real estate investing - Millionaire on the Prairie

Buy Yourself Some “No!”

Every time you get paid, I want you to buy yourself some “No!”

Whatever are you talking about, Blue Lobster?

It’s simple. When you receive your paycheque, endeavour to not spend all of it.

Now, I know that there are those who are barely surviving from one payday to the next due to a low income. It’s very tough to survive when you don’t have enough money. It must be an awful and harrowing way to live. If I had a simple solution to solving the poverty problem, then I would shout it from the rooftops… sadly, I don’t.

For everyone else, there’s enough money to buy the option of saying “No!” to what you don’t want in your life. You may have heard of this concept by its more traditional phrase – pay yourself first. This is incredibly good advice! And I’ve yet to hear of anyone suffering any kind of adverse consequence by ensuring that they feathered their own nest before dispersing the rest of their income to Everybody Else.

When you save some of your paycheque, you’re buying a quantum of power. That power is related to your ability to buy back some of your time. Think about whether you love your job. Are there days where you just don’t want to work, whether “at the office” or from home? When you’d rather garden in your own backyard or spend the day enjoying the fresh spring air?

Or how about that vehicle payment? The financing company has you over the barrel. If you stop sending them several hundred dollars every month, they’ll repossess your vehicle. How nice will it be to stop sending them money every month? What else could you be doing with that payment?

Whatever your monthly payment is for, does the payment bring you joy? Are you excited and thrilled to see the money leave your bank account every month?

No? I didn’t think so.

Cruel Ironies

You can make more choices about how to spend your time when you’re not as dependent on working for an income. The cruel irony is that there’s no incentive for your employer, your creditors, or the Ad Man to explain this to you. As you’re already aware, your employer needs your labour to enrich the corporate bottom line. This means that your employer has little incentive to encourage you to save for the time when you have enough money to re-direct your labour to your own life’s desire.

Your creditors just want you to continue paying them interest, since they make money off the financing and not the doodad on which you spend their money. (And make no mistake – it’s their money. If it had been your money, then you wouldn’t be paying interest on it.)

Finally, the AdMan is paid by the companies that sell you whatever shiny object that has currently caught your attention. The AdMan really doesn’t want you to save any of your paycheque, because then the AdMan hasn’t convinced you to buy stuff…which is how the AdMan gets paid.

Stop Spending All Your Money

I understand how capitalism works. I really do. Yet, the older I get, the more I also understand that unbridled spending and the yoke of debt are impediments to a happy life.

Want a foolproof plan for getting a tax free raise? Stop going into debt.

Once all your payments are done, then more of your paycheque stays in your pocket. No more $700 monthly vehicle payment? Transfer that $700 to your RRSP. No more $400 student loan payment? Invest that $400 in your TFSA. Mortgage payments gone? Awesome! Start contributing the money to your non-registered investment portfolio. Credit cards all paid off? That’s great – save that money in the bank so that you can pay cash for the next thing that you want.

And a funny thing will happen. When you’re finally out of debt, you’ll really, really enjoy the absence of debt payments.

“Wish I was still sending money to my credit cards!” said No One, ever…

All of that money that was being siphoned off to debt payments can be used to buy yourself some “No!”

That Will Take Too Long!!!

I’m not a magician! And I never said it would happen overnight. It’s going to take as long as it takes. The more debt you have, the lower your income, the longer it will take.

The question is how long you want to continue being indebted to Others. You’re the only person who can decide if you’re willing to make the short-term sacrifices necessary to buy back some of your time freedom.

Alternatively, you can keep your current spending patterns yet still buy yourself some “No!” through increasing your income. You could get a side hustle and devote all income earned from that source to saving and investing. (Back in my day, a side hustle was called a part-time job.) You could invest in real estate and start house hacking. You could start buying dividend-producing exchange traded funds, set up a DRIP system, and just watch your dividends compound over time. You could bust your ass at work and get a promotion, whether with your current employer or with a new one. Either way, your promotion should come with a raise. So long as you don’t spend that raise, you’re heading in the right direction.

You Get to Decide.

