BiggerPockets

Pay MORE. Buy BETTER. Buy FEWER.

Saturday, January 28

I just got into it AGAIN on my facebook page (shameless plug: facebook.com/CashFlowMercenary) with someone else pitching cheap-ass properties in bad areas with Section 8 tenants as the Holy Grail for buy and hold investors. He came on my page with an unsolicited pitch for his properties, and then really got his panties in a bunch when I pressed him on his ROI "projections".

It's an epidemic I think. More than just the flavor of the month this time. And I just finished doing battle with a bunch of clowns doing the same thing with Detroit properties here in my area.

I don't know what's wrong with me. It seems that all these other investors out there know the secret to finding magic properties that are really cheap because they're in bad areas, that Section 8 tenants love and stay in forever so they don't have vacancies, and that are so solid and well cared for buy their Section 8 tenants that they never need repairs and maintenance.

See what I mean? Magic. Pure and simple.

Since I don't have the keys to this Magic Kingdom, I have taken a different approach to my buy-and-hold investing. An approach that fits my significant time constraint with my day job, and that also fits my constraints as the head of a large family.

There are a lot of ways to describe it. Set and Forget is one. But to be succinct I can sum it up by calling it Pay MORE. Buy BETTER. Buy FEWER.

The biggest reason that I do this is, like I said, because it fits really well with my significant constraints. I buy great properties in great school districts. I get tremendous tenants, very often with young kids that stay for a good long time. And I don't get a lot of calls for repairs and maintenance because the housing quality and upkeep is so good. So I have been able to minimize my time investment in the business.

But another reason for doing this is because I can. What I mean is that right now I'm buying houses as rentals that never before in their history would have cash flowed as rentals if they were bought with conventional financing. So there have never been a lot of rentals available in the area, and so the area isn't renter-heavy. And that means good solid and consistent rental demand and not a lot of competition.

The icing on the cake with this approach and these houses is that over time my net cash flow is higher and my ROI is higher than crappy houses in crappy areas with Section 8 renters. I have less vacancy time, my turnover expenses are less, and I get higher rents. Without needing to pay a property manager a huge cut of my net. All of this puts more money in my pocket.

At some point the prices in my area will increase, and the banks are trying to do that now as a matter of fact. But while the opportunity exists, why not take advantage of it and put together a portfolio of spectacular houses in a spectacular area that you can hold forever? When the market rebounds someday, then houses in these areas will again be priced beyond where rentals make sense, which will limit supply and keep demand strong.

And let's face it - the crappy houses will always be there. So if you're like me and you don't have the keys to the Magic Kingdom of perfect houses in crappy areas, or you have a day job and a family or other significant constraints, while this market exists Pay MORE. Buy BETTER. And Buy FEWER. It will pay off in the long run.

For a five minute ROI analysis of the difference between great suburban properties and crappy inner city properties, visit www.SuburbanTurnKey.com. Scroll down to the middle of the page on the left and watch the video in blue called "Slumlord Millionaire or Set and Forget Suburban Landlord". No opt-in is required.

Beware Of - The BOYFRIEND Disorder!

Monday, January 23

Since I've been renting houses now for several years I've seen this a bunch of times.

I call it - "The Boyfriend Disorder".

When I first experienced it I shook my head and wondered what was happening. Now I can see it coming a mile away. I wish though that I could see it coming before I drive all the way over to show a house!

What is "The Boyfriend Disorder"?

It's when a single mom and her kids have an appointment to see a rental, and The Boyfriend shows up with them.

It's pretty funny because it plays out with the same pattern, every single time.

Mom makes an appointment to see the house. Mom, kids and The Boyfriend show up. The steps that Boyfriend follows are:

Step 1: He shakes your hand hard, looks you in the eye, and introduces himself as The Boyfriend. You know, it's the whole rooster thing. I have to bite my tongue to not laugh when this happens.

Step 2: They walk around and look at the house. You overhear Boyfriend pointing out all of the "problems" with the house.

Step 3: When they're done looking it's time for questions. Boyfriend tells you that he won't be on the lease, but that he will "be over a lot".

Step 4: Boyfriend starts listing all the "problem" areas with the house, and states that the rent should be lower due to all of the problems.

Step 5: When you hold your ground on the rent, Boyfriend then claims that he's "handy" and wants to negotiate the rent down in exchange for "fixing" all the "problems".

Step 5: When you say no, Boyfriend then complains that the security deposit is "the highest that he has ever seen" and wants to negotiate that down.

Step 6: When you hold your ground on the security deposit, The Boyfriend threatens to walk away.

Step 7: When you call his bluff, The Boyfriend drags Mom and the kids out of the house.

This happened to me today, and it followed the same pattern as always. Mom hardly said anything.

The crazy thing? The mom was a great fit, she had a good job, she could afford the rent, and she had the security deposit. She even had the application almost filled out while the back and forth was happening with The Boyfriend.

And she looked horrified when I took the application back and tore it up as The Boyfriend dragged her out of the house.

