All Forum Posts by: Leo R.

@Nate Robinson a few ideas:

First, you mentioned that the payment is over $7k/month--in most markets, that would get you a pretty incredible property, so I'm assuming this house has a lot of Sq footage? If so, is it possible to split part of the house into an ADU and rent that to offset expenses? ...depending on the layout of the house, sometimes it's fairly easy to build an ADU and get a very, very high return.

Second, what is the grade of the neighborhood?  ...if it's B or A (or if it's likely to soon become B or A), then perhaps holding it long term and hoping for appreciation is the way to go?

Third, does the property have other options for value adds? (e.g.; would it be easy to add an extra bedroom or bathroom?)...if you can force appreciation and/or force rent value, that can sometimes make a deal pencil out...

Lastly, in most situations, it rarely makes financial sense to buy a house and immediately turn around and sell it (unless you added significant value)...obviously, this is especially true if you bought at a market peak...   

Based on the $7k/mo payment and the way you describe it, I'm assuming this house is really nice, and a place you would enjoy living at long term?  ...if so, why not just stay there, gradually fix the issues as they arise, and enjoy the property? (and focus on making money via other properties / other avenues).

...although it might be sacrilegious to say this on BP, not EVERY property in your portfolio has to produce incredible returns--if you're making money on other properties/through other avenues, and you can afford the property, sometimes it's OK to buy a property simply because you love it (and not as an investment). 

I've done this myself!  As an investment, my home is mediocre (compared to my investment properties), but as a home, it's incredible!  ...More importantly, my investment properties more than cover the mediocre financial performance of my home... so, I let my investments carry the weight, and I just sit back and enjoy my home for what it is!

...and now I'll sit back and get flamed for saying that not every property has to be a stellar investment (lol)

Good luck out there!

@Allan Smith ah, the age-old cashflow vs. appreciation debate...where one stands on this debate should depend on their financial picture.

A 20 yr old kid with no net worth can't afford to break even month to month on their first property, and they can't afford the risk of speculation on future appreciation...that's too much risk for them because they have nothing to protect themselves when things turn south. The furnace goes out, and they're hosed. Because of this, they need the "defense" of cashflow until they build up some wealth...

I cringe when I see completely inexperienced aspiring investors with no net worth on the forums talking about buying cashflow negative properties...according to them, it'll all pencil out "when" (not if) rates come back down, and "when" the property appreciates--as if those things are as certain as the sun rising in the morning!

On the other hand, Warren Buffet can afford to do a little offensive speculation. If he loses a few million on a speculative purchase that doesn't pan out, it's nothing to him. If he has a property that doesn't cashflow for a few years, it's nothing to him.

Don't bet the farm if all you have is a farm.  ...but, if you have a thousand farms, maybe it's ok to roll some dice on a couple of farms occasionally...

As with all things, it's all relative and contextual--which is why a hard and fast rule that makes sense for one investor might make zero sense for another investor.

@Jayson Valdez a few thoughts:

1. Due diligence is YOUR responsibility, and you can't hand it off to others.  If you want to be a successful RE investor, one of the first things you'll need to learn is how to personally walk a property and assess its existing & impending problems, current value, and potential value--this is a critical part of due diligence. Although your team members (agent, GC, inspector) can help you with this, at the end of the day, the due diligence buck stops with you, and if you wholly rely on others to do your due diligence, it will often come back to bite you.

2. Photos / videos are not sufficient.  There are countless potential issues that will not be conveyed via photos/video, so it's essential to see the property in-person. For instance, old galvanized steel plumbing hidden under a flipper's brand new drywall. Water diversion failure points causing masonry degradation or rot. Settling issues. A neighbor with constantly barking dogs. The house is directly under the flight path of a nearby airport. A bad neighborhood with drug dealers around the corner.  These are all things that either can't be fixed, or cost tens (or even hundreds) of thousands to fix, and they are not easily conveyed in photos or video.

