Written by Justin Cooper:
My investing strategy has evolved over time and I fully expect it to continue to evolve. I think I got interested in investing back in 2003-2004. I remember it well actually, and I could probably find the exact date. I was working a regular W-2 job and occasionally I would put in a 12 -15 hour day. Well at the end of those days I would come home and have to unwind, which usually meant, watch TV. Well when you get home and turn on the TV at 11pm on a weekday, you can or at least I could find late night infomercials. I never bought that rotisserie chicken thing where I could set it and forget it, but I did take a liking to the guys talking about investing in real estate. Those infomercials were pitching a 2 hour class on how you can get rich through real estate. I’ve got to tell you, the guy sitting on the beach, next to his boat with the beautiful women was really winning me over after spending 15 hours dealing with plumbers and selling toilets. So I went. Turns out they were pitching a 3 day boot camp for a couple of thousand dollars. Well I didn’t have the money for the 3 day event so I just kept going to these live events and took a ton of notes and learned as much as I could. I found myself staying up late just to catch the next infomercial and find the dates of the next event. Eventually one of the “guru’s” came to town and offered a bus tour of the properties during their weekend event. That was all it took – I was in! I actually had to call my Dad to borrow ½ the money to go. Turns out, that 3 day event was pitching the coaching and mentoring program. Since I had to borrow money just to get into the 3 day event, there was no way I could afford the coaching, so I started to learn on my own. I would read everything I could and started following all the ”guru’s” by listening to podcasts and getting on their email lists. The more I read, the clearer my vision became. One of the gurus actually spoke about having a vision. Where do you want to be in XX years? They spoke about how to come up with that vision and then, how to back track and figure out what it would take to get there, ultimately leading you all the way back to today, and what you should be doing, today, so that in XX years, you would be at that vision.
I started taking a hard look at who I was, what was I good at, what I enjoyed doing, how I liked to spend my time and who I wanted to spend that time with. I reflected on my childhood where I would do home renovation projects with my Dad – we replaced the roof on our house, landscaped our property several times, built a koi pond and even popped the top of our house (I had nothing to do with that one!). I began to see that I loved renovating and turning around houses, as well as talking about the value that the improvements brought. I realized that while I was in college, I had rented a house, and that each month we would pay Joe the landlord for the privilege of living in his house and all I ever saw of the guy was when he would randomly show up with a six pack for us and mow the lawn. I began to see the power in holding real estate. I reflected on how much time and effort there was in all of the home projects that I did with my Dad and brother, and how much work it probably was each time college kids like me and my room mates moved in and out each year. I began to understand what hard money was and how I could still be associated with these things but not have to actually get my hands dirty, so to say.
That was when I came up with my first real vision and investing strategy. I wanted to be a hard money lender, having my money work for me through real estate and along the way, I could share my experiences and help other investors grow their knowledge and experiences and wealth through real estate investing. I looked at myself and thought about how long I wanted to work at a “real” job, how long I wanted to be a fix and flipper and when could I possibly become a hard money lender. I set my target age around 55-60 years old to achieve the hard money lender goal. Then, I calculated how much money I would need to be a hard money lender. I don’t remember the exact number but it had to be in the millions. So I continued to work backwards, how much profit could I make doing a fix and flip, how much would go to taxes, how much would I need to live on and how much could I save. If I needed a couple of million saved up to be a lender, and I knew when I needed that money, then I could work backwards and see how many deals I needed to do per year to accumulate that amount of wealth in that amount of time. It was fairly simple math I think, I just had a notebook and scribbled out a few things. I did not spend the time building a big spreadsheet that could be updated or changed.
At the same time, I was also reading about your “Big Why”. If you are going to be setting goals like those I mentioned above, goals that could potentially take decades to accomplish, it’s important to develop a sound reason why. Ultimately, I did not want to put in those super long days until retirement, and wanted to get away from the back breaking work of hauling pipe, loading trucks and selling plumbing supplies. Some might argue that this is not a sound enough “Why”, but for the guy sitting on the couch at 11pm, it sure was!
Soon after, I met my girlfriend (now my wife!). You may have heard me give a talk on my “5 Surefire Ways to lose Money on your First Flip”. If not, reach out and I think I have a video of it. The first thing that happened was that my wife and I bought our first houses within a few months of each other, mine to flip and hers to live in and renovate and eventually turn into a rental. Well I did flip mine and found out that it was a bit harder than the gurus made it out to be, hence the title of the talk! I also got pretty big wake up call. I lost money on that deal and the thought of repeating that was pretty scary which ultimately threw my strategy off course. The second thing that threw a wrench in my vision – but not in a bad way – is that we did work on my wife’s house as we lived there and eventually we turned it into a rental. My initial strategy hadn’t accounted for a rental so quickly, or ever, so strike two! I knew what it was like to have me as a tenant (which as it turns out would be a dream tenant for me now!), and thus I wasn’t really interested in owning rentals. If you’ll recall, my original plan was to flip until I became a lender, but we had some great tenants (we were spoilt with our first tenant experience!) and I learned a lot about being a land lord. They stayed for a few years and when one of them was going to move out, we sold the property to the other tenant. No rent –to-own fancy thing like that just, “Hey would you like to buy the place and stay here?”, to which he was ecstatic about. We made some money in the transaction – the place had appreciated nicely over the 7 years we owned it – and this new found money, the seeming ease of being a landlord (haha – jokes on me!) and the influence of my growing family (not just me anymore, wifey too!) caused me to adjust my investing strategy.
