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
- Select your market in your state, preferably close to home
- List every submarket or neighborhood
- Define and describe the employment picture in the area
- Define and describe the unique persona of the sub market
- Determine supply and demand, by asking your team
- Check your findings
- 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
- Verify property income
- Verify expenses
- Determine net operating income
- Find the capitalization rate and valuation
- 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.
- What are the fees? 8-12% for rent and single family. 4-8% multi-unit properties
- How long have they been in business? Look for at least 3 years.
- How big is their accounting department? How do the deliver reports and when. What is their banking relationships. Check their banking references.
- Get a reference list of the properties they manage and call and visit to verify.
- Ask to see their policies and procedures manual. Reveals company culture
- Professional affiliation last and associations. CPA AMO, CAM,CAPS
- Tracings program. Sales, Service, etc
- Real estate license. For verification and gov’t protection
- Legal and background checks. Ask for the name of the firms that the company uses for eviction last and background checks.
- Vendor negotiations. Need to tell me how they negotiate with vendors to save money on maintenance, advertising, supplies. Economies of scale
- Employees. Know the individual running the building. Run background checks and drug tests
Fire the property management company for the following:
- The company doesn’t have a partner mentality and doesn’t communicate market conditions that affect supply and demand.
- Neglects physical condition of property
- High employee turnover
- Inconsistent or incomplete reporting.
Enforce the policies and procedures in the lease with no exceptions
Respond quickly to your residents