Is it coming back?
When we are talking to our mentoring clients one of the very first issues, we are addressing is the Goal or what we call the “Time Freedom Point Number”
You see, the reason we have the word GROWER in our name is the fact that each letter stands for a step in our circular mentoring model:
- G = Goal
- R = Current Reality
- O = Obstacles/Opportunities
- W = Will take Actions
- E = Experiences while taking action
- R = Results of actions and impact on the overall goal
The Time Freedom Point Number is the amount of money you calculate to cover all the expenses you have every month. That includes your living expenses, but also costs for hobbies you have, travel you might like to do, passion projects you can do when you have lots of time on your hands.
It’s called the Time Freedom Point Number because the Dollar Amount, let’s say for you is $4200/month, has to come from passive income, and not from a job.
Time Freedom means you have total freedom to use all the time in each day the way you want. You no longer have to exchange your time for money or salary, as you would when you have a job.
Typically, people who come to us for help aren’t at the Time Freedom Point yet but they would like to get there. (often as fast as possible)
When we start the mentoring program, it is very important to answer two key questions:
- What’s your Time Freedom Point Number?
- How soon do you want to get there?
Our investing strategy focuses on well-performing residential real estate. I have written a lot about that topic and made videos, was a guest on many podcasts. If you like to go deep on this aspect, check out any of our detailed deep dives.
Well-performing properties are generally found in locations where the balance of purchase price and rental income is good.
As inflation has come into the picture recently it has become harder and harder to find properties that meet the 1% rule we would love to use as an initial measuring stick for performance. 1% rule means: You buy a property for i.e. $160000 and you get $1600/month in rent.
Finding these properties as single-family houses in nice B-class or C+ neighborhoods is harder and harder these days.
We have all along called our strategy OOS-SFR-TK (Out Of State Single Family Residence Turn Key).
This is because of the great benefits the government provides for owners of single-family properties.
In addition, we would always have two potential buyers of our properties if we ever wanted to needed to sell:
- Other investors who are just starting and looking for SFR
- Any local family or individuals who wants to buy a house to move into.
Some people have suggested we should switch to a new strategy that allows us to invest in apartment complexes. The reasoning is that each individual apartment would not meet the 1% rule but if you can buy a 20-unit apartment complex for $1 Million Dollars, it is conceivable that each tenant would pay $500/month, which would give you the $10,000 to meet the 1% rule.
The math is correct but the rules are different. As soon as you have more than 4 units in one building all the financing, valuation, and other rules change. In addition, you can no longer sell to a regular buyer who is just looking for a place to live for herself or her family.
We looked more closely at the exact rules the government and the IRS publish and learned that the same rules that apply to our OOS SFR TK strategy applies for financing, tax treatment, ownership, appraisals, etc. as long as there are no more than 4 units in one building.
I said: “Wow, that’s the solution. If a new mentoring client wants to reach the Time Freedom Point sooner rather than later and needs to get performance as close as possible to the 1% rule in this inflationary market, we should aim to find and get them a tri-plex, and a four-plex in addition to SFR.”
It used to be much more common for developers to build these kinds of buildings but in the last few decades, it has become increasingly rare.
One big obstacle developers are facing is the focus on only two options for city and county planners across the nation when it comes to residential developments:
- Large multi-unit apartment complexes (sometimes including condos and townhouses)
- Single-family housing developments.
There is basically no other option in between.
The zoning, especially in locations that want to solve the housing shortage will need to include much more tri-plex and 4-plex zoning.
As you can imagine, there is still a second obstacle developers fear even if the zoning is in place:
They fear that the market for the sale of these tri-plex and 4-plex units is small because individual buyers would not very likely buy such a building for themselves — or so they think.
Here is a little bit of proof supporting this theory, drawing from a Strong Towns article published Sept 2020:
“At the end of 2018, planners in Minneapolis drew extensive national press for an historic accomplishment: Since an implementing ordinance passed in November 2019, it is now legal to build a duplex or triplex on any residential lot in Minneapolis.
Would Minneapolis begin to sprout triplex homes?
So far, the answer appears to be no and no. As the Twin Cities weekly the City Pages reports, the number of triplex permits filed in Minneapolis so far in 2020 is…drumroll…three.
The devil is often in the details — lots of factors can add cost or complication to a project that is technically legal. We’ve seen this over the years, for example, with accessory dwelling units (ADUs), which are legal in many cities but rare because practical considerations make them uneconomic or undesirable. And what it takes to actually open the ADU floodgates hasn’t always been obvious. Los Angeles, not a place known as a hotbed of interest in ADUs, seems to have stumbled upon the secret sauce (with the help of state legislation): a stunning 1 in 5 housing permits issued in LA in 2018 was for an ADU.
Residential builders are notoriously risk-averse, and the lenders they rely on to finance their projects are even more so. Everybody with skin in the development game wants to know they have a proven model, and so I suspect it’s going to take a few more gutsy entrepreneurs doing successful proof-of-concept projects in this neighborhood or that before interest begins to mount.”
Does this mean the idea of tri-plex or 4-plex investing to generate more cash flow and reach the Time Freedom Point does not work?
Not necessarily. For one there are properties that were originally built in this configuration and can be renovated using the traditional turnkey model. I am helping our clients get these units with the help of our awesome TK providers.
In some places around the country, developers have decided to take things in their own hands and create new fourplex villages for investors.
Fourplexes disappeared for a while because zoning did and often does not allow for them.
New construction rarely meets the 1% rule right away but due to good warranties and less risk of repairs, reserves can be reduced and long-term investors will ultimately benefit from multiple lease payments each month, coming from the same building.
I guess multi-unit residential real estate below the commercial 5-unit limit is a little bit like fashion. What’s En Vogue now comes back in about 25 years again.
The trends favoring working from home, living in a community but not a huge complex, and having space like a house for a little less rent are all factors that will bring the forgotten four-plex back.
If you like to learn more about it or seek our help in finding and investing in these gems to get to your Time Freedom Point as soon as possible, please feel free to contact me and my team.