Our Real Estate Investing Model in Detail
The questions I get most frequently via email from the BiggerPockets audience are:
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– Can you tell me more about your model?
– Why do you think it works?
– Can I copy your model in my market?
– How can I participate in it?
Instead of responding to emails weekly around these topics, I thought I would take the time to write up a detailed review of our model. I will take you through a specific deal we have just locked up and hopefully answer the majority of the questions we receive.
Step 0: Learn your market and establish relationships
Our model starts with doing the homework required to understand what a good deal means in your market and establish relationships with multiple agents.
By putting in the leg work up front you can quickly understand what a good deal means and you can put yourself in the path of success by establishing relationships with agents who control the inventory.
When you spend quality time with agents that control the inventory, you can share with them specifics on what you looking for. When they trust you and they know you will close on deals, they will bring you into the deal flow. They will show you what is available, what is coming and what might be a shaky escrow. Investors who can get in the deal flow with the most agents will find the best deals!
Step 1: Purchase a Property at a significant discount for Cash
As an example we just locked up a tremendous deal because we were in the "Deal Flow" with a particular agent. We were presented with the opportunity to purchase a Tri Plex for only 65K. The Tri Plex is a single building with three units, one of which is two bedroom, one bath unit and two of which are one bedroom, one bath units.
We agreed to pay 65k cash and close quickly.
Step 2: Repair Acquired Unit
The units are in relatively decent shape given they have been vacant for a year. Two of the units just need a good cleaning, new carpet and paint and they are ready. The third unit needs some attention in the bathroom as the subfloor needs work. But all in all, we are looking at under 12K for all the make ready costs.
Once complete we will receive between $1,600 and $1,750 in rent.
We may have a surprise or two arise during the make ready process, however, given our initial price point we have plenty of security and cushion. Regardless of any surprises we will make sure the Tri-Plex is a safe and secure building for our tenants and a great long term investment.
Step 3: Lease Unit
We will stick a for rent sign in the ground and start marketing the property on CraigsList as soon as we clean up the yard and paint the outside of the building. I want to get as many people interested in the units as I can while we spend 2-3 weeks repairing the units.
If the trend holds, we will actually have at least one and probably two of the units rented before we have completed the remodeling.
If we have any vacancies post make-ready, we will run ads in the newspaper, and we might offer a move-in special or other promotions to fill up the building.
Step 4: Secure Passive Investment
The most important step in our model is to recycle our capital by offering a secure long term return to a passive investor. Some past investors have chosen to invest cash while others have used their IRA.
Either way the investor gets a secure 1st Trust Deed and 10% Interest Only Note that pays them every month for the next 10 years.
Each investment is different, but on a deal like this Tri Plex a Passive Investor will lend between 48K and 60K. The payment on said loan would be between $400 and $500.
We could certainly afford a higher payment given our low end rent expectation is $1,600 but we never want to over leverage our properties. We believe this type of margin of safety gives our passive investors the security they need and deserve.
Our Passive Investors’ downside risk is they get a building already repaired for about 80% of our invested capital which is a tremendous deal if you ask me (Given I already bought the deal at a tremendous discount).
Step 5: Recycle Capital
Repeat! We never spend our real estate capital on anything but more real estate! We work with agents and get in the path of deal flow and find the next tremendous deal.
Our 5-step model takes work but once you have done the upfront homework of learning your market and establishing relationships, it can become a lot of fun. The real key is securing passive investors to recycle your initial capital.
I offer double digit returns on purpose because I want them to work with me. I have had several emails asking why I pay 10% when I could offer 6-8%.
While it may be true that I can offer less, I won’t because I want the passive investors to profit from this relationship. Plus, does saving 2% on a relatively small balance really save you that much? If your deals are that skinny then you need to do different deals.
Everyone should win if you follow my model.
Hope this additional detail provides better insight into our model.