3. RE investing is challenging, and it's 10x+ MORE challenging OOS. This has been described thoroughly in other forum threads, articles, podcasts, etc., etc.; so you'll want to study up. Even very experienced RE investors often fail when they attempt OOS investments. In general, OOS is not a good strategy for an inexperienced investor, and there are far better strategies for inexperienced investors to get their start (e.g.; house hacking).

4. "Turnkey" is often too good to be true. One of the most common ways inexperienced investors get into trouble is with OOS property, and "turnkey" properties. Often, "turnkey" properties are freshly rehabbed properties in D class neighborhoods where nobody wants to live, and no PM wants to manage. There are many stories on the forums of inexperienced investors buying a "turnkey" OOS property, only to discover that it's in a D neighborhood, they can't find tenants (or the tenants they do find are a nightmare), and the PM doesn't manage the property correctly--because the revenue isn't worth it for a PM to put in the serious amount of time and effort it takes to correctly manage a property in a D neighborhood. ...also, if a property were truly "turnkey" (i.e.; in great shape, in a B or A area with a top-tier tenant pool), the local pros would be all over it. If RE investing were as simple as buying a true turnkey property in an A area, handing it off to a PM, and sitting back as the rent checks roll in, everyone would be doing it!  ...but, in reality, RE investing takes serious work, skill, creativity and perseverance...if a "turnkey" property seems too goo to be true, it probably is! 

5. Be wary of OOS C areas, and never buy in an OOS D or lower area--no matter how good the cashflow looks on paper!  This is another way inexperienced investors often get burned. Every few days, an inexperienced investor posts on the forums saying "I bought an OOS property and it's a trainwreck; the tenants didn't pay, then they trashed the property, and now my PM is ghosting me"...inevitably, it's a property in a C or lower neighborhood, and the investor got lured into buying it because the cashflow numbers looked great on paper.  A property in a C or lower area takes a LOT of time, effort, and skill to manage properly--and no PM will put in all that effort unless you're paying them a fortune.  Moreover, the catastrophes these types of properties produce aren't worth any amount of cashflow.

6. A good team is required, and a good team is hard to build. It's not possible to succeed in OOS investing without boots on the ground...but good help is rare, and it's expensive. As they say: "Cheap help ain't skilled, and skilled help ain't cheap".  Moreover, the incentives of many potential team members are not aligned with your best interests. Every agent will always be happy to sell you a house, but they are DISincentivized to steer you away from problematic properties (assuming they even have the expertise to spot problems, which many do not). "Turnkey" property companies will be happy to tell you all the good news about potential cashflow, but it's not in their interest to inform you of the bad news (e.g.; low quality tenant pool, neighborhood problems, etc.). Obviously, there are GREAT agents, PMs, GCs, etc. out there who will act in your best interest--even when they're disincentivized to do so--but these pros are few and far between (and their time/experience is valuable!). Since having a good team is critical for OOS investing, it's worth studying up on how to find, screen, build, and incentivize an effective team.

Don't get me wrong: it is possible to succeed in OOS investing (and even OOS turnkey investing); obviously, people have done it. However, it's way more challenging than other investing strategies (like house hacking in your local area), and it comes with unique issues and risks to navigate.

Hopefully that's useful info.

Good luck out there!

@Gavin Little this greatly depends on the grade of the property and neighborhood (which is a prime determinant of who the tenants are).  The tenant issues you'll face with D class properties are often completely different than the types of issues you'll face with A class properties. In general, the lower grade the property/neighborhood, the more tenant problems you'll have, and the more difficult those problems will be to manage (this isn't ALWAYS true, but it's a solid rule of thumb).

Regardless, you'll want a robust tenant screening system, a detailed & well-designed lease, and good systems in-place for managing tenant issues. There are countless articles, forum threads, podcasts, books, etc. that cover those issues (and most are free)--so I'd recommend studying up on those resources.

Good luck out there!

 For one, CO has world-class outdoor activities everywhere.

@Martin Guerrero although you can (and often should) bring a GC with you (esp. if you plan to do a rehab), if you want to become a successful RE investor, you should make it a goal to become proficient at evaluating properties (meaning: evaluating problems with the property, likely costs to remediate problems, potential value add opportunities & associated costs, etc.).

