Rich Investor Poor Investor

[Matthew Irish-Jones]

Over the course of 12+ years as an investor, property manager, top 100 agent, construction manager, and a general student of Business I have seen my own portfolio performance, as well as that of every investor we manage properties for.   Below are what I see from investors that make it vs those that don't. 

RICH INVESTORS ____________________________________________________________________________________________________________________

- Buy great properties 

- Or... Front load the risk and build great properties by gutting and rebuilding units from the inside out, while having the experience and know how to pull this off

- Buy great locations and pay through the nose for them

- Buy for long term equity and appreciation, they are ok with barely any cash flow if its a great location and a quality asset

- Value Asset condition over cash flow

- Value location over cash flow

POOR INVESTORS ______________________________________________________________________________________________________________________

- Chase cash flow in C class or lower locations 

- Buy crap properties that have 15% CoC returns and a ton of differed maintenance that they fail to itemize properly

- Value cash flow over location and asset condition 

- Look in high risk areas that no one else is looking... for a reason 

- Buy inexpensive properties because they do not have enough funds to get into a B class location.

[Matthew Irish-Jones]

@Jim K. I know you have a solid list of performing cash flow properties, maybe you don't agree here, but I am always interested in what you think.

@Bruce Woodruff You have been through a couple RE cycles, if you could do it all over again, what would you buy?

@Nathan Gesner as a fellow property manager, what portfolio's do you see perform the best?

[Bruce Woodruff]

@Matthew Irish-Jones Thanks for asking! Yes, I have been through and survived a few cycles :-)

My MO has not changed, and it works in any market. And although it helps to have construction experience, it is not absolutely necessary.

1) Find an area that is about to 'gentrify' - these are fairly easy to identify once you have a little experience. Every city has them.

2) Find a SFR house that is, well... let's say 'distressed'. Not only does this do away with a lot of the competition, but it also allows for more equity building opportunity.

3) Fix up the property to be amongst the nicest in the neighborhood.

4) Wait. 2-3 years should be enough.

5) If you have done the above steps correctly, you should be able to sell for 2-3 times what you have invested. You have triple growth platforms - a) basic appreciation, b) the return on your remodel work, c) the neighborhood gentrification upturn.

[Nathan Gesner]

Quote from @Matthew Irish-Jones:

Different strokes for different folks, and it changes over time for a variety of reasons.

I think there's great value to starting cheap. I started with a hoarder house for $55,000 in a market where the median home price was $275,000. It was a painful six months of renovation, but it's not had a day of vacancy since and is now worth 5x what I paid for it. At the point in my life, I couldn't possibly afford to buy a fully renovated house with zero cash flow and play the appreciation game.

As I built confidence (and savings), I bought bigger properties. They were still rougher, off-market, creative financing, etc. I had limited resources and needed the upside. I even bought a self-storage facility, but even that was a play for cash flow.

Now I'm at a place in life where I can afford to buy nicer properties, trading cash flow for less work.

I've been investing for seven years and hope to go for another 30, so my methods could easily change again.

[Matthew Irish-Jones]

Quote from @Nathan Gesner:

Quote from @Matthew Irish-Jones:

Different strokes for different folks, and it changes over time for a variety of reasons.

I think there's great value to starting cheap. I started with a hoarder house for $55,000 in a market where the median home price was $275,000. It was a painful six months of renovation, but it's not had a day of vacancy since and is now worth 5x what I paid for it. At the point in my life, I couldn't possibly afford to buy a fully renovated house with zero cash flow and play the appreciation game.

As I built confidence (and savings), I bought bigger properties. They were still rougher, off-market, creative financing, etc. I had limited resources and needed the upside. I even bought a self-storage facility, but even that was a play for cash flow.

Now I'm at a place in life where I can afford to buy nicer properties, trading cash flow for less work.

I've been investing for seven years and hope to go for another 30, so my methods could easily change again.

 So now that you have some higher cash reserves you purchase more expensive A class properties?

