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The Passive Income Myth

“Beware of little expenses. A small leak will sink a great ship.”  Passive Income Benjamin Franklin

Looking back at our early years as real estate investors, it’s astonishing how much money we paid that we shouldn’t have; how much income we should have made but didn’t; and how many problems we could have extinguished when there was smoke, instead of when the fire had consumed a large portion of our profits.

Our belief in passive income had us believing that we could work hard to buy a property, hire property managers and then kick back and let the money roll in. It only took a couple of years before this strategy blew up in our faces with terrible tenants, property managers robbing from us and even being charged with fire code violations. Then it took several more years to right the ship, but once we did it made a big difference. I’ve talked about my belief that passive income is a myth many times … today I want to talk about what you can do about.

First, let me give you one big example of how active involvement – even when you have property management in place – can save you thousands of dollars.

Every month Dave does a review of the expense and income statements for each of our properties. Because he does this every month, anomalies are easier for him to spot. In this one property, Dave noticed the water bill was double what it usually was.

He immediately contacted our property manager and asked that it be checked out. The property manager said it was because the billing frequency had decreased. We were now being billed fewer times, so it was expected that our bills would be double when we were billed.

Because we owned properties in four different cities at that time, Dave wasn’t sure if that was the case, but he seemed to remember that change had occurred over a year ago. He pulled up our property expense tracking spreadsheet – and sure enough – we’d moved to bi-monthly billing over a year ago.

He called our property manager back and insisted that he investigate.

Turns out we had a water leak. The leak was quickly fixed and the next water bill was back to normal. This home is a split level with a one-bedroom basement suite, and because the tenants aren’t on separate water meters we pay those bills. Dave’s swift action saved us hundreds of dollars that year, not just from wasted water but also because he minimized the damage to the home by catching the leak sooner!

It wouldn’t take too many little leaks like this to completely remove all the cash flow from this property.

So besides just monitoring the water bills … what else should you watch for with your rental property?

Rent payments: If you’re managing the property yourself, you’ll typically notice when you haven’t been paid; but when you have a property manager handling your rent collection, you might forget about it. You also might assume your property manager will let you know if rent has not been paid, but that is not always the case. Stay on it. If the rent wasn’t paid, find out why and what’s been done to address the matter. Never assume things are being handled. In every case, a non-payment-of-rent notice (or the equivalent type of notice for your state or province) should be issued, in case you eventually have to take steps to evict the tenant.

Utility bills: Whether you pay the utilities or not, you should keep an eye on the bills because increased utilities could indicate other issues, as in the case of the water leak. It could also indicate a broken seal on a window or a door if your heating or cooling costs have gone up … or just inconsiderate energy usage. When our tenants usage of electricity goes up more than 25%, we always let them know and remind them to turn lights off, turn the heat down, turn off the TV when not in use, and so on. It’s not just better for our bottom line; it’s better for the environment.

Repairs and maintenance: Your property managers should be getting three quotes for any major work. If it’s going to cost you more than $500 to do something, you need options. And you need to insist on this.

You also need to monitor what is going on. Unfortunately, we have many examples of where our property managers have mismanaged repairs and maintenance, not gotten more than one quote, or allowed the repair budget to go well over what was agreed upon. Even with diligent management, we still have these issues on a regular basis; and sometimes we don’t have enough time to deal with it ourselves so we spend money that we could have saved.

So listen to the warnings of Ben Franklin and watch out for those small “leaks.” Spend a few hours every month reviewing your monthly expenses and cash flow. Ideally, enter them into a tracking program or a spreadsheet so the discrepancies are easy to spot.

So what about financial freedom and buying enough property so you never have to worry about money again?

Let’s say you do the math … you figure out that if you own 30 properties that make you $300/month positive income, you will be able to quit your job. And if you can quit your job, you will have financial freedom! Finally!

What a romantic load of crap that is!

What is financial freedom? Most people try to convince me that it’s never worrying about money again. If that is financial freedom, you aren’t going to get there with real estate. “More properties” does not equal more freedom … more properties equals more roofs that leak, more appliances that break, more hot water tanks that flood, and a whole lot more tenants to deal with. Even if you have the best team, these things will still require your attention – and I assure you that it will be during the week when you’re trying to finally relax that you will have a tenant move out on short notice – leaving you with a property to fix up, a hot water tank split open, and a plumber that seems to have vanished off the face of the earth. And things don’t space themselves out nicely – they all happen at once. The expression “When it rains it pours” was not created because of the weather!

Let’s be clear on one thing: “Financial freedom” is bogus. It doesn’t really mean anything. It’s a fluffy phrase that sounds wonderful but doesn’t translate into any kind of reality.

And real estate is not the way to go if you never want to worry about money again. More properties is just that … more properties.

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More Than Cashflow BookLike this article? You’ll LOVE More Than Cashflow: The Real Risks & Rewards of Profitable Real Estate Investing. This is just a tiny excerpt from the Amazon #1 Best Selling Book.

