How to Go From 1 to 50 Houses (Our Story: Part 5)

How to go from one
house to 50 houses– that’s today’s show. Let’s dive into it. Hey everyone. Welcome into the Investing
in Real Estate podcast. I’m Clayton Morris. I’m Natali Morris. And this is the show
where we teach you how to build passive income
and reach financial freedom. And the vehicle that
we use to get there is buy and hold real estate. It’s not sexy. It’s not flashy. It’s not a
get-rich-quick scheme. It’s not something
that happens overnight. It’s slow. It’s methodical. And it’s actually
kind of boring. But I think we believe it’s the
number one way to build wealth in this country, with
all of the tax benefits and everything else associated
with real estate investing. And so, today, this is
part five of our story, because we’ve gone
through the downfall. We’ve gone through
our own mistakes in real estate investing. We’ve talked about
hitting rock bottom, and sort of clawing
our way back from that. And then positioning ourselves,
getting things in line on how in part four,
on how to take action. So this is part
five of that series. So what are we going to
talk about on today’s show? So we’ve talked
about how we came about investing in
real estate, but that’s a long journey from having
enough real estate to– from deciding to
invest in real estate, to having enough that you
can quit your day job. So if you’ve
listened to this show for a certain amount of
time, or if you haven’t, you can go back and hear Clayton
explain the freedom number so many times. The freedom number is
the amount of money you think that you can live
on, so that you wouldn’t need to have a day job. You can then have that
amount of money coming in monthly from passive income. For us, we use real estate. It could be anything. And so, how you arrive
at your freedom number, is you take your budget,
your living expenses now, and then figure
out what you need, and then we always
like to pad it, because we don’t want to live– if we’re really free, we’re
not living by a budget. So we had our freedom
number in 2017, and we wanted to talk
to you about how we did, because we only really
bought our first investment property at the end of 2013. So from that one property,
to our freedom number, which now is close to– it’s
round, it’s 50 houses, or 50– well it’s 50
properties, 50 doors. I won’t parse it out, because
some of them are multis, some of them are duplexes. Anyway, you get the point. So how did we get there? We didn’t just have enough cash
to buy 50 houses and then boom, we’re there. Because I want people to– if you’re starting out
watching this show, and you’re thinking
to yourself, oh, it’s like watching an
episode of Oprah. It’s easy for Oprah to do. You get that moment,
where you’re like– well, no, it’s not. I was in debt. I had like, what?
$75,000 in debt. And I had no credit. And I had all my
bank accounts frozen. So if I can do it, if I can claw
out of that mess, than anyone can do it. It’s really– and people
want to say, well, how quickly can you do it? We did it in about, what? Four or five years. It’s a matter of how hungry
you are to get it done. So if you’re not
hungry, and you just want to pick up one
property every few years, and you’re OK with
that, and you’re OK driving two hours to
and from work everyday, and not spending more time with
your kids, and then by the time they graduate college or
they’re off to college, that’s when you want to be able
to have that financial freedom, great. But if you are hungry, like I
was, and I said, no, no, no, no, I want to do this now. And I was able to
retire at 40 years old. I wanted to do it
earlier, so that I– my knees would work. So that if we wanted
to go on a trip, and I could climb some
mountain with my family, I could still do it. I wouldn’t be 70 years old by
the time that I achieved that. What’s with you thinking
your knees aren’t going to work at a certain age? Well, you know, you always
hear people getting their knees and hips replaced, so
that’s just like my– you know, I remember my
grandmother getting her hip replaced. I’m like, how do you
get a hip replaced? You know, as a kid,
you’re like, what? How does that happen? You sure have some
limiting beliefs about age. No. What I’m saying is– Why would I marry you? You’re going to break down
in a number of decades. I’m not. No, I’m going to be vibrant. I’m going to be windsurfing. I’m going to be like
one of those guys in those squirrel
suits, that jumps off the side of a mountain. You’re like, what’s that guy? At 65 years old. I’m the most interesting
man in the world. I drink Dos Equis. I think about that. I come back to Tim Ferriss’s
book, The Four Hour Work Week that he wrote. But let’s not
perpetuate any more limiting beliefs about age. I really don’t think that
that’s useful at all. OK. But it is true that
as we age, our bodies tend to not be as vigorous. I mean, there’s
a reason that you don’t see any 70-year-old
quarterbacks in the NFL. So yes, you can be
on the Tom Brady plan for life, which is great. He’s just, he’s 40 years old. But let’s be honest,
I don’t think he’s going to be playing
football when he’s in his 50s. Christian Northrop’s
mom skis at 90. I think that everyone
who’s listening to this believes in themselves enough
to believe that they’re going to be able to– my dad listens to
this on the treadmill. He’s in his 60s. OK. My point is that as Tim Ferris– Make your point. My point is, if I don’t
keep getting interrupted, is Tim Ferriss points out
in The Four Hour Work Week that why not plan for your life
now, to live your life now, creating enough passive
income today when you’re 35, or 42 years old, so that you
have 10 rental properties that are producing enough
cash flow now, so you can leave that
nine to five job. You can go climb Mount
Kilimanjaro with your family. You can travel and
backpack through Europe with your 10 and
12-year-old kids. You don’t have to
wait till you’re 65, when you have enough
income, or enough retirement money in place to go start
doing these adventures. We’ve talked before about
that Fidelity commercial that we saw recently. It was like, Charles
Schwab, or something like– they’re like, we did it. We can now retire. And they’re out on a boat. And they’re finally actually
able to go on there adventure when they’re 70 years old. My point is, that it depends
on how hungry you are, why not live for today and
get these things in place today to start your journey? And I also think it’s
a matter of not just hunger, but creativity. Because once you decide that
you want to own passive assets, it’s a matter of finding
all manner of ways. So we talked about how my father
taught me to make a balance sheet, so we did that. So we understood what we had to
work with, right off the bat. So when Clayton decided,
OK, these people on a plane told me they invest in
this suburb of Detroit. I want to do that, too. So what he did was
booked a plane ticket and found a realtor,
