How to Build a Profitable Rental Portfolio

Mike: Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting Expert Interview where I interview awesome guests from the real estate investing industry to help you learn and hopefully inspire you a little bit. For today’s show it’s going to be great. I have Tom Berry with us. Tom is a real estate investor and a teacher out of the Houston area and also the owner and president of a real estate club called the Wealth Club.
Tom has a great story of falling on hard times in 2007 and really having to re-invent himself, he and his wife and for his family. And really roaring back and building a large rental portfolio and taking control of their financial freedom. In fact we were just talking about the vacations Tom has been on this year. So it’s working for him.
In a short period of time Tom has really built an enviable business and today that’s what he’s going to share with us. How to build a profitable rental portfolio, something we all want. If you’re listening to this show, that’s probably something you want too. So before we get started today, let’s take a moment to recognize our featured sponsors.
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Mike: Hey Tom, welcome the show.
Tom: Glad to be here. Thanks for inviting me.
Mike: Yeah happy to have you. So I’m excited to talk about this. I think we were talking a little bit before hand about rental portfolios and how it can change your life. Especially over time because for a while you may feel real estate rich and cash poor because you’ve got equity locked up, or if you’re trying to pay down debt quickly you may have an accelerated kind of payment plan where you’re not enjoying the cash as much upfront, but you know you’re paying down your properties. And so I think . . . but no matter what your focus is in terms of how fast you want to pay off your rental portfolios, I know that you and I agree that owning a rental portfolio is a great thing.
Tom: Absolutely. That’s what I got into real estate for to be honest. I never got into real estate to wholesale or flip, or any of those things. Although I do all those things. And there’s certainly nothing wrong with them. But I came from a finance background and when you do the math, it’s hard to do the math in a way that shows you an easy path to wealth through wholesaling. The easy path to wealth through many of the other things that we can do in real estate. But when I did the math on rentals, that was the easiest and fastest path that I could find to build wealth and that’s truly why I wanted to get in.
Mike: Yeah. I think all real estate investors find… everybody that’s got a decent level of experience you start to find that you have to have different exit strategies under your belt because…
Tom: Absolutely.
Mike: If you wanted to rehab everything I primarily rehab… I’ve been a pretty significant rehabber over the years. But there are some areas where I’m just not going to rehab because the house is too low, or too high end and it just doesn’t fit. So I still am an opportunist, I want to find some other way to make money with that deal, and you just choose other tools in your tool belt, if you will I guess.
Tom: Absolutely.
Mike: Hey, before we get started… and sometimes of course that funds your rental business too, right? You can take that money and plough it back into your rental business.
Tom: Absolutely, absolutely. Yeah.
Mike: Well before we get started maybe you could share your story because I know I started investing in 2008, so about seven and a half years I guess. So I think we started around the same time, but why don’t you share your story of how you got into real estate investing.
Tom: Yeah. It’s a painful one but I will share it again. In 2007 my wife and I were in financial services, so that means in English we did investments, we did annuities, we did insurances, and a third of our business was in loans and mortgages. And so when the 2007 financial crisis hit, of course it hit prior to the real estate crisis. It was probably about 12 months lagging. We got wiped out and we didn’t even know what was wiping us out. But we knew that our business just felt nothing and we couldn’t survive any more. We went through our savings, we had some money put back and I went into debt just to try to get a couple of more months. I kept thinking if I could just survive a couple more months maybe things will work out.
The bottom line is I dug a hole, I dug a pretty good hole for myself. And I wasn’t going to get out. And so I guess you could say we lost everything. We got evicted from our home, we got evicted from our office, we got our car repossessed out of our driveway. It was a major deal. When Hillary Clinton says she left the White House broke, I think it was a different broke than the one I in 2007.
Mike: No doubt. Well I think I’ve talked about this on the show many times before, I’ve known a lot of really successful real estate investors, and it’s a common story that they got to a point in their lives where failure was not an option they were willing to accept. And I don’t necessarily say people have to hit bottom, but I think there’s a lot of people that want to do what you and I do in real estate investing, and they have some excuse or some comfort that’s in the way that allows them to not make the decision to move forward.
But thanks for sharing that part of your story. Now the good part is, you came roaring back and I’m sure you’re loving life now, and have been very blessed with the success you’ve had. So talk to us about how you move forward from there.
Tom: Well, you just touched on something I think most people don’t understand. If you’re real comfortable, the chances are low that you’re going to do what you need to do to build a successful business. And I don’t mean just a real estate business. Honestly the success principles in our business are no different than the success principles in any business.
