What You Missed - February 2019 - General Meeting
Use Your Brains, Not Your Dollars
Pete began with, “I’ve been doing this since 1965 and had zero dollars to start.” “If I had waited to invest when I got money, I would just be starting.” When you are trying to build an estate, you need to get some leverage.
You need to get some assets. It costs me $4000 per month to live in Madeira Beach. I can rent out a house in Madeira Beach for $1,300 that will generate $700 per month and I would need only 5 or 6 houses to live free.
He proclaimed, “Whatever your goal is, you can realize it. You just have to understand that capitalism works.” I have friends that would sell a house to get dollars and get a new car, or boat, or take a trip. They would sell something they don’t want to get what they do want.
Value is very subjective. I offered a woman to trade an abandoned farm in New Hampshire for my waterfront condo in Florida. Why would I do that? I have kids and grandkids still living in New Hampshire that I would like to have a place to enjoy.
She was worried about not having enough money, but I never mentioned money. I told her, “Your farm is assessed for $200,000 and my condo is assessed for $40,000, but we are not dealing with assessors.”
People like to deal with people they trust and relate to. When I started in real estate my job was to get assets. How do you get assets when you don’t have any money to buy assets? I went out and asked people for help. I asked everyone that I could to let me know if there was anyone selling a property I could look at.
When I got out of high school, what could I do? I could take a job and be strapped down or become a real estate agent and be self-employed. I did not need an office, or any materials. I lived at home and drove my dad’s car. The first year I made $4,000 and was learning how to make offers. I wrote 200 offers and none were accepted.
When I was almost 20 years old, I was making $8,000 a year but the government stole some of my money. Finally, I got my first property. I had sold a gentleman a property in Beverly, Massachusetts and he called me to say he wanted to sell his property.
He had a job offer in Ft. Lauderdale and now had to sell in order to move there. He had just bought the house for $27,000 and got a home improvement loan to fix up the house. He just wanted to get his $3,000 cash back and I could buy the house, but I didn’t have the $3,000. I was able to scrape together $1,900 but needed $3,500 to cover the payment and closing costs.
When you buy a house, where would you get the money? From the seller. I offered $500 to pay closing costs and $1,400 to him now, and would pay him the other $1,600 later. He turned me down.
So I had to borrow from my parents. If everyone paid the rents, and nothing broke, it would pay for itself. Why would I buy it? Because when I was going to be 45 years old, it would have paid for itself. The second mortgage was $100 per month for three years so, after three years, I would have $1200 per year cash flow.
I continued to buy properties and, when I graduated from college, I had 20 rental units. Ten years out of high school I had enough income to fund my lifestyle.
Why did I move to Florida? I got a free home! I bought a 3-bedroom, 2-bath, 2-car-garage home on Lake Magdalene that was paid for by reducing my taxes in Massachusetts. I looked around for some houses by walking the neighborhood asking if they had lived there for awhile. If they didn’t like that neighborhood, what neighborhood did they like? In the event I could find them a house in the neighborhood they liked, would they be interested in selling me this house?
I heard about a house that had been for sale for two years. I asked about it, but the house was vacant. The Realtor said it was overpriced and the owner wanted more than it was worth. If a house is vacant, there are many things that deteriorate. I offered to lease it for $750 per month but the Realtor said their mortgage is $950 PITI so they would probably not be interested.
I talked to the owners and asked, “Do you pay the utilities?” Do you have to have the lawn mowed? They would lose less by leasing it to me at $750 and have the house taken care of. I rented it for $1,100 and, after expenses, I cleared $240 per month without buying it.
Since value is subjective, you have to find out what they value and find a way to get it for them. What did he want? A pink Oldsmobile so he could drive to Vegas. The payment equaled the condo rent in Vegas and he was happy. I fixed the house and sold it and paid him off.
When I bought my fourth house, I bought a fourplex, and needed $10,000 for the down payment. Where did I get it? From my second tenant who I knew had some cash in the bank. I asked, “How much is the bank paying you?” She said three percent. I asked, “In the event I could get you nine percent, is there any reason you would not lend me $10,000?” She said “No” and I borrowed it from her. Since then I have borrowed $75,000 from her since we had such a good relationship.
I use paper to buy my investment properties. I just acquired a million-dollar property. How did I get it? Owner financed, no money down, no payments. What are the taxes on a million dollar house: $20,000. Utilities and maintenance are expensive. What is it costing for this person to keep this house? You have to talk to the seller to find out what they really need. Pete advised, “I am good at meddling.”
I got away from multifamily because they are more demanding, and I wanted more time to myself for my grandkids. People in single-family homes like privacy and I can do privacy.
How do I avoid capital gains? Code section 121 says that you can live in a house for two years and, when you sell, the government allows you keep up to $250,000 tax free per individual. I know several people who have made over a million dollars by moving every two years.
My son Jay is going to UCF in Orlando and I went there to see what neighborhood he wanted to live in. I knocked on a few doors and asked them to call me if they heard of an excess house for sale in the neighborhood. Six and a half weeks later, I got a call from a guy in Niagara Falls who wanted to sell a house his son had lived in while going to school. His son graduated and moved away, and it stood vacant for two years. He thought the house was wrecked so he accepted $5,000 down and $350 per month.
Jay then rented three bedrooms for $400 each per month. He lived there for five years and he made $53,000. Those are the things you can do when you just do them.
My friend owed a lot to a realtor in Ft. Meyers. He needed a car for his daughter. I asked, “how could I help?” I called a friend that sells cars and I bought a station wagon for $1,500 plus $100 for the auction. Ralph is owed a $2,000 note from a builder so I offered to take the note and $1,000 for the car. Why would he give up the note? It had only one payment and provided no income.
I now had a note I could use as currency. l then traded it as the down payment on a half-interest in a house.
My kids are living on a lake where the neighbors all have boats. Now the kids wanted a boat but I kept saying no. Kids are great negotiators and they are incessant. I was driving on US 19 and saw a boat dealer with four boats in front, all on floorplan. I asked him, “In the event I could get you a house and trade it for the four boats, get a mortgage on the house and clear your floorplan, would you be interested?”
I traded three of the boats for a house and the kids got a boat. I then bought the house “subject to” the new loan. We used the boat a few times and traded the boat for another house.
I took 20 years to get 33 rental units and live the life I wanted to, and you can do the same thing. How many houses would you need to have $5,000 a month coming in? Ten $100,000 houses would get that, or 5 or 6 at $200,000, or even one million-dollar house renting at $5,000 per month. Everything would work, you just must decide what you want to do.
Peter remained for several minutes answering questions.
Publication 537 IRS is for installment sale info. Publication 523 is for personal residence.