This article was posted on Saturday, Mar 01, 2014

Starting the new year is an excellent time for self-evaluation and to modify your investment plan in line with today’s opportunities.  On a positive note; there are great new opportunities for do-it-yourself investors who are willing to take their best shot at the American dream and financial freedom.  There are also some new challenges and some different road blocks to keep the game interesting.  Education and know-how will continue to be the main ingredient for success with any plan, same as it’s always been – nothing new here!

I’m always baffled by a new breed of wanta-bees who attempt to launch their investing careers quickly without dedicating the necessary time to learn a few basics!  These folks employ what I call “the Christopher Columbus” technique!  First, they decide to set sail without the foggiest notion about where their investment boat is headed.  If they actually do arrive somewhere, very few can even begin to explain where they’ve been.  And finally, most will encounter serious money problems and can only hope and pray that others will help pay for their ill-fated voyage!  Obviously, this technique is seriously flawed since the Queen of Spain has been dead for over 500 years.

Develop a Plan

In my books and seminars, I’ve been teaching different strokes for different folks for many years.  Not only have I taught it – I’m also the best example I can show you because what I teach is exactly the way I invest myself.  By the way, you should never take lessons from anyone who doesn’t use their own techniques!  The best advice I would offer anyone starting this business is to learn your lessons from a teacher whose techniques and strategies are pretty much in line with how you would like to invest yourself.

The general topic of real estate investing is about the size of an elephant.   I always recommend that investors should first develop a very basic plan with the benefits they need, or at least the benefits they would like to have, before they set sights on finding a property!  Obviously, this basic preparation (developing a plan) will automatically eliminate a whole boat load of real estate that doesn’t provide the set of benefits you’re after.  See how simple this stuff is!  We’ve just gotten started here, and now already, we’ve quit lookin’ at about half the properties in the marketplace!

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Only You Can Decide On the Benefits

Different properties provide different benefits, as well as a different set of challenges.  For example; a single family rental house with a low rent-to-value ratio will not put any jingle in your pockets until the mortgage debt is paid or the house sells for a profit.  Looking at numbers in my own town; a $220,000 medium price tract house will earn $1,200 per month rent and has a .065 rent-to-value ratio ($14,400 annual rent divided by the house value = .065).  Assuming operating expenses will use up 35% of the income; I will only have $780 per month left for the mortgage payment.  After 20% down ($45,000), I would still need to finance $175,000 at today’s 06% investor rate, with amortized payments of $1,049.22 for 30 more years.  As you can see, it will take a lot more money down (roughly $50,000 more) to just break even and hope I never have a vacancy.  If my dream (benefit) is an exotic cruise somewhere – I’m afraid my ship will have long since sunk in the harbor and my cabin totally rusted out before this investment nets out any spendable cash.  I had best come up with another plan or forget about cruisin’ anytime soon!

Although we all like to dream and picture ourselves on FantasyIsland– you must be very careful with your planning and never lose sight of what’s real and what’s not.  Your plan must be solid like the foundation on a house – built on firm ground and able to support all the parts of your planning structure.  Don’t lie to yourself about the money you have to invest.  If you don’t have any, fess up from the very beginning.  It makes a big difference in the properties you must look for.  For example; the average three bedroom, two bath tract house in my town that currently sells for $220,000 will require at least 20% down for most investors.  That means you need $45,000 in your purse and a decent credit report to barely own it.  You’ll still be upside down in terms of cash flow, but if you fail the $45,000 requirement – who cares about the rest of the deal!  Right now, it’s simply beyond your capacity to acquire it!   A big mistake many newer investors make is looking at properties totally out of their reach financially.  Don’t waste your precious time – agreed; go ahead, just nod your head anyway!

Benefits Are Always Personal

Different people look for different benefits depending on where they are financially.  You may have carry-forward losses from depreciation, so you wouldn’t need that particular benefit right now.  If you have adequate cash flow from your job, there’s not much use of earning more income that gets automatically reduced as it runs along the state and federal tax treadmill.  A far better plan would be to sharpen up your negotiating skills and buy $200,000 properties for $100,000.  Now you’ve earned $100,000 without any tax consequences (no deductions).  Sometimes new investors can get financial relief from their mortgage payments by investing in a nice duplex to start with.  Quite often the tenant’s rent will cover most of the mortgage payment.  This means you, the owner, get very cheap housing costs by living in the second unit.  You will also get the depreciation and tax deductions for expenses on the side you have rented out.  As a bonus, living next door to your tenant will teach you how to pick ‘em right, which will help your landlording skills in the future.