Yes – that’s right. The choice is yours.

When your current vehicle is paid off, are you going to drive a paid-for car or are you going to go back into debt?
Do you need all the streaming channels right now? Could you pay for one for a few months, then switch to another one later?
When the pandemic is over, is your gym membership really necessary? Maybe you could walk outside instead of on a treadmill?
Is being able to live without a paycheque for a few years worth learning how to cook?
Is the hamster wheel of living hand-to-mouth bringing you joy? Would you appreciate a lot more wiggle room in your budget?

Money buys you the option to say “No!” to what you don’t want in your life. Harness its power by investing a chunk of your income every time you’re paid. The sooner you start, the sooner you’ll be able to walk away from situations that no longer serve your purpose or no longer make you happy. You’ll have the peace of mind that a financially firm foundation allows. You’ll be able to walk away from employment that no longer aligns with your values…without wondering how to feed/shelter/clothe yourself. You’ll have the comfort of knowing that you’ll be alright even if it takes you a little while to find your next job, if you even want one.

And believe you me… the more “No!” you have, the less often you have to do un-desirable things. I’ve yet to meet anyone who hated having control over how to spend their time and energy. Unless you’re already quite wealthy, the only way to obtain this power for yourself is through carefully investing your own income until your investments allow you to be independent from a paycheque.

Money-Making Magic – Real Estate Investing

It’s taken me a few years but I finally understand how to create money from real estate re-financing. It’s another aspect the money-making magic of properly investing your money.

Right off the top, I want to tell you that I have never done this. In other words, my understanding of the process is only theoretical and it is not based on my own experience. I have never bought a property, renovated it, and then re-financed it to extract my investment.

Secondly, I want to be explicitly clear that I am not telling, instructing, advising, recommending, or otherwise encouraging you to do this with your money. It’s just a theory that I have finally understood so I want to share it with the world via this blog.

I’m a fan of the podcast Millionaires Unveiled. In episode 145, the hosts were talking to a guest who had made significant money in real estate. The guest used the same BRRRR method espoused by Brandon Turner at Bigger Pockets. You may also want to check out Graham Stephan on his YouTube channel, where he goes through a detailed example of how to profitably invest in real estate.

A Simple Example…as I understand things!

Purchase Price – $80,000. Renovations – $20,000. Total Investment – $100,000. After Repair Value – $150,000. Re-Finance & Cash Out @ 85% of ARV – $127,500. Free Money to Investor – $27,500.

So let’s un-pack this.

In this example, the investor bought a property for $80,000 in cash, meaning that there was no mortgage debt to the bank. (This example also works if the investor invests a 20% down payment – $16,000 – and gets a mortgage for the remaining $64,000. Either way, she’s still buying an investment property for $80,000.)

Renovations of $20,000 were made to the property. At this point, the investment in the rental property is $100,000 = $80,000 + $20,000.

The money-making magic starts when the investor goes to the bank to get financing on the property. (If the investor had had a mortgage, then she would’ve “re-financed” the property.) In the example above, the bank appraises the property at $150,000, which is $50,000 more than the investor’s total investment. The bank agrees to finance 85% of the ARV, which puts $127,500 back into the investor’s hands. As we all know, $150,000 x 85% is equal to $127,500.

(And if the investor started with a mortgage, she would go to a second bank to re-finance the property. She would then pay off the mortgage of $64,000 at the first bank, and be in the same position as if she had paid the full $80,000 up front. $127,500 – $16,000 – $64,000 – $20,000 = $27,500.)

Since there is now a mortgage on the property, equivalent to $127,500, the investor uses the rent from that property to pay back the mortgage. If everything goes perfectly, the rent will also cover other costs such as insurance, property taxes, and repairs.

In this example, the investor has earned $27,500 in free money through the money-making magic of real estate investing. Remember, she invested $100,000 of her own money ($80,000 + $20,000) and is walking away with $127,500 after financing her property. There are three things to take-away from this example.

