All Forum Posts by: Leo R.

@Wilson Aquino here are some suggestions for finding an investor-friendly agent:

An investor friendly agent is an agent with investing experience--but what does that mean? ("investing experience" could mean experience with house hacking, flipping, STRs, syndication, or any of the other many investment strategies). An agent may be a total rockstar when it comes to BRRR'ing, but they may know nothing about STRs. So, you probably want an agent who has experience with the investment strategies you plan to pursue.

Also, IMO, successful investing requires an agent who facilitates a strong due diligence process, and who has the ability to see opportunities that other buyers miss. Because of this, my agents need to be highly experienced in assessing the potential problems of a property (my agents are often as good or better at spotting problems than the inspector!), and my agents also need to be able to envision the value-add opportunities the property presents.

I'll give you an example of each:

First, an example of an agent going all-in on due diligence, and saving me a ton of cash and headache: When I was an inexperienced investor, I found my "dream house", a property that I instantly fell in love with. I was ready to buy that place on the spot. However, while I was succumbing to shiny object syndrome (admiring the fancy new kitchen, new hardware, and beautifully tiled bathrooms), my agent was crawling around in the basement crawlspaces, collecting cobwebs and assessing the plumbing. The basement had some un-finished spaces, but most of the basement had just been beautifully re-finished with a mother in law apartment (which I was going to rent out). I tell my agent to write the offer, and he says "OK, but before we make an offer, you need to understand that the entire house has galvanized steel plumbing, which will fail. It may fail in 5 years, or it may fail in two weeks, but it will fail in the relatively near future. When that plumbing fails, you will need to demolish substantial portions of that brand new basement MIL apartment to replace the plumbing. It will cost you approximately $35k-55k to demolish that fancy new finish work in the basement, re-plumb the house, and then re-finish the basement again. Are you prepared to take that on?" (the answer was no, and although I was incredibly disappointed, we walked). Point being: my agent began the due diligence process the moment we walked into the property. He did not wait for the inspection to begin the due diligence process. ...and it saved me $35k-55k and a massive headache. A NON-investor friendly agent (or an agent looking to make a quick commission) would have said "yes, this house is SO CUTE! LET'S BUY IT!", and I would have ended up with a serious problem. That's the value of an agent who goes hard in the paint on due diligence.

Now, an example of an agent thinking creatively and seeing a value-add opportunity that everyone else missed: There was a house that had been on the market for a long time, and the reason was obvious: it was only a 2 br 1 ba house, and the floorplan was very, very weird, so nobody wanted it...however, my agent spotted that the listing had unusually large Sq footage, so we went to check it out...10 minutes after walking into the house, my agent says "we can turn this loser into a winner". The floorplan was arranged in a way that some non-load bearing walls could easily be removed, some new walls framed, and with about $40k, the house would be transformed from an un-appealing 2/1 that would lose $300/mo as a rental into a very appealing 4/2 that would cashflow about $500/mo (incl. the debt service for the rehab)... We bought the place and executed the plan--not only did it become a solid cashflower, the property value also increased by about $125k. It's critical to understand that the agent who recommended this rehab knew about building code, construction techniques, and the costs associated. For instance, he identified the load bearing walls when we walked the property, he understood where the existing plumbing was, and where new plumbing would need to go, he assessed where HVAC ducts were, and where new ducts would need to be routed, he understood the changes that would need to occur to the electrical system, etc., etc., and he understood the costs of all of those issues. Plenty of people (agents included) can come up with pie-in-the-sky ideas of how to change and improve a house, but few have a real understanding of what that work entails, what challenges will need to be overcome, and how long it will all take and what it will all cost. ...how did this agent know all this info? Because he had personally rehabbed many of his own properties--and had done that work himself, and also via GCs!

We'd all love to buy turn-key, A-grade, cashflowing and appreciating properties, but those properties are almost non-existent. Because we have an extremely challenging market (high prices, increasing rates, limited supply), being able to envision and execute value-add strategies that everyone else misses is often the only way to make a property succeed--so, having an agent who understands value-add strategies is a huge advantage!

Agents with this type of expertise are worth their weight in gold to an investor--especially when the investor is relatively new and inexperienced. This is true in most areas of life--we are most in need of an experienced coach when we're learning something new (particularly if what we're trying to learn is a high-stakes process like RE investing). The less experienced the investor is, the more experienced their team needs to be!

Good luck out there!