One major benefit, which is very difficult for newbees to find is seller financing for single family houses.  In the single house market, everyone involved, including selling agents, owners, banks and even the buyers, fully anticipate traditional financing will be a requirement!  Seller financing is even made more difficult because most new investors cannot make a convincing argument for owner participation even if the seller is agreeable to consider it.  Worse yet, neither can most real estate agents who will almost automatically advise their clients against it!  When your investment plan or strategy is to acquire multiple units (five or more) a whole different mindset can be found.  A very large percentage of sellers (including me) are greatly in favor of seller financing.  In fact; as you shall read, seller carry-back financing is a very important part of my overall wealth strategy for Stage III investors (more on this later).  In my opinion, do-it-yourself investors who leave financing for others to figure out will have great difficulty reaching their full potential in this business.  I often tell students at seminars and presentations – there’s just as much or more profit in financing and paper than in the real estate itself.  Naturally, I get some very puzzled looks from skeptics!

It’s About the Profits – Not the Building

In part, Webster’s Dictionary defines investing as to make use of for future benefits or advantages – or to commit (money) in order to earn a financial return.  You’ll notice there’s no mention of what you should use to accomplish this task.  Real estate investing offers a wide range of choices and obviously each investor may choose his own poison.  By the way, poison is exactly what many seem to find – investments that not only fail to provide any advantage, but quite often they suck the novice investor under water with the deal.  It’s for this reason that I suggest looking for benefits and advantages rather than properties.  Almost all properties have some investor benefits, but when you can learn to pick out properties with the most benefits – along with greater advantages, you’ll be well on your way to bigger bank deposits – plus a whole lot closer to becoming what I call a Stage II investor.

Most of my readers are aware that multiple unit properties (five or more units) are my specialty – but they haven’t always been.  There was a time when I bought one house at a time and looked at almost every property presented to me.  In my early years, the excitement of looking, bragging and buying heavily financed properties was enough to keep me happy.  Profits on paper (not actual deposits) had me convinced that before much longer I’d surely be rich.  The only thing I had to do was keep borrowing from Beneficial so I could stay alive.

Borrowing never failed to put a big smile on my face the day I picked up the check – but when it came time to write the monthly mortgage payments, much of the fun had disappeared!  Using forced equity or regular appreciation to borrow more money on a single house is seldom covered by additional rental income and more often than not, the added payment will turn a break-even house into a money-eating alligator.  Even if you use most of the borrowed money to purchase your next investment, you’ve crippled the house you own with burdensome debt, making it difficult to sell because of the higher monthly payments.  After you’ve done this several times, you’ll end up with no cash flow and properties, which are quite difficult to sell.  Then finally, the bank pulls the plug on anymore loans – you’ve reached our limit for mortgages, they say.  Investing by banker rules can effectively shut you down long before you reach the Promised Land.

Any Planning Begins With Your Goals

It’s very simple; if you don’t know where you’re going – how will you know when you get there?  Simply wanting to become rich and famous as a real estate investor is akin to eating an elephant – it’s too big, too broad and without the slightest hint of where to begin.  But like eating an elephant; your real estate plan can best be accomplished by reducing the task down to smaller bites.  My earliest investment plan could be called; “seat of the pants investing” and was fueled by my blind faith, which had me completely convinced that owning any kind of real estate was bound to make me rich.  I labored under this false belief far too long before realizing I was using the Christopher Columbus technique I spoke of earlier.  In hindsight, I bought the wrong properties, did too much borrowing and sold properties I should have kept.  My lack of knowledge back then cost me thousands of dollars and many back-breaking hours doing things my way instead of the right way!

There are basically three kinds of do-it-yourself investors like I was starting out!  There’s the person or family with a good solid job who intends to keep it and invest on the side (part-time).  Next – you have the wanta-bee investor who has a less than secure job, who can clearly see it’s coming to an end.  He or she will remain working so long as the job holds out, but regardless, they want real estate to be their backup plan.  Then finally, there are folks who are sick ‘n tired of their current employment or perhaps laid off – out of work and wish to immediately jump in and become full-time investors.  This group is different than the first two because they must start generating net spendable income as fast as they can or pray for another unemployment extension.  All three of these groups are average working folks with very modest savings, so money to purchase real estate is always an issue.

