From the types of roof, electrical wiring, heating and cooling to the parking lot condition, windows and hot water heaters there are alot of checklist items to consider when negotiating your apartment deal.
Nathan Tabor shares his insight into some of the the nitty gritty so you won’t be left in the lurch after closing. Read on to find out what you may not have been thinking about for your ideal setup.
Check for city complaints
How do you know if the plumbing is alright? Or the electrical connections are okay?
“So the number one thing on top of my list that I do first when I start due diligence is to go to the housing authority or whoever is writing city complaints and get the last two years’ worth of city complaints. The reason why – I got burned on this.” says Nathan Tabor.
This will give you a general idea as to what issues you’ll be facing. From the housing complaints, you can determine what else is probably wrong with property revealing any expenses you will incur so you can factor them into your deal.
Thinking about the roof
The type of roof you have not only impacts your installation and maintenance costs, but plays a part in insurance costs as well.
Let’s look at pitched vs flat roofs. A flat roof is cheaper to install but that’s about as far as the benefits go. A pitched roof has a longer life span and has a more appealing appearance while flat roofs have an institutional vibe. You see a flat roof and the first thing you’re thinking about is a medical facility as opposed to something that feels like home.
Usually, flat roofs cost more to insure because they’re not going to last for very long and also have a greater chance of developing leaks. Not to mention the host of other problems a leaky roof would present in your apartment building.
Nathan on flat roofs: “…[With flat roofs] you’ve gotta climb up there often, make sure that the drains are unstopped… Depending on where you are in the South, flat roofs just make your electrical bills more, because in the summer it’s hotter, and in the winter you don’t get the sun.”
Look out for fire hydrants and mailboxes
Nathan sheds light on some other hidden costs:
“Do you know who owns the fire hydrants on the complex you’re getting ready to buy?”
Most folks would never think of this until there’s a gigantic puddle next to the fire hydrant. Sure, you can call the fire department to come over and fix it, but since it’s on private property you could be on the hook for a surprise $6,000 expense.
Nathan on multi-unit aluminum mailboxes: “I just thought hey, it’s stamped on the side of it “Property of the USPS”, they maintain it. Guess what they don’t do? They don’t maintain them.”
When Nathan looked into the replacement cost of a 4’x4’ mailbox seven years ago it was…wait for it…$1,800.
Having one meter on a multi-unit complex means you’re footing the bill for your tenants no matter who is taking 20-minute showers, outside washing their cars or letting their faucets run. Having individually metered units means you can bill your tenants individually holding them responsible for their own water needs. If you’re looking at buying a complex with a single meter find out the the average cost of the total water bill. Then weigh the cost of conversion and savings over time to help you decide which route you want to take.
What does your due diligence look like? Let us know in the comments.
Real estate is the most exciting investment vehicle because there are nearly an infinite number of real estate investment strategies for beginners who want to achieve financial freedom and/or launch a business to create generational wealth.
There are many investment types to invest in, but which one is the most conducive to long-term success?
Today, I want to determine the answer to this question by looking at two real estate rental investment strategies in a particular – single-family residence rentals and apartment investing.
I will define SFR real estate investing as purchasing a single-family home using your own capital and renting it out and apartment investing as purchasing an asset with 50 or more units and raising capital from passive investors and renting it out.
For the purposes of this blog post, I will assume that an individual has set out to achieve a goal of $10,000 per month in cash flow (or $120,000 per year), which will replace their current corporate salary.
So, based on this goal, which of these real estate rental investment strategies is superior? Let’s compare both across three important factors: scalability, barrier to entry, and risk.
Scalability is how efficiently one can grow their real estate portfolio. The more difficult it is to scale a business using a certain investment strategy, the longer it will take to attain a cash flow goal.
Both SFR real estate deals and apartment investing will allow you to generate $10,000 per month in cash flow, but which strategy will reach this goal the fastest while reducing the number of headaches?
For SFR rentals, the average cash flow per property per month is in the $100 to $200 range (depending on the market of course). Therefore, 50 to 100 SFRs are required to make $15,000. We immediately run into a few problems. First, you can only take out a limited number of SFR loans. Once you’ve purchased 4 to 10 homes (depending on the bank use and if they use Fannie Mae or Freddie Mac), you no longer qualify for a standard residential loan. However, a simple solution is to find a local community bank, who – once you’ve established a successful track record – will provide ongoing financing for your deals.
Although, you haven’t completely solved your financing problem. How will you afford the 20%, 25% or 30% down payments required to purchase 50 to 100 SFRs? This is the biggest drawback of SFR real estate investing in terms of scalability. If you’re buying all $100,000 properties, that’s $1,000,000 to $2,000,000 in 20% down payments. Even if our sample individual saved up half their corporate salary to cover these down payments, it would take them 17 to 33 years to purchase 50 to 100 SFRs, and that’s assuming everything else goes according to plan. This timeframe can be reduced through refinancing, lines of credit, or other creative financing strategies, but it will require a large amount of capital for down payments nonetheless.
For apartment investing, since you’re receiving commercial financing, you can obtain an unlimited number of loans (as long as the numbers pencil in for the lender). However, you will run into the same funding problem if you plan on using your own money. That’s where raising private money and syndicating an apartment comes in to save the day!
As an apartment syndicator, one of the ways you make money is from an acquisition fee, which is a percentage of the purchase price paid to the syndicator at closing. The industry standard is 2%. Therefore, to make $120,000 in one year, you would need to syndicate $6,000,000 worth of deals. To break it down even further, since an apartment deal generally required 35% down, you must raise $2.1 million from private investors to achieve your annual goal. And that’s not even accounting for the other ways you’ll get paid as a syndicator (i.e. asset management fee, a portion of monthly cash flow, a portion of the sales proceeds, etc.), which you could then use to purchase your own properties or reinvest into future syndications.
Technically, you could also raise private capital for SFR real estate investing. However, the problem is that you’ll need to find multiple cash flowing deals at the exact same time in order to attract private capital or make the same amount of money compared to an apartment community. It’s possible but much more difficult to find 50 to 100 SFRs than finding an equivalent-sized apartment community.
Unless you believe it will take you multiple decades to raise a few million dollars or you win the lottery, apartment investing is more scalable than SFR investing.
Winner: Apartment Investing
Barrier to Entry
Barrier to entry means how easy it is to get to the point where you are capable of investing in your first deal. From a personal finances perspective, the barrier to entry is lower for apartment investing than SFR real estate deals. To syndicate an apartment deal, investing your own personal capital will promote alignment of interests with your investors. However, this alignment of interests can be achieved in a variety of different ways (having your property manager invest in the deal, having your broker invest in the deal, having an experience syndicator as a general partner, etc.).
Therefore, it is possible to syndicate a deal with zero dollars out of pocket. Although, I always recommend investing some of your own money in the deal for alignment of interest purposes but to also benefit for the profits! Whereas, for SFR real estate, as I outlined above, you will need to save up millions of dollars to afford the number of down payments required to generate $10,000 a month in cash flow.
From an educational and experience perspective, apartment investing has a much higher barrier of entry. No one is going to invest with you if they don’t know who you are or if you haven’t proven yourself to be a credible apartment syndicator. The solution to the former is creating a thought leadership platform. The solution to the latter, however, is more difficult (although, establishing a name for yourself through a thought leadership platform will not happen overnight).
From my experience, before you can even entertain the idea of becoming an apartment syndicator, you must have a successful track record in real estate, business, or preferably both. Once that’s established, you need to educate yourself on apartment investing and syndications, which requires a lot of reading and research (but that’s what this blog is for!). Then, you need to surround yourself with credible team members who have an established track record in apartment investing. Only then will you be ready to search for your first deal, which could take anywhere from a few months to a few years! Whereas, for SFR real estate, as long as you have the money, you can buy a deal.
