Get Rich With Real Estate – An Overview

There was an advanced discussion in our highly popular post on passive income. We’ve taken it and organized the content into a readable blog post (thank you to all the commenters “ownmyhood”, “Nixon”, “RE Guy”, “YM” for creating this idea). In addition to adding highly valued comments, we have vetted a few of the named individuals to confirm they are millionaires from the real estate game (ambiguity for double protection of their identities!). As many are aware we prefer the online route, but lets get started on this path.

Step by Step to Making Big Money in Real Estate

There are a lot of books on real estate investing out there, problem is most are terrible (and written by get rich quick gurus rather than people who have been there). If anyone’s actually interested here is an 8 step process to get started in real estate that actually works:

Step One – No Need for College: Skip college and go to a technology school for a building trade, preferably the one that pays the most in your area (plumber, electrician etc).

Step Two – Become a Contractor: Get a job with a reputable contractor in your field, preferably someone who offers overtime opportunities. Work as many hours as possible, learn all you can and get licensed as quickly as possible. Make friends with other tradespeople on job sites, preferably the more intelligent, young, hungry ones (these can be tough to find). Save every penny you can.

Step Three – Location, Location, Location: Locate an area that is run down, but shows some signs of turning around. Meaning multifamily buildings for sale that bring in double digit cap rates are common enough to where as there might be a few listed on the MLS and the population of the immediate area (or least the surrounding area) is not decreasing and preferably growing. Also, being within commuting distance to a desirable downtown area helps a lot.

There is quite a bit more than this when locating a suitable area, but there are some things that must be left out for others to figure out (notice no one gives away their business, otherwise they would be out of it!). If this area is local, good for you, if not, time to pack up and move. There are a lot of places where you can buy double digit caps all day that aren’t total war-zones. You don’t want rodeo drive (entry cost too high/tough to make money) but make sure it isn’t a demilitarized zone either.

Investor Note – RE Guy: You can call these run down areas with signs of turning around “the borderlands” because they normally are on the border between a garbage area and a nice area. You shouldn’t count on anyone giving away all their trade secrets, especially not for free, especially not on a public blog, the same way this blog won’t give you specific stock picks or exactly the products they market online. However, all these resources combined make a great starting point for anyone looking to get into real estate, so if it is something you’d like to do, after us giving all this information in one place, you have no excuse not to start!

Step Four – “Campaigning” (no different than affiliate marketing): After locating the right area, use the MLS, targeted mailings, call campaign (anything else!) to locate a building with potential for a double digit cap and an owner willing to sell. Bonus points if they are willing to hold paper. Remember these properties are rarely pretty, be prepared to deal with some rough tenants and buildings. If either of these scare you, stop reading now.

– Investor Note – RE Guy: He’s currently setting up a deal with a single digit cap on a multi that will convert into a double digit cap, based on the purchase price and what he put into it for the renovation and subsequent higher rental income. Not based off it’s “true” cap, it’s new after rehabbed value which he believes will remain single cap. Cap is more tied to the general area than the building, it’s more “how risky is it to rent properties in this neighborhood” or “what quality or income level of tenant will possibly be attracted here” and cap will generally decrease as the quality of tenant increases (it’s less risky to rent to a doctor than a bus driver, and the market recognizes this and makes doctor friendly buildings more expensive than bus driver friendly buildings, relative to cash flow). Currently the owner is warming up to the idea of holding paper.

Step Five – Cash Flow Positive:  Buy the building using a method that allows for at least some cash flow after all expenses (lenders don’t like negative cash flow). Meet the tenants, keep the decent ones, immediately evict the bad ones, raise all rents to market rates if they are not already (if you lose sleep over raising ol’ miss McGillicudy’s rent $50 per month or start shaking in your shoes when you realize you have to hand Chopper the Hells Angel an eviction notice, this ain’t your gig). Renovate the lousy units into nice apartments using low cost but durable materials. You’re not going for a luxury penthouse, just a nice clean apartment. Now is the time to call your buddies you met on the job to help you or at least learn enough to be proficient at a few other activities. Hanging drywall, painting, basic carpentry can be learned by anyone who’s willing to put in a little time.

Investor Note – RE Guy: Decide ahead of time what the rules are and enforce them. Make them firm and strongly in YOUR favor. Add to that a moderate dose of pragmatic compassion; evictions are an expensive proposition and you may need to decide between a small and large loss. Make the decision to evict more on something like the person not answering phone calls than on them not being able to pay for a week or two IF there is an agreed upon payment plan that you believe they will stick to. If you conduct yourself ethically, you will have no problems with evictions.

Step Six – Learn from Competitors: Learn how local apartments are advertised, list your vacancies, learn how to take nice pictures and write coherent, appealing descriptions. Price them right, don’t overprice or they will sit vacant and carrying costs will eat up any profit. And most importantly SCREEN YOUR TENANTS THOROUGHLY. Nice people will rarely tolerate living next door to dirtbags for any length of time.

Investor Note – RE Guy: If you get too few phone calls you know it’s priced too high, too many and it’s priced too low (art that turns into a science over time). Know your market, know the seasonal variance, know what to expect as reasonable so you can adjust accordingly. Sometimes trying to squeeze every dollar out of a place leads to having to compromise on the quality of the tenant… and that knowing this is also knowing what is a good tenant for that particular neighborhood.

