Retire in 10 years - step by step
/I grew up watching my parents and, every adult around me try to execute their traditional standards of retirement. Acquire a great job, take advantage of 401k, pay off your house over 30 years, have a savings account or CD that pays about 1% per year. Then, work that job for 30 years, retire with about $300,000, and ride off into the sunset, tired and old until eventually, you die.
I can not even begin to explain how flawed that strategy is. First of all, if you are lucky enough to do all of that, your future could still be grim. In the next paragraphs, I will prove to you how this is flawed and exactly how you can change your strategy and never have to worry about finances again.
Let's say that you make the average median income in America which is $55,000 per year. With that $55,000 you want to be able to use 10% of that money to invest in your future, which will leave us with around $5,500 per year, which is not much money. The traditional way to get a return on this money would be to put it into a savings account or CD. Your average savings account in 2018 yields only 1% per year, which is only $55, NOT COUNTING INFLATION! With inflation accounting for about 3% of your money you will be losing $110 per year. What is even worse is that now, you still don't have a vehicle in which you can continue to grow and compound this money. As you can see this plan already is a failure but, for the sake of making my point, we can continue.
If you were able to save every penny of this $5,500 per year for 30 years, you would have $165,000. Now, does that sound like something you can live off of for the rest of your life without working? Of course not! Even if we were able to add bonuses, raises, and other lump sums of money, you would maybe be left with $400,000, and that is being generous. I have not added for health conditions, children, student loans, mortgage, and other random expenses that could quickly drain this account. If you are lucky, you will be able to live 5 - 10 years of retirement before you are out of money and living in a government nursing home waiting to die.
Now, I didn't mean to put a damper on your plans or scare you about your future. I see so many people my age over-looking their retirement and just how much money it costs to live during their later years. Luckily, I will share my plan and program that has helped many wealthy people build financial freedom that lasts through their 20's, all the way until they pass on from this world and even, to the generation after them.
As you may have already guessed, this program revolved around real estate. As a first-time, home buyer or a first-time investor purchasing a property can be terrifying. I know that when it came time to buy my first duplex I had no clue what I was doing. As well, your first property can be a deciding factor on how effectively and quickly, your financial freedom is achieved. In the following paragraphs, I am going to explain the exact blueprint that I am currently using to build my freedom, and I hope that it inspires and motivates you to do the same.
Step 1 - Buying Into Equity
I will start this section by saying that the key to financial freedom is to buy a house; however, this does not mean that you should go out and buy the first house that you see. I spent close to one year looking at over 50 properties and understanding my market before I acquired my first duplex. One thing that I NEVER do is purchase a property for what it is worth.
The easiest way to make an instant profit is to buy into equity. For example, if you know a property's, appraisal price is $200,000, and you manage to acquire the property for only $150,000 you have just instantly made $50,000. Honestly, it is that simple. After that statement, I am sure that I will have most of you thinking that this is some scam, get "rich quick" theory, or impossible to accomplish but it is that simple. Most people will put this practice off because they think they cannot do it when in reality, they have never even tried. When I acquired my first duplex, the property was worth $170,000. I was able to negotiate my way down to $150,000 with 20% down to instantly make a profit of $20,000. Now, since buying the property, I have entirely redone both units as well as put in new appliances and updated the landscaping which has driven up the property to even further heights, but the point is, at the time of purchase this property was already worth more than I paid for it.
If you are new to real estate or just a beginner, there are many things to take into account when acquiring property such as real estate agent fees (anywhere between 3%-6%) property taxes, attorneys fees, the survey fee, a recording fee, and any fee to create documentation that you will need. These fees for myself cost me close to an extra $4,000 when purchasing my property. These fees are something that must bring into account. Not only do you pay these fees when you are buying the property but, when selling, you will pay up to double the number of closing fees. In my case, if I were to sell my home, I could be looking to pay up to $10,000 in closing costs. That means that the $20,000 in instant equity that I acquired when buying my property is down to $4,000 just from buyers and sellers closing costs if I were to sell in 5 years. That is just crazy, and I am not even counting capital gains tax if you were to sell within a year or the purchase! In Step 3, I will show you how to keep your closing costs to a minimum or even better, get rid of them ENTIRELY!