The barrier to entry for apartment syndication is easier from a personal finances perspective, but much more difficult from an educational and experience perspective compared to SFR investing. And there isn’t a way to fast track this process. It will take time.
Winner: SFR Rentals
Investing, in general, will always have risks. However, not all real estate rental investment strategies are the same in that regard.
As I mentioned in the section on scalability, the typical monthly cash flow generated by a SFR real estate deal is $100 to $200 per month, or $1,200 to $2,400 per year. However, those low margins are very vulnerable to being drastically reduced or wiped out completely. One unexpected maintenance issue (let’s say a broken HVAC system) will cost thousands of dollars. Even minor maintenance issues of a few hundred dollars (replace an appliance, plumbing problems, electrical problems, etc.), when added up over time, will cost thousands of dollars.
The same goes for turnovers. Some turnovers are relatively smooth and cost a few hundred bucks. However, if you have to repaint walls or replace carpet/refinish hardwood, those expenses add up quickly. An unruly resident may stop paying rent or violate the lease, and the resulting eviction process can be quite costly. Any one of these scenarios will eliminate months or even years of profits! Some of these risks can be mitigated with proper due diligence, but most of them are just the costs associated with investing in SFR real estate.
For apartments, these risks are spread across tens or hundreds of units. One maintenance issue, one turnover or one eviction has a much smaller impact on your profit and loss statement. Unless you are hit with a large amount of these problems at the same time, the apartment will cash flow. Whereas for SFR investing, you will not be able to benefit from this risk reduction until you’ve created a portfolio of at least 10 to 20 properties.
Apartment investing has a higher barrier of entry. However, once you’ve addressed your education and experience, apartments are advantageous in terms of scalability and risk when compared to SFR real estate. Take a look at my text, Best Ever Apartment Syndication Book, for more information regarding this rewarding investment strategy.
Buying a home without a real estate agent may seem daunting, but did you know that as many as 20% of all home buying sales are completed without the help of a real estate agent?
Thousands of home owners and real estate investors save thousands of dollars on their property investments simply because they were able to avoid using an agent. With that said, it is important that you purchase a property only if you have the sufficient knowledge and expertise to do so.
We are going to touch upon three leading problems you may face when buying a home, and then dig deeper into how to buy a house without a realtor or an attorney.
Problems You May Face Buying a Home Without an Agent
Learning about the pitfalls other investors and homeowners have fallen into will help you avoid making the same mistakes.
You may overpay for the home
Homeowners are notorious for overestimating the value of their property.
You are not protected if sellers do not disclose property problems
If a real estate agent is aware of a problem with the home, that problem must be disclosed in almost every state.
You don’t know how to handle the paperwork
Real estate law is difficult for those inexperienced with it to navigate, and it varies by state, county and city.
A Buying a House Without a Realtor Checklist
Buying a house or property without the help of a realtor is possible as long as you protect yourself by taking the correct precautions. First and most important:
Learn About the Neighborhood
One of the greatest advantages to hiring a realtor is that he or she knows the neighborhood you are interested in. They have years of experience in knowing what homes sell for right down to the very street the property is on so they will be able to give you a realistic view on the cost of a home as well as be able to negotiate on the price.
Price is an important consideration, but be sure to look into other aspects including:
HOA rules (if applicable)
This will also have a significant impact on the value and the re-sale potential of the property.
Speak to a Real Estate Lawyer If Necessary
Many homeowners and investors want to save, which is why they will look into how to buy a house without a realtor or attorney. But a real estate attorney is someone who, at least with your first or second purchase, will be your most valuable asset when buying a property.
As soon as you are ready to sign the Offer to Purchase, start working with a reputable real estate lawyer in your area. While the cost of real estate attorney may set you back hundreds to a couple thousand dollars, it is worth the expense to prevent any potential legal troubles down the road.
Get the Home Inspected and Learn How to Read the Report
Have the home inspected by a well-trusted inspector in your area and take time going through the report. There may be anywhere from 20 to 50 or more points of concern, some of which may be a concern while others – while masquerading as a big deal – are not.
Try to obtain as much information as possible from your home inspector about the leading points of concern. Your real estate lawyer may also be able to shed some light on a few key points.
Buy (or Have the Seller Pay) for a Title Insurance Policy
This is critical as it will ensure that you are able to receive the property’s title free from any liens and encumbrances.
While hiring a real estate agent to help in the purchasing of a property has become the norm, that does not mean that homeowners and investors can take on the task themselves. The key is educating yourself so that you are empowered to make the best decisions that make sense for your family and for your financial goals.
In 2016, furnished rentals collected $3.2 billion per month in rents across the United States.
I bet that piqued your curiosity!
For example, there are 100,000 to 200,000 traveling nurses per year in the United States. They work for 6 to 12 months on a contract basis before picking up and moving to another part of the county. That’s 100,000 to 200,000 candidates for a furnished rental, and it’s just one example.
Kimberly Smith has been involved in the furnished rental business for over 20 years, way before popular businesses like AirBnB were founded. In our recent conversation, she gave us an inside look at how to run a successful furnished rental business. This business model is relevant to a single-family investor, someone involved in apartment investing who has a 1000-unit building, and everyone in-between who wants to increase their real estate investment income.
How to Find Tenants?
Marketing for tenants for a short-term, furnished rental is different than finding a standard renter.
One way to find tenants is through old-fashioned relationship building. The idea is to find a large corporation or institution to tap into. For example, you could reach out to a nearby university’s student housing department, a hospital’s housing coordinator, or a corporation’s human resources manager and ask if they are in need of short-term housing.
Kimberly said, when she searches for potential tenants, “I would do old-fashioned request proposals with major corporations, and they would say, ‘Okay, I need 103 one-bedrooms for 6-months. Can you get them all ready for me?’”
Fortunately, with the advent of the Internet, finding tenants and increasing your rental income is much easier than the old-school cold-calling of the past. There are distribution portals online you can leverage. Kimberly offered examples of these distribution portals, “You’ve got HomeSuite, you’ve got AirBnB, you’ve got Booking.com, you’ve got HomeAway. All these guys are just starting to think, ‘How do we best service the needs of the business traveler?’ So in the short run, you want to be in all those places.”
Another great resource for finding renters and increasing your real estate investment income is a creation of Kimberly’s called Corporate Housing By Owner. “For the last 8 years, Corporate Housing By Owner has created an annual report,” Kimberly said. “You can get it on Amazon.com or you can register for free at CorporateHousingByOwner.com and you can download it for free. And it will tell you – we asked hundreds of people across the country, ‘How do you market your furnished rentals and where do you get your best results from?’ We have 8 years of data in that report and [you should] start by just reading the details.”
Who Manages the Furnished Units?
When comparing management of unfurnished vs. furnished rentals, Kimberly provided an analogy of a tortoise and a hare. “In unfurnished property management, you are the tortoise – you are renting a property for a year, and if your kitchen has a leak, you report it and they come out in the next week and they’re going to fix it for you.” For furnished rentals, Kimberly said, “If I’m there for 30, 60, 90 days and there’s something wrong, I need you to deal with that [right away].”
