Intro:
Mike Butler began his real estate investing career while working his full time job as an undercover police detective in Louisville, Ky. Mike investigated “murder for hire,” “contract killings,” and organized crime. Between working and court appearances, Mike spent anywhere from 55-80 hours weekly on his job.Mike Butler began buying fixer uppers and renting them to make extra money vs. working “off duty” moon light jobs like many of his fellow police officers.
Mike discovered very quickly how investing in real estate is the way to true financial freedom for his family but was stuck with having only five hours a week for real estate.He created his system that exploded his real estate business allowing him to buy an average of 2.5 rental properties every week, and for several years, while working his full time job!
Now Mike works when he wants to – as a fairly new husband to Beth, Dad to Rachel and Melissa, an investor, speaker, author, coach, and consultant.
Mike’s investing success has been featured in Money magazine’s featured article “Can Real Estate Make You Rich?” and The Wall Street Journal Radio network with over 170 syndicated radio shows. He has authored the book “Landlording on Autopilot,” #1 Best Seller Business Books on Amazon. His book has become the “go-to-training-manual” reference for thousands of landlords and property managers around the world.
Mike Butler enjoys training and creating millionaires and future millionaires. He is a sought after featured speaker and trainer at real estate seminars all across America.
Questions:
Mike, You Have Obviously Written Not One, But Two #1 Best Sellers on Amazon “Landlording On AutoPilot” On This Topic, But…
If You Can Distill It Into A Single Sentence: Why Landlording vs. Fix And Flip Or Other Forms Of Investment?
I’m glad you asked this question first so we can get this out of the way. Let’s take a look at the definition of an investment.
“An investment is an asset or item acquired with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth.”
Now you know the definition. As far as your question goes, a true “real estate investor” makes investments in real estate and owns rental properties.
All of those other activities are NOT investments. Fix and flip is just a job. Wholesaling is just a job. Don’t shake your head. This is true. When you stop fix and flipping or stop wholesaling what happens to your income? It comes to a screeching halt! These activities are no different than owning a used car lot. You buy cars wholesale, put lipstick on them, and try to sell them for top dollar. Can you see the similarities?
Real Estate Investors invest in real estate. The IRS even agrees. If you invest in real estate and your investment produces income, it is treated as “passive income” and not “earned income.” Simply put, because you own it, it puts money in your pocket. All other activities producing income are the result of you doing something. This is “earned income” and is taxed the same as having a job.
Don’t get me wrong, these other activities do produce big chunks of cash. Imagine what your life would be like with 20 nice rentals paid for… and do it safely in 3 to 5 years. Use your earned income activities to achieve your investment goals faster and safer.
Over the years, I’ve worked with many self-proclaimed real estate investors who were clueless about investing. They created a wholesaling machine and/or a great buy, fix up, and sell machine. Life is good except for income taxes. Then life happens. People are living longer, tragedies happen, health issues involving family members and you might have to take care of your family members and loved ones. Can you walk away from your “earned income” business and still having money getting deposited into your bank account every night while you are sleeping? Only investors do this.
Too many times, life happens and the real estate dealer’s income STOPS because they stopped moving. This is not good. So please, please, make sure you completely understand the word “real estate investor” vs. a real estate dealer. Sharp investors combine both real estate investing with real estate dealing to help achieve your investments goals faster.
Therefore, owning rentals is what real estate investors do, but do a little of the other stuff to get you their faster. Next question please.
What Made You Decide Real Estate Was The Right Path For You?
Growing up just a few blocks from Churchill Downs in Louisville, in a blue collar neighborhood and the oldest of seven kids, I never had the opportunity to hook up with any superstar successful people. Those people were only seen on TV in the Lifestyles of the Rich and Famous.
I witnessed firsthand where my fellow police officers traded their hours for dollars. I also saw old timers retire and they could not live on their police pension. While riding my beat on the graveyard shift, I would see these retired police officers working for almost minimum wage riding in a golf cart guarding horses on the backside of Churchill Downs. This was not a good thing for a young officer to see.
My original goal was to somehow figure out how to buy three little 2 bedroom fixer uppers on my old paper route, fix them, rent them, and get them paid for before I retired from the police dept. If I could do this, it would more than double my police pension.
Here’s what I saw. What else could I buy with no money, someone else pays for it, and it puts money in my pocket every month… just for owning it? I had no idea there were additional tax benefits as well. I did expect it would require me to do stuff every once in a while, but nothing like punching a clock or trading my hours for dollars.
