In this episode, Jack discusses the pros and cons of different kinds of real estate. You’ll learn the differences between land flipping, rental housing and multi family housing. Jack goes in depth into each kind of real estate and talks about the reality of investing in them.
You’ll learn how to avoid losing money on your investments by making smart decisions based the experience of other investors who have made (and lost) huge amounts of money in land. Jack also recaps some concepts spoken about in previous episodes, including The Law of Large Numbers and the pitfalls of not thoroughly inspecting a property.
Listen and enjoy:
- Learn about the different kinds of property
- Discover the pros and cons of each
- Avoid making the mistakes others have made before you
- Find out why land flipping is the simplest and most flexible form of real estate investment
- Recap why multi family housing can be an excellent opportunity
- Look into the complexities around rental housing
Mentioned in this episode
- Subscribe and rate our podcast at: http://www.Jackbosch.com/podcast
- Learn about Lots and Land Flipping: http://www.jackbosch.com/land
- Join our thriving community and talk to other people! Join our Facebook group https://www.facebook.com/groups/ForeverCashClub/
- Follow Jack Bosch on Facebook to get the latest updates: http://www.facebook.com/jack.bosch
Jack: Hey, there. Jack Bosch here and I am here today again on a new podcast with your podcast series and also audio podcast if you listen to this on iTunes. Welcome. As always, let me first quickly say, make sure if you enjoy this podcast, you subscribe to the podcast either on YouTube or on iTunes. And also, give us a review particularly if you’re watching or listen to this on iTunes. Give us a five-star review because the only way anyone can actually hear about this and actually anyone that shows up in the searches for more people is by more people give us a five-star review. So, go there, put down a review. So, what are we gonna talk about today? Today we’re talking about what kind of real estate is the right kind of real estate for you. I’m gonna talk about the principles of land flipping, house flipping, and multifamily investing. Right? So, then compare those three against each other so that you can decide for yourself what is best for you as either an active investor or as a passive financial investor. All right. We’ll get started right after this quick intro.
Man: Welcome to the “Forever Cash Life Real Estate Investing Podcast,” with your host, Jack and Michelle Bosch. Together, let’s uncover the secrets to building true wealth through real estate and living a purpose-driven life.
Jack: All right. There we are again. First of all, let me drink a sip of water off my new cup. We got to keep it a little bit light here, coffee. I won’t even say what it says on there. Okay. So, I wanna keep this light. I hope you don’t mind the little joke here. So, I’m going to talk about right now about the three different kinds of real estate that we talk about, that I usually talk about. Usually, I talk about land flipping. Land flipping is responsible for 90%-plus, 95% of all our deals that Michelle and I have done with our team of course. Then, we owned a bunch of houses for single-family houses for rent, rental houses just for long-term cash flow. And then, over the last few years, we’ve also gotten started in multifamily.
Now, I have a podcast just a few episodes ago, that where I talk about why are we doing multifamily. And I explained the concept of one-time cash, temporary cash, forever cash. That really the goal of investing is not just income. Keep that in mind. The goal of investing is not just income. The goal of investing ultimately, is financial freedom. And more than anything, lasting financial freedom. Lasting financial independence. Financial independence that’s generational, right? When you pass away, your kids won’t have to necessarily work unless they want to work…usually, they should work, but only in something they want to, right? And their kids, and their kids, and their kids.
Like if we look at the Rockefellers in this world. Think about them whatever you wanna think about it, political or whatever they are. Party wise, I don’t even know which party they belong to. But bottom line is the Rockefeller father died like 100-plus years ago or so. I don’t know exactly. It might be wrong, but a few years here. But his son, Rockefeller II died a bunch of years ago. Now, their children are all pretty much dead already except for one, which is I believe David Rockefellers is like 100 and something years old. He’s on his fifth artificial heart and so on. Their kids are already in retirement age. Their kids are already now in their bloom of their working activities and they’re all working in politics, in the business, and things like that. Yet, financially-speaking, none of them had to be worry about having a warm meal on their table, a warm plate of a food on their table, about a roof over their head or anything like that. They all can afford to go to the best schools. They all can afford to be part of the best, kind of, what money can pay for. And that actually frees them up in some degree, not only they Rockefellers or not, but if you do it the right way, then, money can free you up to really be dedicating your life to what you really want to dedicate your life to, to really fulfill your mission.
