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12 Steps to Financial Freedom

The 12 Steps to Financial Freedom provides you with a Step-by-Step approach to acquiring your first property. Use this site as a summary of what you've learned in our seminar. If you have questions, please send an email to richdadnyc@yahoo.com. Please keep in mind that there are a lot of members in the group so please be specific in your questions in your email.

Step 1: Creed
Say out loud with conviction the following pledge:

"If I ... do not buy ... a property ... by Decmber 31st ... I ought ... to be ... ashamed of myself !!!"

It's so easy to purchase an investment property. Regardless if we're in an Up Market, Down Market, or things just aren't moving there is always a deal. The difference is having the right education to identify which sector of the real estate cylce we're in and invest accordingly. By taking this personal pledge you are accepting responsibility to have No Excuses for not achieving your financial freedom goals.

The second part of the process in reshaping your investor attitude is creating some motiviation for yourself. I found life coaching techniques, "The Secret", and many, many other develomental ideas really do work. so what I want you to do is to right your Resignation Letter. That's right !!! You read it correctly. Write a formal letter from you to your manager dated Dec. 31st stating that your officially resigning from your position. I then want you to tape this letter to the back of your front door. So everyday when you leave you got a constant subconcious reminder as to what your focus is. This Vision Board technique will help you stay focused and on track to accomplish the goal you've setforth for yourself in creed.

Step 2: " Get Your House in Order "
Although money and credit are not required as you go through the 12 Steps it certainly makes it a whole lot easier. If you've done some of these exercises previously it's always important to update your information:

  • Credit - Your credit score determines your "willingness" to repay a debt. In todays market, lenders place more emphasis on the credit score when considering approving your loan application. I recommend using myFICO.com as it's one of the closest consumer reporting agencies that will generate a credit score close to what lenders use. Get All 3 FICO Scores and Credit Reports! If your middle credit score is not at least a 680 you'll need to do (a) bring a partner into the deal that has the credit score or (b) work on a credit restoration program to increase your credit score. We've done a credit repair seminar and perhaps you can get a copy of it.


  • Assets - Your assets determine how much money you have available for the Downpayment & Closing Cost of your purchase property. Although you can actually by a property with as little as 5% Down with the bank, I'm suggesting that you have about 20% Down payment and 4% for Closing Cost. so just to make the numbers easy you should have 25% of the Purchase Price of your property in cash. Now, we've learned that it doesnt have to be our "cash" but leveraging someone elses. In this case, our partner for the deal is the bankin forms of unsecured business credit lines. These lines can be credit cards and line of credits as we've discussed in previous sessions. If you've missed those seminars, perhaps you can get the tape or ask someone in the group who has been through the process to be your mentor. If you cannot come up with the 25%, then consider bringing a "money partner" into the deal to contribute the cash you need to close on your deal.

  • Income - Your income determins your "capacity" to repay a debt. Although we're only purchasing positive cashflow properties, the Lender wants to make sure that you can manage the debt you do have before taking on anymore. What that means is that you should have no more than a 38% debt-to-income ratio. That means take all the minimum payments that are shown on your credit report, add them up, and divide them by your gross monthly income. This is your debt ratio. If you don't make enough income, you may have to find a partner with the W-2/paystubs or tax returns to help you qualify for the mortgage.

  • Financial Statements - You have to know where you are and where you'd like to be in order to map out a plan to get there. Your financial statements help you to do this. You should complete as much as possible of the (1) Income Statement, (2) Balance Sheet, (3) Cost of Capital, and (4) Working capital. You can download the EXCEL spreadsheet at Financial Statements. I also suggest opening up your FREE account at Mint.com. This is a great website where you can view most of your online accounts in one centralized place. However, the best thing about the site is it will give you great recommendations on how you save more money and reduce your expenses. Sounds familiar.. :-) Like your acccountability call homework.. LOL

    Look at your Income Statement. Your financial freedom goal is to have your passive income exceed your expenses. This is your magic number. However, you're cashflow requirement for this assignment is that you have at least $100/month of positive cashflow.
Step 3: Farm Your Area
The general rule of thumb is that you shouldn't purchased your first investment property more than 50 miles from where you currently live. I've redefined this rule such that your Farm Area is anyplace that you can get to by (a) Metro North, (b) MTA, (c) LIRR, or (d) NJT transportation systems.

