The process of building your wealth is indeed a long and painstaking journey. To avoid trapping yourself in an endless rat race, you can take control of your financial future by putting money into real estate. Lauren Wells chats with Nathan Smith, a real estate investor and industry leader in creative financing and asset management. Nathan shares how he quit his job and began a career in real estate. He looks back on starting with single-family homes and eventually reaching financial independence at the age of 30. He breaks down tips and tricks on how aspiring real estate investors can jump-start their careers, his recommended three-year plan, and the importance of discipline and patience in winning in this highly profitable space.
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Securing A Bright Financial Future Through Real Estate Investing With Nathan Smith
I am joined by Nathan Smith, who is a real estate investor and industry leader in creative financing and asset management. He reached financial independence at the age of 30 and currently owns over 200 doors totaling approximately $24 million in assets. He has founded multiple real estate businesses, including Clearwater Capital Group, a real estate investment company that delivers dependable cashflow and appreciation, while also owning a property management company that managed over 1,000 units at the time of his exit. One of his passions is teaching others about the power of investing in real estate, and that’s why we’re here. what we want to do is to help educate and get other people started on their journey. Welcome, Nathan.
Thanks for having me. I love having high-level conversations about this stuff. It’s my passion, your passion, and hopefully, the audience’s passion. I hope we can provide some value to this episode.
You’ve done quite a bit. Reaching that financial independence at the age of 30, I feel that whenever people are googling what they want to do, “How do I get out of the rat race? How do I quit my job? How do I invest in real estate so I can do that?” You did it. Let’s dive into that. How did you get started, and at what age did you get started?
Early on, I was always bent towards entrepreneurship, and that morphed into a lot of small businesses growing up. In my opinion, wealth is built through a repeatable system. That started in college when I bought my first rental property. I was going to get my Doctorate at the University of Wisconsin and my dad helped me buy what’s known now as a house hack, where you buy a house. You live in a room and you rent out the other rooms to friends or to anybody else, but they were only friends at that time. Back then, it wasn’t called house hacking. It seemed to make sense. That’s where it started for me.
Did you get your Doctorate?
The amount of beer in Madison, Wisconsin is plentiful, but I still managed to make it to class a little bit and I did get my Doctorate. I practiced as a pharmacist full-time for about five years. Ever since then, I’ve been dabbling in and out. I still maintain my license to have that fallback and to be safe. I focus more on real estate now and being a dad and a husband. I did manage to make it through.
You graduated and had that house. At that point, you saw that work. You’re like, “I can make money off of this.” How did you grow your portfolio? I imagine, at your Doctorate, you’re only 24 or 25-ish. In five years, you will be in a good place. What steps did you take in what you invested in?
That first investment, I made a fair amount of mistakes on it. It just broke even. It wasn’t a great market. Madison, Wisconsin is a great market appreciation-wise and all that, but it’s a little tougher on the cashflow from a Midwest market. It’s more of a white-collar Midwest market. It’s nothing compared to California. I recalibrated and learned a lot during those first couple of years. I went back and invested in where I went to undergrad, which is a little town called Eau Claire, Wisconsin.
I started buying there because cashflow was so much higher, the price point was so cheap, and I started picking them off as quickly as possible. One of the big keys that I did that allowed me to scale so quickly is I kept living exactly like I was in grad school for the first couple of years after I graduated. My income went way up when I started working as a pharmacist but my lifestyle didn’t. I didn’t buy a car or a house. I lived like a college kid and kept buying these rental properties every quarter. I then figured out some more things, creative financing-wise and I ramped it up from there.
If anyone reading this episode and did not read the last episode before this, we talk that it is a big part of it. Something I’m hearing continually is keeping your lifestyle the same and not necessarily making more money to spend more money. If you want to get ahead, it’s okay to set that budget and use the extra funds to get yourself ahead. I have a couple of questions. Single-family homes, I’m assuming, are what you invested in?