How Did You Finance Your First Rental?
Another great question. I paid cash, but I had no cash. When I got started, my wife and I had less than $1,000 in our Police Officers Credit Union account. My wife Tammy was in nursing school and we had two beautiful daughters. The real estate market back then is pretty much the same as today. Investors were required to have 25% or more down payment to get a bank loan to purchase an investment property.
I did not have that kind of money, but my gut told me this was the way to go as I described in the previous question. The first house I purchased was on my old paper route I had back in the 7th grade to save up money to pay for my private high school diploma (PhD). I hocked pretty much anything and everything we owned to round up some cash from the credit union. Our old Ford pickup truck, our 1977 Monte Carlo, along with maxing out several credit cards on both cash advances and purchasing materials to fix it up. That’s how I purchased my first investment. Today they call it BRRRR. I was BRRRR before it was cool.
Just FYI, in my 3rd year I wanted to buy 100 rental houses. I fell short and purchased only 84 that year and kept my buying machine cranking for several years. Not one time I have ever gone to a bank to buy an investment property. Not one time. Nor a private lender, nor a hard money lender, nor a partner.
What Is The Biggest Difficulty You Face When Renting?
The biggest challenge was not knowing what I did not know and the stubbornness to think I could figure it all out by myself. I failed to “invest in myself and my business in education.” So many super expensive school of hard knock$ could have been prevented if I had invested in education. Office Depot rental applications and leases back then remind me of Legal Zoom today. If you pay peanuts you get monkeys.
There are so many things allowing you to Work Smarter, Not Harder while making more profit and income.
As far as getting started with rentals, there is no free lunch. It does require work. If you don’t know how to process rental applications properly, legally, you might end up putting a dirt-bag in your rental. When this happens you will have a boatload of headaches and very expensive seminars learning from your professional tenant who will wear you and your bank account out. It is much wiser to do your work on the front end, to get a great resident like Aunt Bee, Andy Taylor and Opie and your life as a landlord will be almost $lick as $not.
What Is The Most Important Factor In Deciding On A Tenant?
Where are you getting these questions? These are awesome. There are several “Most Important Factors.” It is not limited to just one. Rule #1 is You better NOT “decide” on a tenant. You MUST follow HUD’s and your local government Fair Housing Laws. PERIOD. No Exceptions.
Therefore, the first applicant who meets your “qualifying standards” must be approved. You better not look over multiple applications and try to pick the best one. This is a time-bomb for you and your business.
Here are my most important factors to find in an applicant to make your life easier and more profitable. There are four and these are the same four questions to ask previous landlords.
Did They Pay Rent on Time?
Did You Get Any Complaints on Them?
Did They Damage Your Property?
Would You Rent to Them Again?
and How Long Did They Rent from You? (ideally, you want great ones to stay forever!)
What Factors Are Most Important In Picking Out A Good Rental Property?
Finally an easy question. Thank you. Take a look below.
Preferably built after 1978 to avoid lead paint issues (this is hard in older towns)
One story, 3+ bedroom, 2+ baths, with maintenance free exterior – I like brick ranches
FACT: low income neighborhoods have better cash flow with more management.
Must be structurally sound and well built.
75 rental houses take less time to manage and are safer investment than a 24 apartments
Energy efficient in today’s world of expensive utilities – insulated well, good windows, etc.
Neighbors can be Kiss of Death. Might be great home next to yard full of pit bulls or trash?
Should A Would-Be Investor Focus On Cap Rate When Thinking About Purchasing A Rental?
Absolutely Not. When I got started I focused on Numbers. I never learned what a cap rate was until after I had 150-200 rentals. That was a word used by the big time investors and before then I thought it might have something to do with baseball.
In ciphering the profitability of a prospective rental, I run my numbers as shown below. If I like the numbers, then I buy it. If I do not like the numbers, perhaps a wholesale. When I got started, things were cheaper and my Pay Me First number many times would be $100 or $150 dollars. In today’s world on a single family rental, my Pay Me First number would be no less than $300, preferably $500 per month in my pocket. Try it.