and said I want sort of more off-market,
distressed properties, and I want them to rent
for about this much. So he understood what he wanted. He had no real team in place,
or even peers to help him out. He just was searching
around on the internet and decided I’m
going to do this. So he went to
Detroit and he said, I want to buy these properties. Now, we knew what
we had to work with. We decided to take
some money that was in a fidelity trading
account in exchange trader funds and we sold it. We also had some Apple stock. Remember, Clayton was a big
fan of Apple stock back then. So we sold all of that and
we bought those first two properties– cash. And then we paid a contractor
cash to rehab them. And they were renting in
about five or six months, I want to say, right? Right, exactly. So it didn’t take very
long, but again, I did things in a way that
I probably wouldn’t today. I went to this area. I didn’t know what
I was looking at. I met with a distressed
property realtor, who I don’t even know what
that is, to be honest with you. Because most
realtors, most times, are going to be selling you
a property at a retail price. But this guy was pretty with it. And the reason you trusted
him was because you found an article about that market and
finding off-market properties in that market. And he was a realtor who
was watching that article and commenting on the post. And you were like, OK. This guy gets it. Now, of course, not everyone
in real estate does. Most people are
focused on retail. But you understood that this guy
understood the off-market game. And so he took you around. He was very generous
with his time. And we were lucky that we
could start with one or two with cash. Now, of course, not
everyone can do that. But you go to your
balance sheet and see what you have there
that can turn into cash and we’ll talk
about that further. [AUDIO OUT] most have,
in your asset column, you have a home, probably
with some equity. You probably have
some stock accounts. You may have an IRA account. You may have a 401(k) account. All of that can be
transferred into cash and then transferred into
a higher performing asset. So that’s exactly what we did. We found some cash
by way of stocks, cashed it out, and
bought these properties. Now, do you remember
how we then– so we had those two properties. It was like the sweet
nectar of success when those checks
started to roll in, because they both rented
for around $900 a month. So we were getting
like $1,800 a month. And we’re like,
wow, this is amazing that this actually worked. So then, we–
where’d we go next? Do you remember? Oh, so you want to skip– you don’t want to talk
about those assets at all? You want to just
kind of skip past? I was going to talk about
getting those properties. You don’t want to talk
about that at all? I don’t understand what you’re– Well, yes, I mean just calling
up a distressed property realtor, like, that’s not
how I would do it today. I mean, that– I don’t even– like
they don’t really exist. And I was able to get short
sales and foreclosures, at the time, which also
don’t really exist anymore. But I also overpaid. I paid a little bit more
than I would have wanted. I also over upgraded
those properties. I hired a contractor who
then became part of my team. So these are all
pieces that are very important to that
initial puzzle. It’s like making sure you have
a really strong team in place. You can’t just– You know,
if you go into your backyard, we have a lot of videos– Well, OK. But, I think, you’re saying
your way was not the right way. I’m not going to say that
it wasn’t the right way. You had the luxury of
traveling during the week and figuring this out on
yourself, on your own. You didn’t know that there
was such thing as turnkey real estate providers. You didn’t know that you could
find someone who would help you through this process. You thought you had
to do it yourself. So you had the luxury of
time, that most people don’t. Most people can’t go Monday
through Friday to a market and find their own team and
build it from the ground up. And so that’s sort
of how you came up with this whole idea of
Turnkey Real Estate, but– And I got very lucky. I should say there was an
element– we were watching this Letterman
interview last night and when he was talking
about the element of luck, and I got very lucky, because
the contractor was actually a family friend. So I didn’t get burned. I didn’t like– I’ve heard horror stories from
people that have e-mailed me that have like– I hired a contractor. They took my money and ran. Or I did this, and
now the property has been vacant
for eight months. I haven’t got
anybody in there yet because I don’t
know what I’m doing. So there’s all of
those elements of luck that kind of came
into place for us. And yes, they
started cash flowing. So those were our first
two in that Midwest market that we talked about that
flight to New Zealand, I think, on a previous one of this four– this five part series. So that’s kind of the gestation
for where this all started. Those first two
though were with cash. You’re right. So then we’re sitting there,
saying to ourselves, great, these first two we got with
cash that we had in the bank. My credit is ruined. We don’t have any extra cash
sitting around right now. What the heck are
we going to do? And that’s a common
question that we get from people who get
those first two properties and they want to start
doing the snowball effect. What am I going to do? We could have–
here is one option. We could have refinanced those
initial properties, perhaps. And we may have gotten,
maybe, 80% of what we put into it,
because we’re not talking about million
dollar homes here, San Francisco,
where you would see this huge appreciation
from where I bought it and rehabbed it. There isn’t are a huge spread. So maybe we would have gotten– all in for $50-52,000 on
some of these properties, maybe we would have
gotten like $40,000 back, if we did a refinance, or
$37,000, which is still good. We would have gotten $37,000
we could have worked with. But we didn’t do it that way. We did it another way
for our third property. So we looked again
at our asset column. We had no more
cash to work with. And then we had cars, houses,
and we had IRAs from old jobs that we had before we had taken
our 401(k)’s and converted them into IRAs. And so Clayton
heard on a podcast this person who said
that they had transferred their IRAs into
self-directed IRAs and bought real
estate with them. And he came home one day
and was like, oh, my gosh, we have to do this. And I was like, oh,
that sounds like a pain. I always sort of have
this fixed mindset, like, no, our IRAs are
in exchange traded funds. They’re doing OK. And he goes listen
to this episode. So I listen to it,
and I started to read about the philosophy of it, and
then I was completely on board. So we took our IRAs
and we bought– did we buy? We bought two. One in each IRA. And both of those then
