Jason still has remaining tickets to the Meet the Masters event. Remember, this will be the sweet 16 Meet the Masters event and there will be a lot of insightful experts at the conference. Do not miss out! In Jason’s Creating Wealth intro, he talks a little bit about the book The Future of the Mind by Michio Kaku and what he has learned from it. Today’s guest is a case study of one of Jason’s clients, Fernando. Fernando talks about his success in real estate as well as shares to the audience a bit about his background and where he came from.

Key Takeaways:

4:10 – Jason talks about the Meet the Masters event and the people who will be coming to the event.

8:00 – Jason shares what he learned from The Future of The Mind book written by Michio Kaku.

11:00 – Jason welcomes Fernando.

14:00 – Fernando talks a little bit about his life growing up in Brazil.

17:35 – Due to the horrible inflation that happened in Brazil during Fernando’s youth, he saw a lot of people lose their life savings overnight.

20:10 – What got Fernando interested in real estate? He explains in this segment.

31:30 – Fernando bought his first property in Florida.

41:20 – Jason asks about some of Fernando’s challenges during all of this.

51:45 – Fernando talks about appreciation and tax benefits.

56:30 – Jason and Fernando wrap up the call and end with some final closing thoughts about leverage and debt.

Tweetables:

I saw the 40-50% of my earnings being taken up by taxes.

Income properties are the most tax favored investment in America.

The most conservative thing to do, ironically, is to have as much financing or as much debt as possible on the properties.

Mentioned In This Episode:

The Future of the Mind by Michio Kaku

Transcript

Jason Hartman:

Since it’s new year’s eve, I thought I’d bring you another client case study today. What this illustrates is how amazing easy it is when you just get really focused in building a real estate portfolio, so you’re going to hear another case study today just like you did on the last episode. On our upcoming Meet the Masters event, we’re going to talk about making 2015 your best year ever, about moving from active to passive income about investing in real estate and income property, of course, but also the paper side of the asset class as well. So, let’s listen in to today’s show where we will do another case study. Happy new year.

Hey, welcome, welcome, thanks for listening. This is Jason Hartman and this is episode 459. You know, I know on the last episode that we just aired, episode 458, on Monday, we did a client case study with our client David Porter and he’s done a great job investing. Today we have another client case study, we have Fernando coming on with us today. This one was kind of long waited, because he’s been a client for about 3 years and I started bugging him maybe almost a year ago now to come on the show and he said, I will, I will in time, so he finally did it! I’m really happy about that.

Both David Porter and Fernando and the other guests we had, client case studies, that we’ve had over the years on the show have done a great job investing and they’ve been very good managers of their portfolio and managers of their property managers. I just love what I do. One reason is a great thing to do, because I learn so much from you, I learn so much from our clients. I look at it as, a big part of my job, is kind of gather and assimilate all this learning that I learned from our thousands of clients, thousands of transactions they’ve done in building their portfolios and some of the best practices, I really learned from them. It’s not like I made all this stuff up or figured all this stuff out.

So, today, again, on this episode, that’s what we’re going to do. We’re going to learn from Fernando and learn about how he acquired 50 properties that are 70 units, so 70 doors or units in those 50 properties. I met him about three years ago, shortly after he discovered the podcast. We just had a game plan and went to it. He’s just been doing a great job. You’ll hear his story today. He’ll also be at the Meet the Masters event and I think I’ve talked him into speaking at the event as well and sharing more of this detail with you, so that’ll be a great thing. So, you’ll get some today on the podcast, but also, of course, at Meet the Master with so many other of our good things.

By the way, we just confirmed one of my own attorneys to speak at the event. He’s coming. He’ll be speaking on Sunday. He’s just done a phenomenal job with IRA investing. He actually wrote the book on it, one of the best books on the topic about IRA investing and asset protection. He is speaking on Sunday at Meet the Masters, January 11th. The 10th and the 11th. You’re really going to like what he has to say as well as all the other fantastic speakers.

I’m looking through a land contract deal that I’m actually doing myself. I’ve been looking through that for the past three days or so and kind of poking holes in it and looking for potential pitfalls. What are some of the possible problem areas when we talked about all the stuff on the podcast, several episodes ago where we talked about land contract investing. That was episode number 454, so I’m going to bring that knowledge to you as well. I sent an email to the seller of this land contract. It was really interesting yesterday too calculating my return, because the face value of the land contract, I think, on this deal was 9%. The overall return though assuming the land contract preforms as the contract is stated looks like it’s going to be around 14%, but if they default, the land contract deal could actually provide a better return. You know, it’s just funny how things work.

When you set up and structure your deals properly, regardless of the scenario, you can win. You can win if it goes well and if it goes, seemingly what most people would consider poorly, you can actually win more and we’ll talk about that at Meet the Masters in great detail. Be sure to register for that at JasonHartman.com. We do have a few seats left, unbelievably. I thought they’d be all sold out by now, but we’re doing this one kind of earlier than usual, so seats are left. Go to JasonHartman.com and take advantage of that. We will look forward to seeing you there.

Now, before we get to Fernando’s interview. I wanna ask you, do you want to know an interesting fact? Something I learned a few months ago, I’ve been meaning to share with you and it has very little to do with real estate, but it does have to do with the incredible gifts we’ve all been given. I finished a book by Michio Kaku, I know that is a tough name to pronounce, I want to get him on the show in the future. He is a really interesting futurist, scientist, all kinds of things. He’s got many things out there. This one is called Future of the Mind. One of the amazing things I learned about what he says, I believe it; it’s probably very true, is the most amazing discovery ever and that is the human mind.