Step 2 - Living For Free
Before we dive into eliminating closing costs, I want to touch base more on what to do with your first property and how to operate it. When I purchased my first property I made sure that it was a duplex, while some investors will tell you the best property is a single-family home, multi-unit apartment buildings, I believe the best properties to start with are duplexes. Shortly after I closed on my duplex, I moved into the bottom unit. I spent my off time rehabbing and modernizing both units. At this time my total mortgage payment each month was about $1,000. The property that I was renting before this cost me $1,400 per month, so already I was saving money. Once the unit upstairs was fully modernized, I was able to rent it out for $1,000. After two months of rehabbing, I was using that tenant's rent to pay my mortgage and live for free! With this incredible opportunity at my disposal at the time, if I were to move out, I would be net profiting a total of $1,000 every month! That means that off of my 20% down payment of $30,000 (which ended up being around $36,000 after closing costs) I was able to make $12,000 a year as well as take advantage of that instant $20,000 in equity from purchasing the property below market value. That means by leveraging my time, knowledge, and money I was able to acquire a $170,000 property that generates cash flow every month for the price of $8,000. I bet nobody taught you that in college. Now that you have seen the incredible power of real estate investing with just one property imagine 25, 50, and even 100 properties.
Step 3 - Compounding This Effect
Remember earlier in step one when I told you that there was a way to minimize your closing costs or even eliminate them? Well now is the time to talk about it. See, now that you have purchased and property and essentially put a good source, if not all of your money (like I did) it will most likely be tough for you to acquire another. Getting a secondary loan is much harder than getting a primary because in most cases people believe that your debt to income ratio suffers, banks do not want to lend out more money and that having multiple properties will not look good on your credit. For the most part, all of these are false. The only issue that you will have from financing a property a second time is a slightly higher interest rate and in some cases debt to income ratios being a bit off. For those of you who do not know that debt to income ratio is, simply put, it is the amount of money that you make versus the amount of money that is owed. Banks will be more hesitant to lend you money if they see that you owe much more than you make. The way around this is simple, and I will explain it now.
When acquiring my property with my friend Paul we made a combined income of $70,000 per year both with excellent credit ratings between 767-790. The combination of these helped with getting a low-interest rate at 4.2%. Once the dust had settled, and we closed on the property Paul and myself now each owed an extra $500 per month to our mortgage which diminished our debt to income ratio. The way we got around this and acquired another loan is by renting these two units out and producing a copy of the tenant's leases to the financing bank.
Now, we were able to show the bank that not only do we have another property (that we were paying the debt off every month without missing a payment) but, we are also making $1,000 per month or $12,000 a year. Now we have proved we have the credibility to do this exact plan with a new property. See, people think that banks never want to loan out money which is just ridiculous. In reality, banks want to loan out as much money as they possibly can because that's how they make their money!
At this point, you may be thinking, "Instead of attempting to get a second mortgage, why wouldn't you sell the property you currently own, pay back the bank, and take out a new loan. While that would seem to make sense, we would end up paying all of those closing fees to sell the house. Instead, I will be showing you how to acquire a Home Equity Line of Credit.
Remember, in my case; I purchased my duplex at $150,000, and the very next day; it's worth $170,000. With this information, I can go to the bank, or whichever lender I want, and explain to them that I have $20,000 of equity in my house. Remember, banks and lenders want to lend us money. With this $20,000 of equity in my home the bank will give me the $20,000 in a line of credit with my duplex as collateral. This means, if I default on my payment of that $20,000 the bank will repossess my house so using this line of credit wisely is a must! Yes, this money was free. Yes, I could buy whatever I want with it but, using it on anything else besides another property or investment is a mistake.
