Financial Freedom Investments “Wake-Up Money” | Mark Henrichs
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Mark Henrichs
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913-307-4011
Mark@
ReeceNichols.com

Licensed in KS
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 Financial Freedom

Investments

“Wake-Up Money”

Mark Henrichs

913/307-4011

www.MarkHenrichs.com

Mark@ReeceAndNichols.com

Have you ever wondered what it would be like to wake up in the morning with enough money coming in that you could do what you want that day? Would you consider yourself “Rich?” Here’s a definition of “Rich” that we like:

 

“ “Rich” is the ability to wake up in the morning with the

physical health, knowledge, friends, financial freedom, and

passion to do what you want that day.”

 


Financial freedom occurs when your annual investment income (your money at work) exceeds your annual lifestyle expenses. At that point you have “Wake-Up Money.”

We have many customers who have achieved (or are on the path to achieving) this “Wake-Up Money” lifestyle. “Rich” through their investment in local real estate – specifically homes and condos. One customer in particular comes to mind who has never earned more than $30,000 in a year but currently has over $50,000 a year in “Wake-Up Money” from his real estate portfolios.

 

These customers understand that we have three choices in life:

1. You at work. Do you worry you will have to work the rest of your life?

2. Your money at work. Do you dream of someday not having to work?

3. Charity. Do you worry about being dependent on others?

 

If you prefer choice #2 and want to get on the path to “Wake-Up Money,” this simple brochure is devoted to showing you the way.

 

Peter Lynch, the great stock market guru and author of “Beating the Street” was once asked what he thought was the greatest investment. His answer: single-family house.” 

A Simple Investment

Homes are one of the three basics of life: food, shelter and clothing. Homes and condos are simple investments that most people understand because they already own them. Ask yourself these questions: Do I own a home? Has it been a good investment? What would my net worth be like if I owned ten of them? What would my lifestyle be like if they were all free and clear?

 

What If!

If you purchased ten houses 15 years ago (average price then was about $70,000/each) and financed them on 15-year loans, today your houses would be free and clear. Today, they are probably worth about $175,000 each and your portfolio of ten houses is worth about $1,750,000. Your houses are probably earning you a net income of about $10,000 per month in “Wake-Up Money.”

Will Rogers said, “Just the name ‘real estate’ implies that all other forms of investment are illusory.”

 

Three “Rules of Thumb” Help Investors Build Wealth Quickly

 

1. The “Rule of 72” is used to estimate how long it will take your money to double itself at a given rate of return on your investment. If you divide your rate of return into 72, the answer is how long it will take your money to double. For example, if you earn 6% on a savings account, it will take you 12 years for your money to double in value – 72 divided by 6. If you are able to increase your return to 10%, your money will double in 7.2 years – 72 divided by 10.

2. The “Rule of Leverage” One of the beauties of real estate (as opposed to other forms of investment) is that you can use leverage to increase your rate of return. You leverage your investment by using a loan on the property and reducing the amount of your own money you invest. The tenant makes the payment for you by paying rent. When you leverage (use a loan), your rate of return is increased. For example, if you purchase a property for $100,000 cash and it goes up in value by 5%, you have earned %5 on your money ($5,000 divided by $100,000) plus the amount of rent collected. However, if you purchased the property with a 10% down payment ($10,000) and a $90,000 loan, your rate of return will be 10 times greater or 50% ($5,000 divided by $10,000.)

 

 

3. The “Rule of Return” Here’s a simple way to figure your return on investment:

a. Convert your down payment to a fraction.

b. Multiply the denominator times the appreciation rate to find your first year return on investment.

For example, if your down payment is 20%, when we convert it to a fraction your down payment is 1/5. The denominator is 5. Multiply the denominator (5) times the property’s appreciation rate (say 10%) and your first year return on investment is 50%.

Let’s test this rule to see if it works. Let’s say we buy a $100,000 property and put 20% down ($20,000) with an $80,000 loan. Our down payment of 20% converted to a fraction is 1/5. If the property appreciates 10%, it will go up $10,000 in value. $10,000 divided by our investment of $20,000 equals a 50% first year return.

