At least Memphis is in a growth market. The tech sector seems to be booming.
What is your market doing?
Source: Multi-Family Executive
Read more here.
Buy and Hold
Looking At Properties? Take These Tools
You’ve read the books.
You’ve found the blogs
You’ve networked with investors.
You’re ready to jump in!
There are a few things that you absolutely have to have before purchasing an investment property. These tools will be a resource to you as you analyze potential deals. Keep them in your car because you never know which corner opportunity happens to be hiding behind.
- Camera (or phone with a camera and flash). As you look through properties, keep them organized by first taking a picture of the address. Then, make sure to take pictures of each potential repair. This approach will be invaluable. You could look at a hundred properties before you find the right one.
- Hammer. When looking at properties, there are going to be some areas you don’t want to touch. Maybe you want to check out the siding or wood strength/malleability. Maybe you smell a dead animal in the walls. A hammer is a good tool to bring along, and also a tool you’ll use again and again.
- Tape measure. A tape measure can also serve as a level. If think the floor is sloped, pull out the tape measure and find out. I have 4 tape measures…
- Flashlight. I looked at plenty of properties that didn’t have electricity. It also helps when you want to check out those small crawl spaces and underneath sinks. I recommend picking one that you can also wear on your head. Since I do a good deal of rehab after working hours, having a hands-free flashlight is a gem.
It should go without saying that the internet will be one of your best resources as well. Make sure you are searching through the brick and mortar—as well and combing through the paper trail of each property.
Kevin—have I left anything out?
When Is Cheap Worth It?
I delved into real estate investing because I thought it would save me from the misery of living paycheck-to-paycheck. I’m 2 months into my rehab and I’ve found that not much has changed yet. I’m rehabbing paycheck-to-paycheck. When I’m shopping for tools and supplies, it’s no surprise that I reach for cheap. I look for deals and I do the work myself.
Not everyone shares my sentiments concerning frugality. I bought a Husky crescent wrench and was advised to buy better tools. My plumber strongly recommended that I install a new, double-basin sink. My partner and I disagreed when I insisted on using a combination of old and new shoe molding. This isn’t how I imagined my investor persona!
I justify my frugality by telling myself that I can replace it all during my next vacancy. I need to get my second unit cash-flowing so that I can better fund repairs. I ask myself if my tenants will know the difference. This is when I turned to Kevin. I emailed him, “when is cheap NOT worth it?” This is his response:
- When it involves gas.
- When it involves electric.
- When it wastes your time. You have to understand the value of your time. You may need to pay a plumber for a service call, but they will get it done right and quick. You may be able to do it, but it will take you four times as long to do it. You will have to make three trips to Home Depot to finish it.
- Appliances! Just buy a new “used” one rather than trying to replace parts. Unless it is incredibly simple to fix, it is just not worth it. The part will cost almost as much as the replacement appliance. You will most likely order or receive the wrong part. Beware, many parts look the same but have slight differences. Trust me on this.
- Is it really cheaper for you to do it? Don’t try to save money if it is costing you potential rent. Take a rehab for example: You do it all yourself and it takes two months. You could have had it rented at a rate of $625 per month. A contractor could have had the job done in 2 weeks for $1500. Did you really save any money?
I appreciate Kevin’s emphasis on avoiding repairs with safety implications: gas and electricity. I was considering teaching myself how to repair appliances, but I think I’ve axed the idea. For the time being though, it makes financial sense for me to most of these repairs myself. Sometimes cheap is worth it, and sometimes it’s not.
Save
- We used the cheapest vinyl tile at Home Depot and the kitchen floor looks great. You don’t even notice the mismatched shoe molding.
- We shopped for used cabinets. We bought unfinished cabinets and painted them. The cabinets look great.
Spend
- We bought the cheapest paint brushes we could find, and it was a horrible decision. The hairs fall out and get stuck in the paint. Don’t do it!
- We paid full price for a window air conditioning unit. I never will again. I later came across two used ac units, which were three times better for a third of the price.
While I advocate for frugality, please don’t cut corners by sacrificing quality installation. Tenants and buyers will notice. I firmly believe going cheap should be our current strategy. We rehabbed the entire kitchen of unit 1 for less than $1,000. It looks so much better than before. I look forward to seeing it look even better than now.
Do you have any advice? When is cheap worth it and when is it not?
Preparing to Buy Your First Property
If you’re like me, you turn to the internet to answer all of your questions. Every time I’m ready for a new challenge, I begin by typing, “How to…,” in the Google search bar.
So, I’ve created a few posts that combine strategies that have helped me to prepare for the big purchase. Following these strategies can increase your savings, reduce your expenses, and move towards your goal of home ownership.
