For those that have built a rental portfolio, they understand the power of rentals. While there can be some challenges with rentals…the wealth building, cash generating and tax benefits are incredible. Kathy Fettke of the Real Wealth Network joins us today to talk about how to retire rich with rentals. If you’d like to better understand the power of building a rental property portfolio (small or large), don’t miss this episode of the FlipNerd.com Expert Interview Show!
Mike: Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting expert interview where you learn to be successful real estate investing experts and entrepreneurs. Today I’m joined by my friend Kathy Fettke. She’s an active real estate investor, a coach, a realtor, a former mortgage broker and a number of other things, but Kathy specializes in helping others build up rental portfolios to generate passive income and build wealth. She’s also fellow podcaster through her show The Real Wealth Show and today she is joining us to talk about How To Retire Rich With Rentals. Sounds good so stay tuned. Before we get started with Kathy though, let’s take a moment to recognize our featured sponsors.
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Please note the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
Hey Kathy, welcome back to the show.
Kathy: Thank you.
Mike: Yeah great to see you as always.
Kathy: Good to be here I’m glad my Internet’s working this time.
Mike: Yeah, yeah. That’s an inside joke for those that don’t know what we’re talking about but that’s okay. So Kathy, welcome back. How’s everything going?
Kathy: Well, kind coming back to the inside joke let’s just make it public. My husband and I bought a house and we should probably know things . . . know better but it turns out it had a serious foundational issues, so we’re kind of homeless right now so I’m the real estate investor who’s homeless. But we’ve been . . .
Mike: Actually, you own a bunch of houses but you can’t live in them, right?
Kathy: Can’t live in them. Someone else does. So fortunately we have friends and my company is called Real Wealth Network and the idea really of real wealth has always been having the time and the money to live life the way you want with the people you want, and really it comes down to your network, and this last month has been such an example of how people have just come in and said, come stay with us, or go ahead and house sit, and we’ll take care of you, and so we’ve been staying in beautiful mansions in Malibu that are overlooking the ocean and I have the Internet, so I can be here today.
Mike: Awesome. Awesome. It’s kind of funny I have a friend that’s been on the show before and he owns tons of apartments. I don’t even know how many but well over a thousand. And he rents, he doesn’t own anything. He’s like I just I want to just have the flexibility to . . . he has multiple homes that he rents, multiple parts of the country, but just the flexibility of not having to necessarily own.
Kathy: Listen, we have been renting for that very reason for four years because we live in Malibu and it’s expensive here and so we could live waterfront for a quarter of what it would cost to own or a tenth of what it would cost to own that same place and so my husband still recovering from what was four, five years of watching other people take care of the property. So he’s still not sure why we actually bought a home that now have to take care of. But my thoughts I will explain why because I . . . rents are going to be going up so it’s great as a landlord, but if you are the one who has to pay more rent every month whereas you could be in a fixed payment, I’m starting to question yeah, so we bought.
Mike: Yeah, yeah. And the truth is it’s one thing to live in Malibu, but your property you’re not buying rental properties in Malibu. You’re buying them in other parts of the country that are much better investments, if you will, right? That cash flow and everything, yes.
Kathy: If you bought a rental property in Malibu, you would have negative cash flow most likely although, just in our last event . . . we do events every month and somebody told me from LA, why have rental properties and they do cash flow in the Los Angeles area and I said, “Well how can that be?” And he said, “Well, they don’t have loans.” I said, “Okay, well that that’s good if you have a $2 million property that sure is heck better cash flow without a loan. But what I had to explain to him was, the amount of cash flow you’re getting is so minimal compared to what you would get on $2 million worth of property elsewhere. Basically he’d have at least $20,000 a month and still today you can get those kind of returns and I can guarantee you he’s not getting that in Los Angeles. So it can be very confusing I think sometimes for people to think that a property is cash flowing when they’re not really looking at the value of property versus income it can produce. They’re just looking at well it’s not a negative, but that’s not the way to look at it.