Can you believe it? You already own one of those, free and clear, that amazingly powerful entity, the human mind. We all own one, free and clear. Cool, cool, concept there, isn’t it? So, we own this great thing free and clear and we own a bunch of other things, you know, in our body, free and clear, which is fantastic, but the eyes, wow. The eyes are really an extension of the brain, because they’re basically brain cells in the eyes. The largest nerve from a sensor organ to the brain is the optic nerve. So, most of our data and our perception is visual. That’s not from the book, that’s just what I’m saying there and from other readings and learnings I’ve done from the past, but here’s the amazing thing from Michio Kaku’s book, the Future of the Mind: The Scientific Quest to Understand, Enhance, and Empower, the Mind. Did you know, your eyes, you think you’re seeing everything with your eyes, but you’re actually not.

Here’s what I mean by it. All of our eyes actually have a small blind spot in them where you think you’re seeing, we think, I should say, we think we’re seeing an entire picture of what we’re looking, but actually, our mind is generating some of that. It is fake. We are not really seeing everything we think we’re seeing. So, here’s what I mean. It is a philosophical fact that the eye does not see everything in front of it, there’s a small blind spot in front of it.

So, what our brains do is they actually create that image of what it saw when the eye moved into that area, you know, as it’s moving around so quickly. The brain actually creates that image on a computer. I think they call this resterizing. The computer will  rasterize the image, that could be the wrong word, but I think that’s the word, and put it up on the screen for us. On the monitor for us to see it, right. Amazingly, our eyes are not seeing everything that we perceive. A small portion of that in each of our eyes, in our visual field, is blind. It’s not see-able, our mind creates it.

So, if you just think about that one, that’s a pretty amazing thing. So, again, not much to do with income property investing there, but I just wanted to share it with you because I keep thinking about how fascinating that idea is. That our mind literally generates the image to fill in the blind spot. Wow. You own that free and clear, already! Amazing, right? Amazing. Sometimes we got to really appreciate that. You know, thanksgiving wasn’t that long ago and talk about something to be thankful for. The most amazing computer that can outdo any computer that has ever been created, we already own those free and clear. Pretty darn cool.

Well, hey, let’s get to our interview, our client case study with Fernando and you’ll hear about how he acquired his 50 properties. They total 70 units, because he’s got some plexes in there. Here we go.

Hey, I want to do a case study with one of our clients and I’ve been asking him to come on the show for a while and he said he’s not ready yet, but then to my delight I saw that he requested a time to be on the show. That is someone I talked about before and he was on just briefly a couple of months ago when we were at a conference and that is Fernando. Fernando, welcome, how are you?

Fernando:

I’m doing great, Jason. Thanks for having the time to talk with me.

Jason:

It’s good to have you on. You have quite an impressive story and I think the clients and listeners of ours will really benefit from hearing your story. So, thank you for sharing it. Maybe we’ll go back and kind of take a big high level overview here of how you became interested in real estate and maybe even in your childhood growing up in another country talking about what you saw in terms of inflation and parent’s business and so forth and we’ll lead right up to the present day and how you built your portfolio, so does that sound good?

Fernando:

Yep, sounds like a good plan.

Jason:

So you grew up in Brazil, right?

Fernando:

Right, yeah, I was born in Sao Paulo, Brazil in the late 60’s, although my parents are from a European decent. I lived in Brazil when I was there in my childhood and when I was a teenage. I actually lived through a period in Brazil where high inflation was really making its mark. There were a lot of people who were hurt by inflation in Brazil and some people who were making quite a bit of money with inflation. At the time, we had annual rates that were over 100%, so it was kind of an interesting time.

Jason:

So, inflation rates of over 100% annually, that is just crippling. What a way to destroy people’s saving, to destroy people’s stock investments.

Fernando:

Most people living there, even at a young age, myself, I understood money left unused in the bank or even in the wallet would lose its purchase power literally on a daily basis. Prices would be nothing and then prices would go up by 10-20-30% in a shop. I even remember living through a change of currency when the government decided or decreed when we would be using a new currency and they had to remove 3 zeros from the old currency because it was getting out of hand.

You’d pay a 1,000 cruzado at the time for a pack of gum, it was that bad.

Jason:

Unbelievable. So the currency was a cruzado?

Fernando:

Cruzado, yeah.

Jason:

So, 1,000 of those for a pack of gum, but what was it before, I mean, give us a comparison on how we should relate to that.

Fernando:

Well, it went from being a 1,000 to 1. They took 3 zeros out of the currency and created a new currency with a new name. It became more sane. You wouldn’t be carrying millions of currency with you. You carried a lot less. It was amazing.

My father at the time was a shop keeper. He owned a bakery, a deli. I used to help him by working there. I was a teenager at the time. I remember vendors coming in just to stock up and sell goods like cheese and hams and they’d tell him, the prices would just go up by 20%. My father, he had to pay for these products with money from his previous sales, but due to inflation, all these price highs, he had to come up this new 20% money to pay for products that he hasn’t sold yet. That were just getting in to the business.

I saw this cycle repeating itself numerous times. It was just sad to see. He was just getting to the point where his business would never catch up. He was always behind the curve. He was always trying to come up with new money to come up with the basic goods that he needed. He got to a point where, as he needed more and more money, he started borrowing money, get this, Jason, at a rate of 5% a month.