@Samuel Jolicoeur becoming an agent or wholesaler so that you can become a real estate investor is a bit like becoming an NFL quarterback so that you can become an NBA basketball player. Are there some overlapping skills? Sure. But, if your goal is to play basketball in the NBA, practice basketball (not football).

If your goal is to be a real estate investor, instead of putting all your time, energy, and money into becoming an agent or a wholesaler, put all all those resources into investing in real estate. Specifically, house hacking is arguably the best way to get started in REI.

Once you're a successful real estate investor, the agents and wholesalers will be working for you.

Good luck out there!

@Michael Crist an appraiser would typically take most or all the things you mentioned into account.  Appraisers use a form that includes things such as the size of the lot, the sq footage of the house, number of br's and ba's, the grade of the neighborhood, and the grade of the house, and comps.

I'd suggest reading the appraisal report, which provides all the info on why the property appraised for a certain price.

Also, keep in mind that appraisals are based on comps--the comps your appraiser used are probably from sales that occurred several months ago. Several months ago, the market was very different than the market today.  I.e.; a comp that was worth a certain amount several months ago might be worth quite a bit less today, because the market has slowed down a lot. ...because of this, real estate investors engaged in any strategy (like flipping) that requires hitting an ARV should be very conservative with their financial models right now...even experienced flippers BRRRRers are missing their ARVs these days, and some folks are losing their shirts...

I'd also suggest reading up on how flippers and BRRRRers analyze properties, since your plan is to rehab this place.  Things like the 70% rule are useful guidelines to determine whether all the work of rehabbing this property is worth the effort.

Good luck out there!

@Justin Mabry I should also point out that DYI'ing can make you a MUCH better real estate investor (even if you eventually end up hiring everything out). You learn a LOT about properties and how they function when you DYI things, and that will make you better at spotting potential problems, potential solutions, etc. when you go to acquire more property. It also gives you a better understanding of property management, the costs of operating a property, the risks of owning/operating a property, and just the overall financial model of real estate investing...it's a valuable education!

@Justin Mabry whether it's worth it for you to DYI or hire out depends partly on your net worth and how valuable your time is spent elsewhere. For a person with minimal to no net worth and not many other options for making money, it may be well worth it to DYI--and this is especially true if that person has a lot of free time. But for a person with a higher net worth and/or other ways of making money, and/or very limited time, then hiring out begins to make more sense--in those scenarios, it's often easier and (ultimately more profitable) to hire people to do this stuff.

These days I hire out most of my work, but back when I was a beginner, I did tons of DYI. Here are the things I DYI'd vs. the things I hired out back when I was starting:

DYI: painting, laying flooring, basic carpentry, basic plumbing, drywall repair, basic house maintenance, yard work, property management, VERY basic electrical (like wiring in ceiling lamps to existing receptacles), basic tile work. Also, there were some jobs I did myself purely because they were so unusual that I couldn't find anyone I could pay--for instance, I once dug out and installed a commercial grade sump system...a long story). I've also done insulation, re-sided a house, and re-roofed a house myself, though I'd probably recommend hiring those out, if you can...

HIRE OUT: all but the most basic of electrical, advanced plumbing, advanced carpentry (esp. anything structural or requiring engineering), HVAC, appliance repair, most masonry work.

Sometimes there are things that probably would be fairly easy to DYI, but I hired out because the price was low--for instance, I found that gutter installation was pretty cheap (at least it was when I last got new gutters), so I hired that out-- even though I probably could have figured it out on my own. 

One thing that you should always ask yourself is:  "If I DYI this, what is the worst case scenario if I screw it up?"  Painting a room is fairly low stakes--you might spill some paint; big deal. But if you screw up on electrical work, the house could burn down, and people could get killed. So, think of the consequences of messing up when you decide whether to DYI, and hire pros when the consequences of mistakes are high.

Good luck out there!

@Bianca Rodrigues as others have mentioned, there are a LOT of factors to consider. Although you definitely should consult the relevant data, at the end of the day, nothing beats boots-on-the-ground firsthand experience with a neighborhood.  

There are a lot of important factors that are not well-conveyed in data, photos, or via websites. For instance, it's somewhat common for a property to be in a zip code that has GREAT data (high income, great schools, low crime, etc.)--but, the property happens to be on the other side of a major road, and where the property is located, there's actually significant problems with crime, and avg. income is very low. Within a single zip code, there can be A, B, C, and D neighborhoods, and sometimes just crossing the street makes all the difference--and this is often NOT conveyed in data or on websites. Hence, the importance of seeing the area for yourself.

