Rogers. That’s it. Gotta know when to hold them,
gotta know when to fold them. Thanks for watching the
Investing in Real Estate Show. This is how the sausage
is made, everyone. Much love to you all. Thank you so much. If you’re ready to pick up
your first rental property and you want a team to do it
all for you, you know the drill. Just come on over
to our web site. It’s morrisinvest–
M-O-R-R-I-S– morrisinvest.com. Click on the book a
call tab, and jump on the phone with our team. We’ll talk to you
for like 30 minutes. We’ll find out what your
freedom number looks like, and we’ll walk you
through our process for getting set up and getting
your first rental properties under your belt. Until next time, everyone. We publish this show Monday,
Wednesday, and Thursday. So we’ll be back on Thursday
with another episode of the Investing in
Real Estate Show. Much love to you all. Bye, everyone. Bye.

39 thoughts on “Behind the Scenes of a Real Estate Deal

  • Hi guys. Great video. One question. Who takes care property taxes and insurance. Does seller collect the money the way a bank does or does the buyer? How does a seller insure the taxes and insurance is being paid if buyer takes the responsibility?

  • Thanks again. My wife and I are finally on the verge of getting our two single family houses rented (one was a pretty major rehab, and the other we just had some minor stuff that should be finished today.)

    I like your take on why sellers might be amenable to owner-financing. Makes sense for both parties.

    As to why we may only hold the properties for 5 years and then sell, since both are now relatively pristine, that is about the timeframe when we may start having maintenance issues. Also, our long term goal is to use the single family as a stepping stone to multifamily. We've currently got about a 5% stake in a small complex in San Antonio, and that will generate about the same monthly (though paid quarterly) passive income as the two rent houses.

    I really enjoy your channel!

  • very very interesting and informative! please update when the deal progresses. hold, fold or walk. you guys are the best.

  • We have numerous duplexes and single family homes. Duplexes are much better for income, much harder for everything else. Tenants talk, complain about noise, and other tenants. Some things to think about. 1. Assign parking and put in lease. 2. Pay to take care of yard because tenants will not. Harder to get tenants who qualify based on normal credit and income criteria. 3. Try to stay away from over and under style duplexes, better to have side by side. Much harder to sell than single family. 4. Seller loans are the best. They offer more flexibility. Can put loan on another property or properties at purchase or transfer to another property later.
    Sounds like a reasonable deal, good luck with it.

  • Clayton, would you ever consider working with a person interested in buying through Morris Invest with hard money? If not, would you consider changing your mind if said person purchased 1 property a month?

  • Folks, Give Clayton & Natalie your attention. Why?….Because they're REAL and they GENUINELY want to help you! After I initially questioned Clayton's motives (because I thought they might be another internet scam), he replied to me personally for reassurance, motivation…..and to indicate that his advice is free. Great guy – Great Couple!

  • Great video guys. Always enjoy the information and strategies you provide. Keep up the insightful videos and GO MSJ Warriors!!!!!!!

  • Please try to get the volume levels close to even between the two speakers. This can be done with compression, limiting, or just better setting the static volume level at the start. I've noticed this trend recently with her levels hotter than his.

    Keep up the great content and thank you.

  • im currently at 3 homes rented out i plan on reaching 10 by next year but the higher gal is 100 rental properties this is inspiration find out how i invest on my page

  • Clayton – I have a real estate investment portfolio in Texas and my investment philosophy is very close to yours. One key difference is that you try to pay down principle on your properties as quickly as you can, while I want to keep my portfolio leveraged (at reasonable interest rates, of course). I'm looking at cash on cash returns in the 20-25%+ (net cash flow divided by invested cash). Love your videos!! Keep'em coming!

  • Hey I'm 22 years old. I've been really interesting in real estate. I would like to know if you guys willing to help me in the process?

  • I'm interested in hearing your thoughts about investing in areas that have a high volume of single-family homes on the rental market? Is there such a thing as an overcrowded market in terms of your selection criteria? For example, I know your team invests in Jacksonville FL and there are currently about 1000 single family homes on the market according to websites such as Zillow. I would love to hear your response. Thank you for making great videos!

  • I'm waiting on my consultation phone call with Fund and Grow next week to go over credit and as soon as I can get that settled I'll be able to purchase a property with you guys!

    Always great information. Thank you!

  • IRA – the trick is to initiate the traditional IRA then! convert it to the ROTH IRA: pay the conversion fee (very small than withdrawing from the traditional IRA. Courtesy of Dave Ramsey, I listened to him also. But I make no mistake, you guys ROCK.

    Dave Ramsey is great to help eliminate personal debt. Kiyosaki is better to help learn how to use debt to leverage wealth. You put the numbers to practical application. PRICELESS.

  • Thank you both. My wife and I are working on our structure now so we can dive into real estate investing in the near future. Is Morris Invest still doing turn key houses and if so does Morris Invest do seller financing?

  • Do you write off the travel expenses associated with the purchase and renovation of a property or properties against that property or general expenses against business?

  • Hi Clayton and Natalie, please clarify; did Clayton roll over his 401k to a Roth IRA? And you are using Roth IRA to buy these units? My husband has a 401k and we are thinking where we can roll over in order for us to use for real estate investment. Thank you

  • I'm currently at 14 units in Ohio, trying to get to 20 this year. My wife and I self manage. Something I can attest to is 1. Yes, inherited tenants can be a pain in the ass and 2. If you own rentals you will eventually have evictions. If you don't, it's because your units are vacant or you're letting tenants run the show.

  • Hey Guys, love the content super helpful, I'm trying to learn as much about real estate as possible and your knowledge is greatly appreciated. Only thing I have to say is you mentioned your total expenses (taxes/insurance/utilities) comes out to $22,800/per year… you said that per month that would be $2700, where in fact it would actually be even cheaper at $1900/month saving you even more money. (16:04), anyways love the channel and the only reason I even noticed this was because I take notes on so many of your videos, thanks -Sam

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