All Forum Posts by: Ross Denman

@Hana Bae currently we have a strong selling season in Indy and it's keeping the MLS properties at a pretty competitive range. I am expecting a pretty soft market by late Fall this year and probably for the next year with the election circus that's about to happen.

As @Bobby Sharma said, if you are looking at wholesale properties, you will have to ensure that you do your due diligence and verify every number. Most of these deals are motivated because there is some kind of problem and they may not be obvious from the listing descriptions. Also, most wholesale deals use somewhat unreasonable numbers to dress up deals. ARV's for homes that aren't really comparable. Bare bones rehab budget. Higher than market rental assessments. By the time you reduce the ARV by $20k, double the rehab budget and reduce the projected rent rate, you will find that most wholesale deals aren't really deals. The wholesaler tends to walk away with more net profit than the investors have in equity.

Because of that, I'm a big fan of team building and we've found that working with property managers and investor oriented Realtors tend to be the most important part of your team. I good realtor will help evaluate and close a wholesale deal, but they may charge a fee on top of the wholesale price since they don't usually get much of a bird dog fee from the wholesalers. You realtors/PM's should be able to assist you in getting a rehab budget built and the framework for a scope of work.

To answer the questions about locations... it depends on the amount of risk you're looking to take on right now. I'm watching Twin Aire very closely as the city has some developmental plans going on.

http://liscindianapolis.org/media/Twin-Aire-Abridged-Plan-ilovepdf-compressed-1.pdf

There are also several westside projects scheduled over the next 5 years or so that will be changing the near West side and the Riverside/United Northwest Areas.

Personally, I'm a bigger fan of already established areas on the outskirts of town where we can get good tenants now. Areas with a poorer tenant pool tend to not cash flow or at least not cash flow well. If you're looking for something to hold now that will be changing over the next couple of years, you can check East of Rural, South of Brookside Park, but north of the 1300 block. The closer to Rural the better as violent crime around Sherman has gotten pretty bad.

@Mike Mullins I think that the PodCasts are just glimpses of the bright side of investing. The biggest problem is the lack of actual education and unreasonable expectations.

Yes, you can flip a contract for free... but how much money to you have to spend to get that first deal. The biggest wholesalers in town claim to spend nearly $30k each month in marketing. The flip 30-40 deals each month though.

You can structure different types of wrap-around deals, but there's so little money in this, it's not usually worth it, especially if you're the one responsible for maintenance and have expenses during vacancies.

The BRRRR strategy is great, but the financed position is going to reduce your cash flow to such a little amount of income, you either have to have adequate reserves set aside or you'll find yourself coming out-of-pocket every time a tenant moves or a big maintenance expense comes up. BRRRR is not a cash flow game... it's a highly leveraged way of obtaining several assets with limited capital... but you still have to be adequately capitalized to build a portfolio with the BRRRR method.

The Gloom and Doom comes in because inexperienced investors are not prepared for going over the rehab budget, extended vacancies, mortgage payments but late rents, maintenance and preventative maintenance, holding cost and turn costs during vacancies, etc.

Holding rentals is not a consistent income. Some years it will be cash flow positive and other it'll be cash flow negative. The real wealth comes in purchasing below market rates, value add, appreciation, and principal paydown... not usually cash flow. If you're investing for "cash flow", you're probably going to want to hold your homes in cash. There are strategies (like Dave Ramsey's programs) to accelerate the paydown on your debt service to get to a cash flow position from a BRRRR'd portfolio in a few years... but they are 2 different positions with 2 different purposes.

I would recommend finding an investor in your area to sit down with and really understand the ups and downs of real estate. BP is a great place to network and educate yourself... but don't get sucked in to the hype. Rentals are not entirely passive. Expenses may outpace cash flow, especially on lower end homes or leveraged positions.

I hear from investors all of the time that want $500/mo cash flow and 10% ROI on a home. You can likely have one or the other, but it's tough to hit both. Most financed deals in my market are cash flowing $500-$2,000/year when they are occupied and negative on a year with a tenant move out.

So... My biggest issue of the way everybody talks about BRRRR being amazing is the cash flow is usually really low unless you refinance less than you're investment or have a ton of equity and amazing rent demand. With most BRRRR's ranging from $500-$2000/year cash flow you're going to be in the hole if your tenant moves out in years 1-3. Even with $6,000 cash flow, a big tenant turn (I see an average tenant turn ranging from $1,000-$3,000 for owner responsibility,) excessive holding costs (high mortgage, lawn care, utilities, taxes, insurance, etc.,) and/or extended vacancies (tenant moves in a bad time of year, turning the unit is slow, etc.) will wipe out your reserves. Add up 3 months of mortgage payments, taxes, insurance, utilities, property maintenance, $2,000 in repairs, and if you're using a property manager... they're probably charging you something for tenant placement.