So, money can be a means to a good end or means to just spoiling and being a spoiled brat and things like that. I hope that’s not the path you go through. But having said that, the income itself is not something to just use, it’s the income use up. The income is actually that you generated something to actually rollover into other ways off real estate. So, that’s why we do multifamily because it’s a way for us to roll our income into long-term generational wealth. Having said that, let’s compare the three kinds of real estate that are out there.
So, first of all, land flipping. We already know about it. We love it, love it, love it, love it. Because there’s lots of people out there that no longer want their pieces of land. They’re willing to sell them at pennies on a dollar, 5 to 25 cents in a dollar. You can do everything with land that you couldn’t do with houses except for moving in. Well, you can pitch a tent, but other than that, you can’t really move in. But you can build a house on it, right? Which you can’t really do on a house…you can’t build usually another house on top of that house. But so, you can wholesale, you can retail, you can sell a financing, you could split, you can improve, you can do all these different things and you could make money with land. Right? And the best part is, if you buy your land at 20 cents in a dollar and you sell it at 80 cents in a dollar, you’re quadrupling your money and on top of it, if you do solo financing, in many cases, you get your money back just with a down payment and then cash flow and all these different things. If you go all the way back in my podcast to like the first probably in our podcast, Michelle and I podcast, due to the first probably 15 episodes that we have ever done under the “Forever Cash Real Estate Podcast,” I think it might have been a different podcast on iTunes, you will be able to find all these kind of details about that stuff. And now, obviously, over the next episode, we’ll jump into that a little bit more too.
So, let’s compare that to houses. Now, houses are very cool because a house in itself is something useable. It’s something that people can move into that they can buy. They can improve. They can make their own. It’s like the American dream, right? At the same time, houses also have some challenges. First of all, typically, when you buy a house, somebody needs to go see the house. Might not have to be you yourself, it can be somebody else. It can be contractors. It can be inspectors. It can be a trusted employee. It can be your business partner and so on. But somebody needs to go, see their property and they better be qualified in identifying what’s wrong with that property. Because I’ve seen guys like friends of us that have lost $30,000 because they overlooked a $50,000 foundation repair issue, right? And they only had $20,000 margin in the deal, boom. That margin was gone along with a few other things. And now, they lost $30,000 in a deal.
Now, that’s hard to do if you buy a piece of land for 20 cents on the dollar, right? If it’s worth $20,000, you buy it at $3,000, 4$,000. Well, worst case scenario, you can still sell it at $6,000 or $7,000 or $8,000 double your money. If you buy a $300,000 house for $220,000 and you overlook the $50,000 item, you are toast. You’re going to lose money on that deal. At the same time though, you can make really nice checks. You can buy properties if they are buying with a lower rate or if you can finance a house is much easier, than you can finance land with banks, I mean, at lower interest rates, right? And therefore, if the money makes sense, you can rent them out as a…and get cash flow from them.
Again, it has pros and cons. The positive is, that because you can leverage it, you can borrow from the bank, and if you do it right, you can…if you get the right kind of deal and the right kind of lender, you could borrow almost 100% in some cases. Then, you can get cash flow without having much money in the deal. But what happens if that tenant moves out or stops paying? Your cash flow goes from past a few hundred to minus 1,000 or so. And that’s actually also almost impossible if you compare back to the land area. It’s almost impossible to do because in the land area, if you buy a property for $3,000 that’s worth $25 and you go sell it for $20 and they give you a $3,000 down payment, now you have your money back. All your money is back. And now they say they give you a $400 a month monthly payment or $500 a month, monthly payment, when they stop…if they stop making those payments your payment just goes from $500 to 0, but not to minus 1,000 because you’re not carrying a mortgage like you done in the house,.