Ultimately, you want to become almost as good (or maybe even better) at evaluating properties as a GC and inspector.   ...Once you get to that level, you become an invaluable piece of your due diligence process, and your due diligence process involves three experienced pros (you, your GC, AND your inspector--which is much better than just a GC and inspector).  ...at that point, your due diligence process is multi-faceted and very robust (which is critical to success in RE investing).

...you can make your due diligence process even more robust by adding an agent who is highly experienced in property rehabs, RE investing, and who understands how to evaluate properties.

Good luck out there!

@Laura Harris  this is a common question, and I'd definitely suggest surrounding yourself with people who have significant RE experience as much as possible...and other folks here have provided some good ideas on how to find a mentor...

However, before you try to find a mentor, I think you need to answer two very important questions:

1) "What value am I bringing to the mentor?" ...if you're not 100% clear on this, then a mentorship will never materialize, and if it does materialize, it will likely fail. 

The value you bring might be in the form of capital, experience, access to deals, the ability to put in a lot of work, etc., etc., but you have to bring SOMETHING to the table. ...regardless of what type of value you bring, it has to be sufficiently valuable for the mentor to benefit (and if the mentor is a highly experienced and successful RE investor, their time is extremely valuable, so they ain't gonna come cheap!).  ...which brings us to the second question:

2) "What value is the mentor bringing to me?"  You'll need to answer this question, and use that to estimate what you need to bring to the table to make it worthwhile for mentor. For instance, a "mentor" with a net worth of $50k, who has done one BRRR and one LTR has relatively little to offer you that you can't learn from reading books, listening to podcasts, etc.--as a result, they might "mentor" you for free, or for very little in return...but, are you really getting anything of value from them? (probably not).  On the other hand, a mentor with a seven-figure+ net worth, a huge portfolio of residential, multifam, triple net, etc., and decades of experience in every area of RE can bring a ton of value to you, but that means you'll have to bring a ton of value to them, too--because their time and experience is so much more valuable.

I'm constantly approached by beginning investors with no real estate experience who want to "partner" with me, or want me to "mentor" them, but who have zero idea how to make it worthwhile for me. Unfortunately, in most of these situations, "partnering" with or "mentoring" a beginning investor is code for "wasting my time helping someone who's constantly screwing up (because they're a beginner), and not only getting nothing in return, but also exposing myself to increased liability". 

Why should a high net-worth, highly experienced investor put their very valuable time, money, experience, reputation, and resources on the line for someone with no experience? ...you'll have to answer that question if you want to build a mentorship with anyone who brings any real value to the table.

Now, I realize all that sounds like it's very difficult (or maybe impossible) to find a worthwhile mentor--that's not necessarily true, and it's not what I'm trying to say. I'm simply saying that you'll need to carefully consider the aforementioned issues, and find answers to these types of questions if you want to find a mentor who's actually valuable.

I have partnered with, and have also mentored inexperienced aspiring RE investors in the past, but those arrangements were mutually beneficial, and the partner or mentee brought significant value to the table (and they were very clear on what value they were bringing to me, and what value I was bringing to them).

Good luck out there!

@Matt Sora  what @Nathan Gesner said 100%

It also depends on how many total units you have, and their performance. For instance, if you have only one unit, and it goes vacant--that could be pretty catastrophic if it has a big mortgage payment & utilities and it's not bringing in any rent. On the other hand, if you have 10 units, and one goes vacant, then the other 9 can potentially cover that vacancy (if they're performing well).

In addition to the condition of the property, also think about how many breakable items the property/properties have. For instance, if a quadplex has 4 AC condensers, that's a lot more breakable stuff than a quadplex with no AC (or a single fam house with 1 AC).  ...4 single fam houses is 4 roofs that will eventually need to replaced, but a quadplex might only have 1 roof. A duplex with two water heaters is more liability vs. a duplex with one water heater ...etc., etc.