Single and small multi is my bread and butter. I don’t buy single-families. My first one was a single-family, and then a duplex, then a single-family. It’s right in there, from 1 to 4 units.
That seems to be its own asset class. Why did you decide on that, and why that town? Did you just go for it? Did you have any hesitancy or fear around, “What if this doesn’t work?”
At that point in my life, there were very few markets I had intimate knowledge of. The key is you need to have some leg up in a market to give you that advantage over other people. If I want to go invest in Orlando, Florida, I can interview the best property managers. I can figure out who’s a good real estate agent. I can build a team down there, but I don’t have a competitive advantage. That is key if you’re investing somewhere.
Your competencies, everybody has them, are probably where you should invest. I knew that market because I had lived there for four years as an undergrad student. I was two years removed. I knew where kids like to live, and that’s what I started into. I did a lot of student housing right away. I was like, “I knew exactly where you wanted to live if you were going to school there.” What was the other part of the question? I’m blanking.The key to winning real estate is to invest where your core competencies lie. Click To Tweet
You got your Doctorate and you’re working. Any thoughts where you’re like, “Do I want to do this? Should I keep doing the pharmacy thing?”
Not really. Everybody has hesitancies, but what’s your alternative? I don’t think a lot of people think through this very well. My alternative was I worked at a Walgreens pharmacy, and I still do, which is not a glamorous job for 40 years of my life, 40 hours a week, and begging my boss to get vacations. I don’t think enough people do this. They have their job and they’re like, “This is how it is.” No. It doesn’t have to be that way.
If people would sit down and lay out the pros and the cons, it was a no-brainer. It’s like, “These investment rental properties that I’m doing might not be it, but I need to find something that makes it, so I don’t have to do this column over here. I want to move over to this column where I control my time.” If the rental properties didn’t work, but they did, I would’ve done something else. I think having that attitude is important.
You hit it right there, saying that there is a lot of a mindset that goes into it and laying out. You have to feel the pain or see the pain of 40 years of sitting at a desk. I don’t knock people if they’re okay with that. If you don’t mind that, it’s cool. For people who are looking to create something else for themselves and don’t want that, you have to get to a point where you feel the pain of doing that every day. As you said, asking for a vacation. You’re a dad now. You’ve been hit by this winter season. How many times has your kid been sick?
This is the third sickness we’re on right now.
Imagine not having that flexibility to be like, “I need to be home with my kids.” As you said, mapping out, “This may not be it, but this is going to give me some lesson learned to go on and take the next step to find whatever it is that does work.” Luckily, it worked out for you.
One thing I’ll say too, and this is maybe a little deeper, but you hit it on, is you need to be in that to realize the pain of that. What I did are two things. It gave me more cash, and it also rubbed my face in the job enough that I did not like going to work. What I would do is I would work full-time and I did what’s called a 7/70 shift. I’d work 70 hours in 7 days, then I’d have a week off. It was an overnight shift, but then I would pick up hours on my off. That’s me rubbing my face in my job, hating it, doing 60 hours a week, but it also gave me more cash to invest.
It’s two things. I hate my job and want to get out of it and more cash to invest in more rental properties. That definitely might not be for everybody because I burnt myself out after 3 or 4 years, but to your point, you need to develop that disdain for your situation. That is very important. Change doesn’t happen until we reach a certain point of uncomfortable or dislike for our current situation. I believe that.Change doesn’t happen until you reach a certain point of being uncomfortable or dislike for your current situation. Click To Tweet
That can apply to not only your job but your lifestyle and all the things. You have to reach a point where you’re like, “No more. I need to make changes,” or whatever. This is a perfect New Year’s episode. From an outside view, it looks like everything went super well. Talk to us about some of the things that went wrong in your first few years.
When any investor is starting off, especially in real estate, usually you’re limiting ability is cash and capital, whether it’s raising capital or funding your own deals. I was funding most of my own deals at the time. There have been a couple of points in my career where I’ve expanded too quickly and not had enough cash and reserves. That’s caused some stress in 6 to 8 months of me having to dial it back and figure things out.
