June 26, 2017

JF1028: He Quit His Corporate Job After Replacing His Income With Rentals!

Fernando had a great job designing computer chips.  One day he realized he would never be truly wealthy working for someone else.  Like so many other investors, he read and followed the advice of Rich Dad Poor Dad, and began his investing career to escape the rat race.

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Fernando Aires Real Estate Background:
– Co-Founder & CEO at RealEstateTools.com
– Achieved financial independence through real estate income investing after retiring from Apple
– Entrepreneur in the areas of real estate and software applications for real estate investors
– Designed computer chips in the tech industry for over 25 years
– Based in Chandler, Arizona
– Say hi to him at http://realestatetools.com  and www.fernandoaires.com
– Best Ever Book: The Bulletproof Diet

Click here for a summary of Fernando’s Best Ever advice: The 3 Principles to Achieving Financial Independence Through Real Estate Investing

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Fernando Aires and income from rentals






Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluffy stuff. With us today – Fernando Aires. How are you doing, Fernando?

Fernando Aires: I’m doing great, Joe. How are you?

Joe Fairless: I’m doing great as well, and nice to have you on the show. A little bit about Fernando – he is the co-founder and CEO at Real Estate Tools. He achieved financial independence through real estate income, investing after retiring from Apple. He has been an entrepreneur in the areas of real estate and software applications for real estate investors, and he designed computer chips in the tech industry for over 25 years. He’s now based in Chandler, Arizona. With that being said, Fernando, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Fernando Aires: Sure. As you mentioned, I worked for Apple. Most of my career has been for designing computer chips, but I realized that I wasn’t gonna become financially independent by working for someone else. Taking advice from Robert Kiyosaki in Rich Dad, Poor Dad and many other books, I decided that I should put my money into real estate income property and achieve financial independence. It certainly worked out well for me. I’ve retired from corporate America in 2014, and I’d been growing my portfolio even before then, to a point where I make enough from the rental properties to replace my corporate income, and I have all the freedom to travel and really control my properties from anywhere in the world as long as I have an internet connection. In a nutshell, that’s what’s been happening over the last few years.

Joe Fairless: I want to and I will dig into that, and we’ll probably spend most of the time there, but just for anyone who’s curious about what RealEstateTools.com is, where you’re the CEO and co-founder – what is it?

Fernando Aires: Real Estate Tools is really the premier set of tools that allow investors to evaluate properties very quickly, to track their income and expenses after they purchase the properties… We have an online tool called Property Tracker that people can subscribe to, and it allows them to do what I’ve just described… It also allows them to create their [unintelligible [00:04:36].14] once they input their property information and income and expenses, create the [unintelligible [00:04:41].15] to give to their accountant, which is a very useful feature.

We also have a set of apps in the apps in the App Store – these are all for iOS, Apple devices. One is called Property Evaluator, which is just a mobile platform for the evaluation piece of looking at properties. You input a little bit of information about a property and it can tell you based on the rents and some of the expenses and assumptions what your financial indicators are.

A similar app called Property Fixer is for people that are flipping properties and rehabbing them, seeing if it makes sense to hold the properties for an X amount of time, how much the cost will be, and gives them a quick way to analyze that portion of it.
Both apps are also available on the Mac for Apple users, with similar functionality. If you go to RealEstateTools.com, you’ll see the deeper description of these apps. Within these apps there are ways to purchase premium and pro versions of the apps once you download the apps; the initial versions are free.

Joe Fairless: Very cool. I think you’ll have a lot of Best Ever listeners going to check out those three. I’m on your website now… Property Evaluator, Property Fixer and Construction Costs Estimator apps… That’s interesting, and that makes sense given your background as a professional in the corporate world. Now let’s talk about what I imagine a lot of the Best Ever listeners are wondering about “Holy cow! He retired and his income has been replaced through real estate investing.” I’m gonna ask you a question that probably won’t be as typical as you might be asked – what is the one property that’s generating the most cash flow right now?

Fernando Aires: Well, to be fair, it’s really the combination of properties. Most of my properties are financed. I try to get as much long-term fixed rate financing as possible, so by itself the property doesn’t generate lots of cash flow. My typical cash flow for financed properties is about $250/month, so you can imagine you need to have a lot of these properties in order to generate enough money to replace — you know, I was making a quarter of a million dollars at Apple; it’s quite a big salary to replace. But what really helps when listeners can do the calculations is to remember that with income property, due to depreciation, which is the best tax write-off that you can imagine, you end up paying very little in taxes when you take that into account, which means that — when I was working for Apple in California, I was roughly paying 50% of my income to the government, which means that I only need to make about half growth that I was making in corporate America in order to be at the same point, due to the tax situation.