Step 4: Find the Property
Your deadline is to be in contract by Dec. 31st to purchase a property. You're participating in this exercise because it's your first investment property. From my experience, I'm recommending to you that the property you purchase should be a property that within 30 days after closing your new tenant can move into the property. That means that no major repairs are needed for the property and any cosmetic upgrades that you want to do to the property to get the maximum market rent should all be completed within 30 days. I added an additional suggested requirement that your 1st property should probably be a condo or coop since the maintenace of the property is taken care of by the buildings management company. And because of the current state of the real estate market I don't suggest buying, fixing up, and flipping the property. You may end up holding it longer than what you anticipate because of the slowdown in sales.
  • Lead Sources - Use the foreclosure sites listed on our website. You can also check NY Times, Craiglist, Village Voice, Realtor.com, etc. other sites to find highly motivated sellers. Distressed properties in today's market comes from many sources: pre-foreclosure/short sale, foreclosure, bankruptcy, tax liens, divorce actions, and property has been on the market more than the Seller would care to admit. Therefore, just don't limit yourself to once lead source for finding properties in your area.


  • Spreadsheet - Use your Farm Area Spreadsheet to keep track and organize your deals. Use HUD Fair Market Rent System to fill in the Sect. 8 rents for your area. Use websites like Realtor.com, NYTimes.com, or the local newspaper classified to get a sense of what the open market rents are for your farm area. Use the Property Value sites under the Great Resources ---> Evaluating Real Estaate link to help you guestimate the property market value. After keying in your "Market Value" price, you may want to change this number so that the rest of the formulas calcuate until you have at least $100/month positive Cash Flow.


  • Submit An Offer - Send an email or fax or call the Seller to submit your offer. I found it always best to disclose your intentions upfront so let the Seller know that you're an Investor looking to purchase a cashflowing property. You have been pre-Approved by your lender and your ready to close when the Seller is. Here is a sample email you can send:

    Hi Joe Realtor,

    I would like to submit an offer for $XXXX to purchase your property located at 123 Main St Anywhere, USA 12345. I am an Investor pre-Approved by my bank to close in 30 days. Please email me the contract.
    Notice how I used a positive close with "Please email me the contract". This ascertive statement does not leave your email open ended to negotiate the price.

Step 5: Due Diligence
This is when all of that hard work that you've put in really begins to pay off. In this Step you'll do furthur investigation to verify what the Seller, Realtor, and others have told you about the property. You'll check the actual data against the estimated cashflow that you calculated in your Farm Area spreadsheet and make adjustments accordingly.
  • Step 4a - Accepted Offer - Congratulations !!! Every week you've been updating your spreadsheet with new "distressed" properties that you've found. You've emailed the Seller and after a lot of going back and forth you've agreed to a price. During this art of negotiating you've ascertain the Sellers "real motivation" so keep this information in the back of your mind as you may need to use it to get even a lower price as you go through your due diligence phase. As soon as you learn that you have an accepted offer, email richdadnyc@yahoo.com to spread the good news and get more guidance through the process. Your email should include the following:
    1. Purchase Price
    2. Property Address
    3. Monthly Property Taxes
    4. Monthly HOA Dues
    5. Amount of monthly cash flow
    6. Return on Investment (ROI)
    7. Estimated Appreciation Rate
    8. Amount of property equity you'll have at closing
  • Based on your email to me I'll help you complete your preliminary analysis to see if it's worth while going into contract on the property. This would be a great point to now complete your Buy This Property or Not spreadsheet. In fact, if you want you can just email me the spreadsheet since it will have the information I would want to see. In addition, please include in your email your thought process as to why you think it's a good deal !!!

