I know many and many of you love real estate or maybe you have been thinking about it and you’re interested in it and would like to know more. It is something that I have a personal interest in and am getting more and more knowledge on it. As such I have been listening to some podcasts and one of my favorites is a man who is here with me.
He’s a seasoned gentleman, to say it politely. He’s done 1,000 of real estate deals and many and many courses.
He is the real deal. He brings out of the box thinking that I think will be very valuable to us today. About how to invest in real estate, what to look for, weather your dead broke like a resident or extremely wealthy and have some cash to put to work.
Please help me welcome Larry Harbolt of the Larry Harbolt show!
In this podcast you will:
- Discover why real estate is the #1 way to generate money from assets.
- Learn about the critical difference between seller financing vs bank financing
- How to find the deals without using realtors
- Find the lessons learned throughout his 30+ year career in real estate
- Discover the 4 types of real estate purchasing
- Learn Larry’s best business advice to physicians (HINT: It’s not what you may think)
Resources mentioned in this podcast:
Email: info@larryharbolt.com
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Dave: My name is Dave Dennistion. Welcome back to the latest episode of the Freedom Formula for Physicians podcast. This show my friends is about helping you slash your debt, slash your taxes and live a liberated lifestyle. About once a month I bring someone on the show that have some unique perspectives. As a matter of fact I am at a conference right now with other podcasters.
I know many and many of you love real estate or maybe you have been thinking about it and you’re interested in it and would like to know more. It is something that I have a personal interest in and am getting more and more knowledge on it. As such I have been listening to some podcasts and one of my favorites is a man who is here with me.
He’s a seasoned gentleman, to say it politely. He’s done 1,000 of real estate deals and many and many courses. What I like about this guy is he is the real deal. He brings out of the box thinking that I think will be very valuable to us today. About how to invest in real estate, what to look for, weather your dead broke like a resident or extremely wealthy and have some cash to put to work.
Please help me welcome Larry Harbolt of the Larry Harbolt show! Welcome Larry.
Larry: Thank you, Thank you. Pleasure to be here. I understand that most of the listeners are doctors of all different income levels; so today I wanted to talk about ways to generate money from assets that pay for themselves. Real estate is the number one item on my list. I have been doing real estate investing for 38 years. Most of the stuff that I have done has been seller financing, where I pay the seller every month. Instead of getting bank financing or borrowing from individuals. I have done that most of my career because when I started I had nothing like many of you. I think that would be a good thing to talk about.
Dave: Perfect. I am looking forward to that Larry. I think it would be good to give people a background on you. We were talking before and you were not always involved in real estate, so where are you r from and how did you get started on this journey?
Larry: Ok I grew up in south west Michigan in a little town of 800 people. I was born into a dairy farm family. We had very little. We had 3 families living out of one little check from the milk we sold. It was hard to survive. Thank God we had the meat and vegetables to survive on, but that little town of 800 people is where I got started. The time I got started I was 31 and that was in the late 70’s. So my income at that time, I was a union pipe fitter. After I got out of dairy I became a union pipe fitter. I was unemployed a lot because of the Michigan winters. It was hard to feed 6 children, which I have on an unemployment check. So I had to do something. I thought I would get into real estate being a famer real estate is very important part of your life. So I thought I would try the real estate. The only problem: I had no money and had horrible credit because I was unemployed a lot. So I was always late with payments, didn’t have the money. I wanted to get started and I got started, but I had to be creative to do my deals. Because when you have no money, no access to money, nobody will lend to you and your credit sticks, it’s really hardtop get people to trust you. I got started buying houses and what I did was I paid the seller. Instead of getting intuitional financing or borrowing money from a friend, I would pay the seller every month until I paid off the entire property.
Dave: I think that is an interesting idea, particularly for someone that does not have dough. I would love to know step by step, if you can remember, the very first house or building that you purchased. How did you find the property? How did you find the person? How did it come about?
