multi-family mastery - re/max results success series
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MASTERING THE SALE OFINVESTMENT PROPERTYNovember, 2015
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AGENDA Why work with investors? Understanding the Benefits Establishing Value (Setting the Price) Listing Investment Property Working with Investment Buyers Financing Options Contracts and Forms Wrap-up
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TYPES OF INVESTMENT PROPERTY Single Family Homes Condo’s 2 Family 3-4 Family Buildings 5+ Family Buildings Other
Commercial/Business Properties Mobile Home Parks Vacant Land
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WHY WORK WITH INVESTORS? Investors Buy More Often = MORE SALES Financial Decisions, not emotional ones = LESS
STRESS Investors need our services in BOTH up and down
markets = CONSISTENT SALES Investors eventually become SELLERS Investors who are building a portfolio will buy/sell
larger and larger properties. The market is prime for buying properties.
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WHAT ARE THEIR GOALS? Owner/Occupant – Wants to get ahead by buying a
home, but doesn’t want a large house payment
Family Need – College Savings Account for Child
Occupation – Wants to quit job and manage property
Recreation – Buy a Condo at the Lake for Rental
Dreams/Retirement – Doesn’t have a retirement plan or wants to supplement retirement income.
Net Worth – Wants to build assets and net worth.
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UNDERSTANDING THE BENEFITS Cashflow
Taxable Profit/Loss
Increasing Net Worth
Return on Investment
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CASH FLOW EXAMPLE $200K 4-FAMILY
Gross Rents $625 x 4units x 12mo $30,000Less Vacancy 5-10% $ 1,500Net Rents $28,500
ExpensesFixed Expenses
Taxes $ 2,400Insurance $ 1,200Sewer/Roads/Trash/Water $ 2,800
Maintenance Expenses 10-20% $ 4,500Total Expenses $ 10,900
Gross Income $ 17,600
Payment (P/I) 80% LTV, 5.0%, 30 year = $859/mo $ 10,307
Cash Flow $ 7,293
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CASHFLOW VS. TAXABLE PROFIT/LOSS
Gross Rents $__________Less Vacancy $__________
Net Rents $__________
ExpensesTaxes $__________Insurance $__________Swr/Roads/Trsh/Water $__________Maintenance Expenses $__________
Total Expenses $__________
Gross Income $__________
Less Payment P/I $__________
Cashflow $__________
Gross Rents $__________Less Vacancy $__________
Net Rents $__________
ExpensesTaxes $__________Insurance $__________Swr/Roads/Trsh/Water $__________Maintenance Expenses $__________
Total Expenses $__________
Gross Income $__________
Less Mortgage Interest $__________Less Depreciation $__________
Taxable Profit/Loss $__________
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CASHFLOW VS. TAXABLE PROFIT/LOSS
Gross Rents $ 30,000Less Vacancy $ 1,500
Net Rents $ 28,500
ExpensesTaxes $ 2,400Insurance $ 1,200Swr/Roads/Trsh/Water $ 2,800Maintenance Expenses $ 4,500
Total Expenses $ 10,900
Gross Income $ 17,600
Less Payment P/I $ 10,307
Cashflow $ 7,293
Gross Rents $ 30,000Less Vacancy $ 1,500
Net Rents $ 28,500
ExpensesTaxes $ 2,400Insurance $ 1,200Swr/Roads/Trsh/Water $ 2,800Maintenance Expenses $ 4,500
Total Expenses $ 10,900
Gross Income $ 17,600
Less Mortgage Interest $ 7,946Less Depreciation $ 6,545
Taxable Profit/Loss $ 3,109
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DEPRECIATION Not Actual Cash Expense
Tax Calculation Only
Based on the fact that Land Appreciates and Buildings Depreciate
Count 80-90% of the Sale Price as the Building Value and 10-20% Land Value
