Recent letter to a beginning real estate investor

4 Replies

 This is a copy of an email I sent to a beginning real estate investor last week. It’s just some random thoughts on real estate investment based on my 35 years in the business.  During that time we have purchased over 200 properties. We currently own and manage 100 single-family homes and small apartment buildings in the University of Wisconsin campus area as well as several farm properties.  The following is intended for beginners but it’s possible seasoned investors may find an idea or two.      

Subject: Re: Real estate investment 101
Hi James, Here are a few random thoughts regarding your potential real estate investments. I will apologize in advance if some of this seems too basic or obvious.

There is a podcast called BiggerPockets Real Estate which features real estate investors from around the country. It is an amazing resource. I would encourage you to listen to as many episodes as you have time for. You can also get in touch with other local investors in your area through the website. All episodes are archived so you can listen to past podcasts. The podcast will feature investors with far more experience and far greater real estate IQ than I have.

I’m sure there is a local investment group that meets in your area. You may want to become involved with that.

There is another website called The Black Swan Group. The principle is Chris Voss. Chris wrote a book called Never Split the Difference. Chris was a lead FBI hostage negotiator. I would strongly encourage you to subscribe to his email service and to read his book. This should be your Bible for learning how to negotiate. I wish I had access to it early in my career. Negotiation is something that you can practice in your every day life. As you perfect the art you will find it extremely useful when making purchases in real estate or other items.

Wait for the right deal to come along. You can only own and manage a finite amount of property. You won’t want to have purchased the “OK” deal and subsequently have the deal of a lifetime come along the next week, and you’re not in a position to buy it.

It’s been estimated that 10% of all sellers are extremely motivated. A motivated seller is much easier to negotiate with. Sellers can be motivated for any number of reasons. They might be retiring, need quick cash, divorce, management issues, etc. If you are patient you will eventually encounter the motivated seller and recognize how much easier they are to negotiate with.

Are you planning on managing the properties yourself or do you plan on hiring a management company? Management companies can vary greatly in their commitment to service and the fees they charge. You will definitely want to do some thorough research if you are going to hire a management company. To a degree you may also have to manage your management company. We manage all of our properties ourselves.

Interest rates are still at extremely low levels. Sometimes it’s difficult to borrow money at long-term fixed rates for income properties. If you purchase a property and the interest-rate is only fixed for 5 to 7 years you have to ask yourself what the cash flow will look like if interest rates go up substantially when you have to renew the loan. What will the value of the property be if interest rates go up substantially. Real estate values go up, but they can also go down, so if you leverage to purchase a property it’s great when it goes up in value, but it can hurt you if values drop. If you can’t find fixed-rate financing for the life of your loan you are speculating more than you are investing. You might ask yourselves if it’s more likely that we are near a market top or market bottom at this time. If you purchase a property in a good location that you can keep fully occupied, and have a fixed interest rate, you can survive the fluctuations in value. The way I look at it is that I am purchasing the property and my tenants are paying for it. If the value goes up or down it is less of a factor if I keep it full and have a predictable loan payment.

I never used 30 year amortization‘s. The properties that we have purchased recently we have used 15 year amortization‘s. If I can’t find a property that will cash flow and be paid off in 15 years I usually won’t buy it. In the early days when we needed the cash flow we would do 20 or 25 year amortization’s. There is very little difference between a 30 and a 25 year amortization and you will save thousands of dollars in interest with the shorter amortization.

You will want to find a good accountant that is knowledgeable about real estate investing. Different types of repairs and improvements are treated differently for tax purposes and it’s important to know how to maximize the benefit of the improvements that you will do to save on taxes.

I became involved in real estate because I loved old houses and working on them. I feel it’s important to ask yourself why you want to invest in real estate. If it’s something you are naturally drawn to, that will work in your favor. I have purchased many properties from people who thought they wanted to be real estate investors, but in the end it didn’t work out and they were happy to sell and move on.

You might want to look at crime statistics in the areas where you are considering investing. There are areas in Madison that used to be good middle class neighborhoods that have degraded into high crime areas where values have dropped.

It’s important that you understand the rental market. When we evaluate a rental property we can immediately tell if it’s under rented. This is where a lot of value can be added by getting the rents up to market value. Sometimes there are small things that you can do like add dishwashers, garbage disposals, fresh paint, new light fixtures, or a more stylish flooring to increase rents. I’m sure there are excellent resources online or YouTube videos that can make suggestions on how to get the biggest bang for the buck.

Most of the property that we have purchased over the years was not actively for sale on the market. We would approach sellers directly and inquire if they had any interest in selling. We did this through direct mail or with a phone call. We obtained the owner information by searching city records. Approaching owners directly kept us from competing with hundreds of other potential buyers. If you purchase a property for 10% under market value and put 20% down, you just made a 50% return on your down payment investment the day you bought. It’s the old adage you make money when you buy.

If you find a property that you feel is a good value you must be decisive. Good properties tend to get snapped up quickly. Many times over the years people have asked me how we acquired such a great property. The answer was simple; we acted immediately when we saw the opportunity. If you snooze you lose definitely applies to real estate investment. You can always put contingencies in your contract that will allow you to do your due diligence such as inspections, financing, appraisals, etc.

Speaking of building inspections; the quality of building inspectors varies greatly. It’s not unusual for inspectors to miss problems with properties. Just because you get an inspection doesn’t mean they will catch everything. You will want to make sure you have a competent inspector. We purchase mostly smaller properties and handle most of the inspections ourselves. I will confess there have been times I regretted not getting an inspection. Don’t expect sellers to be honest with their required disclosures. The sad truth is most sellers conceal at least some of the defects that they are aware of. (Be aware of heating systems with steam boilers, they can be problematical and do not always heat buildings consistently.)

You will want to develop relationships with several lenders. As you can imagine pricing and terms vary greatly.

If you were to ask me what my most important tool was for real estate investing, I would answer the ability to build close personal relationships. My previous career was in sales and I feel that prepared me well for building business relationships in real estate. I developed friendships with local real estate brokers, bankers, and other local investors. All of these relationships resulted in amazing opportunities.

I have invested in different types of real estate at different times in my career. Most of the investments have been relatively small in scale. We have invested in small apartment buildings, single-family homes, small commercial properties, farms, and student housing. The student housing market has been consistently successful for us. I have had varying degrees of success and failure with other types of real estate.

If you get involved in real estate you are going to make mistakes. Learn from them, adjust and move forward. There are going to be setbacks and surprises and you need to expect that ahead of time.

In closing I would add that our approach to our business is that we are here to serve our customers. We strive to give them excellent service and give them more than what they would expect. We are not perfect, but even with that consideration we have managed to stay fully occupied for 35 consecutive years. The reason we focused on student housing was because there was a limited supply at the time we started in the business. I wanted to be involved in a market that I knew I never had to worry about occupancy. You will want to have precise knowledge of the areas that you are going to invest in in terms of trends and occupancy rates. Obviously well-maintained properties will be a lot easier to keep occupied.

I heard a quote from a successful billionaire New York city real estate investor that reflected his philosophy. “ I take care of my properties and they take care of me.” That underscores the importance of proper maintenance of buildings.

I look forward to speaking with you soon.

Best regards,

Jeff Tallard

Very good points @Jeff Tallard I agree with you and run my portfolio much the same way, especially with regards to amort schedule, if is dosnt meet my cash flow needs on a 15 its not a good deal. I do hire Management in my different markets, as I do a poor job of PM so I have great teams working on that.  I hope some newbies and maybe some more seasoned can get a few nuggets that stick out of your letter.  Thanks for sharing 

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