Step Seven – To be the Best, Never Settle Like the Rest: Alright, you’ve got one building cash-flowing, good work. Time to sit back and let the rent checks fill up your bank account right? Wrong. Visit the property often, pick up litter, respond to maintenance calls promptly, evict non-payers and troublemakers and ALWAYS PAY ALL OF YOUR BILLS ON TIME. Credit will *make or break you* in this game.

Step – Eight Wash Rinse and Repeat:  Now just repeat steps 4 through 7 over and over and over…

Key Notes

When you are starting out, nothing is beneath you: Unclog toilets, keep your own books, do apartment showings, represent yourself in court. Learn these things now so you can teach and competently evaluate others to do them for you later.

Don’t let emotions get the best of you. From buying a property to resolving tenant disputes emotions run high in the real estate world. Dealing with a stubborn moron who you want to purchase a building from? Be nice. Handing a tenant an eviction notice? Be nice. Nothing to be gained from losing your cool.

Keep in touch with people that matter. RE agent points you toward a good deal? Keep in touch. A seller holds paper for you? Keep his contact info and reach out to him later if you need a reference. A bank loan officer mentions they have some foreclosures in the works? Call him in a few weeks and see how their coming along. All pretty obvious stuff if you read this blog. The moneys out there, if you want it, it’s yours.

–  Income Property Debate:  Opinion one: Don’t be the guy who buys a duplex in order to “live in one unit and let the other unit pay my mortgage” as a side hustle. If you’re going to get into this game plan on going big or not wasting your time (scale remember). Real estate is a complex endeavor that involves quite a few areas of expertise (sales, advertising, legal, building trades, tax accounting etc). You don’t have to be a master of all of them, but must be at least competent enough to judge whether someone else who you’re paying is doing a good job. Learning all this takes a lot of time and doing so just to “pay your mortgage” is foolish. Opinion two: If you buy it well enough to much more than cover the mortgage (which is a standard you should absolutely set for yourself) it is possible. In addition, you can go up to 4 units of pure residential while still qualifying for residential mortgages.

The main point of ownmyhood that I agree with 100% is not just buying a property to pay your mortgage, but buying a place to live in it and have it as an investment can be done all sorts of ways (including renting rooms, always legal if you live there to my knowledge a.k.a. Airbnb before there was an Airbnb), and for those who are really strapped for cash, that means you can even get a single FHA loan for a few % down.

How To Manage Once You Get the Hang of It

Once you’ve got the hang of it there is potential to see cash on cash returns of *at least* 10-20%, with minimal work (relatively speaking). If you don’t want to manage tenants you don’t want success bad enough (Real estate being your chosen path to riches). If this is the mindset someone has to be successful… well it is the most common red flag example. The second most common red flag? Are you willing to spend your Saturday checking out and analyzing deals rather than watching sports from 12pm to 12am? No? You don’t want it bad enough.

Back to dealing with tenants…hire a property manager. Yes you will pay money for the service and it will hurt your returns, but if you buy a property correctly you will be able to afford it and still make plenty of money. Average rent per month on units can come in around $800 and managers typically charge between 5-10% depending on your scale. If you’re just starting out and paying $80 ($800/rent x 10% mgmt. fee), that’s the best $80 you’ll ever spend because you don’t have to deal with tenants, contractors, or accounting. As a note, don’t choose a property manager solely based on the management fee. You can find a manager for 6% ($48/month in my example vs $80) and save a few bucks, but the wrong property manager can cost you *much more* than that in excess repairs or lost income. Find a manager who is going to look out for your best interests as an investor, not just someone looking to increase their revenue.

Deal Example – Nixon: Here’s the deal he’s working on today. 16 units priced around a 10% cap rate for $500K (that means around $50K of cash flow a year *after* paying a manager, but before debt service). The lending terms he went with on the last deal was 75% LTV at 4.5% using 25 year. That would cost about $25K of debt service a year on this deal, leaving $25K of the original $50K cash flow. He’d put up $125K of equity and end up with a 20% cash on cash return on a semi-passive basis.

Investor Note – ownmyhood: In most cases would recommend training and hiring your own property manager over a paying a management company. While the short term costs in time and money may be greater (training, setting them up with office, tools etc), in the long term you’re not going to pay for someone else’s overhead and the needs of your tenants/buildings will always take preference.

Basic Real Estate

You throw money at the property and hand the keys over to someone else to deal with it. This is not a risk-free situation given 1) potential debt load, 2) trust in property manager, 3) interest rate environment and 4) any one time hazard/maintenance issue that kills your yield for the year. We peg a solid return at somewhere around 6-9%. This includes a management company eating into your yield and of course the natural reserve fund for any maintenance issues.

Another option is working through a private equity firm such as a Blackstone, Lone Star or Brookfield. You’re locking up your money for a longer period of time (typically) but the returns should be notably higher as well (double digits). Now there is certainly a wide range of private equity transactions from low to extremely high risk… But. Locking the money up for longer periods of time is generally the theme here. Unless you’re in the Ultra Rich group, it’s one of your best bets to get exposure to commercial real estate (apartment buildings, offices etc.).

Bigger Pockets: Biggerpockets can be a good resource for beginners, and possibly if you have some good knowledge already a resource for looking deeper into specific topics. For example there is a thread there on construction of a full home from a lot. The issue with it is that it’s got a whole host of contributors of various levels of competency, different backgrounds, goals etc. It is easy to get confused or get misinformation in the form of biases you may not recognize as a beginner from there.