First and foremost, define your goal
Do you want to buy a single family house or a multifamily house? Will you live there? If so, how long do you intend to live there? Will this be a rental property? Do you plan on selling it in the future? Answering these questions will narrow down your search criteria.
Next, decide on your price range
I’m a huge proponent of living below your means. Reduce your expenses to live a more moderate lifestyle. My advice would be to set the top of your price range below what you can afford. Make sure your price range is based on a well thought out budget and a consistent spending record.
Get your finances in order
Pull your credit and review that information. You are allowed to request a free copy of your credit every year from each of the three reporting agencies (find that link here). Is everything correct? 1 in 4 people have a mistake on their credit report. Having open disputes on your credit report could prevent you from qualifying for an FHA loan. So, take care of this early.
Get smart
You should be able to have an intelligent conversation with your lender about your options. Don’t let others make decisions for you. This is your purchase, isn’t it?
Which product best suits you: FHA, FHA 203k, Conventional, or Homepath?
Learn the lingo: GFE, Warranty Deed, Closing Costs, Owner-occupant, Per Diem Interest, FRM and ARM
Save and Source
Stick to a savings plan that is consistent and can be tracked. It’s not enough to stick money under your mattress. You have to be able to show where the funds came from and where they went, for at least 3 months. This is to ensure you’re not opening new debt to fund your down payment or closing costs.
Find a Knowledgeable Real Estate Agent
Everyone I have worked with was based on a referral, and I must say, I have worked with some amazing professionals. If your real estate agent is knowledgeable and experienced, he/she can connect you with other knowledgeable and experienced professionals like lenders and title companies. They can advise you of real estate trends or bidding strategies. I chose an agent who was also an investor. So I gained a good bit of insight on buy and hold deals, flipping houses, and the benefits to gaining your real estate license. You can often find such an agent at your local REIA meetings.
Have FUN
Searching for a home is a fun experience! Don’t let the research or the pressure stress you out. Don’t get emotionally attached to the property either. The best real estate purchases are made when the buyer has a clear mind and is not in a hurry. I lost out of many bids that I wished I had won, but I ended up with a great purchase that I love. I’m sure you will too.
Know Your Market
As a Smarter Landlord, you should be very in tune with the market where you invest. Remember, you are a real estate investor buying investment properties and the value of an investment property is based solely upon the income it can generate.
To a landlord that means you really only need to know one thing when looking to buy a property, what will the property generate in rent. Once you are reasonably certain about the rental income, everything else will fall into place.
I have seen way too many “investors” go at buying properties from the wrong direction. They start, not by looking at the income, but by looking at the expenses. They note that their mortgage, tax, insurance and expenses payments will be X dollars. Therefore they reason, they will need Y dollars to cover those costs and make a little profit.
Sounds great, but here is the problem. You do not get to set the rental amount at Y dollars. The market, hundreds if not thousands of other landlords and tenants, will determine what the rent will be for you property. It may not be Y, it may very well be Z. The market does not care that you need Y dollars and were not in tune with what it was trying to tell you, it will simply ignore you
This is why knowing your market is so important. Knowing what your market can generate in rents will set the price for the properties you are looking to invest in. Knowing your potential rent first and then subtracting expenses will lead you down the path towards becoming a successful investor. You will also be able to see when a deal is truly a deal.
Remember, the numbers do not lie. If the numbers do not make sense, then do not buy. And never, ever bet on appreciation. Betting on appreciation is speculation, not investing. Look where that got folks in the last few years.
So learn your rental market and what it closely, by doing so you may just spot your next deal. I’ll write more about that in future posts.
The Key to the Deal is Motivation
There are generally two types of investment properties out there on the market to buyers like me. These are:
- Investment properties that are owned by other investors.
- Investment properties that are owned by banks.
I have bought from both of these owners over the course of my investing career. Both present their own unique circumstances. But no matter who the owner is, they have to be motivated. Without motivation, there is generally no deal to be made.
Investor owned properties that are on the market are generally going to be listed with a real estate broker. Many times the broker will list the property with an “exceptional” price. In these circumstances, you have no idea why the owner is selling the property. The owner may be retiring, he may be sick of dealing with tenants, he may have an illness or he may be trying to gauge the market. He may just be trying to see if there is someone out there who will “pay his price” so to speak.
In other words you have no idea if the seller is truly motivated or not. You can ask the broker why the owner is selling, but most likely you will just receive a vague answer. If you want the property, all you can do is view it, run your numbers and make your offer based on those numbers. If the seller comes back with a counter offer, you can begin to gauge the motivation. If not, move on, he is not motivated.