“Finally, an honest, real-life guide to Real Estate Investing! There are many Real Estate books available that talk about one aspect of real estate investing or another, but very few are as honest and concise as ‘More Than Cashflow’. I have a small library of Real Estate books and this one will definitely be the first on my list of recommended books to read.” ~ From Rick on Amazon.ca

 First Image Credit: © Photographerlondon | Dreamstime.com

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And from the Rev N You Video Archives … some additional tips to help you make more money when you’re working with a property manager:

In Pursuit of Passive Income?

Let me ask you:

Passive Income What makes you want to become a real estate investor?

Many investors say the answer is financial freedom. Others may say passive income. But these answers aren’t good enough to keep you going through the tough stuff that you will encounter.

If you got into real estate to make $5,000 a month in passive income or to buy 50 properties, you might get there but you’re probably not going to be happy (Read: The Real Estate Investing Costs You’ve Never Considered).

Real estate investing success is not about getting to some number. If that’s what you’re chasing, it’s going to be very hard work; and when you hit the really big obstacles, you’ll give up or make yourself miserable.

It’s not enough to pursue financial freedom or passive income. There needs to be a much bigger reason. There must be a clear vision. And that vision has to go beyond money.

When your tenant pulls a knife on her roommate, and then stops paying rent when the roommate moves out, and it takes you three months to evict the knife yielding tenant; money is not enough to keep going. When you discover that the roof you spent $10,000 repairing the year before is still leaking and requires another $7,000 to fix; and at the same time you discover a tree growing from the inside of the house out the window; giving up on real estate will be top of mind – right behind how the heck am I going to pay for all of this? (Yes – all those things happened to us.)

So you need to ask yourself: Why do I want to invest in real estate?

If the answer is for financial freedom or passive income, then the next question to ask yourself is:

Why do you want financial freedom / passive income?

Because I want to be able to leave my job and live my life the way I want.

Why?

Because I want to spend more time with my family and because I believe I have a bigger purpose in life than working for someone else all my life.

Why?

If you keep going down this path you’ll eventually end up in a place that lets you know that you are pursuing all of these things for the simple reason that you think they will make you feel happy and fulfilled.

We used to believe we were passionate about real estate.

Passionate About Real EstateWe like doing deals. Dave loves running the numbers. I like looking at properties and finding the deals. I like thinking strategically about the risks and how we can make money.

That’s not passion though. I think that’s excitement. I’m excited about what real estate offers. It offers financial comfort and security; and that comfort and security allows us to dedicate more time to helping other investors avoid mistakes and create a life they love, thanks to rental property.

Making money is exciting. I like it a lot. I like that real estate is a fantastic way to make money over time.

I’m not passionate about real estate though, and here’s how I know:

If I was told I could never do another real estate deal in my life, I wouldn’t be devastated. In some ways, if I’m honest with myself, I would feel a bit of relief. It’s so much work to continuously do deals, and being forced to take a break from it would be nice.

On the other hand, if you told me I wasn’t allowed to teach others anything for the rest of my life, I would be lost. I would have no purpose in my life.

You have to dig deep. If you want to be a real estate investor for money, it’s not going to be enough to get you through the low times.

A good friend of mine started down the road of becoming a real estate investor. He had the big goal of buying 50 properties. There’s nothing wrong with that. The problem was he was really seeking fulfillment in his life.

Today you would never know he’s the same guy that was chasing all those properties. He’s writing books, loving time with his family, and they’re choosing where they live and what they spend time on – and he didn’t get there through real estate. Real estate is not the only possible solution – it just might be the only one you’ve considered so far.

When you realize that, and when you understand that it’s not that quick, and it’s definitely not that easy, you may find that real estate is not at all the place to start.

Or you may find, as we have, that real estate is an effective vehicle to help you take a big step towards the big WHY’s in your life.

Don’t get me wrong … we all need money. But once your basic needs are taken care of, you need a lot more than money to feel happy. You need to figure out the WHY in your life.

Next time we’ll talk about who is setting your real estate investing goals…  After years of asking our clients what their goals are … I’ve come to some startling conclusions. Most people aren’t setting their own investing goals!

Image #1 Credit - Dave Peniuk (it's my dog Maya on the beach in Tofino living the life but not catching the ball!)
Image #2 Credit - © Andrey Kiselev | Dreamstime.com

 


More Than Cashflow BookLike this article? You’ll LOVE More Than Cashflow: The Real Risks & Rewards of Profitable Real Estate Investing. This is just a tiny excerpt from the Amazon #1 Best Selling Book.

“I have read many different Real Estate related books over the years from many different authors across Canada and the US, but this book was one of the best that I have read in a very long time. If there is one real estate book that you should read this year, it is this one!” ~ From qmanrei on Amazon.ca 

 

 

Sticks and Stones May Break My Bones but Words Can Forever Hurt Me

Sticks and Stones

As I child, my Mom would always correct me when I used the word can’t. She had various things she would say when I used that word. Sometimes she would simply say “I think I can I think I can.” Other times she would say something like “If you think you can’t then you’reright” or “you can do whatever you put your mind to“.

