I found myself at a real estate investment workshop/roundtable event tonight. I thought it would be a networking function more related to my job, one that I could do some professional marketing at. Instead, it was filled with some successful, some not-so-successful, and some newb real estate folks all looking to learn in the arena of single or multi-family home buying (some buy-hold, some flipping). Since Holly and I have started socking money away with the intention to one day buy a rental property to further diversify our income, I actually found this session incredibly interesting, but it was like drinking from a fire hose. I have no idea if these “rules of thumb” or things I learned at this event are accurate or worthwhile, I thought I’d share them anyways. Maybe those would-be real estate investors in the audience will find value. If not, the only other real estate person I have happened to listen to thus far is Paula Pant at Afford Anything. She started real estate investing accidentally (not wanting to have a real job) and now has a lot of properties.
Anyways, here are my takeaways from tonight:
- Shoot for an “all in” cost (that is, purchase price plus renovations to get to a sale or rent condition) of 65% if using borrowed money or 70% for your own money. This leaves you a lot of wiggle room for mistakes and profit. So if after your research, if your comps show your completed/renovated house will be worth $100,000, then your purchase price plus renovations should be between $65-70,000. So if you have $25,000 worth of renovations to make it comparable to similar properties, you would be offering $40-45,000.
- It is a sellers market, at least where we live, so that means if you’re doing it right you aren’t closing a lot of sales on the buyers end. All the successful people in the room were saying they were lucky to be closing on one in every 20 or 40 offers, but weren’t willing to increase their offers since their margins or factors of safety would not be met. They’ve seen too many people pay too much, lose their wiggle room, and go under (or at least lose money).
- If you aren’t a real estate agent, and are looking for an investment property, you have two options. A) Buddy up to a new, hungry real estate agent who wants to learn more about his market and see a lot of houses, and burn him out. You may end up seeing 50+ houses before you close on one, not good use of time for your agent (especially if you can never close a deal, in which case he’d make a big, fat goose egg). Or B) Draft up some agreement on an hourly rate where they’d show you houses, and if a deal comes that payment is essentially an advance on his commission – or maybe it’s an advance, with a kicker on the back end ($500??) to make it worth his while. Then you work with him on a script to the sellers agent so he doesn’t look like a fool presenting all these low-ball offers (See Item 1 above). It would go like this: “Hi Seller’s Agent, this is Joe Schmo over at AMD Realty. I’m representing this investor, Mr. Peck, who has been selectively looking at and redeveloping properties. He’s interested in one of yours. Before I waste your time, I wanted to see if it is worth writing an offer. Mr. Peck is looking at offering $45,000, would that be something your client would like to see?” And then you let the seller’s agent say yay or nay, and it doesn’t make your buyer’s agent look bad (to seller’s agents who may otherwise think you’re a dink for constantly putting in low-ball offers) and minimizes wasted time.
- Single family vs. multi family rentals – they both have positives and negatives. Single family typically are more stable renters, more likely to treat the house like a home. However, you have one living group under one roof, so your profit will most likely be smaller. Multi-family (duplex, quad, 8-unit, etc.) they are likely less invested so there are higher percentage of problem tenants. With more rental units under the same roof, you end up with more profit since you have some shared costs. One guy had an 8-unit apartment in a nicer community and he thought it a great investment with better tenants and fewer issues.
- You probably won’t make a killing being a landlord, but steady as she goes is still good. Make sure you factor in all costs and repairs into your budget model. They suggested that 50% of any “take home” income from rent (after mortgage, taxes, insurance) be set aside for maintenance, vacancy, repairs, or capital upgrades. Things like new roof, water heater, dishwashers, snow plowing, and repairs outside the limits of the security deposits tend to eat you alive otherwise. One guy was getting about 7% cash income (after all expenses were taken out) return on investment on a paid off property. This was in addition to an annualized 3% property value increase over the life of the property. Steady and reliable.
- Many people think they want to be a landlord, that real estate will be easy. But they miscalculate the budgets, and either make small margins (their time being worth little to them or pay that out to a management company), or get sick of dealing with tenants.
- Make sure you screen your tenants, and pass on the screening charge (or at least $20 of it) as part of the application fee. One really successful black real estate agent/investor (who delved into all sorts of properties in all sorts of neighborhoods) highly recommended MySmartMove.com. They look at credit reports, eviction reports, criminal reports, and resident scores (which are apparently sometimes more accurate for renters than credit reports). Sounded like a good service.
- They recommended forming an LLC when doing an investment property purchase. And if it’s a flip, you shutter the LLC after it sells on the back end. The advantages are the banks like to deal with LLCs more than individuals (easier to foreclose upon), and it does offer you some liability protection in the event of a lawsuit.
- Coming back to point #1, several times the moderator said financial success in real estate is made at the start of the process by buying the property for a sale price. If you do this as an investment, it is not the same as paying fair market value to live there like you would a home. You need to get a pretty dang good deal, since if all goes to hell, you can walk away even or making a little money (when the reno is twice as expensive and your carrying costs twice as long) instead of hemorrhaging cash. Good words to live by.
There were a ton more, but those were the big ones. Most people there with any experience had been burned a time or two in various ways. Despite having watched HGTV and dealing with bankers and developers on a semi-regular basis, I was pretty out of my element. Still, it was an interesting night and I learned a lot in the process. I wanted to say too that the 30-some people who were there encompassed all socio-economic groups. Some were obviously pretty well off, but others you could tell didn’t fit into a normal 9-5 and were cutting their own path. Not all were the sharpest knives in the drawer if you know what I mean. It was also interesting to see other real estate investment strategies. One guy specialized in buying trailer parks. Very eye opening.
If this type of thing is of interest to you, see if your community has a real estate group that gets together and shares ideas and experiences. It was invaluable, and as we get closer to actually buying a property, I’ll be partaking in more of these types of things. But after sitting in, it was apparent that real estate is not a get rich quick idea and is just as much work as any other way to make money and build wealth.