All Forum Posts by: Ross Denman

@Nick Wilson I can't say for sure about other markets, but I have to agree with @Ernesto Hernandez regarding 2 bedroom vs 3 bedrooms in my local market in Indianapolis. We rent either one of them just as quickly as long as they are in desirable locations, but our tenant turnover is much higher in the 2 bedroom urban markets than the 3 bedroom family market. Many two bedrooms cater to more transient tenant demographics (younger people, people going through transitions like relocation or divorce, etc.) The needs, desires, and goals of that tenant demographic change more frequently. Targeting more family style homes in good neighborhoods and school systems can frequently yield 5+ year tenancies as your tenants are raising their children and not looking to change most things until the kids head off to college.

Since tenant turnover/retention is the metric that has the most impact on cash flow and overall productivity... I always recommend homes that are most likely going to retain tenants the longest. That's generally going to be 3+ bedrooms / 1.5+ bathrooms / 1,000+ sq ft. My favorite homes are 3 bd /2.5 ba /1,300 sq ft / 2 CATG homes built after 1990 that rent for $1,050/mo or higher. Typically, your tenants won't outgrow these homes for years to come. They don't usually have the excessive maintenance problems that the 100+ year old homes in the urban areas of Indianapolis have either. Because these homes are in areas that have high 'home ownership' the value of the home grows consistently every year because of the demand of the retail market.

If you are in a market or where 2 bedrooms seem to be more suitable, I always recommend equipping the home with the most durable products reasonable for the price range. This will not only enhance the desirability of the home, but also reduce the vacancy time to get the home back on the market. It's much cheaper and faster to sweep and mop LVT flooring than to change carpets. Likewise, tile backsplashes in kitchens and bathrooms are easier to clean than having to paint those areas at every turn.

Don't skimp. I know that it seems to make sense to go the cheapest route possible, but I see it throughout the year. Owner's who take a variety of shortcuts and cheaper options tend to draw in tenants who don't care to take care of the homes. They tend to leave the homes in disarray, full of trash and dirt as well as excessive wear and tear. Most tenants to move in to a beautiful and equipped home tend to make more efforts in taking care of the homes.

Think of it this way... When you buy a new car, you find yourself parking further from other cars, keeping it in the garage, washing it more frequently, etc. When you purchase an old beater, you tend to not care about the upkeep as much as long as you can keep it on the road. Which kind of home/tenant would you prefer?

@Tushar P. We are going in to Spring right now, so the market demand makes it difficult to find these types of properties in March/April, but I see them every month on the MLS during the Fall and Winter months. We also see deals like these come across the wholesale lists, but usually they need more work. You can also find REO deals, HUD deals, auction deals, etc.

As far as purchasing homes at a 22% discount... that's 78% of ARV. Many investors actually target 75% of ARV or less because many lenders will only refinance 75%-80% LTV... so most deals that we see are somewhere in this range.

Lastly, often times you will be putting an offer in below ask. I don't recommend throwing out offers more than 10% lower than the asking price though as it really gives you and your realtor a poor reputation for wasting peoples time.

@Jason Malabute You also have to consider that the underlying asset is growing in value and the rental income should increase every year or two (depending on current price and local market.) The most successful clients that I work with not only look at cash flow, cap rate, and COC ROI... they also consider IRR (internal rate of return) over a number of years. IRR is figured with discount rate (original equity position from buying under market,) cash flow (leveraged or not,) and equity growth over a number of years. Let's look at an example.

Year 1. Purchased a home at $90k for $22,000 after inspection, down payment, closing costs, minor repairs, and cleaning. The home is valued at $115k. This makes the discount rate $25k from the very beginning.

You rent the property at $1,100/mo for a year and after all expenses, you finish the year with $1,200 cash flow. This is not a very good COC ROI (about 5.45%.) That value of the home is now around $118,500 (about 3% appreciation.)

Year 2. The tenant stays (no vacancy or tenant placement fees) and the rent is raised to $1,125/mo.

You finish the year after all expenses with $2,100 in cash flow. COC ROI is better this year with the rental increase and stable performance. Year 2 COC ROI comes out to about 9.54% for the year. The value of the home has risen to $122,500 (about 3.4% appreciation.) Overall average is $3,225 cash flow over 2 years or an average COC ROI of 7.33%

Year 3. The tenant decides to move. You lose 2 months of rent (about $1,400 in mortgage payments,) spent $1,500 getting it rent ready again, and triggered a tenant placement fee equal to 1 months rent. 

The home is rented this term at $1,150/mo. Year 3 only cash flows about -$1,650 (yes, negative) or a COC ROI of -.075%. The home's value has risen to $125,000 (about 2% appreciation.)