Jason:

5% interest per month. So, when you compound that, that’s just insane. Wow.

Fernando:

I took a look at some of his, I did a spreadsheet with him back when I went to Brazil to visit after living in the US, it just made no sense. It was absolutely crazy to live like that, but on the flip side. This is an example of my dad who was really struggling with inflation. I had an uncle..it’s always an uncle.

Jason:

It’s always a rich uncle. You know, it’s so funny. I recently listened to an interview that I did with my aunt Joan, and, of course, uncle John. He wasn’t there, but I did it it with aunt Joan and it’s always a rich uncle, right?

Fernando:

I don’t know how that works, but anyway, he was actually a business partner of my father and they owned a butcher shop and they owned various different things. He lived in Brazil through the same time period, went through the same inflation issues. But, there was one crucial difference. He managed, at that time, to buy a couple of commercial buildings and rent them out. I remember he used to live upstairs, it was a two story building, one of them he lived upstairs and rented the lower side of the building to a business. The rents would keep up with inflation. As a matter fact, he would raise the prices of rents higher than inflation at the time, because the steps were quite big. It’ll be 20-30-40% change in price hikes, you can definitely put a bit more towards your rent increase and go ahead of inflation.

So, he was able to make money and save enough money and ended up purchasing a small business in Europe. Move away from Brazil, before hyper inflation really took off. This, in the 80s, it went from 100s to 1,000 of percents a year. It just became insane. He basically left Brazil and he was able to continue with a decent life in Europe and it really stayed with me, that learning. The way to get ahead and to get wealthy is to do what my uncle did, essentially.

Jason:

Amazing. When you were a kid and you saw this type of inflation, I mean, you talked about what it did to your dad’s business and put him behind the 8-ball where he was always trying to catch up. How did you feel, how did other people feel around you that you knew, I mean, to see this kind of ravaging of the currency devaluation first hand is just gotta be amazing. It just changes your whole psychology, doesn’t it?

Fernando:

It does and it doesn’t, because when you’re living in a situation like that on a day to day basis, you just adapt. As a kid, I just thought that’s how the world was. It was just prices kept going up and if you don’t keep up and if you don’t do the right moves, you’re going to fall behind. It’s just the life you live in. You don’t put too much thought into it. You’re just catching up trying to survive. A lot of people worked very hard and saw their life savings just being eaten up by inflation.

Jason:

It would encourage people to spend sooner rather than later, I would assume. It’s really bad for the economy when you don’t have a way to encourage people to save money and you don’t reward them to save money, because if you don’t have capital, that really limits progress. Big things are done with capital formation. They’re not done if you form capital.

Fernando:

There was very little credit available at the time. Like I said, money was so crazy. The inflation was so high, it was..credit was virtually non-existent. So you saw a lot of hard money loans at these crazy rates and people just being desperate trying to catch up and most never did.

Jason:

That would be a very dangerous time to be a lender, because one of the things I teach is inflation transfers wealth from lenders to borrowers and borrowers are enriched by inflation and lenders are hurt. Amazingly, we don’t have more inflation in the US, which I don’t know how long they can keep defying gravity, Fernando, but for the past year they seem to be doing it pretty well. Before that, you know, for the last couple of years, we had some real inflation and the government statistics are always understating it, which by the way, back to Brazil. I don’t even know if you paid attention to it, certainly as a teenager, I didn’t, but did you notice anything about the way the government acted or did they understate inflation like we do here in the US or, you know, was there any awareness of that?

Fernando:

I don’t think they had…it was so obvious, I don’t think there was anyway to play these games. You know, it’s just so high that people see it every day. It’s crazy. It doesn’t really matter if it’s a 130% or 150%.

Jason:

It’s still just really, really high. Period.

Fernando:

Exactly.

Jason:

Okay, so what got you interested in real estate investment? When did that first happen?

Fernando:

As I said, I was learning as a child what inflation would do and I saw how real estate helped my uncle. Basically, I have to take a step back and give you a little bit of a background of some of the deep realization I had while working that lend me to real estate in a more direct way. As I was working in corporate America a few years ago, I wake through an awakening, a deep realization, that I wasn’t going to become financially independent at the rate that I was going.

My investments was basically tied to the stock market and, honestly, they were basically trending water. I tried to, you know, make it big, becoming financially independent from stock options by working in start ups. I had two tries, two different start ups that I worked for, but it didn’t quite worked out. I didn’t make enough money to make me financially independent, instead it was certainly enough to trigger huge tax payments to uncle Sam. I saw the 40-50% of my earnings being taken up by taxes. Literally, hundreds of thousands of dollars in taxes to the federal government, state of California for the years I’ve got lucky enough to have options that were above water, that actually made money on.

Jason:

Stock options.

Fernando:

Yeah.

Jason:

We should say you’re an engineer chip designer. You live in Santa Cruz, so your career has been spent in the  Silicon Valley area, right?

Fernando:

Right, let me give you a little bit of background there. I came to the US, I guess, permanently, in 1984. I was an exchange student through the rotary club, it’s a service club. I went to live in New York state. I attended high school there. When I was in high school, I played soccer and I caught the eye of a soccer coach. There was a near by state university of New York campus and the soccer coach offered me a small scholarship to study engineering and computer graphics at the state university of New York.

