Joe Massey’s Investing Strategy

My investing strategy is not as robust or as detailed as many investors who are reading this post, but hopefully this will give you some ideas to compare with your own strategy. First a background note is that I am very conservative in my investing strategy. I work in a high-risk industry (mortgage lending) and my income can vary widely (100% commission) depending on a number of factors outside of my control. So while I’ve have chosen a high-risk profession (which I am 100% comfortable with), I have taken a very conservative approach to my investing. Looking at my life as a whole, I feel that I am well diversified with risk vs. reward since I have a high-risk job, but a low-risk investing approach, which gives me an overall medium-risk profile and fits my comfort level very well.

Goal: $20,000/mo Passive Income

Ok, let’s talk specifics about my investing. The first thing that I think is important is that you need to have a goal with your investing. My goal is very simple: I want $20,000 per month of passive income that I do not have to manage, look at or think about. I want this income to be stable and as insulated as possible from market fluctuations. I also want this to be INCOME from my investments and not including withdrawals from principal. Once I hit this number on a monthly basis, then I’ll be able to comfortably quit my job, retire with my wife and do something else.

How do I plan to get there? I use a multi-faceted investment approach and I do not advocate putting all of your eggs in one basket. Because of this risk aversion, I focus on keeping no more than 50% of my money in real estate. I completely understand that real estate is a “better” investment strategy that the stock market, bonds, annuities, gold, etc., but for me it is not something that I am willing to completely tie up all of my net worth in to one classification or another. I see many investors get too focused on one asset class or another and they put all of their money exclusively in to one thing and then if they have any sort of speed-bump or hiccup it can completely break them. I am hyper-sensitive to this issue and therefore make sure to have my cash spread out over multiple areas.

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How I Split Up My Paycheck

Understanding that I don’t have all of my cash tied up in the same place is important to understand why I split out my checks the way I do. I’m paid on a bi-weekly basis and my income can fluctuate significantly as I am 100% commission based. So everything I do is based on percentages, not on flat dollar amounts. When I receive my check every other Friday, it is split out as such:

  • 10% pretax goes to my 401K along with my company match
  • A large portion goes to taxes (obviously)
  • 10% of the gross dollar amount goes to my long-term savings account
  • 10% of the gross dollar amount goes to my investment account
  • The remaining amount is used to pay bills, mortgage, insurance, utilities, food, fun, business expenses, etc.
  • Finally, any remaining disposable income at the end of the month is used to make additional principal payments on our rental properties.

Quick notes on each of these items:

401K – Nothing fancy here. Standard 401K through my company with a company match, I make sure to have my contribution high enough to maximize the company match every two weeks. The investments are allocated on a percentage basis as recommended by my financial advisor who handles my investment account (see below).

Long-term Savings Account – I’m sure everyone knows the rule of thumb that you need 6 months of bills saved up in the event of an emergency. I prefer to have 12+ months in liquid savings. Many financial experts have told me this is foolish and I should “have my money working for me.” However many of these “experts” went bust during 2007 – 2010. While I did have to tap in to this emergency fund for several months, I came out of the financial crisis unscathed and it was only because I had sufficient reserves to carry me during the hard times. I’d encourage everyone reading this to have MORE money saved in your emergency fund than you really think you’ll need. An important saying that I’ve long held on to is “I’d rather have it and not need it, than need it and not have it.” I think this statement is one of the most important things to understand about your long-term savings account.

Investment Account – I have an actively managed investment account with a local investment manager. I meet with him once per year to review my goals, my portfolio and his performance. His annual charge is between 1% – 1.5% of assets under management (depending on portfolio size) and he has a unique value in that he reduces his charge by any trading fees that you are charged each quarter. Many investors shy away from working with an active investment manager because they feel like they get eaten up by trading fees. My manager is unique in that if he spends a ton of time trading the portfolio, it will quickly eat in to his profits and will not serve his interests. With his unique commission structure, our interests are aligned and I see that he only puts me in to the best investments that he can justify long-term and I don’t see a lot of short-term, low yield trading. This strategy makes me happy and makes him more money, it is a true win-win scenario.

My 4 Requirements for Real Estate Investing

Now let’s talk about my real estate investing strategy. I apologize for waiting this long to get in to the meat of what you want to know, but I thought it important for you to understand my entire investing strategy so you can see how it all ties together.

I have very simple requirements with every property that I purchase:

  1. Denver Metro Area
  2. Minimum 7% cap rate – Including 8% management, 8% reserves and 5% vacancy
  3. Turn-Key to Minor Rehab (less than $5000)
  4. My property manager has to like the property and be willing to have it in his portfolio.

Let’s hit each of these areas individually:

1 – Denver Metro Area – People tell me all the time that there are great opportunities in Phoenix, Omaha, Detroit, Timbuktu and anywhere else in the world. I have 100% confidence that they are telling me the truth and there are great opportunities there, but those areas have two major problems:

  1. That’s not where I’m located.
  2. I don’t know anything about those areas.

For problem #1 that I’m not located there, people always say “well get a property manager.” That’s a great solution until you have a problem with the property manager. What if the property manager doesn’t do a good job or quits or goes on a drinking binge or any other of 1000 different things that could happen and I need to jump in and manage the property myself for a period of time. It would be a hell of a lot easier to do that with a property that is within a 30 minute drive than a property in Tulsa, Oklahoma (or wherever).