Mike: Well, you’re not considering leverage using somebody else’s money or bank money, yeah.
Kathy: Right. Even without leverage what they’re not looking at is the dead equity sitting in that property doing nothing. So if it’s, again if it’s a $2 million dollar property that’s let’s just say it’s bringing in and this is fairly typical, let’s say it’s bringing in $5,000 a month rent, you could be getting 20,000 if you spread that out. And even more importantly you’d be diversified. So if that one property in an expensive area is vacant, you’re going to feel it because you have no income. But if you were to spread that out and buy several properties, and in this case you could probably buy 20, and if you have a vacancy, you don’t even care.
Mike: Yeah. Yeah, absolutely. Well, Kathy, before we get to much for those who don’t know you, tell us more about you and how you got into this business.
Kathy: Oh sure. It was super by accident. Actually it was somewhat tragic and it’s in my book “Retire Rich with Rentals” and it turned out great so that’s the good news. About 15 years ago or 14 years ago my husband was diagnosed with melanoma and he was misdiagnosed and told he had six months to live.
Mike: Oh, my goodness.
Kathy: They thought it had spread to his liver. I had been a news reporter and anchor woman in the San Francisco Bay Area and wanted to stay home, and so I quit my job there. I didn’t want to chase fires and murderers and so I stayed home to raise our children. And I kind of had been out of the work world for a while though, I still had a radio show. I was still involved in the media at that time but I wasn’t really making much money at it. It was just a hobby and a way to stay connected. But as much as I didn’t want to believe the doctor and I didn’t. I never thought my husband could die from a freckle. He’s the kind that jumps out of helicopters and bungee jumps off half dome and Golden Gate Bridges and stuff like that, so I just couldn’t buy into the fact that a freckle would take him down. But at the same time I knew that he needed the time. He needed time to take care of himself and heal and get better. And I needed to figure out how to make money.
So I used my radio show which was called The Real World Show, and I started interviewing people who were wealthy and quite honestly up until then I had always had the philosophy of do what you love and don’t worry about money and I still actually do have that philosophy but at the same time I didn’t know, I didn’t understand money. I didn’t understand investing and I didn’t understand anything my financial planners were telling me, and I didn’t care. It didn’t make sense. And so I started to just interview real world people, and at the time also brought in a sponsor and that was back in 2002 and so it was really the mortgage companies that have all the money because that’s when with the liar loans you could make 10 to $30,000 pushing a little paper on one loan. So they had big dollars and so I had a sponsor on it and I was very lucky that, that sponsor was a real estate investor and a successful one and had taught lots of people.
So he was he taught me on the show and our audience how to use leverage, how to use loans to acquire income property and cash flow. And so every week I’d interview his clients, his mortgage clients and find out . . . or sometimes these 30 year olds and even younger were literally retired because of the cash flow they generated from the properties they purchased. It was just a totally new concept to me, and as my audience learned, and as I learned, we just, I, all the sudden, everyone wanted a loan and so I got my license, and I became a mortgage broker and I was probably one of the busiest mortgage brokers because people wanted to do it, and that’s how I got started.
Mike: Okay, awesome. And then tell us a little bit now about your network for those who don’t know.
Kathy: Yeah. Well, so then after that I became known as an expert in the industry as I was becoming one, and so I started to speak at different real estate clubs and I would just sit at the back of the room going something doesn’t feel right. These people are selling products, it just sounds like a lot of work, and I’m not going be knocking on doors, and trying to sit down with a homeowner and negotiate a way to get their home from them. I don’t know, the whole . . . I just didn’t get it. And then I was lucky enough to have some experts who guided me, the experts on our show who would say, “Go talk to that speaker and find out if they’ve actually ever done this.” There’s only 20,000 other boot camp but have they actually ever done what they’re saying? And when I did I found out when we started asking questions, some of these speakers would literally escort us out of the room because they didn’t want us to ask those kinds of questions and reveal who they really were.