After I graduated I was offered a job with a company that no longer exists. It was called Digital Equipment Corporation and at the time, it was a huge company. I think IBM was the biggest one in the 80s and Digital was second, although like 15 times smaller than IBM. Big difference, but it was a great company. It had top technology and ended up going to work near Boston, Massachusetts, in Hudson, Massachusetts, to design computer chips.

I don’t know if you recal Vex line of computers and then I went on to work on alpha computer chip line with Digital Equipment Corporation. In 1993, Digital decided to open a design center in Palo Alto, California. This is where I moved to California, moved to Palo Alto in the end of 1993. There was a design center that Digital opened in Palo Alto, they were actually designing chips for a project that Apple was developing called the Newton. You might have heard of that.

Jason:

I do remember that flop. If Apple didn’t have the Newton flop, we might not have the iPhone if you ask me.

Fernando:

It was kind of a PDA, a personal assistant. It had some hand writing recognition software, but it was just before it’s time. It was a commercial disappointment to say the last, but I worked with Digital on that project through 1995 and that’s when I tried my luck with a startup. Being in Silicon Valley, I had to try at least one start up and I know this was one way to become financially independent. So, I tried to go to work for a company called Nextgen in 1995. Nextgen was basically designing computer chips CPUs. It was competitor of Intel, along with many other companies that actually struggled quite a bit since Intel was a virtual monopoly for the PC world at the time.

So, Nextgen, I was brought by Advance Micro Devices, which is a much bigger company and also a competitor of Intel and they paid quite a bit for the start up I was in. They paid $1 billion in 1996. Even though that was a great price, bottom line for me I made little money on the deal. I think I made less than a $100,000. I didn’t have enough shares and investing.

Jason:

And the government took everything in taxes, right?

Fernando:

Yeah, they took a lot in taxes and I was really lucky in a way, but unlucky to not really make money out of the deal. So, I worked for AMD, since they bought the startup, I worked for AMD as a chip designer from 96 to 2004. During that time we went through the dot com bubble and AMD stock reached its peak. It was over 40 bucks, riding that bubble, but overall, for the time that I worked at AMD was about 8 years. During these 8 years I was able to make a few hundred thousand dollars from stock options. I put some of it away as investments in the stock market.

After AMD I worked for another start up, since the first one didn’t really get me to financially independent, I went to another start up called P.A. Semi. P.A. Semi was a start up that produced power efficient CPUS and this was quite revolutionary at the time and it was to be used for gaming, consoles, routes, and that sort of thing. You know, I worked there for through 2004. What I do remember even though I didn’t quite make it big in the starts ups is the work in the start ups was very demanding. I was having difficultly in seeing enough of my kids during the times I was working at the start up.

Jason:

Fast forward a little bit if you would to your work to Apple and how that came about and then how you got interested in real estate.

Fernando:

So P.A. Semi was acquired by Apple in 2008. They paid almost 300 million for the deal. Honestly, for the four years that I worked at the start up, I made about $350,000 from the sale, but the government, again, took over a $100,000 in taxes.

Jason:

Ouch.

Fernando:

The interesting thing in California, the money that I made from all of these years was not enough to even put down even as a down payment for a decent house. Houses in the Silicon Valley, you know, million dollars is common for a house here and I couldn’t even put it down for a down payment. It was sad. But, Apple did offer me a nice package as I joined them, but it required a four year vesting period. You had to wait for your stock options to vest, restricted stocks to vest, you know, put your time through in order to reap any rewards. I worked for Apple as a senior manager doing chip design, doing program management, working on their intellectual property hardware.

Jason:

So, now you’re working at Apple. Apple makes some great projects, obviously. We all love them or most people do, but that is hard work, isn’t it?

Fernando:

It was hard work, as I mentioned, I was going through some enlightenment or realization internally and becoming disillusioned with how fast I was progressing towards financial independence, especially with my stock market investments. I went through the sub-prime of the financial crisis 2007 to 2009 that really took a dent on my savings. I remember paying of thousands of dollars for a financial analysis and investment counselor at  Charles Schwab and Morgan Stanley, but my returns were absolutely terrible.

Jason:

Welcome to Wall Street.

Fernando:

Depending on how I measured and which account I used, I lost 20-40% of my savings, my investments that I had worked on for many years. That would mean for it to go up 40% to 80% just for me to be back up to where I was. It was just sad.

Jason:

You just don’t get anywhere. You spin your wheels on Wall Street and stock investments, because even if you make a return on the deal, the government takes so much of the gain. It’s just not a tax favorite investment. Income properties are the most tax favorite investment in America. So, how did you get interested? What did you do? Did you start searching for podcasts or what was your start?

Fernando:

Sure, so it’s kind of an interesting story before I got to the podcast before 2011, I was watching late night TV at a lake in New York state and I was there with my American family and I saw a program from a TV network America Auction Network. AAN TV. They were selling newer homes in south west Florida in Lee Country, this is where Fort Myers, Cape Coral, Lehigh Acres are. You probably know. These new homes, the homes that were built in 2006, 2007, they were $60,000, $70,000, and they were being rented out for $750, $850 a month. These were nice. Three bedroom, two bath, two car garage, 1,500 sq ft and higher.

