Tag: Investing

Author: John W. Schaub

My Rating: 3/5

Summary: Practical advise for building wealth by investing in single family homes.

My Takeaways

Buying houses let’s you diversify your investment across price ranges, locations 

Commercial building’s value is tied to the cash flow it generates, a well located house will appreciate at a greater rate.

When investing in commercial buildings, you are negotiating with other sophisticated investors as opposed to homeowners.

Starter houses rent well and rent fast. During hard economic times, tenants often downsize to these houses to save money. 

Larger houses will produce larger capital gains, but can reduce taxable income. 

If income is important, start with lower priced houses in a good neighborhood.

Buy in the best neighborhood you can afford. 

Majority of renters prefer 3 bedroom two bath house. Demand is higher than 2 bedroom house. 

Find a house with a garage or basement. Tenants need storage. 

Yards are a big selling point. Look for an average sized yard

An investment house should be big enough to attract a normal-sized family with their belongings, but not much bigger.

Buy a house that is functional and well located, then keep in good operating condition. Don’t buy houses with fancy items like trim and elaborate landscaping

Don’t get houses with pools or hot tubs. 

Avoid lots on busy streets or odd shapes

Avoid corner lots

Before you buy a house, research propert taxes to see if they will change when you buy the house. 

Tenants can be too rich or too poor.

There are six reasons why single-family houses make better investments than any other asset class:

1. Houses can make more money with less work.
2. Houses provide cash flow, but their value doesn’t depend on the income generated.
3. Homeowners sell because they have to and aren’t experienced investors like those found with commercial real estate.
4. Lenders prefer to make loans on single-family houses because they’re lower risk and easier to manage.
5. Diversifying is simplified with individual houses, leading to increased investment safety and higher profits.
6. Easier to identify trending factors that make a market good to invest in: population growth, demographics, local government regulations and zoning laws, and inflation.

The first step is to set a goal for the number of free and clear houses that you want to own. Work backwards into this goal by first setting an income goal and then asking how many free and clear houses you will need to produce that target income.”

1. Set a goal by deciding how much monthly net cash flow you want and determining how many houses you need to get there.
2. Buy one good house at a time, at the right price and terms, and hold while it appreciates in price and cash flows.
3. Own your houses free and clear by using the cash flow to pay off debt quicker, strategically sell some houses to pay down the debt on others, or refinance some houses to pay off other.

If you have two houses, it’s better to have a debt of 80% on one and 0% on the other, rather than a 40% LTV on both. 

That’s because as a real estate investor, you have more negotiating power with the lender with a conservative 80% loan-to-value. Conversely, the more equity you have the less likely the bank is willing to work with you, because they know you’re highly unlikely to walk away from the property. 

Author: Ken McElroy

My Rating: 3/5

Summary: A book packed with actionable tips for how to properly invest in real estate.

My Takeaways

Unlike residential property, commercial property like apartments is based on the cash flow of the property itself. 

Apartments are also less risky because you spread the risk of occupancy across the units.

The money is made in the management of a property.

No money down is risky because you pay higher interest, which eats into your cash flow if you don’t improve the management operations. You are banking on appreciation which is risky because of timing the market. 

Set SMART goals, they will be the foundation of the roadmap.

Have someone hold you accountable to your goals.

Communicate your specific goal to everyone.

Set milestones 

Business to do list

Find your team

Evaluate the market

Find a great property

Assign a valuation to that property

Establish a property plan

Develop a budget

Manage the property

Find your team. Start out with an attorney, an accountant, real estate broker and property manager. 

Talk to an attorney about setting up the best corporate structure to protect assets and provide tax advantages 

• Use an accountant for your own tax advise. 

Property search team

• Use a real estate broker to help find properties and understand the market. 

Property managers will help asses the properties you are considering from an operational perspective 

The offer team. 

Attorney – help you wade through letters of intent and purchase on sale agreements.

Lender or Mortgage Broker – find someone who understands property investing. Could also provide leads on other properties. 

Investors – sources of equity open to investing in rentals 

Contractor / Rehab specialist – before signing a deal, have a contractor perform a detailed inspection and file a report of all critical and non critical repairs. 

Accountant – to help with your finances but also put together profit and loss projections for properties you are considering

Appraiser – specializes in your market and the types of properties considered. Help determine value of property before and after sale. 

Architect

Insurance Agent / for proper protection 

Property tax consultant – to help determine if property taxes are being assed fairly. 

One tax consultant – to keep up with complicated tax laws 

Estate planner – help shelter assets in the event of illness or death 

Environmental company / industrial hygienist – mold, asbestos or other hazard

Surveyor – help asses boundary lines, elevations etc

Structural engineer – often recommended by contractor. Will analyze a problem related to structural integrity and recommend a solution. 

