Households of FI-Zach and Marilyn Talk Real Estate Investing With Paula Pant
Episode 247
Episode Guide
Episode Summary:
Episode Timestamps
ChooseFI Podcast Episode Show Notes
Episode Title: Exploring Financial Independence through Real Estate
Episode Summary:
Zach and Marilyn, a couple from Southern Utah, share their transformative journey towards financial independence, focusing on real estate investment. After overcoming financial struggles and achieving debt freedom, they explore tangible ways to increase their income through real estate, particularly through live-in flips. The discussion features insights from real estate expert Paula Pant, who offers guidance on investment strategies and emphasizes the importance of treating real estate investments as a business.
Key Takeaways:
- Zach and Marilyn's Background: The couple shares their experience living below the poverty line, achieving debt freedom, and their desire to invest in real estate.
- Live-in Flips: They explain their strategy of purchasing homes to live in and renovate for increased value, seeking to maximize profits.
- Paula Pant's Insights: Real estate expert Paula Pant emphasizes the need for a business-like approach to managing real estate investments and offers strategies for success.
- 1% Rule: The 1% rule serves as a guideline for evaluating rental properties; your monthly rent should be at least 1% of the property's purchase price.
- Out-of-State Investing: Discussion on the benefits of being an out-of-state landlord and the importance of building systems for effective property management.
- Financial Tools Awareness: Emphasis on understanding financial tools and setting achievable goals as critical strategies for listeners.
Timestamps:
- Podcast Intro
- Introduction and Overview
- Zach and Marilyn's Financial Journey
- Entering the World of Real Estate
- Insights from Paula Pant
- Real Estate Strategies
- Understanding the 1% rule for Rentals
- Managing Properties Out-of-State
- Focus on Present Investment Opportunities
- Closing Thoughts and Encouragement
Actionable Takeaways:
- Explore local real estate opportunities and consider live-in flips to increase equity.
- Seek accountability in your financial journey to maintain momentum and motivation.
- Apply the 1% rule as an initial screening tool for potential rental properties.
Key Quotes:
- "The 1% rule means your rent should equate to 1% of the property's purchase price."
- "Out-of-state rentals simplify management challenges."
- "Focus on present investment opportunities."
Related Resources:
- Afford Anything Podcast - Insights from Paula Pant on real estate and financial independence.
- ChooseFI Books - Support ChooseFI publishing by leaving reviews!
Discussion Questions:
- How can the 1% rule apply to your investment strategy?
- What are your thoughts on live-in flips as a method for increasing real estate value?
- How important is community support in pursuing financial independence?
Action Items:
- Consider leaving a review for the financial books you've read to support the authors.
- Research local real estate markets to identify potential live-in flip opportunities.
- Begin building an emergency fund specifically for property management needs.
Podcast Description:
Explore Zach and Marilyn's transformative journey towards financial independence through real estate, as they seek guidance from experts and uncover the key principles of successful investing.
Unlocking Financial Independence Through Real Estate Investment
The journey toward financial independence can often feel daunting, especially when considering the various paths one can take. Among them, real estate investment stands out as a powerful means to build wealth. This article provides actionable insights derived from the experiences of a couple, Zach and Marilyn, who transitioned from debt to financial freedom. Alongside expert advice from real estate guru Paula Pant, this guidance can assist you in navigating your own investment journey.
Understanding the Basics of Real Estate Investment
To begin your real estate investment journey, it’s essential to understand foundational concepts like the 1% rule and live-in flips.
The 1% Rule
The 1% rule is a quick way to assess potential rental properties. The idea is simple: your monthly rent income should ideally equal 1% of the property's purchase price. For example, if you buy a property for $200,000, you should aim to rent it for at least $2,000 a month. This rule provides a guideline to help filter properties quickly, preventing you from wasting time on properties that won't meet your investment goals.
Exploring Live-in Flips
A live-in flip involves purchasing a property, living in it, and simultaneously making improvements to boost its market value. This strategy allows you to enjoy your home while gradually increasing the property's worth, ultimately leading to a sale at a profit.
Setting Actionable Goals
To achieve financial independence, it's crucial to set clear, measurable goals. Here are some suggestions:
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Identify Your Market: Start by researching your local real estate market to find undervalued properties or areas with strong rental demand. This will help you hone in on the best investment opportunities.
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Create a Property Portfolio: Consider a mix of property types—single-family homes, multi-family units, or multi-use properties—to diversify your investment portfolio.
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Establish an Emergency Fund: Having three to six months' worth of rent saved can provide a financial cushion for unexpected expenses, such as repairs or tenant vacancies.
Seek Community and Accountability
Being part of a supportive community can help maintain motivation and accountability on your financial independence journey. Here are ways to engage with others:
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Connect with Other Investors: Networking can provide invaluable insights into your investment strategy. Seek out local real estate investor meetups or online forums, where you can share experiences and learn from more seasoned investors.
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Consult a Mentor: Find someone experienced in real estate investing—like Paula Pant—who can offer guidance, share strategies, and help you navigate complex situations.
Utilize Real Estate Resources Effectively
Recognizing the right resources is fundamental in real estate investing. Here are a few key strategies:
Property Management Systems
If you choose to invest out of state, don't be deterred by the distance. Embrace the benefits of being an out-of-state landlord. This scenario often necessitates creating a solid property management system to handle operations efficiently from afar. Develop a checklist for move-ins and move-outs, and rely on property management services to oversee tenant interactions and property maintenance.