Depreciation Expense = Building Value / 27.5 yrs
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HOW REAL ESTATE IMPACTS NET WORTH
Cashflow is not the game we’re playing … The ultimate game is Net Worth
If you generate enough Net Worth, you can generate Cashflow
Balance Sheet Lists Assets and Liabilities Shows Net Worth
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BALANCE SHEET SHOWS NET WORTH
12/31/2015Assets Cash $ 20,000 Home $250,000 Car $ 20,000 Total Assets $290,000
Liabilities Home Loan $150,000 Car Loan $ 15,000 Credit Cards $ 10,000Total Liabilities $175,000
Net Worth $115,000
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NET WORTH IN 10 YEARS12/31/2015 12/31/2025
AssetsCash $ 20,000 $ 20,000
Home $250,000 $337,338
Car $ 20,000 $ 20,000Total Assets $290,000 $377,338
Liabilities Home Loan $150,000 $122,014
4 Family Loan Car Loan $ 15,000 $ 15,000 Credit Cards $ 10,000 $ 10,000
Total Liabilities $175,000 $147,014
Net Worth $115,000 $230,324
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IMPACT OF 4-FAMILY PURCHASE ON NET WORTH
4 family @ $200,000
New Loan $160,000
Downpayment $40,000 from Home Equity Loan
$5000 closing costs
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BALANCE SHEET WITH PURCHASE OF BUILDING ON 12/31/2015
12/31/2015 12/31/2015 after closingAssets Cash $ 20,000 $ 20,000 Home $250,000 $250,000 4 Family $200,000 purchase price $200,000 Car $ 20,000 $ 20,000Total Assets $290,000 $490,000
Liabilities Home Loan $150,000 $195,000 Home Eq Loan
$45,000 4 Family Loan $160,000 New Loan Amount Car Loan $ 15,000 $ 15,000 Credit Cards $ 10,000 $ 10,000Total Liabilities $175,000 $380,000
Net Worth$115,000 $110,000
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NET WORTH IN 10 YEARS12/31/2015 12/31/2025 12/31/2015
12/31/2025w/o 4fam w/o 4fam w/
4fam w/ 4famAssetsCash $ 20,000 $ 20,000 $
20,000 $ 20,000 Home $250,000 $337,338
$250,000 $337,338 4 Family $200,000
$269,870 Car $ 20,000 $ 20,000 $ 20,000
$ 20,000Total Assets $290,000 $377,338 $490,000
$647,208
Liabilities Home Loan $150,000 $122,014
$195,000 $158,617 4 Family Loan $160,000
$130,148 Car Loan $ 15,000 $ 15,000 $ 15,000
$ 15,000 Credit Cards $ 10,000 $ 10,000 $
10,000 $ 10,000Total Liabilities $175,000 $147,014
$380,000 $313,765
Net Worth $115,000 $230,324 $110,000$333,443
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WHAT ARE THE FINANCIAL BENEFITS OF OWNING RENTAL PROPERTY?
Appreciation – Increase in Building Value over time
Increase in Equity – Due to Loan Paydown
Cash Flow
Depreciation Tax Benefits
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EXAMPLE OF RETURN ON INVESTMENT
$200,000 Four Family w $40,000 down-payment.
What is the Return on Investment?
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RETURN ON $40,000 INVESTMENT Appreciation $200,000 x 3% = $ 6,000
Loan Paydown 1st yr $ 2,360
Cash Flow $ 7,293
Total Benefits $15,653
Return on Investment $15,653 / $40,000 = 39%
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RETURN ON INVESTMENT VS. TAXES PAID
Return on Investment = $15,653 Appreciation Loan Paydown Cash Flow
Taxes Paid on Actual Profit/Loss = $ 3,109 Income – Expenses – Interest - Depreciation
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HOW TO DETERMINE A BUILDING’S VALUE?
Gross Rent Multiplier considers rent only
Cap Rate considers rent and expenses
Cost per Unit
Cash on Cash Only considers cash flow
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GROSS RENT MULTIPLIER Gross Rent Multiplier (GRM)
= Sale Price / Annual Rents
One way to remember it … without any expenses, how many years of rent would it take to equal the cost of the building?