  • Step 4b - Sign Contract - As soon as you receive the contract from the Seller, you should begin to verify your numbers and have a Real Estate Attorney review your contract before signing it. Now that you have the actual price of the property, you need to go back and update your Farm Area spreadsheet with the (a) price, (b) current rental income, and (c) actual HOA dues if it's a condo/coop or actual real taxes and insurance if it's another type of property. Attorney should review the contract with special attention to the details of the following:
    1. Ernest Money Deposit - Also known as the "Good Faith Deposit" is typcially required to make the contract legally binding upon signing. For example, if you're purchasing a HUD foreclosure the gov't requires $500 if price is less than $50k and $1,000 if it's greater. However, there is no set rule when purchasing from other Sellers. Try to negotiate the least amount of deposit as possible. In fact, there's a strategy I've taught where instead of giving actual money as the deposit you give a Promissory Note which states that the deposit will be given at the closing table. Check it out being used in Ryan Smith's Purchase & Sale Agreement.

    2. Mortgage/Financing Contingency - This contingency allows you to get out of your contract if you cannot secure financing based on the terms outlined in your contract. Depending on the state, some real estate contracts actually state whether the mortgage is conventional financing or not, adjustable or fixed rate, the term, and max. interest rate for your financing. You will negotiate with the Seller how long you'll have to secure financing for your deal. Try to go for 45 days but no less than 30 days to apply and be conditionally approved for your mortgage.


    3. Title Contingency - You or your Attorney will order what's called a Title Report (Lien Search if it's a coop). This report gives you insurance that the Seller has the legal right to sale you the property. The report will also highlight any city/county violations, Certificate of Occupancy issues, or unresolved liens, judgements, or unpaid taxes/water bills. The title company will also run a check against the Buyer for any outstanding liens/judgments as these can attach to any personal property you purchase. Remember in Step 2 where I advised you to review your credit report well by now all of these types of issues should be resolved and clear title can be issued. A good title company can have your report ready for you in about 15 days but try to negotiate 30 days for this contingency.

    4. Appraisal Contingency - Although no one and I repeat no one should be signing an "All Cash" deal in today's market just in case you are I'll cover this contingency. An appraisal contingency allows you to cancel your purchase contract if the property does not appraise for at least the purchase price. You typically want to negotiate 30 days as well for this contingecny. In today's slow market, an appraisal company shouldn't take more than a week to get your appraisal report done.

    5. Closing Date - Also known as "Close of Escrow" this is the date at which you must close by. If you don't the Seller's Attorney may send you what's called a "Time of Essence" letter stating that if you continue to extend the contract closing period you may be in jeopardy of loosing your Ernest Money Deposit for non-performance of the contract.

    6. Rider/Addendum to Contract - If any of these items are not specifically spelled out in the contract you receive from the Seller then your Attorney should create and attach a Rider to the contract. Additionally, the following items should be placed in the Rider for your additional protection:
      1. Property Inspection Period - You typically want 45 days to have your Property Inspector gain access to the property, provide you with a report, and you convey any repair items that must be address by the Seller. Seller has to ensure that you have access to every unit(s) for inspection.

      2. Partner Approval - This is your "end all .. be all.. get out of jail free card". Simply put "Subject to Partner Approval" and if all of your other contingencies are met and at the end you decide that you don't want to purchase the property you can simply say that you're Partner did not approve of the deal.
    Keep in mind that some of these contingencies overlap but it's just good to know that they exist in some form in your contract. Remember like everything else they are negotiable and your Seller will want the least amount of contingencies as possible but it's up to you to negotiate there existence in your contract because they're all for your protection.

    Now that you've negotiated all of your important points of your contract its time to sign, date it, and give an Ernest Money Deposit if any. Now the real fun beings !!!