Having those strong cash reserves and realizing that things are generally going to cost a little bit more than you think they are, we all have a bias. When we’re running an analysis on properties, we think the rents will be a little higher than they probably are and the renovations are going to cost a little less than they probably will.
Knowing those biases now has helped me out. As I said, that first property was in no way a slam-dunk whatsoever. We bought it for $275,000. I renovated the basement for $15,000. We held it for five years and I sold it for $325,000. Nothing great. It broke even cashflow-wise. That was a five-year crash course education. It wasn’t like I was rolling in money or anything like that. It was an education.
Honestly, in my first 3 or 4 years of investing, there wasn’t a lot of success reinforcing it. I only knew of the foundational principles of passive income, wealth, and debt paydown. I knew I was on the right path. I, for some reason, think things come in threes. Good things happen, and they happen in threes and bad things happen in threes.
If you own rental properties, you’re going to get punched in the mouth and it seems to be a combination punch. Usually, a furnace goes out at property X that’s going to cost $7,000 to replace. We have a roof leak at property Z that’s going to be a full replacement of the roof for $12,000 and there is a third thing. They seem to come in threes, but they only come in ones. Now, I’m happy because it’s like, “It’s only this $5,000 expense,” but I always set myself up because you’re going to get hit multiple times in the mouth sometimes, and it’s painful.
One other thing that was in your bio when I introduced you was about property management. How does that play into all this? Was that after, or was that your own property management from the rentals that you owned? Did you work for a company? What’s that like?
The company still exists now. It’s called Prosper Real Estate at ProsperPads.com. I have zero ownership of it anymore. If you guys want to check it out, that’s fine. I started off, and I had a mentor that was a few years older than me. He had reached financial independence by the age of 29 and he had 30 to 40 doors. I knew him from college. We hung out in the same circles and I knew who he was. He knew who I was, so it made sense to pay him. Eventually, a deal came across where it made sense to partner on it.
If you think about this from a logistical standpoint of LLCs and ownership, he has all his stuff. I have a little bit of my stuff and we have stuff we own together. If somebody is coming to us and be like, “How do you market that?” His name is Chase. You sasy, “Rent from Chase. Rent from both of us,” or the names of the different LLCs. We decided we needed to put an umbrella over the top from a marketing standpoint and say, “This is our property management company. It doesn’t matter what LLC owns the property. Rent from Prosper Pads.”
That’s how it came to be. The reason we grew it from there is we wanted to selfishly have more employees to manage our stuff. One of the benefits of having a property management company is if you manage other people’s assets, which we decided to do, I can employ a CPA full-time. If Chase and I maybe had 60 to 80 doors between us, it probably doesn’t make sense to have a full-time CPA on staff. If you’re doing another 400 doors for everybody else, the payroll is there to support that.
Maybe we could have an HVAC maintenance guy on staff that helps us out on our own property so we don’t have to call an HVAC company and pay market rates. Things like that were some of the driving factors. The other main benefit of managing units for other people is generally they let you know one of the first calls if they’re going to sell. We’ve been able to purchase a lot of assets from our owners because of that.
A couple of things that came up for me there is a good reminder for our audiences. Something that comes up with probably everyone we speak with is the idea of having a mentor or someone to help educate you. I think in this day’s Insta personality world, you have a lot of gurus which I would not consider mentors. As you said, you knew him from college. He was a few years ahead of you.
It’s important for people tuning in to realize that you can find people that aren’t necessarily a guru online that are in your area, which leads back to your other point. Let’s say I wanted to invest in Florida. I’m in California. I might have a competitive disadvantage because I’m not from Florida. What I would do personally is I’d probably reach out and partner with someone who was local to the area to learn all about that area or to invest in your area and be like, “I’m interested. Can I pick your brain?”
