Your Very First Investment by Mark McMahon

This is for all of you who are looking to buy your first house. It’s not exactly what you’re used to seeing; It’s going to be more of a road map to financial security. But wait! Don’t stop reading because you think I sound like your parents. It’s not like that. I am lucky enough to have been fairly successful over the years picking the right properties to provide a pretty nice retirement for myself and my family. Unfortunately, I’ve also been pretty good at picking some of the bad ones; guess that makes me an expert of some kind. Regardless, at least humor me and keep reading. Instagram can wait (find me @mark_mcmahon_real_estate) a few minutes. Who knows, maybe I’ll change your life.

Imagine having enough income to retire at 50. It’s totally possible. All you have to do is get started now. What you say? If I get started now, I can retire at 50? But I’m already 45, what then? Hmmmm, possible, but not probable. That’s the bad news: good news is you might have to work till 65, just like you planned. The difference is you will be comfortable, vs being at the mercy of Social Security. Let’s concentrate on 20 and 30 somethings for now. Or maybe you’re in your teens and want to get started. That’s cool. We can talk about that too.

So, you’re looking for your first house. A place to call home, to raise your family. Or maybe you’re still single (especially if you’re in your teens!). Maybe you should look at things a little differently. Perhaps you could buy your first property and make it pay for itself. What??? That sounds too good to be true! Let me tell you how it works, then you can decide if I’m full of s#!*t. This won’t take long.

The first thing you’re going to have to do is decide what kind of property you want. I suggest a 4 unit apartment. Also known as a 4-plex. You move into 1 of the apartments and rent out the other 3. If you’re smart (I know you are, you’re listening to me J) you’ll take the biggest unit, use one bedroom, and rent out the other, or others. There’s a real good chance you won’t have to pay a penny to live there. You might even cash flow (that’s the money left over after you pay all of your expenses. We’ll cover this in another article). There are other sources of income at your 4-plex. Look at your property as a mine; you are mining every bit of cash flow you can. There are garage rentals (you’re driving a car that doesn’t require a garage, you’re smarter than that!), laundry money, and the cash you’ll save fixing things, managing your units, and cutting your own grass.

Wow! This is getting exciting; I’m going to live for free and make money to boot! Yep, it’s possible. Now you know how you’re going to make it work, but how do I buy it? Most properties you buy require 20% of the purchase price up front (also known as the down payment). In other words, if your 4-plex is $800,000, your down payment would be $160,000. What!!!! Wait a minute, you said I could do this! Liar!

True, I did say you could do this; here’s the secret: It’s called an FHA (Federal Housing Administration) loan. Simply put, it’s a government backed loan that allows you to buy 1 to 4 units at, get this….. 3% down! Yep, you heard me, 3% down. That’s $24,000 down! Plus about another $10,000 for closing costs. So, you can be an apartment owning landlord for about $34,000!

There’s lot’s more to discuss, like where to buy, coming up with the down payment, living a frugal lifestyle, saving and investing diligently, working out at the park instead of the gym, surfing, camping, hiking, hanging around people that have similar goals, and lots of other cool stuff. But I’m going to show you how to do it. If you have a decent job and a desire to be your own person and you don’t want to count on anyone else, take a listen to what I have to say. The world is your goldmine, and I’m going to show you where all the gold is located; you just have to be committed to doing a little digging.And listening. Now go

What I aim to accomplish by sharing my thoughts.

What do you do when you find yourself downsized at work and you have too much house and a driveway full of toys you can’t afford? Well, it’s never too late to start over, right? People do it all the time. And I really want to help you with that. I was in that situation 10 years ago and it was the absolute worst feeling ever. I started that story a couple of days ago, and I’m going to finish it. Promise. First, let’s talk to the folks that haven’t dug a hole so deep (if you’re in that hole, I suggest you get rid of the shovel now; we’ll address your situation another time) they can’t get out.

First of all, acknowledge you’re going to have to make some big changes that might not be too popular with the family. I would start with those toys. Sell em. If you owe more than they’re worth, take them back. Hopefully you can make a deal with whoever you bought them from to pay off the negative over time. With any luck, you can find somebody else to take over payments on you motorhome, jet skis, and motorcycles. While you’re at it, you might want to check on the value of your home. Do you really need all that room? Afraid what everyone will think? It’s more embarrassing to have the repo man drive away in your Class A motorhome. Trust me, I may or may not have knowledge about that; not a motorhome, but maybe a car.

Don’t be confused; this plan has nothing to do with paying down debt, it has everything to do with eliminating debt. In other words, you’re going to do a debt cleansing. Or a debt enema. If you truly want to fix your situation, you have to accept that you screwed up. You went and lived the American dream like every other dummy out there. And now it’s time to fix it. And you can do it; i know you can. I believe in you.