But most of the successful people I know came from a tough situation. And not necessarily that failure wasn’t an option. I would say that starvation is a great motivator, might be a more appropriate way to word it. And that’s where we were. We were to a point where we didn’t know how we were going to pay the rent. We didn’t, and in many cases, we didn’t pay the rent.
Thank goodness we didn’t have a professional landlord. He didn’t know how to run a professional portfolio. And I was able to be the professional tenant that we all dread for a minimum of probably the first six months. After that we became great friends and he was very sorry to see us leave when we bought our home. But those are struggles and they do make you stronger. They also made us realize we never wanted to be in that position again. And I think it made us more conservative in our business model. I see so many real estate investors especially the newer ones. They just want to swing for the fences, that $100,000 deal, and I’m going to be 100 grand on this thing. I’m going to make 200 grand.
And I build a business in the last seven and a half years on doubles and singles. That’s what else I built my business on. An occasional blessing of a triple but I’ve never hit a home run, because I’ve always walked from those. I always saw that they came with too much risk, and something that we have always reminded ourselves of, my wife and I, is that we’re only one mistake away from being broke again. And we said that over and over and over for at least the first five years in this business.
At least once a week we’d look at each other and one of us would say to the other, “We’re one mistake away from being broke again.” And that’s how we lived our lives for the first five years.
Mike: Yeah. It keeps you moving forward. It’s funny you use that analogy because I tell everybody this is a business of base hits. Every once in a while you hit a triple or a home run and they may make it… they’ll make a big difference in the course of a year. But it’s a game of base hits and you’re right, I think a lot of real estate investors because they watch TV shows that make it look like everything is gravy.
It’s a hard business and you’ve got to grind it out each and every day. And I tell a lot of people that as I mentor a lot of people, and when people are coming in, I tell them if done right this is a very boring business. You’re going to just grind to that every day, you’re going to do the same thing over and over again. There’s nothing sexy about it. But over time it builds up.
Tom: Yeah definitely.
Mike: Yeah. Well talk about… maybe take a few minutes and tell us about… I know when you went through that difficult time and I appreciate you sharing that story with us. You had… something happens to where you feel like you need to take your financial destiny into your own hands. And you can’t rely on anybody else.
I know that some of what I went through, I won’t share my story again. But similar situations to where you just realize that the only way out of this is for me to take care of this myself and build something that I’m confident that I have a little more control over. But talk about your decision there.
Tom: Yeah. When we lost our business I said, “Well, I’ll go get a job. I’m not above doing anything I need to do to feed my family.” I put out resumes, I’ve never been unemployed a day in my life unless I chose to be. But at that time in late 2007 there were no job opportunities. Nobody was calling me back. I’m spending my entire day putting out resumes and trying to get interviews, and it just wasn’t going to happen.
So I tell my wife I said, “Look, if nobody’s got a job they want to give me then we have to build one, we have to create one.” And so I guess that’s kind of what you’re saying, taking it in your own hands, because I wasn’t going to just sit around and wait for somebody to call me off of the resume that I sent out. And I’m glad because it’s been dang near eight years now, and I still haven’t gotten a call off of any of those resumes. I guess I would’ve been sitting here a long time.
So I’m a little bit odd in when we had nothing, and we had no money, I sat down and I told Melissa I said, “I don’t want to build a business that we are slaves to,” which we were in our previous one. And I said, “This is something I’ve studied and I’ve done the math on this, and if we do this right, we can be financially independent in five years and never have to work another day in our lives. And that’s what I want to do this time. I don’t want to just build a business.” And she’s like, “Look, that sounds great. All I want to do is be able to pay the bills.” And I said, “Okay then I think we’re on the same page.”
So we sat down and we built a plan, we literally wrote out what we wanted our life to look like in five years. And we listed, what would we be driving? Where would we be living? What type of home would we live in? What type of vacations would we take? How many would we take? Where would we go? What kind of toys would we have? How would we spend our time? All those things we wrote out and I built based on my financial planning background, I built a five year plan to be completely and totally financially independent.
Now back then I didn’t even know what that really truly looked or felt like, but I knew it sounded awfully darn good. And so I identified a couple of key things. I said at the end of five years I want to have $30,000 a month of residual rental income coming in. And I want to have a net worth of $2 million. And I felt that if I had a net worth of $2 million and I had 30,000 in residuals coming in, that I’d be financially independent. I’d never have to do another deal as long as I lived. And that is what kept us working for that five year period.
Mike: Talk about your financial background because I think where a lot of real estate investors fail is they have a plan, it’s just in their head, but it’s not as thought out as what a traditional financial planner would do. They kind of lay out short term goals, and here’s how you get there, and really think about it. It’s not rocket science but just think about it.