How to find a property

Level 1 Research

• Google the markets and overall trends in employment, housing, economy etc

Level 2 Research 

• Go to the markets and assemble your team face to face. 
• Met with local contractors and communicate goals. Ask for referrals to build the team in that market

Level 3 Research

• Call every referral in markets and asked same questions of initial contacts

Become familiar with local newspapers, business trade publications, gov’t website and trade organizations

Realize that employees work for you and meeting you is part of the job

Research your own market online, through face to face meetings and follow up calls. 

***The market is more important than the property 

The most important thing is to evaluate your market and sub market. 

Get an accurate read on supply and demand in your market – make your broker do the research. What is the supplier of available rental properties. 

Estimate occupancy rates to get an understanding of demand 

Focus on employment. Population follows employment 

Places that have clearly defined personas (like Venice beach) 

Consider investing in markets with population drivers such as infrastructure updates like highways trains, master planned communities, sports stadiums, universities, redevelopment areas, casinos, military bases, regional airports, company relocations, major events like the world fair, Super Bowl good indicators of growth

Don’t invest in markets reliant on one thing like one large employer

Make sure there is economic diversity

Look for markets where the cost of home ownership far exceeds the cost of renting. The closer the two are, the harder to find renters and keep them.

Location has to be evaluated related to supply and demand

Look for places with good drive by visibility 

Great locations are low in supply and high in demand

Steps for finding a property

1. Select your market in your state, preferably close to home
2. List every submarket or neighborhood 
3. Define and describe the employment picture in the area
4. Define and describe the unique persona of the sub market 
5. Determine supply and demand, by asking your team 
6. Check your findings
7. Rate the sub markets based on the criteria. 

Don’t pick the property before assembling your team, developing your goal and targeting a market. 

Join a business networking group to hear from people in your market

Find brokers in your target market and can make calls to property owners to save you time

Reach out to owners of properties you want to buy in your market that aren’t for sale

Narrow your property parameters further in your area. 

Find real estate associations and join them

The sellers asking price is irrelevant 

You determine the property value, which becomes your offer

With multiple units, the property value is based on the current cash flow of the property

5 Step property evaluation 

1. Verify property income
2. Verify expenses
3. Determine net operating income
4. Find the capitalization rate and valuation 
5. Calculate the loan payment and your profit (cash on cash)

Buy a property on actual income, not future potential income

Trust but verify all numbers on the proforma for a property

Sign up for a mailing list to secure several real property pro formas to practice the 5 step property evaluation process. 

Use the numbers on the proforma form to calculate offer price 

When you go through these numbers for real, verify with your team. 

Make calls to property owners you see interested in. 

Perform this valuation process on an actual property with real data

Once you’ve established the valuation of the property, create a letter of intent with the deal points. 

Send the letter of intent via email and have your broker prepare them. That’s where the bulk of the negotiation happens

Review sample letters of intent and purchase of sale agreements

During due diligence, walk through every unit and inspect every detail. 

The goal of due diligence is to find out 100% of everything there is to know about the property and generate an operating plan and budget from that information. 

Any contracts you do not want to continue that were under the previous owner need to be spelled out in the completion of due diligence.

Need to verify current rent roles. 

Review the detailed due diligence checklist and use as a guide when inspecting the property 

Leverage your team to complete the due diligence process in a timely manner

Take notes and analyze the books

Categorize income and expense items as you discover them for your operating budget

If you discover issues during due diligence, those expenses will not come from your wallet. 

When hiring a property management company, ask the following questions. 

1. What are the fees? 8-12% for rent and single family. 4-8% multi-unit properties 
2. How long have they been in business? Look for at least 3 years. 
3. How big is their accounting department? How do the deliver reports and when. What is their banking relationships. Check their banking references.
4. Get a reference list of the properties they manage and call and visit to verify. 
5. Ask to see their policies and procedures manual. Reveals company culture 
6. Professional affiliation last and associations. CPA AMO, CAM,CAPS
7. Tracings program. Sales, Service, etc
8. Real estate license. For verification and gov’t protection
9. Legal and background checks. Ask for the name of the firms that the company uses for eviction last and background checks. 
10. Vendor negotiations. Need to tell me how they negotiate with vendors to save money on maintenance, advertising, supplies. Economies of scale
11. Employees. Know the individual running the building. Run background checks and drug tests

Fire the property management company for the following:

1. The company doesn’t have a partner mentality and doesn’t communicate market conditions that affect supply and demand. 
2. Neglects physical condition of property 
3. High employee turnover
4. Inconsistent or incomplete reporting. 

Enforce the policies and procedures in the lease with no exceptions 

Respond quickly to your residents