Hello Fellow Investors!
Lately a lot of people have mentioned feeling frustrated that they can't find deals that cash flow on the MLS. It is harder these days than a few years ago, not going to lie, but there are definitely still deals out there so I wanted to share some tips on how to get into the best properties from a cash flow perspective. I live and invest in Minneapolis and St Paul MN, so this will be specific to our MLS but I am guessing most of the thoughts and ideas will be relevant in any market on all MLS databases.
Tip #1: Most landlords set their rent too low, and sometimes way too low! I would say this is the case 90% of the time, not kidding. Sometimes by as little as $50 and I have seen as much as $500 per unit per month given away! So instead of using the rents the tenants are currently getting, use real life rental comps/averages instead (I use www.rentometer.com for comps). This will usually uncover some deals hidden in plain sight. You may have to wait out a leases for a few months but if your goal is long term buy and hold then a few months of forgone cash flow is usually worth it.
Tip 2: Set your search to leave out properties with 1 bedroom units. Making sure the property has only 2-3 Bedroom units will help you cash flow much better. "Rent ceilings" are much lower with 1 bed units and they often also mean you only have one source of income which I try to avoid as well.
Tip #3: Look for unfinished attics. They can often be a way to add value with more finished square footage, bedrooms and baths. Ideally the deal should cash flow without finishing the attic but if not, you can quickly finish the attic right after closing and bump up rents by adding 1-2 more bedrooms for the upper unit.
Tip #4 Look for properties that have higher DOM. (DOM = Days On Market) Many of these sellers may now be willing to negotiate a bit on price. Also, some of these have had an offer that fell through during inspection (*which your agent can find out for you) which means they are now starting over and likely have more realistic expectations giving you an edge to work down the price a bit.
Tip #5: Make offers under ask price with no inspection contingency. (**THIS IS ONLY FOR VERY EXPERIENCED BUYERS) When you do your 2nd showing on a property you really like, schedule to have a contractor or retired inspector or builder come with you to identify any of the super major items that would cost a fortune to fix and do a mini inspection (IOW, test water pressures, run dishwashers, get outlet tester, turn thermostat up or down to check appliances are working if possible, etc. I would say you can often get $5-10k off of a purchase price by doing this and often win against other higher offers. Sellers like it because you can do a faster close time with no inspection and move right to appraisal after acceptance and they don't have the unknown of worrying about what will come up in the inspection that might lower the price or have the deal fall apart alltogether. Most good listing agents coach their sellers that stuff always comes up in inspection, and they will often push the seller to go with an offer with no inspection for this reason.
I hope these help! Good luck and private message me if you have questions or want help looking in Minneapolis and St Paul.
Great ideas, thank you!
@Ryan Luthi Well put! This is good stuff.
I made some of these recommendations the other day to a guy I am working with. I don't even look at properties with 1BD units as I haven't found one that worked in a while.
Just some thoughts.
1. You can't analyze whether something is a good deal by looking at the MLS without going in. Your note of lots of lower than market rents is a great point.. One of the biggest faux pas occurs when Realtors don't write a listing correctly and I've seen it a numerous times. They don't have the number of bedrooms or sq footage correct. Again, you only see that if you go in the property. You should become knowledgeable about your target area even before you start looking at properties.
2. Don't leave off 1 bedroom units since I've found you can sometimes carve out a more bedrooms in lots of properties including 1 bedroom apartments. I just bought a 2 duplex package where each unit was a 2 bed/1 bath that I'm adding bedrooms to make each unit into a 4 bed/1 bath.
3. Unfinished attics are a great place to look for opportunity but make sure you understand the building code on what has to be done to finish them legally. Very good suggestion with the caveat of understanding the $ investment to finish them.
4. I like to look at expired listings more the listings with high DOM. I've bought several this way including calling an investor after an expired listing and ultimately working with them as they were slowly selling off their entire portfolio which gave me access to the rest of their properties before anyone else.
5. Very good comment that a not imposing a contingency on inspection should only be used by very experienced investors. I'm very experienced and a general contractor and inspectors I've used often find things I've missed as they have seen EVERYTHING so I still suggest using one if you are a newer investor.
6. One of the biggest wins you can do If you are a newer investor is to use a realtor that is not only experienced with buying/selling multi family properties but owns them too since they will have numerous nuggets to share with new investors since they know the codes and rental licensing issues that come up. If they manage their own properties, that's even better since they will have a list of sub contractors they have vetted.
@Ryan Luthi Appreciate the tips!
With no inspection contingency, what percent earnest money are you committing to the deal? If so, is there a clause that would get you out of losing that earnest money if major works turns up during your 2nd showing? Thanks!
Good question @Bilal A.
I would say just a normal 1% or so for earnest money is fine, maybe slightly more if you are really low on offer price. You always have your financing contingency to leverage in case but that isn't a guarantee to get EM back.. basically this strategy works best when you are really committed and backing out is not in the plan.
However, on a different note the seller can't sign another purchase agreement (assuming you are backing out) until he signs your cancelation so IF they still plan to sell then they will eventually sign and concede your EM back 99% of the time but sometimes they drag their feet in doing so. So as long as that EM isn't going to be needed for a month or so then you should be fine. The only down side really is losing credibility with the listing agent and seller which affects your agent more than you and isn't the end of the world unless the seller or listing agent is like the #1 agent for investment properties in your area.
@Ryan Luthi Thanks! I like the way at you think.
@Ryan Luthi Great food for thought - thanks for sharing.
Thanks for sharing.
A very high earnest money check and no contingencies can also make your offer look good in the case of a bidding war. I helped negotiate a purchase for @James W. and he paid 95% of the purchase price in the form of an earnest money check. It showed he was committed and he got the deal.
1) Agreed! I am currently renovating and living in a duplex I purchased this summer, and each unit was about $200 under market rents for the condition of the units. If you factor in renovations, the rent bumps can often be even higher than that! If you underwrite a deal and it at least breaks even under worst case scenarios, every increase in rents is straight cashflow! In addition, I'd suggest using zillow, craigslist, hotpads, apartments.com, etc to look at market rents.
2) I don't completely agree with this one. I'm with @Bruce Runn in saying that adding bedrooms is often times the key to creatively creating value. If you don't consider 1 bed units, you might miss out on deals you could add bedrooms to! The only caveat I would add to that is the bigger the unit, in terms of bedrooms, the longer it might take to rent. However, the vacancy rates in minneapolis are so low that I don't think that is a big enough factor to warrant any real concerns.
3) This is great! Like I said above, adding bedrooms is often times the best way to boost cashflow!
4) Yup, higher DOM is a good indicator that you might have a motivated seller. However, it also means that, most likely, a lot of other highly experienced investors have walked it and passed, which means you should definitely be wary of it. Most of the time the best deals are on and off the market in a day, so for those properties that sit, especially in this market, you definitely need to be extra careful.
5) Having someone knowledgeable in construction, walk through a property with you is invaluable! I didn't have that when I bought my first place, which made setting up a renovation budget much more challenging, so I will definitely be doing this in the future now that I have several contractor contacts, and I'd strongly suggest anyone newer in this space to do it as well!