So the key for me has been to buy enough properties, mostly with long-term fixed rate financing and some with cash, in order to achieve this parity with my corporate income.

Of course, with the income property there are many aspects that are related to it, and appreciation is certainly something that comes into play, and not something that I counted on specifically for my achieving this financial independence. But over time, the properties have appreciated and some of them I’ve been able to do 1031 exchanges, buy instead of one property, maybe exchange for two properties due to the things that I’ve made, and you can also do an equity strip from the properties and you don’t pay any taxes when you borrow money against the properties

There’s just a lot of angles that you can play that are related to the properties. For me, it’s been really more of a numbers game. What is it that I need to do — I get the model right for a single-family home… How many do I need to have in order for me to achieve the amount of money that I’m looking for in a particular month? Does that make sense, Joe? It’s not just one that has made a lot, it’s just a combination – that’s the simple answer.

Joe Fairless: And that’s beneficial for you from a diversification of income stream standpoint – you don’t want one golden goose that’s laying an egg, and then something happens to the golden goose…

You mentioned the depreciation on the property, so that your number one expense – and my number on expense, and every Best Ever listener’s number one expense is taxes… And it gets overlooked by almost everyone; we get so caught up in lowering and trying to fix up the property or increasing the income of the property, when in reality our first focus should be on “How do we minimize the amount of taxes in a legal way, so that we’re playing by the rules, but also taking advantage of what the system allows?”

Fernando Aires: That is beautifully said. I present a chart when I’m at events that shows — I’ve tracked my portfolio from 2011, and the latest date is 2015. 2016 is rolling in fairly quickly, but… I show this beautiful chart that plots the real estate income from 2011 to 2015 compared to income taxes as a percent of income. What happens with the chart is the real estate income goes up steadily over the years as I build my portfolio, but the taxes go the exact opposite way.

The end result at this point is mostly due to depreciation, there’s very little being paid in taxes, but my income is up. This is exactly what I was shooting for when I decided to go down this road.

You’ve mentioned earlier — I really have a beef with financial analysts that talk about investment as only being in stocks and bonds, and basically the stock market, and they tout these returns from corporations or mutual funds, but they completely disregard the fact that you can leverage your own money with real estate, and because of depreciation you pay very little taxes. This completely puts real estate in your favor.

A quick example for most of my properties – for listeners to appreciate – is if you put 20% down on a property with a long-term financing fixed rate in place, which is what I recommend, you’re essentially leveraging your money 5 to 1. Five times 20% is 100% of the property. What that means is if the property goes up by let’s say 5% a year – basically tracking inflation numbers that we’re given – you’re actually making 25%, because it’s five times your leveraged money.

So if you add that 25% with a relatively low cash-on-cash return of 8%-10%, your already at 30%-35% for a property that is leveraged. Try to beat that with buying any stock. As a matter of fact, I’ve compared – since I’ve worked to Apple – Apple stock’s annualized return from 2012 to 2015 with my real estate portfolio, and my real estate portfolio beat the Apple stock. Just appreciate the significance of this – Apple has had an amazing run from 2012 to 2015; it became the world’s most valuable company, it just blew away all of the competition, it came up with all of the iPhone-related products… So this is like comparing the best that the stock market has to offer with my little portfolio, and it beat it.

My numbers were 14.8% averaged over the period, and Apple stock was 12.1%… So it’s just no comparison.

Joe Fairless: You should have your own podcast, by the way. You talk about kind of complex things in a very simple fashion, so that people like me can understand, so thank you for that.

It sounds like you haven’t been swinging for the fences with your investments, but instead have been content with getting singles and doubles with these properties. Can you talk about the most perceived highest risk investment that you’ve done?

Fernando Aires: Well, the highest risk investment was a multiplex… A 6-unit that I purchased in St. Louis before it was rehabbed. It turns out that the partner that I was with underestimated the costs of rehabbing that apartment complex. Six units – a small building, relatively… And it turns out that it didn’t work out at all; only part of it was done, and long story short, I had to foreclose on the property and then sell it after doing the foreclosure.

The collateral on that property didn’t quite cover the amount of money that I had put in, so there’s gonna be a loss that is obviously gonna offset my gains in the next year or so. But I went on a limb mostly because I wasn’t educated enough on the complexities of a larger building.

I am very familiar with single-family homes, which are simpler, and they also have the element of being able to have them sold to retail, to a homeowner via MLS. It’s relatively simple.

I underestimated that portion of it. That was a learning experience for me… It was probably the biggest learning experience that I’ve had.

Joe Fairless: What would you do differently, if presented that same situation?

Fernando Aires: Well, I would educate myself more.