  • Step 4c - Build Championship Team - As we learned in the 23 Billionaire Principles we must build a championship team. You may not need every member of your team for every property but here are your team members and how to find them:
    • Attorney - Your Attorney should definitely be a real estate attorney. And if you're purchasing a coop/condo it should be an Attorney that has experience in these type of transactions. Coop/Condo buildings come along with Offering Plans and coop's have Stock & Lease documents that must be reviewed. The best place to start in finding an Attorney is a referral from a trusted source like a friend or family that has purchased property and can refer a good Attorney to you. Other members on your team may have recommendations as well. Every Attorney operates differently but usually cost from $750 - $1,500 per transaction. Regardless if you close or not they must be paid for their services.

    • Property Manager - Property Managers are like the captain of your ship. Just think of them as the Chief of Operations. You can partner with an individual or a company. Regardless of entity you choose, the property management fee can range 7% to 10% of the gross rental income. You definitely want to find a property manager that is experienced in your property's neighborhood and property type. However, you don't want a property manager that's too busy and cannot give your property the proper attention it needs especially if it's a value play. Try to check 3 references before deciding on a manager. He/She should have a clear definition of your goal in holding this property in your portfolio. I'll add this disclaimer that since you have at least a Super in a Coop/Condo bldg that I think you can manage the property yourself.

    • Contractor - Since you're buying a property that should only need cosmetic repairs/improvements that can be completed within 30 days of closing a home improvement contractor should have the expertise you need. You want to ask your property manager and other team members for a referral as well as friends/family. The key to hiring a contractor is choosing someone that is good at estimating (a) how much it will cost to do the job and (b) how long they think it will take to get the job done. Whatever quote they give you I would always add another 10% to the final number and another 2 weeks to the estimated time. It's a good idea to choose the best contractor from 3 different estimates. This will give you a better checks and balance on the estimated cost and time to complete the work. You also want to speak to 3 referral sources about the quality of work of the contractor you finally decide on. And if you're having work done in a coop/condo buiding you should definitely find out any additional fees or paperwork that the Board requires in order for you to have the work done in the apartment. Board's typically also require that the contractor has an adequate amount of general liability insurance in case any damages to the building are done during renovations. Never pay your contractor upfront for the complete job. It's recommended that you give a deposit and balance upon your satisfactory completion of the work.

    • Other Team Members - After closing and depending upon your portfolio size you may have to add a Realtor, Bookkeeper, CPA, Tax Strategist, etc. to your team. But for now at least bringing on board the Attorney, Property Manager, and Contractor should be enough to get you started. Remember, your Property Manager is like your COO so as different things come up the manager should make recommendations to you of who to outsource the task to.

    Remember, you are as only good as the members of your team. They can make or break your company. Choose wisely in building your team and replace members as you move along and new levels of expertise are required. Your team sort of serves like the Board of Directors of your company as well as virtual companies that you hire to do each task required to make your investment successful. Also keep in mind that you get what you pay for so unlike our negotiation strategy in dealing with the Seller we definitely want a different approach in selecting our team members.

  • Step 4d - Secure Financing - Now it's time to pool your money sources together. You need to ensure that you secure enough financing for the following:
    • Lender required down payment
    • Mortgage amount
    • Closing Cost
    • Renovation Cost
    • 2 months of operating expenses for reserves
    You should go back and update your Purchase Price in the spreadsheet with the all inclusive total cost of project.

  • Step 4e - Property Inspection - Housemaster rent roll water electric bill tax bill contractor estimate repairs back into spreadsheet
  • Step 4f - Pre-Lease -


Forms & Spreadsheets
Ryan Smith's Purchase & Sale Agreement
Suze Orman's Unsecured Promissory Note

Financial Statements
Buy This Property
Farm Area
Negotiating Scripts (coming soon)
Developing Your Team (coming soon)


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