Year 4. The tenant stays and the market will not bear another rent increase this year. Total cash flow for the year ends up being $2,400 (10.9% COC ROI.) The value of the home rises to $129,000 (about 3.2% increase.)

Year 5. The tenant stays again and the rent increases again to $1,175. Total cash flow for the year ends up being $2,600 (11.8% COC ROI.) Value of the home increase to $132,500 (2.7% increase.)

Year 6. The tenant finally decides to move and you decide to sell the home. You still have an unpaid balance of $68,000 owed to the bank and you have about $4,000 in cleaning, repairs, and upgrades to sell it at the top of the retail market. The home is listed at $142,000 but ends up selling for $137,000. During this time you pay 4 mortgage payments totaling another $2,500.

Here's the total outlay in 5 years of owning this home.

Initial Discount Rate

$25,000

Cash flow

$1,200

$2,100

-$1,650

$2,400

$2,600

= $6,650 total over 5 years. Average of $1,330/year or 6.04% COC ROI

Appreciation

$22,000 (100% leveraged appreciation)

Principal Paydown

$2,000

Total = $25,000 + $6,650 + $22,000 + $2,000 = $55,650 profit (before selling costs and taxes.)

IRR = $56,500/$22,000 = 256.8% = annualized over 5 years = 51.3% averaged IRR annually

You can see that the original discount rate and the appreciation are the biggest numbers here. The longer that you hold the property, the more powerful the principal paydown can become a factor, but you will likely be refinancing too often for it to add up.

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With that being laid out... this is not a "cash flow" strategy. It's a mid-term hold strategy that capitalizes on the appreciation (the largest gain on a good leveraged investment.)

Instead of selling, most of my investors are continuing to hold. You do not have to sell the home to access the equity. Depending on your lender... you could likely access 75%-80% of this equity growth (through a refinance) to purchase 2 more similar performing homes and keep the current asset to leverage it's equity growth again in the future.

At three performing homes, you should be able to purchase another home like this every couple of years. Once you get to seven performing homes, you can likely purchase one every year. At about 12 homes, you should be able to purchase 2 homes every year.

This strategy reinvests the profits and compounds several factors and leverages them for maximum growth potential. You can build a million dollar portfolio in about 14 or 15 years (about homes) with only a $27,000 initial investment (including $5,000 available for reserves.) To expedite this, most investors continue to add personal funds to grow their portfolios much faster. Here's the outlay of this kind of portfolio growth.

Year 1-3 = 1 home

Year 4-5 = 2 homes

Year 6-8 = 3 homes

Year 9-10 = 4 homes

Year 11-12= 5 homes

Year 13-14 = 6 homes

Year 15 = 8 homes

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To hit $200/mo cash flow, you will likely need to hold a $650/mo rental in all cash or have a rental of $2,200/mo that is leveraged with a mortgage payment (not including ins/tax) of $1000/mo or less (around $200k.)

I just put a $2,000/mo rental on the market in Bates/Hendricks that will come pretty close to these numbers, but I believe that the owner is refinancing a little over $200k, so he may not quite hit the $200/mo range and he's leaving about $40k in the home. His COC ROI is only going to be about 5% the first year, but that home should climb in value around $10k each year (25% ROI on leveraged equity increase ($10k/$40k.))

Hope that stimulates some thoughts.

For wholesalers... most of the biggest players in any market are putting their deals on the BP marketplace. That's always a good place to start networking. Also, contact PM's in your target cities and see if they have any recommendations for sourcing inventory. I subscribe to about 5 different large wholesaling lists in Indianapolis and about 4 more small ones. I also unsubscribe from anyone who is remarketing someone else's deal at another mark-up (daisy chainers.) I only want to deal with the contract owner who is direct to seller.

Another option is to search google with "we buy houses for cash (name of city)." That's likely going to take you to the seller's side of the wholesalers business, but you should be able to call and get on their list. Check the "google ads" first as these wholesalers are probably sourcing the most leads and have enough income to pay for advertising. This probably means larger deal flow.

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Most active investors and providers that I know are very selective about who they share their contractors with. I only share my preferred GC's with clients who have offers on homes. I do not give them out as blank referrals. To many tire kickers waste their time and the GC's don't want to waste their time with unproven investors anyway. The best contractors are usually somewhat proprietary especially if they have plenty of business year round. I give my 2 top GC's about 10-15 jobs each year ranging from $10k-$100k in work.

Here is some insight in to how you might find some licensed and active contractors in Indianapolis.