Also, think about the quality of the breakable items, and the expense to replace those items with things of equal quality...for instance, is the HVAC a fairly standard forced air system, or is it a super high-tech, high-end system with radiant floors, etc.? Is the fridge a low-end unit you can find at any home depot for a few hundred bucks, or is it a luxury sub-zero unit worth 15k+? Are the windows just regular, standard-size windows, or are they huge, multi-story, custom made units? etc., etc....all these factors impact how much repair/replacement costs will be, and therefore how much money you need in reserve...

Also, think about the grade of property & neighborhood, and what types of tenants that will attract--and how those tenants will treat the property. For instance, if you're renting to 18 yr old party animal college kids, your repair & turnover expenses will likely be a lot higher than if you're renting to mature, 35 yr old, high-income professionals. If you're renting to young adults who are transient, you'll probably have a lot more turnover than if you're renting to people in their 50s & 60s, etc., etc.

As others have mentioned, it's also common practice to have open lines of credit ready for emergencies. 

Personally, I have mostly B and A class single family and small mutli fam properties with pretty well-qualified tenants, and I usually keep about 10-20k cash per property, plus an additional 35-50k of available credit per property.

Good luck out there!

@David Yee real estate investing is difficult when you're a beginner...it's 10x+ more difficult when you try to do it OOS. There are countless threads on these forums of inexperienced investors trying to start off with an OOS property, and completely losing their shirt.

I'm not saying it's impossible for an inexperienced OOS investor to succeed, I'm just saying it is MUCH harder than investing in RE in your area--this is true for experienced investors, and it's exponentially more true for inexperienced investors.

As others have mentioned, you'll need a team on the ground, but more importantly--you'll need an A+ team you've thoroughly vetted that is trustworthy, and that you have properly incentivized to go above and beyond in helping you succeed.

Yes, you will need to learn how to inspect and analyze properties, and you should personally go to the property yourself before purchasing. There are countless issues that would blow up a deal that an experienced investor can spot if they're at the property in person, but that they can miss if they don't see it in person (and you can't just trust that your team on the ground will spot these issues for you). If you want to be a successful RE investor, you need to learn to take control of the due diligence process, and you cannot blindly trust that others will handle due diligence for you (hopefully they will, but ultimately, the buck stops with you).  That $500 plane ticket to see the property could end up saving you a $50k mistake!

...and that applies to every area of RE investing--you can build the best team in the world, but ultimately, the buck stops with you. Regardless of how good your team is, you cannot blindly trust that other people will do what's in your best interest, or that they'll operate in a way that's up to your standards. 

Contrary to popular belief, RE investing is NOT passive--it takes serious work (even if you have a good team managing your properties...you have to mange your managers, and that's a job).  ...the people who think it's a "set it and forget it" process are usually headed for a rude awakening.  If RE investing were as easy as having someone else manage all due diligence, buying an A-class turnkey over the phone, handing it off to a PM, and then never touching it again as the rent checks roll in, everyone would be doing it, and everyone would be rich!...But, unfortunately, RE investing ain't that easy!

Lastly, no matter what you do, don't get a property in a low-grade area (regardless of how good the cashflow looks on paper). Many inexperienced OOS investors get lured into buying properties in D class areas because the cashflow looks great on paper, and then they get seriously burned when they discover that no PM will put in the significant effort it takes to correctly manage a property in a D area for such little return...then, they're stuck with a property nobody will manage correctly, that is a massive headache & liability, that nobody wants to rent, and that nobody wants to buy... don't fall into that trap!

Do plenty of homework, and become the central driving force of your due diligence process before pulling the trigger.

Good luck out there!

@Nick Vogel FHA 100%...or, just a standard non-FHA 30 yr owner occupant mortgage. The primary reason for house hacking is that it enables you to take advantage of the great terms of owner occupant mortgages, and allows you to avoid the poorer (and sometimes questionable) terms of other forms of debt (like ARMs).

Generally, I'd say avoid ARMs like the plague unless you're a highly experienced investor (and even then, I'd generally recommend against them, particularly when you can house hack and get the superior terms of an owner occupant mortgage).