Most beginning real estate investors would be well-advised to only buy property in neighborhoods they've actually visited. IMO, buying a property without seeing the property and neighborhood with your own eyes is a bit like buying a used car without verifying that the car even runs.

Good luck out there!

Shoe Dog (the autobiography of the co-founder of Nike)

@Marc Marquez will this be your first investment property, or do you have prior experience in REI and property management? Also, what is the grade of the neighborhood you're looking at?

I ask, because we see a lot of folks on the forums who are inexperienced, and who buy OOS "turnkey" properties that turn into trainwrecks. The story is always the same: the property is a fresh rehab (looks great in pics!), but it's in a C (or lower) area, and the investor buys it because it has "great cashflow on paper".  Then, the problems of the C-class area begin: non-paying tenants, crime, vacancy.  Then, the PM goes MIA because the revenue of a single house in a C area is minimal for a PM, yet the burden of management is maximal. In other words, most PMs cannot afford to put in the significant amount of effort required to correctly manage in a C area for the minimal returns a single property produces in a C area. PM'ing a single property in a C or lower area is like taking on the worst job in the world for the worst pay in the world! (maybe not that bad, but point being: the incentive to perform usually just isn't there for the PM in these scenarios).

Properties in A and B areas are usually easier to manage, but of course the cashflow doesn't come naturally, so value-add strategies that force casfhlow are often the only option...

I don't know anything about the Memphis market, but if the property is $150k and rents for $1350, that's pretty close to hitting the 1% rule--which would make me quite skeptical. When a property hits the 1% rule in today's market, there's usually a major catch (two of the most common catches are that 1) the rent projection isn't accurate, and it's actually nowhere near hitting the 1% rule, or 2), the rent projection IS accurate, and it IS close to the 1% rule, but it's in a C or lower area and comes with all the aforementioned problems).

Good luck out there!

@Oliver Bernardo I'm not an agent, but I've worked with plenty of agents--and I've seen the good, the bad and the ugly. So, here are a few tips for finding a good investor-friendly agent:

An investor friendly agent is an agent with investing experience--but what does that mean? ("investing experience" could mean experience with house hacking, flipping, STRs, syndication, or any of the other many investment strategies). An agent may be a total rockstar when it comes to BRRR'ing, but they may know nothing about STRs. So, you probably want an agent who has experience with the investment strategies you plan to pursue.

Also, IMO, successful investing requires an agent who facilitates a strong due diligence process, and who has the ability to see opportunities that other buyers miss. Because of this, my agents need to be highly experienced in assessing the potential problems of a property (my agents are often as good or better at spotting problems than the inspector!), and my agents also need to be able to envision the value-add opportunities the property presents.

I'll give you an example of each:

First, an example of an agent going all-in on due diligence, and saving me a ton of cash and headache: When I was an inexperienced investor, I found my "dream house", a property that I instantly fell in love with. I was ready to buy that place on the spot. However, while I was succumbing to shiny object syndrome (admiring the fancy new kitchen, new hardware, and beautifully tiled bathrooms), my agent was crawling around in the basement crawlspaces, collecting cobwebs and assessing the plumbing. The basement had some un-finished spaces, but most of the basement had just been beautifully re-finished with a mother in law apartment (which I was going to rent out). I tell my agent to write the offer, and he says "OK, but before we make an offer, you need to understand that the entire house has galvanized steel plumbing, which will fail. It may fail in 5 years, or it may fail in two weeks, but it will fail in the relatively near future. When that plumbing fails, you will need to demolish substantial portions of that brand new basement MIL apartment to replace the plumbing. It will cost you approximately $35k-55k to demolish that fancy new finish work in the basement, re-plumb the house, and then re-finish the basement again. Are you prepared to take that on?" (the answer was no, and although I was incredibly disappointed, we walked). Point being: my agent began the due diligence process the moment we walked into the property. He did not wait for the inspection to begin the due diligence process. ...and it saved me $35k-55k and a massive headache. A NON-investor friendly agent (or an agent looking to make a quick commission) would have said "yes, this house is SO CUTE! LET'S BUY IT!", and I would have ended up with a serious problem. That's the value of an agent who goes hard in the paint on due diligence.