Another thing you mentioned was you did that partnership with him. Learning and having skin in the game is important for people to understand. You talked about your mentor, your partnership, and your start, but you have 200 doors now. How did you scale? That lends to your creative financing expertise. Talk to us about how you scaled the business and things that you would recommend people to look out for as bottlenecks that you came across when scaling. You spoke to that a little bit with the hiring employees and whatnot.
As far as personally scaling, that particular mentor was very good at seller financing. Generally, what would happen in a seller financing scenario, the most common one that I did anyways, is a bank would give me a first mortgage for 75% to 80%. A seller would lend me some of the down payment between 10% and 20% of the down payment on what’s called a 2nd mortgage and a 2nd position that you’re very familiar with.
It has its own set of terms and rules that you have to play by. You have to let the bank know that it’s happening, and all parties are very disclosed. This was much easier. I will tell your audience to do it when I was doing it hard from 2014 to 2017. Cashflow’s easier to come by. It’s much tougher to do now, but that eliminated the main bottleneck of all investors, which now I think, is a different bottleneck.
Back then, I could pull up the MLS and find five projects and they all met my metrics. We would pick which one we wanted to do. If your audience is reading and they’re somewhat new, they’re like, “No way is that possible,” but it was back then. The bottleneck was capital and that was the biggest thing. Even though I was a doctor making a very good income as a pharmacist, I probably had $60,000 a year left over to invest. At 20% down, I can only purchase $300,000 in real estate a year.
That doesn’t get you very far so you need to solve that problem. Whereas in this day’s market, I feel like the deals are very hard to come by and the capital seems very plentiful to me right now, which is slowly going to fade away over the next 12 to 18 months, but that seems to be the market we are in right now. If you have a good deal in this market, you can find the money. In hindsight, good deals back then were everywhere. It was money that was the problem to find. Does that make sense?
It leads me to ten more questions and thoughts on every season or life cycle that we go through in real estate and the market has its own pros, cons, and bottlenecks. We look back in 2008, 2009, and 2010, and I’m like, “Those people were able to buy a house overlooking the ocean for $500,000.” I live in Santa Barbara and that house is worth $5 million now. There’s no way.
Knowing what’s going on in the market, what the bottlenecks are, getting creative, and finding how to capitalize on what is available. Right now, it’s cash. How do you capitalize on that? How do you differentiate yourself to find deals which are not fun at all? Those are my thoughts on what you said, but in agreement there. Did you do a lot of seller financing?
That’s how it allowed me to scale. Instead of having $60,000 a year, I knew I could work with sellers and open up and have an infinite amount of cash. Now, seller financing doesn’t work in all scenarios. There has to be some equity there. You have to have a conversation with the seller. When I was starting off, it was a lot of hat in my hands like, “I am 27, 28 years old. I’m just getting started. I have a strong W-2 income but don’t have enough cash to purchase your $500,000 property. I have $50,000 saved up. That’s 10%. I have this bank over here that’s agreed to give me 80%. Find that 90% of your purchase price.”
“One, we can either come down on your purchase price or, if you’d be willing to give a $ 50,000-second mortgage at 5% amortized for over twenty years with a five-year term, I can meet your purchase price of $500,000. Would that be agreeable? Here’s why it’s good for you, tax advantages, etc.” Back then, 5% was pretty good on your money. Now, that’s not very good for your money.
Here’s why it works for me. I don’t have to find another $50,000. I’m a standup kid and from this area. I was still investing locally at that time. Here’s the job I hold. Some sellers would even come to visit me at Walgreens, making sure I was who I said I was. I have no idea if it’s true, but I’ve seen these surveys that say a retail pharmacist is the most trusted healthcare professional. They would come to look at me and be like, “He is who he says he is. He’s trustworthy.” That’s how a lot of those conversations went, although they didn’t all work out.