So I saw a very early on, that real estate investment groups for the most part were bringing in speakers, who were teaching the wrong thing, and not helping people really build wealth over the long term in real estate and certainly not passively. And so I just created an organization that did that. I said I don’t want professional speakers. I don’t want anyone in a business suit in my room. I want people that look like they just came off the construction site. I want that Millionaire Next Door that you can’t tell they’re millionaire because they wore a baseball hat and a shirt, t-shirt and then driving old truck but they’re wealthier than anyone because they’ve got this passive income and so we started bringing in those kind of speakers, just like you interviewing successful people and that’s how Real World Network was started. And so now, we have 16,000 members all around the world. I’m going to Australia tomorrow. I’m meeting with investors there who want to buy US property because they see this incredible opportunity still.
We were so many foreigners and I still have to shake people here in the US to see the opportunity, they can’t see it. They’re too close to it but foreigners certainly can.
Mike: Yeah. Talk about that a little bit. Talk about how different it is here in the US. We take it for granted but how different is it the people that look in Australia for example. Even from California to invest in the Midwest, right? They really can’t see that opportunity because they’re just so far in the weeds. Talk about that, that kind of phenomenon.
Kathy: Well, the biggest difference and it comes back to my background and my foray into real estate which was through the mortgage world. First and foremost, 30 year fixed mortgages don’t exist anywhere else. We take them for granted here, because we’ve always heard about them but it makes zero financial sense to lend somebody money for 30 years at the same rate. Any smart bank would say that’s crazy. Interest rates go up and down. There’s inflation. It’s not a good business plan. Wonderful for the borrower, so you just can’t get it. And our Australian investors would do anything to be able to qualify for US financing but they can’t.
And so first and foremost, get as many 30 year fixed rate mortgages as you possibly can because right off the bat, you’re going to make money as long as you buy the right property and have the right management in place. You are fixing your payment for three decades. So stop and think about that for a minute. This is so important. I get super passionate because I just want to wake people up to this. Imagine 10 years from now, 15, 20 years from now. What that payment is going to feel like? Our government has created trillions of dollars out of thin air and poured it into the economy. This is money magic that has never been tested before, and when you throw that much money into an economy without working for it, just creating it, you’ve devalued the money that’s already there, and you’ve devalued the dollar. So our paper money gets less valuable while hard assets become more valuable.
Especially when there’s not enough of them and we have not built enough homes to keep up with demand. So not much supply of housing, but lots of demand and a diminishing value of the dollar, but you can get a 30 year fixed rate mortgage at under 5% and lock that in for 30 years while rents are going up every year?
Mike: It’s pretty incredible, yeah, and just to clarify for those that are listening that you’re talking about, typically you get up to 10 loans through Fannie and Freddie to get conventional type financing for your first 10 houses, right? So once you get beyond that it’s just a different game but for the first 10 houses is what you’re referring to, right?
Kathy: Absolutely and if you have a spouse that works, and can qualify . . . I mean that the houses that we help investors get in, we want them under $150,000 ideally, around $100,000 would be our goal right now. That’s going to change. Prices are going up and you’re not going to find these deals much longer but right now you can. So a mortgage on that is going to be 80,000 and the payment is going to be maybe under $400 a month and you can qualify for that.
When you’re going to a high priced market, you might have a hard time qualifying for $500,000 income property. And you might have a hard time making that payment if the property is vacant. But when you’ve got a $400 mortgage, you can probably qualify for that, and you only have to put $20,000, about $20,000 down on the property. You can save for that, and make that payment and so again coming back to the Australians, they would do anything to get US financing, so that that first.
Second is, there are huge taxes when you buy and sell real estate in other countries and Australia for sure. They just can’t believe the tax benefits that we get in the US and that you don’t pay massive taxes when you buy and sell. They’re shocked. So when they come up here, and they see that difference . . . and then again there big one especially for Australians is the price of their real estate is very similar to San Francisco and New York markets. And so, they’re not getting cash flow there.