That said it is a a good beginner’s guide to real estate, because the person who wrote it called the system of “buy, renovate, rent, refinance”, he says “BRRR”, which he correctly stated was something many investors have been doing for a while and he was just creating an acronym for easy understanding. In other words, if you treat it as a summary of various concepts and a jumping off point for either further study or just to give you a basic framework to use while you go out and start taking action then it is good.

Of course, your best education is your first deal. A single deal is worth an additional 10k-20k because you’ll be getting your education out of it. Like as if you were paying a college for a semester of classes on real estate.

Example of Bias: There is a segment example where it discusses using someone to do certain repairs and spoke against it, while another contributor (who had many more units) said “I could see if you already have your portfolio and are just trying to maintain cash flow, then it is good, but if you want to keep building it, you’re better off paying someone to do it and looking for your next property.” Also, if you are just starting out and don’t have a background in the trades, it could also possibly be useful (this is another point of dispute among some people).

Basic REITs Exposure

A Real Estate Investment Trust is a company that owns and operates income producing real estate (yes there are other types like healthcare but we’ll keep it simple).  While they do offer high yields (distributing 90% of earnings to shareholders), the REIT is exposed to 1) tax rate changes – you’re taxed based on your personal income bracket vs. dividend distribution rate, 2) reliance on debt, meaning more leverage is needed to boost returns, 3) real estate can be extremely location dependent and is prone to cycles just like we saw in 2008 and 4) since it’s an equity product and as a shareholder, we have to realize they can only re-invest 10% of net income since the rest is being distributed. Take a look at REITs and you’ll see they move around in ways un-related to the stock market.

Your best bet is to DCA into VNQ for REIT exposure (0.12% expense ratio as of this writing), although be mindful at the moment as REITs tend to underperform in a rising interest rate environment thanks to the bond-like income. Dividends will be taxed at your ordinary rate vs. qualified rate, but netting 66% of VNQ at 4.7% is higher than 85% of VYM at 2.8%. Check out PFF as well for another high yielding (5.7%) ETF that isn’t related to real estate

Comments

  1. New Investor says

    This blog has seriously turned a corner! It’s interesting to see how successful people are willing to give a detailed guideline and always stop right before giving away all their secrets, cannot ask for much more, thanks!

  2. says

    Contracting is hard, but rewarding business. I tried running that business before and it is indeed not easy.

    One thing I realized only after running it for couple of years is that liquidity is most important thing for business.

    Company can afford short term losses, but can’t afford not to be liquid. When I was at MBA, we had exchanging profesor from Harvard who taught entrepreneurship.

    Whole semester he was emphasizing liquidity. As it is in my country, construction companies pay late, which put a lot of small businesses, subcontractors into bankrupt.

    Further, you need some money to play in this field. You have to invest upfront to get investment back, when you finish project.

    Takeaway: Whatever the price, you must stay liquid.

    • RE Guy says

      What you said emphasizes why it’s so important to never let a contractor get ahead of you with payments vs. work completed.

      If you don’t plan ahead well and have good structures in place, there will often be this game of them trying to get money before completing work, whether it be in the form of deposits (you can always buy the material yourself) or whether it is moving the goal posts during construction for instance having a payment schedule based on certain things being completed and them trying to change it later with an emotional appeal to time while not having results to justify it “…but I was here all week…and I need to pay my guys…” etc.

      Of course, sometimes they have other jobs to manage, or they simply don’t know how to manage a single project well.

      So what pushes all this towards a confrontation or them skipping out on a job partially done (either completely, or for a few days or weeks), is as you said, liquidity.

      They will try to collect your money to keep themselves afloat while finishing another job to get paid for actual work.

      So with contractors it’s best to assume they are broke and have poor money management skills, and create appropriate structures where they have to produce to get paid.

      • Mike says

        Thank you for the insight.

        I recently had a Flipper (also a Broker) share a personal rule he follows.

        He won’t do a renovation if the property is greater than a ten minute drive from a Lowe’s, Home Depot, etc.

        He warned against contractors needing to pick up additional materials while on the clock and instead of sending a worker, the supervisor will go to the store thus leaving all the workers to do whatever they want. Apparently, his rule mitigates this issue to some extent.

  3. Sir Alfred D. says

    What a great article.
    Thanks to all the WSPs readers that contributed.

    Also can’t wait for the book.

    Cheers

  4. Mike says

    Thank you to WSP, Nixon, RE Guy, ownmyhood, and YM!

    The borderlands concept makes a lot of sense. I’ve actually been applying that when looking for my second property.

    If any of you are willing to answer:

    Obviously there are deals everywhere. However, I will relocate in two years to what I believe is an optimal market in 2019. My starting point for some research was the Top Rated lists you find with a quick Google search. My initial impression is that if a city has made it to the top of one of these then a lot of the value has already been priced into the market. Similar to stock prices adjusting with breaking news. Although, I realize real estate doesn’t adjust as quickly as the stock market. My next line of reasoning was to watch the back end of these lists for what will heat up in the next few years.

    Are any of the cities you consider prime locations on a mainstream list or are you focused on locations completely opposite of the mainstream?

    Are there any key metrics, contrary to mainstream thinking, that lead your decision making on location?

    I’m located in El Paso, TX which I believe shows some unnoticed signs of potential in the next few years, but it still seems sub-optimal. I’m currently intrigued by Columbus, OH. Florida seems like it has received too much attention already.