I love that you gave your pitch on how because I think for people who might be reading, they’re like, “That sounds great, but how do I approach someone? What do I say?” I love that you went through like, “This is a situation. This is how it works for you.” At the end of the day, that’s what the seller wants to know, “What do I get out of this? This is why you should trust me.” It’s because trust and what’s in it for them are the two biggest components.
That’s the two biggest components. They care about what’s in it for them. Especially in negotiations, each side thinks the other side is hiding what’s in it for them. What are you trying to get out of me? I would always come out and lead. I’m like, “Here’s what I get. I don’t have enough money to purchase your property. That’s what I get.”
You have to build that trust.
I don’t think enough people lead with that.
Not because they’re trying to withhold or be shady. I don’t think it’s natural for a lot of people to say, “This is what I’m getting.” I’m putting that out there and I think if more people did that, there would be more trust built between the two parties. It is intuitive to a lot of people. In this day’s market, there are different bottlenecks, as you alluded to.
What are some things that you would recommend to people who are looking to get started now? What are some things off the top of your head? If they have a great income, but deals are less, what are some recommendations, tips, and tricks that you would give to them or places you would start? Maybe it’s not even in single-family or there are other avenues. What are your ideas?
As I said, it seems like deals are very scarce now. I do believe that it changes over the next 12 to 18 months. Right now, “If you got a deal, I’m ready to invest.” It’s hard to find a very good deal where interest rates are. If I was a new investor, I would figure out my buy box, which is very important. I would only invest in duplexes built after 1940 in this market, or I only invest in single-families. I’m going to house hack. It doesn’t matter what it is. Define that. The piece that I think a lot of people overlook and a lot of gurus like you say on Instagram are pushing is I talk to young investors a lot. They reach out to me and I try to give them my time.Real estate deals are scarce right now, but this may change over the next 12 to 18 months. If you are a new investor, figure out your buybacks before putting your money somewhere. Click To Tweet
All they seem to know about are these 30-year fixed mortgages. If you understand that there is a plethora of ways to finance a property, you are going to be so much better equipped to thrive in the next 24 months. The analogy that was given to me is most people are carpenters with one tool in their tool belt. They see a screw in a piece of wood and a hammer in their tool belt and they’re like, “I have a hammer. I’m going to hit this screw.” However, as we know, that doesn’t work with a screw. You need a screw gun.
That is going to be so key in the next year or two to get deals done. You better have the right tool in your tool belt to make this deal work. What I mean by that is the things that are going to work in the next 12 to 24 months. It’s things like subject to, land contracts and things that are way outside this 30-year conventional mortgage that is expensive right now. I think it’s at around 6.5%.
It’s not great and it kills so many deals right now. Eventually, that market is going to have to come back and reach an equilibrium where some deals are going to pencil in with traditional financing. Right now, if you want to get deals done, you need to get very creative and look at that as an opportunity. That’s not a barrier. There are XY access and four different boxes and it’s a high barrier to entry from a knowledge standpoint and a high barrier to a cash standpoint.
Where you want to be, ideally, is in the upper right quadrant. It’s a high barrier, low barrier, low and high. You want to be at the high barrier of knowledge and cash. That is where the thinnest air will be and where the most deals will be. If it’s a low barrier to entry of knowledge, which is a 30-year conventional mortgage because everybody knows about that, and a low barrier of entry for cash, which is a 5% down 30-year conventional mortgage, everybody is playing in that pool.
You’re going to get crushed unless you’re the best at it. I don’t want to swim in that pool with those people. If you get up to the upper right there, it’s a high barrier of entry for cash, which maybe isn’t what a lot of the audience can do, but from my analogy, that’s where you’re going to eliminate a lot of people. In high barrier to entry for financing and creativeness, you are going to be swimming with a lot less fish, and that’s where you want to be.
I would study on the subject of land contracts. Land contracts work best if you can find properties that are free and clear. Older people own the home. You should be able to do these searches. “This guy is owned this property for 40 years. He probably doesn’t have a mortgage on it, or it’s very small.” That opens up infinite possibilities and how you can finance that property. You can have a conversation with him and figure out the financing terms as long as he doesn’t need the money.
