OUTLINE

Introduction: How to Use This Book
Chapter 1: My Story
Chapter 2: The Big Picture
Investor Interview: Anna Kelley
Chapter 3: The Unique Aspects of Real Estate Investing
Investor Interview: Maria Francesca Dattilo
Case Study 1
Chapter 4: Getting Started
Investor Interview: Phil Chadbourn
Chapter 5:
Investor Interview: April Crossley
Case Study 2
Chapter 6: Investing Is a Team Sport
Investor Interview: Steve Sell
Case Study 3
Chapter 7:
Investor Interview: Julia Okamoto
Case Study 4
Chapter 8: Key Real Estate Formulas
Chapter 9: Find Your Why
Resources and References
Acknowledgments
About the Author

Investor Profile: Anna Kelley
Robert: How have you applied the IDEAL and how did your understanding evolve from when you began to accelerate at some point and where you're at now?

Anna: The real estate acronym IDEAL implies that real estate is an ideal investment compared to all the other investment alternatives out there in the retail world, such as stocks, bonds, mutual funds, and annuities.

• I is for income. Real estate investing generates an income ideally, if you're buying right.
• D is for depreciation, which is paper losses that save you money on your taxes even though you’re really making money. That's always a really good thing.
• E is for equity. This is where tenants pay off your mortgage in rental properties. That’s how your net worth really grows. As properties go up in value, you create equity, which is more value than what you have in a mortgage. The difference is your equity, and that's where real wealth comes in.
• A is for appreciation, which is the fact that very rarely does properly actually go down in value. If you’re maintaining it, it’s usually going up in value and creating more wealth over time.
• L is for leverage. With most institutional retail investments, you can’t get a loan to invest. For example, you can’t borrow money to invest in the stock market. With real estate, you can. The power of leverage is being able to borrow 80% of the value of that investment and only have to put 20% into it. That's what makes it attainable for the average American to invest in real estate.

Robert: To leverage with stocks and bonds means, you have to take gigantic risks.

Anna: Very.

Robert: People do it. I'm sure people do know how to make money in that, but it’s hugely risky and complex.

Anna: Right. And you're borrowing on speculation. Usually, stock market arbitrage and leverage are only usually available to people who already have a lot of money (unless you’re just going to borrow from a credit card to invest in the stock). You have no control over that stock or its value. With real estate, you’re borrowing with a reasonable certainty of how to control that investment to make sure you can cover that mortgage payment. It’s much less risky if you’re investing in the right kind of properties. When I graduated from college, I was offered a job at Bank of America to work in their private bank department. Basically, their private bank and trust department was where we handled the wealth of the top 10% in our bank. We worked with them to show them how they could utilize our products to grow their wealth from our annuities to insurance products, stocks, bonds, mutual funds... and so I knew a lot about retail traditional investments, and I could tell people through my training once they had money what to do to grow it and to meet their financial goals. But I really didn't know anything about real estate. They didn't train us on real estate, only retail investments. I didn't have any money, and I thought, “Wow, if I had money, I would know what to do with it to make more, but how can someone like me, who grew up in San Antonio, Texas in section 8 housing and knows nobody that has wealth other than my clients, how can I develop this wealth?” That gave me the mindset of thinking about investments, and it wasn't until really 2007 that I started thinking about investing in rental properties. I had done some flips. I had bought a little condo so that I wasn't wasting money on rent and then could use that as a rental. We also had one rental in Houston, but it was really just to help cover the cost of the property we were flipping.

In 2007, I moved to Pennsylvania in 2007 to help my husband start his own business in central Pennsylvania where he was from. Leasing space at that point at the height of the economy was very, very expensive. I found this building for sale. It was in a perfect location, but it had three tenants and four garages with it. At first, we were like, “Oh, we don't want to become landlords. We'll just buy this property, maybe we'll just lease space.” But then we decided the income that those rental units would generate would more than cover the mortgage on this property, and it would be much less risky than trying to lease a space for a new business, so I realized the power of the income. I realized the power of the leverage because we were able to borrow most of the money to buy that building. We thought this is pretty cool. We were able to buy a building with income and leverage, but I wasn't thinking about depreciation or equity or appreciation at all. Then we bought another building, and we house hacked it. We lived in one unit, and we rented out the other three units, and that was really a protectionary move thinking about the income. Again, if I lose my job and this business doesn't go well, then at least we can cover our food and our mortgage. We thought, “This is powerful for income. The headaches of tenants will be worth it for the income.” Again, because we house hacked it, we were able to borrow 97% of the value of that property.