The sad thing was that she called me a little while later to apologize and tell me that they had "reconsidered".

I told her that I hadn't.

So beware of The BOYFRIEND Disorder. It's just too much drama.

Just Say NO To Property Management

Saturday, January 14

Why? Because it sucks big time. Call me Captain Obvious, but I just recently came to this conclusion as I was shopping around for property management services for my rental house portfolio.

Let's look at how it works.

You hire a company to "manage" your rental house. They're supposed to collect rent, pay expenses like insurance and property taxes, and make sure that the necessary repairs and maintenance, including preventative maintenance gets done.

And for single family houses in my market, the going rate for this type of property management is 10% of gross collected rents. Most of the bastards will even keep the late fees all to themselves. Don't get me started on the up front, the exit, and all the junk "fees" that they charge. It's like working with a damn bank.

From my perspective, 10% is highway robbery. My houses turn over on average once about every three years. They're all also in spectacular condition, such that I rarely have maintenance issues. In fact the last time I had anything significant happen at one of my houses was three winters ago when an ice dam formed and pulled a portion of a gutter off of a house. So their work every month amounts to getting a check in the mail, depositing it, then sending me a check in the mail.

For that I would have the pleasure of paying them 10%, or around $100 per month per house. I'm shaking my head even as I'm writing this.

Then when you add to this the fact that the true impact to me is FAR greater than the 10% they quote, my blood boils. Let me show you two scenarios.

The first scenario shows the numbers from one of my houses with no property management. I generally put aside $50 per month for Repairs and Maintenance and about a half-month's rent per year as a Vacancy Reserve. (You ought to do the same thing unless you own one of those magic turn key rental houses in Detroit that never turn over or need maintenance. I hear they come with a free unicorn as well.)

You can see that it throws off about $350 per month in net income or net cash flow. Not great but it's at the lower end of what I'll accept.

The second scenario shows the same house, but it includes a fee for property management of 10% of gross rent collected. Or in this case, $100. 

Notice the difference?

The net income is exactly $100 less in the second scenario because of the fee for property management. Exactly as expected.

But while the cost of property management is claimed to be only 10% "off the top", when you do the math like I did above, you see that the $100 fee actually amounts to a staggering 27.9% of the Net Income.

The fact is, you don't eat gross income. You can't feed your family on gross income. No. You do all that with NET income. And the impact of property management on Net Income is far more significant than you think.

A 27.9% reduction in Net Income. For doing what?

I'm still scratching my head trying to figure that out.

To be honest though, I don't think that property management completely sucks. I think it's more that the model is outdated and broken.

These days rents can be paid online. Marketing is done primarily online, and a lot of tenant screening is done via phone and email. A lot has changed with property management in the last decade. It can take a whole lot less time, effort, and energy to execute. But the way that property managers are paid has not changed at all.

I've been kicking this idea around quite lately with a couple of colleagues of mine, all together we have 44 houses. We'd all like nothing better to outsource property management so we could sit home and drink mai tais and play yathzee, but we're all of the same mind that you'd have to be smoking crack to willingly give up 27.9% of your net income to someone for not doing much of anything for you.

As a group we've even started seriously talking about starting our own property management company that specializes in houses like our that rarely turn over and that on balance don't need a lot of attention.

But we're still trying to get our arms around a payment model for property management that works. We're thinking along the lines of an a la carte type model, where there's a low base fee every month for rent collection, then the property owner pays something additional for each other service that the property manager performs that month.

But we still don't have it right. We will though.

What are your thoughts on it? How could the property management model be restructured? How can property management companies be incentive based rather than fee based? What's the right arrangement?

To be blunt I have no desire to hear from property managers about how they earn the money they make. They probably do in crappy areas with crappy houses. What I'm looking for is a new model that fits with the times. Not a new way to use a buggy whip.

Let me know what you think.

My FAVORITE Halloween Treat - $200,000 in New Private Money!

Tuesday, November 01

I have to say I have come to REALLY like Halloween. The trick or treating with the kids is a blast, as several of us Dads walk with the kids and smoke cigars and shoot the breeze.
 
But the most fun part of Halloween the last few years has been raising private money.
 
No joke.
 
You see, my neighborhood is a lot like Stepford (read the book, skip the movies). It's hypersocial. There are far too many social activities that us husbands get dragged to. Halloween though is different. My buddy Frank who lives a couple of streets over has a gathering every year that started small but has grown to 40-50 people every year. He and his wife now take the day off and cook for it, and everyone brings something. And we all go back to Frank's after we're done walking with the kids trick or treating and sit around his outdoor fire pit.
 
Always a lot of fun as you can imagine.
 
Three years ago Halloween fell on a Saturday, so the gathering at Frank's was HUGE. I had just closed on first apartment building and a house a couple of days earlier, and a couple of folks that were there knew it. So of course they asked about it. In the middle of a crowd of 15 people.
 
To make a long story short, I sat there for an hour and answered questions on real estate investing. And one of the 15 was intrigued, and he chased after me for a month and a half until I found a rental house purchase that he could fund. He's been a consistent and reliable private investor ever since.
 