    • RE Guy says

      I would say that in any major city there are sub-markets, small neighborhoods where there are individual trends happening, and having your boots on the ground and walking through these along with your other research will alert you to new opportunities.

      So there are factors that influence Columbus, OH generally and then certain smaller areas of the city which are probably starting to gentrify, showing signs of progress as ownmyhood stated. Finding an appropriate place to insert yourself into this process, given your ability to manage certain scales of renovations and certain classes of tenants is key (some might choose rougher and higher return, some more stable and lower return).

      Your best bet, wherever you decide to invest, would be to fly out there and actually see if you can find a deal today, get the process started. I wouldn’t wait till 2019, a lot can happen between now and then.

      What if Columbus, OH passes a bunch of anti-landlord or anti-business legislation for instance? What if an aspect of the economy that it depends on goes south? Or what if there already are all these great opportunities and an entire neighborhood turns around and the majority of the deals there get snatched up (and you missed the chance to get a few of them in these two years)?

      I’d rather focus on finding a deal that is good no matter what. Remember, the difference between investing and speculating is investing has a solid return right now without having to have any outside forces align, speculating depends on some future (uncertain) event to happen in order to be profitable.

      And I’ll also answer your question more directly:

      “My initial impression is that if a city has made it to the top of one of these then a lot of the value has already been priced into the market.”

      A city is not a neighborhood. What are specific sub-markets there doing? Where are there a dozen or so city blocks ready to “pop”? You’re right that the hype machine will at some point pass by the deal potential (the agreed upon “hot neighborhood”, or the generally “hot city” but less so), but where certain neighborhoods are at this moment can only be determined by your hard work.

      • Anotheros says

        To extend on anti-landlord regulations: I’m currently living in a city in Europe that has implemented a restriction on raising rents by more than a certain percentage after the previous tenant has moved out (unless extensive renovations are made). Furthermore, people traditionally rent for life in this country.

        I’m very reluctant to buy even an apartment in this city, but it has one of the “hottest” rental markets in the country, and apartments and buildings are being bought and invested into regardless.

        Do you have any experience with situations like this? I can’t really imagine this happening in the States, but you guys might have your own legislation issues.

        Thanks for your contribution in the comments and to the article, it’s been very interesting to see this M.O. written out.

    • ownmyhood says

      In the wake of the real estate bust I took a job at a firm that managed REOs for banks all over the country. It was a horrible job, but gave me a decent perspective on the state of different RE markets. For people using the strategy I outlined I’m guessing there are a fair amount of spots in the rust belt that would fit the bill.

      Be careful though and do your research before buying that $15,000 3 unit in Detroit…

      • Mike says

        Thanks for the tip. I’ve looked through some of the listings from Detroit, Grand Rapids, etc and there are definitely a lot of those. Nothing says Chi-Raq like a $15,000 3 unit.

      • Anonymous says

        nothing like trying to evict jose and his cousins until you realize the house is used as a cocaine smuggling point.

        then again if it was used for that they would probably pay their bills on time, and you to not check up on them.

      • RE Guy says

        I just wanted to address this potential lack of information:

        A) In many areas, if you own a building that is being used for drugs distribution, the DA can both raid and re-possess the property. Essentially you can be held at fault for not alerting the authorities to it, I’m not a lawyer but my understanding is you are assumed complicit in the operations. Look into this if you’re buying into the rougher parts of a given city.

        B) Evictions, procedure-wise, are straightforward and in my mind not that risky. The sheriff shows up, or the police, I believe you have the option to choose (sheriff is quicker to schedule though), he’s got a bulletproof vest on and a gun. LET HIM GO FIRST, and stand back; I’ll wait down the street. Then once he’s made contact with the tenant, or if he believes the tenant has vacated, you come over and change the locks after opening the door or drill out the locks and change them (if the tenant changed the locks on you, you won’t have the key to open it). You can, of course, just have a carpenter on premises to do this for you and never even put yourself in any danger at all (Well, unless you fear them coming back to the property at a later date for retribution while you’re there).

        I have seen stories of people getting stabbed during this process etc. but then I’d ask what were they doing so close to a hostile tenant when there was a guy with a gun there who should be protecting them. Or they should be carrying themselves, I know many people who go into these neighborhoods with guns or other weapons. It comes down to street smarts, which you’ll need if you want to survive in the streets. Personally I’m not involved with the really rough areas anymore, but if that’s your choice know what you’re getting into and how to proceed.

        Also, I believe a lot of people get emotional during evictions. The guy who was stabbed probably got angry and got confrontational with the tenant, or course it’s easy to do this the tenant is essentially robbing you. But understanding why you do it and following the process (while taking steps to make sure it doesn’t happen in the future) should help alleviate these emotions. I’ve also evicted single mothers who start crying and begging etc. to which I am unmoved; I know I treated them fairly and gave them a chance (or several chances) to get their act together, so if we’re here at the point of me evicting them, it means they’ve exhausted any reasonable attempts on my part to avoid it.

        Funny story about that, there was once a single mother who kept paying late, and making it up, one of those tenants who I never really know if I’ll have to evict them or not. Potentially the most frustrating ones because they creep behind and get caught up again. Then lease renewal time is approaching and I ask her what her plans were (I wasn’t particularly looking forward to keeping her there, but the place needed some work if I was to re-rent it. I was more or less indifferent.). She answers she’s moving out, and I ask her why she decided to (I always ask this, I want to know their motivation).