Which is better … a high GRM or a low GRM?
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GROSS RENT MULTIPLIER – 3546 MORGANFORD
Sale Price = $400,000
Annual Rents = $425 x 12 units x 12 months = $
61,200
Gross Rent Multiplier$400,000 / $61,200 = 6.53
GRM
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GROSS RENT MULTIPLIER – 3600 HEREFORD
Sale Price = $450,000
Annual Rents = $395 x 10 units x 12 months = $47,400$450 x 2 units x 12 months = $10,800Annual Rents $58,200
Gross Rent Multiplier$450,000 / $58,200 = 7.73
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GROSS RENT MULTIPLIER
Based only on the GRM, which of these buyers got the best deal?
Sale Price GRM 3546 Morganford $400,000 6.53 3600 Hereford $450,000
7.73
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GROSS RENT MULTIPLIER– GROUP EXERCISE
Based on the average GRM for 3546 Morganford and 3600 Hereford, what would you pay for 4205 Botanical with Annual Rents of $61,200?
GRM = Sale Price / Annual Rents
Sale Price = GRM x Annual Rents
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GROSS RENT MULTIPLIER– GROUP EXERCISE
Sale Price = Gross Rent Multiplier x Annual Rents
GRM for 3546 Morganford = 6.53 GRM for 3600 Hereford = 7.35
Average is (6.53 + 7.35) / 2 = 6.94 GRM
Rents for 4205 Botanical = $61,200
Estimated Value = 6.94 x $61,200 = $424,728
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GROSS RENT MULTIPLIER
What are the advantages and disadvantages of using the GRM?
Easy to compare similar properties
Does not consider the impact of expenses
Does not work with unlike properties
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CAP RATE
Net Operating Income(Income – Expenses)
(Price)
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CAP RATE – SAMPLE 1 Use the information provide by the listing
agent to determine the CAP Rate for 3546 Morganford
Income $61,200 Expenses $16,044 Net Income $45,156
Sale Price $400,000
Cap Rate 11.29%
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CAP RATE – SAMPLE 2 Use the information provide by the listing
agent to determine the CAP Rate for 3600 Hereford
Income $58,450 Expenses $10,805 Net Income $47,645
Sale Price $450,000
Cap Rate 10.59%
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CAP RATE Based on just the CAP rate, which property
was the better buy?Sale Price Cap Rate
3546 Morganford $400,000 10.59%
3600 Hereford $450,000 11.29%
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CAP RATE – GROUP EXERCISE
Based on the Average Cap Rates for 3546 Morganford and 3600 Hereford, what would you pay for 4205 Botanical?
Net Income / Sale Price = Cap Rate
and
Net Income / Cap Rate = Value
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CAP RATE – GROUP EXERCISE
Based on the Average Cap Rates for 3546 Morganford and 3600 Hereford, what would you pay for 4205 Botanical?
Average CAP Rate = (10.59% + 11.29%) / 2 = 10.94%
Net Income / Cap Rate = Value
$47,200 / 10.94% = $431,444
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CAP RATE Considers both Income and Expenses
Does not consider the effects of the loan
May not consider maintenance of building
Useful when comparing different types or ages of buildings.
What is the effect of Vacancies? What is the effect of Deferred Maintenance?
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COST PER UNIT Cost per ‘DOOR’
Used by Builders, Developers, and in “Product Specific” situations
For Builders, it’s always a comparison to how much money it would take to build a comparable unit
Developers don’t care about rents or condition, because they are changing the use of the building. They may look at Cost per Square Foot.
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COST PER UNIT – EXAMPLE 1
3546 Morganford
12 Family Building sold for $400,000
What is the Cost Per Unit?
$400,000 / 12 = $33,333 per unit
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COST PER UNIT – EXAMPLE 2
5847 Sunshine
8 Family Building sold for $480,000
What is the Cost Per Unit?
