All Forum Posts by: Eric Baum

Hi All,

Hope everyone is having a great weekend.  I am an active real estate investor that has portfolios in a few different markets.  I am starting to evaluate a new market and have been intrigued a bit with Birmingham ( I invested strongly in Memphis back in 2010 and 2011 where you could get in strong / premium owner occupied areas and still generate good cash flow) and on very basic due diligence so far it seems like Birmingham has many characteristis / metrics that memphis had a few years ago before the hedge funds and hype change the risk / reward ratio there a bit.

My focus / target for Birmingham would be less the working class neighborhood / formats and more SFHs focused on higher quality (higher owner occupied type neighborhoods, near better schools, rents comfortably over the median rent levels, low crime, etc).  I wanted to see if I could leverage local expertise / investors to better educate myself with where there is a balance of high relative tenant quality / neighborhoods with good cash flow as well.  Want to avoid C areas, but realize A+ areas won't be godo cash flow.  Looking for the elusive sweet spot witha bias to higher quality. I always look for that invvisible rent threshold that seems to divide some of the tenant quality. Seemed to me that rent level in the $900-$1000+ range could be the range that starts to tier tenant quality as I see $700-$800 level to be most common.

I have noticed that there are a bunch of turn-key players that do extensive rehabs such as Birmingham Income Propertues and Spartan.  In some markets, I have built my own ground operations over time and do my own extensive rehabs and in other markets I have partnered with local players like turn-keys if they are truly high quality and offer value that i can't get on my own (e.g if they have so much rehab scale that their rehab costs are far below what I can do on my own, etc).  I couldn't yet get a feel for whether their inventory was in more desrable areas - much of it seemed still in very C type areas.   Any insight is appreicated.  This could be a market that i look to develop a sizable portfolio in, but am still at the beginning of my education and due diligence and always find Bigger Pockets to be such a wealth of knowledge.  And am always looking for local advisors.   I currently have portfolios in Memphis, Chicago, Florida, NY,  Charlotte, and Philly so if I can be of any help to others please let me know as well.

Thank you so much!

Eric

Hi All (@Jay Hinrichs , @Miriam Nalumansi @Martin Yung etc

I also wanted to add that I have extensive knowledge of both the operations and their product and I echo Jay's comments. I have a high amount of respect for their company and the integrity and transparency of their owner Alex. They are one of the few Turnkey operations that I think are solid and provide value. Many turn-keys do not. This is no way saying it’s the right product, format, or investment for you. But – I would seek to reduce any anxiety about the quality or reputation of the company.

I think what often happens here is that sometimes we accidentally don’t compare apples to apples. While, I think as discussed in other threads that to buy or not to buy turn-key depends on a host of variables such as your goals, risk / reward desires, level of available inventory in market, individual challenges of that market, whether you can replicate what the turn-key can provide at a similar cost, etc we also have to make sure we are normalizing things.

Yes, you can absolutely buy in the same neighborhoods for $40,000. But that is not equivalent to their product. For example the cab driver might be able to assess the outside looking similar, but not the inside or state of the roof, porch, etc. The truth is many people are slum lords there and what they are willing to accept as a product to provide might be what the cab driver is used to. As@Jay Hinrichs Jay Hinrichs mentioned, this operation does essentially a rebuild almost from scratch NOT just some rehabbing and they put an excessive amount of money into the rehab. That is part of their strategy to have a more "luxury" type product in a more working class neighborhood so they can try and attract the tenants that want a better quality of life, appreciate the owners that care about what they provide, and tend to stay longer. It also minimizes a lot of maintenance going forward. It may end up that people don't agree with that strategy and that is fine, but they have one and its different than the slum lord and as a result their rent levels, evictions, and overall performance are different as well. That said, that product may not be for everybody. You may decide that you rather have a lower price point in and a worst condition property to try and get higher ROI – not something I would recommend especially in working class neighborhoods but there are people out there that this has worked for and had the tools to make it work. What I will add, having audited their operations, they have large scale - so they can do the rehab at a fraction of the cost that someone would spend to do it on their own, they have a long experience of understanding how to manage and working in those areas which is very important in working class neighborhoods, and their typical investor purchases over 5 so I would assume if their clients are not happy they wouldn't buy more.