        Her answer: “I’m putting my kid in private school, and that’s going to be more money, and I want to find a landlord who will work with me more if I need to pay late” ! lol. Ok, yeah lady, then definitely leave my property, good luck with that!

      • ownmyhood says

        All very good advice.

        The eviction process differs from state to state. I’m in a very pro-tenant area legally speaking and we have to serve them prior to law enforcement getting involved (then law enforcement has to serve them multiple times before they can be physically removed).

        When I use to deliver the notices myself (and I delivered a fair amount), no one ever physically threatened me. People definitely got surly, but that was usually just funny. I would sometimes have trouble keeping a straight face when things started getting ridiculous and that didn’t help the situation. Now I have my manager do it and she’s a woman in her 20s. Many of the less reserved male tenants have made it known they find her attractive and don’t give her much trouble, even when she hands them a notice. The women seem to get angrier with her than they did with me, but who knows, maybe I’m just imagining things…

        I often wonder if I got my start in a higher end area if I’d have experienced anywhere near as much funny/ridiculous stuff. Some of my favorite tenants are the rough around the edges types who came with the building. These are people who never would have passed my screening, but since they’re already living in the building when I buy it I give them a chance and they turn out to be fine tenants and far bigger characters than the squared away types we usually rent to. In addition to making the visits to the buildings more entertaining, oftentimes these are lifelong renters who will take greater ownership of the building and do small things to help with upkeep as well.

        It’s also pretty entertaining watching the two types of tenants interact.

  5. says

    One of the best ways to make tax free money that I rarely see around the internet is taking advantage of the Primary residence Home sale exclusion. If you can locate an area being revitalized and have experience in remodeling, you can make up to 250k tax free every two years (500k if you are dumb enough to get married). Being your primary residence, you don’t have to issue 1099s, so you can pay contractors cash (They will give huge discounts if you do). I have had great success in historic areas that are seeing gentrification.

    The major downsides are moving every two years and the the 3-6 months you have to live onsite while the shit is being done, but after the first one this isn’t a concern if you plan properly.

    • RE Guy says

      Young childless couples and gays have been doing this forever.

      No small children = less concern for the crime in a gentrifying neighborhood = greater willingness for such a strategy, to be a “pioneer”, to “homestead”.

      I’ll leave it to you to suss out how this is useful.

  6. RE Guy says

    Slight correction, ownmyhood can chime in if I’m wrong, I don’t think there is any disagreement at all on the income property debate.

    I believe he was talking about a specific type of “investor” who is just happy to cover the mortgage, and it’s specific manifestation of the “buy a duplex and live ‘rent free’ ” variety. High income and low investment knowledge individuals may also fall into this (“dumb money” I think was the term), who are just looking for something stable and low yield.

    Basically someone who had low standards for their investment and thus buys too high or is without the skill-set and determination to make an actual good investment via renovation, managing higher risk tenants or simply managing it like a business.

    I don’t think he would have a problem with making a first investment as a multi-family that a person lives in, particularly if they have to choose between renting and owning the building.

    It was more an issue with buying a bad deal and calling it a “side hustle” a.k.a. not being willing to do the work to make it an actual business.

    I was also pointing out that it might be easier to enact this strategy effectively if you use 25% of the property (4 unit) instead of 50% (duplex).

    • ownmyhood says

      You hit the nail on the head. I don’t think buying a 3 unit at a good price with a residential loan and living in one of the units for your first investment is a bad idea at all (I did this). In many cases it makes getting a higher return easier (lower interest rate for owner occupants vs investors).

      It’s happened a number of times when someone finds out I’m a landlord they mention that they’re also landlords and it’s almost always some variation of the “bought a duplex and it covers my mortgage” situation after I find out what they paid. Just for fun I’ve crunched the (hypothetical) numbers on some of these deals and they would likely have been better off renting and investing their money in CDs from a returns standpoint, and this doesn’t even factor in the headaches of property ownership.

      One other thing I wanted to clarify about cap rates is that I will buy a building if the market rent for the units will give me a double digit cap rate. When I purchase a property I will immediately jack up rents and oftentimes evict some of the tenants, both of which can lead to vacancy, in these cases I will usually renovate the units as in my location the building stock is generally run down and yes, this has lead the cap to be in the single digits the first year. This is more out of preference than necessity, I could usually keep the units outdated and re-rent for slightly lower rents and maintain double digit caps, I’d just prefer to get the highest rent I can for the neighborhood/apartment, cater to higher end tenants and maintain my “brand image.”

      That said, I have done a number of deals buying double digit caps and barely touched the places, I have also bought properties where the prices were so low to begin with, even with spending a decent chunk of change to make em’ beautfiul, the cap rate never dips below 10.

      After rereading my post, it’s all pretty superficial and there are so many things I didn’t even touch on like the financing side (you need to have at least basic understanding of time value of money etc), ways to capitalize on economies of scale, structuring leases (more complex on the commercial side) and a number of different bargain purchase techniques. Can’t give away the entire recipe for the secret sauce though…

      • RE Guy says

        Not surprisingly we agree on a lot. Including the other comment you left below about financing.

        I’ll just agree and add that appealing to the higher end tenants in the rougher neighborhoods is a must.

        I don’t mind renting a house in the hood, as long as it’s a nice house in the hood, and my business model accounts for allowing me to buy that outright (rare) or to buy it at a cheap enough price that I can renovate it properly.