This really blows the "infinite rate of return" out of the water when you have to keep $5k liquid for reserves at all time. If it's not invested elsewhere, I have to consider it part of the cost of the investment. If your cash flow negative one year... is that a negative infinite rate of return... not sure what -$2000 divided by $0 is.

Be sure that you understand your cash flow model. I've seen hundreds of portfolios for years and the 50% rule is pretty accurate. You'll cash flow at 70% of gross income one year and negative 20% of gross income another year. Adequate reserves will offset the difficulty.

BRRRR is a good way to build a portfolio, but you will usually find that you have some long-term capital tied up in your portfolio. Be sure that you understand the cash flow. I would target mortgage payments of about 40% of gross rents if you want some kind of cash flow. You don't have to include taxes and insurance (escrowed) in the 40% as it's figured in the 50% rule already. Run every number conservative and NEVER believe the word of the person selling or brokering the house. They'll all tell you it's worth too much, will cost very little in rehab, and will rent for amazing numbers. Verify everything. Due diligence is always your responsibility!

Also, I've been hit with bad appraisals. Get your appraisals in the late summer or fall because they will have fresh data for comparisons. If you get an appraisal in Feb, they can only consider Oct-Feb sales... which for us midwest states is the slowest selling season. School year, Holiday's, and Colder weather slows things down.

When I help with deal evaluation, I consider

• Rents to be the lowest number reasonable to get the home rented if I hit the market the first of Dec (very slow time of year for most markets.)
• Prepare for a lower appraisal than you might think. It's not always the case, but it happens.
• Ensure your lender's terms. Are they 70%, 75%, or 80% LTV? What interest rates are you looking at? What amortization schedules do they offer? If you lender only offers 15 year AM's... your mortgage is probably going to be too high.
• Add at least 10% to you rehab. The larger the rehab, the more likely you will need this.

Lastly, keep it simple. Understanding your team is vital. The last thing you want to do is put ten's of thousands of dollars on the line and find out that your working inexperienced people or worse... scam artists. Ask anyone who purchased through Morris Invest.

@Van Hoang We used to have a lot of relocated homeowners under management, but today's market has mostly shifted to OOS Investors. We have a lot of investors from CA, CO, WA as well as several international investors from Canada, Israel, Singapore, Australia, and more. Local investors usually self-manage until they build a portfolio that's too large/cumbersome to manage themselves, so while we have some local investors, most of our owner's (85%+) are out of state or country.

There's actually several quality PM's in town. Some of us do many of the same things and others have more niche management. All of the PM's that I would recommend have some kind of presence on BP, so stick around and you'll meet most of us. There are also some facebook groups that may be beneficial as well. If you come to town, try to schedule it when there is a meetup or REIA event to network further. Building a good team is going to be the most important thing at this point.

As always, Jay is so right. There are many moving pieces in investment properties and usually appreciation is the better payout unless your holding "all-cash" which will usually have a lower COC ROI than a levered position. Mike D'Arrigo has a great article breaking this down. Equity is a powerful piece of the puzzle that can't be ignored. I'm not talking about speculation... just established, stable areas with retail demand.

While he's a competitor, I hate sending business his way, @Mike D'Arrigo's outfit is probably the most established and dependable one in Indianapolis. I've had a few clients purchase from them. We had inspections done and the few items that came up were handled. The tenants that we took over were good tenants. The homes were rented at or near the top of the market. The only issue with them... is the issue with TK's in general... the price. I would certainly check them out. There the only ones that I would personally refer (and I do not get any kickback's from them.)

As far as visiting a city... start with understanding the market. My thought is this:

• Look at a map of your target city on Zillow and Trulia. Look at sales prices of active listings in various neighborhoods. Look at rental prices in various neighborhoods.  Look at days on the market for those areas. Compare your rent/price ratios, consider retail demand, research crime and schools, etc. That will help you understand the layout of the city... but understand that Indy has distinct boundaries of neighborhoods and homes 2 blocks apart can be very different. You can use sites like niche.com, city-data.com or point2homes.com to research neighborhood and zip code demographics as well.
• I'm a big fan of building your team around your property manager. In the long run, they will be your longest partner and have similar financial incentives. Basically, a realtor gets paid when you buy a home, their goal is to sell you a home and how much they get paid is relevant to the purchase price. Wholesalers are the same way. Property managers get paid by renting your home. They get paid based on how much they can rent it for. They don't get paid when it's vacant. There incentive is to keep units occupied at the highest rent reasonable... pretty similar to yours.
• To identify property managers, I recommend starting with their leasing departments.
  
  A good PM should have the ability to take good pictures, create compelling listing descriptions, utilize technology (online applications, social media campaigns, etc.,) and have a leasing team that you can get in touch with and is flexible to schedule showings. There are PM's out there who will not show a property until you fill out a $35-$50 application which is a turn off to a majority of tenants. There are PM's who only respond to online inquiries. There are leasing teams who are impossible to schedule a tour of the home.
  