Tom: No. It’s not.
Mike: And I think a lot of real estate investors too don’t think about financial goals. I know that sounds crazy but I don’t really think of… they think about the units. “Well I want to have 20 houses,” well what does that mean? That doesn’t mean anything. Maybe talk about how your background helped you there, maybe how others could learn from that.
Tom: It really helped us because I thought differently about planning. And you’re right, I find that real estate investors don’t… they don’t have a clue how to build an effective plan to get them to financial freedom. I teach at our local club here in Houston, I actually teach a class, a two-day class on that very subject. And it’s not a class, it’s not even something that people say, “Gosh, can I get the DVD on that?” I’m not pitching nothing because it’s not something I can DVD. It’s a workshop where at the end of the day when everybody walks out, they walk out with their five year plan, but it’s not something I’ve taught from the stage.
I merely facilitate the planning. I tell them, “Okay, now this is what you have to do and you have to plug in your own life and your own numbers, but this is how you do it.” And it literally takes us 16 hours to get through it. Over a two-day period. It is not something that you can just, on an airplane, take a piece of paper and write down I want these five things out of my life. That’s not what I’m talking about.
Mike: Yeah, I think traditional kind of financial planning, it’s a series of stepping stones that you can build from. And I think a lot of real estate investors…
Tom: [inaudible 00:15:59] by the way start at the end.
Mike: The end in mind right?
Tom: Yes. It starts with the end goal. You’ve got to understand what you want your life, I call it your desired lifestyle, what you want your desired lifestyle to be at the end of whatever period you’re planning. We’ll just use 60 months for example, which is what I use. At the end of 60 months I want my life to look like this, and we had pictures. We had a four foot by eight foot whiteboard on the wall with the pictures of what we wanted our life to look like with a timeline and dates, and the achieved goals, move to a different spot on the board. It was a very thought out, a very methodical deal. The bottom line is we hit one of those two goals within 48 months, and the other one we had hit by 60 months.
Mike: That’s fantastic.
Tom: And we’ve just grown it from there.
Mike: Sure, sure. So Tom, for those that are listening today, let’s talk about some actionable things that they can do, because I think some people that were in a situation like yours, where they were kind of wiped out financially didn’t have any money, they would tend to use an excuse, “Well I can’t do that because I don’t have any money, and nobody’s going to give me any money.” You hear a lot of the excuses, don’t have the time for that, all those things. And I’m not here to rag on anybody, I’m here to motivate people. So talk about some actionable steps that people can do towards building a profitable rental portfolio.
Tom: Well yeah. I mean if that excuse was valid, I wouldn’t have any rentals.
Mike: Can you share with us your… I know you talked a little bit early before we started with your portfolio. Can you share what your portfolio looks like now? Just roughly?
Tom: Sure. As far as single family homes I think we probably have 50 to 70 somewhere in there. I don’t really know how many. I closed on eight last week, so I don’t keep track. But we probably have 50 to 70 single family homes, probably another 300 to 350 apartment units, a couple of self storage facilities, a couple office buildings, a couple of other commercial properties as well.
Mike: And all that in about seven years. That’s fantastic.
Tom: Yeah, yeah. We went from 28 units to 325 units in 22 months. That was our biggest growth phase was from December 2010 for the next 22 months almost 2 years towards the end of 2012. We’ve grown from 28 to 325. And that was a function of I’ve gotten my groove, I learned what was going on, I learned how to raise money which is how we got on that topic. I didn’t have any money, so how can I go out and buy real estate? I was broke, I was bankrupt, not broke, I was bankrupt. So how do you go out and buy real estate if you don’t have money?
Well the good news is even though yes you have to have money to buy real estate, it doesn’t have to be yours, and it doesn’t have to be the bank’s, and it doesn’t have to be hard money lenders, although many of my friends are lenders. I’m now a hard money lender myself. You just have to find people that have money and you have to show them that you know what you’re doing and you have a good deal. And show them how safe that investment with you will be. I’ve raised just today about $250,000 in hard money or in private money. A quarter million dollars today that I’ll use to go buy more rental properties. And every time I raise a dollar I use it to go buy more rental properties.
Mike: Yeah. That’s great. Well Tom what are people that are listening, they’re inspired by your story and they just are not real clear where do they go from here. Can you talk about how to how to get started whether that’s mindset, or planning or whatever it might be?
Tom: Well, there’s a few keys. First of all, mindset. I mean yes, obviously you’ve got to get your mind right and you’ve got to get all the negativity out of your life and you’ve got to get around positive people. You’ve got to read positive things, you’ve got to listen to positive things. That’s just a given in any business environment. But beyond that, I think you also have to rub shoulders with and connect with not necessarily… well, you’ve got to start finding people that are where you want to be. And you’ve got to get around those people. And I did that very early on.