[Matthew Irish-Jones]

Quote from @Bruce Woodruff:

@Matthew Irish-Jones Thanks for asking! Yes, I have been through and survived a few cycles :-)

My MO has not changed, and it works in any market. And although it helps to have construction experience, it is not absolutely necessary.

1) Find an area that is about to 'gentrify' - these are fairly easy to identify once you have a little experience. Every city has them.

2) Find a SFR house that is, well... let's say 'distressed'. Not only does this do away with a lot of the competition, but it also allows for more equity building opportunity.

3) Fix up the property to be amongst the nicest in the neighborhood.

4) Wait. 2-3 years should be enough.

5) If you have done the above steps correctly, you should be able to sell for 2-3 times what you have invested. You have triple growth platforms - a) basic appreciation, b) the return on your remodel work, c) the neighborhood gentrification upturn.

You like the hard work, high upside, investing strategy.  There is no doubt it works, but it takes experience or smarts, and execution. 

[Nathan Gesner]

Quote from @Matthew Irish-Jones:

That's the plan. I've only bought a couple nicer properties.

When I first started, I needed the cash flow to build up my reserves and enable me to purchase the next property. Now that I have strong cash flow - and a little more smarts - I can buy properties that pay for themselves but don't cash flow, holding on to them until they do cash flow or they increase through appreciation.

[Nathan Gesner]

Quote from @Matthew Irish-Jones:

@Nathan Gesner as a fellow property manager, what portfolio's do you see perform the best?

I forgot to answer your question.

The ones that perform the best are still the fixer-uppers. Buy off market, below market price, from a tired investor that hasn't kept up on maintenance, rent increases, etc. It takes more work, but you get a better return for the effort.

I helped a friend buy 8 units that were severely neglected and not on the market. Half the units were vacant and winterized because the Landlord couldn't afford repairs. The other half were renting at 50% of market rate and one tenant hadn't paid rent in over six months! My friend bought them for $225,000 and spent $100,000 on renovations. They appraised for $750,000 before he even finished renovation. His cash flow is ridiculous and I suspect he has around $750,000 in equity. It's hard to get that kind of return with A-class properties.

[Matthew Irish-Jones]

Quote from @Nathan Gesner:

Quote from @Matthew Irish-Jones:

@Nathan Gesner as a fellow property manager, what portfolio's do you see perform the best?

I forgot to answer your question.

The ones that perform the best are still the fixer-uppers. Buy off market, below market price, from a tired investor that hasn't kept up on maintenance, rent increases, etc. It takes more work, but you get a better return for the effort.

I helped a friend buy 8 units that were severely neglected and not on the market. Half the units were vacant and winterized because the Landlord couldn't afford repairs. The other half were renting at 50% of market rate and one tenant hadn't paid rent in over six months! My friend bought them for $225,000 and spent $100,000 on renovations. They appraised for $750,000 before he even finished renovation. His cash flow is ridiculous and I suspect he has around $750,000 in equity. It's hard to get that kind of return with A-class properties.

 Agreed that the fixer uppers have the best returns.  I would argue that the most well off investors I know do not really go after these properties, they buy premium properties that are performing already with a low yield.  As rent increase they hold and get better returns. 

[Nathan Gesner]

Quote from @Matthew Irish-Jones:

Quote from @Matthew Irish-Jones:

Agreed, but that's because they can afford to. Bill Gates doesn't buy property for cash flow because he has enough cash. Ever listen to Barb Cochran? She pays above asking price on everything because she is holding on for appreciation, not trying to fund her kids college tuition.

Different strokes for different folks, and it changes for a variety of reasons over time.

[Jim K.]

Quote from @Matthew Irish-Jones:

@Jim K. I know you have a solid list of performing cash flow properties, maybe you don't agree here, but I am always interested in what you think.

@Bruce Woodruff You have been through a couple RE cycles, if you could do it all over again, what would you buy?

@Nathan Gesner as a fellow property manager, what portfolio's do you see perform the best?

 Sorry to be so late to this one.