Problem #2, people say “well you could get a realtor to teach you about the market.” This is true, but there is no substitute for experience in the area and understanding what are the good and bad parts of town. Also being able to drive by and look at a property is a critical feature that I just can’t get if a property is so far away that I need to get on a plane in order to see. Out of area investing might be good for some people, but as far as I’m concerned, if the property is outside of the C-470 loop, then it might as well be on the moon and I have absolutely ZERO interest in it.

2 – Minimum 7% cap rate – I think that every investor should have a metric for how they look at properties and determine if it is a good deal or not. The metric can be as simple or as complicated as you like, but most importantly you need to be CONSISTENT in applying the metric.

For me, I like to see a 7% cap rate including vacancy, management, and reserves. Many people say this is too conservative and I miss out on better equity or better deals or marginal deals or flip opportunities, etc. All those things are great, but that is not what I’m looking to do. I’m looking for simple, long-term properties that I can keep and generate cash-flow over the long term. If a property is a 7% cap rate today, then I’m confident that it is in a decent area, has average appreciation potential and likely will be a strong property in the long-term.

3 – Turn-Key Condition or Minor Rehab (Less than $5000) – This is simply a function of the best use of my time. I am a full-time mortgage lender and I do not have the time or the interest in rehabbing a property. I don’t care if the equity gain is $20K, $50K or even $100K. This is not what I’m good at, it is not my area of expertise and it is not something that I’m looking to learn. I am very happy with a property that needs little to no work and will meet my long-term cash-flow goals.

4 – My property manager has to like the property – This is a critical piece that I think many investors miss out on. When I find a property that I’m interested in, I look at the numbers based on my best guess and I put the numbers in to my spreadsheet (get a copy HERE if you don’t already have one).

If the numbers are greater than 7% cap rate, then I call my property manager and get his estimate on the rents. I plug his estimated rents in to the spreadsheet and if it is still greater than a 7% cap rate, then I call my realtor and go see the property. Then if I like the property and the rehab fits in my metric of $5000 or less, I call my property manager and have him meet me to look at the property. If he agrees that the rent number is still reasonable and the rehab number is less than $5000, then I ask him a very simple question: “Would you be interested in managing this property for me.” If he says “Yes” then I buy it. If he says “No” then I don’t buy it.

The property manager is the person who has to deal with the property every day and this is his opportunity to say that he doesn’t want to deal with the HOA or the tenants in this area or the potential problems or whatever. I have a great relationship with my property manager and because I don’t buy crappy properties and saddle him with a bunch of junk before he has a chance to look at it, then I know that he’ll do a good job for me because he has a say in what I buy and what he has to manage. So I don’t have the worry of my manager quitting on me or not doing a good job, since he had veto power before we ever even put an offer on the property. This minimizes the headaches and problems later down the road.

How I Finance My Rentals

Once I find the property that I want to buy, then I deal with the financing. My financing is very simple. I have a HELOC on my primary residence that I use to buy all of my investment properties. I have my realtor (Charles Roberts) write the offer as a cash offer with an inspection objection, but no resolution (this gives me the option to inspect and cancel, but not to go back and ask for inspection items from the seller) and with no appraisal and no loan contingency and close in 2 weeks. Once we get past the inspection and I’m happy with the property, I advance the HELOC and wire the funds to the title company so they have the cash several days in advance. Once I close on the property, I hand the keys over to my property manager and I get a direct deposit from him on the 15th of every month.

Now I’m sure you’re thinking…. A HELOC isn’t a permanent loan, how do you buy more properties once the HELOC is fully drawn? Remember all the way back at the beginning of the article when I broke down my payroll deductions? At the end of each month, we take any unused disposable income and apply it to the HELOC to pay down the balance. Once the HELOC is paid down to 0 or down to a level that I can advance it and buy another property, then I’ll start looking again. But if the HELOC is advanced to an amount that is not sufficient for me to buy another property, they I don’t look until I get in a better position. This strategy allows me to remain very UN-Leveraged and not subject to any wild swings in equity, rent changes or vacancy issues.

Using this strategy, I buy 1 property per year and I don’t have to take a ton of time away from my mortgage business. As of the writing of this article, I currently have 4 rental properties generating free cash-flow of more than $5000 per month net after all expenses (management, taxes, insurance, HOA, reserves, vacancy, etc.) and this segment is already ¼ of my long-term goal (not including any dividends, stock gains, bond payments, etc. from my other investments). Based on my progress and my plans, I should achieve my original goal within the next 8-10 years and can then decide if I want to keep working or do something different at that time.

I hope this has given you some good ideas about a simple and conservative investment strategy. If you have other questions or if I can help in any way, please feel free to call or email me anytime. (303) 809-7769jmassey@castlecookemortgage.com
www.loansbyjoemassey.com

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Joe Massey
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