They were renovated, ready to rent. The guys that were selling them on the network were showing returns in investments of above 13%. I couldn’t believe it. I couldn’t believe the amount, the prices, for these, and the returns that you could get. It was just a completely new idea for me. Although, there were some catch. You had to pay cash for the houses, it had to close within a couple of weeks, they were no contingency in inspection, and so on, and I think the network made 10% off the sale, but still, it was a great deal for me living in Silicon Valley. As I mentioned, it’s not uncommon to find a house that costs a million dollars there that needs some work and these homes in Florida in their entity for less than a typical down payment for me.

Well, I studied it quite a bit. I put a spreadsheet together, I analyzed it, compared different properties that are being sold on the network for months and I thought about going to Florida during this time. I think I spent about three months just doing this, just trying to get over my fear of actually purchasing something in a market that I wasn’t familiar with. I did decide to go to Florida and buy properties. This was in early 2012. I ended up buying a couple of properties in Collier County, not in Lee Country. I found a real state agent who was a colleague of a colleague and they knew some contractors and they knew some handymen.

Jason:

Yeah, so it’s all fragmented and you’re just bouncing around.

Fernando:

Exactly. I actually had my dad to go down to Florida for three weeks to actually get the houses ready for rent. He helped fix it up. It was a hotchpotch of items I had to go through. As of today, I self manage it. It was definitely not turn-key. I had quite a bit of difficultly finding support services around the area.

Jason:

That’s exactly what I’ve found and so many of our clients have found, Fernando, is just there wasn’t any way to properly invest on a nation wide basis.

Fernando:

So, after that, this was in early 2012, this is when I found your podcast. I found the Creating Wealth podcast with you and I gotta give you a little bit of background. I always loved podcasts. I searched and listened to many different financial and real estate podcasts and especially a lot of these in early 2012 as I was getting into buying properties. I had bought a couple of properties in Florida, but honestly, almost all the podcasts and webinars and education out there had very little content that could make a difference in my life. It was just lots of talk about the current real estate market and interest rates and a bunch of guesses where things were headed. It was just a real bore, it was just very repetitive. There were some that were offering flipping, you know, how to buy cheap and how to do rehabs, but honestly, they sounded like a lot of work.

Jason:

That is a lot of work.

Fernando:

Most of them require you to be present in the city where the properties were, you had to scrum newspapers and county auctions to find the right deal, the right properties, then you gotta find a contractor to fix them up. I remember one of them taught you how to be something called a bird dog. You probably know that term.

Jason:

Yeah, sure.

Fernando:

It was just so much work. I think what I was learning from that process is despite what they were telling you, being a bird dog or a flipper is not as quick in easy for the novice guy that really doesn’t know the area or the contractors to get economies upscale. So, you wouldn’t become the next Donald Trump doing this. I think most of the successful ones they spent years or maybe decades around real estate. They developed their instincts about what properties to buy and so on, so I didn’t think it was that easy.

Jason:

So, Fernando. You started looking for podcasts out there, tell the listeners what you found.

Fernando:

Well, basically, I found Creating Wealth podcast by searching iTunes and immediately I resonated with your message. You know, the great returning of investment, significant reduction in taxes, steady income that could eventually replace my corporate job income. Also, what I found very powerfully is along with that message, I was impressed with your high caliber of your guests. I remember listening to economists, investors, lawyers, authors, basically people who could present their expertise and allow me to judge their response against your message.

So, as an example, when you talk about inflation, your ideas about inflation going up over the next few years, I could vet that message against your guests and made sure what you were saying made sense and that was very powerful to me.

Jason:

That was very interesting point. So, in other words, you didn’t just take my word for it, you had the guest, you know, say it, assuming they agreed. I certainly don’t always agree with a guest or they don’t always agree with me.

Fernando:

Right, not necessarily agreed, but understanding their reasoning and seeing how they compared with your reasoning and if I was to follow your plan for financial independence, would it work according to the experts and not just you. So basically allowed me to solidify my understanding of  the various facets of real estate investment and the multi dimensions it has and listen to these top notch experts. It was just clear after I listened to the first few episodes, this was in early 2012, I went back and downloaded probably one year worth of podcast and I went on a listening spree. I was gobbling up every podcast that I could get my hands on. At that point, I knew I was ready to sit down with you and come up with an exact plan to achieve my financial independence.

Jason:

Good, good. So, you took your trip to Phoenix just kind of on your own, right? I know you talked with a couple of our local market specialists in Phoenix at the time and then you had contacted me and asked if we could meet and I remember our first meeting together. I just walked down from my apartment and met you at a bar there called Cantina and we just had a beer and a bite to eat, right?

Fernando:

Yep and you brought Coco with you if I remember correctly.

Jason:

I think it was Puppy, I had Puppy back them. You did meet my old dog, so there you go.

Fernando:

Yeah, so that meeting was really key because at that time I had put together what I called my independence day plan spreadsheet and this was a lot of my thoughts into what it’ll take, how much money it’ll take, how many properties I’d have to have in order to replace my corporate income. The goal to me was clear that I wanted, within a year, to be financially independent. That would met that, again, I would have enough rental income to make my corporate income. I wanted to quite my corporate job and have the choice to live anywhere that I wanted. If I wanted to live in California, I could stay there, if I wanted to relocated, I could stay, because I was not tied to an office.

Jason:

I loved that you called in financial independence day and you were so organized. I mean, you know, we went kind of the different assets you could use. I know you sold a bunch of your Apple stock and purchased income properties with it. We talked about the possibility of using home equity and all these different things and you just started, you know, after you had the financial independence day outline, which was a great guide, then you started acquiring properties. Where did you start, I can’t remember..