I started going to all the local REIA groups and I became a member of all of them in Houston Texas, which is our closest metroplex. And I would just stand back, nobody knew me from Adam at the time, I’d stand back and watch who are the ones that are talkers and who are the ones that are doers? And I’d go up to the doers and say, “You don’t know me from Adam, but I would love to get to know you and buy you a lunch. I know you’ve got to eat. I’ll come to wherever you do that and I’d love to buy you a lunch just pick your brain while you’re eating.”
And I was amazed how many people were like, “Heck yeah, I’d do that. You don’t even have to buy me lunch. I’ve got to buy a lunch every day anyway. You want to come to me? Sure, I’ll sit down with you.” And I mean big, big names in real estate. Others that I thought were big names until I sat down with them and then realized their name was bigger than they really were.
It was a weeding mechanism. I wanted to find a few people that I could look up to, even if from afar that I could look up to in the sense of a business anyway, and say some day I’m going to catch them, someday I’m going to have a business as good as theirs. And for me I love… I’m a competitive guy, and these people didn’t even know I was competing with them. But it was something I want to get around them, learn from them and then try to do as well as they were doing.
Mike: Yeah. I think there’s something that a lot of successful real estate investors have. Not everybody of course, but there’s something in a lot of folks that it’s kind of a lonely business. I say this all time on the show, it’s a lonely business and people inherently want to teach others. And some of that might be ego, it kind of helps validate what they’ve done if they can rinse and repeat and help somebody else do that. I don’t know how to describe it other than that, but there’s something there.
Tom: And I think both of what you said is true. I love to teach, even in my previous business I did a lot of teaching and public speaking. And it’s just something I thoroughly enjoy. But at the same time I think it does validate also that all the hard work that I put in then I do know something, I figured something out.
Mike: Yeah that’s great. There’s a lot to be said for what you said, just networking and I did the same thing when I started. There wasn’t meeting in town that I wasn’t going to, and I think a lot of folks assume that they go to a meeting. And it’s not like you’re going to walk in and say to somebody, “Well I’m looking for deals.” And they say, “Well I have a deal.” “Okay. Well let’s sign a contract right now.” It doesn’t work that way. It’s this kind of a slow drip effect of meeting people and networking and just being in the right place at the right time when things do happen.
Tom: Well, yes and to this day I still go to anywhere from 8 to 12 networking events a month in Houston, Texas. And I don’t have to anymore, but I do it because I know how much I have gotten from that over all these years. And it’s just a habit I can’t break. I don’t enjoy it. I’m not that outgoing guy that just loves to go mingle. I don’t do it for the social aspects of it, believe me, I’d much rather be on a shooting range with my ear muffs on. But I know how much that networking has done for my income and my net worth over the years, and it’s hard to quit doing something when it works so well.
Mike: Yeah and the interesting thing is that you’re always one handshake away from some opportunity you never saw coming to you. I mean you just… things just happen and they just tend to, I don’t know how to explain it. They say, I’m going to screw this quote up for sure, but luck is where hard work and opportunity meet. And it’s true.
Tom: It’s totally true.
Mike: You just happen to be in the right place at the right time, you were hustling a little bit harder, you were going to a club a little bit earlier, or staying little bit later, or whatever it might be where that opportunity comes up. And people say you’re lucky, but you worked a little bit harder than they did maybe.
Tom: Yeah. No question about it, no question.
Mike: Well, so Tom, let’s say in terms of helping other people here, let’s try to get a couple more takeaways people can use. So one is just get in their head right, being around people that are successful now and trying to network and meet others and learn from others. And then on the financial side where a lot of people have problems, I know you’ve had a lot of success with raising money. Maybe you could give some tips to people just early on, about how they can get that piece of the puzzle out of the way.
Tom: Well, and again, man I hate to sound like a broken record, but that goes back to networking too. All the money that I’ve raised, and I don’t know if I shared with you earlier, I’ve probably raised between 11 and $14 million in private funds to fund the deals that I’ve done. I’ve never used a bank loan and I’ve never used a hard money lender. Everything I’ve done has been through private funds. And I’ve raised it all through networking.
I’ve raised every bit of it through networking. A lot of it came from third party administrators of IRAs. Quest IRA in Texas is a phenomenal one, there are others around the country. The Mid-Atlantic over in Baltimore area, in Ohio there’s one called Equity Trust. But just look for third party administrators to self direction, or self-directed IRAs and any place you can get in with folks that have IRA money or if you can teach people about self direction.