1. Go the the Marion County Permit database here https://accela9ca.indy.gov/citizenaccess/ and click "Search Cases" under the Permits area

2. Change the start date of the search to something more recent. Just choose something in the last 3-6 months.

3. Change the License Type drop down to "General Contractor."

This should pull every General Contractor that has pulled a permit in the last several weeks or months. You will probably bypass the ones like sewer excavation or connection permits, electrical permits, or heating and cooling permits. Just click on the record to see what the permit was for and who filled it. It should have name, company name, license number, phone number, and email on most records.

The more that you work with the database, you will find ways to filter your search more effectively, but I use this database a lot... I use it to find homes with potentially motivated owners, to find sub-contractors, evaluate due diligence in a neighborhood (does other homes on the street have tons of code compliance issues?,) find out how many rehabs are going on in the area, are their any outstanding fines to the city against the home, etc.

You can also look at rehabbed homes for sale in your area and check to see who pulled permits on that property. Most interior work in Indianapolis doesn't need permits, but if there's extensive work done, there's likely several permits that were pulled.

Licensed contractors who pull permits are usually going to be pretty reliable... especially if they work with other investors. Pricing may vary... but I will pay more for a reliable, honest, and quality contractor who completes jobs in budget and on time than take a cheaper route with a contractor. Many of us have lost money on poor quality of work, poor communications, delayed rehabs, or contractors who disappear with your money entirely. I also prefer to use licensed, bonded, and insured GC's for my OOS investors. You can also check to see if there are any lawsuits against a GC here as well. https://public.courts.in.gov/mycase/#/vw/Search Bad contractors tend to get sued or have a checkered legal past.

Honestly, you either need to build up to it or save more money. As the cost of debt service is increasing and rent ratios are getting worse, 20% is pretty unrealistic in a stable and predictable neighborhood. You can certainly slumlord it, but that tends to not work over the long haul and it's hard to build a portfolio around homes that never have any true value.

My recommendation would be to purchase 2 homes at under $100k that will rent at $1,000/mo or more. I see a few of these each month on the MLS in Indianapolis and occasionally on the wholesale market as well. You will have a $20k-$25k investment with a yield around 8%... which is considerably less than what you are wanting.

Each year, your properties will appreciate around $2,500-$3,500 in equity and cash flow about $1,800 each. After 2 years, you should have enough equity build and saved cash flow to purchase a third home in a similar method. At that point, you can likely start adding a home to your portfolio each year with the equity growth and cash flow. Once you get to about 6 or 7 homes... you will have met your numbers (about 5 years) and will be able to start picking up 2 homes every year and begin to start building more rapidly. By 10 years, you should have between 15-20 homes, all cash flowing about $120/mo and building about $50k-$60k in equity every year with a $2M portfolio... of course, the bank will own most of it, but you will probably have about $350k-$500k in equity at that point.

This is my favorite strategy that I have clients using as it's eliminates and manages a lot of liabilities that comes with owning rental properties.

1. Newer houses most likely mean less maintenance expense
2. Insurance costs is usually less
3. Less chance of vandalism, theft, bad tenants, legal problems, etc
4. Township/Suburban family homes tend in neighborhoods with decent schools tend to retain tenants (average of 5+ years) about 3 X as long as urban or city rentals (average of 1-2 years.) Tenant turnover is the most expensive part of the investment cycle and most disruptive to your performance
5. There will always be demand in areas where families want to raise their children so the appreciation will be relatively stable and the rents will be able to increase almost every year
6. Banks like to loan on these properties as they are considered much lower risk

I know that it doesn't meet your current goals, but it happens faster than you think. I have several client purchasing 1-2 homes each year by refinancing the equity from their portfolio to use as a downpayment for the next. You'll meet your goals in 5 years and be in a place to replace your income in 12-15 years. If you can save money to expedite this process by paying down the principal on the debt service or adding to the cash available for acquisition, you can move even faster.

Something to consider. If I am building a portfolio, would I rather build it around a foundation of a desirable home in a desirable neighborhood... or a cash cow that never grows in equity and is constantly robbing my cash flow with the problems that come along with those types of properties?

Build it right. Find a good property to build around. Measure risks and liabilities with each location, housing type, and tenant demographic. For instance, I just met an investor who purchased a home that he planned on BRRRR'ing because it was such a "good deal." Now he can't as he found that he's in a flood zone and has to carry mandatory flood insurance for the bank to refinance and the flood insurance kills the cash flow (about $1,800/year.) If something looks like a great deal, you're likely missing a piece of the story. Find proven methods with predictable risks and liabilities. The one above is my favorite for most of my US clients, but there are several ideas.