When they see that they can come to a major world class city like Chicago. Chicago the third largest city in the US and you can still buy properties for under $150,000 just a few minutes outside of town. They just don’t believe it. They just don’t exist there, and so again, we maybe have a preconceived notion about some of the cities in the US. You might think Pittsburgh is still dirty, and you might think Cleveland is still toxic, the mistake on the lake or you might think that there’s nothing happening in Kansas or Missouri and that’s . . . you got to follow the data and not follow the bad reputation of the past.
Really find out what’s happening and where jobs are headed and what cities are redeveloping and how you can get in, around all of that before the world finds out and take advantage.
Mike: Yeah, yeah. That’s great. Well Kathy, let’s talk about of the principles that you teach people on how to retire rich.
Mike: I’ll let you take it from here, where do we go? Where do we start?
Kathy: Well, you know, I went over a little bit. One is really understanding the use of leverage. If you buy a $100,000 house and again let’s just throw out a city there. Let’s just say Pittsburgh and you’re going to probably spend more like 50,000 but let’s say it’s $100,000 house in a city that is improving itself, that’s investing self and there’s job growth and there’s population growth. You get to put $20,000 in to acquire this investment that’s worth $100,000. Now you’ve borrowed the money to acquire this asset. You’ve borrowed 80% of what it takes to acquire that asset, and still get monthly cash flow.
So now you’ve got money coming in every month that you could either put towards paying off the loan, or you could put aside to buy more real estate that’s up to you. Then in addition to that, you get tax benefits that are incredible that make the cash flow even better and bring down what you pay to the IRS. And then over time, you have this thing paid off that will keep paying you through your retirement, and even after you pass away it can go to your kids, where it’s stepped up to market value, and they don’t have to pay those capital gains taxes on it. So there’s just the idea of buying an asset with somebody else’s money having somebody else pay off that money you borrowed, and you get deal in the end. And so you put 20,000 into maybe buying this $100,000 property and let’s say it just went up a couple percent every year in value, you’re getting . . . let’s just say 2% okay? Two percent of $100,000 property is $2,000, right?
I think we can all agree that property is going to probably go up in value 2%. It’s been going up 6 to 9% percent or more and it will certainly continue with inflation to increase in value. Now if you put $20,000 into that property but you’re gaining 2,000 just in the appreciation because you’re getting it on the whole asset, not just the money you put into it. That’s a 10% return because . . . right so. So the use of the leverage is really what can accelerate your wealth building. I’m going to just keep going . . .
Mike: Yeah. Keep going, yeah.
Kathy: But we have a situation where there are a lot of baby boomers who are not ready to retire yet they’re at retirement age and they’re freaking out and they should be. So one of the ways that I’ve been helping a lot of these baby boomers is showing them how they can accelerate their retirement portfolio through leverage. And one lady we just got a beautiful testimonial from her on our website. It’s really cool, basically she said, we’re in our 50s, my husband’s a dentist, they’re doing really well, they have like six kids, sending them all to college. So they’re kind of in a place where they’re not where they thought they’d be in their 50s given how much money they’ve made over the years. We find a way to spend it don’t we?
Mike: Yeah, absolutely.
Kathy: So they went to their financial planner, and the financial planner said well, based on your age, in your 50s, we’re going to put you in some very conservative . . . I don’t know what it was but annuities, I think. And they put all the numbers together, basically was like, “Okay, by the time you’re 90, you should be able to retire on like $200,000. It was just ridiculous. It wasn’t going to work. And so she just left that meeting very depressed went to the gym, talked to one of her friends at the gym and they said, “Oh, you got to talk to Kathy of Real Wealth Network and they hooked us up and we sat down with her, and this is the plan we gave her. We said, “Okay $250,000, that gives you the ability to buy 10 houses like we said he’s got a good job, they can qualify for these 10 mortgages and so $20,000 on each. 100,000 properties about 200 to 250 with closing costs.