You see, I have a theory; you don’t deserve all the crap you own right now. If you did, you wouldn’t be in the position you’re in. Someday when you’re older and more responsible, you’ll be able to get all that stuff back. But you won’t do it; nope, you’ll do what the rest of us apartment owning (no partners, no syndications) conservative types do. What do we do you ask? First off, when it comes time to move up to the bigger house, we buy a 4 unit apartment complex. When we have our debt ratio on that building down to 50% (thats how much debt you have compared to what you owe), its time to go shopping for a boat. Not just any boat, but the bass boat of your dreams. I want you to look at them, research them, figure out what kind of gear you’re going to get, and the truck to pull it with (you’re driving an older Toyota pickup now. Cheap to fix, and you can haul all the stuff you need to do repairs on your units). After you’ve done all the prep and research (that’s the fun part for us guys), buy the 4 unit next door to the one you already own. Keep all the boat and truck brochures, you may need them someday. Trust me, one of your buddies will get a boat, you can go fishing with him.

Heres the thing guys and gals; once you start down the road of financial debt cleansing, you’re going to enjoy the saving and investing game a lot more than the spending one. We spend because we’re insecure (a whole ‘nother story). Once you remove the insecurity (ridiculous amounts of debt for stuff you don’t have time to use), you get this amazing new feeling; a feeling like no other. It’s called pride. Pride in your financial position, your families happiness, and pride in yourself. When the kids go to bed, and your wife or husband looks you in the eyes, I guarantee that sexy feeling has a lot to do with being debt free and cash flowing. It feels better than a new Mercedes, or a Gucci handbag. And sleep? You never slept so well (until you get the call at 3am that the toilet in unit 4 is overflowing; yeah, thats a reality until you can afford a property manager).

Theres a whole lot more to talk about. Don’t worry, I’ll share all the secrets about how I did it. I’ve been doing this for 10 years now, and Yuko and I have made pretty much every mistake you can make; I’ve been thorough, I don’t think I’ve missed any. You’ll hear about our journey, the good and not so good. Some parts are funny (maybe not then, but now it’s kind of amusing). You may cry. If you read a couple of days ago, it was pretty crappy. That will continue. I need to share that, been holding that s__t in way too long. Don’t worry, you’ll laugh too, as I’m pretty darn funny. Please share this with someone you care about. I’m not looking for likes or anything like that. Message me if you want. I respond.

Oh, one more thing; I meet with one person every week at a coffee shop in Costa Mesa to talk about where you’re at. Then I talk and you listen for a bit. Then you get to ask questions till the hour is up. That’s it. No charge, and I usually even buy the coffee (pumpkin spiced double espresso whip cream grande latte is not coffee). Thats all you need. I don’t mentor, don’t ask. But I write, and I’m learning everyday, so chances are I won’t run out of stuff to talk about; and it makes me feel good. See, I am selfish.

With Humility and Affection,

Mark

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Gotta Hit Rock Bottom.....

Our first flip was crazy!! We were broke, couldn’t find work, and it was 2009... 

I’ll save that story for another day about the flip itself, but today I want to about what drove me to do it.

I didn’t have any money, just a massive amount of motivation; a few days before that, I was in a completely different place. I had been bouncing around on the bottom for 2 years, driving aimlessly (wasting gas) trying to find work, and my results were horrible. I couldn’t commit to anything, and I’m sure my attitude came shining through on the few interviews I was able to manage. The pizza place on the corner turned me down for a delivery job, and I hit bottom. Just like that. At the time I couldn’t grasp the enormity of that moment; I just knew it was the end, and I started making plans in my head to give up the house and and car (we were down to one). I had 2 rolls of quarters in my pocket from a secret stash my wife didn’t know about (could’ve bought a few day groceries with that), so I headed to my favorite liquor store. You know, desperate times and all that... as I pulled up, I thought long and hard about the decisions I had made. Most of them not good. I decided that one more wouldn’t hurt, so in I went. Brilliant. I walked out with a bag full of guilt and went home. More tomorrow...

Lions, Tigers, and recession??

It’s been awhile since we’ve heard the word “recession” spoken about with any real passion. I do believe I’ve been hearing rumors for the past few years or so, but that was more than likely the talking heads trying to sell newspapers. With mortgage rates near record lows and the stock market reacting to the Chinese trade issues, it seems we might be in for some convulsions. Here’s the funny thing; of the last 5 recessions, housing prices actually went up. In 1980, properties appreciated 6.1%. In 1981, we had an increase of 3.5%. 2001 saw a gain of 6.6%! Of the the two times they went down, once was in 1991, with a drop of 1.9%, and a massive devaluation in 2008 of 19.7%. 2008 was clearly a case of irresponsible lending and the discounting of mortgages on the secondary market.

What does all this mean? History tells us that often times when the stock market starts to move back and forth, investors pull out cash and invest in hard assets like real estate. The sudden demand can cause an opposite effect on real estate and push prices up due to lack of inventory. Inventory can decrease due to sellers taking properties off the market with a “wait and see” attitude.