So I am not advocating that anyone should buy turnkey, buy in Chicago or whatnot. In most areas you shouldn’t buy turnkey as the value isn’t there or the ease to replicate is high or the relative level of risk in the area is low. As I mentioned in a prior thread where I spoke a lot about to turn-key or not, only buy Turnkey if you think there is value created beyond what you could do on your own. Most turn-keys will fail this test and I speak about other ways to know if it makes sense. In this case, I am saying if you wanted to replicate their product to their standards as a mom and pop investor I would imagine by the time you acquired the building in all cash, paid all cash for the same rehab, dealt with insurance, holding cost, and contractor risk during the rehab, then looked for and placed safe and solid tenants, you would probably be in at a much higher cost than they sell (again just looking at scale of material and appliance buys). Again, that is if you tried and replicate their exact product. If you wanted to create a different product with a different strategy then there will be different price points to reflect the different levels of risk, variability, and return desires you want.

You run into risk purchasing a bad turnkey, but people also overlook you run into risk trying to do it yourself and that is my fear sometimes when people are 100% anti-turnkey as I have seen more people get into trouble trying to do something themselves when they really didn’t understand what they were getting into. I have my own operations in some markets and have done turn-key in others – I look at it a market and determine the right format by a case by case analysis of all the variables. There is no right or wrong format in general – you just want to optimize in each market you want to be in what the best strategy to accomplish your needs.

If you have any questions please don't hesitate to reach out to me. Disclosure – I have no sales referral relationships with any property sellers. I have been in real estate 15 years and made a host of mistakes across the board and people were great in helping me along the way and I am happy to try and provide any insight I can to others now in return. 

Hi All ( @Damien Christian,@Daniel Foster  @Will Pritchett @Jerry W. @Brian Larson @Jack Slattery 

My view of this thread is similar to very common financial discussions around using credit cards for purchases versus cash.  The truth is to me it always comes back down to discpline.  If you use a credit card for convenience and timing, but are displined to ensure you treat it responsbily and pay it down, then it is a valuable tool.  However, many start with good intentions and end up later with a lot of saddles debt.

I view the HELOC similarly. I myself, find it a great way to help continue to finance real estate investing. But it makes sense, when you ensure (1) you are not over extending yourself - e.g. if any surprises happen both with the project or general life do you have reserves or contigencies? If you do, then again a good financing source for me. If you don't, then you risk being too leveraged where any hiccup could bring the house of cards down which unfortunately happened to a lot of people in the downturn (2) Does your investment make sense from a cash flow perspective considering total financing costs? A HELOC is a good way to being able to seize an objectively and independent good investment where you simply would like less $s in the deal or the use of the funds help you be able to do the deal. Too many times, I have seen HELOCs as way to rationalize a bad deal (the old hey I have 100% financing so it must be good). A good deal needs to be able to generate enough cash flow to both cover your traditional costs and your HELOC costs. Treat it as a loan with a defined minimum principal and interest pay-off schedule. If it does, then you are borrowing money at a low interest rate to earn a higher return and keeping the spread. HELOCs can give you flexibility so you don't want to keep them hilted, you want to use cash flow to pay it down at a regular schedule so you have additional emergency reserves or the ability to deploy it elsewhere.

So in summary, with little displine, HELOCs can lead folks to make a bad deal happen or end up with more leverage than is healthy or long term debt.  With good displine and a good deal, HELOCs can be a very inexpensive financing channe and one that allows you some flexibiltiy to seize a good deal you might have not been able to.  The key is to have a plan and to ensure you can easily service the debt and still have cash flow.

Hope that helps,

Eric

Welcome to the site as well.  I have found it to be invaluable resource to be able to research or educate yourself on almost any topic as well as network with great people.

I have invested in a variety of markets and currently focus on Charlotte, Chicago, and Philly.   I have heard good things about Nashville (I do have a lot of investments in Memphis) and am in my due diligence stage of that market.