started to cash flow. Now, we’ve taught you this
method in other episodes of the podcast. So you have to remember that
these houses cash flow inside the IRA, so we cannot
actually live on that money. So that money
doesn’t necessarily translate into our
freedom number, because both of those
properties rent, but that money goes
straight back into the IRA, so that’s future money. But it still was increasing
our ownership of real estate. It still was towards that goal. So then you’re adding in. We don’t get the tax benefits. We’ve done whole
episodes on the IRA. And should you buy it within
an IRA, or outside of an IRA. And there’s huge
benefits of buying in it. There’s also huge benefits
to buying it outside of it. So it just depends
on– if you’ve got that money sitting there
and it’s not performing for you like it wasn’t
performing for us, there’s a way to make it
actually perform at a really high level, 10% to 12% return. That was a no-brainer for us
to use our self-directed IRA to start purchasing real estate. So Tom Wheelwright
makes the point, you don’t want to finance
properties inside of an IRA. But if you have the cash
to purchase outright, usually that’s a
better investment than what else you’re
going to do with it, which is put it in the stock market. So that’s how we did that. So then we’ve gotten
these properties in the self-directed IRA. We used some money from our
stock account to purchase our first– so cash– to purchase our
first few properties. And now, we’re at what? Three or four properties
at this point. And I had learned the
skill of wholesaling in this amount of time. I started studying and
learning and taking a course on wholesaling and being
mentored by my mentor Tom Kroll, who we’ve talked
about here on the show. You can go back and listen
to those episodes as well. And I started doing wholesaling
in the state of New Jersey, and not for the benefit of
keeping properties myself, but flipping them to
investors who wanted to spend $200,000 on a rehab. I didn’t have that kind
of cash at that time. He tried, believe me. I tried. Many of these properties
he found, and was like, can we do this? But we are not experts
at construction. And having our own team of– we only just do projects
around our own house. So doing that here in New
Jersey, when we didn’t really have a team in place, like we do
in the markets we work in now, we were just really
green at the time. And we’re like,
oh, I don’t know? Can we do that? And the holding costs here
in New Jersey we’re so high. Also, in New Jersey, it
costs about $70 a square foot to rehab a house, and
that’s three times as much as it costs in the
markets we work in now. So most of the
markets we’re in– Ohio, Detroit– Ohio’s
not a market, it’s state, but you know what I mean. The states that you work in. Florida and Indianapolis,
Ohio, Michigan– it costs us about $15
to $20 per square foot. So not only were the taxes
super high to hold those, but the rehab
costs were so high. And we just didn’t have
a full team in place. So we didn’t do that. Yeah, there’s a lot of other
reasons, too, in New Jersey, too. There’s like getting
certificates of occupancy for properties. There’s all this
kind of bureaucracy involved in New Jersey
in rehabbing and doing all of that. And so, I was flipping them. I was making a good
profit from flipping those to investors who wanted
to actually spend eight, nine months working
on a 3,000 square foot home. Most of them were contractors. Right. So there were a lot
of contractors– And wholesaling is
a whole strategy. Again, we spent whole episodes
talking about that here. So we’re not going to
go into the strategy. But it involves a
lot of marketing. I spent thousands of
dollars in marketing, by sending postcards, and
all that kind of stuff, being on the phone nonstop. But because I had my
weekend job, I was able to– I’d be making like
40-50 phone calls a day, talking to sellers,
being hung up on. People were like, how
did you get my number? Never call me again. Never call me again. I’m calling– I’m
like, OK, I just wanted to see if you were
interested in selling your house. So you’re like
learning the lingo and trying to learn all of
that, and I put in the time. I put in the time. I was hitting the streets. I was out knee deep in– I mean, the properties
we rehabbed, the properties that
actual investors rehab, are not pretty at all. You’re knee deep in black mold. God knows what
you’re knee deep in. I mean, the stuff that I’ve
seen in properties in New Jersey and all over the country would
make your hair stand on end. But the point is, you’re
ripping all of that crap out. So anyway,
wholesaling, I started using some of those
strategies to find our next round of properties. So I was in New Jersey,
and I said, you know what? Let me just send a
few postcards to areas that I’m familiar
with in Pennsylvania. And I spent a couple
thousand and I sent it to Redding, Pennsylvania where
I’m from, where I grew up. And also up in the Poconos near
where we had our getaway house. And got some calls. I was like, OK. And made some deals with some
sellers, who were like look, this house needs a ton of
work, probably like $15-$20,000 in work. I don’t want it anymore. I’ve inherited this thing. Do you want it? And we’d make a deal. I’d send them cash. We’d close. I buy it. And then I had to go
in with a contractor. So the next round
of stuff, I was able to find discounted
with some minimal cash in order to add those
to our portfolio. They weren’t beautiful. And they needed a lot of work. And we did some upgrades and
improvements over the next one to two years on each of these
wholesale properties we found. Again, these were not
turnkey, because you were making it your mission,
Monday through Friday, to find these deals for us. I remember, he was
working so hard, and he was always around
and always on the phone, that our son, Miles, was
about four at that time, and he had this little
spider-man phone, and he was playing around with
it, and he was like, Hi, yeah, I a cash buyer. I a cash buyer. Because he was imitating you. Because he heard you
saying that so much. So many times– like, oh, yes,
I want to buy this property. I mean, it’s a full-time job. When someone says they want
to get started in wholesaling, I’m like, well, how
many hours do you work at your nine to five job? Oh, I’m there 8:00 AM until
about 6:00 PM at night. I’m like, buddy– That’s going to be tough. I mean, it depends
what that job is. If they sit there watching
a security camera, and they have the time to be on
their phone, that’s one thing. So I don’t want to make judgment
about other people’s lives. But again, this is not turnkey. Most turnkey investors
probably don’t understand that their properties
did start as wholesale fines, because there is somebody
out there identifying these off-market properties for
us, then to sweep in and buy and rehab for you. That’s where it starts. But if you don’t have