Larry: That particular property, my first deal, was a three unit building. A real estate agent told me about it. It was in another small town, population 450. I decided I would take a look at it. He told me to go and talk to the banker that took the property back in foreclosure. So I went to talk to Mr. Petty. Mr. Petty brought out a folder, actually a stack of folders of properties they took back in foreclosure. As we talked, he knew at the time he knew I was not only a pipe fitter, I was a licensed builder. So he showed me tis 3 unit and I asked him what he was asking for it, you have to understand this is Michigan in the 70’s. They wanted $60,000. I said oh, ok. I asked how much repair does it need. He showed me an estimate from a local contractor in the amount of $8,000. Then he said are you interested. I said sure I am interested, but I said I have a problem I am just $60,000 shy of having enough to buy the property. He said something very strange, he said that’s not a problem. So then I said I am also $8,000 shy of having enough to do the work. He said that’s not a problem either. What I didn’t realize is that it was the end of the year, these properties were held on their books as nonperforming assets. So what he did was he sold them to me on land contracts, where you pay the seller every month and you do not get the deed until the last payment is made. Then they escrowed $8,000 into an account. As I got work done to the property I would bring in receipts and picture and they would release money so I could pay the contractors. Those were nothing down deals. I found out that was a wonderful program. I bought more properties like that from different banks in different small towns where I lived, but when you have nothing you have to get creative. Once the banks did not have any more of those foreclosures they wanted to sell. Then I had to start dealing with the sellers. When you are offering a sellers something other than cash you need to be creative in how to do it. You have to figure out what the sellers want and you have to give them what they want. Negotiating with sellers is not something that everyone has time to do or wants to do. That’s how I got started, that’s how I built my knowledge base.
Dave: Perfect. I wonder what do you think life would have been like if you did not do that first deal. Would you have done something different? What do you think life would have looked like if that first deal fell through at that time?
Larry: You have to understand that in Michigan at that time the only way that was the accepted way to make money was if you had a job in a factory or in construction. I would have just struggled along, I had to feed those kids. I wanted to have a life for my family, so I would have done something. But the real estate has given me so much freedom over the years, it’s been a struggle at times, but it has given me a lot of freedom. To get started in the business it doesn’t have to be complicated. It doesn’t have to take a lot of money. It doesn’t have to take getting financing if you know how to structure a deal to give you the maximum profit that you can make off of it. That’s what I teach all my students how to do.
Dave: So it sounds like finding the deals could be challenging, could be difficult perhaps. I know that you emphasis on your show, The Larry Harbolt Show, to not to go through realtors most of the time. To find deals through alternative means; like mailing people out for example. I understand that you have letter templates for example that you give out to some of your students. I am wondering for some doctors that are really really busy to lick stamps and put them on letters. Number one how would someone get started? For a resident or fellow that thinks this sounds kinda interesting, but they are really concerned about their time and resources for mailing out. Where should they go? How should they get started with this?
Larry: First of all you need to know your market place. So no matter where you live you have to know the properties in your area. If you do not have time to do that, you need someone you can trust that knows your area that you can give you quality advice. I do letters; my wife and I sent out letters. Now we have hired people to hand address the envelope and the letter and mail them out. We provide the stuff. If you do not have time than you can hire people to do it. One on the unique things we have done in the past was we hired an elderly lady to hand address our envelopes that had very shaky handwriting. That was a blessing; that shaky handwriting I guarantee my letters got opened when others were thrown in the trash. Because everyone wants to see what is in a letter from grandma. That was a blessing, But then she passed away and we had to find other ways of doing it. My point is know your market, know the values in your area or get with someone that does.
As far as working with real estate agents. I never look in the multiple listing service. Now the reason being the MLS is like a bowl. In that bowl there are pieces of paper with property addresses on them. When those properties get listed the people that do tons of deals, they know the market and have unlimited cash they pick out the choice ones. So by the time we get there we have leftovers. So as listed in the MLS I do not think that there are good deals in there. Another point the real estate agents are sales people, but they try and keep you away from the seller. I have to talk to the seller and figure what they need and create a deal that is good for my family, I hope it is good for their family. So it is very, very important the market you want to go after. So may want to go after single family homes; some may want to go after multiple units. The critical part of all of it is you must know the numbers. It’s all based on numbers, not on price. Price is less relative if you are going to pay the seller over time and you don’t have to get an appraisal. I can give a little bit more that what the property maybe worth if I can get an affordable payment and run it and cash flow it.
Dave: I think that it may be helpful to go through an example of maybe one thing that worked great and one thing that horribly went down the tubes in a time that you invested in real estate. May be you can think on that for a second. A lesson you learned along the way that you can pass on to us, the listeners what is something that went well and perhaps your best deal and on the other hand something that went horribly wrong with a property when you invested in it.
Larry: When did something go wrong…I have numerous stories. You have to understand that for the first 16 years I was in the business I learned from the trail and terror method. I had no education, I just went out and made mistakes; that’s how I learned. From that I now teach people how to avoid the mistakes, that’s a blessing. You do not have to make the mistakes I made.