Like whether there’s a tenant in there or not, you are owning the property and you’re having to pay $1,000 mortgage on that house. On the land, you don’t because you got it so cheap. So, there’s some advantages to this over that. But obviously, there’s the leverage fact that you can leverage the house, that you can lend against them or borrow against them from the bank is a great tool. The appreciation of houses, if you’re buying in the right location, they appreciate. Well, land does too, right? So, both appreciate. Banks are really happy to lend on it. And then, obviously, if push comes to a shove, you can move in yourself. Right? And the other part is, if you rent them, the cash flow will go on, assuming you keep the property in good shape and it’s in a good area, the cash flow will go on literally forever. So, that’s a nice part about it. But it comes with hustles because it comes with a hustle of repairs, of tenants that moved out, they leave the property in less than optimal condition. That it comes with the hustle of having to find a tenant, having to have a property management company, having to manage them. It comes with the midnight move outs. It comes with the 2:00 a.m. emergency calls. And all these can be mitigated by using a good property management company. But here’s the key, it needs to be a good one. Right?
We have gone through that ourselves. We bought some houses in Omaha, Nebraska. And the first property management company we hired, unfortunately, was a mishire. They screwed up that deal so bad that we basically didn’t have any cash flow for the first year and a half. And because we kicked them out after like nine months, and then…but it took the new property manager who was actually very good, another seven months to clean up the entire mess and only now, a few months ago we’re starting to actually get some good cash flow out of these houses.
So, you got to make sure that you manage the manager and that you’re really on top of that. So, it’s not 100% hands off versus just collecting a check from a land customer can be pretty much hands off. Now, of course, you can also sell houses with solo financing which then brings you to an equal position that you just go sell it and solo financing. In this case, you might have to do what’s called a sandwich, kind of, loan where you have a loan to the bank for like $1,000. And you do solo financing for $1,400 and therefore, you get the middle $400. But still, if they stop paying, you’re still responsible for the $1,000 mortgage. So, keep that in mind.
The thing with houses though, is the appreciation of houses is very much limited to what the neighborhood appreciates at. So, if there is brand new school being built and it’s a good school district, prices might go very much higher. If there’s something negative happening overall or if some people have a financial hardship and then, that neighborhood have a foreclosure and sell their properties at 60% of value, guess what? The entire neighborhood now drops down to 60% off that value. And that’s a problem. And yes, while this is also a problem to a degree in the land area, you’re actually in more control in the land area of your values because you can do stuff like rezoning. You can do stuff like splitting.
I just spoke to one of our students literally this morning. We tried now in the process of buying a piece of land, the large piece of land for $235,000. And once he split it up, and he’s gonna split it up into about 4, 5 pieces and then sell those pieces individually, they made the calculation that by doing that, they’re going to overall make $950,000 on that $235,000 property. So, they actively were able to increase the value by splitting the properties into smaller pieces because in the land area, the way it is that if you…like 100 acres might sell for $10,000 an acre. Right? So therefore, it’s a million dollars. And 10 acres might sell for $30,000 an acre. So, basically, if you take your 100-acre parcel and split it into 10, 10-acre parcels, now, the value of those individual 10-acre parcels is each $300,000, or a total of $3 million dollars. So, you’re taking a $1 million property and made it into a $3 million property, or you’re taking a $100,000 property and made it into a $300,000 property. And we have done that multiple times. That’s obviously hard to do in a house because you can’t carve off a bedroom and sell it separately is all. So, that just doesn’t work. But it works in the land area.