the time or the interest or the hunger to go out
and be a wholesaling, that’s not for you. It was, again, just
for us, because Clayton had the time and the humility
and the desire to do it. And we had a small
handful of properties. And he really wanted more. Using the wholesale
strategy is smart because it’s not using a
retail realtor strategy. If realtors were to bring
you the same properties, they’d probably be $20,000 more. And then, if I have to
put $20,000 worth of work into them, then we’re over the
retail price of the property. So, that’s why I
like my team now. I’ve got a team that
has to go out knee deep in these properties, is
walking through all kinds of disaster homes
that we then have to buy, fix, and rip apart. So I was doing it all myself. So that’s the
wholesale strategy. That’s enabled us to get our
next round of properties. So again, in telling this
story, I want to reiterate, we’re not telling everybody
to do these things. But we’re trying to
inspire creativity in you so that you understand what your
path will be, because we used– we didn’t use any one tool. We used all the tools. So not all of them are going to
work for you, unless you want to, but a good handful of
them will work for you, in a way that most
worked for us, because we’d commit to them. So after we had that handful
of properties, some in an IRA, some owned in cash– at that time, we didn’t even own
an LSE, which was dumb of us– but we then went to the 401(k). So again, it was
another sort of story where Clayton heard it on
a podcast and came home and I was like, oh, no– Actually, no, I didn’t. I heard it from
one of my coworkers at Fox News on the
Fox Business side. Stuart Varney actually said. He’s a real estate investor. He owns properties
all over the country. And we got to talking. I said, well, I’m a real estate
investor now– small one, but I– And he said, you know, a
strategy most people don’t even know they can do, and
I do it every year, is to borrow from my
401(k) to purchase real estate every year. I said, I’m sorry, what? I thought you don’t
touch your 401(k)? It’s a sacred cow. You don’t ever touch that thing
because you’ll get penalties. And he said no, no,
no, borrowing from it, not withdrawing from it,
but borrowing from it, you don’t get any penalties,
and you’re paying yourself back, and you get the double
whammy of the fact that it’s your own bank,
it’s your own money. And then, when you’re
paying yourself back, you get to exceed the
federal allotment per year. So what was it? 16.5– Because you pay
yourself in interest, a market based interest. Whatever the
current interest is, you match it, and
pay yourself back. So what is it? The cap, like 16.5,
you can pay yourself back more than the amount that
you would be federally capped at, because you’re paying
yourself that interest back. I was like, wow. So then I maxed that out. I went to Fidelity,
took like three minutes on their website to
manage my 401(k), and I withdrew, or
borrowed, $50,000. The rules are
$50,000 or up to 50%. Right. So then we went and
bought a property, or two, with that money. We did a few things
with it, actually. We borrowed every year for
about three or four years. Now we don’t have that
option, because neither of us has a 401(k) with a day job. But we tried to evaluate
what that money was worth. And so, we had a car payment. We used part of it to pay off,
I think, it was like a $12,000 car payment. And the rest of it, to buy
an off-market property. And so, that was one loan. And that ended up
being a great deal, because instead of paying
the car company the interest, we were now paying ourselves
interest in that loan. So I’ve turned that kind
of not favorable liability into a favorable liability,
because it’s to us. And then, we bought a house. The rules, according to
your custodial company, like Fidelity, or Scott
Trader, whoever has it, are different for how
often you can borrow. If you take the full
amount, usually there’s like an 18 month period
before you can do it again, or you can take a
partial amount of it. So we did that several times. And then just set it
as a direct deposit from his paycheck to
pay that money back. So you have to work out
what you can pay back, but the goal is that you
find a property that’s cash flowing more than
your debt to yourself, and then you are then paying
yourself back as the lender, but then also
benefiting from the cash flow of this performing asset. Once that loan is
paid back, you don’t have to pay anything else. Now that cash flows
is totally yours. The bottom line on
that 401(k) option is that most people
are just like oh, I don’t have any money. And actually, if you start
to look under your pillows, you look in your IRA,
you look in your 401(k), you realize you actually
have some ability to pull money out
and borrow from it. This is your own money. It’s not sacred. In fact, I’d rather have the
money out of the stock market completely and be
able to use it to buy an actual cash-flowing
asset, something that’s real, tangible, that is adding
to your net worth. Stock market is not
adding to your net worth. It’s not adding
to your overall– Well, it’s nominally adding– It’s nominally. But you’re not building
that passive income in the cash flow. You’re not turning it into
a golden goose, where it’s producing on a regular basis. So a lot of people
have this money. They don’t think that they do. And if you just start being
creative about the ways in which you can
pull it out, then you can start to get that
first and second property, and be able to leverage that
first and second property, and roll it into your
third and fourth and fifth. It’s a very simple process. Because when you look
at your balance sheet, and you see your house, and your
car, and your stock accounts, you put in the number for
your house is market value. It’s not like your
house is worth $500,000 and then that means
you have $500,000. Of course, you don’t. It’s worth that much. So whatever you have
in equity, most people don’t understand, you can
take it out and use it, if you get a home
equity line of credit. That was our second
strategy, now. So we used cash from
the stock account, then we went to the IRA, then we
did some wholesale deals, which were sort of cheap cash deals,
then we went to the 401(k), and then we went to the
home equity line of credit. Again, this was another one
of Clayton’s ideas, which at first I was like, no, because
I liked the idea of not having debt attached to my house. But then, when we realized
we could get this really low-interest loan
attached to our house, and then turn that low-interest
loan into a high-performing asset, I did like
the idea of that, because most of our houses, on
average, are about 10% return– 10% and 12%. So obviously, if I can get a
1.99% percent loan on my house and get a 12% return on that
money, that’s a no-brainer. So what we did was