Now, an example of an agent thinking creatively and seeing a value-add opportunity that everyone else missed: There was a house that had been on the market for a long time, and the reason was obvious: it was only a 2 br 1 ba house, and the floorplan was very, very weird, so nobody wanted it...however, my agent spotted that the listing had unusually large Sq footage, so we went to check it out...10 minutes after walking into the house, my agent says "we can turn this loser into a winner". The floorplan was arranged in a way that some non-load bearing walls could easily be removed, some new walls framed, and with about $40k, the house would be transformed from an un-appealing 2/1 that would lose $300/mo as a rental into a very appealing 4/2 that would cashflow about $500/mo (incl. the debt service for the rehab)... We bought the place and executed the plan--not only did it become a solid cashflower, the property value also increased by about $125k. It's critical to understand that the agent who recommended this rehab knew about building code, construction techniques, and the costs associated. For instance, he identified the load bearing walls when we walked the property, he understood where the existing plumbing was, and where new plumbing would need to go, he assessed where HVAC ducts were, and where new ducts would need to be routed, he understood the changes that would need to occur to the electrical system, etc., etc., and he understood the costs of all of those issues. Plenty of people (agents included) can come up with pie-in-the-sky ideas of how to change and improve a house, but few have a real understanding of what that work entails, what challenges will need to be overcome, and how long it will all take and what it will all cost. ...how did this agent know all this info? Because he had personally rehabbed many of his own properties--and had done that work himself, and also via GCs!

We'd all love to buy turn-key, A-grade, cashflowing and appreciating properties, but those properties are almost non-existent. Because we have an extremely challenging market (high prices, increasing rates, limited supply), being able to envision and execute value-add strategies that everyone else misses is often the only way to make a property succeed--so, having an agent who understands value-add strategies is a huge advantage!

Agents with this type of expertise are worth their weight in gold to an investor--especially when the investor is relatively new and inexperienced. This is true in most areas of life--we are most in need of an experienced coach when we're learning something new (particularly if what we're trying to learn is a high-stakes process like RE investing). The less experienced the investor is, the more experienced their team needs to be!

Good luck out there!

@Neil Tollner I'd take a liberal estimate of the conversion cost, and a conservative estimate of your projected post-conversion rent income, and calculate the cash on cash return.

I'd also consider things like:

-How will this conversion impact the manageability of the property? 

-Will this conversion make the existing units more, or less "livable" for tenants? (some buildings have the sq. footage to easily accommodate 8+ tenants, whereas that number of tenants might be cramped in buildings with inadequate sq. footage...similarly, adding tenants to some buildings can create noise issues, whereas other buildings have a layout where noise wouldn't be a problem with added tenants...does the property have sufficient parking for the added tenants? etc., etc.). In a nutshell, what effect will this conversion have on the functionality of the property?

-Will this conversion affect what type of tenant the property attracts? (In most areas there's often pretty good demand for 2 br units...but there might be less demand for 4 br units, and the type of tenant who rents a 4 br is probably different than the type of tenant that rents a 2 br).

-Instead of adding br's to the existing units, would it be possible/advisable to add an extra unit or two?

-Instead of adding br's to the existing units, would it be possible/advisable to add bathrooms? (depending on the property type and the tenant pool, sometimes an extra bathroom can improve the rent performance and the ease of management as much or more than an added bedroom...also, sometimes an added bathroom can change what type of tenant you can rent to--e.g.; if there's a bathroom for each bedroom, that can make it easier to rent by the room to young professionals (who are often willing to have housemates, but prefer not to share a bathroom)

-What other things could you do with the 100-125k?

-what is the current cashflow, and what will the cashflow be after the conversion? (taking into account the new debt service if you're borrowing to do the conversion).

-how will the conversion affect the property's value?

-what are "worst case scenarios" with the conversion process, and how can you prevent those scenarios, or deal with them if they occur?

-How sure are you that the $100-125k estimate is accurate? Is that number based on years of construction and contracting experience, based on multiple estimates, or based on something else?

-Do you have experience doing this type of conversion, or would this be your first rodeo?

-Presumably, the entire building would have to be vacated while the conversion is done--how much would you lose from vacancy? (in my experience, construction jobs almost ALWAYS take longer than expected--often by a significant margin). I like to run multiple financial models--with the expected vacancy doubled, and tripled, and also with multiple "worst case scenario" cost overruns.

-If you're hiring a contractor, is it someone you know and trust, or is it a new person?

Of course, I don't have the answers to any of these questions for your particular situation, but those are a few of the considerations I'd be mulling over...

Good luck out there!