The investor now owns an investment property while also recouping her entire $100,000 investment. In other words, she has none of her own money in the property.
If everything goes right, someone else is paying the mortgage and costs of this property with a little something leftover for cashflow to the investor.
Finally, the $27,500 is tax-free money. This is money that was derived from a higher appraised value. She’s removed some of the equity from the property and put it in her own pocket.

If you decide to start real estate investing, get proper accounting and tax advice from professionals you’ve paid to do work on your behalf. Do NOT take accounting and investing advice from blogs on the internet.

Lots of Things Have to Go Right for This to Work

The rewards are bountiful when things go right. In our example, the investor had the money to invest. The appraised value after the renovations was high. The bank was willing to finance 85% of the property value. There was a pool of available renters who could afford to pay a rental amount that covered the mortgage payment and associated costs of the investment property. The market rental price was high enough to cover the mortgage payment and the aforementioned associated costs.

Let’s say the bank had only wanted to finance 65% of the ARV. Our investor would have only been able to pull out $95,700 (= $150,000 x 65%). She would not have pulled out her entire $100,000 and the increase-in-equity-through-the-power-of-smart-renovations amount of $27,500.

Or let’s say that the real estate market had dropped between the date of the purchase and the date of the new appraisal. The bank tells our investor that the appraised value had come back at only $115,000, instead of $150,000. Even at the 85% ARV financing, the bank would only give the investor $97,750 (= $115,000 x 85%) to put towards the purchase of her next investment.

Another area where the plan could’ve gone haywire is the renovation costs. If our investor had budgeted $20,000 for renovations but wound up paying $50,000 for renovations, then her investment amount in the property would be $130,000 (= $80,000 + $50,000) instead of only $100,000. If the re-appraised value remained $150,000 and she could finance the property at 85%, she still would not be extracting her full investment of $130,000 because the bank would only be giving her $127,500.

Finally, there’s always the possibility that the renter stops paying the rent and the investor is forced to pay for the property. Every dollar out of the investor’s pocket is a decrease in the return from the investment property. The money-making magic has suddenly been turned into a money-sucking curse.

Research, research, research!

Like I said at the beginning, I finally understand the theory behind the money-making magic of real estate. It’s taken me years and many, many, many hours of listening to various podcasts & YouTube videos, but I finally get it. Now that I do understand it, I personally think it’s disingenuous to use click-bait language like “buying real estate with none of your own money.”

Obviously, at some point, you will need money to invest in real estate. It’s more accurate to say that there isn’t always a need for your own money to stay locked inside your investment properties… Okay, I get it – my language isn’t nearly as catchy and it would never qualify as click-bait.

However, that doesn’t change the fact that I generally know what the pundits mean when they use the click-bait language. I’m not a real estate investment expert. I haven’t put this theory into practice, and I’m not certain that I ever will. What I am certain of is that I finally understand – in a very rudimentary way – how a person can own real estate without keeping their money in an investment property. If the stars are aligned just right and nothing goes awry, real estate investors have the ability to own real estate without their money remaining in their investment properties.

It’s certainly not risk-free, but it does sound like it could work if everything goes right. If it’s something that you’re interested in, then I suggest that you start learning as much as you can before you start investing.

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Weekly Tip: Pay off your mortgage before you retire. It’s not good to go into retirement with debt. You will more than likely be living on a fixed income. Do what you can to ensure that creditors aren’t take a bite out of your fixed income every month. You won’t regret the fact that you’re mortgage-free when you’re retired.

House-Hacking is Worth Considering

House-hacking can be an amazing tool for building wealth.

You know how sometimes you’re on YouTube watching one thing and then a suggestion pops up on the side of the screen? And you decide to hit play instead of scrolling past it? Well, this week held one of those so I indulged my curiosity and hit play on a video that I otherwise never would have found by searching. For one reason or another, I was watching some videos about tiny houses. I started with this one because I wanted to know how anyone could spend $165,000 to build a tiny 300 sqft house.

