All Forum Posts by: Emmett McNulty

@Chris Ayers Great question and this is one we faced ourselves over the last year.  We were in the Denver, CO Market and the Columbia, MO market.  One very vertical (Denver) and the other with strong cash flow (Columbia). I can only speak to my analysis, but here's what my thoughts are and were.  A lot of this boils down to your business model, is your goal to grow vertically through equity or horizontally through volume (cashflow):

The following are my opinions on both:

First the vertical model. Exceptional wealth is both gained and lost in the vertical model.  In this model you are anticipating market appreciation to build wealth, which over the long haul is reliable.  What you have seen with a 30% increase over 5 years in the properties net worth in NC is an example of this model when it works.

Second, the horizontal model. The horizontal model lends itself to a sustainability and your income is generally limited to the ROI based on rents. If your selection of properties is good, you may be capable of seeing strong annual returns with a more diversified portfolio. These will generally be less than the vertical model when markets are good, and better than the vertical model when markets are poor.

The question that I would ask yourself is: "Am I more comfortable with all of my capital in a limited number of investments or over many investments".  Over the long haul, both will perform similar on a net/net basis (my pinion over a 20 year period of analysis between Denver, CO and Columbia, MO).

Once you know the answer to that question, I believe you will know the answer all 3 of your questions above.

Just my thoughts.

While listening to a BP Podcast this morning and hearing about the interaction required by the investor as it related to funding and negotiating a deal, I got to thinking how much my Real Estate interactions have allowed us to catapult into the entrepreneurial lifestyle. When we as RE investors as thinking about funding, financing, cash flow, solvency, rental cycles, CAP Rates (just to name a few) we are actually thinking about the operation of a business. You hear quite frequently that in order to succeed in real estate you need to treat it as a business. But what does that really mean? Coming form a W2 (9-5 job) background doesn't exactly lend itself to understanding this principal.

I wanted to try and start this string to hear some peoples stories of growing form a W2 income based person to a business owner and what allowed that to happen.

To kick it off, a little over 2 years ago my wife and I started pursuing RE aggressively and this pursuit is what lead us to where we are today. In the past 2 years, we have built our portfolio and started  4 RE companies and a few others. Had we not started treating RE like a  business, we would most certainly still be working at our jobs.  What I believe initiated our paradigm shift was when we consolidated our homes with a local portfolio lender, completely separating our investments form our personal life. We then started treating our rental and home sales incomes (100%) as business income, allowing this to be reinvested over and over.  This also strengthened our relationship with this lender and paved a clear path of our successes for other investors and lenders to see. This path has in turn allowed us to grow our business and develop new businesses with confidence from multiple lenders in the public and private sectors.

In short, separating our personal and private financials was from my memory the start of this paradigm shift.

I would be interested in others stories on this subject!

Kayla,

First and foremost, good job performing a proper evaluation. I'm not certain, but if this is your first out of state deal, I would certainly get 3-4 contractor quotes to firm up that reno budget. Your have a great CAP rate, and I would say, if you are renovating your CAP Ex is very conservative (high). Ideally if you are renovating, you are reducing the opportunity for capital expenditures. For a hold, I would also make sure that your rents are on target with at least 3 property managers and see what their absorption rate is (ie how fast it will rent).

In your reno, I would recommend you budget to put in another full bathroom, that will help secure your ability to rent.  Older homes quite often only have 1.5 baths, but our 2-2.5 bath units rent much easier for a 3 br.

Again good job!

@Bill S.  you are correct regarding the competitive nature of flipping in a market like Denver.  We had some good experiences flipping homes in Denver through the end of last ear, but it was very challenging to land those deals and the appreciation in that area played a substantial role in their success.  Regarding buy and hold, it is my personal preference to ensure strong positive cashflow on those investments.  Long term appreciation is a great bonus!

I find this post interest on a couple of fronts. It appears your goal is to buy and hold, wich would indicate that you are looking for cash flow on your property. That said, the markets you are looking at over the past few years have been a heaven for appreciation. In my opinion when looking for a buy and hold market, the Most important factor is your CAP rate and/or rent multiplier, whichever you chose to use for evaluation of cash flow. For a buy and hold via rent strategy, I believe you may find that Albuquerque may actually have better potential, especially for a newer investor than the cities you are researching.

Before you make your selection, I would make sure you spend some time researching the areas in these cities you would like to invest and compare your average rent vs home purchase price in these cities and in your home town.

In my opinion, the cities you are looking at have a great deal of potential for flipping and long term appreciation.  That said, for cash flow, a smaller town such as Albuquerque tends to lend itself for cash flow better and you can reduce your management expenses if you manage the properties yourself.

I must say I am biased as I have invested in both Large Cities (Denver, CO) and small towns (Columbia, MO) and really enjoy investing in the smaller towns more.

Everyone, its great to see some people in our area on this forum! AS it relates to the question.  YOu are usually defaulting on your loan terms if you transfer ownership and the lender could call your note due.  This Claus would be in your mortgage and I would recommend you meet with a real estate attorney about it for better advice.

That said and in my experience if you are looking to build a portfolio of rentals in an LLC, I would recommend you talk with some of our local banks and lenders and would be happy to provide referrals if you want to reach out to me.

Just because I don't see our towns ( Jeff city and Columbia) on many posts, this is a good opportunity to say that I believe this is an exceptional area to invest and there are plenty of opportunities succed. We are also doing some business down at the lake and I think that market is prime for certain opportunities.

I see some post referrals for KC in Missouri and agree with those.  For 125k the Midwest provides some strong opportunities for both flips and rentals.  We predominantly focus on college towns and have handfuls of rentals with great equity and cashflow after Full Renos.  We started in Denver and as stated above moved a great deal of our assets out of that area with 1031's over the past year to focus solely on our mid west college rentals.  This move in itself allowed us to go from part time to full time investors. As with anything, your level of success depends on how serious you are at trying to make something work and there are always opportunities proportional to the level of commitment you are willing to invest.

I love student rentals, but have two tips

1. Always have a parental guarantee.  That way if there is a vacancy caused from a student leaving or damage from the renters, someone will cover the costs.

2. Start looking for new lessees early (6+Months before the end of the lease).  In our experience, we have most of our student rentals leased in the winter before the next school year.

Just like any rental, success is usually decided before the lessees moves in, choose good tenants.

For what its worth, my opinion of Zillow is as follows:

If I look at Zillow and it shows something drastically different than what I am planning, I consider this a decent indicator that my estimate may be worth further evaluating.

Zillow uses some very advanced algorithms to determine value that can not be ignored (as much as people want to).  That in mind, if Zillow is showing a value way below what you are thinking, you may have a problem and need to dig into your evaluation further.  However, if it shows a value that is way above what you are thinking, you may want to try and find out why and may have hidden gem.

That said, nothing replaces doing your own due diligence, 99% of the deals out there won't fit the Zillow algorithms in a way that predicts a good or bad deal.

John,

1. I believe I posted about this a few weeks ago. What I beleive you want to research regarding the detached carriage house is a dwelling called an "Accessory Dwelling Unit" (ADU). What is typically the largest hurdle for this type of dwelling is the property boundaries. Denver has requirements that pertain to the street access linear footage and overall property square footage.

2. Assuming you classify the dwelling as an ADU, the zoning will be in your favor.

3. Understanding what you are building will effect your initial permitting and unless you GC this yourself, this is really your only primary concern.  Do some homework on the property boundaries and any challenges those may present related to the construction.

Hope this helps!