Joe Fairless: On what in particular?

Fernando Aires: Well, I think I was naive in understanding the sequence of how collateral works when you are rehabbing. In other words, if you’re starting out with a building that is in pretty bad shape and you have to take over that building, it’s not gonna be worth much, or not nearly as much as you think it would, because in my mind I was picturing that building as being already rehabbed and some of the major expenses being taken care of by the time I would have to foreclose on it, and that wasn’t the case.

So just having very solid collateral when you’re putting money — especially if you’re putting lots of cash, not necessarily financed money upfront, make sure that there si enough collateral there. The bigger the project, the more careful you have to be.

Education comes from really starting a little slow, a little smaller, and working your way towards a bigger purchase. That’s really what I would do differently.

Joe Fairless: With your other investments, the single-family homes, was the model basically you make money from your full-time job at Apple and then you invest it in real estate with a 20% down long-term financing fixed rate for the most part, and then you have a third-party property management company manage it and then that’s it, you just forget about it?

Fernando Aires: Pretty much. There were some adjustments along the way, but that was the main [unintelligible [00:15:46].22] of it.

Joe Fairless: What were some of the adjustments?

Fernando Aires: Well, I ended up self-managing some of the properties as I grew my portfolio. What I found with self-managing was pretty interesting… Over the last 5-10 years the number of companies that have come up to solve the property management task has been incredible. You can get rent collection done online very economically; you can have repairs done through companies that are online, and some of them are nationwide; you can have evictions done, you can have collections done, and you don’t necessarily need one location or one property manager to do all of these pieces. You can have accounts online with different companies that handle these pieces and then you can do the self-management.

I found that that worked really well, especially for the higher-class tenants, what I call the class A tenants… They tend to be less problematic; they have less requests and they tend to stay longer and they tend to work on the property themselves many times.

That was an adjustment that worked out really well. As I built my portfolio, I hired an assistant that essentially did a lot of these self-management tasks for me, and I concentrated on the higher strategic vision on the portfolio, such as “Should I change insurance companies for this geographical area because I might be able to get a better rate? How do I go about doing the research for this?” That is a lot of savings that could be happening, as opposed to doing the management of details on a single property.

Joe Fairless: What type of software did you use when you were doing – and are you still doing – self-management?

Fernando Aires: My company, Real Estate Tools – we offer PropertyTracker.com. If you just go to PropertyTracker.com, as I mentioned in the beginning of the show, it allows you to evaluate a property, it allows you to make a decision whether to buy or not to buy a property, it gives you a projection (one-year, ten-year projections etc.) and it’s very easy to use… But then it tracks that investment – the income and expenses, all of the leases, the documents… You can upload all of that information.

So I’ve been using that software even prior to acquiring the company Real Estate Tools… I’ve been using that software for many years. That’s been the primary hub where I keep all of that information, and every year I analyze the entire portfolio, I break it down into different geographical areas and see what items I’m spending the majority of my expenses on, what I should be concentrating on, what’s the low-hanging fruit, property taxes and so on. It really gives me an overall tool and a way to fine tune the portfolio as I go forward.

The property management — I do some self-management as I mentioned earlier. My property managers, they have their own tools as well, and then I have also property managers for some of my properties. They use various tools such as Appfolio or Buildium, and they send me the owner statements monthly, which I do review.

Joe Fairless: What is your best real estate investing advice ever?

Fernando Aires: If you want real wealth, stick with income property, with rentals. If you want spending money, then become a flipper. [laughs] I have watched my portfolio build, wealth creation build over time. The combination of what I call the growth equity income, the return on equity, which really takes into account the appreciation, the leverage that I showed, long-term principle reduction — remember, I advocate fixed rate long-term loans on these properties, which means that every year you’re reducing that principle, and that principle in real dollars becomes less and less of your income due to inflation.

The beauty of the income property play is that on the one hand you are using inflation to your advantage, because you’re leveraging your properties… You’re doing a  5:1 or 4:1 leverage), which allows you great returns from appreciation against inflation.

On the other hand, you have a fixed principle that you pay every month that does not change over time, even though inflation keeps going at its pace. So you’re setting your expenses on that side, so it’s helping you both ways.

And then on top of it, you have cash flow, which is the money left over after your expenses, as long as you buy properties that cashflow, which is obviously what I recommend. This is how you create wealth. It doesn’t require the expertise or the economies of scale if you’re trying to flip properties. A lot of gurus out there will tell you that that’s the way to make money… I disagree 100%. It’s a lot harder. It’s a business, and having rental properties is not completely passive, but it’s a much easier long-term wealth creation tool.