        I don’t want to deal with the lower end tenants in the rougher neighborhoods, that’s one of the reasons section 8 was invented, the gov’t would guarantee the rent and make it “worth it”. That, and drive up returns so people would actually invest there.

  7. Mike says

    I’m interested to hear how some of you maximize your ROI via renovations for flips, rental properties, etc.

    I’ve read from a flipping perspective, putting money into the wrong area of a house will not lead to a higher sale price. For example, $5k into the wrong area might increase the sale price by merely $3k whereas that same investment put into the bathroom or kitchen might raise the sale price by $10k. On top of that there’s also the idea that you have to invest in a few targeted areas to synergistically increase sale price.

    • RE Guy says

      Your information so far is good, kitchens and bathrooms. Also nice closets. Think “what would the woman of the house like to see, what would make her ‘feel good’?” since buying a house is often an emotional decision made by the wife who controls the husband lol.

      Also, adding a half bath is usually a good idea for say a 3bd 1ba. You can fit them in very small spaces, and put them directly over / under the other bathroom to save in plumbing costs (run off the same stack).

      I know by synergistic you mean “working together” so I’ll assume it’s more “to the whole house” (as an aside I’ll have my kitchen and bathroom tile arrangements have a “theme” that matches, that might have been what you are looking for, I’m not sure). There are certainly different schools of thought like say making that theoretical 3bd 1ba into a 2bd 1.5ba with a large walk-in closet a.k.a. appealing to a young couple buying their first or second home, as opposed to having 3 moderately sized bedrooms, where you can rent out more rooms to more tenants and thus higher rent (generally). You’ll have to research your particular market to know what to do exactly.

      In fact, this is a bit tangential, I remember reading in a trade publication I subscribe to a breakdown of the per sq ft prices of apartments for studios, 1 bedrooms, 2 bedrooms and 3 bedrooms, and there I think 2 bedrooms were having the greatest return from the data they had collected that year. Apartments, not houses.

      So if you really want to get the right answer, find the local real estate organization(s) and sign up for the newsletter, start going to the meetings, and start getting local market data. You can also look at recent sales (or rentals for that matter, although that could be less exact since the lease price may be different than the listing i.e. it’s not public record), and see what other people are doing in your market who are getting the top prices…and steal their ideas!

      Also as a general rule, even if you spent 5k and only make 5k in appreciation, you’re doing it wrong. I’ve heard the 3X rule tossed around, but you can look around for what you’re comfortable with (2X, 4X, whatever). I’m more figuring out the various fit outs while I’m buying and seeing what avenues make sense, and then coming up with a total cost (buy and renovation) vs. total ARV, but I’ve been doing this for a while.

      As an example for a rental, the property I mentioned in the last post, where I was advising the guy looking for his first place, he is offering 40k and will likely have to put in 10k-15k to have a property worth around 70k, cash flowing at 8k a year (an 11.4% cap for those following along, you can guess what kind of neighborhood. Also as I said, I’d pass on this deal personally, but it’s good for his first one since he’ll also be getting an education.). When we walked through I explained to him how to “get away” with only 10k, that there were 5k in possible unknowns, and that ultimately he’d get 800/m.

      However. Should he put in 20k-25k and improve the property even more, it’d likely be worth only 75k, and only bring in 850/m (that’s 10k to increase 5k in value, and 10k to make 600 more per year). For instance he could make the kitchen neat and serviceable or he could do a full upgrade. I’m sure you see where this is going, in a nicer area the full upgrade would make sense. So knowing these nuances of your market and being able to predict the end value in rent or price is what makes you be able to improve the property the proper amount.

      Actually, just to circle back to your original question about the “wrong area” I’d be more concerned with simple over-improvement of any particular area i.e. putting granite counter tops and stainless steel appliances in a house in the hood.

      Also of course, and it bears repeating ownmyhood, knowing construction i.e. I explained to my friend that he should sand and refinish the downstairs floors, not mess with the tile upstairs and just carpet over it (not worth the hassle of removing), in other words I’ve seen it before, done it before, and know where he might waste money or how he could save money doing things a different way.

      I hope this was helpful.

      • Mike says

        Very helpful. I’d be hard pressed to find a post this dense in quality information on Biggerpockets or in one of the many books on flipping these days.

        Looks like it’s all about developing an eye/system for finding the exact point of diminishing marginal returns. It also makes a lot of sense how you incorporate emotional appeal into your renovations.

        It sounds like you’re willing to invest some of your time into the younger guys.

        Not trying to harass you with questions. Just looking to be in touch on occasion after this post slows down and return the favor whenever possible.

      • says

        This thread is great and the real estate guys are being very generous with the knowledge.

        It’s all about the numbers. I’ve had clients renovate and over price the rent because they need to make their returns and after months of vacancies they drop the rent and accept less quality tenants. You guessed it, in less than a year they are evicting and losing even more time/money.

        Very important to rent to the best quality tenant willing to move to the neighborhood. For a rough guide in determining rental rates you can check the HUD website for the rental rates in your neighborhood. I find it to be on the high side but it’s useful as a guide along with the other suggestions made.

        During the initial walk through take pictures, it’s easier to estimate renovations when you know what you are looking at.

      • RE Guy says

        Mike, you should probably remove your email and facebook from the public part of the blog.

        Ask WSP to put us in touch.