So, you’re actually more in control of the values if you wanna change them in the land area by being able to do things like that, right? Secondly, now, let’s talk about the multifamily now. Again, I told you the reasons we do multifamily because it’s a long-term cash flow wealth kind of business. The beautiful part about multifamily is that it has the law of large numbers. In a prior podcast, I talked about the law of large numbers. And that is basically that things average out over a large number. So, if you take a coin and you flip it and you have heads and tail, it’s a 50-50 chance of heads and tail. Every time you flip that coin, it’s a 50-50 chance of head and tail. However, if you flip it five times, it might be five times head or five times tail or two times or three times each. And at six times it might be three-three, or six-zero, or zero-six, or five-one and, you know, basically, any combination is quite likely. If you do this, however, if you have 200 flips, chances are that 100 times, 105 times tails comes up and 100 or 105 times or 95 times, the other one comes, a head, so, tail comes up, whatever I just said. The other one, right? So, basically, it levels out over time. And that’s the principle of buying multifamily.
When you buy a 100-unit apartment complex or when you as a passive investor…that’s the other thing. I know a lot of people that wanna invest in real estate and they say like, “I got $200,000,” or “I got $500,000, what do I invest in? Do I buy single-family homes with that?” A friend of mine called me says like, “I got x amount of dollars that’s a good amount. Should I buy myself 10 houses with that or should I invest that in multifamily?” My answer was, “Well, let’s look at the pros and cons.” And that really triggered this podcast right now. The pros of single-family is that you own various individual assets to a 100%. You own this house to 100%, that house to 100%, that house to 100% and so on. The cons is that, even if you buy 8 or 10 houses, you don’t have a critical mass yet that allows you to financially survive any kind of, like, major impact on one of them.
So, what I mean by that? Let’s say each of these houses throw off $500,000 in cash flow after the mortgage is on. So, let’s say…or even if they throw off $1,000 in cash flow. Let’s pick like…let’s say $600 and you have 10 houses, $600 each, it’s $6,000 a month in income. You’re be like, “Hey great. I can retire.” Most people can retire at $6,000 a month in income. Not everyone, but a lot of people can. So, therefore, you’ll be like, “Okay. That’s $72,000 a year, I get the depreciation. I get those things. I pay very little taxes on it. That’s actually a benefit of houses in multifamily and land. There’s no depreciation. So, I get this. So, yeah, I’ll probably net $60,000 a year or so after taxes, I can live on that. Great.” And they invest their money and they’re done. However, what happens if in 2 of these houses and 1 of them there’s a move-out and now we have the mortgage, you have to pay minus $1,000 on that thing instead of plus $600. And on the second one, an air-condition breaks and it cost $4,000. And if that happens in the same timeframe, the time period in a month, all of a sudden, instead of getting $6,000, you’re making $1,000 because the air condition cost 4 and the mortgage that you still have to pay and you have no income is an extra $1,000. So instead of making…having a $6,000 positive cash flow, you only have 6 minus 4 is 2, minus 1 is 1, you only have $1,000 that month.
And that happens when you invest in individual kind of assets. So, let’s look at multifamily again. In multifamily when you invest passively in multifamily or if you want it to be a passive investment like single families and having a property management company is also considered passive investments. So, if you invest there…because for example we only buy you…and that’s the reason we only buy 90 units plus. So, on the 90-unit plus deal that we just put under contract that we just closed on actually, just a couple weeks ago that we just finished closing on, on that deal we have…there’s enough revenue coming from that property and it has a track record of being 90%-plus occupied. So, basically out of these 90 units, 81 or more were occupied at all times. And so, there’s no reason to believe why that would be not be the case in the future. It’s well-located, it’s well-run. And so, when we take over we’re gonna improve that from 81 occupied units to like 85, 86. There’s always a couple of people that move out and leave their unit empty for a couple of weeks. And if an air condition breaks, it’s like we counting with every year about five air condition units breaking, right? But if 1 air condition unit breaks on a revenue of $60,000 a month, then it doesn’t take that because rental revenue is about $60,000 a month on that property and that’s before we increased it. If there’s an air condition breaks, well, guess what? It’s gonna cost us $4,000. We still have $56,000 to work with, right? As a result, after paying all the expenses and the staff, it allows us to pay full-time staff and all the stuff, we still have a profit left over called net operating income. We still have profit over to pay the bank, to pay our investors, and even a little bit leftover for us.