Here is something that my mentor told me that hit me in the side of the head. I do a lot of seller financing, but I never realized why it works quite a bit. Let’s say somebody is on a million-dollar property that they own free and clear. If you tell them, “I’m going to give you $1 million tomorrow. What are you going to do with it?” They honestly don’t know. It is tough for them to decide that. They would be like, “I need to invest some of it, but I don’t think a lot of people want to go in the stock market right now.”
They don’t know what they want to do with it. My seller financing pitch to them would be like, “I’m going to give you a couple of hundred thousand or maybe $150,000, and then you’re going to give me a note for $850,000 that you’re going to be earning interest on. I’m going to make a monthly payment to you.” These people that are in retirement, “Here’s a couple of hundred thousand. That should serve anything you want to do from a blowing a bunch of cash standpoint. I’m going to pay you $2,500 a month every month. Does that sound cool?” That resonates with people.
One thing you mentioned, too, is to give our audience some education on this. Can you talk a little bit more about the subject to, what that is, and how that works?
Subject to or assumable debt is the stuff that I’m getting at here. There are certain loan products. The Freddie and Fannie financing is a little bit more rigid on this, like FHA loans and commercial loans through banks. There are these products out there called swap loans and those that have language written in them that allow them to be assumable. It means that buyer number one comes in and sets up the loan. Buyer number two can come in and assume that loan.
Let’s say that you have a property for $500,000. It has a $400,000 note on it. Buyer one paid $100,000 down, a 20% down, and a $400,000 note. Twelve months later, another buyer can come in and pay the buyer one $550,000. He made a little money. He can pay $150,000 down and assume the $400,000 note that buyer one had. The reason that’s of such advantage in this market is debt that was made even a year ago is so much cheaper than it is now.
You should be getting in at a 3% or 4% interest rate versus 6.5%. I can’t stress how important that is. If you run the numbers on a $400,000 mortgage at 6.5% versus 3%, you’ll see you want that 3% debt even if you have to go and put a little bit more money down. There are situations where you can do that and that’s a conversation if you’re working with agents and brokers and be like, “Is this debt that the seller has? Is it assumable?”
It’s going to be a conversation and I think over the next few months, I’m having those conversations right now with commercial lenders and they’re like, “No. We don’t want the new buyer to be able to assume this debt.” That’s going to loosen up a lot because commercial banks have a lot more leeway on what they can do and can’t do. If you’ve put in this Fannie and Freddie box, which I know you guys are very familiar with, it’s a very rigid box, and it’s not that we can bend these rules.
However, if you’re in a commercial bank or a local commercial lender on a duplex or an eight-unit apartment building, there’s nothing they can’t do if they like you enough or if they’re desperate enough to create new business. I’ve seen commercial lenders do some very creative things if they want to make deals work. I think that’s going to happen. They haven’t had to do anything for a few years. Everybody is originating loans out of their ears, but things are screeching to a halt. If they want to increase the amount of loans on their book or not lose the loan that they had from the seller, they’re going to be more open to those conversations, in my opinion.
Can you give some examples of why the first buyer would want to let someone else assume that loan? I can think of a few that I did in COVID but go ahead.
The price point is the biggest one. If a buyer bought a property a year ago from now, let’s say it was January 1st, 2022. Interest rates were at their rock bottom. You could get a 30-year fix for the high twos, but let’s call it 3%. Fast forward, twelve months later, it’s 6.5%, let’s say. I don’t know where it’s at. I live in Denver, but let’s say that a buyer came in, got a job with Google here and now, has decided to switch jobs, or is transferred by Google twelve months later. They bought an $800,000 house. They have a $600,000 mortgage on it, and they need out. That’s a big problem for them because that house has definitely, by the rational mind, decreased in value because it now has to support 6.5% debt.