What we do is a hyperlocal niche. If you don't treat it as a niche, you'll pay a steep price to learn the error of your ways. Generally speaking, you're right, Matthew. The average person with a decent income starting out on rental property investing would be best served using your approach.

[Eric Gerakos]

Quote from @Matthew Irish-Jones:

Quote from @Nathan Gesner:

Quote from @Matthew Irish-Jones:

@Nathan Gesner as a fellow property manager, what portfolio's do you see perform the best?

I forgot to answer your question.

The ones that perform the best are still the fixer-uppers. Buy off market, below market price, from a tired investor that hasn't kept up on maintenance, rent increases, etc. It takes more work, but you get a better return for the effort.

I helped a friend buy 8 units that were severely neglected and not on the market. Half the units were vacant and winterized because the Landlord couldn't afford repairs. The other half were renting at 50% of market rate and one tenant hadn't paid rent in over six months! My friend bought them for $225,000 and spent $100,000 on renovations. They appraised for $750,000 before he even finished renovation. His cash flow is ridiculous and I suspect he has around $750,000 in equity. It's hard to get that kind of return with A-class properties.

 Agreed that the fixer uppers have the best returns.  I would argue that the most well off investors I know do not really go after these properties, they buy premium properties that are performing already with a low yield.  As rent increase they hold and get better returns. 

This. In 20+ years of buying rentals I have never bought a fixer upper or hired a contractor. I’ve also never had to evict anyone. I see new investors buying “affordable” properties in the Midwest that look like they have great cashflow on paper and a few months later they’re asking how to evict the crappy tenant that’s renting the crappy house they bought in a crappy neighborhood. I buy desirable properties in desirable neighborhoods that have over time had great appreciation which is where the real money is. No one is going to get wealthy making a few hundred dollars a month in cashflow. Just my opinion.

[Bruce Woodruff]

Quote from @Eric Gerakos:

I buy desirable properties in desirable neighborhoods that have over time had great appreciation which is where the real money is.

But this takes a lot of bankroll on the investors part. I agree that it is the ultimate way to invest, but not everyone can go this route...

[Eric Gerakos]

Quote from @Bruce Woodruff:

Quote from @Eric Gerakos:

I buy desirable properties in desirable neighborhoods that have over time had great appreciation which is where the real money is.

But this takes a lot of bankroll on the investors part. I agree that it is the ultimate way to invest, but not everyone can go this route...

That's true. My point was that there is more than one way to invest. Not everyone  buys fixer uppers or needs a team with a contractor, or wholesales or flips. Sometimes buying one nice property in a desirable area is better than buying 4 rentals that all need rehab, etc. There are many ways to succeed in investing. 

[Bruce Woodruff]

Quote from @Eric Gerakos:

Quote from @Bruce Woodruff:

Quote from @Eric Gerakos:

I buy desirable properties in desirable neighborhoods that have over time had great appreciation which is where the real money is.

But this takes a lot of bankroll on the investors part. I agree that it is the ultimate way to invest, but not everyone can go this route...

That's true. My point was that there is more than one way to invest. Not everyone  buys fixer uppers or needs a team with a contractor, or wholesales or flips. Sometimes buying one nice property in a desirable area is better than buying 4 rentals that all need rehab, etc. There are many ways to succeed in investing. 

That's very true! Many is the time I wished I could just buy somethings that is ready-to-roll... ;-)

Although there is a part of me, and I suspect others, that likes the challenge of fixing up a piece of crap property. That is until we get halfway through it and it's not going well....

[Eric Gerakos]

Quote from @Bruce Woodruff:

Quote from @Eric Gerakos:

Quote from @Bruce Woodruff:

Quote from @Eric Gerakos:

I buy desirable properties in desirable neighborhoods that have over time had great appreciation which is where the real money is.

But this takes a lot of bankroll on the investors part. I agree that it is the ultimate way to invest, but not everyone can go this route...

That's true. My point was that there is more than one way to invest. Not everyone  buys fixer uppers or needs a team with a contractor, or wholesales or flips. Sometimes buying one nice property in a desirable area is better than buying 4 rentals that all need rehab, etc. There are many ways to succeed in investing. 

