Im a newbie investor no deals under my belt still just learning. I want to start off my journey in investing rentals .What are some major DO-NOTS when it comes to real estate in detail and examples would be great as well.
Negative cash flow, too high of a down payment,...and negative cash flow...and did I mention too high of a down payment?
Joe, what percentage do you find your down payments to be at typically? Obviously the smaller the better but what is typical or preferred for you?
It depends on the property. As low as I can get it and still cash flow positive based on the criteria dictated by the plan I'm working with at that time...and the specific strategy & market I'm using.
@Joe Villeneuve Still waiting to Joe to write a book........ With examples :)
I'd be interested in reading your book.
Book written...three times. 4th on the way...none published...I keep adding and changing. However, if you want examples, I have given probably enough to fill two books on this site. LOL.
@Joe Villeneuve Still waiting to Joe to write a book........ With examples :)
I'd be interested in reading your book.
Book written...three times. 4th on the way...none published...I keep adding and changing. However, if you want examples, I have given probably enough to fill two books on this site. LOL.
I’m going to go against the grain here a little bit! Hear me out! While I agree, location buying ugliest house in best neighborhood sounds great on TV and Is a great strategy for flipping properties, this is not always the case for multifamily investing. Multifamily investing is about achieving your goals!
Antony, you first have to define your goals and decide if your looking for highest cash flow or highest appreciation and you have to decide what class your comfortable investing in. If your looking for highest cash flow, this will never align with the best location! What is your goal?
It’s also important to remember that 5+ units is commercial and based heavily on income, so you can drive your appreciation on a property through effective management. Our focus is C class and I will tell you that our best performing buildings for cash flow are in areas that scare most people. However, we know how to manage these and we do not shy away. You will find your best cash flow and best deals in C class that have been poorly managed. But, you have to know or have a property manager that knows how to manage this class because you can get bit quick. Getting to 5k, 10k passive income monthly can be done quite easy in C class through hard work and it can be done in a short time frame. You have to educate yourself and find the really successful investors that are doing what you want to do
If you have high cash flow, you can can reinvest that money into higher appreciation properties. With proper investing through using cash flow, you can create an enormous amount of wealth and financial freedom.
And, I disagree like @Joe Villeneuve with basing your strategy on list price. Again, define your goals and put deals to pencil & paper. If the numbers pencil on paper to achieve your goals it doesn’t matter what list price is and sometimes you pay more and sometimes you pay less, but knowing your numbers allow you to be competitive instead of being another person on this forum complaining about people “overpaying” for a property.
I’m going to go against the grain here a little bit! Hear me out! While I agree, location buying ugliest house in best neighborhood sounds great on TV and Is a great strategy for flipping properties, this is not always the case for multifamily investing. Multifamily investing is about achieving your goals!
Antony, you first have to define your goals and decide if your looking for highest cash flow or highest appreciation and you have to decide what class your comfortable investing in. If your looking for highest cash flow, this will never align with the best location! What is your goal?
It’s also important to remember that 5+ units is commercial and based heavily on income, so you can drive your appreciation on a property through effective management. Our focus is C class and I will tell you that our best performing buildings for cash flow are in areas that scare most people. However, we know how to manage these and we do not shy away. You will find your best cash flow and best deals in C class that have been poorly managed. But, you have to know or have a property manager that knows how to manage this class because you can get bit quick. Getting to 5k, 10k passive income monthly can be done quite easy in C class through hard work and it can be done in a short time frame. You have to educate yourself and find the really successful investors that are doing what you want to do
If you have high cash flow, you can can reinvest that money into higher appreciation properties. With proper investing through using cash flow, you can create an enormous amount of wealth and financial freedom.
And, I disagree like @Joe Villeneuve with basing your strategy on list price. Again, define your goals and put deals to pencil & paper. If the numbers pencil on paper to achieve your goals it doesn’t matter what list price is and sometimes you pay more and sometimes you pay less, but knowing your numbers allow you to be competitive instead of being another person on this forum complaining about people “overpaying” for a property.
The key here, when discussing "overpaying" for a property is understanding the difference between the "total cost" of the property and the "actual cost" to the REI. They are not, and should never be equal to eachother. If they are, then you are in fact "over paying".
The Total Cost includes the DP, the rest of the principle and interest. The Actual Cost is only what comes out of the REI's pocket in the form of cash. This is based on the property having positive cash flow. This also means if the property has negative CF (God forbid), the REI is paying more for the property based on the amount of negative cash flow...as it adds up.
So, if a person pays 20% down ($20k) and has a mortgage for $5k/year (for 30 yrs), the total cost would be $170k...but the actual cost to the REI would only be $20k. If that investor chose to pay the full $100k in cash with no debt, the Total cost would be equal to the Actual cost...$100k. Why does this matter? Profit doesn't start until the Actual Cost is recovered.