        As long as you’re respectful of my time and what I’m willing to share, that’s fine with me.

        If you’ve got a deal you’d like my input on, shoot me over the information and I’ll let you know what I think.

        I respect hustle and humility, so if you want to return the favor take what’s here and go out and apply it to be successful.

  8. Mike says

    *Bonus points if they are willing to hold paper*

    When structuring an owner financed deal, what sort of terms do you guys negotiate for? What do you realistically consider a great deal?

    I’m currently searching for owner financed properties in my area willing to accept a 10% down payment. Is this unrealistic or am I not pushing hard enough?

    • ownmyhood says

      Totally depends on the market, the property and the owner. Your best bet is to cast a wide net, talk to a lot of people and figure out which ones are the most motivated and then work on doing the deal with the first motivated person who has a property that meets your criteria.

      My strategy is that I will meet the owner in person ASAP and be as nice as possible (even if their property is disgusting, never, ever talk smack about it, most people don’t like being called a slumlord) , then explain to them the the tax and income benefits of them holding paper. As has been stated before in this blog everything is sales, convincing an owner to lend you hundreds of thousands or even millions of dollars via a mortgage is no exception.

      I’ve done deals structured quite a few different ways, but doing nothing down, very small payments (5%), or even cash back on closing is possible. Just don’t let some sweet financing blind you to the rest of the aspects of the deal and always remember: markets change. If you over leverage and the RE market tanks there’s potential that your nothing down deal won’t seem so sweet anymore. Many of my best deals have come out of the aftermath of these situations. Generally speaking you should only buy if you’ll make money in an up or down market, so be conservative when you run your numbers.

      • Mike says

        Thank you! I actually missed out on a $5k cash back on closing duplex a few months ago. Seemed suspect at the time. I’ll keep it in mind in the future.

  9. Chopper the Hells Angel says

    you guys are actual heroes. I’ll never understand why you do this (the book isn’t gonna make you crazy $$, you even said so on Twitter. you don’t need $$ either)

    Just world class advice and info, almost daily and for free.

    <3

    • Wall Street Playboys says

      The book will be a net loss in terms of money, we have a reason for creating it to be explained later. Once it’s done you’ll see more changes (depressing knowing how much money will be lost but oh well).

      On a positive note, laughed out loud at the user name, great visual from ownmyhood!

      • ownmyhood says

        You guys really tapped into something when you pushed aside the garbage that makes up 99.9% of self help stuff on the internet and gave the straight dope on how to become a well rounded, successful (and ultimately happy) individual.

  10. Mike says

    I would love to hear where/how you guys personally draw the line on leverage.

    I imagine it has changed a bit throughout your development. How has the process for determining it changed?

    • ownmyhood says

      I personally don’t have a “line” that I don’t cross regarding leverage, it’s usually driven by the deal.

      In the beginning I would usually maximize leverage on every deal. This wasn’t just youthful ignorance and being overly enthusiastic (well, being honest with myself, some of it was). But I had run plenty of numbers, including what my returns would look like in a nightmare scenario and though the deals would be considered “high leverage” from a banker’s (loan to value) standpoint, they still would at least break even under some really terrible conditions (worse I believe than my area has ever seen).

      Now I like to put more down (usually shoot for at least 25%) because I have enough cash coming in to do so and don’t ever want to go into break even or, god forbid, negative cash flow for any length of time.

      Though there always are exceptions: I was approached by a seller recently when I already had a property under contract that would require the bulk of my funds to close. So I told him “I don’t have the spare cash to do the deal, so unless you hold all the paper I’ll have to say no.” This wasn’t a negotiation tactic, I didn’t care if I got it or not. He was selling at a good price, but my work crew already had plenty to do and this place needed some serious TLC.

      Well after a few days the seller got back to me and said they’d do it, so I figured what the hell and bought it nothing down (and the guys on my crew are still cursing me for it).

      It’s basic human nature, but the best deals are the one’s you’re indifferent to: you’re not afraid to make lowball offers and once in a while the stars align and you end up getting the place.

      • ownmyhood says

        I will add there are a few things helping the “stars align” with the deal I mentioned:

        1) I had already purchased a place off the seller where he had held some paper, so he knew I paid my bills on time.
        2) I’m known in the area as a guy who buys, rehabs and maintains nice places and the seller has an interest in improving the area (has a business here), not just selling to some flipper or slumlord.
        3) The seller and I were on good terms personally, not best friends or anything, but when I see him around I always ask him how he’s doing, reach out to him occasionally etc.

        Again, this goes back to what I said about maintaining contacts and what this blog has been preaching for years: nurture relationships with the people who matter. Don’t be afraid to send someone a birthday card or buy them lunch once in a while.

      • Mike says

        Again. Thank you! I can’t even begin to place a dollar amount on the value you and RE Guy have shared. This is definitely more than enough advice to last through my next several deals. 

        I obviously want to stay in touch and return the favor. So I will put my own info here and hope to see a quick note from you so you don’t have to compromise your ID.

  11. Mike says

    Have any of you had success in finding a property listed for rent and convincing the owner to sell to you while still getting a great deal for yourself?

    Maybe you felt you had a better vision for what the property could be than the current owner.

    If so, were there keys to “selling” the owner on this that were different from approaching an owner already looking to sell?

    I’m my current location, I believe one of the prime spots to invest is near the local state college. However, there are far more properties for rent in this area than for sale. And the properties that are for sale seem better suited for a professor and his family as opposed to properties fit to rent out by the room to students.

