Posted 23 days ago

Step One to Start Investing

THE JOURNEY OF A PART-TIME REAL ESTATE INVESTOR

I’m a day late but I left Thursday afternoon with my 8 year old daughter to visit friends in Seattle. We returned very late Sunday; 1 AM Monday actually. We had a great time but I was only able to spend 3-4 hours on real estate activities. Today I’m sharing how to get started, going over my progress, an example deal, and offering a gift at the end.

GETTING STARTED

You think I’m going to start talking about wholesaling, rentals, or flips don’t you? But that isn’t where you start. I have a close friend that has been interested in investing for years. He wants to invest passively and each time we talk he is pretty interested, yet his money continues to sit idle. The last time we spoke he said “Man, I should have started investing with you years ago.” This stall is common whether you want to invest passively or actively. It’s happens when people skip straight to the interesting real estate stories or even worse, tv shows, which are exciting, but they don’t know what to do next. I’m going to share with you the exact same advice I’ve just given my close friend.

Before you start anything, you should have your financial house in order. You should have a budget, know how much you are saving each month (whether it is $0 or $1000), know your debts/bills, and know exactly how much you have to invest. Budgets are hard, I know. If you share finances with someone, they need to be involved because you need consensus and commitment. If you struggle with this and already feel defeated, read about budgets from Dave Ramsey or search for budgets on The Simple Dollar. That’s what I did. You could also sit down with a friend that is good with budgets (I’ve done this for family/friends), hire an hourly non-commission based financial planner to help, or find some other financial blogs that you like. This takes time and it won’t be right the first time. Get it started and update it as needed.

Now that your financial house is in order, you need to answer these 3 questions. How much time do you want to put into investing? What type of returns do you want? How much risk are you willing to take?

Time – if you have 10+ hours per week to dedicate to real estate investing, then actively investing is an option. It takes time to educate yourself by attending meetups, classes, and reading. You need to cultivate relationships with many professionals like wholesalers, property managers, real estate agents, and a dozen more. Then you need to find a deal, buy it, and manage it. For myself, I actively invest and passively invest. My passive investing is currently just with my retirement accounts.

Returns - you should think about your criteria for an investment and know what would be an investment you are interested in. You don't create this from scratch, it comes from seeing many deals. It can be very different in different cities. I know people that are fine lending with a house as collateral and getting 8%, others that only want 12%, and others that only want 20%. I know people that only buy a flip if they can make 15%, some if they make at least $20k, and others only buy if they get it for 70 LTV minus the repairs. For buy and hold, people often target a minimum CAP rate or cash-on-cash return.

Your return ties into your risk. Here are some examples I see regularly for private lending. The associate that gets 20% lending is doing risky gap funding which is a 2nd position loan for flips so the flipper needs almost no money. For the 12% rates, it is less risky than the 20%, because you are in 1st position, but you are likely funding 100% for up to 12 months and getting paid at the end. For the 8% rates, you are lending in 1st position but they are putting 20% down.

Risk – Understanding your risk is critical to making a decision. Flipping houses is generally higher risk than buy and hold. Buying houses at auction is higher risk because you don’t even see the house prior to ownership. Lending on good collateral with a safe loan-to-value is less risky than flipping houses. In all cases, your capital is at risk. Whether you are flipping, lending, buying long-term rentals, or something else, you need to understand what can go wrong (this is the risk) and be ok with that. I’m not listing extreme examples that can and do happen, but rather, am focusing on the common risks.

Flipping Houses - what if you lose money on a bad contractor? What if you uncover hidden expenses? What if your water main shut-off valve breaks when the plumping is only partially installed? What if your contractor messes up the permits and you get red tagged and have to wait 14 weeks to start construction again? What if it sells for less than your ARV? All of these have happened to me! The high level risks are discovering unplanned repairs, anything that extends your timeline (since a decent part of your budget is holding costs), and problems with contractors. You'll have insurance for theft, fire, etc. You need to be an active investor to do this. As an active investor there is a lot of education to do that I'm not covering today to be prepared for a rehab project.

Buy and Hold – buying a property with little to no repairs needed is pretty simple to analyze. With a property manager, this can be done passively. Your inspection should uncover any surprises. You should know the average vacancy rate and rent for the area which would have been part of your analysis. Your risk is if major components need repairing like the roof, AC, HVAC, and you aren’t prepared for it, or if your tenant stops paying, trashes the place, and you need to evict. The first one is mitigated by setting aside money to repair those items in the future. Now the last one is where I see the most concern. In reality, it is pretty rare, but if you plan to buy lots of rentals, I’m sure it will eventually happen. My advice is to have an inspection, know the vacancy and rents, have cash reserves, know how long the eviction process takes, and hire a professional to do it.