And that’s how I discovered Robuilt. I promptly watched several more of his videos and I have to admit that a lightbulb went on after watching his video on house-hacking. I loved this particular video because this fellow goes into detail about how he financed his house-hacking project. He’s not shy about sharing how he obtained the money to build a tiny house, to renovate his basement suite, and how much rental income he’s earning from various sources. The only question I would’ve appreciated hearing him answer was how he and his spouse had initially accumulated the down payment for the purchase of their $640,000 home on writer & teacher salaries, but I guess everyone likes to maintain at least some small measure of mystery.

Anyhow, the lightbulb moment for me was when I realized – deep in the marrow of my bones – that it’s sometimes okay to go into debt if you’re borrowing money to buy real estate. I shouldn’t have been so shocked by this revelation. I’ve borrowed money to buy all of my properties. I’m very familiar with the concept of mortgages, how they work, how to repay them, etc…

Living in a Million Dollar House for Free

No. What shook me to the core was the manner in which Mr. & Mrs. Robuilt went from having a $4000/mth mortgage payment to a $0/mth mortgage payment by borrowing money. This video goes into more detail about how exactly they accomplished this feat so I encourage you to watch it.

Okay – so they bought the house and renovated the basement suite within two months. That rental of that suite netted them at least $2K – sometimes $3K – each month.

Blue Lobster, that still leaves at least a $2K/mth mortgage payment.

Yes, Numerate Reader – you’re right. Having the basement suite wasn’t enough.

The Robuilt’s decided to build a tiny house in their backyard. They’d initially budgeted $40,000 but the project ended up costing them $72,000. They didn’t take the money from the equity in their main home. Instead, they went to a private money lender to pay for this project.

Once the tiny home was built, they eventually rented it for $1800 per month. They refinanced the mortgage on their home to get rid of their PMI, bringing their mortgage payment down to $3700/mth… meaning that they were able to live in their home for free. Oh, and the value of their principal residence had gone up to over $1,000,000 because of the tiny home in the backyard.

Damn…

The Key was Getting Financing

Pay attention to the part where they went to a private money lender. (And they also relied on their credit cards, which is a very risky move because of the very high rates on credit cards. I am not recommending that you do this.)

As I watched the video, I could hear the thunderclap inside my head. You need access to money to acquire property, whether your own home or rental properties. The money can come from your own savings, from a family member, from friends, from a sou-sou, from a lifetime of collecting your loose change… it matters not. You need to get your hands on money to fund your real estate purchase.

And if you don’t have cold hard cash of your very own, then you need financing.

The Robuilt videos opened my eyes to the world of private money lenders. I don’t know all the details about how they work. Nor am I familiar with how they structure the lending terms. I don’t even know the rates or how they assess your credit. And to be clear, I don’t know why Robuilt’s didn’t go to a bank to get the money they needed to build their tiny house.

What I do know is that people who are cut off from obtaining financing are essentially cut off from the opportunity to acquire real estate. And if they’re not cut off completely, then their lack of access to money contributes to their delay in wealth-building. Maybe it takes someone an additional 7 years to be in a position to buy real estate. Whether that’s 7 years to save up a sufficient down payment, or 7 years to clean up their credit enough to qualify for a mortgage or a private money loan, it hardly matters. The result is the same – that person is unable to build wealth through real estate for 7 years.

Financing & Intergenerational Wealth

The thunderclap for me was the realization that access to financing is one of the keys to getting ahead when it comes to building wealth. If you buy rental properties, then you earn the equity while your tenants pay down the debt. If you buy your own home, then you still earn the equity while you pay down the debt. In order to earn the equity in the first place, you have to own property.

House-hacking as displayed in the Robuilt videos wouldn’t have been possible in as short a timeline as theirs without access to financing. That access allowed them to start creating wealth for themselves today. They’re also now able to build intergenerational wealth for their daughter.

It should be obvious that a lack of access to financing inhibits the creation of intergenerational wealth. In this blog post, I’ve focused on one couple who have used financing to buy & build real estate. Their reliance on financing allowed them to craft a situation where others pay for their mortgage. This results in their salaries going to other things, like accumulating another down payment to buy more property if they choose.

I’d like to point out financing can also be used to start a business. People who are more sophisticated than I am use it to invest in the stock market. For the record, there are many ways to use financing to build wealth.

