Buying Retail Properties to turn into Rentals

13 Replies

I am living and investing in ATL, well starting to invest. I am have identified my target area and the types of houses I am looking for, fixer uppers and turnkey. In the area I am looking I am able to purchase all cash and made 5 offers last week via the MLS and my agent, none of which got a counter offer and a few didn't even get a call back. On turnkey I am offering around 80-85% on the comp and on the fixers I am offering 60-65% of list which equates to about 75% of ARV with repair costs included. My struggle is that I know I can cash flow at List price. But I really wont have any instant equity. My plan is to buy cash upfront, get repairs done and tenant in place than finance so I can buy another rental. I will need to minimize the amount of money left in the property so I can continue to grow my portfolio. My driving goal is to cash flow. Based on how hot the market is in the area I am looking at, most houses sell at 95% of list price within 30 days, should I be offering full price and just slowly building cash flowing properties until the market cools off?

Everything in real estate is about opportunity cost. 

If you know homes are selling for 95% of list price, and you're offering 60-80% and getting no action, maybe you should try something different. 

Here's where the opportunity cost part comes in: 

  • If you make 500 lowball offers over the course of the next year, and buy nothing. What are your returns from your real estate investments going to be at the end of that year, or 5 years from now? The math is easy: nothing/zip/nada/zero.
  • Conversely, if you change your tactic and start making offers at say 75-90% of list price, and actually pick up a couple of fundamentally sound properties as a result, how will that change your overall financial picture? And how does it fit into your goals and objectives? If it's better than zero, it might be better than doing nothing (this depends largely on your personal financial picture, and personal goals).

Let me be clear: I would never suggest you overpay for a property, or ignore the fundamentals when analyzing a potential purchase. On the contrary.

But, ignoring the realities of your market and repeatedly making lowball offers with zero chance of being accepted accomplishes nothing, and earns you nothing. 

Originally posted by @Patrick Shea :
I am living and investing in ATL, well starting to invest. I am have identified my target area and the types of houses I am looking for, fixer uppers and turnkey. In the area I am looking I am able to purchase all cash and made 5 offers last week via the MLS and my agent, none of which got a counter offer and a few didn't even get a call back. On turnkey I am offering around 80-85% on the comp and on the fixers I am offering 60-65% of list which equates to about 75% of ARV with repair costs included.

My struggle is that I know I can cash flow at List price. But I really wont have any instant equity. My plan is to buy cash upfront, get repairs done and tenant in place than finance so I can buy another rental. I will need to minimize the amount of money left in the property so I can continue to grow my portfolio. My driving goal is to cash flow.

Based on how hot the market is in the area I am looking at, most houses sell at 95% of list price within 30 days, should I be offering full price and just slowly building cash flowing properties until the market cools off?

 By your own observation you are offing $85 cents on the dollar for what houses are selling for within 30 days. Of course your offers are being declined. This is fairly obvious as to why. If you want to close on more deals you need to pony up more coin. If you want to get something at $85 cents on the dollar you'll need to keep doing what you are doing but expect to be waiting a long time if not indefinitely. 

Another thing to factor into your strategy is your time cost. How much time are you spending shooting out offer after offer only to have it be declined. There is a monetary value to that time. Not to mention if you are using an agent it won't be long before they fire you and you need to spend more time finding a new agent who may or may not be better than your current agent. 

If you are just slinging offers that get declined most of the time odds are good any agent you end up working with is bottom of the barrel talent as the talented ones won't bother with you. Are you missing out on opportunities by only working with low quality agents?

These are all things you need to factor in.

Hi Patrick,  REad the doc off my profile, a file URL in my profiles first paragraph:  Buying a Bulletproof rental portfolio.

I also suggest you join the local REIAs.  The many years many deals experts are in the REiAs.  BP is great but experts see the value in face to face REIAs who help each other find deals and talk about what areas are working.

If you are finding it a problem? Then I suggest join the REIAs. I chose GaREIA because its the largest and has the most experienced investors flipping and buy and hold. My expertise is buy and hold, but I do a lot of REI education as well.

Specific to your problem:  stop using a buyers agent and call up the listing agent, easiest to find on realtor.com but zillow does show "presented by" on some ads.

Learn how to calc MAO (max allowable offer), call the listing agent, small talk, ask if the seller is flexible, why selling etc etc. Develop a relatoinship. Something that is imposible using a buyers agent. Its a relationship that will get you a call back; hey Pat,,, your offer is a bit low, you saw the house and know its a good house, if you raised your offer a bit, you'd be in the hunt. Pat what would you like to do?.....

To make a strong offer to the listing agent, do as many of these as possible:

- all cash offer, close in 2 weeeks

- NO INSPECTION period. Do you poking around during initial walk through. You need to be an REI expert, don';t depend on inspectors, contractors walking with you during an inspection period. You need to learn (at a REIA) how to look for issues, estimate rehab costs on a fast walk through. I walk a rental prospect in 15 min and know wht it will take to fix.

- If you are financing, say NO FINANCING contingency.  But you have to be solid financially and know the house will appraise to be sure your financing will go through.

- I do this often, mainly to build a relationship with the listing agent, never had one take me up;  offer $500 bonus to the listing agent, and that she gets the full 6%.  Remind her that your offer will make her MORE money.  :)  This is where using a buyers agent is killing you.  She makes 3%...  Plus you don't learn the inside info or get any biddin help.  Belive me!!!!  I've been told the high bid every time, yes every time!  Because I develop a relationship with the listing agent.  They are just people, bored, love to talk, they will tell you crazy things.  LOL!!  