Robert: Because you were living there, right?

Anna: Because we were living there.

Robert: You had kids too, right?

Anna: We had a 3 year old and a 10 month old. And let me tell you, it was a big backward move to move from this big house in Houston, two income family, to living in this tiny apartment, but we knew that it was worth the sacrifices we were going to make in order to potentially build his business and allow me to be home with my kids. This was my real goal in in taking these moves for income. Fast forward to 2009, Robert, the economy collapsed, and I worked for AIG as a Financial Relationship Manager. I was working with ultra-high net worth investors again in the retail world when AIG almost went under. They were in the news every day, and I thought, I am going to lose my job. My husband's business is just starting, and we're going to have no income. Moving from a high paying six-figure job in a major city in the US to living in rural Pennsylvania where there's not a lot of jobs like that. I thought, we've got to do something.

Here's when I really started realizing the power of investment property. When my husband's business as an entrepreneur was struggling, when working for the largest company one of the largest in the country was struggling and no longer doing well. And, by the way, within a couple week period I lost about ⅔ of my 401k, which we're taught as financial advisors this is never going to happen. Well, it did and all I had left to my name was $50,000 in my 401k’s. What I did is I borrowed from it. Your financial advisors tell you, “Don't ever take from your 401K,” but I'm like, I'm about to lose it all. I need some more income. There was another 4-unit building for sale, and I thought, okay I can borrow the down payment from my 401k and pay myself back with interest, and I can get go get a loan for the difference the other 80%. That's when I realized the power really, not just the mortgage, but the power of leverage. Being able to leverage my 401k and a bank loan to buy a property that would then bring me $1,200 to $1,600 dollars a month. I thought, I may lose my job, my husband may lose his business. We will be able to afford food. I found out I was pregnant the same week, that all this was happening-- and diapers for a new baby, and all that. I felt, we won't have money, we will be poor, but we will have our income needs met at least, our basic cost of living.

That's when I realized the income and the leverage, and also that the value and the stability of having these properties was more valuable and more stable than any job or any entrepreneurial productivity. But what I noticed is, even during this recession, the tenants were continuing to pay rent. What was really cool, as the value of the property was going up, and then I realized the power of appreciation (and not just natural appreciation, waiting for property values to go up like you have with single-family homes.

You hope that for years they go up 3%, but with multi-family properties, you can actually force the appreciation as fast as you want to force the value to go up. The way that you do that is with multi-family properties, the value of that property is highly reliant on the net operating income that you can produce, so the more you can raise rents and cut expenses, the net operating income—and therefore the value of the property—goes up equivalent to how much you've been able to increase that income.

We quickly realized that if we fix these units up, they might be worth $200 or $300 more per month than they are now as is. We put all of our time and energy to starting to fix up those units, raise the rents, cut the expenses, and therefore, significantly increase the value. We forced the appreciation quickly, and we created significant equity in that building.

Because we borrowed at one price, we made it worth a lot more, and then we had the equity that we needed to be able to continue to grow. We took second mortgages on the properties that we had for the difference in that equity. Through this we were able to create more value and equity. We refinanced and took that equity to use as the down payment on the next one, and the next one, and the next one. Essentially, we used the BRRR method on multi-family properties, and it just juiced the ideal investment to be a lot more income because you have a lot of units you can buy for a lower price per door. We used leverage, not only for the down payment, but also leverage for the down payment of the future ones through the forced appreciation and equity that we created. It was just a very powerful learning experience as we grew to have these aha! moments of, “Wow, multi-family is the ideal investment, and we want to buy more. It wasn't until in the future that I even realized the power of depreciation as well.

Robert: That's a hard one to explain to people—until you get your tax bills and you realize, “Oh, my goodness!”

Anna: Yes, I started talking to my accountant, who said, “You’re going to have to depreciate the cost of this refrigerator that you bought, and you can't count it as an expense, so your income is going to look a little higher when you have to depreciate other things.” But when you get to depreciate the value of the building, the government says, “This building in 27 and 1/2 years. It’s going to be worth nothing.” Now, that's not reality. The reality is, they go up in value, but the government gives you this tax incentive to say, “Let's pretend like the building's going to be worth nothing in 27 and a half years,” right? Let's say my building is worth $275,000 just to make the math real easy. Well, I can take $10,000 of a year in losses against my income. That is a depreciation loss, so you're actually making money every month on your property, but you get to pretend that you have a $10,000 loss against it, which makes your net income very low to negative sometimes in the beginning, so you're not even paying taxes on the income that you're generating because of this great tax benefit called depreciation. It's very powerful because it gives you huge incentives to buy property and then not to even have to pay taxes on the income for quite some time.