The second type of seller is generally always motivated. Banks do not want to be landlords. They may have unrealistic prices in their heads, but they are generally motivated. Again these properties will also be listed with a broker and what I have found is that banks often need to be educated on the true value of the asset they are holding. Sure, the asset may be worth the price they are asking if it was fully rented, generating top of the market rents and lacking repairs of any sort. But that is rarely the case with bank owned properties. It can take a little time to educate the sellers and work these deals.
I like working with either type of seller, but for the deal to work for me, they always have to be motivated to sell. If the motivation is not there, the gap between ask and bid is just too wide to bridge. So determine the level of motivation as best you can early on. If you find it lacking, move on to the next deal.
What is a Real Estate Deal?
Check out my latest podcast where 
Jo Garner, Richard Scarbrough and myself discuss the components of a real estate deal. We discuss figuring out the value of retail, wholesale and buy and hold real estate deals. We cover how to determine offer price, repair prices, holding costs, maintenance and a whole lot more! Originally aired on WREC AM 600 on March 3rd, 2012.
Is That a Good Buy and Hold Deal?
Buy and hold deals are my favorite kind of real estate deals. They provide you with monthly income and generate long-term wealth.
With buy and hold deals, cash flow is the name of the game. The deal must generate positive cash flow. A property is not a deal if it just breaks even. It is not a deal if you have to write a check to cover expenses every month. You want to collect checks, not write them! Do not bet on price appreciation. Appreciation is a nice benefit to get, but it is almost completely out of your control.
So how do you determine if a property will generate positive cash flow? First, you need to determine how much potential income a property will generate. Most of the time income equals rent, but there could be other sources of income such as utility and vending income. For now, let’s keep it simple with rental income.
Expenses are more varied. Let me list those:
- Most of us need to borrow money to acquire the deal (if you do not, good for you!). So your first expense is your principal and interest payment or the cost to borrow other people’s money. This is the one major expense that we as investors have control over on the front end. This control comes in the form of the price we can offer for the property. Too high a price will skew the principal and interest costs up turning a potential deal into no deal. Remember you make money in real estate when you buy. So buy them right on the front end.
- The second expense is property taxes. Be sure you include everyone who can add a little piece to your bill. Where I am today I just pay city and county taxes. I recall living in Fort Lauderdale, Florida where there were no less than six or seven different taxing authorities.
- Property insurance is third on the list. The cost of this expense will vary depending on your location. These first three make up the major expenses and are sometimes collectively referred to as PITI (Principal, Interest, Taxes and Insurance).
- Repairs and maintenance are next. Something always needs to be fixed and there is routine maintenance such as keeping the yard cut, raking leaves, cleaning gutters, painting, etc. Budget approximately 10% of your gross rents in this category. In other words, if monthly rental income is $1,000, budget about $100 per month for repairs and maintenance. It will not always be exactly $100 per month. Some months will be higher and some will be lower but over the course of time 10% is surprisingly accurate.
- Vacancy is another expense you will have. Your rental unit will never be 100% occupied 100% of the time. If it is not occupied, it is not generating any income and you still have to pay the bills. So a good rule of thumb is again to budget about 10% of your gross rental income towards a vacancy credit. Depending on your location and market, this number can be higher or lower. Use your own experience and expertise and adjust accordingly.
- Utilities should also be figured into the deal. There may be house electric meters or it may be common for the landlord to pay for water in your market. Market conditions will vary, as will rates. Some properties for example will be charged residential (lower) rates while others will be charged commercial (higher) rates. Make sure you know your market and your rates.
- Reserves are an expense that more and more bankers are asking about these days. Reserves are funds that you set aside for those big future expenses such as roof replacements. A lot of banks got burned in the real estate bust because landlords did not budget for this (among other things) and left the bank holding a ruined property. If you are going to borrow bank funds, show them that you are going to set aside 10% of gross rents for future major repairs. Plus it is nice to have that money there when something major happens (notice I said when not if).
- Other expenses could include trash removal, homeowner association fees, advertising, professional fees (for lawyers and accountants), license fees and other various taxes. These types of expenses will all vary depending on your local laws and market conditions. Sometimes I just throw in a miscellaneous category of about 2.5% gross rents just to be safe.
Once you have determined your potential income and expenses for a particular deal, you can then list them to determine the potential cash flow. Let’s say I am looking at a single family house that will rent for $1,000 per month. The owner is asking for $50,000. Is that a deal?
I always look for at least $150 per month positive cash flow after all expenses outlined above are paid. I will also have to pay 7% interest with a 20 year amortization to borrow $50,000. Those terms make my principal and interest payment $387.65 per month.