we went to the bank, we told them how
much equity we had. They did send an
independent appraiser. And then, they said, OK, you
can [AUDIO OUT] [INAUDIBLE] this amount of money. We took that money, then
we bought more properties. And you can buy those
properties in your own name or in your own LLC. They don’t have to be
attached to anything, and then that is
cash flow that you get to keep that adds
to your freedom number. I mean, so the HELOC strategy–
people email us all the time, and they say, you know,
should I take money out of my primary residence in order
to purchase rental real estate? And the answer is,
it’s up to you. But this is the– we’re in a debt
system right now. We’re not in a gold
standard anymore. The government is run on debt. And this is how we operate. The government wants
you to operate on debt. And the banks are
giving you their money based on the equity in
your primary residence. Now, you could go
and buy a boat, but I think that would be
stupid with that HELOC money. You could go and sink
it into random stuff that you don’t know about,
or you could actually buy performing cash-flowing
assets that then are adding to your net worth column. So now, the bank is
giving you the ability to go out and buy another
house with your house, the equity in your house. I mean, to me,
it’s a no-brainer. So you and I both,
we use that strategy where we paid down debt. We wrote a whole book on
it, as you pointed out. We wrote a whole book on how to
pay off your mortgage in five years using your HELOCs. So we split it. I think we had like $80,000
to work with, or something, and we kind of split
it in half, and we used half to pay down our
primary mortgage, pay it off. And then we used the other
half to invest in real estate, buy additional properties. So we were using it in tandem. And I think that was
probably one of the best strategies we’ve ever done. Yeah, it was amazing. Now, I want to say there
are two things that make this strategy a tiny
bit less favorable now then when we started doing it
and around 2014-15, I guess, is one, the interest
rates are higher. I was just in the
bank yesterday. So we got those
introductory interest rates at 1.99%, which was awesome. And now, I looked at the
sort of advertised rates on home equity line of
credit at the bank yesterday, and they’re like 4%. Even introductory rates are
like hovering around three, for just the first year. So those interest rates are
based on market indexes. And interest rates
are higher now. The economy has
recovered since then. So you want to watch those
interest rates keenly. But it’s just a simple game
of a teeter totter math. Is that interest
rate lower than what you’re paying on other debt? Probably, if you have
credit card debt, you’re paying between
12% and 20%, which sucks. So wouldn’t it be better than
to pay that on a home equity line of credit than to the
credit card rate, which is compound interest. So that’s something to
consider very seriously. Another thing, though,
is now the interest on a home equity line of credit
is no longer a tax deduction. So if you take advantage
of the tax deduction on your interest on
your primary mortgage, that’s obviously more favorable
than paying interest on a home equity line of credit. So we would have to reconsider
that now based on the new GOP tax law, which is about three
weeks old, at this point. So we’re not saying,
definitely, you should do that. But it ended up being a
great strategy for us, for the time and
place that we were. So it’s a great strategy using
your home equity line of credit to expand your
portfolio of properties. And also, then, you
can get lines of credit on the properties
that you purchase. So you can then further
and pull out more equity on those properties and begin
to leverage, and to pull out the money that you currently
have in these properties, if you want. Now most of the properties
we own now, free and clear, because I like the idea of the
full benefit of the cash flow. But there are some that we got
some– we said, you know what? We’re going to do a
package of properties. We bought, I think, a group
of b-class properties. They were definitely b-class
that we added to our portfolio. Most of our properties
are c-class, but we added a group of b-class. They are a little
bit more expensive, and we did a loan on them. We got some hard
money, private money, and put together on a
package of– what was it? Eight properties
or 10 properties? It was eight. It was supposed to be
10 and they threw two, because they didn’t appraise
for their minimum value, which kind of sucked because those
properties cash load the same. They still do, in fact. The people who
ended up buying them still make the same amount
as we would have made. But the lenders sort of live
and die by those appraisals, and that’s what really kills
me, because once you’re used to working in
turnkey properties, and then you bring a
lender into the mix, it’s just so much more red tape. And you’re like, oh,
why did I do this? It ended up being a
great deal for us, because I think that
loan is at about 4.25%, and we added eight properties
to our portfolio in one fell swoop. Now, we did have to
come up with 30% cash. So we saved for that
for several months. And it is not easy, if you’ve
ever secured a mortgage, you know they ask for
everything but urine samples. I think that took me about
four months to secure that. But then, those eight properties
cash flow over $5,000, and our debt service
on them is $2000, so that add added $3,000
to our freedom number, right out of the gate. But it also added to
our liabilities column. So we try and overpay that
mortgage so that we can the amortization game. But, yes, that was
a great strategy. Again, though, as
interest rates change, and now the economy is
[AUDIO OUT] going back to the point where lenders
are getting tough again. Don’t you feel that’s
sort of the way things are going right now? Well, I mean, what? That lender is getting
tougher for lending right now? Well, it’s still difficult.
So when people talk about like this housing bubble,
I say you’re wrong, because the data
doesn’t show it. Maybe you have areas of Silicon
Valley that are overinflated and so forth, but it’s
still incredibly difficult to get a loan. And so, you have to have a
couple of things in place we’ve talked about to have
there be a housing bubble. You have to have
exuberance, like craziness. You have to have
these rising prices. And you have to have demand. Guess what? The demand and the rising prices
are kind of going hand-in-hand, and there’s not a
lot of disagreement right now between realtors
and the price people are willing to pay. They’re kind of like,
yeah, that’s the price. I don’t think that’s ridiculous. I’ll pay $700,000 for
that house in New Jersey, because that’s what it is. They’re not saying $900 what? They’re in alignment. And there is a lot
of excitement about– there’s not as much