People who don’t have access to financing have fewer opportunities to build wealth. It can still be done but it’s harder because those people have to accumulate the same amount of money from their own earnings. Imagine if your credit was so bad that you couldn’t get a mortgage. Or if you were legally prohibited from owning property. The only way for you to buy a property would be to save money from your paycheque then pay cash for a home.

How long would it take you to save enough money from your paycheque to buy a house? Even if you were house-hacking by living with a roommate?

Access to Financing = Access to Opportunity

The person who has to pay cash for a house doesn’t have the same opportunity to build wealth through real estate as the person who can get financing to buy property. I know that it might take the mortgage-holder a lifetime to repay the debt. After all, that’s why 25-year and 30-year mortgages exist, right?

Assuming the mortgage is paid, then the home can be passed down to the next generation. Imagine where would you be financially if you’d inherited a full-paid for home!

The person who can’t get financing for a home – yet miraculously saves enough money to buy one – can also pass their home down to the offspring. The possibility exists in theory only. It’s just such a monumentally harder endeavour to use cash to buy a home that most people never seriously consider doing it this way.

I’ve always believed that debt-free is the ultimate and best status when it comes to personal finance. This week, I’ve had cause to re-assess my position on debt. For whatever reason, these videos about house-hacking were more visceral for me than anything else I’ve read, watched, or heard. The power of financing and its ability to generate intergenerational wealth was put on full display. I have to admit that my eyes were opened to the possibilities in a way that they hadn’t been before.

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Weekly Tip: Borrow books from the library. It’s free and it’s a better use of your time than scrolling a social media site. There are books on anything that you can think of. Borrowing books is free. Libby is a magnificent app that prevents you from ever incurring a late fee because it automatically returns books to the library for you. Feed your brain – read a book.

The Power of Intergenerational Wealth

For the past year or so, I’ve been fascinated by all the examples I see of intergenerational wealth. I like to think that it’s because my assessment of the FIRE movement and personal finance has become more nuanced. I’m always curious about and very intrigued by how people get the money for their first investment. When I listen to podcasts devoted to personal finance and FIRE, I’m constantly thinking about the power of intergenerational wealth. I want to know how many people honestly and truly do it all by themselves.

Lately, I’ve been listening to podcasts from www.biggerpockets.com, which is a US-based website. I have learned a lot about real estate deals from listening to these podcasts! If you’re in any way interested in doing real estate investing, I would suggest that you spend some time listening to this podcast. It’s a great starting point, and you’ll learn what regular people with regular jobs have done to improve their finances through real estate investing. Some of their methods might work for you, or they might not. The salient factor is for you to learn about these methods so that you can figure out whether to pursue them. Once you do, then you decide how to customize your next steps to best suit your own particular circumstances. Knowledge is power, right?

**** To be explicitly clear, I am not endorsing any of the methods suggested on that website. I am not an expert in real estate investing. I am not qualified to tell anyone how to do it. ****

This post is about intergenerational wealth, not real estate investing. So why am I talking about Bigger Pockets?

Intergenerational Loans are a Huge Help

Earlier this week, I listened to an interview with a man who was earning $10,000 per month by age 35 from his real estate investing. Needless to say, I was very interested in what he had to say. I too would like to earn $10,000 per month, even though I am no longer 35!

Without divulging too much, I would like to focus on one particular element of the story. The interviewee had benefitted from intergenerational wealth on atleast two separate occasions as he built his real estate portfolio. He and his wife were able to gather a down payment on their first home, a duplex. However, they needed to borrow $4K from their parents to pay the closing costs. This was the first time that they benefitted from intergenerational wealth since their parents had the $4k to lend them. As a result, the interviewee and his wife were able to significantly lower their living costs and they decided to start buying more properties.

As the podcast episode continued, the interviewee disclosed that he borrowed money from both his father and his father-in-law. They each took out lines of credit on their residential homes and gave him the down payment to buy property. This was the second occasion on which the interviewee benefitted from intergenerational wealth.