@Jay Hinrichs 

Hi Jay,

Couldn't agree with you more about some of the keys to success - at it's simplest you need tenant's that PAY (by that I mean high quality tenants) and tenants that STAY (people underestimate the importance of length of tenancy as turn-over is a killer of returns). And the foundations which everything sits on its strong property management.

I couldn't agree more with what you said about rents. I believe that in every market there is an invisible line on rents that correlates to different types / class of tenants. For example, I always want properties that have rents that are decently above and beyond the median rent. That is ultimately one of the reason that while I do own multi-families (particulalry in Chicago) I think some newer investors chase the returns on duplexes not truly understanding the trade-offs. For instance, if I showed someone a SFH that rented for $1100, and for the same purchase price I showed someone a duplex that rented for $1300 ($650 a side) most people will see the duplex as a much better investment (higher rent to purchase rate). However, I would argue a $650 a month tenant is a distinctively different type of tenant than the one $1100. So while it could look better on paper, more often than not a duplex like this is in a worse area and will have far more tenant quality issues and its net yield (not the gross) will often end up much lower than the SFH with $1100 tenant.

 As mentioned above, I also think one of the characteristics of return that is often overlooked is length of tenancy as even when you have god tenants if you had tenants leaving each year, you then constantly have rent ready costs, vacancy, tenant placement costs.  If you had a property that had 2 year occupancy on average compared to a property with 4 years on average the return would be more substantially different over the long haul that I think we often realize.   

The issues with multi-families when bought wrong is that people don't realize it is more transient types of tenants that see the places as more of an apartment than a home and so you have greater turnover. You need to ensure that your return isn't just higher than a comparative SFH but also included additional return to offset the higher turnover rates as well as the different tenant quality. Now obviously, I am generalizing and if you really understand multi-families and do your analysis right there are good opportunities (duplexes or multis in better areas are much different to me than multis at the same purchase price as a comparable SFH), but what I like about SFH (when you are not slot constrained) is that bought right you have multiple exit options, longer tenancy on average, less transient and more families. That said, only if purchased right like you mentioned.

I like duplexes in Chicago since duplexes are almost like SFH there as the city was built less on SFHs as standard configuration and more on multi-family so families are used to renting and staying in a duplex for the long haul.

@Jay Hinrichs 

I agree.   I do think it makes sense if you enter a market to have the thought of wanting to build a portfolio there.  That allows you to ammortize some of the upfront costs whether tangible (visiting the market) or intangible (hours of research, phone calls, etc) across a number of properties instead of one.  In addition, even from a property management perspective, you want the best PM of course, but you want to have a few properties so that you can achieve scale with that PM and attain better fees and costs.   Just one example of costs that scale or are optimized if you build a portfolio versus a property.

When I speak with new investors, I always tell them that real estate is an interesting asset type - risk actually declines with additional purchases if you buy right which is always the case with other assets (e.g. buying more gold bars doesn't make your existing gold bars less risky unless you are cost averaging down).  If you buy a fantastic property, you will eventually have a bad tenant or have some unexpected maintenance and often times it is the timing of when that hits that can have the bigger impact.  Your one property could just not perform like it should be based on similar probabilities and averages due to some bad luck.  My example is when you have 1 property, you may use a vacancy allowance of 1 month, but the truth is you only have two types of occupancy - 100% (occupied) or 0% (vacant).  If you have 4 properties, now you can now have  much wider set of an occupancy rate (0,20,40,60,80,100).  Like a coin flip, if you purchase truly great properties than the more homes you have the more you will head towards averages.  And that has been key for me.  I don't chase the highest returns, I seek to reduce variability  - I like to have a low standard deviation of return.

The reason I do invest outside of one area is that I am very conservative so once I started to build large sized portfolios (first I diversified within different neighborhoods and formats I liked to have some protecttion) but then I wanted geographic / market diversity.  You just never know when an individual market could be hit by local micro-economic issues that no one expected or some terrible natural disaster hits so as I built my cash flow, I wanted to be able to better hedge and minimize the risk.  It does lead to having to constantly develop new teams, new duplicate models, but allows me to sleep a little better at night.