exuberance, because it’s difficult to get loans. I don’t know. I don’t think– it’s not
like it was in 2006 when anyone could get a loan. With a pulse. Now, it’s difficult
to get a loan. However, there is a movement
right now in Congress, beyond the GOP tax bill, to
loosen some of the regulations around lending. And banks– Jamie Dimon saying
this, J.P. Morgan saying, look, we don’t want
to go back to lending to people without a job. He said, but there
are some areas where we can see
some loosening where there are people who would
qualify for a loan who are otherwise being
ignored right now and we know that they’ve
got a stable job. They’ve got a good income. They have the ability
to pay it back. And those people are not
being served right now. So maybe we should loosen
things a little bit, in order to allow those
people to get a loan. No, I misspoke on that
loan that we have. And we used Lima One
Capital for this. Although, there are a lot of– you call these
sort of hard money lenders or private lenders. They’re not
regulated by the SEC. That’s why– so it’s not– it’s very much the
process of getting a loan. They need all your
bank statements and all that kind of stuff. Their interest rates
are usually somewhere between like a private
money lender, that you’ll meet at [INAUDIBLE] meeting,
who will give you money for 12%, and the bank, which is
right now around 4%. So we paid for that 7.25%. They now have adjustable
rate mortgages. They didn’t two years
ago when we did this. So you can find a little
bit more favorable terms. But we locked it in at 7.25%. And we, actually, because those
properties cash flow $5,000, and the loan is
around $2,300, we put an extra $1,000 every
month towards principle, so that we can knock down that
loan, because that’s just cash. Those properties are
cash value, and I want to knock down the
overall amount of money, like my dad says, it’s just
paying money for money, so I want to pay as you–
how would I say that? As little money for money. As few money for money. Few money. And also, if we
had to do it again, I don’t know that we would,
because the prepayment penalty. Look, there’s a
prepayment penalty. And so, I want to be able
to pay these things off as quickly as possible. I would have just as soon not
done it this way and paid cash, and then we could pay
them off more quickly, because the interest that
we’re paying, so we’re– So again, you got to
weigh these things. And also, the
properties themselves have to hit that minimum
number for a private lender, like $75,000. And you pay for the appraisal
on all of these properties. So it’s about $500 per property
to pay for that appraisal. And so we paid
for 10 appraisals, and only got eight properties. So that was $1,000 that we
just sort of kissed goodbye. So that also sucked. The prepayment penalty
is on a sliding scale, so you can only pay 20%
of the principal balance every year for five years,
and then after five years, they feel good
enough that they’ve made enough interest on you,
that you can then pay it off. So it’s not terrible. There’s no prepayment penalty. But I think we only have
like two years left of that. But if someone’s really looking
to add to their freedom number, and they saved 30%, and then
they did a portfolio loan like this, and say, that they
maybe were a little bit tighter on their freedom number, these
numbers are great, for anyone. You’re now cash flowing $5,000. You have a $2000 debt. That’s $3,000 we added
to our monthly income. So it ended up being– I mean, in comparison
to the other ways that we’ve purchased,
it was more expensive. But just for the purpose
of adding to our portfolio, I think it wasn’t a bad idea. Yeah, and it did
take four months, and you were ready to pull your
hair out a number of times. Well, I’ve never secured
a loan that I didn’t cry. So that’s how we got to– I want to say, after
we had that package, we were close to 30 properties. Now, everything that
we’ve acquired since then to get to that 50 number, we’ve
been able to save and buy cash, one at a time, in the last, I
want to say, 2 and 1/2 years. The next thing
we’re looking to do, because we found this awesome
package that we talked about a couple months ago– we told
you about this deal we got in New Jersey– is to work with this same
guy and do seller financing with him, because he’s
willing to sell off his, I think it’s a package of
like 50 he’s still got, and he’s willing to
sell brackets of 10 for seller financing. So we’re all about that. And that’s just, again, another
trick to add to your portfolio. So this is by no means an
exhaustive list about how people acquire real estate. It’s just the tools that
we’ve used to get here. The investors that we work with
at our company, Morris Invest, I’ve heard all kinds
of creative ways. We borrowed it from grandma. I’m a partner with my father. We took money out
of our business. We did this. We sold off a Subway franchise. One of our investors,
actually, he said the properties
I’m able to– Oh, I remember that guy. Yeah. His said, the properties
I’m able to get with you guys get me between
a net 10% to 12%. He’s like, I only get
like, I don’t know, like a 5% return on a Subway
franchise, if I’m lucky, and I have to work
like 18 hours a day. He’s like so I’m done with that. So I’ve heard all manner of ways
in which people are leveraging their contacts, their
friends, their money on hand, to able to purchase real estate. Yeah. It was a Subway sandwich, right? Not like the subway train? Right. Subway franchise,
subway restaurants. Yeah. Right. So there you go. That is part five of our
story, the way in which we’ve acquired real estate. We’re still doing all
sorts of crazy ways of acquiring real estate
and adding to our portfolio as we have the cash available. We obviously have the
huge tax bill this year and everything we
had to go through. So we were short of cash
poor at the end of the year, as we were setting
up different things, and moving money
around, so we wouldn’t get hit with a huge, huge
huge, huge tax burden. But as this year unfolds, we’ll
be acquiring more real estate on a regular basis as well. So I’d love to
hear your comments and let us know how you’ve
been acquiring real estate– anything that you
would add to this. Any final thoughts,
any final words? No. But I hope that this
inspires you to figure out, as a team, how you can
find more performing assets in your existing assets. That’s just what it’s all about. We want to help other
people figure out how to do it their way,
just by being transparent about our way. We welcome your
questions as well. That’s right. So in the meantime, we’ll
be back with another episode of investing in real estate. Now go out there, take action,
and become a real estate investor. And if you’re not
already a subscriber, please do share
this with somebody you love that you
think could actually benefit from achieving financial
freedom in his or her life. We’ll see you next
time, everyone.