Therefore, the furnished property manager is going to have a level of involvement that far exceeds that of the standard, unfurnished property manager. As a result, you are going to pay a premium. Kimberly said, “for corporate housing, an Avenue West-managed corporate housing brokerage [Kimberly’s company] would charge between 25%-35%, depending on the market. If it’s a corporation, it’s paying rents via credit card. Avenue West is incurring that expense, and not passing that on to the owner. They’re doing all the key arrivals. They are doing whatever background checks are necessary. They’re doing all of that service for that corporate tenant. They have extensive software to do the invoicing and such that’s necessary as part of that whole thing. And they’re building relationships. [The owner is] working with a management company that doesn’t say, ‘Oh, I hope to find you a corporate housing rental.’ [They’re] dealing with an Avenue West company who’s been around for 18 years, developing these relationships, that says, ‘Hey, these are the corporations that work with me every day.’”
Most unfurnished property managers do not understand corporate housing. Therefore, Kimberly recommends finding a property management company, like Avenue West, that specializes in furnished rentals. “I would be a little wary in just handing a furnished rental that you’re expecting to get a business client into an unfurnished property management because they don’t really understand how to find that right tenant.”
How Much Money do Furnished Rentals Make?
To determine the rates you can charge for furnished/corporate rentals, Kimberly said, “You want to look at the extent of stays in your neighborhood. You want to look at the hotel rates in your neighborhood. You may even be able to find exact corporate housing rates in your neighborhood.”
According to Kimberly, the average daily rate for a one-bedroom corporate housing rental was $150 in 2016. However, this varies from market to market, so in some market it will be higher and in others, lower. Kimberly said, “You have to understand your individual market and figure out where you fit. And you can purchase something called Corporate Housing Industry Report, which this year is a 206-page document that goes through all major metropolitan state areas and looks at … the average rent that was collected last year on a studio, on a one-bedroom [and] on a two-bedroom.”
For example, Kimberly said in Arizona, an unfurnished, one-bed unit will rent for $750 a month, but the same unit furnished will rent for $2,500. Whereas in other locations, like San Francisco in 2016, an unfurnished unit rents for more than a furnished rental. It is very market-dependent. Kimberly’s recommendation is to look at the Corporate Housing Industry report to see if corporate housing is an effective business model in your area.
For a personal example, I currently own a four-bed single-family property in Dallas, TX. It currently rents of $1,200 a month. Kimberly said, if I furnished the unit and offered it as a corporate rental, I could get $4,100 a month in rent. Knocking off the 35% management fee, that’s $2,665 a month, which is more than double the rent I am charging now and seriously increases my real estate investment income.
Furnished, corporate rentals are a $3.2 billion a month industry and is relevant to investors in all niches.
To find tenants for furnished rentals, build relationships with local corporations, hospitals, and universities, or post a listing to any number of distribution portals like AirBnB.
To manage the furnished rentals, hire a property management company who specializes in corporate rentals. However, expect to pay 25% to 35% in management fees.
Depending on your market, the increase in cash flow from converting an unfurnished unit into a furnished unit will more than cover the increase in management and other expenses. However, before pursuing furnished rentals to increase rental income for yourself and other investors involved in the deal, determine the rental demand in your area.
Wouldn’t it be amazing if you never ran out of deals? Well, by asking the right questions and presenting the right offers, your investment opportunities could be endless.
Whitney Nicely, who is a contractor, broker, auctioneer, investor and self-proclaimed Millennial Millionaire Next Door, coaches real estate investors on how to uncover the best deals in the market. The reason why she can teach this investment strategy is because she’s followed it herself. She’s purchased industrial land, single families, small multifamily properties, and large multifamily buildings putting little money down, using creative investment strategies, and at prices below market value.
In our recent conversation, Whitney explained how she approaches deals in order to continue to find an endless stream of highly motivated sellers.
Whitney’s Best Ever advice for finding deals is simple to say, but difficult in practice – Keep going! “Keep going,” Whitney said. “If it’s a good deal, keep going. If it’s a bad deal, keep going. Don’t stop, keep going. My favorite Bible verse is Proverbs [31:16], which says that she goes to inspect a field, and she buys it. So ladies, go buy it. Men, go buy it. Figure it out, get a plan and go buy it.”
Now you may be thinking to yourself, “Well obviously Joe. But what does she mean ‘If it’s a bad deal, keep going?’ We don’t want to buy bad deals, right?”
Right. However, when Whitney says, “keep going,” she doesn’t mean, “keep buying.” The goal is to always press the seller for their pain point. “Whenever I’m buying a property, whether I’m buying land or a house or an apartment complex – and I teach all my students this – you have to find out what the seller’s pain is,” Whitney said. “If you can solve somebody’s problem, you’ll never run out of opportunities. If you’re afraid to ask what their pain is, or if you keep finding people with no pain, you need to go find somebody else, because there’s plenty of people out here in the world with properties they don’t want, houses they don’t want to take care of, and they just want somebody to come through and take this headache away from them so they can sleep at night. So as long as you’re actually helping people and not trying to be sleazy or slummy or anything like that, you’ll never run out of buying opportunities.”
If someone is selling a property, they are doing it for a reason. Likely, the reason is to alleviate some sort of pain. Whitney said, “Another thing I tell my students is it may not be that a lump sum cash payout is what [the seller is] stressed over. If that’s what their pain is, then solve that pain.”
If you can’t find the pain point, or the seller doesn’t have one, then Whitney’s next step is to make an offer. Not just one offer, but three. Providing multiple offers is a good way to indirectly discover a seller’s hidden pain point (or another pain point). Whitney said, “When you go look at a house, don’t be a one-hit wonder. Don’t make one offer. Don’t solve just one thing and then be like ‘Poof! I’m gone.’ I want you to take a cash offer. I want you to take a five-year payout offer, and a ten-year payoff number. You’d be surprised.” For example, Whitney submitted these three offers on a past deal and walked away with a 15-year owner-financed deal with no money down, no down payments for four months, and a completely reasonable monthly payment. She said, “Be open for those and never stop negotiating.”
The cash offer would be so low that if the seller accepted, it would be the best deal ever. Then, the five-year payout offer is higher and the ten-year payout would be the highest. For the payout offers, you can either form the deal so that you must have them paid off or you can form it with a balloon payment. When that five or ten years is up, you’ll have a massive net worth and you can cash out, you’ll have private money investors or partners to cash you out, the tenant buyer will cash you out (if you signed a five or ten year lease option with your tenant), or you can renegotiate with the original seller and make another deal.
Whitney’s best ever deal was her last deal, which was a creative/pain point combo. “I had a house. It was three-bedroom, two-bath, and the backside of it had caught on fire a number of years back (pain point #1). I had it under contract for a lease option for $6,000 with $100 [down] and $200/month paid off whenever it was I paid off $6,000, so 5 to 6 years at $200/month,” she said. “I sold it on a lease option for $12,000, with $5,000 down and $300/month. So I bought it for $6,000, I sold it for $12,000. This morning, I was talking to my seller and he was like, ‘Well what if we didn’t do the lease option? How much would you give me just to cash out?’ (pain point #2) and I said, ‘I could give you $3000,’ and he said, ‘Okay fine.’ So now I bought the house, people gave me $5000, I’m giving it to my seller, and I get to keep $2000, and now I’m cash flowing $300/month on a $7,000 balance.” In this scenario, the seller just wanted cash now, not later, to be out of the property. Whitney gave the seller $3000 of the $5000 tenant’s down payment and won’t have to pay the seller another dime.
Recently, a Best Ever listener (Neil) asked me the following questions: “I’m a newbie to the real estate business, and I’m thinking about buying a quadplex in my area … It would be nice if you could do a podcast about how you calculate numbers for a property you’re thinking about buying.”
Even though my current business model is to raise money from private investors to buy apartment buildings, I got my start in real estate buying single-family properties.