Joe Fairless: Yeah, flipping properties you get chunks of cash, but you have to actually invest it into long-term income producing properties in order for you to not be a hamster on a wheel.

Fernando Aires: Exactly. The velocity of money is something you have to watch out for. You always have to keep the ball rolling. Again, it’s a business… I started out with income property as a corporate engineer, senior manager at Apple; I didn’t have any time to go and try to find a crew that could do rehabs at a reasonable price. If you’re only doing one or two, guess what? You’re not gonna get a good price. [laughs] Economies of scale play a big role.

Now, of course people have created very lucrative businesses that specialize in providing properties to investors like myself, and that’s just fine. But that’s what they do for a living. The ones that are good at it make good money… But I don’t for a second think that that’s better from an investor perspective, or easier. I just don’t see it…

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Fernando Aires: Sure.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:22:07].20] to [00:23:04].06]

Joe Fairless: What’s the best ever book you’ve read?

Fernando Aires: The Bulletproof Diet by Dave Asprey.

Joe Fairless: Best ever deal you’ve done?

Fernando Aires: Two houses I purchased (income properties) in Naples, Florida. They both have appreciated 100% almost in four years, and the rents have gone up just as much. I’m not selling these for 1031 exchanges.

Joe Fairless: You’re in Arizona, you were in California… You’ve told me about two deals – one in St. Louis, and the other in Naples, Florida. How are you finding these deals and how are you able to qualify them, even though you’re not in these markets?

Fernando Aires: I am a partner with Jason Hartman. If you go to JasonHartman.com, you’ll see that Jason’s company essentially educates investors and also has referral fees for referring investors to various markets that are recommended. I started buying my properties from Jason and became a partner with him. As a matter of fact, we’re co-founders of RealEstateTools.com… But the important part of this is that investors do not need to live in the area where they invest. As a matter of fact, that’s probably the wrong thing to do for many investors that are in California or the Northeast, which are just too expensive; the rents, the yield is just not there.

Now it’s so much easier to control properties…  I have over 70 units and I’ve never met a single tenant; many of the houses that I bought I’ve never seen. I don’t need to visit. I just control everything via the internet.

Joe Fairless: What’s a mistake that you’ve made on a particular deal that you haven’t talked about?

Fernando Aires: I purchase properties in Dallas, Texas and I was not having good luck with the property manager there… And I insisted on keeping that property manager for too long and it cost me a ton of money. I should have fired the property manager much earlier. Had I done that, I would have come out on top with that particular property. I’ve learned that lesson and I know would do that with much more certainty.

Joe Fairless: What’s the best ever way you like to give back?

Fernando Aires: You know, when I look at what has happened with my life over the four years, an interesting aspect of doing investments for income properties is at the end of the day we’re taking homes that — many of them are in pretty bad shape, and completely rehabbing them… Paint, carpet, new [unintelligible [00:25:43].07] landscaping… Making it a beautiful place and allowing the family or renters in many areas to live in a very nice place. I feel very proud to be able to offer this and spend money on the local economy. To me, that’s the best that I can give back… Making the money move – as energy moves; money is energy in many ways – by investing and making sure that everyone is succeeding in their piece of what they’re getting, either from a renter perspective, a contractor perspective or an investor perspective. A deal is a good deal if all parties are benefitting from it.

Joe Fairless: Where can the Best Ever listeners get in touch with you, Fernando?

Fernando Aires: You can go to my website, FernandoAires.com. There are links there for setting up appointments with me and other things that I do. You can always go to RealEstateTools.com –  as we’ve mentioned, that’s my company for the software for real estate investors. You can also go to JasonHartman.com. I’m a partner and I’m a counselor with Jason Hartman. They can also find properties there.

Joe Fairless: Outstanding. Fernando, thank you for being on the show, talking about how you’ve managed to replace the amount of money that was coming into your pocket from your full-time job to now real estate investing. I phrased it that way because of the point you made earlier, where you mentioned that because of depreciation on your properties, you actually need to make about half of what you’re making in your full-time job, due to the tax advantages and how the system is set up.

Then your overall approach, which is a pretty cookie-cutter approach, and that’s what I love about it. You can replicate the model that you’ve talked about. It’s not some crazy, esoteric thing. It’s something that is pretty darn straightforward. You make money, you invest it in income-producing properties, you get fixed rate long-term financing, and you rinse and repeat along the way. And also talking about the high-risk investment that you did… It didn’t work out; the lesson learned is make sure that you know what type of collateral is in place, and if it’s solid enough, so that if you have to take it back, then you’re gonna either come out ahead or at least get your money back.

Thanks for being on the show, Fernando. I hope you have a best ever day, and we’ll talk to you soon!

Fernando Aires: Thank you, Joe. You too!


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