Hi All,  ( @Ali Boone @Jay Hinrichs @Cassandra Boyett , @Chris Clothier  etc)

Just reading through this thread and I think it is very informative with great information and real discussions involved multile perspective from different sides and it is up to each reader to digest the different imformation and due their due diligence. I will add my perspective to the mix.  I apologzie for the insanely long email as I realize this is such a common debate and just wanted to share my view.

Interesting, I have properties in many of the markets mentioned Memphis, Charlotte, Chicago, Philly, etc.  At the end of the day, investors have different risk and return appetities, different visions, goals, and objectives they are looking to accomplish and of course different paces / timing at which they want to acheive it in.  What I would think most investors would be consistent is against their particular strategy optimizing the risk / reward.  As why would you ever want to take more risk than is normal for a level of return or vice versa have a lower return couple with higher risk.  As many posters have alluded to, their are different paths to get their such as whoelsaling, turnkey, do it yourself, invest only locally, etc.  In my portfolio I both have turnkeys AND markets where I have properties that in which I have my own team and operations to acquire, rehab, and tenant my own properties (full disclosure I do not sell any properties to investors, I only buy and rehab for my own portfolio). In every purchase I do, i use the format that I think optimized my return at the lowest level of risk. 

For newbies, the key is you can do harm in any path. I sometimes purchase from wholesalers directly (and while there are great and credible wholesalers - many are junk and new investors can be easily scammed). I often build my own operations in the market myself and instead of selling to an investor I am simply using it as a platform to create strong rental properties for myself. However this has challenges for newbies as well - buying yourself is another way you can get saddled with a terrible investment even with some D&D (I say this as I have been invetsing in real estate for 15 years and made every type of mistake in the beginning and that really allowed me to hone my strategy and approach). In many markets, just a few streets down could make the difference of a good buy or bad buy, not truly understanding how to scope repairs and rehab costs and needs, over-estimating ARV or rent is sadly far too common, etc. So while you may think you are getting a cheaper deal, you may in fact be setting yourself up for a worse deal. If you are new to a market that has a lot of big players there is a risk that the inventory being shown to you is the properties that those in the know didn't want (and then you have to wonder why, unfortunately often times our egos get in the way to take a step back and question your great deal as hard as you might). In addition, if you want to optimize acqusition you need to have capital or funding flexibility as the best properties will often need to be purchased all cash, close quickly, etc. And as mentioned, I have purchased Turnkey and while I do 100% stand behind there are great turnkey companies out there delivering real value to their clients, there are far too many crappy companies that give the niche a bad name and will definitely sell you an overpriced property with lipstick rennovations and not a rehab. In these cases it is hard to bounce back from a bad purchase. So you do have to be very careful in evaluating turnkey companies, understanding their reputation, talking to investors, understanding the average number of properties purchased by their clients (the old rip me off once your bad, do it twice my bad If people have bought 20 properties then to some extent it has been meeting that investor's expectations), do they actually benefit from scale or volume in a way you couldn't, etc. So each path has risks and makes sense in different scenarios. So the take away as a new investor is in any path you need to do your homework and realize that in every path you can make a bad investment.

For me, when I do my own research, analysis, and due diligence and decide I want to enter a market because I feel that it meets a host of investment criteria I have (such as price to rent rations, tax rates, diversity of economy, population migration to, etc) as well as where I feel that market sits in it's real estate cycle I then look at what is the best way for me to further learn and enter the market at the lowest risk that meet my return hurdles as I prepare for a larger presence / operations.  This is where many mistakes can be made one either side of the coin - do it yourself or turnkey.  Either way you need to ensure you understand and are intelligent about the the market.  I recommend regardless of path forward, reaching out to all the different players including other investors, turnkeys, property managers, brokers, local real estate attorneys, etc and understand all their perspectives (what themes are you hearing that are the same, where are the differences, test one opinion or perspective against a different particpant, etc).   This will give you the info to decide the best path forward and the level of both risk and reward you want.  Talking to all particpants regardless of path has truly helped me immensely - after you have 20 conversations it is easy to see through a lot of the bull and with different stakeholders that have different interests and incentives will ensure some light gets through. Reagrdless of path, even if you want to be passive, it is your capital and hard earned money and you owe it to yourself to know you truly understood why you invested as you did.