When I evaluated single-family deals (and the same logic applies to 2 to 4 unit properties), I would ask and answer two questions
What’s the rent to all-in-price ratio
Does the property meet my three deal criteria?
The rent to all-in-price ratio, commonly referred to as the 1% rule, is a quick calculation where you divide the monthly rent by the all-in price of the project. For example, for a single-family purchased for $70,000 with $30,000 in renovations and a monthly rent of $1000, the ratio is 1% ($1000 / $100,000).
I considered 1% to be the bare minimum. Every investor has their own opinion on it because the acceptable ratio depends on the area, the business plan, the overall goal, etc. But I personally consider 1% to lowest. I bought all four of the SFRs in my portfolio at a ratio between 1.4% and 1.6%.
If the monthly rent to all-in ratio is equal too or great than 1%, I moved on to the next step: does the property meet my three deal criteria.
Just like the 1% rule, everyone also has his or her own deal criteria (based on similar reasons i.e. market, business plan, goal, etc.). For me, my three criteria were:
Is the property move-in ready? (Costing a maximum of $1000 to be move-in ready)
Do I have at least $10,000 in equity based on the valuation of sales comps at closing?
Does it make me at least $100 per month in rent?
To calculate the answers to these three questions, I created a simple Excel calculator. If you are interested being sent the calculator, email email@example.com and put “SFR calculator” in the subject line.
Knowing what I know now, after interviewing 1,000 people and evolving my business accordingly, I would have purchased deals with more equity in them. I was basically buying turnkey properties in lieu of improving the properties and putting in sweat equity. That’s what I would do now if I were buying single-family homes (but I’m not).
For the investor who wants to follow my path and purchase turnkey properties, you can use the exact same criteria as me. However, I would recommend changing the first criteria to reflect the idea of adding value through sweat equity.
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Guide to House Hacking Your First Real Estate Investment Property
One of my favorite Tony Robbins’ quotes, among many, is “success leaves clues.” This applies to a wide-range of activities, and real estate investing is one of them. If we want to learn how to get started and create real estate investment strategies, we don’t need to reinvent the wheel, because there are “clues” we can leverage to shorten the learning curve.
For those who are on the outside looking in, what you must do is quite simple: find someone who has successfully entered the real estate investment property forest and follow the breadcrumbs they’ve left behind.
Sunny Burns, a 26-year old real estate investor, purchased a fourplex for his first deal, and in our recent conversation, he outlined exactly what he did to successfully enter the real estate arena, which a newbie can use as a guide to purchasing their first investment property.
The Real Estate Strategy
Sunny’s first real estate investment property was a fourplex, which he purchased using the house hacking real estate strategy. House hacking is when an investor purchases a two, three, or four-unit property, lives in one unit, and rents out the others. “I definitely recommend the house hack,” Sunny said. “If you buy a single-family house, depending on how much you make, half your income could be going straight into that house (mortgage, taxes, repair costs).”
“Buy at least a duplex,” Sunny continued. “You don’t want to become a slave to your house. You don’t want half of your paychecks to go there because it’s hard to get out of that and grow from there. But if you can buy something like a duplex, a triplex, or a quad, you can really start to almost live for free.”
By following this house hacking strategy for his first investment property, Sunny says, “we actually live for free, and then make a couple hundred dollars after that.” He gets the benefits of both an investment property (cash flow, appreciation, etc.) and essentially a free primary residence.
Sunny’s House Hacking Deal
Sunny found his real estate investment property on the MLS. “We were just looking at Realtor.com, and I got regular emails from them. One day, I got an email for this 12-bedroom, 4-bath quadplex, and I look at my email and was like ‘wow, this is the property we’ve been looking for.’”
When searching for properties, Sunny’s criteria was simple: $1,000 per month in cash flow after moving out of the rental and fully renting it out. It took a while to find the property, but the patience paid off when they found the fourplex.
Most investors who purchase a real estate investment property via house hacking use a FHA loan, which is an owner-occupied loan that requires 3.5% down. However, the drawback of the FHA loan is PMI, which is an additional monthly fee for mortgage insurance. Sunny, understanding that the PMI cost would decrease his monthly cash flow, elected to pursue conventional financing instead. “We actually did conventional financing through a smaller bank,” he explained. “We put 10% down. We went to the smaller bank because they don’t charge you borrower-paid PMI – they take care of the PMI – and we got a great rate at 4%, which I’ve since financed to 3.5%.” The down payment was higher, but since the bank covered the PMI, Sunny was able to save a couple hundred dollars each month. That being said, for your first real estate investment property, make sure you shop around for a loan to ensure you’re getting the best loan that fits your investment strategy.
Sunny purchased the fourplex for $430,000. He put down 10%, which is $43,000, and put in an additional $20,000 in repairs, so $63,000 all-in. Once they completed the renovation, Sunny and his family moved into one unit, rented unit two for $1,000 per month to his in-laws, and rented out the other two units for $1,700 and $1,710. He said, “we can definitely get $1,500 for our unit easy, and then another $500 for my in-laws unit easy once they move out.”
As for the renovations, Sunny was able to cut the costs of his real estate investment property by doing them himself. Besides the fact that he and his wife already had some handyman skills (his wife grew up in an old Victorian with her family that constantly required repairs and he had experience working on cars), they learned how to do the majority of the repairs using YouTube. “YouTube really helped a lot in a lot of things,” Sunny explained. “Learning house repair, that was definitely a learning curve, but YouTube, and [my wife] having a lot of knowledge [was key].”
10 months after purchasing his very first investment property and after completing all the renovations, Sunny was able to refinance the property and pull out all of the money he put in, both the down payment and the renovation costs. He said, “It worked out great. We purchased it for $430,000, we put that $20,000 into it in repairs, and I think it was under market when we bought it, so it appraised for $550,000, so that was $120,000 over what we purchased it for. We did a cash-out refinance, so we pulled out $67,000, and that was pretty much the $43,000 that we put into it and the $20,000 repair costs, and some closing costs wrapped in.” Not only were they able to pull out all of their initial out-of-pocket costs, which they will use for their next investment, but they also have 20% equity, which is double what they initially put down. That’s a solid way to get into the real estate investment property business!
Additional Factor When It Comes to House Hacking
Besides the tactics behind house hacking, there is one additional factor in play that applies to those who are looking to get into a real estate investment property via house hacking, but have a family: convincing your significant other! Sunny said he had some issues convincing his wife in the beginning. “She was really hesitant about working with tenants. She was really scared about tenants – they’re going to sue you, they’re going to cause all these headaches.”
Rather than go another investment route, Sunny implemented policies and procedures to mitigate the risk of tenant issues. “We did credit score checks on every single tenant. We did background checks on every single tenant. We made sure that they had a least two times the rental income coming in.” As a result, he was able to lower his wife’s fears and now, he says, “she’s a huge fan and tries to tell all our friends to do the same thing.”
One of the best ways to get your start with a real estate investment property is house hacking – live in one unit and rent out the others.
Sunny followed this strategy by finding a property on the MLS that fit his criteria, performing the renovations himself, refinancing and cashing out his initial investment, moving into one of the units and renting out the others, and implementing policies and procedures to mitigate his wife’s fears of owning and living in a rental property.
Newer investors can use Sunny’s story (either in its entirety or pick out useful clues) to guide them through their first investment property purchase too! Or, you can contact me to see about creating a strategy that works for you.
One of the main reasons why people become interested in real estate investing is the allure of financial freedom. Purchase enough real estate to cover your personal expenses and voilà, you’re financially independent. For some, one of the hardest parts may be learning how to determine whether the rental property in question is good investment.