Fernando:

We talked about buying in Dallas, Atlanta, Phoenix, St. Louis. We made a plan and at the time there were different lenders that were offering incentives for different markets, so we made a plan and I ended up going to Atlanta first. The idea was really to try and use up my conventional financing spots. As you know, there’s a limit of 10 conventional financing loans that you can have under your name and those are the 30 year fixed interest rate mortgages that are great. We tried to use those 10 spots in Atlanta and get those done and out of the way so that I could purchase more properties with commercial financing after that point.

Jason:

So, Atlanta was the first market then.

Fernando:

Yeah, I bought several properties in Atlanta. By October 2012 and then a few more by November 2012. Phoenix, we looked at a few houses, ended up making a couple of offers, but we didn’t purchase any. The inventory was already getting pretty low at the time.

Jason:

Yeah, Phoenix doesn’t work any more so well, but you know, there will be a time where it’ll soften a little bit or the rents will catch up, either one. It is just a question of either one. Once they do, you’ll be in good shape to be buying there. Okay, good.

Fernando:

Then I went to St. Louis, St. Robert in Missouri. As you know, St Louis, the specialty there is the multi duplexes, 2 unit and 4 unit buildings. The older buildings built 100 years ago. I bought several of those also in 2012 and I bought new construction plexes in St. Robert. Near the military school and base and that was completed by January of 2013. After then, I bought a few properties in Austin, Texas also in 2013. I ended up buying a couple of properties in Dallas as well. I started using my IRA money for that. I opened up a self-directed IRA after going to one of your Meet the Masters weekend. I learned about self-directed IRAs, I opened on in July of 2012 and I bought a couple of properties under the IRAs as well.

Jason:

So, tell us some of what your biggest challenges were in investing in these different properties? You went to a lot of the markets and really you worked hard at this, you were not unambitious here. I mean, you really jumped in and you did it. I gotta tell ya, I was impressed.

Fernando:

It’s funny, people talk about being lucky and you know, how great your life is at any point, but what they don’t look at is how hard, how many hours, and how much thought you put in to the planning. I was lucky in that I was able to sell some of my Apple stock during the time that happened to be going up in a strong clip, so I was able to reap the benefits of that and put it into real estate, but the challenges were..I had a clear plan as you remember, my independence day spreadsheet, I had a clear goal of becoming independent within a year and it was very difficult to accomplish that within a time period, mostly because of what I call mortgage sequencing.

You know, it’s one thing to have the money and be ready to buy a lot of properties and try to achieve a goal, but in reality you have providers that might not have properties available at any one time. It might be they only have one or two crews that might be doing rehabs at one time, so they just don’t have enough inventory. Even if they did have the inventory, they might run into snags where it take longer to finish the rehab in one particular property and you can’t buy what you thought you could by at the time you wanted to buy.

The interesting aspect of mortgage sequencing, because of what I just described, is this, the banks want to take a financial snapshot of the applicant prior to close of escrow. They wanna know where you are financially. They don’t want any new contracts, any change to your financial picture during the 30 or 45 days prior to close of escrow, once you open a contract. In that sense, that meant I couldn’t just go down to Dallas and make an offer to buy a couple of houses with one lender and then go to Atlanta and make an offer on a couple of houses to another lender.

You know, the lenders all want to know about each other. At the time I wasn’t lucky enough to work with a single lender that could take a holistic approach to my plan and do it across the US. Tell me, okay, I get what you do, let’s put a grand plan together. It was kind of a hog approach.

Jason:

What’s interesting, I want to comment on something you said a moment ago too, you talked about the different local market specialist wouldn’t have enough properties for you to buy. By the way, just tell the listeners, how many properties do you have now and we’re just talking income properties, not your own home. Are you at 57 properties, now?

Fernando:

I got about 50 properties, 70 doors. There’s about 12 plexes.

Jason:

Right, so, you have some plexes. Yeah, how many doors totally

Fernando:

70.

Jason:

Okay, so 70 units and 50 properties. Alright, good. So, one of the challenges you had they just wouldn’t have properties for you to acquire and this, by the way, is why Wall Street has a very difficult time being in our business, which is great, because it keeps them out, but the institutional investors find it frustrating. You know, they wanna be able to go and deploy a billion dollars with a mouse click and a due diligence report. You know, and they just can’t do it in our business, can they? Not very easily at least.

Fernando:

Yeah, so, as I was saying, I really had a tough time hitting my goals within one year. I frequently got into a spot where I was purchasing 2 or 3 properties and they were all being rehabed, getting ready for tenants, and what the banks..You know, if I was getting the close of all properties to be done at the same time, the banks would wanna make me wait until all properties were ready, you know, for their appraisal until we could close on all of them. So, if you had one who had trouble rehabing, it’ll delay the purchase of all the others. It would then push out the timeline for all the eventual purchases. Bottom line is, I had to wait longer for my financial independence day date. It got pushed out from one year to two years.

Jason:

Right, so it took twice along. Two years rather than one year to get to financial independence and how did you feel about that? It was just a problem of being able to get the properties, right? You just couldn’t acquire the properties fast enough.

