Huh? Real Estate that pays for itself - what's the catch?


About 2 years ago, I left my job in Australia in the banking and finance industry and moved to the US with my wife and two young children.

We didn't know anyone here. We didn't have any connections or friends. No job offer. Crazy? Yes!

But coming to the US was something we'd wanted to do for a while and things lined up the right way and we took the leap and we've never looked back.

When we arrived, because I was no longer working, we had plenty of time on our hands. It was delightful and dangerous. I enjoyed checking my phone and not having my Blackberry accumulate 150 e-mails a day. But at the same time, I was so used to being 'on' that I was beginning to find it challenging to stay motivated - I had lost my purpose. I had worked for a decade in my chosen career and had progressed from being a part time phone consultant to a Regional Manager running a division with a $700m balance sheet and responsibility for 7,500 customers. I had a housing and vehicle allowance, and a great six figure salary. Now I had - well - nothing. No responsibilities and nothing to drive me. I wasn't needed.

So I started looking around and thought i'd go back to my first love before banking - real estate. I purchased my first investment property when i was 18 - i was still in high school. I didn't have a job. Or a deposit. I won't go into how i got the loan or made the repayments the first few years - both were a miracle. Over the years I continued to buy homes and set myself a personal goal that I wanted to have a portfolio worth $1m by the time I was 30 years old. I hit almost $2m by my 28th birthday.

So landing in a new country I (wrongly) assumed the system was the same as the one i was accustomed to. In Australia, you purchase a home, lose money on it (the rent doesn't cover the interest and expenses) whilst you own it and then hopefully you sell it in a few years for more than you paid for it. The process is called negative gearing and basically the money you lose (expenses of holding the property minus the rent) can be claimed against your income earned from your job which in turn reduces your taxes. Overall, it is a good way to grow your wealth and it served me well for a long time.

Eventually though, you run out of money to lose. Once you have a certain amount of debt, the bank will no longer lend to you as you've used up all your disposable income from paying into the properties you are negatively gearing. At this point your investing hits a brick wall and you have to wait until either your salary increases (more disposable income to invest) or you pay down debt so you can borrow more. Either way, it's a SSSSLLLLOOOWWW process at that point.

One day, I heard something that rocked my world. I don't remember how it happened, but I remembered the impact it had. I was listening to someone and they said that they could buy properties that paid for themselves. What? Paid for themselves they repeated. Hang on - you mean properties that eventually go up in value and when you sell you get that money back? That was my thinking and mindset as that was what i had done in Australia.

"No" he responded. You can buy a property, RIGHT NOW, that after all the costs puts money in YOUR pocket. I was floored. And skeptical. How could that be? There had to be a catch. I started to research and ask questions and sure enough, lots and lots of people attested to it. You could purchase a property, finance it and the rent would cover not only the interest, but also taxes and insurance and still put a surplus in my pocket.

I don't know how many people i asked, but it was a lot. I would sheepishly get along someone that looked like they understood investing and ask them - hey, what's the catch? What do you mean? was usually the response. Well, I've heard you can buy real estate that cash-flows using only the rent and that it covers interest and expenses. Yes - they would respond. What's your question? I would reply - what's the catch? Why isn't EVERYONE doing this? i would ask. Why wouldn't you just buy everything you could get your hands on. They would shrug their shoulders.

In Australia, each property purchased REDUCES your cash-flow, here, each property INCREASES it. I didn't believe them. So i kept asking people and kept getting the same response. Eventually, I did my first deal and purchased my first US property and the rest is history.

What i learned through the process was this:

1. My experience in real estate in Australia closed my mind to other opportunities - because i was so experienced it lead me to believe all markets are alike

2. It WAS possible to buy cash-flowing properties

3. Capital growth or appreciation was not the only way to make money with real estate

Well since that time I've purchased many properties for myself and my clients. They all cash-flow and provide a fantastic return. Whilst there are a lot of pitfalls and things to know, i can tell you that in the end, there's no catch! You just have to be open to the possibility that you don't know it all and there are other ways to be successful in real estate investing. This one revelation changed not only my understanding of investing, but has propelled us down the road towards financial freedom.

What preconcieved ideas or experiences do you need to shatter in order to open your mind to new possibilties?