I found myself being drawn to the slow growth and cash flow of rentals. We had one and it went really well, so we took that money from selling our first rental and rolled it into a new one. No, we didn’t do a 1031 or anything. We just adjusted our mindset and were open to finding a rental. Soon enough, a wholesale deal came across my desk and the numbers seemed strong. My buy price, including a wholesale fee, was $125,000. Rents were $1,250. This mean that it hit the 1% rule or that the GRM (Gross Rent Multiplier) is 100. Both the 1% rule and GRM are basically the same thing, just inverses of each other. The purpose is to determine what % of the purchase price the rent will be. The closer to 1% or higher, the better. Similarly, with GRM, the lower the number, the stronger the cash flow. However, even if both of these indicators are strong, that doesn’t necessarily mean it is a done deal. There are several other factors that go into whether or not you should buy that property:
- What is the price point?
- What is the neighborhood like?
- How would you be financing it?
- And the list goes on…
With hindsight as my guide, I’ve come to use the GRM as the initial test to know whether if I should look at a potential property. If the deal is outside of my GRM requirements, then I won’t even bother or pursuing it.
Somewhere along the way, probably mid-fix up/live in at our first property, I found the law of attraction really kicking in. An opportunity with Pine Financial came up… suddenly I was a hard money lender! This blew my mind as I had planned out that I would be at that stage in my 60’s but seemingly magically, I was now a hard money lender in my 30’s. This opportunity sky rocketed my investing. Being associated with such a great team helped me grow both personally and professionally. I was now teaching classes alongside some of the best investors in Colorado. Networking and finding deals became much easier. I believe that network can drive your networth, and now I had an amazing and rapidly growing network, thus helping my networth.
My network was growing, so was my access to deals. I was connecting with the top wholesalers as well as all newer wholesalers. I was connecting with the top agents in town, and they were willing to work with me! I had more and better resources around me to more quickly analyze deals. I was spending more time developing my rental criteria. Step one, GRM. Step two was cash flow. Everyone seems to run their numbers slightly differently, and I think that is OK, so long as you know how YOU want to run them. I like to be able to move quickly when looking at deals so I simply take the gross rents minus the mortgage payment, so I am looking at the gross cash flow. I do not dive deeper into the repairs, maintenance, vacancies, etc. If we meet up and discuss what we look for, my cash flow number might be much higher than yours but that is because I am looking at the gross number where you might be looking at more of a net cash flow after those other items. This is a great thing because of course we are all on our own journey and set our own rules but it is also frustrating because if we are only having a quick conversation, we might think each other are crazy, me for having such a high requirement that I will never find a deal and you for being so risky with such little cash flow. But in reality, we are both comfortable with our methods. This is I think the biggest lesson to be taken from this series of articles, everyone has their own way. You just need to find yours.
Anyway, I was now a hard money lender and owned rentals. My original strategy was out the window. Actually, I was achieving everything I wanted too, but in record time! So now what? The plan was changing as was my life. I was married and we were growing our family. Fix and flips were becoming less and less of a priority as I wanted investments that would stay with me for the long term. The goals were shifting and I was now looking at cash flow and appreciation on my rentals over 18-20 years. Could this cash flow cover the costs of nanny’s and pre-schools? Could I have the properties paid off by the time my kids got to college? If so, then we could sell one property to pay for each child’s college tuition. I was more focused on spending time with my family and making sure they were going to be taken care of and the monthly cash flow and long term appreciation seemed to allow for the costs of the growing family as well as the time with them instead of chasing my flips.
That is not to say that I completely abandoned flips. Deals were coming my way and when the timing was right and the right deal came along, I would jump on it. I was able to be pickier in the deals I chose. One of the deals was a new construction project. I had always wanted to build brownstones and the project that I was asked to partner on was to build rowhomes, essentially the same thing. After getting through the preliminary diligence and understanding of the project I realized that this was again the law of attraction kicking in! Again I found myself jumping way ahead on my long term goals.
I now find myself putting more and more value on my time. I have realized that, although it doesn’t take much actual time to manage my rentals, I do spend a lot of brain power on them. I have also found that I am not the best property manager. I have been transitioning my rentals to a property manager. I now have enough experience to manage the manager and this allows me to free up that brain power for other things. My properties have been appreciating like crazy, like almost everything in Denver has. I have chosen to leverage this appreciation with home equity lines of credit or HELOC’s. I like HELOC’s because, similar to a credit card, it allows you access to money if and when you need it but until you actually draw on it, you do not have to pay anything. I could have done cash out refinances on the properties but without a clear and urgent need for the cash, I did not what to have to be paying more each month. This would have changed my monthly cash flow permanently.
It is hard to say what the future will hold for me and my investing. The current strategy is to continue to be a hard money lender, which keeps the consistent income flowing and fulfills the desire to teach and share what I have learned and am learning, to continue to buy rentals and build my monthly cash flow. I am staying in Colorado because I know he market and can easily drive to the properties if I want or need. I will be using property managers for any new properties that I pick up. I am shooting for $100,000 per year in gross income from the rentals. From there, I will probably adjust the goal upwards to $200,000 so that we will be netting $100,000 per year. This would essentially replace my wife’s income and allow for more freedom and time with my family. Something that I am always thinking about is, when should I adjust from continuing to acquire new properties to, when do I begin paying them off. The ultimate goal, as of right now, it to own these rentals free and clear.
As the market and my life continues to evolve, so will my investing strategy. I’ve learned that change is allowed and should happen as life situations alter the direction in which you are heading.