Again, it was an “A-ha!” moment for me. This man had access to family members who had assets. His family had been able to lay hands on money, and they willingly helped him to invest in real estate. This is the heart of intergenerational wealth – those in the older generation are able to use their own accumulated money to assist the people in the younger generation to build wealth.

Please don’t misinterpret this post. I don’t begrudge this man for seeking his family’s help, nor do I think it’s unfair that his parents and his in-laws were willing to assist him and his wife. It’s completely natural for parents to want to see their offspring succeed.

Getting A Leg Up

What I find fascinating is the effect that intergenerational wealth has on so many aspects of our lives. Those who don’t have access to this form of wealth face more barriers in acquiring wealth. One of the barriers that I see for those without access to intergenerational wealth is the passage of time. It simply takes longer to build wealth if you don’t have wealthy parents or grandparents because you, as an investor, first have to save the seed money to buy that first investment. No one is around to gift you, or lend you, the money to start investing.

The sooner money is invested, the sooner a person can start building wealth. In other words, those who have access to intergenerational wealth have a leg up on those who don’t. Those with access can invest their money sooner. This means they have more time for their assets to grow and to compound.

If the interviewee’s family had not lent him $4K for the closing costs on his first home, then he wouldn’t have been able to buy it. I’m not saying that he never would have bought a home. I’m just saying that it would have taken him longer to buy one; he would have had to save up the money for closing costs to complete the purchase of another house. The same goes for his first real estate investment. Without money from his father and father-in-law, the man would’ve had to wait until he had sufficient seed money – whether equity in his first home or savings in the bank – to buy his investment property.

The Confidence of a Cushion

The second barrier to acquiring wealth is the natural hesitation that can arise when assessing risks without a cash cushion. When you know that your family has the ability to financially assist you if the need arises, you have the confidence to take more and/or bigger risks with your investing dollars. The confidence rests on knowing that you won’t lose everything, that you won’t have to start from scratch all over again. If your family can help you to recover, you’re more inclined to try in the first place.

For those without a financially-flush family, the consequences of making a poor investment decision include the very real and very significant risk of losing everything. There’s no one to bail you out so you might not make the same kinds of investments, or you may hesitate a bit longer before making a decision. The price of a failed investment is costlier when you don’t have the option of accessing intergenerational wealth should things not go as planned.

Do not misunderstand me. No investment is without risk, regardless of your access to intergenerational wealth. I’m simply stating that the downsides of the risks are more acute, and possibly more detrimental, when you do not have access to family money should your investments fail.

A Lack of Intergenerational Wealth is a Hindrance, not Brick Wall

I want to be very, very clear on this point. A person can still acquire assets and build wealth for herself without the benefit of intergenerational wealth. It will probably take a bit longer, or it might involve thinking outside the box.

To its credit, the Bigger Pockets podcast also features people who haven’t been able to turn to family for financial help. I particularly like the episode about the 23-year old single mother who has created a steady cash flow from her real estate portfolio. Though very young when she started, this woman learned how to buy, renovate, and refinance her properties. She has created a financially secure life that for herself and her children. In turn, she is pursuing a path that will allow her to provide intergenerational wealth to her children when they need it.

The longer I think on this topic, the more I appreciate the power of intergenerational wealth. Money creates the opportunity to build wealth. If it is not squandered, then wealth can be transferred from one generation to the next. The wealth, if not lost, can create a self-perpetuating cycle that ensures the financial security of successive generations. Each generation can reap the rewards which come from financial stability and good investment opportunities.

There are few among us Singletons who don’t have a connection to the next generation in some form or another. Even if you don’t have your own children, perhaps there’s a young person in your family who you would like to help at some point. If so, build your own wealth and you’ll be able to offer intergenerational wealth when the time comes. Perhaps you have a niece who wants to go to med school, or a nephew who wants to start a business. Maybe you just want to start some sort of scholarship for students you’ve not yet met.

Whatever your goals are, I encourage you to build your wealth now. One day, you’ll be the one who has the power to transfer it to the ones coming up behind you. You have the power to create intergenerational wealth for the next generation.