Making M0ney In The Buy
Seasoned investor Pip Stehlik shares his secret to good real estate investments
When it comes to property investment, Pip Stehlik knows the game like the back of his own hand. A student of Robert Kiyosaki and a charismatic speaker in his own right, Stehlik has been coaching property investors for years, ever since he realised how useful property investment was financially, in comparison to stocks or precious metals.
Currently, Stehlik is the owner of more than 40 properties all over the world and a speaker for Tigrent Learning, an educational service that teaches potential investors tips and tricks of the trade. Before becoming a successful property guru today, Pip was like the rest of us as he started out as a novice investor with nothing but a handful of cash in his bank account and a dream to make it big.
Having been inspired by famous author Zig Ziglar at a motivational seminar, Stehlik was more than on fire to start his property investment career as it was during this training session that he understood the value of property over other forms of investment.
At that time, Stehlik and his family ran a small grocery store business in Nebraska City, but the constant fear of giant supermarket chain Walmart coming to town and cutting into their profits drove Stehlik to seek out alternative means of generating income. He did not have a love for property, but chose property investment as an ‘escape plan’ — not only did it make sense, it would also be the most viable source of return even if the market turned sour.
CASHFLOW IS KEY
Stehlik’s strategy is a very simple one: buy property for cashflow. According to his reasoning, as long as your property is generating monthly income in the form of rental payments, you can rest easy knowing that your mortgage is being taken care of. Even if the value of the property goes down, Stehlik assures that the constant cash flow is more than enough to make a profit. “It doesn’t matter if you’re buying property in the UK, U.S. or Malaysia — as long as you get cash flow out of the property from the beginning, then it starts to make sense. And that’s the key.” he said.
Of course, Stehlik does not discount the prospect of selling a property if its value appreciates, but by focusing on cash flow, he is able to control his investments while keeping options open to making money through other means. “Its value may go down, but if we invest in property with the notion that it can make cash flow from day one onwards, we’re still going to get that rent cheque every month,”
He added, “The nice part about property is that we get that monthly cash flow and if we invest right, often times we see the value going up through capital appreciation or renovations on the property… There are many different ways to make money.”
Stehlik recalls one of his favourite properties that offered the best of both worlds. “I’d bought a property in Florida sometime in 2003 or 2004, and it had cash flow from the very beginning. I think I made a minimum of USD 200 per month and never had a vacancy. After owning the property for two years, it doubled in value and I sold this single family house. Did I expect property values to go up by 100 percent in two years? Not at all!” Although it was arguably his best buy ever, Stehlik always reminds his listeners to exercise caution if a property’s capital appreciation seems too good to be true.
Buying a property for cash flow instead of capital appreciation has one other benefit, and according to Stehlik, you won’t even have to lose sleep every night hoping the value of your property will not drop too much during a bad economy. Even if a recession hits and the value of the property goes down, your investment will still be secure due to the consistent generation of rental payments. As a matter of fact, there will likely be more potential tenants as those who lose jobs or are forced to take pay cuts will no longer be able to afford their own homes, hence forcing them to rent instead.
“When people lose their jobs,” Stehlik explained, “they can no longer buy a house and have to become renters, so the rental market actually goes up when property values come down — it’s an inverse relationship. I’m happy when property values go up although that might mean some vacancies, but I’m also getting capital appreciation. On the other hand, when the market goes down, there will be more tenants due to the laws of supply and demand.”
DIGGING FOR A DEAL
Of course, finding a property that provides good cash flow is no walk in the park, but Stehlik has his ways of sniffing them out. “We look for motivated sellers — if somebody puts their property listing with a real estate agent, they generally want to sell but not obliged to, either. So what we do instead is use sourcing agents that are out there in the field to find people who are motivated,” he said.
By that, Stehlik is referring to landlords who want to get rid of a property that they believe has no value, and to him, nothing is completely useless. By purchasing properties at discounted rates thanks to the original owners seeing little need of it, Stehlik has been able to improve the properties’ value via many alternatives i.e. refurbishing, adding rooms or putting a tenant buyer / lease option on it.
By taking on creative options, those properties become increasingly attractive to renters and that’s where Stehlik collects his cash flow. On top of that, websites like Craigslist in the United States, Gumtree in the UK and Kajiji in Canada are like gold mines for investors to find lucrative deals.
It’s common knowledge to evey investor that location is also key to determining the value of a property, even if you’re just investing for cash flow. In his case, Stehlik is careful to only select properties in locations with a stable economy and plenty of good jobs to go around. On the other end of the spectrum, he tends to stay away from what he calls ‘one-horse towns’, which essentially are communities that revolve around a single industry.
The reason for doing so is simple — if the industry collapses, the entire town fails and all the properties in the area not only drop sharply in value, but a lack of tenants will keep it vacant continuously, thereby affecting cash flow.