My best deal: I bought a property and the people pretty much stuck on price and did not want to give me installment sale or pay them by the month. Because I wanted to keep it as a long term rental, let’s just use the number $100,000, they wanted $100,000 cash. I did not have $100,000 cash. So I said how about this: I will give you $120,000 if you will take (however much I figured I could afford in payment). By giving them an increase in price that convinced them they did not interest because they are going to get more out of the property. It allowed me to get in with no interest. Interest is a negative. If you pay interest it can be good for a tax deduction, it is also a negative. They got what they wanted and I got the property. You have to realize I do not pay a penny for my rental properties. My tenants get up every day, go to work, earn money to give me in the form of rent to pay for my assets. That money gives me my lifestyle and someday when they are paid off I am going to look like a genius and have several million dollars in real estate. Someone else is paying for your assets and your life style that’s the beauty.
My worst deal: I tried to block them out of my mind. I bought a house that was a real real real dump; not knowing any better. I put in a tenant without screening them that was horrible. They ended up ripping up every door off the hinge, after I demanded that they pay me rent. Can you imagine me wanting to get rent to make the payment on the property? They ripped off every door and piled in it the living room floor. They took a hammer and smashed in the wall between every stud in every room.
They tore the treads off the stairway going up the stairs. They went into the bathroom and ripped the tub out and smashed it with a sledge hammer. They took the toilet and smashed it. The lavatory they smashed. They went in the kitchen, ripped all the kitchen cabinets loose and smashed them. That was a bad deal, but they didn’t realize is I should have thanked them when it was all over because they did half the demolition work that I needed to do to fix up the property. That was a horrible deal, I did not make any money. It did not benefit my family at all. I have done serveral of those and that is just part of not knowing what to do.
Dave: Well here is what is on my mind Larry. When I think of the opportunity of real estate and where things might be headed. Obviously people need a place to live, right. So real estate is good from the perspective. As I look down the road to where the economy is head or whatever. As I look at real estate; whether it’s owner financed or bank financed whether you owe interest or not. You are still making a monthly payment to someone in some sort of case. I come from the belief that there is good debt and bad debt. Bad debt in the form of consumer debt especially. Student loans fall into that category cause it’s no long tax deductible, which for a lot of physicians that is the case. With real estate certainly, the younger physicians that are listening, those that are residents or fellows and newly practicing physicians. Taking risk, which what debt is a form of leverage or leveraging up. When you do not have a tenant you could put yourself in the hole potentially especially starting out when you do not have a whole portfolio of properties. For me I feel that at some point that being debt free or at least mostly debt free is a good thing to do. Because you do not have to worry about collecting that rent check any more you just have minimal property taxes or whatever. I would be curious to get your thought on that because you believe in owner financing. Is there a point where older physicians that are listening should be deleveraged, so they do not have the commitments to pay every month someone every month whether it is the bank or the owner?
Larry: Well for those that actually have money and they are looking for a way either to generate more income but not necessarily be taxed on that income. One of the things that I do is when talking to someone in a high income bracket, depending on what they paid for it. If it is paid off, no debt on it. I may offer then only what they pay for it because that is their base. So when I buy it they are not going to have to pay capital gains because they sold it for what they paid for it. I have even offer $20,000-30,000 less than what they have paid for it, so they took a loss that they can write off against other income in some instances.
So it’s how you structure your deal. Interest, principle is all the same. If you have the money and can buy you can get tax advantages. The value of the properties go up in value if you buy correctly.
You get to depreciate the properties. There are many advantages to owning the property you don’t have to deal with it yourself. You just need someone that will watch what you have and do a good job taking care of it. Because if you are a doctor, you’re established, you are busy. This is a way to write off some of the debt you have.
The other thing I was going to say about offering below what they paid for it is no interest. In other words let’s do a simple deal I’ll give you $100,000; I’ll give them $800 a month for 125 months. Well if they paid $100,000 for the property they do not have any capital gains and no interest which is taxable. So what I have done is I have taken a property where they might have had a big tax consequence and I turned in into no tax on that deal or minimal. They still have to recapture the depreciation they have taken over the years. You structure deals to do them intelligently.
Dave: I want to revisit that question. Is there a point that you say I do not want to keep on having people lending me money essentially? To where you have the obligation to pay them every month whether it is the bank or the individual. Is there a point where I do not want to take on the risk of trying to find tenants all the time and risk that they are not going to be paying me?