That's very true! Many is the time I wished I could just buy somethings that is ready-to-roll... ;-)

Although there is a part of me, and I suspect others, that likes the challenge of fixing up a piece of crap property. That is until we get halfway through it and it's not going well....

 Yup, that's what I'm trying to avoid. Sipping on some Lagavulin 16. I remember you have a similar palate. 

[Bruce Woodruff]

Quote from @Eric Gerakos:

Sipping on some Lagavulin 16. I remember you have a similar palate. 

Yessir. A little early for me yet...yes, the Islays are my favorite, but they're not for everyone are they? My wife says I smell like dirt...

[Matthew Irish-Jones]

Quote from @Eric Gerakos:

Quote from @Matthew Irish-Jones:

Quote from @Nathan Gesner:

Quote from @Matthew Irish-Jones:

@Nathan Gesner as a fellow property manager, what portfolio's do you see perform the best?

I forgot to answer your question.

The ones that perform the best are still the fixer-uppers. Buy off market, below market price, from a tired investor that hasn't kept up on maintenance, rent increases, etc. It takes more work, but you get a better return for the effort.

I helped a friend buy 8 units that were severely neglected and not on the market. Half the units were vacant and winterized because the Landlord couldn't afford repairs. The other half were renting at 50% of market rate and one tenant hadn't paid rent in over six months! My friend bought them for $225,000 and spent $100,000 on renovations. They appraised for $750,000 before he even finished renovation. His cash flow is ridiculous and I suspect he has around $750,000 in equity. It's hard to get that kind of return with A-class properties.

 Agreed that the fixer uppers have the best returns.  I would argue that the most well off investors I know do not really go after these properties, they buy premium properties that are performing already with a low yield.  As rent increase they hold and get better returns. 

This. In 20+ years of buying rentals I have never bought a fixer upper or hired a contractor. I’ve also never had to evict anyone. I see new investors buying “affordable” properties in the Midwest that look like they have great cashflow on paper and a few months later they’re asking how to evict the crappy tenant that’s renting the crappy house they bought in a crappy neighborhood. I buy desirable properties in desirable neighborhoods that have over time had great appreciation which is where the real money is. No one is going to get wealthy making a few hundred dollars a month in cashflow. Just my opinion.

 Yeah I am with you.  Do you buy with fixed interest rates or variable?  Even with variable interest rates I still buy B+ class or above to avoid all the headaches, and to own something that someone else will want to buy. 

Newer investors seem to think the next guy is going to fall head over heels for their garbage property because of spreadsheet numbers. 

Rich investors have desirable properties that multiple people will bid for. 

[Matthew Irish-Jones]

Quote from @Bruce Woodruff:

Quote from @Eric Gerakos:

Quote from @Bruce Woodruff:

Quote from @Eric Gerakos:

I buy desirable properties in desirable neighborhoods that have over time had great appreciation which is where the real money is.

But this takes a lot of bankroll on the investors part. I agree that it is the ultimate way to invest, but not everyone can go this route...

That's true. My point was that there is more than one way to invest. Not everyone  buys fixer uppers or needs a team with a contractor, or wholesales or flips. Sometimes buying one nice property in a desirable area is better than buying 4 rentals that all need rehab, etc. There are many ways to succeed in investing. 

That's very true! Many is the time I wished I could just buy somethings that is ready-to-roll... ;-)

Although there is a part of me, and I suspect others, that likes the challenge of fixing up a piece of crap property. That is until we get halfway through it and it's not going well....

 I make exceptions because I own a construction company, and love to be involved with the vision of fixing a property.  However, even those properties are expensive and located in B+ class areas. 

[Benjamin Sulka]

Matthew, 

This put a lot into perspective for someone who is looking to buy real estate in the near future. 

I appreciate the post. Going to put more consideration in paying a little bit more for a really good property that isn't going to have a bunch of deferred maintenance and will make more sense as an investment in the long term. 

Thanks!!