@Joe Villeneuve absolutely and I Hope most on here understand that. Cash on cash return year 1 should always be a criteria for analyzing a deal. For those of us that use 0 of our money and utilize private lending, the game changes a bit. However if your buying a value add property and able to successfully refinance out you must understand that model. You can take a property that you “over payed” for in the current state and turn that into a property 6-12 months later that you “under payed” for. Now that is a simple statement and I’m not going to bore anyone with numbers, but simply using actual cost and total cost is not always a winning formula. If your doing a simple retail purchase your formula will always win. If your creative, its bit more complicated than just looking at those two components to determine if you over payed or under payed.
@Antony Charlier I've learned to watch out for buying from a long term investor that is only selling one of their properties. If they're only selling one there's a reason for that. And that reason is usually that it is a bad investment.
Make sure you're 100% aware of potential future repairs. For example. Make sure all windows work properly, make sure all doors work properly, check for potential foundation issues and moisture issues with professionals not just the inspection guy. These things can be a nightmare to deal with it you miss them. Ask me how I know! Jk don't ask but make sure you're aware of these things.
@Joe Villeneuve absolutely and I Hope most on here understand that. Cash on cash return year 1 should always be a criteria for analyzing a deal. For those of us that use 0 of our money and utilize private lending, the game changes a bit. However if your buying a value add property and able to successfully refinance out you must understand that model. You can take a property that you “over payed” for in the current state and turn that into a property 6-12 months later that you “under payed” for. Now that is a simple statement and I’m not going to bore anyone with numbers, but simply using actual cost and total cost is not always a winning formula. If your doing a simple retail purchase your formula will always win. If your creative, its bit more complicated than just looking at those two components to determine if you over payed or under payed.
...and it can go well beyond that...and I will bore those interested with numbers (LOL).
Example: PV = $100k; AP = $100k; CF w/NO debt = $10k/y (and yes, this is a real property...and not uncommon)
Option #1: Offer = $100k; DP (100%) = $100k; Loan = $0k; Annual DS = $0k; CF = $10k/y Total Cost = $100k; Actual Cost (to REI) = $100k; Cost Recovery = 10 years; Profit over 10 years = $0k (total) # of properties = 1; Total PV = $100k
Option #2a: Offer = $100k; DP (20%) = $20k; Loan = $80k; Annual DS = $5k (approx); CF = $5k/y Total Cost = $170k; Actual Cost (to REI) = $20k; Cost Recovery = 4 years; Profit over 10 years = $30k (total) # of properties = 1; Total PV = $100k
Option #2b: Using the same $100k as Option #1 Offer = $100k; DP (20%) = $20k; Loan = $80k; Annual DS = $5k (approx); CF = $5k/y; Total CF (5 Prop) = $25k Total Cost = $850k; Actual Cost (to REI) = $100k; Cost Recovery = 4 years; Profit over 10 years = $150k (total) # of properties = 5; Total PV = $500k
First and foremost, fall in love with the deal not the property. The best investors know when the numbers work and when they do not. Learn how to analyze your deals and run your own due diligence. Build a team that you trust and wont rip you off. Know your criteria and do not budge on it. Find good tenants and treat them well. I firmly believe that the longevity that you create when building your business in real estate is determined by how well you treat others. Feel free to hit me up!
you can repair the building. You can change the tenants to better ones. You can raise rents to improve cash flow.
You can never change the neighborhood. Make sure the neighborhood is one that will be a good area to invest in for the long haul. you are stuck with the neighborhood.
@DeAnna Beard no it doesn’t as long as you do it in a short period of time. Because shopping around for the best mortgage rate is encouraged, your credit isn’t affected as much. I for this most recent loan I don’t even think my score went down a point. I had 3 loan officers pull my credit. For the NYC transaction I know at least 7 pulled my credit and my score went down about 3 points and recovered in a month or two.
When I did the NYC transaction my credit wasn’t that great so the 3 points made me nervous, lol. But currently my score is excellent so even if it came down 10 points (which it totally won’t by having your credit pulled for a mortgage) I wouldn’t care much. I’d still be in the “excellent” score category.
@joe villeneuve what do you view as a reasonable time period to get your cash back? I have one property at 8 years (20% down and low rehab), and another at 13 years (25% down for great interest rate at the time, but I didn't control the rehab cost well).
@Antony Charlier Im new too. Recently got a HELOC just to find out that the area I initially wanted to invest in, the numbers just did not make sense for a buy and hold. Which caused my motivation to be deflated. Now I have to research other markets, which I have no idea how to do, in which I can afford. So my advice would be to do the math and market research, so that you can set realistic criteria for yourself.
Hey @Antony Charlier! Congratulations on choosing to start your RE journey.
Tips:
1. Take action. The last thing you want is analysis paralysis.
2. Learn as you go. I learned so much from fixing up my first investment property. Bad contractors to good ones. How much rehab costs are. How to get permits and all the intricacies with that.
3. Keep a strong mindset. You do this by surrounding yourself with like minded people. What I do everyday is listen to parts of an audiobook every single day.
4. Set up good habits. Good habits are hard to break.