However, the fastest financial freedom strategy I’ve ever come across is Andrew Holmes’ 2-5-7 strategy. He has successfully implemented this strategy, which is a version of the renowned BRRRR strategy (buy, rehab, rent, refinance, repeat) on over 160 properties. In our recent conversation, he outlines, in extreme detail, his exact step-by-step 2-5-7 formula for how he purchases a minimum of 5 properties every 2 years and pays them off in 7.
What is the 2-5-7 Investment Formula?
Andrew’s investment strategy adheres to what he calls the “2-5-7” formula. In 2 years, the goal is to accumulate a minimum of 5 properties and using the cash flow pay them off in 7 years. Andrew said, “The formula doesn’t change, it’s just the number of properties, how much cash flow you want to create, and you scale based on that.”
In order to achieve his specific investment goals, Andrew has the following four additional requirements at are not necessarily included in the original BRRRR Strategy:
1. Deal Location – “Most people, whenever they own rental properties, they tend to buy … in areas that are rather challenging. We have a different philosophy, which is we tend to buy in bread and butter areas, right next to what we would call premium areas. Basically, if premium areas are A, we tend to buy B- or C+.” Click here for my ultimate guide on selecting a target investment market.
2. Minimum 25% equity– “Whenever we’re buying a property, after rehab, it must have a minimum of 25% equity.”
3. Small Ranches– “We focus on buying small, three-bedroom, one and one-and-a-half bath ranches.”
4. $400 to $450 cash flow– “They must cash flow to the tune of $400 to $450 per property after all expenses, including management.”
Similar to the BRRRR Strategy, you start with the end goal, which will likely be the amount of cash flow required to cover your personal expenses, your current salary, or your ideal lifestyle, and then reverse engineer your 2-5-7 strategy to determine what market to invest in, how much equity you need (more on that later), the property type, and the monthly cash flow requirement for each deal.
Here’s an example deal Andrew provided to see the 2-5-7 formula in action:
“Let’s say you’re buying a bread and butter property: three-bedroom, one bath ranch for $65,000. You’re going to put $20,000 to $25,000 into rehabbing the property. You have a carrying cost of another $5,000 to $6,000, so you’re all in cost into the property is somewhere around $90,000.”
“This is the most critical part, which to me [distinguishes] investing versus what most people do, and that is the property needs to appraise on a conservative refinance appraisal for $120,000 to $130,000. That’s the key thing – that’s the only way you’re going to be able to get all the capital that you put into the property out, so that you can efficiently recycle the same money over and over and over.”
“So the property appraises for about $125,000. The lender is going to give you about 75% of appraised value… That’s the key thing. That’s the benchmark people have to look at. If the property appraises for $120,000 to $135,000, now they’ll give you the $90,000 to $95,000 refinanced.”
“So you take that loan, you pay your first lender off – the loan you used to buy the property and to do the rehab – and then you just recycle the same funds. Or if it’s your own money, that’s fine also, but you just repeat that process over and over and over, [with the] goal being you need to get to a minimum of five.”
How to Finance the Properties, Completing the “Buy” Step of the famous BRRRR Strategy?
On the front-end, Andrew explained that there are three major ways he funds his deals:
1. Partnership– “Number one, you can partner with somebody that has the capital and do a 50/50 joint venture. They buy the property, they put up the money for capital [and] you’re the driving force. You’re doing all the work, but you’re giving up 50% of the returns. That’s where I started initially”
2. Hard Money Lender– “The second way to do it is the traditional route, which is you borrow money from a hard money lender, and put in some of your own money.”
3. Private Money– “The third route, which we tend to use the most [is] private money… Join your local REIOs, join the local groups; whichever town you’re in, there are tons of them. There are people that are willing to make loans out of their IRAs, they have personal money, and you end up paying anywhere from 8% to 12% and that’s what we tend to do and that’s what we always try to get people to understand – there’s a lot of money out there where people are willing to loan for the front end of the transaction.”
As an apartment syndicator who sometimes uses the BRRRR Strategy myself, this last option – private money – is my bread and butter. Here are posts on the most effective methods for raising capital from private investors:
On the back-end refinance, the biggest challenge Andrew faced in regards to following this take on the BRRRR Strategy and buying 5 properties in 2 years is that most residential lenders will usually only provide up to 4 loans. However, he has found a solution to his problem: commercial loans at small, local banks.
“Basically, a five-year balloon with a 25-year amortization. It’s a commercial loan at five, five and a half percent,” Andrew explained. “The speed at which you can scale and grow is much faster.”
“We tend to go to the small banks that are in town. Typically, they’ll loan on anywhere from one to five, ten, fifteen, twenty ranches. We’re not going to go to Chase Bank and we’re not going to go to the big lenders, because they don’t really offer these programs for small investors.”
When Andrew walks into a small bank to get a loan and implement his BRRRR Strategy, his goal isn’t to speak with a teller or a manager or a loan officer. He wants to go straight for the bank’s Vice-President. “You always want to go and directly talk to the VP. Typically, at these small banks, the VP is pretty much the main guy there, and that’s the person you want to approach.”
When approaching a conversation with a bank VP, the first thing Andrew does is explains, in two minutes or less, his business plan. A condensed version of his two-minute elevator pitch is, “Hey, we’re buying foreclosure type of properties or investment properties that are rentals. When we come to you, they’re going to be purchased, they’re going to be already stabilized (they like that word) and there’s already an existing tenant. We do two-year to three-year (minimum) leases only; we don’t do short-term leases.”
Next, Andrew explains he has his version of the BRRRR Strategy, the 2-5-7 formula, as well as his philosophy of aggressively paying down the properties in 7 years. Then, he goes into more details and shows the VP a couple of successful past deals. However, if you’re brand new, just show them a property or two that you have in the works.
How to Find Local Banks
A great resource for finding a local bank in your target market is https://www.bauerfinancial.com/home.html. Also, Andrew advises, “whatever community you live in, I would draw a 10 to 15 mile radius around it, and then start with the ones that are closest to wherever you’re going to buy properties. Especially if it’s in a B-market, a C+ type of market, then the banks that are local in that area, they have depositors from that particular area and they need to make a certain amount of loans in that particular market. So that’s the first place to start.”
Advantages of Local Banks
Besides the ability to provide more loans than a standard bank, Andrew said local banks have three additional advantages:
Building Relationship– “As you start developing relations, as you start having credibility with a particular bank, they’ll scratch their arms a little bit, but in general, the place to start always is the community banks – they want to have a relationship; it’s a relationship sort of lending, and they really like that word. If you go in and say, ‘hey, we want to develop a relationship with you’ and you tell them that you’re going to put your rental deposits in their bank, they’re all over that because that’s really what in the long run they’re looking for.”
Flexible Loan Qualifications– “They don’t have stringent criteria. For people who may not have a W-2 income, they’ll work with 1099. If somebody doesn’t have a W-2 or 1099, but has retirement income, they’ll work with. If somebody doesn’t even that but has some assets, a good portfolio in the stock market, or just cash, they’re much more forgiving and they’re not as sensitive, even in the department of credit scores.”
Loans to Business Entity– “As you work with these commercial banks, you can buy properties in your LLCs, you can buy properties in your S Corps, you can buy companies under a trust.”
Andrew follows the 2-5-7 investment formula (which is similar to the BRRRR Strategy): purchase a minimum of 5 properties in 2 years and pay them off in 7 years.
The three ways Andrew finances his deals on the front-end are partnerships, hard money, or private money loans. On the back-end, he refinances the properties with a commercial loan from a small local bank. When walking into a bank, Andrew goes directly to the Vice-President and explains his business plan.