Another thing if you’re going to raise money, become an expert in private money. And one of the first things I would say about becoming an expert at private money is figure out, where is all the money? If you look at the wealth of this country, the bulk of it is in qualified accounts. Either IRAs, 401(s)s, those types of things. So learn how to tap into the trillions and trillions and trillions of dollars there, and that’s a phenomenal asset.
The other good place that I’ve raised money and probably the second most I’ve raised is at the local REIA clubs. A lot of people, I say this all the time, a lot of people will come to a real estate club because they like the idea of being a real estate investor, until they meet actual real estate investors. And then they find out that it’s work, and then they hear a tenant’s story, or they hear a contractor story from a flipper. And all of a sudden this person that thought that it was just a great idea to become a real estate investor, because they have money to invest, all of a sudden they realize maybe being a real estate investor isn’t for me after all. Those are the people that you want to meet.
So if you’re looking to raise money go to your local REIA club and try to meet the newest people in the room, because 80% of those new people at the club won’t ever be back. But a lot of them have money to invest. And they already know the benefits of investing in real estate. So you don’t have to convince them that real estate is good investment. All you have to convince them is that investing in real estate is great as long as they go through you.
Mike: Yeah, right, right. Yeah I’m definitely not an expert in raising private money, but I know a lot people that are. And one thing that I know is I’ve met some people that have access to a lot of money. And they want… they are real estate investing and they know it’s hard work. The thing is they can’t apply it all. If you find somebody that has a million dollars, two million dollars, well they may be flipping houses too, but they do six a year. So they need to park that other money somewhere else. So they may do both. So yeah, absolutely.
Tom: Absolutely. This lady I talked to today, I raised $150,000 from her. She is an active real estate investor, but she cannot deploy all of her money, you’re absolutely right. That was a prime example.
Mike: Yeah. Well Tom, we’ve got just a couple of minutes left here and I really appreciate you sharing all this with us. Any kind of words of wisdom you want to share, or kind of summarize what you’ve said here to folks that are listening that are saying, “Tom’s inspired me today. Where do I go now?”
Tom: Well, we’ve talked about a couple of things, but we never really did talk about how to build a profitable rental portfolio. I think we’ve tried to lay the foundation and that is getting the mind set right and getting the money found to build that rental portfolio.
Getting around successful people is probably the key for me. I still do it to this day. If you calculate the average income of the three people you hang around with most, I guarantee that’s about your income, give or take 5%. So hang around with people that have a higher income that you currently do, and if your friends don’t fit that maybe you need some extra friends. And maybe you need to wean off a little bit from the ones you currently have, give them a little bit less of your time.
When I used and put that practice into play, I only hang around with millionaires, I found three millionaires that I can hang around with, and fit in with, even though I wasn’t close to their playing field. It changed everything because I started seeing these people are just like me. These people aren’t any smarter than me, they’re not any harder workers than me, and all those things changed my thinking primarily because they changed my belief system.
And I think you have to change your belief system. When you look at your desired lifestyle five years out, you better believe that you can achieve it. Because if you don’t believe you can achieve it, you’ll never do the hard work to achieve it because it’s too hard and the sacrifice is too high.
Mike: Absolutely.
Tom: But I can swear to you it’s worth it.
Mike: Yeah, yeah. Awesome Tom. Well, hey thanks for your time today. If folks want to learn more about you or your club, how will they get a hold of you? How will they find out more?
Tom: Sure. Our website for the wealth club is www.thewealthclub.org. Real easy and yeah, that’s a good start. I don’t even have a website for most of my other businesses, it’s word of mouth and networking. That’s how I’ve built them. I’m not a very computer literate person. So word of mouth, networking and reputation.
Mike: Fantastic. Well, Tom we’ll add a link for your club down below for those that want to learn more about it, or if they happen to be in Houston, maybe stop by for a meeting. I know you have a lot of online resources too on your site, and I also know from everything you told me that you’re not the one putting it out there.
Tom: That is correct too. That is correct. Thank you very much for inviting me on.
Mike: Sure. Sure and thanks for sharing the message one more time. We really do, on this show and with FlipNerd, want to help people take financial control of their lives. And I think even though I’ve rehabbed a lot of houses and done a lot of wholesaling and stuff like that it was always with the goal of building a rental portfolio. And I think if you’re not building hard assets, like rental properties to help you build wealth over time, you’re missing out. So hopefully this show inspired some of you out there and definitely thank you for sharing your story with us Tom.
Tom: Absolutely. Thank you.
Mike: All right. Have a great day my friend.
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