  Write down the PM's who seem to be the best at what they do and start calling the leasing phone numbers and leave a voicemail if you don't get an answer. You'll be surprised how many will never answer the phone or never call you back. When you do get in touch with someone, tell them that you are relocating from out of state and will be in town late Saturday and most of Sunday and would be interested in a couple of their properties. I bet you won't be able to get a showing in that time frame from most of them. The point is this... if you home sits on the market for 60 days instead of 14, you're losing almost 2 months of rent. That is a huge increase to your vacancy rate.
  
  After you've identified the better leasing departments... call their business departments and start interviewing. Get a short list and be sure to meet with them on your visit.
• Finding investor oriented realtors can be difficult, but get a referral from other investors and your PM's probably work with some as well. See if you PM's and/or Realtors can recommend insurance agencies, lenders, contractors and whoever else you may need to put your team together. Understand, most of us are protective of our contractors though, so don't expect too much.
• When you visit your town, drive the neighborhoods and get a feel for the kind of area it's in. Do all the homes have security doors and bars on the windows? Are there blighted homes in the area? Do the streets have sidewalks? What parks are nearby? What types of homes are in the area and how are they kept?
• Meet with your short list of PM's, Realtor's, Wholesalers, Investors, etc. You might even schedule your visit around a meetup or REIA meeting to extend your network further.

I will tell you, I've met several OOS investors who were quite surprised with the difference of what they expected to see and what they actually saw. Sometimes realtors and wholesalers paint pictures that are quite different that what you'll find. Experience is the best teacher. Your putting 10's of thousands of dollars on the line, do your due diligence.

@Daniel Mendez We work with a lot of OOS investors and I generally don't recommend a new investor to take on highly distressed property. It's a lot of trust, risk, and stress. I'm not always a turn-key fan for the reasons listed above, but it is a great way to start a portfolio. IMHO, I think that the first home in your portfolio is going to determine the strength and ability to grow as time goes on. It's really the foundation of your portfolio, so I recommend less risk for your first home or two. This will also give you more time and experience with your team. When investing OOS, trust and communication is vital. I recommend you visit your target city, interview several professionals/providers in the area, and network with other OOS investors in your target city. Start with something easy like turn-key or a near "rent-ready" MLS home. The ROI will not be as great, but you will learn a lot. I always recommend finding something with predictability, not speculative neighborhoods or "pigs" marketed as "cash-cows." What seems to be a "cash-cow" tends to get "milked" every year or two when your tenants move out.

@Van Hoang Indy is still strong and I believe that Memphis is still doing decent as well. We are having a strong retail season this year, so the MLS is very competitive right now, but I expect to see a lot of good deals this fall for all of the homes that couldn't sell.

Zip codes can be pretty broad, at least in Indy. I recommend familiarize yourself with the market by looking at Trulia's crime map and understanding the school districts, as well as watching rentals and homes for sale to gauge the trending areas. It depends on what your niche is. Most people on BP talk about the gentrifying "up and coming" neighborhoods, but I prefer already established areas or newer homes on the outskirts of town.

I try to keep my most of clients in newer neighborhoods that will rent for at least $950/mo+ when they are in growth mode for their portfolio (conventional finance or BRRRR.) Clients who are looking for cash flow are usually put in strong C neighborhoods. Eagledale, Mapleton-Fall Creek, and Chapel Glen/Chapel Hill are some of my favorites. Just look for areas renting in around $800-$850/mo in lower crime areas.

I always recommend networking in your target city and building a team. Get information from as many types of professionals that you can when you find potential opportunities. A realtor, a property manager, a home inspector, a contractor, and an insurance agent will all have a different take on a property which will provide you with more data.

Awesome. I've done JV deals with some of our OOS clients in Indianapolis and I think that it's a solid way for investors to capture some decent gains while offsetting some of the risks of investing from out of state.

Managing contractors is one of the more difficult aspects of flipping whether your local or OOS... you just have to keep them on a short leash.

Congratulations and Keep it Up!

 I use NREIG and have several clients use them as well. We've only had one claim ($40k in fire damage) and the process started off a little slow, but was fine once everything got started.

I know that they have changed things a few times over the years. The were purchased by ThinkRealty a few years back which called for some changes. Also, they used to purchase blocks of insurance through Lloyds of London to secure their underwritings and I believe that they are doing it internally now. I spoke with one of the VP's last year at an event and discussed some changes that were going on. I've been happy with them and they seem to be a company that's always trying to enhance their services.

I do know that they will try to upsell you though, just had a laugh with an out of state client over "sink hole" insurance. Not that it may not be valid, it's just something that I'd never heard of before. Most sink holes in Indy are in the roads where they run over the 100 year old sewer lines. The water/sewer company has tried to be more proactive in identifying those areas in advance over the last year or two so we haven't seen any more major occurences recently.