All Forum Posts by: Gideon Sylvan

Looking at 100 properties can mean many things.  I look at well over a hundred for the "10 offers" I make, but I'm looking at them online.  Great real estate investors need to know about, or have someone who knows about, every opportunity in town.  Most of those opportunities are for owner-occupants; most of the opportunities will yield negative equity and/or cash flow.  You will likely have to look at more than 100 to make 10 offers, way more, at least at asking price because most properties are not listed with a profit.  

As far as visiting properties, this should be done to finalize your offer decision, not for shopping purposes.  By the time you show up at the property (within half a day of it going on market), you should know the internet version is a good deal, and it's just about nailing down the details.  

You probably won't get the deal due to competition, and 10 offers to 3 accepteds is probably a low ratio for an individual investor needing a larger margin to learn in.  Be ready to make 20, 30, 40+ offers before getting something, but also don't be surprised if you get the first offer because 1/x still means you're likely to get 1.  

One caveat: if you're using a skilled real estate broker or wholesaler, and you're in buying mode, you should be making offers on almost everything they send within your criteria.  

I buy kitchen and laundry appliances from them (or Lowe's), and get the 5 year warranty on rentals so the tenant can deal with them without me.  I use to buy used appliances but found a lot of time was spent dealing with them breaking down.  I also like the idea of switching appliances between houses and having them match when needed (which hasn't happened yet).  I used Home Depot for blinds once, but don't have too much experience with blind alternatives to comment.

I buy MLS properties without conventional financing because the properties are generally not fanciable in their then condition (but would be after repairs/improvements) and because the competing offers don't have financing contingencies.

Regarding the other credit unions, I would be interested in learning more.  I'm a little hesitant to leverage beyond 70-75%, but it's good to know about, especially for the lower rates.  I'll connect with you to get that info please (or you can share it here), and I'll message you some recommended professionals to work with. 

All of my East Tacoma properties (all meaning three) are <1800sf 4 bed 1.5-2 bath. Two were purchased from the MLS and one was purchased at auction. The best one was from the MLS, sold to me by a very talented agent who also buys in that area (I'd be happy to refer you). They were all purchased with hard money followed by a cash out refinance with an additional BECU HELOC to max out LTV on the last (have another very talented all purpose finance referral if you're looking for one).

Full disclosure: I haven't made a purchase in that area for over a year and my latest appraisal (for the BECU HELOC) came it at $150K for the smallest one, so I'm guessing comparable deals are proportionally more expensive. Here's a list of "inexpensive" 4bd Tacoma houses that have sold in the last six months: http://www.matrix.nwmls.com/Matrix/Public/Portal.a... (I'm a licensed real estate agent but no longer soliciting or accepting clients).

Real estate investing is always risky, but being a general contractor mitigates that risk substantially.  Another way to mitigate the risk is to use an experienced investor agent; and he or she should give you a discounted listing on the backend. 

From there, budget for unknowns and make offers that reach your minimum acceptable ROI. The offers should include an inspection clause or other out; know that you can always turn back after a closer look.

But if the deal is still good post inspection, with solid, reliable resale comps, and you've budgeted for unkowns, go for it!  In the wise words of one of my original mentors, "listen kid, the only way to do it is to do it."

I would argue that a first step is to not care about that house and rather to care about it as one of many options.  At the end of the day it is an asset, and it shouldn't matter if it is across the street or across the town.  If anything, I would prefer a property that I don't live across from.  What will happen when checks are late, if you have to evict them, etc.?  

That being said, it could become a great deal, and you may as well work the numbers as a first step in long journey of real estate investing. The first thing to determine is normally the after repair value (ARV); this could be obtained from your effort or those of a real estate agent as @Steve Kansa suggested with a CMA. This number will be important if you plan to finance the property; if you do, you're likely looking at a maximum loan opportunity of 75% of the appraised value, which is generally a pessimistic version of the ARV. I also consider the ARV important in rentals as a liquidation guide in case everything goes wrong.

To determine your monthly costs, use a mortgage calculator online with a rate 0.5% higher than average (since it will be an investment loan) or what you expect rates to be 3-7 months after acquisition. Add in taxes, expected insurance, and property management (you should budget for it even if you plan to self manage, since you may have to move one day and your time has an opportunity cost). Then budget for vacancies (use your area's number), maintenance (large range, but normally about 0.15 the ARV or the assessed structure value divided by 330 if you're going with the government depreciation definition), and possibly a legal/eviction budget.

Your estimated monthly revenue minus all those costs is loosely your net profit. The purchase price, acquisition costs, bridge loan costs, improvement costs, and initial waiting costs (i.e. all your costs) minus the 75% of appraised value is loosely your ending cash out; yearly net divided by cash out is your cash ROI.

With all this mind, your equity (100% of the ARV - "all your costs") is arguably equally important to consider. Not only is this a safety plan (the market crashes, tenants stop paying rent, you're savings are gone), but it's also an opportunity cost issue since an unattached investor could theoretically get a deal that has both cash flow and equity.

With cash flow and equity considered, and a budget for unkowns, it's time to figure out your minimum acceptable ROI / maximum offer. Make an offer with that amount, and if you don't get it, oh well. You can try again in a week or two, but don't get caught up in going higher. The offer should have been your minimum ROI, and you shouldn't lower your standards beyond it. If you don't think there's going to be offer competition, you could go below your maximum offer, and work towards your minimum ROI with counteroffers, but you may also miss out as an other investor swoops in.

Every deal shares certain constants and certain unique costs. Using your example neighborhood, let's say you can safely flip for $200,000, you'll incur somewhere between 6-12% in selling costs (3% selling commission, 1-3% listing commission, 1-2% excise tax, 1-4% closing costs).

Next you'll have more specific costs including improvement costs (huge range, but let's go with your $45,000ish) and holding costs (depends on time and other factors, but let's say $1,500ish average). At this point, very generally, you're down to $135,000.

Now you work from the purchase price end. With an on market deal, you're mostly looking at closing costs (1-4% or $2,500ish) and, if you're using it, hard money costs (2ish% origination + 1ish% a month around here). There may be unpaid obligations, so let's round up to $10,000.

Budget for unknowns and property specific knowns, and you arrive at your estimated profit. With no additional costs your example net would be $25,000.

So yes, the numbers appear to work for flippers, but each deal really is its own. Generally speaking, a neighborhood with more deals will also have more competition, driving offer prices up and profits down. It's often helpful to have a minimum acceptable ROI for making an offer (includes unkowns) and make your offer right up against that. The number of deals you'll have the opportunity to pursue will largely depend on that minimum.

Most of my acquisitions have been single family houses in a neighborhood called East Tacoma (in Tacoma, WA).  On average, they have been small (<1800sf) 4 bedrooms that cost around $80,000, needing $20,000 to $35,000 in improvements, and appraising around $140,000.  I rent them for $1,400 a month, though $1,200 is a little closer to average. 

If you teach me to fly, I'll teach you to invest!  ...seriously (I'll pay for the gas)

I personally like to work backwards, with the ARV as my revenue source and everything else, including the purchase price, as a cost. Some of the costs (such as selling costs) rely on the investor's resale price (i.e. ARV); other costs rely on the purchase price (holding costs, hard money costs); and some costs are unrelated to either (holding costs, unpaid liens).