Now once you have 10 properties and our goal will be that you cash flow, even with all that financing, at least $300 month on each property after all expenses of reserve maintenance, and vacancy reserves, for maintenance and vacancy and taxes . . .
Mike: Yeah, property management, all that stuff.
Kathy: All the stuff, property management, after all that, you should still be cash flowing about $300 a month when it’s still leveraged to these properties. And you go 10 of them, $300 a month times 10 is $3,000 a month cash flow. $3,000 over a year is $36,000 cash flow from this $250,000 that you’ve invested. Now the loan on the first property is $80,000, right? $100,000 property, $80,000 loan. If you’re getting $36,000 a month cash flow, how quickly are you going to be able to pay off that first mortgage if you take all the cash flow and do that? A little over two years, right?
Mike: Right. Right.
Kathy: So now they own a home free and clear, totally based on leverage, and cash flow and now they’ve got more money they can they can take to pay off their second home, and then third home, and the fourth home until they have all 10 homes paid off in less than 15 years more like 12 years.
Mike: Yeah, that’s awesome.
Kathy: Now by the time they’re 65, they’re in their 50s, by the time they’re in their 65, they’re going to own ten homes free and clear. Again now, that’s 10 homes and 100,000. Now they have a million dollars, that 250,000 has turned into a million. And that million dollar portfolio is cash flowing $10,000 a month. That’s not what their financial planner gave them.
Mike: Of course not, of course not. They don’t know anything about real estate in and real estate is a bad place to be according to them right?
Kathy: They may or may not believe that, but they don’t make money from it.
Mike: Right, right.
Kathy: So it’s not in their best interest to promote it.
Mike: Yeah, yeah. So when you advise people about buying houses in other parts of the country, do you advise that they if they’re going to buy 10 houses they stick that all in the one market?
Kathy: I don’t advise that.
Mike: Or geographic market. Yeah.
Kathy: Yeah, a lot of people do because they just like it all . . . they like to be able to go visit it, and be with one property manager. I prefer diversification and I think that’s one of the great benefits of buying low cost housing. When I say that I’m not saying . . . I’m just saying really affordable properties, 100,000. I still want us to be in good neighborhoods, good schools, a place that a tenants feels safe, and are happy and want to stay long term.
So we stay, you and I talked about that friend of yours that’s buying in higher crime areas. I’ve seen . . . yeah, that’s a that’s a real and I do not recommend it to the faint of heart or anyone who wants hands-free investing because there are parts of this country where you can get a smoking good deal on the front end, but if you’ve got if it’s a dangerous place and your tenants aren’t safe, or if the house is vacant, which they go vacant. People move out, and people move in, only they’re not paying. They’re just throwing parties in your property and stealing everything in there, so they can sell it and get high for the day. And then you go to fix it and all that stuff gets stolen again. Listen, I’ve heard all kinds of horror stories so you stay out of those neighborhoods.
Mike: I understand.
Kathy: And for the plan I’m talking about for the person who’s really trying to accelerate their retirement, they need to be in good neighborhoods and any areas where there’s job growth, but jobs that are there to stay.
Mike: Yeah. Yeah. So talk about the role of property management because obviously that’s linchpin in this whole thing, right, is good property management. And maybe talk about, obviously, not just the importance of it, but maybe how it’s evolved over the last couple years. I think with technology in terms of being able to see a property without being there, some of the reporting and stuff that it’s available now but just maybe start by talking about the importance of it.
Kathy: Well the importance of it is, the first thing that people say when they see my book cover, “Retire Rich With Real Estate” is that sound good, everybody knows real estate’s the winner but nobody . . . there’s very few people that either know how to do it, or think it’s too hard. So the old belief that I don’t want to fix toilets, I don’t want calls in the middle of the night. That’s what keeps most people out of this business, and that’s too bad, because you don’t have to do those things. Believe me I am not fixing toilets.
Mike: Yeah, me either.