 

The Benefits of Residential Real Estate Investment

Residential real estate offers five major benefits. Most other investments offer only one or two.

1. Cash Flow – The rent provides income, i.e. “Wake-Up Money.” This is your ultimate goal. When your property is “free and clear,” you have the maximum cash flow and “Wake-Up Money.”

2. Leverage – You can own $100,000 worth of real estate with only 0% - 20% cash. You can also borrow cash out of one property to buy another. Your short-term goal is to use leverage to acquire a portfolio of real estate. Your long-term goal is to pay the loans off and own your properties free and clear

3. Debt Reduction – Real estate is one of the few investments where someone else will make your payments. In essence the tenant makes the payments and reduces your debt.

4. Tax Savings – You are allowed to depreciate the house and write off you expenses in order to reduce your taxes.

5. Appreciation – Over time the value of houses and condos have risen. The average sales price of a home has more than doubled over the past 15 years.

 

“Free And Clear”

These are three magic words for the person who’s committed to creating “Wake-Up Money.” Many investors consider “free and clear houses” as the ultimate investment for three reasons: 1) The house generates large amounts of cash flow. 2) The house appreciating in value. 3) There is very little risk because there is no debt.


“Wake-Up Money” Example

Here’s an example of how to purchase a “Wake-Up Money” property. This property was priced at $150,000 and sold for full price. Here’s how the investment works on this property.

$150,000 Price

$37,500 25% down payment

$112,500 Loan @ 7.5%; 30-year; fixed rate

$781.73 Monthly principle & interest payments

$100.00 Monthly taxes & insurance payments

$25.00 Monthly reserve for maintenance & repairs

$906.73 Total monthly expenses

$18.27 Monthly cash flow

Here are the 5 Major Benefits of owning this “Wake-Up Money” house.

1. Cash Flow - $219.24/year; $219.24/$37,500 = .6% Return on Investment

2. Leverage – You own $150,000 of real estate for a $37,500 cash investment.

3. Debt Reduction - $1037 in principal reduction the first year. In essence the tenant is buying you the house and giving it to you at the end of the loan. $1037/$37,500 = 2.7% Return on Investment.

4. Tax Savings – About $3300/year in depreciation. This means that your income from this property will not be subject to tax.

5. Appreciation – If this house goes up 5% in value this year, it will increase by $7,500. $7,500/$37,500 = 20% Return on Investment.

 

(If the house doesn’t go up at all, there is no return on investment.)

 

Total Return on Initial Investment of $37,500:

 

0.6% from cash flow

2.7% from principal reduction

20.0% from appreciation

23.3% Total Return on Investment

When this property is free and clear, you will have nearly $10,000 a year in “Wake-Up Money.” Of course by then the rents (and the “Wake-Up Money) will probably be a lot higher, as will the property’s value. Home values and rents have more than doubled in the last 15 years.

 
Top Ten Tips for Creating “Wake-Up Money”

1. Buy residential properties. Houses, condos and town houses. Stay away from land and commercial real estate unless you are an experienced investor or are buying as a business “user.”

 

2. Buy “mainstream” houses and condos. Buy properties that are at or below the average sales price. Buy properties that appeal to most buyers. Avoid high priced or unusual properties. Buy houses with at least three bedrooms and condos with at least two. If possible, buy properties with a garage

 

3. Don’t buy with partners, unless you have to. If you have to have partners, make sure they have the same goals and values, are of similar age, and have a job, geographic, and marriage stability.

 

4. Believe in the long run. Real estate markets are cyclical but the long-term trend has been up. Hang in there for the long run. The great investor’s lament is “I should never have sold that property.” The other investor’s lament is “I could have bought that property for $___!”

 

5. Take care of your property and it will take care of you… It’s your “golden goose.” If you don’t like property management or are too busy, either hire a professional property management firm or buy condos and town houses. They take a lot less management. The homeowner’s associations take care of most of the property management.