The reason I have purchased turn-key in some areas and timing is pure risk / reward optimization at that time.  First and foremost, I realize that a turn-key provider will make money off of me.  I respect that they should be compensated for a service they provide like anyone else - however, being an active investor I hate giving up part of my deals.  That said, there is a difference in how I analyze the mark-up.  I realize that the turn-key will make money above and beyond what THEIR all-in costs for the property (acquistion, rehab, etc) but what i look to understand is how much of a mark-up if any is it from what MY relative all-in costs would have been in the same scenario.   These are actually two different things.  I have purchased turn-key in scenarios where the turnkey clearly made profit / mark-up on me, BUT because for instance they purchased 60 properties at a time (their acqusiiton prices had some economies of scale then if you purchased individually and potentially having to purchase all cash), they did similar rehab / redevelopment where they purchase tiles, flooring, furnaces,  appliances, etc in large volume at one time and got significant discounts from vendors, Lowes, etc that I just couldn't match, they have full time contractors which I could support, etc.  And in some cases the specific streets / neighborhoods my analysis told me I wanted, there simply was no inventory as it was always sntached up first.  In those cases, there was economic value to me that balances the margin they made and I ended up at an all-in price point similar to where I thought I might be on my own and with less risk (any unexpected suprises on rehab, having to tenant it by close with a tenant I approved, not having to sacrafice on street or neighborhood I wanted, etc).

 I ask myself, if I wanted to purchase a good property (based on my criteria) can I find it.  If I can, I ask myself why other larger players in the market didn't purchase it?  If I feel in a given market the inventory is extremely tight particulary for my harsher quality criteria, then I might conclude I am probably getting the left overs which often can mean higher risk.  Sometimes, I will run a few properties that are out there that I am looking at by different turn-keys to see what they think (and understand why they didn't buy it.  I take the info with a grain of salt, but sometimes their analysis makes sense and you can validate it and helps you have further enlightment on mistakes that could be made out there if you do decide to do it yourself which I mentioned I often do).  Don't be afraid to marshall all the resources around you to be as knowledgeable as you can and good quality turnkey operators will understand and appreciate that as well since they believe there is a value they bring.  If not, that is a sign right away.   If I truly believe that inventory is crazy tight and there are other really saavy investors out there than there could be some risks that sometimes people overlook -  potential to buy a dud even after doing due diligence than someone with deeper local knowledge understood and in some instances the best deals are off of all cash offers and whether you are prepared to do that.  On the other hand, in some markets there are many fragmented players, there is a good amount of inventory, etc and my analysis points that I can find good properties at similar price points to turnkeys in the streets / areas I want and I don't need to have an acquisition mark-up. All it really requires it some effort and time.  In this case, I am willing to do that and that becomes a non benefit of turnkey for me. I recognize that for others that have a desire for less effort this isn't as relevant.

Next I think of rehab.  I know that the turnkey provider will make money on me based on their all in cost, but I compare objectively what I think a typical rehab might cost me (managing it long distance and not having my construction volume / scale built out yet) versus does the turnkey truly have a large enough operation / scale that their rehab cost would be significantly less than mine (as mentioned do they bulk buy flooring, appliances, etc).  If I feel that initially, I will be able to only acquire either the left-over properties outside of my first choice streets, or a property at a much higher relative purchase price due to less local relationshops AND I think that my rehab cost will be much higher than the turnkey's, if I did it myself I might end up at an all-in cost for doing it myself that could actually be the same.  For me at the end of the day, like many posters, I don't want to pay a mark-up that just takes away from what is in the deal for me.  What I do want if I buy turnkey is to know that the company created value that i couldn't which offsets the mark-up (again that value could be access to the type of property I want that just isn't easily available to me on my own since all the players have picked the good inventory or their rehab is substantially less than mine would be, etc so that we land on the same all-in price either way).  To be fair, many turn-keys are simply not able to create the above and beyond value, but there are some out there.