Now, that’s the beauty of it because when you buy big enough then you can roll…then this kind of minor swings in occupancy and the minor swings in expenses, they are built into the budget already and you account for it. And therefore, it’s not gonna hit you as bad as it does when you own like 5 to 10 rental houses. Lastly, why I like multifamily is that you can actually make your own…it’s almost like a money-printing machine. It’s a business that you’re actually buying. Instead of real estate, it’s really…what you’re buying into is an essence of business. So, if you have a good manager, good operator, right? If you have a good operator and good property management company, then what’s actually happening is you are increasing the value of the company by increasing the cash flow of the property. Because the value of multifamilies… Again, remember the value of single families is determined by comparable value of other houses in that neighborhood. If there’s five people having a foreclosure in that neighborhood because the local company went bankrupt and they lost their job or so, the entire neighborhood goes down, right? Because these 5 houses now are selling for 40% less than before and the entire neighborhood now gets depressed in value.
In the multifamily area, when you go…when we go and reduce the cost of management which we are doing right now in this property that we just bought, when we go and we are increasing the amount of occupancy, right, from 90% to 95%, 96%, when we go and we add additional revenue sources onto that property, for example, there’s a storage building that we can make that’s full of old furniture right now because the seller used to rent these properties furnished which is ugly furniture, we’re gonna have this all go…give this all to Salvation Army and we’re gonna instead build storage units inside of that building that we can rent to the tenants for 50 bucks a month. Well, you built 40 storage units at 50 bucks a month, that’s an extra $24,000 a year in revenue that comes in. Right? Then, we can increase the rents. The rents are $100 below market, right? That’s over 90 units and $100 at $1,200 a year, that is, guess what? That’s almost $100,000 in more revenue for the property and so on and so forth. So you get my point. If you add all these together, all of a sudden, you’re generating a property that’s…you have a property that’s all of a sudden generating $100,000 to $150,0000 or $200,000 more income per year. And the value, the way these properties are being valued is actually by the income.
The value of a multifamily property is a multiple of the income it generates. So therefore we almost…of course, if the world comes to an end, we’re affected by the value of the properties are affected too, right? If the city goes into a big depression because of whatever reasons, then the values will be impacted. But to a large degree, the value of the property is being driven by the income it generates. And as long as we can do those changes…that’s why we pick properties like that. As long as we can make changes like that that increases the net operating income of that property, the value goes up by a factor of anywhere between 10 and 20. Now, why 10 and 20? Why do I not give you specific numbers? Because it depends on the market, it depends on the market condition, where in the cycle that market is. But right now, if you do that to a multifamily property in Dallas, Texas, every dollar you increase in net over income, the value goes up by $20. So if you increase the net over income by $100,000, that property is worth $2 million more. If you do that, same thing in a completely…in a tiny little town outside of Detroit, let’s say, or like in a suburb of Detroit where nothing’s going on then, probably you don’t get more than an 8-fold increase or so because it just doesn’t sound like the same multiples. But…so therefore…so it just depends where in.
But conservatively estimated, you can always get about a 12 to 13 times increase for every value increase for every dollar that you put on the bottom line. And that’s the biggest difference. That’s why we love our land because we can split it, we can artificially increase the price. Not artificially, meaning like we can control the value increase to splits and things like that and do strategic improvements. You can buy a property with no road access, put road access on it or get an easement on it and the property might go up five times in value, right, or three times in value by doing that. You can go…and in the house area, as nice and conservative as it is, your options are just very restricted. So that’s why we’re flipping land. We’re making money in flipping land. And for years, we moved out into houses but we have realized several years ago that really the better way to move with this is move the money that we’re making from the land flipping into multifamily.
