A couple of days ago, I told you about 3 of my main Aggressive Income Strategies and how they're working so well that I'm taking advantage of this period of "borrowed time" to funnel Aggressive into Passive Income.
Then I promised to tell you about the top 4 best Passive Income property classes. So, here they are:
1) Single family residences (SFRs): As long as you don't mortgage these babies (and pay 100% cash), this is my preferred investment right now. I get the highest amount of rent per month, have the greatest amount of expense pass-through (on a residential property), and have the lowest amount of expenses (which means higher bottom-line cash flow) on these types of properties. Why no mortgage? Because it's too risky if your only tenant stops paying rent (through loss of job, maliciousness, death, etc.). You'll then personally have to carry the mortgage until an eviction occurs. And if it happens to more than a couple of your houses (because of a dip in the economy), you'll end up losing them.
2) "Quads": These are 4-plexes: You need great credit because you'll get a residential loan on these as an "investor." They require 25% cash down but the qualification requirements (aside from a 680+ mid-FICO and the cash) are nil. They offer a very nice cash flow yet have the highest bottom-line cash flow by percentage out of every other type of multifamily because the expenses are so low. (Not as low as an SFR but pretty damn close!)
3) Small apartment houses (24 units or less): I have really been focused on these for the past couple of years. I haven't even considered anything larger for the last solid 2 years. Why? The economy has changing. All serious "big boy" investors were snatching up all of the larger apartment buildings like they were going out of style since about late 2011. I found myself thoroughly sick of dealing with corporations with snotty real estate agents to boot while competing with malicious game-playing investors. Smaller apartment buildings are mom-and-pop owned and operated while most big investors avoid them altogether because they're not considered "big" money. So, no competition for me and I can negotiate with real people. Plus, lenders don't run me through the loop on requirements and I get much better bottom-line cash flow than I would on larger apartment buildings.
4) MHPs (mobile home parks): Specifically "resident-owned" properties, or at least that's how they are converted upon immediate possession...this means that the residents own their mobile homes (or trailers) and I just get "pad/lot" rent. I don't maintain any of the units, just the grounds. This is the ideal and most profitable situation. MHPs typically have the lowest expense ratio which are equivalent to the low expenses on SFRs.
What do I mean about properties with a "low" or "lowest expense ratio"?
You have something called a GOI or a "gross operating income." This is calculated annually (as with everything having to do with investment properties). It means the "gross receipts" or "gross rents" received in the period of a year.
Your "expense ratio" is the percentage or "chunk" of the GOI that's taken to cover property expenses including, but not limited to, insurance, management, utilities, taxes, etc.
Here's something that surprises most of my students. The larger the apartment building, the higher your expense ratio percentage. For example, a 100-unit apartment building in the Midwest will probably have an expense ratio of about 68%. This means that a whopping 68% of your GOI goes to expenses. And no, this does not include the mortgage payment either!
So, if your building has a GOI (or gross rental receipts) of $100,000 per year, a whopping $68,000 per year is going out for expenses and not even covering a single cent of the mortgage payment. This means that, more than likely, you're not making a damn dime on these types of properties.
However, when you have smaller multifamily properties, the expense ratio (or percentage) is much lower. You have fewer expenses. You have less money going out for property maintenance (including landscaping and snow blowing), fewer dollars for management costs, few (or no) common-area utilities to pay for, and lower property taxes.
If you had a "quad" (4-plex) in the same area of the Midwest, your expense ratio would be shoved down to about 32%. That's less than half of what it costs to operate a much larger property!
Doesn't it make more sense to, say, buy 25 "quads" (totaling 100 units), all with a consistent expense ratio of 32% across all 25 buildings vs. buying 1 single 100-unit building with an expense ratio of more than double? It certainly makes sense to me. Yes, it's more work but it's much more profitable.
Yet, strangely, all of my most fresh-out-of-the-box newbie real estate investing students want to run right out and get that 800-unit building. (I had a property that was so large that it required a freaking unbelievable 88% in expense ratio to keep the property functioning. Once I took the property over, I cured the vacancy problem then sold it. It didn't seem worth it to me to make chump change on the cash flow on such a large building when I could do 100% better on a handful of smaller properties. It just didn't make any sense to me!) These types of assets are a waste of time even if a newbie investor can somehow miraculously raise the millions of dollars needed for the down payment, have the credit requirements in place, show the lender a management resume and prove that they have a vast portfolio of other properties verifying that (s)he is an experienced enough investor. (Yes, all this stuff is required to purchase multi-million-dollar properties.)
This is all stuff you need to know if you want to cash in with real estate in the New Economy.
How are you going to learn all of this stuff overnight?
I'm not aiming at teaching you everything overnight. My job is to get you started. Get you motivated and educated enough to get off your ass and get started in the business of investing.
This is where my September LA event comes in. Not only am I going to show you how to get the money for your real estate but where to invest that money for maximum leverage and bottom-line cash flow.
What I'm going to be describing to you in 2 power-packed days in Los Angeles is exactly what I'm doing on this Aggressive Income side (Day 1) and where I'm funneling the cash (Day 2) into Passive Income Assets.
This is going to be a more intense seminar event than my prior events because the days will be longer. I'm aiming on presenting 3 days worth of material in only 2 days.
Here's the link: http://www.monicamain.com/new_wealth_warrior_seminar_event
If you want to get started with the Aggressive Income side right now, I have my last ever New Wealth Ninja Mentorship Group starting on Wednesday. This will kick-start the Aggressive side into action so, by the time you attend the event in September, you'll already have some cash for your Passive Income Assets!
See you at the top!