Fernando:

Yeah, it couldn’t be done fast enough. You know, I had to sequence my conventional financing backed by Fannie Freddie early on and only after those were done I could move on to commercial and portfolio landing. So, even though opportunities were presenting themselves for commercial lending, I had to first get my conventional loans done, because those are so much better terms than everything else, so it just has..the point is there’s a sequence you have to follow and it doesn’t just happen the way you want it to happen, even though it might have..I had a great credit score, almost 800, I had 787 credit score. A great job being over $200,000 a year. I mean, I had no problems getting credit, financing for these properties, but it just doesn’t happen as fast as I thought it would.

Jason:

That’s true. This is a fragmented business and you gotta dive in. So let’s talk about more of the challenges. You talked about some of the challenges in acquiring the properties, Fernando, but what about managing them? How difficult is it? I just want you to share some of the pitfalls and the challenges and some of the good sides too. Give people an accurate picture of this.

Fernando:

There’s bumps in the road. It’s not rosy as you might think. It’s not a passive investment. You have to be involved. As I was purchasing properties in Atlanta, the property manager that was indicated by the local market specialist, the provider in Atlanta, was becoming overwhelmed. She just had too many properties coming her way, too many clients that were coming her way, and she didn’t have enough software backbone to her business to handle all these properties. It became so bad where it got to a point where I fired here and I got involved to a new property management company. I had to transfer all my leases and make sure the tenants were aware of it, so that took a bit of time to go through.

As a matter of fact, the very first home I purchased in Atlanta, we had to evict a tenant. This was my first taste of my financial independence day plan. It started out with a big bump and it took a while, over three months, to get that ironed out. Also because the property manager was getting overwhelmed and he couldn’t handle it, wasn’t on top of things.

Jason:

Okay, so you got that squared away and that took some time, what else? What other challenges?

Fernando:

Challenges in rehabbing. In St. Louis is a perfect example, the rehabs in St. Louis are extensive. You’re basically looking at these 100 year old properties that needed to be gutted and have new plumbing, new electric, sometimes you had to remove bad plaster jobs and had to put sheet rock and sometimes you had to repair the framing. It was just a big rehab. It was not a cosmetic type of job. These took a lot longer than planned, both because of this and also because the provider was also getting overwhelmed with too many clients and just trying to do too many things at one time. Just didn’t have enough contractors and resources to address all of these clients.

It’s interesting in the boom times…

Jason:

We had some real challenges in St. Louis. That was one of our more challenging markets, for a time, they’ve mostly ironed themselves out now, but it took some time, that’s for sure. Oddly though, Fernando, as many challenges as we had in St. Louis, people benefited from them most of the time. They had huge construction delays and people were anxious to invest, the market was going up. So, even though it was kind of disappointing to some, but really overall it had a pretty big financial benefit in a lot of cases.

Fernando:

True, if you look at the building prices now, they have definitely gone up. So, it’s quite interesting.

Jason:

So, with these 50 properties and 70 units that you have. You’re really good at keeping track of things. I mean, you’re an engineer, you’re a chip designer, so what kind of gains have you made and what kind of returns have you had?

Fernando:

I was just looking at this recently. When I set out to replace my corporate income with my rental income, I took a snapshot in the beginning of this year and my corporate income after everything taking into account, all my expenses, all the normal items that you would see from working regularly, I would come with $8,500 monthly of net corporate income. My net income from real estate, though, is now closer to $10,000.

Jason:

The difference is you now have a huge tax advantage on the rental properties, right?

Fernando:

This is already 15-20% more than my corporate income and I do have equity building in all of these properties and I do have the tax benefits. The nice thing about taxes when I look at my situation is I am getting to a point where i’m having over $250,000 in depreciation every year. What this means is I can make this much in cash flow income before I need to pay taxes on the rental income.

Jason:

Okay, say that again. The depreciation, for the few that don’t know, is the most tax benefit in America. I mean, when you say depreciation, that’s a good thing the way we’re talking about it now, because that’s what the IRS calls it, but the property could double in value. It could appreciate in real life, but according to your tax return, you’re getting a big deduction as though you’re losing money. So, it’s a great thing, because it doesn’t make any sense in a way. Okay, so, say that again? What are those numbers?

Fernando:

Yeah, so, I have over $150,000 in depreciation expenses, as you described.

Jason:

Tax benefits, yeah.

Fernando:

And, what this means I can make this much, I can make up to $150,000 in cash flow before I show any income and therefore I need to pay any taxes on the rental income because I can deduct $150,000 straight from my income. So, it’s just wonderful. It’s just a great tax benefit.

Jason:

Have you calculated your return on investment? You’re pretty good at using property tracker and keeping track of things, what does that look like?

Fernando:

I don’t have the actual numbers in front of me, but it took awhile. I started in 2012, actually 2011, but 2012 was when I gained a lot of traction with you. The properties took a while to get to perform. It took awhile from the rehabs to be done, etc, etc. So, my cash flow was very little, like $5,000 or something like that. It was not very much. This is the real cash flow, a lot of the noise out of the equation. In 2013,  it was much better. The yearly cash flow was $60,000 as the properties came to perform. In 2014, the projection about $120,000. That’s where I come to the comparison in being able to replace my corporate income. When you look at taxes that you’re paying with your corporate income, you don’t need as nearly as much rental income to get to the same point because of the tax benefits. So, things will only get better.

Jason:

So, let’s talk about that for a moment. I want to make sure people understand that. I mean, if you have $10,000 a month in tax free income, depending on where you live and what your tax brackets are, of course, that’s about $6,000 a month at your corporate job, right.