For those interested in following this strategy or just want to find a small local bank, visit: https://www.bauerfinancial.com/home.html. The three main advantages, among many others, of using a small local bank is the ability to form relationships, flexible loan qualifications, and loaning to your business entity.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book.
Are you a millennial that is ready to dive in and make you first home purchase? Lauren Bowling, a millennial and award-winning blogger and editor behind the personal finance site “Financial Best Life,” recently took the dive into real estate investing and made many costly mistakes. In our recent conversation, she outline the mistakes she made and the lessons she learned, as well as provided a guide for first-time, millennial investors so that they can avoid falling into the same expensive and time consuming traps.
Do All The Research You Can Prior to Closing
Lauren’s first piece of advice for first homebuyers or investors is, “do all the research you can do, not only on just the purchase itself, but what you’re going to do after.” In order to explain why she provided this advice, I’ll provide some context – what happened on Lauren’s first deal?
Lauren’s first investment was a three-bed, two-bath property in an up-and-coming area in a southwest suburb of Atlanta, which she purchased for $65,000. Her business plan, she said, was to “really get a great deal, buy low, and eventually, in 5 to 10 years, sell high so I can really make my first home purchase make money for me.” After closing, Lauren put in $70,000 in renovations, lived in the property for 3 years, and then rented it out. Currently, the property rents for $1325 a month, which nets her $500 a month in profit.
$500 profit a month? Sounds like a 360-windmill slam-dunk, especially for a first deal! However, when we dig a little deeper, that doesn’t turn out to be the case.
“First of all, it was a complete gut job,” Lauren explained. “It was a massive renovation that I undertook, not only as a first time homebuyer, but also as a first time renovator. We’re talking stripping things down to the studs, which was just such a huge project to undertake. I was 26 years old. I was a young, single woman and I had no clue what I was doing, which was a prime opportunity for a lot of vendors to come in and take advantage of my inexperience and kind of present themselves as trusted advisors and then bait and switch me.”
After major renovations were completed, as well as $70,000 later, Lauren is still fixing things to this day. “It’s the gift that keeps on giving.” She also explained, after the major renovations were completed, “I had another contractor come in and bid some things. He said ‘you spent $70,000 for about $40,000 worth of work.’ The other $30,000 of stuff still needs to be done, not only as a landlord, but also if I want to eventually sell the house.”
The lessons that Lauren learned in order to avoid overpaying for renovations and finding the right contractor:
Put in a contingency into your rehab budget,
Research as much as you can to determine exactly what you’re going to do once you close the property
Obtain multiple contractor bids to see if she’s getting price gouged
Most importantly, ask TONS of questions. “I definitely could have asked a lot more questions … even if I already know the answer. I think the process of asking questions let’s people know you’re paying attention.”
To purchase the property and pay for the renovations, Lauren used a 203k-renovation loan. She said, in regards to a 203k-loan, “it’s a loan product where you can lump in your costs to renovate in with your mortgage so you’re making one payment every month. It’s a good program. It’s a great way for people to raise money to fix homes … especially as a first-time buyer. Maybe you have money saved up for a down payment, but not enough saved for the project and the fixes.”
For Lauren’s deal, the purchase price was $65,000 and her rehab costs were $70,000. So instead of getting a conventional loan for $65,000 and paying $70,000 out-of-pocket, she was able to get a loan for $135,000, which covered both expenses. That is an upfront cost difference, assuming a 3.5% down payment for an owner-occupied loan, of $67,550 ($72,275 – $4725).
When Lauren was pursuing the 203k-loan, she learned that there are two different types. “There’s the streamline 203k, which is less than $35,000, which is for more cosmetic fixes. Then there’s a full 203k-renovation loan, which is for those bigger projects like what I did.”
Which 203k-loan option does Lauren recommend for first-time homebuyers or investors? The streamline. “I definitely recommend for first-time buyers, only do a streamline 203k because that keeps you out of the bigger projects [so you won’t be] in over your head.” In other words, the 203k streamline forces the investor to keep renovations under $35,000 and to avoid risky projects that require major renovations since those are the homes that are more likely to result in budget creep.
Lauren specifically focuses on providing financial advice to the millennial generation. Besides being a millennial herself, the main reason she focus on millennials, she said, is “I think given all the factors, [like] the recession and the student loan crisis, millennials are in a very interesting place financially so they need a different type of advice than what their parents got or even the generation that comes after is going to get.”
That being said, Lauren provided two, millennial specific pieces of advice:
Get Student Debt Under Control:
“You can’t really talk about buying a home as a millennial without first talking about how millennials can get debt, if they have it, under control… [So] first, it’s about getting your debt under control. Maybe not paying it off entirely, but to the point where you can accommodate both a mortgage and a loan payment.”
For those unfamiliar with the student debt crisis: According to Student Loan Hero, Americans owe over $1.3 trillion in student loan debt, spread out among over 44 million borrowers. The median monthly student loan payment for borrowers between the ages of 20 and 30 is $351. The average Class of 2016 graduate has $37,172 in student debt, which is up six percent from the Class of 2015.
“The second thing I see a lot of millennials not doing is a lot of comparison shopping for different interest rates. I think a lot of millennials will go with whoever their parents told them to get a mortgage with or maybe a friendly recommendation, which is fine, but you lose out on a lot of money if you don’t shop for interest rates and take the lowest one.”
“There’s lots of website where they can go, like Lending Tree is a place where you can just plug in your information and see the ballpark of what you’re qualifying for. Then, if you want to see what your home bank will offer you, [go in] and say ‘hey I got this offer from this other place,’ and do it that way just so you have in mind your credit score and what you’re looking at. If you go with just your first offer, you don’t know how much money you’re losing on the table.”
For example, let’s say you are purchasing a $200,000 property. The difference between a 3.5% interest and 3.75% interest loan that is amortized over 30 years is over $10,000!
The lessons Lauren learned after spending $70,000 on $40,000 worth of renovations on her first investment property are:
Put in a contingency into your rehab budget
Research as much as you can prior to close
Obtain multiple contractor bids
Ask tons of questions to contractors, brokers, and lenders
Of the two 203k-renovation loan types, Lauren recommends using the streamline option, which covers renovations up to $35,000. This forces the investor to keep rehab costs under $35,000, so they will be less likely to take on riskier rehab projects.
For millennials who are looking to purchase their first home, either for personal or investment purposes, get your student debt under control and make sure you shop around for interest rates
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When valuing a property, there are three distinct valuation methods. As investors, two are most relevant to us. If the subject property is a residential property – single family, a duplex, triplex, or 4-plex – an appraiser will utilize the sales comparison approach. They will locate recently sold, comparable properties, adjust for any differences (age, size, amenities, etc.) and determine a property value. For multifamily properties with 5-units or more, an appraiser will utilize the income approach. To determine how to calculate the income approach for real estate and the value of a property, the appraiser considers income generated and market cap rate.
Therefore, if you have a duplex, for example, even if the cash flow is extremely high, typically, the appraiser won’t take that into account when valuing the property.
Nick Baldo, who has been a full-time rental property investor since 2014, was able to convince a lender to accept an income approach appraisal on a package of four duplexes. In our recent conversation, he explained how he was able to do so.
Setting the Stage
Here’s the story: The four properties were all located around the University of Buffalo in New York. Nick found two of the properties first, and then randomly came across the second pair of duplexes. “The way we did it was we identified two [duplexes] that we were going to buy,” Nick explained. “It was an off-market [deal]. We had an agent we were working with [and] he had an investor who owned two houses in the area.”