$480,000 / 8 = $60,000 per unit
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COST PER UNIT
Compare similar size units with similar features
Compare similar age buildings
Compare similar rents
Compare similar condition
Compute the Cost per Unit on Sold PropertiesUse several comps and average the results
Adjust for differences in your property
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CASH ON CASH$200,000 4-family, 80% LTV, $40,000 down
Income ($625 x 4 x 12 x 95%)$28,500Less Expenses (incl maintenance) $10,900Less Loan Payment $10,307= Cash Flow $ 7,293
Divided by Investment ($40,000) 18.23%
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CASH ON CASH Does not consider appreciation
Will change based on the financing
Used to compare real estate opportunities to non-real estate opportunities
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SUMMARY - COMPARING PROPERTIES
Gross Rent Multiplier considers rent only
Cap Rate considers rent and expenses
Cost per Unit
Cash on Cash Only considers cash flow
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HOW TO LIST RENTAL PROPERTY
Meet the owner at the building. Make sure they notify the tenants and bring keys for all units.
Make a list of maintenance items for the seller to address.
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HOW TO PREPARE A PROPERTY TO SELL View the exterior. Note all maintenance
issues ... clogged gutters, trash, muddy areas, broken fencing, peeling windows …
View the basements. Note all maintenance issues … debris, past sewer backups, dangling/loose wires, missing elec panel cover, dirty/missing furnace filters …
View the interior of all units. Suggest which unit you think should be shown. Note all maintenance issues …plaster/drywall repair, needs fresh paint, water stains on ceiling, torn carpeting, ripped vinyl floors, torn blinds. CLEAN any empty units.
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TIPS FOR LISTING RENTAL PROPERTY
While at the property, get all information needed to complete the MLS profile form. Measure the rooms for each floorplan.
Get information about the major systems Roof age and type Furnace and A/C age and type; Are there flu
liners? Electric upgrades? Is there any visible knob-n-
tube wiring? Type of Circuit Panel? Copper or Galvanized Piping Plumbing Stacks … PVC or Cast Iron
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TIPS FOR LISTING RENTAL PROPERTY Run title commitment and verify who needs to sign
documents? Is it owned by a LLC? Have the owner complete the Rental Property
Verification Form. Update Rent Roll for closing. Get Seller docs, including applications, leases, rent
rolls, occupancy permits, capital improvements, etc. Verify date rents are due Verify who owns the appliances. Find out status of occupancy permits, especially for
vacant units. Discuss which seller disclosure form to use. Get tenant names and telephone numbers and
arrange for showings.
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TIPS FOR LISTING RENTAL PROPERTY Bring comps with multiplier or cap rates. Use
this data to establish a suggested price for the subject property. Adjust for deferred maintenance.
Get the listing contract signed. What to emphasize in the MLS Remarks
Things that make a property easy to rent Things that keep revenues high Things that make a property easy to maintain Things that keep expenses low
Email the listing to your investor prospect list …
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WORKING WITH BUYERS Focus on Buyer’s Capacity and Goals Condition – Is Buyer doing own maintenance? Location – Close to Buyer’s workplace or
home? Goals – Cash Flow vs. Appreciation Time Required – High tenant turnover, Rent
Collections, etc. Cash Required – Deferred Maintenance and
Vacancies at time of purchase?
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HOW TO FINANCE RENTAL PROPERTY
Owner/Occupant SFR, FHA 96.5%, VA 100% Conventional 95%
LTV 2 family, FHA 96.5%, VA 100%, Conventional 85%
LTV 3-4 family FHA 96.5%, VA 100%, Conventional 75%
LTV
Non-Owner/Occupant Single Family, Conventional 75% LTV 2-4 Family Building - Conventional 70% LTV
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HOW TO FINANCE RENTAL PROPERTY
Rates are Score-Driven
75% of Rents are counted as Buyer Income PITI is counted as a Buyer’s Debts
Appraisals are a little higher for non-owner/occupant single family and $400-500 for Multifamily Properties
Reserves – 2-6 months required unless only one owner/occupied property.