Lending - this is another passive investing option. Your risk is not getting paid. If you lend money on a property it should have a deed in trust which gives you the ability to sell the property through the foreclosure process if they don’t pay your loan. This is a lien against the property and the first one recorded is in 1st position, the second one is in 2nd position, etc. If the 1st position lien is not paid and they foreclose, whatever it sells for at auction will first pay off the lien in first position, then extra money goes to the 2nd position lien, etc. The foreclosure process removes your lien from the property. If you weren’t fully paid through foreclosure, hopefully you had a personal guarantee. The personal guarantee gives you the ability to file a judgement against the person. This can hurt their credit score, freeze their bank accounts, block them from buying or selling properties, and cause them grief until they pay you. Each city/state can have different laws and you’ll be working with a lawyer to do this. My advice is to lend on a project that you have faith will be successful, lend to someone you have faith will pay you back, make sure you get a deed in trust so a property is collateral, you want your lien position to be the smallest number possible, and get a personal guarantee.

ACCOMPLISHMENTS

I went to one multi-family meetup with good pizza and good people. It was a social event and there wasn’t a speaker. I was able to spend a few hours meeting many new people and finding referrals for property managers and general contractors.

For the 8-unit property under contract, I had the inspection, was able to see all the units, and met with a GC. There's more rehab needed than I initially thought, but it is still a good deal. It also looks like I'll be able to separately meter the water which is great! I've compiled a list of referrals for property managers and general contractors. I've called a couple and need to call more and decide on one. Then finding the right GC will happen. I also creating my operating agreement for the LLC this week. Escrow needs that to show who can sign for the LLC.

I signed a letter of intent (LOI) for a 24-unit property. An LOI shows you are serious and many apartment owners want one before they will release some of the financial documentation. We're doing some negotiation right now so maybe I'll have something to report next week.

Even though all my money is committed to the 8-unit and the 24-unit, if I get it, I kept up on deal analysis. If the 24-unit deal doesn’t happen, I have more that I’m ready to jump on. In addition, I met up with a local full-time rehabber that is also a real estate agent. I plan to start flipping houses again in Q1 to generate cash for more buy and hold properties.

I spent four days in Seattle on a Daddy-Daughter trip visiting friends.

EXAMPLE DEAL AND GIFT

This is a deal I saw and is a great buy and hold property with no rehab needed. I see many smaller deals also but this one was my favorite medium sized deal and I think of it as my backup property if the 24-unit doesn't happen. This is what my deal analysis spreadsheet looks like (ignore the rehab loan & closing section). The rents in the spreadsheet are the increased rents, so it would build up to that. I like deals like this where the COC (cash on cash) return is enough to split with a money partner. Next steps for this property would be to do less than an hour of research on the area to ensure the crime rate wasn't bad and to be confident that the rents can go that high. Then it would be time to contact the buyer's agent, talk further about this property and see if it is really below market rent or if the units need updating to get there. If they need updating, adjust the spreadsheet, make sure it is still a great deal, and put in an offer.

The gift is if you want a copy of the spreadsheet I use, either message me on Bigger Pockets or email me if you got this by email and I’ll send you a copy.

Property Information

Property Analysis - Loan Buy Only

Purchase Price

$ 840,000.00

Loan Amount

$ 672,000.00

Rehab Costs

$ -

Down Payment

$ 168,000.00

ARV

$ 920,000.00

Rehab Costs

$ -

Monthly Income

Closing Costs

$ 13,440.00

Monthly Income

$ 13,440.00

Holding Costs

$ -

Vacancy Rate

5%

Entity Costs

$ 500.00

Other Income

$ -

Checking Account Seed Money

$ 1,000.00

Gross Operating Monthly Income

$ 12,768.00

Total Investment

$ 182,940.00

Yearly Expenses

Property Tax

$ 14,830.00

Insurance

$ 5,700.00

Maintanance Budget

5%

Repairs Budget

5%

Utilites

$ 4,500.00

Gross Operating Income

$ 153,216.00

Property Management

10%

Gross Operating Expenses

$ 55,673.20

Total Annual Expenses

$ 55,673.20

Total Loan Payments

$ 40,804.06

Rehab Loan & Closing

Annual Cash Flow Before Tax

$ 56,738.74

Closing Cost Percentage

1%

Loan Points Percentage

1%

Principle Paid In First Year

$ 16,888.92

Percentage Down

20%

Appreciation in First Year

$ 9,200.00

Interest Rate

4%

Life of Loan (yrs)

25

Monthly Cash Flow

$ 4,728.23

Long Term Loan & Closing

Cap Rate

11.61%

Closing Cost Percentage

1%

Cash On Cash Return

31.01%

Loan Points Percentage

1%

Cash On Cash Return w/ Principle

40.25%

Percentage Down

20%

Cash on Cash Return w/ Appreciation

36.04%

Interest Rate

4%

Cash on Cash Return w/ Principle+Appreciation

45.28%

Life of Loan (yrs)

25

Months Until Return of Capital

38.7

Other

Annual Appreciation

1%

Months Before Rented

0.0

Entity Costs

$ 500.00

Checking Account Seed Money

$ 1,000.00

WHAT’S NEXT

The 8-unit property has a lot of work coming up. I need to follow-up with the lender, finish reading the inspection report and decide on what I need to negotiate, select a property manager, and decide on the SOW for the units and other repairs so I can get contractor bids next week. I have some more negotiation to do with the 24-unit property. There aren’t any meetups this week so I’d like to complete a couple of home projects like painting a wall in my office with white-board paint and mounting my TV on the wall in the family room. Saturday is busy with a girl scout event followed by a small birthday party for myself.


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