Robert: It doesn't seem like a big thing, but actually, it's a very big thing.

Anna: Sometimes people will just think about their cash-on-cash return. They're looking at only the income, such as, “I'm putting $10,000 down on a building. It's going to give me $10,000 a year in net income. That's 100% return on my money.”

Now most properties are going to generate an 8 to 10% return on their cash in actuality, if you have income that’s just one piece of your total return. To figure out your total return on that $10,000 investment, your mortgage is being paid down every single month, the tax deductions are actually saving you money that you would otherwise have to pay out in taxes, and that tax savings and that mortgage pay down, plus the appreciation what you're going to be able to sell it for down the road, all add up to a really powerful return.

When you buy stocks, all you have is maybe some distributions. You hope you have growth, but you're actually paying big taxes on that growth. You're also paying a lot of fees to own it. Your after-tax return is not significant.

On the other hand, when you buy property, you can leverage 80% of the purchase price on that deal, you're coming up with 20% down, but your return on that 20% can be significantly more than the average 8% return in a stock market.

For most of my properties, when I take into account my cash-on-cash return, my tax savings on the depreciation, my mortgage paid out (which also grows your appreciation), and then what I'll be able to sell it for if it grows an average of 3% per year, or if I can really force that appreciation much more quickly. My returns on almost all of my properties are anywhere from 35 to 50%—infinite returns because I'm being able to pull out my equity. I don't have anything left in it, and then it's just nothing but profits. It is so powerful, powerful, powerful. Truly the ideal investment is to buy small multi-family rental properties.

Robert: You had a job that made quite a lot of money. Was it a hard decision to leave it?

Anna: I desperately wanted to be home with my kids. Given the economy, and given that my husband was starting a new business from scratch, and Obama-Care hit (which really lowered reimbursements for chiropractic). We had this double whammy of a business that was struggling (when we started we had $700,000 in business in startup debt, including the building). That's a lot of debt, and we had no more money; it all went into the practice. My goal was, I just want to be home with my babies. If I can just buy so many properties, I can be home with my kids. The struggle after 2009 was, my employer was in the news every day, we had $700,000 in debt, and even if I found properties, the banks wouldn't lend to me. I developed a 4 or 5 year period where I was stuck as an investor. I couldn't buy any more because the bank said no. We had to just focus on really improving our own buildings and making them worth more, so whenever the banks did say yes, we would be able to buy. Fast forward several years, I made a 5-year plan to exit my job, I said, “If I buy 12 units per year over the next 5 years and grow my portfolio to 60 units, I will have replaced my six-figure income, plus enough extra to take vacation. And pay for kids braces and that kind of thing. My plan was to leave my job, but I tell you what, as someone who lived through 2009 and who had made some financial decisions that (in hindsight) weren't wise to start a business with that much debt… I knew that I needed to start to learn economic cycles and real estate cycles. I needed to understand when recessions came and what the signs of a recession were, so that I wasn't blind sided the next time. Toward the end of 2008, I had actually met my goals in 4 years instead of 5, and I was ready to retire. I was watching signs in the economy, and I thought, “I think we're heading toward a recession in the next year or two, and I don't want that to happen again where I'm heavily reliant on my real estate.” I now had the income, but I had some debt to go along with it from all the remodels. I said, “The only way I know that I will feel super safe leaving my job at this point, is if I pay down that debt by selling a couple of buildings.” You grow all these buildings, but then you have this debt, so I said, “I'm going to sell the ones that are a little rougher where I've got some equity, and then I need to save $100,000 for me to feel comfortable that I can leave my job.” I wasn't a person that said, “I made a little money, I'm quitting my job. I’m out.” I had developed wisdom over the significant burden of debt through going through it, in living through it, and it keeping me from being home with my kids. I knew I needed to be wise and conservative, so what gave me the confidence really to say, “Okay, I'm in a position to leave the corporate job forever and live on this financial freedom that we've developed through our rental income,” is I needed to start doing a couple of bigger deals. I knew that if I did a big multi-family property, I could put together an investment with a group of investors, and I could be paid an acquisition fee. Just like a real estate agent is paid to help you find a property, and they get 3%. If you are the deal maker, and you find a property, and you can make it an investment return for your partners, you can charge a 3% acquisition fee. I thought, I need a property that's worth at least 6 million dollars. I can charge a six-figure acquisition fee, so that I can then have that money saved—And by the way I'd create a lot more income from that property. So, I went about finding a bigger multi-family deal. In a couple weeks, I found an off market deal of a six to seven million dollar property. I found investors to partner with me. I created that deal, got it done, got that acquisition fee. Then I thought... I need to do one more thing: I need to refinance my house and pull out the equity and have that safe, so that, if there's opportunity. I need to have money to keep investing. And then I retired. It was that big deal that I had the confidence because I had done it so many times on a small scale. It was just more units in one deal, and I knew I needed to start branching out, working with others, partnering with others, to continue to grow and to feel safe that the wealth that I created and the income I created over those many years of investing really was going to last my entire lifetime, and that I would never need to go back to a corporate job again.