With rates as low as they are, and prices expected to still rise, now might just be the best time to upgrade or make that first purchase. As for income property, my attitude is always the same; if it cash flows, it makes sense. There might be mitigating circumstances that make a particular property a bad choice, but taking advantage of a purchase or exchange with todays rates is a savvy move at this time. I for one am looking to increase my portfolio. As always, contact me if you have any questions or want to discuss your strategy.

Stairs or no stairs, that is the question.

The stairs question comes up at almost every open house and showing. When I’m working with folks starting to think about retirement, it comes up 100% of the time. My wife and I have had this discussion at least 100 times. It always starts with the empty nest concept; when our last child goes off to college, should we downsize to a smaller single story home?

I never thought I’d write about it; what’s the big deal? As we get older, we want everything on the same floor, right? As we become less active, our ability to manage stairs diminishes; or is it the other way around? Maybe we become more sedentary as we age because we are constantly looking for things to make our lives easier. Elevators, ramps, shorter walks, easier to manage floor plans, closer parking places, and on and on. But this question keeps coming up; why exactly do we not want stairs as we age? The obvious answer is we are going to get old and infirm, might as well prepare now. I disagree 

 If we go back a few decades, nobody was downsizing as they got older. Almost everyone stayed in their home till the end, stairs and all. There was no moving to a condo (I love condos!) to make life easier. We are a more affluent society, and a lot of us can afford to move when we want; however, do we have to have a home with no stairs? I would say no; if you are assuming you won’t be able to use them one day, you probably won’t. Most of the time when we tell ourselves we can’t do something, we can’t.

My mother in law is 78. She lives in Japan, in a two story house with very steep stairs, and is fiercley independent. At 4’8”, those steps are even steeper for her. The thing is, she runs up and down those stairs 100 times a day. During a recent visit, I asked if maybe it was time to move to a condo (in Japan they call condos mansions; don’t know why), where she wouldn’t have to deal with stairs. Her answer was absolutely not! The reasoning was if she stopped using the stairs, she would lose the exercise she was getting from going up and down. Also, there would be no garden to take care of, or bigger house (all 700 sf) to maintain.  She assumed, rightly so, that her life would be much too easy in a single story condo. Where lives now forces her to move and exercise muscles she would not have to if she relocated. Consequently, she can out walk most people my age (56) and can certainly out walk most everyone her age. 

Now, I realize there are circumstances where one can not navigate stairs; this is not directed to you. The idea behind writing this is to at the very least give you food for thought; am I passing up what might not ever affect me? Perhaps you might have another 10 or 20 years before stairs are a problem. Perhaps never…..

So, when you’re looking for a new house to move to after the kids move out, don’t avoid the stairs! Unless you already have issues that would keep you from using them. 

 As you search for that perfect home, not worrying about stairs will make your search so much easier. I would think location would be more important. Being close to the things you enjoy, like the beach, the mountains, coffee shops, and having a place big enough for the grandkids should be higher on your list. 

Let me know what you think, comment down below. Thanks for reading!

Oh, and next time you have a choice between the stairs and an elevator, take the stairs!

Timing The Real Estate Market

We’ve been hearing a lot about bubbles, market crashes, and gloom and doom for the past couple of months in real estate; even as the economy keeps up a brisk pace, there is a certain group that always talks as if “the sky is falling”. Even I have become “negative” a couple of times in the last few months, but not for the reasons you might think. It has to do with folks who think they can “time the market”.

When I look at buying and selling real estate, I tend to look from a different perspective; that of a marathon runner, and not so much as a sprinter. In November 1998, the median house was $162,200 in California. In November 2018, the median price is $476,600 (Zillow) That’s nearly three times the original price. I did not pick 1998 because it was a good or bad year, I was only going back 30 years to give some perspective. 

Now let’s have some fun! Assume you purchased this house in 1998 and as of this month (unless you used your home as a credit card and borrowed against it), you are making your last payment. You haven’t thought much about it in the last 10 years or so due to the fact that  inflation has reduced your payment to a much smaller amount than when you first purchased your home.

In 1998, you paid a whopping 10.46% interest rate. Your payment would have been $1612.52 (this includes your payment, interest, tax and insurance, or PITI) per month for the last 30 years. Of course you may have refinanced into a lower rate along the way, but you get the idea. The average rent in California is now $2795 per month.

If you had never purchased a home in 1988, that’s what you would be paying every month with no end in sight. Compare that to the home you bought; after you pay it off, you will only owe taxes and insurance, about $230 per month (plus maintenance). 

So, is it a good time to buy?

Yep, it’s always a good time to buy. If you’re thinking of buying or selling, please contact us so we can show you how. Be prepared to stay in for the long haul, and run the race to the end.