I should say that the other way. If you have $10,000 in income from your job, you really only keeping $6,000 of that. These are very rough numbers, okay, and they do depend on where you are. You can earn $6,000 in rental income if you are able to take all those depreciation tax benefits and actually earn more. I mean, it’s incredible thing. Taxes are the single largest expense in anybody’s life. We’ve got to learn about them, we’ve got to manage and position our investment so that we can benefit in this way rather than be hurt by it.

Fernando:

That’s exactly it. It’s interesting, you know, you gave your exact example, I can give you my exact example where my gross income with the corporate income was $18,000 a month, this is gross, but my net income, as I mentioned before, $8,500. When I look at real estate, my total income is $10,000 a month, but my net income is about $10,000 a month, because I get the depreciation to write off the income that comes in. So, the comparison at the end of the day is in favor of state rental income. It’s much more powerfully, because taxes are such big hit on your finances.

Jason:

They sure are. It’s amazingly important thing. It’s amazingly important. Well, just wrapping up here Fernando, what else would you like people to know? What else should they know about real estate investing?

Fernando:

There’s a lot to know. I’m always learning. I think there’s different things you can do with real estate. There are opportunities for using yourself to direct IRA for some aspect of real estate that provide short term returns that I’m interested in getting into such as land contracts, notes, and that sort of thing. That sort of thing, so that’s definitely something for people to think about to tap into their IRA savings. The other point that I want to make for people who are thinking about buying mini properties, financing is very, very important. Try to get as much as financing as possible with the low interest rates that we have now. I financed over 80% of my properties and pretty soon I’ll try to refinance on some of the ones I paid cash for. Your returns are just leveraged by so much when you get appreciation of 3-6% multiplied by that leverage that financing allows you, it really makes your total income be much, much higher than anything else you can do.

Jason:

It sure does. Did you buy into that idea initially, Fernando? Because, it’s kind of counter intuitive. For many people they think, oh, I’m too conservative, I don’t want to take on debt. I want to own the properties free and clear. Kind of that old school mentality. You know, once you come around to the fact that the most conservative thing to do, sort of ironically, is to have as much financing or as much debt as possible on the properties. The riskiest thing is to own them all free and clear, which is counter intuitive. Did you buy into that right away or did it take some time?

Fernando:

I used to have that same line of thought. I wanted to pay off a lot of my investments, but from my learning over the past three years and my real life examples, I would like to leverage as much as possible and push all that, you know, equity on to the lender. You know, leverage is probably one of the most powerful aspects of real estate income. I’m definitely, strongly, on the side of leverage as much as you can, especially with the current rates that we have.

Jason;

Just to wrap this story up, what happened? You achieved your financial freedom day, you retired from Apple. When did you retire from Apple, in May?

Fernando:

May 2004, a few months…

Jason:

2014.

Fernando:

2014, right.

Jason:

It’s only ten years. Give or take. It’s funny, because I heard someone talking on the radio and they kept talking about 2004 and I kept yelling at the radio the other day, it’s 2014, you’re talking about! Same thing. We don’t realize it’s later than we think.

Fernando:

Exactly. So, I retired. I immediately went with Brazil for 3 months to spend time on the beach with my family.

Jason:

You took the summer off?

Fernando:

I took the summer off.

Jason:

The world cup and all that?

Fernando:

Saw the world cup, I was in Brazil. We had a great time. I could never even dream of taking that much time off when I was working for any of the tech companies. Any of the tech companies I worked for. So, we spent time there. I came back and I absolutely love the freedom of owning my time and if I wanted to go to a conference, which I’ve done, with you, even, I can do that and I really have the choice. I don’t need to worry about asking permission to go on vacation or how long I’m going to be out for.

Interestingly enough, you know, after being retired from corporate America, there’s lost of opportunities for me to get involved in. I’ve been helping quite a bit of people with their plans being a coach, an investment counselor and trying to answer questions for people with me in Apple and colleagues that want to do a similar plan as I have done. So, it has just been incredible.

Jason:

Good, good for you. That’s so good to hear. What a great story. Thank you so much for sharing it with all our listeners today. I really appreciate it. What’s next for you? Are you going to buy more properties? I know you’re looking notes and land contracts and I’m really excited about doing more in that world too. I’ve dabbled in it for many, many years, but I want to do it in a bigger way. It’s not as good as the real estate. It’s better to own the actual property, but for simplistic sake and ease, you know, owning the paper is my second favorite.

Fernando:

Yeah, I think my plan right now is for me to, I’ve got enough properties that I need the help in managing the mangers and just some of the day to day tasks. I’m not going to be buying more if I can’t get more help to take care of them. I do want to get into contacts and notes. I do have a few properties would lend themselves nicely to land contracts. One of them as an initial with HOA. I would rather do a land contract with it. Also, with my self-directed IRA, I have plenty of opportunities to buy notes. I think it lends itself very nicely to the short-term income that notes provide. There’s not as many tax benefits as you do with rental income, so I do wanna get into that as well. So, those are the next few steps that I plan on doing.

Jason:

Good stuff, well Fernando, thank you so much for sharing this today and keep up the good work. You’re doing an awesome job as an investor and it’s really gratifying and great to hear your story.

Fernando:

Thanks to you.

Episode: CW 459: The Future of the Mind by Michio Kaku & A Client Case Study of Fernando from Brazil Who Now Invests in American Real Estate

Guest: Fernando

iTunes: Stream Episode

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