Now – The Doctor’s Opinion

You must be very clear about what you have to contribute – both your time, as well as money. Obviously, for the investor with a good solid job he intends to keep, time to invest will be extremely important.  In my opinion, purchasing one starter-size three bedroom – two bath house every year to keep for rental income is an excellent plan.  For leveraged purchases, there will likely be no cash flow (try for break-even).  But buying one house a year will allow the novice investor adequate time to learn how to perform routine maintenance and minor repairs, as well as becoming acquainted with the business of landlording.  This plan will also provide a great retirement supplement and allow excellent tax write-offs within the limits of TC 469 (passive loss rules).

For the investor wanta-bee with an unpredictable employment future, I’d suggest a slightly more aggressive approach just in case the job peters out.  Obviously, spendable income from the investment becomes more critical in this situation.  Depending on the investor’s blue collar skills, acquiring cosmetic fixer-uppers or multiple-unit properties from two to four units would offer a sound strategy.  With small multiple-unit properties, you’ll often find that the down payment – or the cost to buy in, is no more than the down payment to purchase a single family house.  Most importantly however; you’ll find the cost per living unit is cheaper, which of course, equates to a higher rent-to-value factor.  Remember the rent-to-value equals the annual rent divided by the full value of the asset (unit).

For example; suppose you acquire a three unit building for $150,000.  With rents of $500 each, the rent-to-value = $6,000 annual rent divided by $50,000 (single apt. value) = 1.20 rent-to-value.  Any factor above 1.0 gives the investor a good chance of having a little spendable cash left at the end of the month, assuming the debt service is within reason (less than 60% of the income).  Naturally, with a fixer-upper and an investor who can fix things himself; the buying discount will offer the best chance for winding up with cash flow (not much – yet still positive).

For investors whose goal is to become a full-time career changer and they plan to rely on their real estate income for survival – they must first be completely honest with themselves.  Leveraged single family houses will be totally out of the question.  You can earn more spendable income with a paper route.  Being honest with yourself means standing back and looking at the big picture.  Let’s assume for the moment you have $100,000 to spend for real estate (by the way, that’s five times more than I started with).  Ask yourself; where could I invest $100,000 and immediately begin to earn money back every month for my personal living expenses?  Can you earn a 15% return today?  Would that be good?  Could you support yourself, family, etc.?  The answer is yes, if $1,250 per month is satisfactory – and, if you can find a 15% investment opportunity.  My last question is the toughest; do you actually have $100,000 to invest?  I want you to visualize the task at hand so you fully understand it won’t be too easy.  Changing careers or becoming a full-time investor is a bit more complicated than simply racing out to buy a house.  Let’s talk about why!

Many investors like myself have dreamed about financial freedom, job security and the personal independence that comes from being your own boss!  My first recollection of such a dream dates back many years to my days as a young paperboy delivering our local newspaper on my bicycle.  With 120 customers, seven days a week, freezing cold in the winter months and baking in Redding’s 100 degree summers; I still remember thinking to myself – there must be a better way!  It would be quite a few more years, loads of hard work – plus a lengthy spell at working two separate jobs before my dream would begin to take shape.  Looking back today – I missed a lot of shortcuts, made some dumb mistakes, which I didn’t realize were dumb and took far too long to educate myself.

A Bridge Too Far

Almost every new investor who wants to become full-time fails to adequately develop a plan to achieve the goal.  Of course this is the main reason most will fail!  The old adage that most folks don’t plan to fail – they fail to plan, certainly applies to career changers full-time wanta-bees.  As we discussed earlier, investors who have 9-5 jobs and intend to stay employed, can invest almost any way they choose.  They can purchase property with negative earnings and still be okay because they have eating money from another source – their day job!  Not so for career changers and full-timers who must learn how to develop an income much quicker if they intend to survive.  Career changers don’t have the luxury of merely hoping things will work out okay!  Fortunately, there is another way, but you’ll need to think outside the box – as they say, and quite possibly overhaul your present mindset about investing.

Jay P. DeCima, aka Fixer Jay, lives in Northern California where he operates multiple rental properties.  With nearly 50 years’ experience, he’s a street-wise landlord and best-selling real estate author.

Jay’s recession-proof, adding value techniques are ideally suited for small-time, Mom & Pop investors seeking faster paydays and financial security.  Jay’s self-help books have been voted #1 by both the Los Angeles Times and Chicago Sun during the past 12 years. readers are invited to download Fixer Jay’s latest free how-to eBook, LIVING THE DREAM at


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