There’s some irrational lens out there that is overpaying for things, but that property has gone down in value. If they want to somehow achieve that value or can somehow allow a buyer to assume that 3% mortgage they put on it a year ago, then the buyer rationally can reach up to a higher price because of their debt payment or their monthly cashflow, which is the king of all things, because cash is king, that monthly cash payment outflow to that property is lowered. They should be able to reach higher in price. That’s why sellers should be interested in letting buyers assume their mortgages. Does that make sense?
Yeah. That would’ve been my example. As you said, that’s probably one of the reasons you’re telling people to look at this avenue because of the current climate of the market. To wrap this up, we’ve covered a few of these here and there. If I’m someone reading and I have a good job and the cash to invest, I don’t know where to invest it. I know I want to get into real estate. You’ve given us some different avenues, but what’s an actionable thing they can do to get started now? I’ll let you give me your action.
My word of the year is discipline and patience. I lay goals out and I have a theme for the year.
Patience should be my word in the year.
I do want to preface this. That is my word of the year. For one of the first times in my investing career, I believe that in the next twelve months, I will see better deals than currently. The old adage is, “Buy real estate now and wait. The best time to buy real estate was 40 years ago. The second best time is now.” I don’t know if that’s necessarily true. I don’t want to misguide you. I’m going to preface that with I’m trying to be patient.
I think some time needs to go by so I think cash is going to be very king in the next few months. There are going to be a lot of distressed sellers eventually when commercial notes, which most of them are on 3 to 5-year terms. It means they re-up every 3 to 5 years. When those go up to the market rates, there are going to be some problems and people have overpaid for assets. I will be in preparation mode, but 90% of the time, as far as, “You should take action,” I absolutely 100% believe that.
I understand that I’m coming from a point where if I don’t buy another piece of real estate, I will be fine. If you don’t have any investments or a piece of real estate, you need to get some, and that is paramount. It doesn’t matter what time in the market it is. I was on a podcast and trying to flush this out. I need to get a term for it. If I were a new investor that can stockpile $20,000 to $30,000 in a year from cashflow and being frugal, etc., this is what I would do.Many people have overpaid for assets, pushing many to slide into preparation mode. But most of the time, you must take action regardless of the marketing timing. Click To Tweet
I would develop a three-year plan. In year one, I would buy a house to move in. Let’s say it’s a $500,000 house. I would go that 30-year product route with 5% down. I need $25,000. I would be smart about it, knowing that in a year, I want to move out. Maybe I’m renovating my end of it. I would want to move out so at least it breaks even cashflow-wise when I rent it. I would be saving up throughout that year. I would do the same thing in year two and the same thing in year three.
Whether that’s tops and maybe the third one is a duplex. You’re going to stretch, get a duplex, live on one side and rent out the other side. At the end of three years, you have three properties. I don’t care what you do but you never have to use your W-2 income again in this scenario to feed this investment. Three years of discipline. You have three properties. Let’s fast forward. You’re managing those properties.
Let’s go to year seven. One of them has paid down for 6 years, one for 5 and one for 4. I bet that at that time, you can pull equity and buy three more. You’re at year 6 and 7. Let’s go to year twelve. You paid six of them down. You have five more years. If you want to, you can pull equity and buy six more. Now, you have twelve, etc. If you did it to that point and you had twelve, and let’s say that you’re 30 years old, year twelve will put you at 42. You would have a lot of options at this point.
If you paid them down to the time when you’re 50, I promise you you’re going to be sitting on over $1 million in equity and cashflows. The greatest thing about real estate is we lock in the debt payment, which is our number one biggest expense, especially in these 30-year fixed products. That’s why they’re so great and our rents keep going up. Rents on that original property are probably 150% of what they were when you started, but that debt payment is still the exact same, and that is so powerful. People don’t understand that.
In my scenario, you have to be disciplined for three years, and then you can do whatever you want. You can live life. You can hire a property manager at some point. In that scenario, we started at 30. We’re done buying at 42. By the time you’re 50, here are your options. You can refi and reset everything to 30-year notes as long as it’s not 8% or 10% interest at the time. Be smart, but your monthly payments will come down thousands of dollars, which means your cashflow increases to thousands of dollars per month.