“As we were there one day doing our due diligence, an older gentleman walked up to us asking if we owned those houses,” Nick continued. “We said, ‘well not yet,’ and he said ‘come with me.’ He walked down the street to two other houses that he owned.”
“He was not interested in owning them anymore and was really interested in lending money. What we were able to do was we bought all 4 through different means for each, but on those second two, we did some owner financing.”
The typical property in the area of campus Nick was investing in, he said, were “run down, fraternity and undergraduate housing.” However, for these duplexes, Nick said, “we made them a little bit nicer, increased the rents a little bit, and started really focusing on either upperclassman, the graduate students, and medical students, which was the trend of the area, so we caught that wave.”
Since the surrounding properties were “run down,” a sales comparison approach appraisal would have valued the properties much lower than the new, increased rents demanded. Nick said, “the struggle of the appraisal was trying to convince the bank to go off of income-based metrics, as opposed to the comps approach, because the comps approach would kill us. We had to really [tell the lender], ‘hey, we get it. If you sold it to a homeowner, you’re not going to get the value, but these, as a package to an investor, are very attractive because of the income and cash flow.’”
How did Nick accomplish getting an income approach appraisal? “Our loan [was a] commercial loan [from a] small, regional bank loaning our business money with the property as collateral,” Nick explained. “The coolest part about commercial loans is there’s no hard rules. They’ll loan your business money, given that there’s collateral to back it.”
When Nick initially purchased the properties and approached the bank asking for an income approach appraisal, it didn’t go well. However, when it came time to refinance the properties, he was successful! “What we were able to do was get the loan officer to really sit down with us, understand the cash flow we were looking at, and he was able to go to his board and we were able to get the appraiser to give us the income-based approach,” Nick continued. “He got the bank to take that as the appraised value.” Persistence paid off.
Going to Smaller Banks
That’s one of the benefits of the smaller, regional banks. Their loans give you a little bit more flexibility to actually talk to real people.
Nick was able to get the income approach appraisal on properties that were less than 5-units because he was working with a portfolio lender locally. It was a regional bank that keeps loans in their portfolio. Therefore, they’re their own bosses. They’re not selling the loan on the secondary market, which allows them to come up with creative terms that make sense.
The bank Nick used, he said, “has a board that approves all their loans. They have pretty strict standards still, but they have human-beings that can make rational decisions because in the end, they want to make money.”
Nick purchased the entire 4-property portfolio for $230,000. He put in $15,000 per property, for a total all in price of $290,000. Rather than having the property appraised using the sales comparison approach, which would have probably valued the property around $300,000 or less, using the cost approach, it appraised for $375,000. That’s a difference of a least $75,000 in equity, all because Nick was able to negotiate terms with the lender.
What’s the main takeaway from Nick’s story? Portfolio lenders, as well as regional commercial banks and credit unions, are our best friends when we seek them out and build a relationship with them.
“Don’t worry about failure, you only have to be right once.” – Drew Houston
Mark Ferguson, who is a realtor (sells hundred of homes a year), an investor (has flipped over 100 homes and owns 16 rental properties), and an author (has written 5 books), is one of many speakers who will be presenting at the 1st annual Best Real Estate Investing Advice Ever Conference in Denver, CO February 24th to 25th.
In a conversation with Mark all the way back in 2014, he provided his Best Ever advice, which is a sneak preview of the information he will be presenting at the Best Ever conference. His advice was also featured in the Best Real Estate Investing Advice Ever: Volume I.
What was Mark’s advice? He outlines the most overlooked expenses by buy-and-hold and fix-and-flip investors.
Mark’s Real Estate Background
Mark was exposed to real estate at a very young age. His father was a real estate agent and also did fix and flips. As a result, Mark got started in real estate by helping his father with flips during high school. Having been exposed to real estate at such an early age, Mark told himself that he would never get into the real estate industry. Instead, he went to college and obtained a degree in business finance.
After graduating, Mark could not find a job in the world of business finance, so he decided he would do real estate part-time, only until he found a job. In 2001, Mark re-entered real estate as an agent, and struggled for a long time. He did not have a niche, he didn’t have any goals, and he wasn’t great at talking to people. This all changed when Mark found the REO foreclosure niche. He started listing REOs, started making goals, and his career took off.
In 2010, Mark began investing in single-family rentals, purchasing 16 properties over the next 5 years. In 2013, Mark took over his father’s existing fix-and-flip business and real estate sales team. He has been focusing on that business as much as possible. If being a real estate agent, a buy-and-hold investor, and a fix-and-flipper wasn’t enough, Mark also started a real estate blog, “Invest Four More,” where he writes articles about his past and current experience as an agent and investor.
Real Estate is Very Region Specific
Mark’s real estate agent, buy-and-hold, and fix-and-flip business models focus on single-family residences in the Denver area. Within the Denver area, Mark’s target sub-market is 50 miles north of the city. In this area, prices are more reasonable and he can acquire a property between $80,000 and $150,000. The reason why Mark focuses on single-family instead of multifamily properties is two-fold:
Since he focuses on SFR as a realtor, he knows the properties very well, so he can get a much better deal and make more money on a SFR compared to a multifamily
Real estate is very region specific. He pays considerable attention to different parts of the country and the different terms that people get. For whatever reason, Colorado has horrible cap rates compared to other parts of the country. It is hard to find any multifamily properties above a 5% cap rate.
Due to these two reasons, Mark can be much more successful with SFRs than he can with multifamily in his specific market. He focuses on buying below market value through short sales, REOs, estate sales, etc., so he can make money as soon as he buys the property.
Overlooked Expenses: Buy and Holds
Rents have shot up in Mark’s market over the last couple of years. As a result, he can purchase a SFR for around $120,000 to $140,000 that will rent for $1,500 a month. If he were to purchase a multifamily property, he could get a 4-unit with 2 beds and 1 bath per unit for $250,000 that might rent for $2,000 a month. Compared to most parts of the country, this is backwards, but again, real estate is very region specific.
When investing in SFR rentals, Mark strongly advises that you invest for cash flow. Many people get caught up in a rising market and just buy any investment property they can find. However, they neglect to take a closer look at the actual numbers and operations. People get in trouble because they think that if the property rents for $1000 a month and their fixed expenses (mortgage, taxes, and insurance) are $500 a month, then they will cash flow $500 a month. They factored in the fixed expenses but they overlooked additional expenses, like vacancies and maintenance. If the market goes down and they cannot maintain the $1000 a month in rent, then they have properties that are not making money and they cannot sell, so they are stuck. When you invest for cash flow and figure in all of the additional expenses, if the market goes down, you will still make money and can weather the storm.
Advice in Action #1: When investing for cash flow, make sure that you are figuring in vacancy and maintenance costs on top of your mortgage, taxes and insurance:
Expect at least a 5-10% vacancy rate, even if the historical rates are much lower
One eviction or bad tenant can create that 10% pretty quickly
A little harder to estimate because it varies depending on the property’s condition, age, and how good your tenants are
Figure at least 10%, but more often 15-20% for maintenance and capital expenditures
If you need to replace a roof, these costs can add up pretty quickly
These rates are a percentage of the properties gross rent. If your gross rent is $1,000 per month, figure in $50 to $100 a month for vacancy and $150 to $200 a month for maintenance.
Overlooked Expenses: Fix and Flips
On the fix and flip side, Mark can purchase a property for $80,000, put in an additional $15,000 to $20,000 in renovations, and sell it for $140,000 to $150,000. Being all-in at $100,000 and selling for $150,000, one would think that the net profit is $50,000. However, in reality, this is not the case. After factoring in holding costs, carrying costs, financing costs, and all the other costs that many people do not consider, the profit is closer to $25,000.