If I were to take this $20,000 and use it on another down payment for another house which will generate me even more money, we would be on a steady path to financial freedom. Now, the whole point of this journey is to make more income while lowering your most significant expenses. Taking the example of the first duplex I had already almost eliminated my most considerable cost which was living rent-free. Now, this house is meant to get rid of a second-most considerable cost which could be credit card debt, student loans, car payments, and many other things. Assuming that we took my advice with purchasing this second property with built-in equity, we would then be able to rent these units out, produce a lease to the bank, cash out our equity and acquire a third property, all without ever selling and paying closing costs. That right there is close to $60,000 in closing costs that we have avoided just by using this method.
Remember when I said that banks want to loan you money? While that is true, there will eventually become a point where you will become a risk no matter how great of a track record you have, and that is where you begin to rally investors.
Step 4 - Acquiring Investors
Before I teach you how to bring investors on board, I want to share how I even started in real estate quickly. I was living in a beautiful three-bedroom house with my two roommates last year. This was the first time in my life as a renter that I felt secure with my finances, roommates, and the actual property that I was renting. We had all planned to stay on the property for three years and wanted to make this property feel like a home. Low and behold not two months after renting we received a notice on the door from the county stating that the landlord had not paid his taxes in seven years! For those of you who do not know, that is an incredibly long time. In most cases, the government will cease your house after only three years of unpaid taxes. I showed this document to the lawyer I was working for at the time, and it seemed that this house was being sold at auction for only $64,000. Now, I did not know a single thing when it came to real estate, and I was afraid to go to a lawyer or speak to anyone about this because all they had to do was show up to the auction and outbid me. So, I spent the next three months leading up to auction learning my market, how to buy tax liens, precisely what a tax lien is, and everything else I could gain.
At this point, I had learned enough to successfully represent myself at an auction and understand what the property was worth. If I were successful in acquiring this property, I would instantly be making $156,000 in equity! The only issue now is, where do I find the money? See, with tax lien sales you are not able to fund the property through traditional lending. As well, these properties are gambles to most people because they are not able to even see the property before buying it but, I had a one-up because I lived in it! At the time I needed $64,000 cash minimum, but I decided I need to raise $100,000 in case someone tried to outbid me. I was able to come up with $25,000 by myself, but I still needed to raise $75,000 more. That is when I started reaching out to everyone I would want to become partners with. I created an investor packet explaining the situation, the ROI (return on investment would be), the exit strategy, and everything else that goes into an investor's packet. (I will explain in a later post exactly how to create one) After two weeks I had brought my brother and friend Donald on board for $25,000 apiece. The only part left in the puzzle was the final $25,000. We spent the next week leading up to the auction pulling together other investors until we eventually got my step-grandfather to put up the rest and split the property four ways. What finally happened was that the property ended up having a 1.5 million dollar blanket mortgage on it and we would be responsible for a portion of that as the new homeowners. As this planned eventually failed, I did learn something. I now had the power to raise $100,000 reasonably easily.
I know personally being raised by a family who lived paycheck to paycheck and living off of cut-up hot dogs and macaroni and cheese for every meal, the thought of raising $100,000 in a week was mind-blowing and seemed even unrealistic. If you are looking to get your first deal or want to buy more properties the easiest way is to use other people's money and never under-mind your worth to someone. At this point in my investing career, I can find the deal, underwrite, inspect, and close the deal all without my investors even stepping foot on the property and split the property 50/50. The critical aspect of rallying and finding investors is to never ask for money before you have something. If an investment is a great deal, people will fund it. Use all of the tips and steps that I have laid out above to find the perfect deal and THEN ask for funding.
If you follow everything we talk about in the post, you will be able to acquire 40 properties by the time you are 40. I will say that this is not for everyone, this will not be easy, this will require an immense amount of patience, confidence in your abilities, and at times risk. This strategy is not a way to get rich quick or do the minimal amount of work to get the maximum return. This strategy is a way of life and something that will take years to build, but I believe if you take the time to understand and learn all of what I am saying that you will be able to retire without fear in the world about finances.
If you have any other questions, please feel free to send me an email at peterdicarlo@dfcinvestments.com. As well, and if you would like to invest with me using this same strategy go over and look at my investment company at www.dfcinvestments.com. I hope that this post finds you well and I am excited to see you all living the lives you have dreamed of all while being happy and healthy!
- Peter DiCarlo