You could say, “This Nate guy that I read on a blog twenty years ago that said, ‘Buy these 3 houses and be smart with them over 20 years.’ I don’t like that guy. I hate owning these properties for the last twenty years, but I have twelve of them. I’m going to sell them and wipe my hands off them.” I promise you’ll have over $1 million when you walk away from all those sales, so you won’t hate me after that.
Maybe you want to accelerate the paydown when you’re 50 and be like, “I want to have them all paid off by the time I’m 55 or 58.” I bet you can do that, too and then you will have twelve free and fluid properties by your late 50s. It was all because of three years of discipline. Again, will there be headaches along the way? Are you going to get a call about that leaky roof, that furnace that goes out, and something else?
A tenant needs to move out, and you got a vacancy? Sure. Those are going to happen along the way, but that’s life. Life goes by no matter what we do. You better do something now that you, a couple of years from now, is going to thank you for, and enough people don’t do that in my mind. I need to work on getting more succinct with that example. I ramble on for three minutes but hopefully, that lays it out.
That was good. That might have been one of our best answers to the questions thus far. I love that you laid it out like, “If I was a new investor, this is exactly what I would do.” It’s hard to look at someone who has 50, 60, or 100-plus properties and be like, “It’s easy for him to say,” but to put yourself in an investor or a new person’s shoes and say, “This is what I would do.” I think it lends to that power of you see the snowball effect.
Personally, there are a lot of misconceptions about if you buy one rental property, you’re good. You got this. It doesn’t work like that. As you said, you got to have patience and consistency. Showing up and doing it again and again. As you said, you have twelve properties and you can capitalize on that. It doesn’t happen overnight. I love that answer and that you went through it. You explained it, so I hope our readers take something from that. Thank you so much for joining us.
Discipline and patience is the key. If you’re a new person reading this, even if you don’t like real estate, if you make the decision for the next few years, you want to max out your 401(k) and IRA. Let’s say you’re in your late twenties. That is going to pay so many dividends because time is so much on your side. No matter where you’re at, age-wise is never more on your side than now. That’s a universal truth.
Whatever you’re going to do, you better do it now and you better stick with it. Don’t try it for six months and give it up. This is a 3 to 5-year plan, no matter what you do. It doesn’t have to be rental properties. Make a plan, and not enough people do that. Thanks for educating people because a show like this is how people get educated to do things and to take control of their financial future.
I enjoyed this episode and our conversation. If people want to reach out to you or connect with you can, how can they do that? Is there a way to do that? Are you open to that?
I’ve just started taking podcast interviews and putting out content on social media. Before, I was only in my business working. My handle on Instagram, and it’s probably the best spot to reach out to me, is @Dr_Nate_RealEstate. I put out daily content about the deals I’ve done. I laid out all the numbers and I give my advice on things. You reach out to me there on my DMs. I don’t have a huge following yet, so I probably will respond to you.
Get in before he blows up, is what he’s saying.
I don’t know if I’m blowing up anytime soon or if I’m that knowledgeable, but I’m happy to help. I enjoy helping young investors out.
Thank you so much for joining us on this episode. If you’re out there reading and you enjoyed the show, have feedback and send it our way. Share the show with a friend or subscribe and leave us a review. Thank you, everybody.
About Nathan Smith
Nathan Smith is a real estate investor and an industry leader in creative financing and asset management. He reached financial independence at age 30 and currently owns over 200 doors, totaling approximately 24 million dollars in assets. Nathan has founded multiple real estate businesses including “Clearwater Capital Group,” a real estate investment company that delivers dependable cash flow and appreciation and “Live in Eau Claire,” a property management company that managed over 1,000 units at the time of his exit. One of Nathan’s passions is teaching others about the power of investing in real estate.