Let’s outline it.
Income (monthly) $1,000
Expenses (monthly)
Principal and Interest $387.65
Taxes $50
Insurance $30
Repairs/Maintenance $100
Vacancy Credit $100
Utilities $0
Reserves $100
Misc. $25
Total Expenses (monthly) $792.65
So is this property a deal? You bet it is. Using the numbers above this property should generate a positive cash flow of just over $200 per month. Not to bad. If you buy 10 of these type properties they would generate $24,000 per year in positive cash flow. What could you do with that extra money? This positive cash flow is why buy and hold deals are my favorite deals.
Podcast – Choosing Your Real Estate Investment Strategy
Real estate investing is a great way to build wealth, but which strategy is right for you? Should you wholesale, retail or buy and hold? All three offer great opportunities. Listen as Richard Scarbrough, Jo Garner and myself talk about the pros and cons of each strategy. Originally aired on AM 600 WREC on 2/4/2011.
Choosing An Investment Strategy
There are essentially three ways to invest in residential real estate. You can wholesale, retail or buy and hold. Each has its pros and cons. Let’s go through each one.
Wholesaling
Wholesaling is acquiring a property for a quick turnaround to another real estate investor. This strategy is sometime referred to as “flipping.”
Pros
- You are in and out of the deal quickly.
- You do not need much capital to get started. Since the object is to quickly turn the property to another investor, often very little cash is needed, especially if you can just assign your purchase contract to the other investor for a fee.
- You can earn a quick $1,000, $5,000 or even $10,000 per deal.
- You do not have to worry about rehabbing the property. The Rehab is the next investor’s problem. You may however need to do a little clean up to make the deal work.
- You do not have to deal with tenants. Tenants are also the next investor’s problem.
Cons
- Requires a lot of marketing to both find and sell the properties. Developing the tools to get sellers calling you and developing a reputable buyers list takes both time and money.
- Those quick $1,000, $5,000 and $10,000 chunks of cash are considered active income by the IRS and are thus subject to Social Security and Medicare taxes and well as standard income taxes. So put some aside from every deal you do.
Retailing
Retailing involves acquiring a property to fix up and sell to a retail buyer. These are generally only single family homes.
Pros
- The main pro is the big chunks of cash. The average retailer can shoot for a profit of between $20,000 and $30,000 or more per deal.
- The pride and satisfaction of fixing up and getting someone setup in a home.
Cons
- You will need capital to purchase, fix-up and hold the property until you can sell it to a retail buyer. Holding costs, such as utilities, insurance and property taxes need to be figured into the deal accordingly.
- You will need contractors to help you rehab the property.
- Dealing with retail buyers can be tricky. They can be very finicky and you may have to wait a while for the right one to come along.
- You will generally need to use a realtor and that adds commissions to the costs.
- You need to know your retail market backwards and forwards as well as the neighborhoods you are investing in. Talk to the neighbors and analyze comparable sales as much as possible.
- Those big chunks of cash are taxed in the same manner as above in wholesaling. Be sure to set aside some of the profits for Uncle Sam.
Buy and Hold
The buy and hold investor is a landlord. He or she buys and holds properties to rent for the long term.
Pros
- This strategy is a huge wealth building machine. The other strategies provide chunks of cash but this one builds long term wealth.
- It provides a monthly income from the rents. You do not have to wait for a buyer to come along to get paid.
- You are buying a real asset. You can fix it up and improve the value. Try that with Exxon stock.
- Perhaps the best pro is the tax breaks. Rental income is considered passive income by the IRS. As such, there are no Social Security or Medicare taxes. You also get the benefit of depreciation which can significantly reduce active income and thus the tax you pay. To learn more, pick up this smarter resource.
Cons
- One word, tenants. Proper screening can however eliminate many headaches.
- There are repairs. Always set aside at least 10% of your gross monthly rental income for future repairs. Trust me, you will need it.
- Management is also an issue. You have to manage your properties in order for them to produce for you. You need to check on them once in a while and make sure all is ok. And if you think you can eliminate management with a management company think again. Now you need to manage the management company.
Which strategy is right for you? That depends on your personality and what your goals are. I have done all three but I am generally a buy and hold guy. I like the monthly income, I can focus on one specific area and I dislike waiting for a retail buyer.
If you are just starting out and need to acquire some cash per haps wholesaling is the right choice for you. Have cash to invest? Maybe a couple of houses to hold and rent is the right choice. Many investors do a little bit with all three. They like the large chunks of cash, the monthly income and tax breaks from landlording.
Whatever you do, decide to do one of these three strategies today. You will not regret it. And if you need to learn more about real estate investing, check out your local REIA group.