Last night's gathering at Frank's was really small. I counted 14 people when we stopped by with the kids trick or treating. I was literally there for five minutes when a neighbor arrived and came over to chat as I was leaving. He asked how my real estate was doing, then he asked how I was funding my new deals. I told him I was exclusively using private investors because of the credit markets. He asked what I was paying out as an interest rate. When I told him, he asked if I could use any more money because he had $200k that wasn't generating anywhere near the returns I was paying.
 
We're getting together for lunch this week to make it happen.
 
See why I LOVE Halloween? :))
 
This is all because I follow my Real Estate Private Money 101 playbook for attracting private money.
 
Step 1 is to focus on the people you know.
 
Step 2 is to expose the people you know to your business, but without selling them.
 
This is critical, because in general if you ever ask anyone directly for private money you will very likely turn them off permanently. The key is to attract Private Money - so that they offer it to you.
 
That's how I "raised" $200,000 last night.
 
And in fact that's how I raised every dime of private money that I have today. 
 
 
To celebrate I'm having a sale on my Real Estate Private Money 101 training program to get it into as many hands as I can. Private money is the lifeblood of real estate investing right now, and attracting it is a whole lot easier than you think. You just need the right approach.

 The regular price is $697. The sale price is $297 and it's good through midnight eastern time on Sunday, November 6th.

Get all the details here: http://www.realestateprivatemoney101.com/?page_id=328

The sale price will be shown in the shopping cart.

"Personal Guarantees are STUPID!"

Friday, October 28

Wow.

I just received another screeching email from a self-proclaimed guru bragging about how he just did another risky deal with private money from a new private lender in a crap-hole neighborhood that he would never buy in with his own money, and that he didn't even have to offer a personal guarantee because the lender didn't know enough to ask for it.

Bravo Sparky. Bravo.

You took advantage of someone that didn't know any better. I'll bet your mother is SO proud.

And the crime of it is, he's far from the only one that does this. I personally know several real estate investors that HAVE walked away from risky deals and left private lenders holding the bag.

And that wouldn't hesitate to do it again this afternoon if it suited them. Some of them even brag about doing it.

The amazing thing is that they continue to find new people that will lend to them.

Personally I have never understood that. Sure it's nice to offload risk. That makes good business sense when done properly. But to stick it to someone unsophisticated like a neighbor or acquaintance that doesn't know any better?

C'mon. That's just plain dishonest.

In my book there are really only five basic rules for using private money in real estate deals. I know that if I abide by them I'll significantly increase both the likelihood that we'll have a profitable deal, and the likelihood that we'll do more deals together.

My five rules are:

1. Don't use someone else's money to buy in areas where I wouldn't spend my own money

2. Don't use someone else's money to buy properties that I wouldn't buy with my own money

3. Don't use private money to practice if I've never done that type of deal before

4. Don't take private money from someone that can't afford to lose it

5. Give a personal guarantee

Pretty simple, isn't it?

It really isn't all that difficult to do things the right way.

As you might expect, I get a lot of grief about #5 - the personal guarantee part.

Other more "seasoned" investors are always telling me that I don't have to give one, and one of them even told me that I was "stupid" for giving them when we recently got into a heated back and forth argument about it.

Stupid. Really? Hmmm.

That's not how I see it. It's more like putting my money where my mouth is Sparky. Thankfully there's still a bunch of us left that consider that to be important.

This post was originally published on my blog at the Cash Flow Mercenary Academy.

Step 6 To Buying Turnkey Rentals in Metro Detroit: Protect Yourself

Wednesday, October 12

There are three factors that you should be aware of when you look to buy rental houses here in the suburbs.

Knowing these, and acting on them, will substantially reduce your risk as a rental house owner.

The three factors are:

1. Never own a property in your name

While I’m not an attorney, I recommend holding your rental properties in a Limited Liability Company, or LLC.

If you and your property manager operate your LLC correctly, it will give you liability protection against lawsuits that may attempt to go after other properties you own or money you have. Talk to an attorney or CPA if you have questions. I can refer you to the people I use.

2. Always insist that the seller give you a Warranty Deed and a Title Insurance policy when you buy

A Warranty Deed gives you the maximum amount of assurance that you’re getting clear title to your property. Don’t settle for anything less.

Title insurance protects you in the event that there is something wrong with the title. This is common in most transactions here, and every reputable seller will willingly pay for it.  If they don’t then find another seller.

3. Buy adequate property insurance before closing

This will protect you from weather related and other unexpected issues that may arise.

The key with property insurance is to be sure you get adequate coverage, but not too much coverage. Over insuring your property is a waste of money and will reduce your cash flow.

I recommend you also deal with an insurance agent and company that are experienced with rental properties in this area. I’d be happy to refer you to the people I use.

To get a free copy of my 6 Step Guide To Buying Turn Key Rentals In Metro Detroit, visit http://www.SuburbanTurnKey.com