Robert: That’s a great story. You did it.

Anna: I did it, and it's just amazing. When we talk about an Ideal investment-- and again, any income producing rental property can get you there-- but the small multis (and the big multis, just doing it on scale)-- can get you there faster, There is nothing, Robert-- and I mean, I have worked with the wealthiest of the wealthy names that you would know that are famous, or own big businesses. I’ve worked with their advisors to create really complicated hedge fund investments. I've seen stocks, bonds, mutual funds, alternative fuel investments-- there is nothing like real estate that can take you from section 8 housing, like I was as a kid, from negative $700,000 net worth because of $700,000 in debt, and make you a multimillionaire with a high six figure income in a matter of a couple of years. It is truly the ideal investment, and if you put in the time, and you put in the work, you can truly create wealth and financial freedom that will last your lifetime-- and, hopefully, the lifetime of your children as well, if you do it right.

Robert: The most important thing is your financial literacy.
Anna: Yes, and it's interesting you say that because, through 2009-- when my company almost went under, when the economy basically collapsed… I mean, the greatest recession of our lifetime before what's maybe here today and what may be coming-- I thought I knew a lot. I mean, I was in private banking. I worked with wealthy clients. I knew retail investments. I understood insurance, and the market, and the stock market, and financial products. But I was completely clueless when it came to real estate, and I was completely clueless when it came to the economy and the factors that can make an economy (that looks really great) headed for disaster. It's all about learning as you go. When you don't know, you can't move forward. You can be a really savvy person, even have a lot of understanding about a lot of different things. But until you get exposed and start saying, ok, the humility of “I didn't know…” That helps me as an investor.

Robert: Tell me about your coaching business you're doing now.

Anna: I love it. You know, one of the best things about creating financial freedom-- to me, it never was about, “I want to be a multi-millionaire.” It never was about that; I grew up in section 8 housing. I can be content in an apartment. I can be content in a house. Because contentment is kind of what you make of it, right? What it was for me is being able to have the power to live my life by design and do what I want to do with my time. For me, it took a long time. Now, my kids are in school. I wanted to be a stay-at-home mom. I never got to do that the way I imagined it; they are all in school every day now. But I get to decide every day in the 8 hours that my kids are away from home-- I don't have to work another day in my life, and we would be okay. But is that going to be contentment? Is that going to be fulfilling to me to just sit there and think about myself all day? No, I want to give back. I want to do greater things. Sure, I want to create legacy wealth for my children, so I need to figure out ways to produce income to do that. But really, for me, the coaching is something that I've always wanted. I've always been someone that wants to help other people; I've worked with underprivileged youth. I've worked with inner city kids, and I really have a desire to help anyone really. I especially have a heart for single moms and for working moms and for young people that don't have anyone to guide them and show them what's possible. I've been through it, and if I can help someone see the power of what's available to them, and to short track what took me years to learn and help them to get that first rental property under contract, and just to understand this Ideal investment concept, and to figure out how they can take wherever they are today and figure out a way to get their first property. There is nothing more exciting to me to see that that could change their lives. First, it'll give them just a little extra income, or maybe they don't have to work the second job trying to take care of their kids. But my coaching business is really about taking you from where you are, showing you what's possible, and how to best find a right kind of property for you that's going to help you balance your life with your pursuit of this extra income (in a way where you don't have to work 70-80 hours a week like I did. You can do it in a more manageable). So I just love being able to coach students. Just this month I've had three of my coaching students put their first multi-family property under contract and get ready to close. It's just so rewarding. I'm so excited to see people take the steps to invest in their lives. That really could change the financial trajectory of their entire lives.