Larry: Yes if you have the money and you want to pay for the property that is good. But you as the doctor have to decide what the best use is for that money. Is it better to pay all the cash where the cash is in to an asset that will take time to sell or do you want to make the time payments and have the tenants pay for it? It’s a personal choice. The only thing I am going to say is that you need to know how to buy. It’s all in the numbers. It’s not about oh that sounds like a nicer price. You actually have to do the number and see if it is a good deal.
That’s what we do. We analyze deals for people. We let people know if they will cash flow, if they will pay for themselves and we are realistic about it. I think that knowing what you are going to do, what’s the best use for your money. If you do not want the debt, do not want the risk that’s fine. But you have to realize that if you put $500,000 into an apartment complex it may take you a while to get that money out if you need that money for anything.
Dave: So let’s, we have a few minutes left Larry and I think it would be good to let people know about some of the out of box thinking that I think you have, which is great. Obviously you could buy a property, find a tenant, buy a foreclosure and fix it up. Those are some of the common ways that people know of. But I think one of the things you have talked about in your podcast is the idea of whole sale versus retail. The idea of buy and selling contract rather than buy and selling the property itself. I would love to spend a little time on that cause that is something that I think that is something that physicians aren’t aware of. You don’t have to buy real estate and put a tenant in it, you could actually if you find a good deal sell that deal to someone else without ever actually taking ownership of the property yourself.
Larry: That’s a good point. One of the things that I try and teach all of my students: When you go to someone’s house to try and buy that property. If you can’t make a deal with the seller to give you good terms at a payment that you can afford. I always tell them then try and do a rent to own. This is for those of you that do not have a lot of money, but want to get started. If you can’t buy it with terms that will let you cash flow it. I always suggest do a rent to own, a lease option. You lease it with the right to buy the property someday. At least it gets you in control. You are controlling the property with a lease. If they won’t do a rent to own then I recommend trying to get a master lease with a right to sublease. So you go well armed with three different strategies. It is about cash flow. You have to understand that if I can lease a property with a right to sublease I may have to agree to pay the first $100 a month of any damage done, but my tenant is going to agree to pay the first $125. My point is I am going to try and buy it I am going to try a rent to own. If I can’t get a rent to own I am going to try and get a lease and make cash flow. With that lease you have no taxes to pay. No insurance on the property. You do not have to fix the big things. You may take care of some small things like holes in the wall. The big things the owner still pays and you can still make a good cash flow on it. That is a way of doing it when a seller is inflexible and you can’t buy the property.
The other thing is I believe if you find a property you really do not want to own; this is one of the things that I do. If I find a property that I would never own myself; I’ll put the property under contract. I’ll get the seller to sign my agreement on our terms and I will flip that contract to another investor for a small amount of money. $2,000-4,000 that way I never have to take ownership. I believe that you can make money from every property that you drive past if you know what you are doing. These are just simple things that a person can do. I do not have to have ownership if I have control of a property.
Now when I do my leases or my lease or my options I should say. I will lease for 12 months with a right to renew 10, 12 or 15 more 12 month periods. The reason I do that they can only hold my feet to the fire for 12 months if I want to leave. I can hold their feet to the fire for 10 or 12 years by doing it that way. It’s an excellent way of doing it and it gives you control with that lease. To me if you do not have money it is an excellent way to get started.
Dave: Very good. I think each of these strategies get deployed at different times. Could you very quickly run through; when you look for each of these things what should that look like. When you are talking about just flipping a contract essentially to someone else. When is a good time to look for that versus looking for finding a place with a tenant in terms of the market itself? The market changes, it’s not always the same. Prices go up and down. Maybe there is a smaller supply or a larger supply. How would you think about foreclosures for example, when is a good time for foreclosures versus looking for widows and the husband has passed away and they are looking to down size versus the idea of flipping the contract you were talking about.
Larry: Well because I send letters out I never know what kind of property that I get a response from the seller. It could be a dump it could be a mansion. You just never know. All I know is that I target properties that are free and clear and no debt. The people do not live in the property that own it. There is a reason for that. They are going to get killed in taxes. If they live in the property any two of the last five years IRS section 121 says that a single person can take up to $250,000 of their gain tax free and a couple can take $500,000 of their gain tax free. So if they live in it I lose my negotiating benefit. If they do not live in it they are going to get killed in taxes the year of the sale. They have to pay back all of the depreciation. Then after that they are going to pay capital gains on any profit. I recommend if you are going to buy a property and sell it I recommend rent it for 12 months and a day and then you are in the long term capital gains which is at this present time is 5% of your profit you are saving cause you can always fluff it and buff it and then sell it.