Kathy: I am not getting called. Right. No. You’ve got to treat your real estate like a business, and you’ve got to hire out the things that someone else is better at. And I can guarantee you someone else is better at fixing houses than I am. So a good property manager will, first of all, know the local laws. Too many new real estate investors do not understand the laws when it comes to landlording, right. I heard a guy who actually went into the house to check it out without even telling the tenants, just walked in. There’s rules.
A property manager will know that and they need to be licensed. That’s key, make sure you see their license and make sure you see a copy of their insurance. Very, very important to make sure that they’re legitimate, because let me tell you property managers can rip you off just as bad as anybody.
Mike: For sure, yeah.
Kathy: We’ve seen all kinds of things. We’ve seen property managers charge for repairs that were never done. We’ve seen them spend the security deposit because they did not know how to manage their business and needed to pay payroll so they just borrow a little . . . yeah, I mean all kinds of things. Make sure they’re licensed because the chances of them doing that would be much slimmer.
That is again one of the reasons I created Real Wealth Network was to help our investors manage these property managers. So the way that we’re doing that now because we’ve seen property management improve but it’s not totally there yet. There’s definitely systems now where you can log into a portal and see what’s happening and what’s being spent and so forth. You certainly can get photos and have inspectors come and check that the work was truly done the way that you were charged for. Never send money in advance, definitely don’t do that.
But even so there some of the things that our company has put in place when vetting, and referring people to property managers is regular audits. Because we need to know a lot of times these are mom and pop shops and they don’t know how to grow, and they might hire more than they can afford. And then they do get cash flows short. And then all over sudden they’re in a position where, well the rent came in and do I pay it to the landlord, or do I pay it to our overhead that we . . . and then they start to get behind and then they implode and go out of business.
Mike: Wow, yeah.
Kathy: We’ve seen it a lot so we’re requiring regular audits. We have just hired a fantastic Six Sigma guy he knows . . . he goes in, he’s helping all these companies improve. There’s a lot of property managers now that have bought franchises, and so they’re getting help. I like those because they’re getting help from above, so to speak, to make sure their systems are in place and they have answers to questions.
The mom and pop scare me a little bit because they . . . unless they’re in a franchise like that, and unless they’ve been doing it forever. But again, we have that referral list of good property managers and really happy to share that with you.
Mike: Yeah. And a great part about the way your network is set up from what I know is if you’re buying properties in . . . let’s say in Cleveland or Kansas City anywhere you operate at, then part of people in your network are using the same property manager. So you are getting some leverage by using the same property management company?
Mike: And then of course if that person screws one person effectively, they screw everybody, right. And so news travels fast and so you’re able to kind of become important to them.
Kathy: We’re very important to them. We can make or break companies and I don’t take that lightly. If we have a very large number of investors with one property manager, and that one of our members is not taken care like you said, we’ll take everybody out, and we’ll move into a different property management company. So they listen and we are there to make sure that our members are getting taken care of.
Mike: Yeah, yeah, Awesome. Well Kathy, where can folks learn more about you, and I want to put a link to your book down below as well, but just tell us where and where they can go if they want to learn more about you or about your network.
Kathy: Okay. Yeah, well Real Wealth Network is the company, real as in real estate wealth, your money and network as in the experts we have and all the best cities, and that’s one of my greatest strengths and our company is really finding where these emerging markets are, because California is just tough to make numbers work. So we’ve had to become really good market timing experts. And so we know where we follow we know where the jobs are going and we share that with our members. All you have to do is join us. It’s free, RealWealthNetwork.com And then of course The Real Wealth Show on iTunes you can find us there too.
Mike: Yeah, well, I have links for that too.
Mike: Well, hey, thanks so much for joining us today. Great to see you again.
Kathy: Good to see you. Thank you so much.
Mike: And travel safe to Australia tomorrow.
Kathy: I will, first class, man. It’s the only way I do it these days.
Mike: There you go, there you go. Thanks, Kathy. Have a good day. We’ll see you.
Kathy: All right. You too.
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