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WRITING A GOOD CONTRACT
Residential vs. Special Sale Contract
Utilities Occupancy Inspections Building Inspections
How to Pick the Closing Date
Occupancy Issues Owner Occupant Who Rents Vacant Units? Loan Requirements
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WRITING A GOOD CONTRACT
Rental Property Rider
1. Buyer contingency to receive and approve information
2. Delivery of lease documents and deposits at closing
3. Seller transfers leases and Buyer indemnifies Seller for security deposits at closing
4. Seller shall not modify leases without written consent of buyer between contract date and closing
5. Contingency to review remaining units (not viewed)
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WHAT TO LOOK FOR IN A LEASE?
Expenses paid by Owner
Can a tenant create a lien on the property? Sewer and in some areas … water and trash
Lead Hazard Notification for Tenants
Term of Leases – Automatic Extensions?
Late fees
Who maintains the appliances?
Who pays legal fees to enforce the lease?
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MANAGING THE INSPECTIONS Building Inspections
Consider knowledge and resources of Buyer Full Inspection vs. Systems only?
Municipal Inspections Can these be skipped? Clarify in contract, if necessary
FHA/VA Loans – Same general criteria as SFR
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CLOSING ACTIVITIES Changing the Utilities – “leave on”
agreements
Notification of Tenants – SLAR form
Original Leases, Keys to New Owner
Transfer of Section 8 Leases
Verification of Rents, including past due rents and proration dates. Clarify with client that seller can still collect past due rents.
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1031 EXCHANGE
Lets owner sell investment real estate and purchase investment real estate without paying taxes on the sale.
Lets a seller buy a property more suited to their needs/capabilities
Lets a seller combine the equity from 2 or more properties and buy a larger property …‘leverage up’
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MASTERING THE SALE OF RENTAL PROPERTYSUMMARY1. Look for a need … what will rental prop
provide?2. Help identify the best type of property for
your client, based on time, skills, money, desire.
3. Look at properties, pick the best one4. Set an offer price based on the comps 5. Get advice from professionals – inspectors
and accountants6. Let client get their property ‘stable’ and then
help them buy another one. 7. Exchange as appropriate
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THINGS I’VE LEARNED
4 family properties are often the best type of investment for a first time buyer
Better Cash Flow than SFR, 2fam or 3fam
Overhead spread over more units
30 year fixed financing is available
Smaller % of building is vacant at one time
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THINGS I’VE LEARNEDLower Cost/Unit creates higher revenues
$ 30,000 $450/unit/month 5.55 GRM$ 50,000 $625/unit/month 6.67 GRM$100,000 $900/month 9.26 GRM$200,000 $1500/month 11.11 GRM
$200,000 (4 x $50,000) invested in 4 family4 x $625 x 12 $30,000/yr
$200,000 Single Family $1500 x 12$18,000/yr
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THINGS I’VE LEARNEDLower Cost/Unit creates higher revenues
Lower Cost/Unit properties require more management
Rent rates are directly impacted by Supply and Demand
Seems to be independent of Geographic location
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THINGS I’VE LEARNEDCondition and updates DO matter
Tenants stay longer = LESS TURNOVER
Units rent quicker = FEWER DAYS/VACANCY
Tenants with better credit can rent anywhere, so they are more particular. Tenants will bad credit or a bad landlord reference will accept worse condition because they are limited as to where they can live. FEWER EVICTIONS AND COLLECTIONS
Put the improvements into living space as each unit becomes vacant. Do not wait until you are ready to sell.
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THINGS I’VE LEARNEDYou can buy too many properties
You can leverage too much
Paying loans down or off reduces risk and provides for better cash flow
1031 Exchanges are not complicated
Every year, sell your worst property and refinance your worst loan
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THINGS I’VE LEARNED
Rental Property is a long term strategy to grow Net Worth
Net Worth creates options and ultimately provides for Cash Flow
If we rely solely on our jobs, we will have to continue working to provide the cash we need.
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