$______ Monthly Rent
$______ minus Pay Me First – NEVER allow yourself to think you get what’s leftover
$______ minus 1/12th Property Taxes
$______ minus 1/12th of Insurance premium for year
$______ minus 1/12th of annual Property Tax Bill
$______ minus 1/12th annual Repairs
$______ minus Vacancy – (do NOT factor Vacancy on Single Family, they average 6+ years)
$______ = Loan Payment Can NOT Exceed This Amount
Ask yourself this question. If you have ZERO dollars invested including both acquisition and rehab costs, what is your Rate of Return?… Your Cap Rate is what when you have zero dollars invested? Your answer is Infinity.
See what I mean? So not to dodge your question, if you have invested $1,000 and your $1,000 investment puts $100 in your pocket every year because you own it, your Cap Rate would be 10%. This as a simple example.
Do You Need An LLC To Rent Properties?
In today’s lawsuit happy world, I do recommend you have a single member llc to get started. They are cheap and easy to get set up properly. Get your investor expert real estate attorney who owns rentals as well, to set it up for you. Most that I know will do it for free (you pay filing fees) as long as you let them do your closings.
If you are not sure about how serious you are about investing, then get one in your name and add it to your homeowner’s insurance policy. When you drink the kool-aid and discover real estate investing is your path to true financial independence and freedom, then it’s time to get together and I will help you set up your ultimate privacy, asset protection, and tax entity structure to get Tax Free Profit & Income for Life! Your goal is to Control Everything and Own Nothing!
How Can I Equip Myself With The Right Knowledge?
By find high quality, high integrity expert trainer, coach, consultants.
You will hear me and almost all experts tell you to join your local real estate investor club. My superstar status is the result of direct and in-direct educational opportunities as a member of my local reia group.
WARNING: I would still have my job as an Undercover Police Detective in Louisville if I tried to learn from self-proclaimed in house experts at my local reia. To get superstar results, you must learn from those experts who have been there, done that, and have blown the doors off in their business.
Let me repeat this. If I had relied on trying to learn from the self-proclaimed local experts, I would not be a superstar today. These are the sharks and snakes who tell you NOT to buy products, seminars, boot camps from qualified national experts.
Personally, I have invested well over $250,000 in my real estate investing education. Have I spent money on bad seminars or boot camps? Why of course; however, it was well worth as I quickly learned I did not want to do what they were teaching. Now I did not have to go out and learn the expensive, time consuming and painful way thru the School of Hard Knocks. In fact, the bad boot camps saved my money and my precious time.
What Is Your Biggest Piece Of Advice To An Aspiring Investor?
Always know your exit strategy before you make your offer. I bought many, many houses because I thought they were “deals.” I did not have a clue what I was going to do with it.
Focus on Quality, Not Quantity. Each deal must support itself independently of others is the safe method.
Education gives you POWER. Every year, dedicate X number of dollars for education. Treat it just like property taxes and insurance. Every year. As you learn more, you will automatically graduate yourself to more advanced investor trainings and they cost more than kindergarten. A high quality mentoring program can be priceless with the right PROVEN mentor who has achieved results you admire. And yes, do join your local investor group to stay up to date on changes in everything we do from Fair Housing, local laws, landlord tenant laws, IRS and tax updates and so much more.
Measure Twice, Cut Once. Do your due diligence in your business. Not only on deals, but self-proclaimed incompetent experts, vendors, contractors, insurance, attorneys, CPAs, and the list goes on and on. BEWARE of friends and family members who do this or that. You want to surround yourself with 5 Star Experts in their field, not someone’s incompetent cousin.
Don’t Swing a Hammer or Paintbrush thinking you are saving money. WRONG – your job is to sign checks and make deposits… PERIOD. No Exceptions.
Don’t Re-Invent The Wheel – when you find a proven system to make your business more efficient and profitable while saving your precious and valuable time – Just Do It!
Find Mayberry USA. If you do not live in Mayberry, then find a city or town that is Mayberry. For example, folks living in or near Los Angeles, CA can NOT buy any rentals because the numbers do not work. However, they are flocking to my hometown, Louisville, KY and they can get great rental properties with a high cap rate and low property tax rates. In Illinois, you might have a 3 bedroom brick ranch you might make $100 per month, but move this house to my hometown and you will put $400 to $475 a month in your pocket simply due to the lower property tax rates.
After you find your Mayberry, then target this town for your rental properties.
Now you will have one set of landlord tenant laws, one court system, one legal team, etc.
Please do NOT use the shotgun approach and buy single family rentals all over the USA. It will wear you out and you will lose money.
To Your Continued $uccess!
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