 

6. Get started early. Put time on your side. Albert Einstein was once asked what he thought was the most powerful thing in the world. His reply, “compound interest.” Don’t wait to buy real estate. Buy real estate and wait!

 

7. If you don’t have the money, make a plan and commitment to get it. Consider borrowing your investment money out of the equity in your personal residence.

 

8. Know your “enough.” How much “Wake-Up Money” do you need? Know when you are ready to stop accumulating property and start paying off what you have – and enjoying life!

 

9. Work with knowledgeable people. Pick Realtors, accountants, attorneys, and property managers who know what they are doing.

 

10. Have a goal and a plan. Develop your goals and a plan to achieve “Wake-Up Money.”

 

Setting Your Investment Goals

 

1. Where do you want to end up financially? How much “Wake-Up Money” do you want each year?

2. How soon do you want to get there?

3. What do you need to do each year to get there? What do you need to do today to get started?

4. How much money do you have to invest? Can you get more form other sources – borrowing from other properties, sale of stock, etc.?

5. How much risk are you comfortable with?

6. How much time are you willing to invest to find, buy, and manage properties?

7. Are you “handy” with tools and can fix things or do you prefer to hire someone to do it?

8. Do you have the time and knowledge to manage your properties? In Town? Out of town?

9. Will you want to hire a property manager to manage your properties? Do you know one you have confidence in?

10. Do you have geographic stability in your job/profession?

11. Do you have a plan to fund your children’s college education?

12. Can you hold the property for at least three years? Five years?

13. How you can leverage existing properties to buy more?

14. What type of properties are you most comfortable owning? Where?

a) Single Family Homes

b) Town Homes

c) Condos

d) Student/Campus Housing

15. Other than the economic benefits, for what other reasons do you want to invest in real estate?

Getting Started (step by step process) 

Step 1 Pick a qualified Realtor – 3 C’s – Competence, Confidence, Chemistry

Step 2 Set your investment goals (Your Realtor can help you.)

Step 3 Create the criteria for the properties you will buy.

Step 4 Set up your systems

a. Meet with your lender and get pre-approved for you loan(s).

b. Talk to your accountant/attorney – how you want to take title

c. Select your property manager if you are going to use one

d. Gather your paperwork – leases, application, etc.

e. Set up your bookkeeping system – Quicken, files, etc.

f. Make a list of your service workers and their phone numbers.

Step 5 Start your search.

Step 6 Identify potential properties.

Step 7 Estimate rents. Call property managers and other owners; check newspaper “for rent” ads and call on them.

Step 8 Drive by – look for big values, neighborhood, other properties for sale or rent, price relative to neighborhood, “who would want to live here?”

Step 9 Have your Realtor make an appointment to see the property.

Step 10 Do your investment analysis.

Step 11 Write a contract – keep your “big picture,” long-term goals in mind

Step 12 Have the property inspected.

Step 13 Closing.

Step 14 Leasing.

Step 15 Property management. “Take care of your property and your property will take care of you!”

Step 16 Asset/portfolio management – “Golden Goose” and Getting to “Enough.”

 

 

How Do I Get The Down Payment To Buy Investment Property?

 

With falling interest rates are you thinking about refinancing your home to lower your monthly payments? Instead, consider this: refinance your home and leave your payment the same. This will allow you to pull cash out of your home and buy an investment property. This is the #1 way most investor find the down payment to get started owning investment real estate. Here’s an example:

 

Strategy

Original Loan Refinance

Loan Amount $150,000 $183,579

Term 30 years 30 years

Interest Rate 8% 6%

Mthly Payment $1,100.65 $1,100.65

 

Cash out/Payment Change $33,579

 

Your home has just become a golden goose that laid a $33,579 golden egg.

Please contact me if you would like have some "WAKE UP MONEY".

Mark Henrichs
Email:  Mark@ReeceAndNichols.com
Office Phone:  913-307-4011