100 thoughts on “How to Go From 1 to 50 Houses (Our Story: Part 5)

  • Did you guys use the $50k from your 401K to purchase a rental property for cash or towards a down payment on the rental mortgage? Being that you would be managing multiple mortgages.

  • I dont get … part one they say they were in debt… then they have apple stock and buy two houses for cash? … having apple stock in 2013 was worth more than cash, please dont misrepresent your situation…

  • What do you think on buying properties at the Indianapolis auction for rental? Good investment or bad investment?

    I just purchased my first two home in last auction.

  • Natalie, I love you and your honesty. I absolutely loved the line, "I have never secured a loan where I didn't cry." This helps me tremendously!

  • So inspiring, my husband and I were debating on whether we should flip or rent out a property we just bought. Your videos had just confirmed our decision to rent. We have acquired our 4th property within the past year and a half. We go thru the same phases as you guys, making poor real estate decisions in the past but it has taught us the valuable lessons. Thanks for sharing your experience because it just reassured us that we are heading in the right path

  • Knowing what you know now after having done this, do you think 1. If you did it over would you shoot for more properties in five years, or 2. Could you get the 50 properties sooner? I like the idea of having that freedom number. So much information in your videos. Thank you.

  • Here in Norway you can, as a private person, lend a maximum of five times your income in total debt. That makes leveraging new properties extremely difficult as a young man. You also have to have a minimum downpayment on your first property of 15%, and 40% on your secondary properties.. The banks can be lenient on 10% of their total loans every year. I still have two apartments I rent out, while living with my parents, but most likely have to wait years until I get my hands on my next property.. Unless I start my own business. But that seems like a hassle while my "operation" is on such a small scale.

    Decisions, decisions..

  • Hey Clayton I would really appreciate your advice. What do you think about buying a 2 bedroom 2 bathroom apartment in Reno? $145,000 what is your opinion on buying in real estate in Reno right now ?

  • How would you do it in another country where bank interest is like 12%. Rent is less than bank repayment. So how can it be done?

  • Thank you for being so generous with your knowledge and letting people know the right way to invest and grow you’re real estate portfolio.

  • Yooooo love the Show I am from philly! Looking to get into real-estate in the next 5 years! Great advice!

  • How to go from 1 to 50 houses real quick. Buy cheap homes in Indiana. Yep, you're right. Plenty below 50k range. It's smart. You go where you're money and credit gives you the biggest bang for your buck.

  • Gosh!!! I had to stop this video after 20 min in order to give it a like and subscribe before I forget about it. I like this video a lot. I have found so much information in 30 minutes video than hundreds of podcast out there. Note: I thought before like, okay another podcast from the west talking about real estate greatness, then when I heard NEW JERSEY. BOOM! This couple deal in NJ too. Hats down. My respects. Plus the 401k and stocks info, priceless. You earned loyalty with me. Quality in here. Sending this to my friends. Good chemistry couple, smart lady. Respect

  • It's likely she got her hip replace due to the fact she may have been flatfooted. Btw, I love this channel! So much valuable information and Timely! This stage of my life is what i call "homework" before putting my settlement check into performance income. Great videos!

  • Borrow 401k question: when you are separated from the company, aren't you required to pay back the loan between 30 to 60 days ? If your cash are already tied up with the house, what do you do? If you want to turn real estate into cash fast, the price has to be lower than market value.

  • I bought my first 5units so far in 2018 as I turned 40. One single family home with a conventional loan and one 4-plex with an FHA loan in Tucson, AZ. They cashflow ok as longterm rentals but I'm trying to convert them into AirBnBs or Assisted Living Facilities that can potentially bring in more cashflow. I'm planning to buy more rentals in Indiana by the end of 2018. Thank you for the inspiring story getting out of rock bottom and achieving financial freedom by 40 by continuous financial education and grit.

  • I enjoyed these videos before. But every time the lady talks I find myself getting frustrated. I stopped watching it because she keeps cutting him off. I'm sure she is valuable information but she's too much.