In many cases for me, turnkeys will end up not providing enough value where I am much better doing it myself (keep in mind again I am generally more active) and in other cases when I look at the risk and what ultimately it may cost me to replicate I could end up worse off doing it on my own.   

If I do purchase turn-key it is usually when I first enter the market and it allows me continue to validate / learn the lanscape of the market and then I tend to go off on my own when it comes to scale the market and by doing that I have helped de-risk my protfolio over the long haul.  

Hope this was helpful.

Cheers,

Eric

@Kenneth Bell @Account Closed 

Hi All,

Much appreciated for all your comments.

Ok so the zoning is residential - lot is between two existing houses. Easement is no question since there is adequate road frontage. Utility taps are always the same - probably $6,500 for water & sewer.

 I wouldn't need construction loan.  I have a strong relationship with a regional bank that provides me lines of credit as well as flexible loans where my interest is generally prime +1% or prime +2% depending how I structure it.  Probably just access a line for it.  In terms of sales fee, great point.  I would use my agent /broker that does all my business today (buy and sell) so we have an agreement on reduced sales fees whenever I am selling anything so that helps to lighten the costs a bit - but I need to redo all the costs and confirm what is included in that estimate - thanks for that.

 I would probably build this as an additional rental for my portfolio and as a rental you definitely would have build requirements / finishes that would be different and less expensive than if you were finishing it for flip / resale.  If I did want to resell it - the neighborhood is a solid neighborhood but it doesnt have elaborate build, features, or finishes so I would just try to match what is out there.  My team has some good relationships with a few builders and they seemed to think for that neighborhood that was a good estimate, but I agree whenever you develop you need to be prepared to deal with surprises, unseen issues, and cost overuns.  Definitely need to run the numbers at $75-$80 and see if the project would make sense at that (although that does seem pretty high for lots of areas in Charlotte).  I am not in a rush on this, so I think I need to do a lot more extensive analysis and research and then report back.

Thanks!

Eric

@Matthew Catanzariti 

Welcome to BP and kudos to you for getting involved early and already thinking through future vision and goals.

Really solid advise from all these great posters.

What I will add - I got started in real estate earlier on as well.  And at that time a lot of people were talking about real estate, researching, thinking about different gurus.  What I decided to do is take action (which I think is the first step to the path of real estate and the one most miss).  My logic was I could keep researching, I could pay money for seminars, or I could take a small amount of dollars and buy my first property.  I looked for some on the smaller scale that seemed to make sense and told myself that even with that, it would be the worst property I will ever buy - but that I will learn so much from it and that would be the best education I could get.  Just buying a property and learning from experience as long as I kept the property exposure, risks, manageable for me.  As I was right, it turned out to be a decent property, but I learned so much by living it, and it made me far more educated and ready to go.  Almost 15 years later, I continue to think of that as my turning point.

So I think get your feet wet on a first property that you can learn a bit by fire (do all the analysis, leverage the great wisdom on this board to buy right, but don't be afraid to jump  in).  Duplexes sometimes can be a little tricky for your first property.  Sure you will probably get a higher yield, but you may experience more transient tenants and more turnover, tenants not liking each other, etc.  I think mulit-families are great and there are investors that prefer every different format, but SFHs I do find are good starters as you get to learn about landlording sometimes at a more manageable pace for a new investor.  If you want to start your own PM, the best way to get there is to be an investor first, start learning the ins and outs of property, typcial challenges, etc.  As you become an investor and start to have your own expectations and perceptions that wiill serve you well as a PM to understand how investors think.  PM is a tough business, snall margins, and you really need to have a solid system, process, and peopel to make it work.  But great PMs are in such need that if you can become one, the sky is the limit.  Understanding the investor mindset gives you a good start.

best of luck,

Eric

@Justin Colley 

As mentioned by others if it is a conventional mortgage the seasoning period unfortunately will be around 6 months and I think trying to go the HML or private lending route while might get you some of the equity out will cost you a ton in points, fees, and then ultimately closing when you try and refinance out the HML.

However, if you do a portfolio loan or commercial loan (loan to an entity) than often the banks do not have seasoning requirements.  For example, I do not.  However, those loans have shorter ammortizations generally (15-20 years) and higher interest rates.