As a fix and flipper, you have to understand your actual costs. In Mark’s example above, if he overlooked the additional expenses, he would have expected a $50,000 profit instead of the actual $25,000. If the numbers were even tighter and he expected a $20,000 to $25,000 profit, he would have ended up breaking even or potentially even losing money on the deal.
Advice in Action #2: When performing a fix and flip, make sure you figure in the additional expenses on top of the rehab budget. These expenses include:
Everything else that goes on during the course of a flip
Most experienced fix and flippers account for most of these additional expenses, but Mark finds two other surprising costs that many flippers still overlook:
Higher Than Expected Repair Costs – Mark has been fix and flipping properties for a long time, and every single time, the repairs end up being higher than expected. You don’t really know how much work a house needs until you start getting into it and really have a contractor take a look at what is there. There are always hidden surprises, especially on larger renovations and when you are knocking down walls.
Advice in Action #3: To account for these surprise costs, Mark always adds at least $5,000 to his repair budget automatically. On a $20,000 rehab, that is an additional 25%. Commit to doing the same.
Longer Than Expected Project Time – Similar to Mark’s experience with the repair costs always being higher than expected, the same holds true for the project time. The length of time it takes to flip a property is almost always longer. There is a huge difference in holding costs if the project time is 4 months vs. 6 months. That extra time can result in up to $10,000 in additional expenses.
Advice in Action #4: Mark always tacks on an additional two months to his expected project time, and adjusts his holding costs accordingly. Commit to doing the same.
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Adam Sedinger is a professional home inspector that has inspected over 7,000 homes, so he knows a thing or two about what it takes to successfully examine a property. In our recent conversation, he provide the “best ever” investigation technique that anyone can apply when conducting due diligence on a potential investment, or even a personal property.
The best trick Adam has come across during the past 10 years of home inspecting experience is to access as much public information as you can – that is why it is called “public” information. The best way to do so is to call the local city hall. You can ask for information on any type of renovation or update that has been made to all of the local existing properties.
While investigating a new property, for example, when you call city hall (or email or visit their website, depending on the location), you want to request information on permits. Adam finds that a common misconception many new home buyers have is that someone doesn’t need to pull a permit when making a major update to a home (i.e. replacing a water heater, installing an electrical panel, adding or replacing HVAC, etc.) However, whoever is doing the updates, whether it be an investor or a regular home owner, they are responsible for getting a permit from the city so that they can send out an official to, upon completion, come back and make sure the installation meets the current standards.
In a traditional real estate transaction, when a client discovers that there has been updates or upgrades made to a property, Adam recommends that they check into it, look up the information, and obtain the records for the property. In doing so, more often than not, his client will gain a little bit of leverage in the transaction. This is because if they check the property records, compare it to the actual property, and find discrepancies, they can use that as leverage during negotiation.
For example, let’s say you view a property and the current homeowners state that the property only had 2 bathrooms originally, but they added on a 3rd. Then, when you call into city hall for access to the property’s permits, you discover that there is no record of the bathroom update. Since the permits were not pulled, it is the current owners responsibility to pull those permits. When they go to the city to pull the permits, depending on what side of the bed the official woke up on, they can tell them to rip it out and put it back to how it used to be or make them update it to current standards. Or, even if the renovation is up to code, the city could issue some fines. Therefore, this is a card you can use to potentially purchase the property at a discount, since the current owner is going to want to avoid paying fines or making any additional updates, depending on their situation.
So, next time you are pursuing a property, pull the permits and compare the recorded updates to the property’s current conditions. If everything matches, great! However, if you discover that the property was updated and no permit was issued, that can be used leverage during negotiation, or more importantly, it can save you from purchasing a defective property!
Comment below – Whether you are a home inspector or experienced investor that has viewed many homes, what is a trick that you have used in order to uncover “sneaky or hidden” issues that the inexperienced eye would typically miss?
In my conversation with Louis La Vella, a marketing and event expert, he shared the techniques he uses when promoting concerts and other entertainment events, and explains how a real estate agent can apply the same techniques when marketing for an open house. Louis broke down these techniques into a simple, 3-step process: 1) determine your target audience 2) build anticipation and 3) deliver on the experience you have been promoting.
Step 1 – Target Audience
The first item on your agenda, before throwing any event, is to sit down and think about whom your target audience is. Once you understand exactly who your target audience is, (in the case of an Open House, who will be interested in purchasing the property) you can begin to develop the style of event that you will create, as well as how you are going to market to the specific individuals.
Step 2 – Build Anticipation
After selecting the target audience, the next, and most overlooked step is to build anticipation for the Open House. The old school mentality for marketing an Open House typically consists of putting up a sign with balloons in the front yard, a listing in a newspaper, and the promise of juice and cookies to those that attend. While this method may reach your target audience, it also casts a much wider net. It is more of a shotgun approach, whereas, you want to be a sniper marketer!
Therefore, the most effective way to pre-brand the property is by using social media and other digital platforms. Pre-branding can go a long way, especially since it can result in people already being half sold before even coming to the open house, which means your job is already half way done. The main goals of the pre-branding process are to show how the property is different and to create a connection with your target audience.
For example, if your target audience is families with young children, create a post showing the park that is a few minutes away from the property, and include an image of children swinging on the monkey bars with their parents. Or, if your target audience is young professionals and you are listing a condo, show images of the Wholefoods and gym that is right around the corner. Essentially, you want to list all of the great aspects of the area and provide your target audience with a visual experience, rather than simply words on a page, because it will give them a greater feeling of connection before they actually see the property.
Step 3 – Deliver on the Experience
The final step is to follow through and deliver on the experience that you have been promoting. No need to go into detail on this step, because as an agent, this is already your area of expertise.
As a byproduct of following this 3-step process in your own unique, creative way, you will begin to be looked at as the expert and authority in the area. Continue with these branding efforts and soon enough, you will become a mini-celebrity, and be known as the best real estate agent in the area.
While this blog post addressed real estate agents giving an open house, I believe a lot of the same marketing principles can be used for fix-and-flipper, when selling a rehab, and buy-and-hold investors, when they are providing a showing to a perspective
That’s how my letter started out to residents when I introduced the Resident VIP Program.
In that letter I notified residents that they would now enjoy an exclusive discount at Dickey’s BBQ. All they had to do was show our Resident Card upon checkout.
The resident card cost me $15 to print 250 – super cheap. The discount was created by reaching out to the fine folks at Dickey’s BBQ and asking them if they’d like me to help them get more business. Hmm, yes please!
While it was just implemented two weeks ago, the anecdotal feedback is glowingly positive from both residents and Dickey’s BBQ. So much so that I extended the program to a locally owned flower shop because I noticed a lot of our residents have flowers on their patios.
As a real estate investor I’m constantly looking for ways to decrease turnover and increase NOI. Sure, this program probably isn’t something that will be a primary reason for a resident staying but it does add good-vibe points and will be a contributing factor when it’s lease-renewal time.
Here’s a step-by-step plan for how to do your own program:
Find one small biz in the area and ask if they’d like you to help increase their sales
Negotiate an exclusive discount for your residents
Print biz cards with first/last name and signature fields for resident to fill in (I use VistaPrint)
Pass out note to residents announcing the program
Then build on that with other local businesses
Be sure to not get competing businesses in the program or that might ruffle some feathers
Send out monthly newsletter and remind residents of exclusive discounts and announce new discounts
This is a little bit of work up front for a lasting, long-term reward.