  • I'd be surprised if I ever saw these two doing a podcast together again. Extra awkward. She cut this man off plenty. Wow.

  • You can have your own bank system without a 401k. Traditional Dividend-Paying Whole Life Insurance designed for cash value (not so much death benefit) is an incredible vehicle you can use to borrow against and pay yourself back. I'm not an insurance agent or anything, I just read Nelson Nash's book about it 'Becoming Your Own Banker'. You might even be able to just find a free PDF of it.. if anyone is interested in that concept

  • @morrisinvest how does this work for most African Americans who have no cash???? All of this sounds good but we don’t have stocks or passive income (87% of whites have this) if we don’t factor race into it most Americans have 1000 dollars or less in savings. I think you should make a video for those who don’t have Apple stock sitting in abundance to buy properties in cash.

  • Good Afternoon Clayton. The title of this video really grabbed my eye because this is always what I have wanted to do. I am over the real estate problems I had in the past (I mentioned these on another post) and I am looking forward. I am currently 37 and I was thinking of a 5 year plan to see how many rentals I could acquire and hopefully live off of in 5 years. You are not too much older then I am and it looks like you have shown this is very achievable. Thanks for making these videos, they really help.

  • I am living rent right now, but houses are so expensive here in homestead fl, there is way to many people doing this in miami

  • its so nice to get to 50 houses but my question ito you i s do you have all those houses in a LLC each one and with bank acount each one? is a very import question I have 4 and should I put them in an individual LLC each one ? please let me know.thank you .

  • You all are having 2 different conversations. I like how he takes the time to explain and give analogies of not waiting ect. getting old knee. I am tracking with him…Love the extra effort to offer an explanation. Thats why I am here for the understanding piece.

  • Clayton/Natali – Thank you for what you do. When you bought the portfolio of 8 properties, did you conduct full inspections on all of them? I would imagine the inspection costs would be quite high relative to purchase price, no? Thank you.

  • hi cayton and Natalie I am always interesting in real estate and as off right now I have a decision to make but I really don't know. so if you can pls help me and guide me . so I have a home that locate in san Jose California silicon . so my house is worth about 950k or so and I still owe my house 380k. should I sell my house and used the cash to buy a new home in Sacramento. or should I hold on to my house right now? or should I take out a home equity of $200k and buy a home in Sacramento about $450k to live and rent out the one in san Jose? pls let me know what is best

  • So how the heck do those of us with barely above minimum wage jobs and no extra 401K or similar to pull from get started? I don't want to waste time in the game of working my way up in a career, I want to start making my way to financial freedom while I'm still young! How do I get started?

  • Thank you for sharing your journey with us. It is great that you both can work this business together. With the HELOC no longer being a tax deduction do you recommend just refinancing and taking out cash ( equity ) that way?

  • Your wife really needs to let you finish your points. Or do videos solo. Hard to follow when Clayton has to double back to finish a salient thought.

  • Great stuff morris but how can u get line of credit on rental properties? i tried this and csnt pull line of credit of my rental property which i bought cash all free an clear.

  • Wow, not even 5 minutes into it, and we have a domestic disagreement. Don't worry, my wife is always interrupting me too.

  • I'm in real estate here in Ga. I was speaking with our in house lender the other day and he was saying there introducing some low doc cash flow based loans. Probably good for guys in your situation, but the interest reflects the added risk. I'm looking to move into investing myself. Starting small but I can see a path. Love the videos. Actual value in your content. Thanks.

  • I love hearing all the step by step because I am a first time investor and I want to be successful and do it right the first time 🤗

  • Probably best to not get into these silly side-discussions about old people having bad knees – it's pointless

  • I'd prefer just to listen to one or the other – this constant bickering over stupid details is turning a 20min video into 40mins

  • I don't know how much you've looked into the Infinite Banking / Family Bank Concept. I've heard you say a few things in this episode (albeit older) where that concept would really serve you. Especially, what you started to say at 36:00. 🙂

  • I think this video had more meat and potatoes in terms of helpful content than the first four (even though all have been good). I especially like the tip about the 401K borrowing. Good little nugget to keep in the back of the mind.

  • How do you manage the risk? Having 50 properties with mortgages could expose you to risk in a down economy when suddenly 20 of them go vacant

  • Re: the discussion about age, I think what Clayton is saying is: No need to wait. Figure out a way to live your life now, and enjoy it while you're healthy.

    In my own case, I'm 66… still in good health… running a business that's doing well… so it's true that you can be in good health and having fun running a business at any age. But there's no way of knowing what your health will be like in 10, 20, 30 or 40 years. (Who knows… by the time I'm 106 or 116, I might be slowing down.) The aging process might shoot you down, or you might be injured or incapacitated at any age.

    So, whatever age you are, don't postpone living your life into the distant future. Keep learning the essentials of how to achieve financial independence, and taking the steps that will move you in that direction now.

  • I kindly just want to say that I watch these videos because they're a wealth of knowledge! You guys are saints for sharing it all for FREE; however, there is a constructive note that I would add and that is to pay more attention to the audio in your videos. My volume is continuously up as high as both youtube and my computer will allow, and sometimes not being able to hear the wonderful points you guys are making defeats the purpose of your objective.

    All Love -Nat

  • I like the suggestions. BUT when i called the bank, i was told one can only take up to 4 mortgage . So how was it possible for you to pull equity from your many home and borrow more money. Please explain. Thank you

  • Hey guys love your videos just wondering if you have a video of any setbacks with tenants destroying your rentals

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