Understand the 1031 Exchange
Once you have successfully flipped properties, learn about the 1031 exchange, an IRS provision that allows you to defer capital gains tax when selling an investment property, provided you reinvest the proceeds in a similar type of property. This can significantly enhance your ability to grow your real estate portfolio without tax penalties.
Monitor Your Progress Regularly
To achieve financial independence, tracking your progress is vital. Set up regular check-ins to evaluate your investments, assess market conditions, and refine your strategies as needed. Utilize tools and software that can help streamline the process of monitoring your returns and managing your property investments.
Final Thoughts for Aspiring Investors
Pursuing financial independence through real estate is not an overnight process. Much like Zach and Marilyn's journey, it requires diligence, education, and adaptability. By leveraging community insights, employing practical strategies like the 1% rule and live-in flips, and remaining engaged with your investments, you will be on a solid path toward achieving your financial goals.
Stay committed to your vision and take action today. The journey toward financial independence can lead you to a wealthier future, one thoughtful decision at a time.
Households of Fi-Zach and Marilyn
What You'll Get Out Of Today's Show
- Continuing the financial independence case study series, Households of FI family, Zach and Marilyn are a married couple with young kids. Using Dave Ramsey's baby steps, they no longer have any debt but have wondered what to do next. Looking to explore investing in real estate, ChooseFI connected them with real estate expert, Paula Pant.
- Though Zach and Marilyn once lived below the poverty line, they managed to pay off their debt, including student loans, a car loan, credit cards, and medical debt. During that time, they gained a little experience with buying and selling property. Since that time, Marilyn has gone back to work and their income almost doubled.
- Having earned a profit on some previous homes they flipped after living in and renovating them, it's encouraged them to use the skills they've acquired on future investment properties.
- Where they currently live in Cedar City UT, the market is a bit inflated and are concerned about the 1% rule where monthly rent should equal 1% of the total purchase price.
- Paula explains that if a property rents for 1% of the purchase price, that is 12% per year at full occupancy. Since it is estimated that operating costs will be roughly 50% of the monthly rent, 6% of the purchase price is what if leftover as an unleveraged dividend on the property. Assuming no increase in the value of the property, but keeps pace with inflation, that's roughly another 3% based on historical averages, the property gives a 6% dividend and 3% inflationary increase, for a total return of 9%. It is a rough way to determine if a property is worth looking into further
- Exceptions for the 1% rule of thumb may be made when operating costs are expected to be less than the 50% average, such as if property taxes are extremely low or if it is a newer home.
- Other exceptions to the 1% rule can also be made when buying a multi-unit home where you live in one unit and rent out the others. In those cases, personal criteria for where you want to live also come into play and the 1% rule can be thrown out the window.
- Because property values are a little inflated where they live, Zach and Marilyn are interested in buying properties in markets where they don't live. Paula believes that it's easier being an out-of-state landlord because it forced her to treat it like a business when she couldn't just pop over and take care of issues herself.
- Zach and Marilyn were also interested in what criteria they should consider regarding properties that are fixer-uppers versus being move-in ready. Paula says what she teaches the students in her real estate investing course includes a graph where on the x-axis represents a spectrum with "You Find Deals" at one end and "Your Create Deals" at the other. On the ends of the Y-axis are "Move-in Ready" and "Not Even Habitable". There are tradeoffs between effort and reward, but as effort increases, generally, reward increases as well. If you don't have time to devote to the hardest quadrant of the graph, then it might be easier to find deals in the move-in ready quadrant instead.
- Since they are debt-free, Marilyn I feeling anxious about taking on additional mortgage debt, but Paula views the mortgage from an investment property differently from personal property. An investment property mortgage is a tool that allows you to cashflow positive.
- Paula doesn't have a specific price range she won't exceed but says there is a balance of equity to debt that she tries not to exceed across her entire rental property portfolio. She tries to keep a 50/50 ratio where for every $1 of debt she has, she also has $1 of equity which is conservative by most real estate investor standards.
- To ensure that enough funds are on hand to take care of emergency maintenance and other unexpected household repairs, Pauls advises having 3-6 months' worth of rent on hand to cover these expenses.
- Zach and Marilyn are wondering if they should cut back on retirement investments and divert to real estate to help them acquire property faster. Paula suggests instead look at how much from their overall budget they want to save and then decide how to divide up the savings.
- Considering what happened in 2008 with the real estate market, and unsure how the pandemic will impact real estate today, they are unsure when to jump in and purchase an investment property. Similar to trying to time the stock market, Paula encouraged them to look at the numbers to decide if it's a good deal right now. If in the future, the market shifts and no longer makes sense, then sell. When this is done repeatedly over a lifetime, you win.
- Since they have done well in the past with live-in flips, Paula cautioned them to be aware of their emotions and to be careful about separating what they want from a home they live in with what makes sense as a good investment.
- A 1031 Exchange allows you to avoid paying capital gains when selling an investment property and reinvest the proceeds from the sale within certain time limits in properties of like-kind and equal or greater value.
- Living in a property for two of the last five years qualifies you for a capital gains exclusion of up to $250,000 or $500,000 for couples filing jointly.
- Brad has been an out-of-state landlord like Paula for more than a year. He purchased a couple of properties in Georgia for $50-55,000. The market rent for these properties is about $750-800 so Brad is above 1% at around 1.4%.