Chapter 3: The Unique Aspects of Real Estate Investing

Real estate investing is different than other types of investing. Learning about the aspects of real estate, to feel confident in making decisions using these concepts, and to harness them to benefit you and your family is probably the most important lesson in this book. The Case Studies and insights from interviews with other investors will highlight how they can be applied to your life and journey toward financial independence. Here are some key real estate investing terms you’ll need to understand to begin investing.

Cash Flow
After you’ve collected your rent and paid your expenses, such as mortgage, property taxes, insurance, maintenance, and property management, the money you have left over is your cash flow. If you are receiving more money in rent than you’re paying in expenses, your cash flow is positive. That’s, of course, the goal! If you are paying more in expenses than you’re receiving in rent, your cash flow is negative. Time to make a change!

Appreciation
Appreciation is the rising of home prices over time. Home prices fluctuate—going up and also down—but in the long run, over time, real estate values have always gone up. That’s how the majority of wealth is built in real estate. When people make a really significant amount of money in real estate, it’s due to appreciation.
Appreciation is a long-term benefit. While over the long term is quite reliable, it alone should not be the primary reason to acquire a property. In any time period and market, the value of a property can decline, and the factors contributing to this are largely beyond your control.

Depreciation
Despite what the word implies, depreciation is not the value of real estate dropping. It is actually a tax term describing your ability to write off part of the value of the asset itself every year. This significantly reduces the tax burden on the money you make, giving you one more reason real estate protects your wealth while growing it.
Each year, if you own residential real estate, you can write off 1/27.5 of the property’s value against the income you’ve generated. For example, if you bought a house for $200,000, you would divide that number by 27.5 to get $7,017. This is the amount you could write off the cash flow you earned for the year from that property. Many times, this is more than the entire cash flow, and you can avoid taxes completely.

Other Deductible Business Expenses
Depreciation is not the only item that can reduce your taxable income. Related business expenses can also. You should always consult with a qualified CPA to determine what business expenses can be legally reduce your taxable income, but there are many.

Taxes
Income from real estate is taxed differently than income from work. First, when you receive income from a job or any activity that produces a W-2 or a 1099, taxes are deducted from your gross income, such as social security, Medicare, and federal, state, and local income taxes. With real estate income, you are able to deduct expenses such as depreciation and business expenses such as insurance, property taxes, and other items first before calculating your taxable income. Second, real estate income is taxed at different rates than earned income—most of the time at lower rates. This is a little understood benefit to real estate investing, and yet it is available to the investor at any level. Be sure to discuss this with your CPA or tax advisor.

Leverage
Leverage is an investment strategy of using borrowed money to increase the potential return of an investment. When you borrow money for a real estate investment, you pay it back on a predetermined payment schedule just like any other loan. Real estate is one of the easiest assets to leverage—maybe the easiest. Interest rates are currently below 5%, down payments can be 20% or less, and loans are routinely amortized over 30-year periods. What else can you invest in using financing with terms like that?
Many business enterprises are more or less a way to create a job. This is a time-honored tradition and in the words of my grandfather, “all work is valuable.” But few businesses would be considered assets by a bank or lender. Real estate is! Being able to leverage this gives you an amazingly effective tool.

Loan Pay Down
A pay down applies to any type of loan; you are simply making regular payments to pay off the debt. When you have a car loan, student loan, or mortgage, you are making the payments toward your debt. When you take out a loan to buy real estate, however, you typically pay it back with the rent money from the tenants. When you invest in real estate, you have cash flow, and you are also slowly paying down your loan balance with each payment to the bank. Just like when you pay your own mortgage, the principal is paid down over time and the equity is built up. With a rental property, the tenant is making those payments and you, as the owner reap the benefits.

Forced Equity
Forced equity is a powerful term in real estate. It’s the equity you instantly put into a property when you make improvements to it. By improving the home, you increase the home's market value, and you also increase the market rent, which means you can make more money each month and pay off your property faster.
Unlike appreciation, where you are at the mercy of the market and factors you cannot control, forced equity gives you control. It gives you an option where you have a hand in increasing your property’s value.
The most common example of forced equity is buying a fixer-upper property and improving its condition. If you can pay below market value for a property that needs upgrades, then add appliances, new flooring, and paint, it’s a great way to create wealth through real estate without much risk. While this is the most common method, it’s not the only one.

Inflation
Inflation is the decline of purchasing power of a given currency over time. But how does inflation affect real estate prices? In general, overall, our money supply is worth less and less with each passing year. As the value of money decreases, the price of goods and services increases. Many of us take this for granted and don’t think about it much. We accept that prices go up. While it’s easy to take for granted, it’s actually an incredibly powerful wealth-building

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