How are investors sourcing great rental properties in busy markets?

Most major real estate markets across the USA have been in full recovery mode for some time and waves of cheap money are chasing a shrinking number of opportunities. As a direct consequence, many investors are struggling to add to (or even start!) a portfolio of rental properties that generates solid cash flow.

Therefore, I thought it would be interesting to write a short summary of the methods successful investors use to source great value rental properties REPEATEDLY no matter how competitive or distressed their local market is. I realise there are large funds out there who buy hundreds (and sometimes thousands) or properties every year, but I´m focusing on the tools investors who are interested in purchasing 1-10 units can use.

As you will see, there is nothing complicated about what these people do, although discipline, focus and a strong work ethic are certainly common factors. 

I´ll start with the most obvious & simple ways and will finish with the more sophisticated ones. 

Public Listings (MLS/Zillow/Trulia/RedFin)These are the properties that are listed for sale on the open market. The majority are in decent condition and are being sold by licensed realtors. The multiple listings system (MLS) is what realtors, brokers, property managers and other professionals use to buy and sell properties. Within Torcana, we use the MLS quite a lot for research purposes (and sometimes for resales) but we don´t use it much to buy properties any more.

The reason is very simple - there is too much competition. Properties listed on the MLS (which are then widely distributed on open websites like Zillow & Trulia) are the most difficult way of securing a home at a great price. I still place bids on MLS properties regularly, but they would be short sales, bank sales (REOs) and another "distressed" homes. Anybody placing low ball offers on homes that are in good condition is going to end up wasting a lot of time.

Wholesalers
Wholesalers are specialists who secure properties and then sell them "as is" for a modest mark up. For example, they might put a property under contract for $50,000 and then assign it to somebody else for $55,000. You will find wholesalers on Zillow and Craigslist, they send a lot of direct mail and you´ll see their "we buy houses for cash" signposts everywhere. They will also be at local REIA and other networking events. I am on the mailing lists of 40-50 local wholesalers and every now and again we will buy a property from them. This is a very typical way for people who want to be full time investors to get started, as you don´t need much money to begin with (although it certainly requires a lot of effort).

Yellow letters / Direct marketing
Nowadays, anybody can access very sophisticated databases of potential private sellers using free public records and specialist websites like listsource.com. Aside from being able to target specific neighborhoods and property types, you can also carefully select your criteria to target both financially distressed sellers (pre-foreclosure, tax liens, code violations) and sellers motivated to sell for non-financial reasons (recent inheritance, recent divorce, recent eviction issues, winding down for retirement).

I send direct marketing campaigns regularly to specific zipcodes in Tampa Florida using yellowletters.com. There is a decent amount of trial and error involved and you need to be prepared to stick at it over many months. A lot of people give up too early with direct marketing and/or persist with poorly designed mailing lists.

Coincidentally, we put a property under contract earlier this week from a direct marketing campaign. It is a 3 bed 2 bath in an area of New Port Richey we know very well. It is owned by two sisters who have been going through a lot of personal family issues and on top of that had major problems with tenants. The property has been vacant for six months and there are significant unpaid tax and utility bills. For the sellers, this property has been nothing but trouble and a source of significant stress. We were able to negotiate a cash "as is" offer for the property and I am getting it professionally inspected today. If we proceed to purchase, we will probably spend $30,000 - $35,000 on renovations and transform it from one of the worst homes on the street to one of the best homes on the street.

Private auctionsThere are many private auction platforms available : Hubzu.com, Auction.com, Hudhomestore.com, Hudsonandmarshall.com, Homepath.com and Homesearch.com are just a few of the ones we have used to successfully purchase Florida properties in the past year. They are all very different to each other. Each one has different terms, conditions, fees and contract submission platforms. For example, Hubzu charges 4.5% of the purchase price plus a $299 technology fee.

More importantly, some will provide inspection periods while others deduct immediate and non refundable deposits. We have successfully navigated these waters for several years and have converted a lot of neglected properties into beautiful turnkey gems.

Public Auctions
Many people hear about the great bargains available in the online USA foreclosure auctions. There is some truth to that, although there is certainly nothing easy about securing them. Unlike private auctions, there is no title insurance given against any tax or lien defects in public auctions, so you are taking on a lot of additional risk by bidding on them.

That includes anything from a second mortgage, to tax liens, utility liens, code violations and even alimony liens. For example, we might find a lien for $10,000 attached to the property and so we would adjust our bid price by $10,000 as this would have to be settled before I could take clean ownership. You can mitigate this by carefully researching public records for evidence of liens, second mortgages, complex ownership structures, unpaid HOA and utility bills and other complications.

You need to brace yourself for a lot of frustration with public auctions are well - at least 60% of the properties tend to get cancelled or repurchased by the banks as opposed to sold to 3rd parties. In other words, this is for people with a lot of time on their hands and a healthy appetite for risk. We bid on public auctions regularly, but it is really time consuming.  

Where should you get started?
Getting started depends on what way you want to buy property and how much time you have on your hands. Most people never get started - they just spend loads of time thinking and reading about it.

I´m lucky in that I can afford to spend 60 hours a week doing this full time and work closely with a big team of partners and colleagues on the ground. That means we can pursue all the above sourcing avenues simultaneously and deal with the purchase, renovation and resale tasks for a constantly changing stream of properties.

If you are investing in real estate part time you should probably take it a little slower than I do. In other words, master private auctions before moving onto public auctions and get your wholesaler list up and running before you start working on direct mail campaigns.

What people do you need in place to build a rental portfolio?
Nobody has been successful in real estate by working on their own. That´s a fact. There are several essential people any professional investor will need which include:

- Property Manager (finding, processing and managing tenants)
- Contractor (overseeing renovations and all the headaches that come with it)
- Handyman (to fix the multitude of ad hoc issues)
- Property Inspector (to ensure roof, HVAC, plumbing, electrics etc. are sound)
- Administrator (to process all the paperwork involved)
- Title Agent (to perform lien & permit searches and deliver clean title)
- A good CPA and lawyer to make sure you aren´t breaking any rules (or paying unnecessary taxes)

What about purchasing turnkey instead?
If you don´t have the time to build a team that sources, renovates and manages properties but still want to put your hard earned money to work for you, then there are a quite a few turnkey operators out there who will be happy to work with you.

Specialist turnkey providers (disclaimer: I run one of them!) typically take on the risks involved in buying and renovating the properties before reselling them to investors at a profit margin.

While investors certainly shouldn´t be paying over market rates for these properties, they shouldn´t expect huge built in equity either. Built in equity is what you get when you do some work and take on a bit of risk. However, turnkey buyers certainly should expect a home that has been properly renovated which delivers strong cashflow and won´t give you any big ticket headaches (roofs, a/c etc) for quite a few years.

Whichever method you choose, the main thing is to GET STARTED. Once you have got the confidence boost from buying your couple of properties, you´d be amazed at how quickly you can spread your wings. 

Happy investing!