I would roll my eyes and carry on but her words were always in the back of my mind. It’s probably the reason why I have taken on so many challenges in my life. It’s probably the reason why I tried out for the college swim team even though I’d never competitively swam before then. It’s likely why I wasn’t afraid to backpack around Central  America alone at the age of 19. And it’s definitely the reason why, when I was a salesperson, I could dust myself off after a failed sales pitch and go back in the next day to try again.

My Mom was teaching me a very important lesson early on. A lesson that I’ve only really come to understand in recent years as a full time real estate investor. The words we use are very important. In fact, the wrong word can hurt you deeper and longer than any physical injury can hold you back.

For BiggerPockets I just wrote about three words that can kill your deal really quickly if you use them.  Today I want to share a couple of words that you’re probably using as a real estate investor that are holding you back or making things harder than they need to be.

1. Passive Income

I shared this video on Life As Real Estate Investors too – but it’s such an important point that I am going to share it again right now. I don’t believe real estate investing has to be a full time job to change your life, but I do believe that you have to keep a careful watch over your money. Even if you’ve hired a property manager you must keep an eye on your property and the money flowing in and out. Nobody will EVER love your money quite like you do – so give your money the care and attention it deserves and keep an eye on it.

Watch the Video Here:http://www.youtube.com/watch?v=ln-tlqmBz18

Instead of pursuing passive income you could pursue leveraged income or even streams of income. But calling it PASSIVE allows you to feel like you don’t have to do anything– and after we let things passively fall apart in the early days – I hope you will learn from our lesson and stay active and involved in your investments even if you have a joint venture partner doing all the work. Ask questions.  Visit the property. Review the statements. Just make sure things are operating like you expect them to be operating.

2.  Practice Makes Perfect

This one comes up in so many places beyond real estate that I had to share it. Keith Cunningham, business mentor and master money raiser, taught me that practice doesn’t make perfect, practice makes permanent. He taught me to ask myself what exactly I am practicing.

And here’s where it applies to real estate investing:

A lot of people are doing things that don’t work for them. Instead of stopping, assessing where they are and finding help to get where they want to go they self diagnose, shrug their shoulders and figure they just need to “practice” a bit more to get it right.

In other words –  they figure practice makes perfect – and just try again.

Keith once said:What’s a double bogey? Bad shot followed by a stupid shot. Most stupid shots are the results of self diagnosis. It’s one thing to make a mistake, it’s another thing to make a mistake on steroids.

If you have been trying to invest in real estate for years but it’s not working for you then it’s not time to try harder, it’s time to get help. If you’ve purchased a couple of properties and you’re losing money, it’s not time to try again, it is time to reassess what you’re doing and find someone to help you figure out where you’re going wrong. And if you find yourself always dealing with people who cheat you or take advantage of you, it’s not time to dig deeper and just keep trying, it’s a sign that you should take a step back, find someone who is doing what you want to do, and get some outside advice.

Practice doesn’t make you better unless you’re practicing the right motions and steps.

 

3.  Freedom

We became real estate investors because we wanted freedom. We didn’t want to report to a boss every day. Now, my vision of freedom was different than Dave’s. His vision of freedom involves him spending a lot of time playing sports, watching movies and doing things he enjoys. My vision of freedom was more along the lines of never having to negotiate and plea for my vacation time, having the time and space to write and create without having someone else override every decision I make, and the ability to create and control my day.

I have definitely achieved the freedom I desired. Dave is not there yet. To get to his ideal level of freedom he has to grow our business more and build a bigger and better team around him. He also is probably going to (or maybe even already has) redefine what exactly freedom is to him.

Freedom is not a guarantee as a real estate investor. It really depends on how you’re defining freedom. And this is important because big things are very possible in a short period of time if you’re an action taking investor. After attending a couple of conferences this year and chatting with folks who’ve purchased 30, 50 and even 70+ units in the last 5 years or so I know vast the opportunities are for investors that take initiative. I also know how deep the misery can be if you’ve gone all that way only to find out that long journey took you to the wrong destination. In other words, the majority of these folks that I met had freedom from a 9-5 job yet were absolutely unbelievably miserable. Many were selling out of real estate and planning to get into something totally different.

If you’re getting into real estate for freedom then you have to ask yourself what freedom is to you. It is different for everyone. For me it was about control – it wasn’t about not working. We’re hiring a full time assistant this week because I want to control my work not have my work control me – but still I have control and I love it.

The word freedom can be dangerous to use – unless you have given yourself a specific definition. You may find, once you define it, that real estate isn’t the solution for you. Or, you might find, as we have, that it’s able to give you exactly what you want to create the life of your dreams.

My point today is to simply encourage you to choose your words carefully. Next time you hear a child saying “sticks and stones may break my bones but words can never hurt me”, think to yourself if you are actually using words that could be hurting you. Because words can actually hurt far deeper and for a lot longer than any stick or stone can.

First image credit©Chud Tsankov|Dreamstime.com

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