After a year of analysis paralysis
Rental Property Investor · Bloomingdale, IL · Member since 2020 · 20 posts · 15 votes
I'm just getting started in my REI journey after nearly a year of analysis paralysis. I'm an engineer by degree but always wanted to get into REI and get out of the rat race. My hometown of Aurora, IL is where I have started my first deal. Currently in the closing process for my first 3 unit in late 2020. My goal is to get to 100 doors in 8 years. I'm starting small to refine my process for the first few years and kick into high gear in the later years by doing larger CRE deals. Will probably make mistakes along the way but that's what the first years a for. I hear it all that time that RE is a relationship business and as I mildly introverted engineer this could be challenging but very much doable. I want to gain valuable inside from others that have been in this game for sometime or meet other investors, new or season, that want to collaborate to help each other achieve our goals. Send me a message.
There are so many things wrong with your statement that I'm having a hard time figuring out where to begin, so I'll just go in the order of items in your statement:
1 - "My goal is to get to 100 doors in 8 years." - Your goal should NEVER be the number of doors within any time period. Your goal should always be financial. Also, the number should ALWAYS be a number with a dollar sign in front, and NEVER with a percentage sign behind. Percentages lie...especially in REI.
2 -"Will probably make mistakes along the way but that's what the first years a for." - No, the first few years are NOT for making mistakes. If that was true, I want to meet the person that lost the most money in their first few years...that person must be an absolute genius. Of course they probably ran out of money before they stopped losing money, so...
3 - "I hear it all that time that RE is a relationship business..." First, stop listening to those people. REI does involve relationship building, however, REI is , as every business is, a numbers business.
4 - "...and as I mildly introverted engineer this could be challenging but very much doable"....and as a numbers business, your background in engineering should help you greatly with the numbers. The problem with being an engineer, is you have know when to stop trying to "make it better". Engineers are great problem solvers. This will be your greatest tool, and will put you head and shoulders above most REI because you will be able to think on the left side of the equal sign, instead of the right...like most REI do. This will allow you to see the opportunities others don't, and to put deals together others can't, simply because you will have a greater understanding of math...and that means you will be able to develop strategies others won't. This also means less competition for deals, and much greater returns (remember, based on dollars...not percentages).
@Jonathan Klemm I know I know.. you are 100% correct. I'm a numbers guy, but I know I need to be less focused on hitting it out of the park on the first one. There have been several properties that we've passed on that certainly would have worked just fine. So from now on I'll look at the deals in a slightly different light. No more searching for unicorns. 3 deals this year is still the goal!!
@Jonathan Klemm thank you. It will be needing some work and I am a Mechanical engineer.
@Daniel E. I will have to take a close look at this. Thanks for the tip.
My recommendation is that you self-evaluate and perform a mind shift. The answers are right in front of you.
1) A job is just a source of income, it is not "who we are". It is often easier to qualify for a new mortgage with one. I suspect that the "rat race" you feel is because there is a perception that this time spent in your job, is your primary income. If so, find ways to diversity. I have a job aside from being a Realtor (it is a side hustle for me). I commit 40 waking hours per week to my job (so what), that leaves 79 hours for side hustles and fun (I didn't count the 7 hours per night for sleeping). It provides subsidized health insurance, PTO, other benefits that my side hustles don't provide. I go look at homes or meet with clients on my lunch break. I look at this forum and others on my regular breaks. Your engineering background is a win. It will help you evaluate all the mousetraps together, to pick the best one for your needs. And let you realize there is no 100% perfect model.
2) Amount of doors is irrelevant, cash flow is paramount. I used to think $100 a door was a decent goal until I realized that 1 month of vacancy rips net profit out the door for the whole year. Now I shoot for a larger number.
3) I look at all investments, and ask the question, "In one year, will I kick myself for not pulling the trigger?" If yes, then pull the trigger. If I don't have the money to pull the trigger, go find or build it. Read "Profit First". I didn't become a Realtor for a job, I became one to get paid a transaction fee for helping myself, friends, and family; to build capital.
4) Real estate investing is just another way to invest and diversify that may provide cash flow or appreciation fueled by leverage. It should be taken in stride and compared against all other types. I find that diversification affords me less stress and I realize that there is no such thing as the 100% perfect model.
Want an easy way to measure? Project capital gains or cash flow into the future versus investment required. Yes, there is a little bit of speculation involved, but you can also evaluate base on past returns. The point is to make money grow, to beat inflation.
Every house I look at has potential, but they all don't make fiscal sense. If I can't see getting a 1.4+ DSCR on a house and/or the appreciation does not add to the net return, in my opinion, it is not worth investing in it. Likewise, I don't see the point in investing in stocks that only pay a 3% dividend, or that do not appreciate at least 10% annually.
I looked in your area, if the average price is $220,000, appreciation is 1% or less, and it costs 6% (not including any estate tax etc) to sell at the highest value to realize your capital gains, you are going to need to hold onto it 5-6 years before you can break even. What about cash flow? If it only cash flows $100 per month, for a return on $1,200, maybe you can but that break-even point to 4 years? And probably only if there is no vacancy. Is that better than investing in Moderna right now or an index fund that performs at 10%+? If the initial investment is $11,000 (5% of $220,000) what is the apples-to-apples comparison? If I buy Moderna at $110 per share and it goes up to $150 in a year, I will have made $4,000. My cost to sell is negligible @ $10, so not even worth bothering with it. If I hold it another year, and it goes up $40 again, now I am way up. Now let's say you can buy a house or multi-family that will cash flow that or better per year and cover the interest expense, even if there is little return on the appreciation, then purchasing the house is better.
My 2 cents.
@Steve Milford
Thank you much for your input. I was being very conservative when I wrote "at a minimum $100 per door" I was assuming very high vacancies, very high expenses. More realistic is $165 per door, 2.1 DCR, and that's including management expenses. The property is selling for a much lower price per unit of the majority of the properties I've seen. I expect to put in ~$40k of renovation work but I should be able to cash-out-refi to cover all the renovation cost and about half of my down payment, Assuming 75 LTV. Also I expect to be able to increase rent by 20% after the renovation. I'm calculating an increase in cash flow after the renovation to $175 per door. That's also assuming an increase in property taxes. Of course this would depend if the market holds up next year. The property is currently fully leased and two of the tenants leases are up in June. I expect to be able to refinance by lates August. I also hope that lenders don't tighten up their refinance percentages due to the market surge. Maybe it's a bit too risky for my first deal but I'm all in now. Closing soon. Do you think this is a good deal?
Only you can determine if it is a good deal. My recommendation:
1) Talk to a lender first prior to putting in that much in renovations is my thought, to make sure it can work. I have seen predictions that rates are going to tick up 0.5%. I just talked to an investor today that wants to put $45k into renovations into a home, and if the refinancing doesn't work out, then at $175 per door, it would still take 250+ payments to break even.
2) You inherit the renters already there. Be sure to read the tenant law in your area about raising rents, and be mindful of the eviction/raising-rent moratorium. In my area, they are getting expanded. Expectations should be "out the window". Fully leased, does not mean fully paying from my perspective.
3) Look at rents of nearby properties from CL. to see if raising rent is even feasible once moratoriums end.
4) I am curious what a high expense is? A new roof is a high expense for me.
@Steve Milford
Thank you for your insightful comments. I will most definitely take them in to consideration.