  12. Anthony says

    Most people I’ve talked to about non-traded REITs seem to think they are a scam, mostly because they are illiquid. I can’t help but think this could be an opportunity. For a long term investment could it make sense to buy on secondary market at discount to NAV?

  13. New RE investor says

    My father is willing to match my first $60k that I invest in real estate–but only if I buy an actual property and not into a fund–so I am incentivized to put the money to work–but I don’t want to spend much time on it. My day job in in finance and that is my focus, not real estate. Any advice on where and how to best invest to get a decently good return but without much time investment?

      • RE Guy says

        Much time searching? Much time putting in offers? Much time renovating? Much time managing?

        No matter what with zero experience and trying to do things without “much time” your returns will take a hit.

        The only positive I’d say is that you’ve got someone matching your investment, so even if you went in blind on a working class turnkey 7%-9% cap single family home, your father matching your investment makes that 14%-18% (although I would personally consider that somewhat wasteful, and I get you have other priorities).

        Option 2 is to find a partner with more time than money.

        That’s all I can say on the matter. I can’t help you if you’re not willing to put in the effort!

      • ownmyhood says

        That free $ sounds nice, but your dad is making an interesting choice offering to invest in you doing something you’re not interested in. I guess parents do that all the time with their kids be it investing time, money whatever, sometimes as a way to live vicariously through the kid and sometimes because they want to dictate the kid’s direction in life.

        Either way, if you aren’t into it and you like your old man, I’d say let him keep his money until you’ve found a biz idea you’re passionate about.

  14. Houston Portfolio says

    Great info RE Guy, much thanks, brother!

    Would working as a contractor in AC Unit installation be a good contractor job as mentioned in the Overview?

    It’s my uncle’s small business that he wants to give to me and I see potential in using it, along with my experience as a realtor, as leverage into investment RE.

    • RE Guy says

      You’re welcome!

      I think working in the trades can be beneficial, sure.

      In the case of having a contracting businesses, so long as you run it like a business, and it doesn’t become a glorified job with extreme time demands, then yes. If you have to constantly micromanage and put out every little fire then you won’t benefit from it as much as you’ll pay in opportunity cost; you need to have time to find deals.

      See what kind of structure your uncle has and is proposing for you to make this decision.

      As far as guys I know who do this, they’ll generally pick up a shell house for a decent price, sometimes not even a very good price, but they make it up on the fact that they A) are paying wholesale for the construction, it’s their guys doing the work, and also they are often getting good prices from the other contractors who they know from the business and B) you can hold that shell property for when you are slow either because of seasonal shifts (HVAC is a perfect example of feast/famine here, winter/summer is heavy, fall/spring not so much, to my knowledge), allowing you to utilize your guys optimally year-round.

      I hope this was useful!

  15. JV partner RE says

    First time poster.

    One thing that I would like to add is for those who have a relatively high net worth already but want to get into real estate, is to partner up with a sophisticated real estate investor (like some of the commenters here). Become the JV money partner who puts up the money for the down payment, renovations, and become 50/50 partners (or whatever percentage is agreed upon) with the RE investor.

    For residential properties, you would also be bringing to the table the ability to apply for the mortgage, as RE investors can only be on title for “x” number of their own properties before the banks stop lending to you.

    Use the “BRRR” method as discussed above. When refinance, you get back all your money (downpayment, renovation), and the equity left in the property from refinance is split 50/50. Going forward with rents/appreciation/mortgage paydown, everything is split 50/50. Rinse, repeat.

    This is a “win-win” situation for both parties. You bring money and mortgage approval to the table, and real estate investor brings their expertise to the table.

    However, hardest part is to find a real estate investor that you can trust. A lot of real estate investors are always looking for JV partners, but It is the “wild west” out there in terms of abilities/skills. There is no diploma/degree to back-up their credentials.

    It is a long-term relationship, so choose wisely!

    • RE Guy says

      “RE investors can only be on title for “x” number of their own properties before the banks stop lending to you”

      For conventional mortgages that are re-packaged, bundled and sold. This is how the national banks lend.

      For a local bank who holds onto the note themselves, the limit is their belief in your ability to repay. I know people with something like 100 loans this way.

      There are partnerships that are more ongoing on a single property, as you stated, or there are more discrete partnerships where there is private money financing for the purchase + renovation with regular payments from the active investor at some interest rate (anywhere from 8%-12% depending on relative experience and need), or you could negotiate to have one large payment at the refinance or sale (within some specific time frame). Really, anything both parties see as mutually beneficial.

      With private money these are also often long term relationships where many deals are done one after the other or overlapping, creating a perpetual 8%-12% return for the lending party. They are also by their nature long term because they require a good deal of trust be built up beforehand; especially given the “wild west” aspect you alluded to.

      And you’re right, I’m always open to conversations with people who have money and would like to invest in real estate, particularly if they will consider doing private money. I never want to be stuck without funds with a great deal on my hands.

  16. chris says

    RE: Location, Location, Location… there is a lot more to Location than just area. A few hundred feet can be make or break for a property, especially as you move away from SFR into MF, commercial, and retail property where traffic, visibility, access/egress, and neighbors can literally destroy your investment. Think about the difference to a tenant between Rodeo Drive and N Beverly Dr (one block east of Rodeo Drive).

    When markets turn down, the best locations will be the most resilient.

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