In fact, Stehlik is only too aware of the consequences of investing in such locations. He recalls how the bankruptcy of Detroit, a city that depended heavily on the automotive industry, caused a massive population decline that led to lots of vacant properties with poor resale value.
“Wasn’t Detroit a great market 40 or 50 years ago?” he quipped. “It was an awesome market! But who would have thought that the car industry there would fall? General Motors had 140,000 employees at one time in Detroit, and now they’re down to only 20 or 30,0000 employees.”
Other examples include Huntsville in Alabama where the economy expanded around NASA, the town’s biggest employer, and Las Vegas, a tourist-dependent city.
When it comes to investing in properties overseas, there are other factors to take into account, such as the tenant-landlord laws. Every country has their own variation and for investors like Stehlik who want good tenants to produce good cash flow, it’d be better to invest in a country that has pro-landlord laws rather than pro-tenant ones.
He explained, “In the Netherlands, for example, it’s almost impossible to evict a tenant, even if they don’t pay rent. I’ve heard that the same thing happens in France, too, whereas most of Southeast Asia is very pro-landlord e.g. Hong Kong, Singapore, Malaysia etc.”
Stehlik also recommends studying the market in detail as well as choosing areas that are experiencing population growth. Japan, he suggests, should be avoided as its population is declining. On the other hand, China, UK and the US are all potential hot spots as these countries have stable (if not booming!) economies with steadily increasing populations.
OTHER PEOPLE’S MONEY
As soon as he’s gets his eye on an appealing property, the next step for Stehlik would be raising the money to pay for it. Nonetheless, our smart investor has a few tricks for taking care of that as well. “We use other people’s money; we use bank financing whenever we can and there are tonnes of mortgage brokers. There’s also seller-financing where the owner participates in the financing of the property — these people (the sellers) are motivated!” asserts Stehlik.
While the practice may be relatively uncommon here in Malaysia, seller-financing is the norm in many countries. Through this unique transaction, the buyer uses his loan to pay back the remainder of the seller’s mortgage and then uses a second mortgage to pay the seller the remainder of the property’s cost. This way, both buyer and seller are protected by law and if the buyer defaults on the repayment for any reason, the seller can take the property back.
Apart from the strength of the British Pound, the ability to leverage as many properties as he likes is one of the reasons why Stehlik is fond of investing in the UK. “Over there, it’s up to you. If you go to the US, Canada, Singapore, Malaysia, Australia or Japan, your ability to get a loan is based on your income. But in the UK, they don’t care if you’re only making GBP 20,000 a year; if the property you want has good cash flow, they’ll loan you the money for it. If it doesn’t, they won’t loan you the money… Simple.” he elaborates.
On top of that, Stehlik uses the Internet to seek out other like-minded investors. By building a network of investors, he is able to pool their resources together and get more capital for investments. With successful investments leading to positive feedback from his fellow investors, Stehlik’s network grows easily through word of mouth.
TENANT BUYERS & TROUBLEMAKERS
As mentioned earlier, Stehlik usually tries to add value to a property through refurbishment or a lease option. The latter is an attractive means of courting tenants as it offers them the opportunity to own the property in future, possibly within one or two years and depending on how much they can afford to pay.
“We get people – we call them ‘tenant buyers’ – who aren’t quite ready to buy the property today. So, they get into the house they want to own and we rent it to them with the option of selling it to them two or three years later when they qualify financially to buy it.” explains Stehlik.
With the words “qualifying financially”, he is referring to how much money the future owner has allocated for the purchase. A property rented with a lease option is always rented at a higher price – approximately 10 to 40 percent higher – as a guarantee to the future owner that the property will not be rented or sold to anyone else. This way is also exercised to collect funding for the down payment. “Every deal is a little bit different,” Stehlik adds. “What I find with most people is that their monthly income is not the reason they don’t get a property; it’s the ability to save for the deposit.” he said.
“So we have two different situations here: you could have enough money for a deposit but not a good income; or your income could be very good but you don’t have anything saved for a deposit. If you only need to save a little bit more for the deposit, we might put just an extra 5 or 10 percent on the rental charge; if you don’t have enough, it will be an extra 20 or 30 percent towards the deposit. That being said, it will take you a year or more to get qualified, depending on how much savings you have — every situation is different, so we’d advise tenant buyers to work with mortgage lenders to work out how long it will take them to get qualified.”
Even if tenants aren’t interested in a lease option, Stehlik stresses the importance of maintaining a good relationship. Tenants, after all, are part and parcel of the cash flow supply chain because having vacancies or tenants who don’t pay on time disrupts that.
“There will always be challenges with tenants — some tear up your property, some don’t pay. You must factor these into your calculations from the very beginning. I will always have a certain percentage of tenants who don’t pay on time, so we try to curb that by offering small incentives like a discount or Starbucks gift certificates.”
“No investment is perfect, but if I have the knowledge and education, I can buy 10 properties. Even if one of them doesn’t perform as well as I wanted it to, at least I have nine others providing cash flow.”
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