Something that took my 25 years to learn. Every house that you are going to drive passed, single family of course, every house you are going to drive passed are going to be one of four types of houses: It’s is going to be a house in foreclosure. I don’t do foreclosures. A lot of people do. If I get a response from someone who has a house in foreclosure they shouldn’t have been on the list of names that I buy of names.
Then there are houses number two that you do not want. Those are the ones that I flip the contract to someone that does. For instance, a boarded up house in a war zone. I do not want those. So who would I assign that contract to? Section 8 landlords. Section 8 landlords work those area, they are comfortable in those areas. They do not mind being in those war zone area. The perfect type of people.
The third type of house, houses you can fix and sell retail. That’s what most people want to do. Fix it up, make it pretty, sell it. Make a lot of profit hopefully and pay a lot of taxes.
The fourth type is long term income properties. So if you understand that every house that you’ll ever look at is going to look at will fall into one of those four categories. And you understand that each one is analyzed differently and hopefully purchased differently. There is opportunity everywhere you look. I see people that think the market is ready to tank. It’s no good like it was in 2008. I see opportunity everywhere because I understand that no matter what you find if you can negotiate a deal with the seller based on the numbers of the property you can make a profit. It may not be a fast profit, but it will be long term. Long term is always going to be better. You pay less taxes and you can do better deals a lot of the time. The beauty at my age is I am still buying houses. I’m not buying houses for me, I’m buying houses that cash flow every month. So if something happens to me, my wife can enjoy that income stream as long as she lives. Then my kids and my grandkids could enjoy that income stream. You can feed future generations with the properties you buy today, if you buy them right. If you don’t get greedy, if you don’t want all your cash up front so you can pay the highest taxes known in this country. I just think there is tremendous opportunity everywhere if you know what to look for and know how to analyze and buy those properties.
Dave: So to sum up, let me know if I captured this right. It really depends on the type of property. In terms of how you think about it. If it is in a nice area where it is a modest home among a bunch of good homes. You could think that it could be a great long term property to rent out. Alternatively if it is in a bad area, you did not necessarily know that depending on the mailing list and the area, you may want to think about selling the contract for example.
Well we are running out of time. I would love for you to let all of us know two things. Number one how would you define financial freedom. Number two how what kind of advice would you give, cause doctors do not get business advice in medical school, what business lesson would you like to pass on to them?
Larry: Financial freedom, As the years have passed and I have learned, financial freedom is when you have enough income coming in from your assets, whatever your assets are, to live a lifestyle you are happy with. You pay your bills every month, you can go out to dinner. Once you pay all your bills are financially free. Wealth is what is created over time. In other words when I buy an income property someday when the tenants have paid it off is how I will create my wealth. Financial freedom is when you have enough income coming in from all your assets to live the lifestyle you want. That is one of the things that people think I have to have all of this money and not necessarily. So depending on what your situation some of you just starting out if you need to get the information somewhere, do not go out and make the mistakes. If you have money and you are looking for apartments or whatever it is you are looking for and you are willing to buy and pay cash; you need someone to help analyze the numbers and make sure that you are buying houses that are going to make sense or buying houses that are going to make sense. That is something that we do. We analyze for a lot of people; doctors, attorney’s that want information. We analyze the deals. All we have to do is if we find it, we analyze the numbers and print out a report and give to you that you can run by your CPA and attorney to know if it is a deal that you want.
So if you are interested and would like us to talk to you. You can go to info@larryharbolt.com and respond and we will get back to you if it is something that you are interested in learning more about. We would be happy to help you anytime. Go to info@larryharbolt.com and you spell Harbolt H-A-R-B-O-L-T.
Dave: Well thank you Larry so much for being with us. It is an honor to have you here and learn from you. Larry has hours of worth of material on his podcast. I will make sure to link that in our show notes so everyone can check that out as well as the email he mentions.
Well there is only so much time, so I just want to encourage you to take a next step. If you are interested n real estate get some education, use resources like Larry to learn how to get this stuff done so you don’t make stupid mistakes that many of us make as we are just trying things on our own. Larry just pointed at himself and said like I did.
So my friends I hope you got some tremendous value today. Remember we are all here to help you slash your debt, slash your taxes and live a liberated lifestyle. We will see you soon. Have a good one.
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