So, I wanted to describe the different things to it. Obviously, the other part that I really like about multifamily is that if…as long as you have good management, that’s the key, obviously. That if you have good management, they can steer it through some of the ups and downs in the market and the inoccupancy and things like that, through marketing to really can create a community. Because you’re really owning a little…you’re owning, not just one home, you’re owning a little micro cosmos. That’s what I wanna say. You’re owning a little micro cosmos. And as a passive investor, you wanna make sure you invest with people that actually have a vision for that union. They don’t wanna just make it an ATM. Because if we make it an ATM, without building a relationship with your tenants, if you’re not making it a community, then nothing will prevent them from moving over. The people that tend to look at multifamily as just an ATM, they also let everyone in as long as they think they can pay, right?
We, instead we have high credit requirements like credit score requirements for our tenants. We have…make sure that they don’t have any criminal history. They don’t have any evictions and so on and that they have a multiple of the rent in income so that they’re actually can make sure that they pay for their property. But the nice part is also that if you buy 90 units, you’re not gonna manage it, nor do I want to. I’m not gonna manage my own properties. We’re hiring professional management that is on site. And that’s another thing. So now you’re triple buffered. If something happens on the property, somebody needs a repair, they’re not calling you. They’re calling the agent right in the office that works there from 8:00 to 5:00, for 5 days a week and even lives on the property. So, if it’s an emergency, they’ll knock on their door on a Saturday night too, right? So you have…nobody’s ever gonna call you.
If they have…then they go have them in…you have a full-time maintenance person that goes fixes the property, fixes the items that need to be fixed. So you don’t ever gonna get involved in that. If it’s something big, the property management company needs to decide. And if it’s something big enough over a certain threshold, then they contact you, but now you’re only deciding on the major things of the property like are you going to just repair the pool or are you going to redo the pool? All right. One cost $3,000, they’ll decide themselves. One cost $30,000, is it worth that investment? Which color are you going to repaint the building, the property on? All right. Those are questions that you’re being involved in because they impact the overall property.
Now, as the owner…now, the nice part is as passive investor, because you’re right away investing into a micro cosmos of 90, 100, 120 units or 200 units, and because of that cash that comes in the budget, that large cash flow that comes in that buffers you against these…that does now all of a sudden bring you from this level to that level, but there’s like only small kind of bumps in there, allows you to get a steady cash flow every single month from these properties or every quarter. We pay quarterly, every single quarter from these properties. So, if you look at it in the land area, you’re making high profits because you buy super cheap and you’re getting cash flow and you can affect this…the value of the property by splitting and by doing things like that. In the housing area, you’re really very, very limited in value creation. You can remodel that house as beautiful as you want. You can charge twice the rent, but the value of the house is not gonna increase if the value of the house is in a neighborhood that are not gonna increase. And you have that fluctuation. If you don’t have 50 houses then…or if you only have 5 or 6 then, 1 air condition, 1 tenant move out will dramatically affect your cash flow. But if you take that same money, invest it in multifamily or in land, right, you can multiply it here very quickly. And if you wanna park it at a very nice return, then multifamily is a great way to go. Just make sure you invest only with companies that are reputable, that are trustworthy, that have a good plan in place, and have a good management in place.
All right. Those are my comparison about the three different kinds of real estate. Now, you can choose whichever way you wanna go. All right. With that, I wanna finish my podcast. Again, we have a little outro here, which points you to the different places. Again, as always, make sure you go and check out… Give us a five-star review on iTunes. Subscribe to the podcast on YouTube. It’s a video. If you wanna watch this… If you’re listening to this right now, if you wanna watch it, go and YouTube over under Jack Bosch, search for Jack Bosch. Also like us on Facebook, Jack Bosch. Join our Facebook community of land flippers under Forever Cash. If you’re looking for the group called Forever Cash, it’s called myOpenPath – Forever Cash. Check it out there. And I will see you in the next podcast.
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