Good luck, and above all learn how to make this fun, it will show in how you talk to sellers.  :)

Hi Patrick,

I am a GA native born and raised 43 years so far. What counties or cities are you focusing on?

I only work on commercial real estate these days as a principal broker and investor. GA is one of the hottest states in the country for growth. We have a great quality of life to median income levels, and weather. About 75% of net population migration from cold belt states is coming to GA,FL,TX.

GA is slated to add about 5 million more people over the next decade or so to the state. Interstate 75 is getting about 160k cars a day and I-575 off shoot is getting about 100k now.

You have to understand anything listed they would not want to touch a 15% or more discount right away. A smart broker/agent that has a property listed might say ( Thanks for the offer and have seller counter back close to asking or ask. If you do not want to counter then they might say thanks for your offer. We might revisit it in a few weeks after we see what else comes in.)

It's the same in commercial real estate just the numbers are bigger in the millions to tens of millions in price. Sellers want top dollar and buyers want the deals so you have to try to find middle ground where both seem happy to proceed to get paid as a broker/agent and have a successful closing. Sometimes list price IS a deal. You have to look at list price and see if they are over inflating, at market, or below market for current condition of the property being marketed for sale.

Without knowing your current net worth, liquidity, annual profit income from job or business it is hard to comment further.

For example if you have good cash coming in and want to create wealth you might be better off buying a new house in a new development going up phase zero (just dirt and pipes). There is one right now from low 200's will likely when sold out in 1 to 2 years be high 200's in price. So cash flow might be less per month but better equity growth over time and newer property to own. Any new construction is about high 100's to low 200's minimum these days because cost to acquire land, entitle it, labor, and construction materials have all gone up.

If you are buying 150k below type stuff it can be very tough as existing properties you have home buyers, local buy and hold investors, flippers, out of town all cash CA type buyers who will take less yield to get into a market, etc. There was a small window about 3 to 4 years ago where market started to recover but owners did not know it yet. Now pretty much all sellers know it is a stronger market and time to sell. You need to find properties off market with less eyeballs on them to try to negotiate these deals you are looking for.

As to the question of should you just buy properties at market value to work toward your goal that is hard to say.

If you make 100k a year and are trying to replace that income you would need pre-tax 1 million investment cash at a 10% annual return. So your breakeven all in cost to live for your family might be 70,000 to 75,000 after taxes and write downs.

If you buy a house all in for 100k that after all expenses generates 1,200 a month take away 50% for expenses. 14,400 a year total / 2 = 7,200 a year or 600 a month profit if buying all cash. So a 7.2% annual return. Cash flow is one metric but the real wealth comes from the equity appreciation growth.

im glad you asked this question! Ive been thinking about buying one like that. Im looking to get my second rental property but haven't had luck finding deals on properties that need some work. I was looking for something i could fix up and have some equity in right away. Everything I find like that, is in areas where I don't want to own rentals, due to crime rates, etc. 

I see other properties on the market that don't really need anything and would rent out quickly. Ive been wondering why it seems no one buys these. my numbers show I could make 15 percent annual returns on my cash down, after maint, vacancy, etc. 

my goal is also cash flow, so I wonder if I should start buying properties like that as I find them. Ive ran the numbers on 3 or 4 recently that all showed returns like that. Thanks for any input! And good luck with your future of investing Patrick. 

@Brett Loetz If you want equity growth over immediate cash flow, buying early in a new development can work. My friend and his wife did that. Bought a townhouse in a new development for 300k, a year later it was worth 370k. They bought in early and that’s what can happen.

@Caleb Heimsoth thanks for the tip. I'll have to check out some new developments around me and see if there is something that catches my eye. 

A good question is, should I worry about basically instant equity or as long as it cash flow don't worry about it? Im mostly looking to get cash flow coming in and some of these properties show 150-300 cash flow after everything's paid, including maint. and vacancy. 

Originally posted by @Brett Loetz :

@Caleb Heimsoth thanks for the tip. I'll have to check out some new developments around me and see if there is something that catches my eye. 

A good question is, should I worry about basically instant equity or as long as it cash flow don't worry about it? Im mostly looking to get cash flow coming in and some of these properties show 150-300 cash flow after everything's paid, including maint. and vacancy. 

You can do either or both.  One isn’t better then the other persay. 

Originally posted by @Caleb Heimsoth :
Originally posted by @Brett Loetz:

@Caleb Heimsoth thanks for the tip. I'll have to check out some new developments around me and see if there is something that catches my eye. 

A good question is, should I worry about basically instant equity or as long as it cash flow don't worry about it? Im mostly looking to get cash flow coming in and some of these properties show 150-300 cash flow after everything's paid, including maint. and vacancy. 

You can do either or both.  One isn’t better then the other persay. 

Ok, thanks!

A quick update. I purchased a property off of the MLS using my normal real estate agent. Overall the process went pretty well, going with cash helped me lock in a decent price. I purchased the house for 168K, with a few improvements and upgrades, I invested about 6K more for a total of 174K invested. I have the house listed for rent at $1400/month (I used rentometer to get an a 'good' cost basis). So far it has been listed for a week and has 5 showings with 4 applications and I am expecting some more this next week.

My final decision was based on opportunity cost. Since I used the money from refinancing my primary home, I needed to put it to work.  Also it was time to take action.  I think I have minimized my risk by purchasing it out right and then testing the market for what the property will rent for to further prove my numbers for purchasing additional houses in the area.

Once it is rented I am going to work on either refinancing or getting a line of credit for the purchase of the next house.

Hope this helps any new investors who commented on my thread.  Thank you to all the veteran investors for their expertise!!