How To Turn $5,000 into $1 Million Part Time
By F. Scott Tonges
The first impulse of those wanting to “get into real estate” is to own a rental house or do a rehab like you see on TV. Having done both, I’ll say, think again. I divide the real estate investing process into 3 steps: 1. Seed Capital 2. Growing Wealth 3. Maintaining Wealth. Most investors get these mixed up, and that’s a very costly lesson, so let me explain. Seed capital is the process of making money without money, or very little ($5K or less). In the prior newsletter I illustrated how to do a “sandwich lease option”, turning $1,000 into $25,000. The world of seed capital can be summarized as “Assignments” or passing bargains on to bargain hunters. The lease option idea gives you control of a property, a house in the example, let’s you mark up the “down payment” and price to an end buyer above what you lease-option the home for from the owner. One of the hottest items in commercial real estate now is triple net leases in which a building is occupied by a national brand : Dollar General, Auto-Zone, Starbucks, even some Walmarts are investor owned: these tenants lease the building and takes care of all the expenses.
You can buy these deals for $1.2 million to about $8 million and get a 5% to 7% annual return. But any business occupying a building they own can sell it and lease it back. By offering an higher 8% to 10% return to investors...well the last one I did “sold” in 4 days by selling my contract and planned lease back set up for $25,000. In a another instance, I arranged an 8.5% return sale lease back and the end buyer, a Harvard educated attorneyinvestor, signed a 100,000 fee agreement to buy my contract and new lease. This deal did not work out as planned, but with the right pieces, one can make good money by passing bargains on the bargain hunters. My investment on both, zero. What you are really doing is “repackaging” a situation. So, you earn money without money & then, step two, is to invest in value added or distress deals. Since there are far more value added deals, let’s say you take your seed capital, let’s say $100,000, and buy a small commercial property in which you turn a 400,000 property into $500,000, refinance, pull out $75K of your $100,000 and keep the property and it’s cash flow. If you keep the seed capital machine running, which I recommend, you can supplement the $75K you got back on deal one and go do it again with $75 K or more.
You could make a good living just doing seed capital deals, but, in time, you should consider having “passive cash flow” which was suggested here by keeping the first deal. Done a few times, over a few years, it’s not a get rich quick plan, but it’s one anyone could do part time, with the right knowledge, grow to create a million net worth. The wealth creation step was to invest the seed capital into a value added property. When it reaches it’s potential, it’s now a wealth stabilization investment. Be sure and review the prior newsletter for more ideas on the zero down investing, seed capital, step.
Real Estate Investing Process
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SMALL COMMERCIAL PROPERTIES THAT CREATE PASSIVE LIFETIME INCOME – The American Dream Without A Job
By F. Scott Tonges
It’s said that in most US cities, anyone making $75,000 a year ($6,250 / mo) can live a pleasant life in America. According to the US Consumer Survey (Dept. of Labor) the average annual household expenditure, including income tax and savings, is $63,784. So, the $75,000 per year idea has merit. In order to avoid a life of Groundhog Days (working day to day, doing the same thing over and over until you drop), building an income property portfolio, or just acquiring one paid off (no mortgage) income property can achieve this income level and generate passive income; mail box money, for life. The revenue is from rents from a small commercial income property, or more than one. But here’s a chart of how large a single property would be needed to generate Commercial Properties Investment Income of $75,000 a year (with no mortgage debt).
There are several ways to achieve this goal. That is, to own an income property (s) that generates this much income (NOI – net operating income). The properties range from 9,200 Sq Ft (say a 5 tenant strip center) to a 24,000 SF warehouse, or a 19 unit apartment building. Whether one owns a single property that matches this size or several smaller ones (like 5 four-plexes), the result is the same: $75,000 a year in passive income. In short, each property has a value of appx $900,000. That is, if you paid $900,000 cash for a property generating an 8.25% annual return (an 8.25% capitalization rate) you’d net $75,000 a year.
Houses, by the way, are poor long term income properties in most cases as the income vs the value of the home is much too big a gap. A $200,000 home generating $1,400 a month in rent, as an example, does yield an 8.4% annual return. But by the time you pay for upkeep, taxes, insurance, the cost of vacancy, advertising, make-ready costs after one tenant leaves but before another tenant moves in, well, you get the picture. Commercial properties are much more stable and less costly for the income they can generate.
And don’t discount the lowly warehouse. As one of my client-friends of 25 years, George Ablah, who specialized in rehabbing distribution warehouses told me aboard his $12 million Gulf Stream jet, “With a warehouse, you don’t have to keep rebuilding the place!” He went on to explain that with an apartment, as an example, you are forever repainting, re-carpeting, replacing appliances, redoing the landscape, etc….you are “forever rebuilding the place”. Something to think about. So, how do you get there?