Another direction that you might consider is section 8 housing. I don't mess with it, so I don't know much about it, but some people do very well. If it's something you're interested in, you might check with @Harvey Levin who is one of the section 8 guru's in Indianapolis. He's one of the larger and most experienced section 8 PM in Indianapolis.

I entirely agree with Lee. There are decent places to find duplexes, but in general, I usually deter OOS investors from them. See what happens to your deal evaluation when you run about 12% vacancy rate (which is very realistic in my experience.) Duplexes usually turn more frequently, cost more to turn, and sit on the market longer than "good" SFR's. Then figure in what your PM is going to charge you to place a tenant (ranges from 50%-100% of one month's rent.) If you're losing 2-3 months of rent every year or two, paying $1,000-$2,000 every time it goes vacant, and paying the PM $400-$750 every time they place a tenant... You're probably not looking at consistent positive cash flow.

Also, something that many people don't seem to consider. Investment properties that are more than 20 or 30 years old were most likely rented to the poorest of tenants (since anyone could get a bank loan in those days) but investors who spent the bare minimum amount to keep the tenants in the home. This means decades of neglect and deferred maintenance. We forget that there was almost no mid-class  or better rental market until 10 years ago when we saw many middle class homeowners lose their homes. The current culture is changing and more people are seeing renting as being more advantageous to their lifestyle than owning. They like the convenience and flexibility, but they also have higher expectations for the locations and types of homes that they want to live in. Older homes tend to have higher maintenance, even after they are "fully" rehabbed. Fully rehabbed doesn't mean that the sewer line has been updated, or that the 100 year old studs in the walls or attic have been changed or even looked at. Most of these homes also have some kind of foundation problem, even if it's minimal. Most of the time, I don't shy away from homes with somewhat we basements or some settling, but I've seen homes with bowing walls that looked like they could one day collapse in to the basement.

With that being said... @Ryan Mullin is one of the more seasoned investors in town working with these homes and will be a very valuable resource.

Well said Seth.

Here are some things that I see in my local market and with the clients we work with:

• People keep complaining about deals getting thin... but the truth of the matter, we're just back to normal after being spoiled with the opportunities presented from the previous recession. There are always deals in good markets.
• Markets are not as important as working with a good team. There will always be opportunities in good markets, but if you do not have a team you may not be able to move as fast, gather necessary data, etc. to capture good deals when they come across.
• Build your portfolio around a solid/established home. Your first home will be the cornerstone of your portfolio in many ways. At some point in the future, you will be accessing the equity in this deal to expand your portfolio further. If your first home is constantly costing you more money than the cash flow and returning negative some years, it's hard to build a portfolio around that. Choose homes that already have value in areas that have retail sales and demand. This creates the best opportunity for equity growth in your portfolio.
• While a good home in a good location will likely have an inferior ROI, it will frequently outperform a terrible home in a terrible location over a 5-10 year period. The lesser quality homes almost never perform the way they look on paper, but the higher quality homes tend to meet or exceed expectations and become much more valuable the longer that you hold them.

 I would pick about 5-10 markets to explore. Then I would start trying to understand that market. What is the median rent range? Where do you find homes above the median rent range? What are the costs of those homes? What property managers do you find managing those types of homes? Start interviewing PM's that work with the kinds of homes that you may be targeting and ask them for realtor referrals. Ask them if they help with rent rate determination and deal evaluations. Do they have contractors or handymen that they can have help with estimates if necessary? Whatever market seems to have deals that make sense and a team that you can build and feel comfortable with, is probably the place to start. Next... I don't care what anyone else says... I highly recommend visiting your target market. Drive the city with different providers and professionals. Meet people face to face and interview them. The most successful OOS clients that I work with visit the city at least once each year.

Hope that gives you some guidance.

@Jason Malabute I think that the expectation of 10% ROI and $200/mo are two totally different goals that are hard to hit at the same time. Currently, getting a 10% ROI in homes in decent neighborhoods in Indianapolis is typically going to have to be leveraged with bank financing. In order to get $200/mo cash flow, you have to have financing that's no more than $2,400 less than your annual NOI. Using the 50% rule, which I find to be very average for a large swath of properties over a number of years... let's look at a $1,000/mo rental.

$1,000/mo * 50% rule * 12 mo = $6,000 NOI.

Highest allowable mortgage payment is

$6,000 - $2,400 = $3,600 or a $300/mo mortgage payment.

At 6% interest on a 30 year amortization, you can only finance $50k.

This also means that you can invest as much as $24,000 down (for 10% annual COC ROI from $2,400 cash flow.) So what you're looking for is a $1,000/mo rental for an "all-in" price of $74k or lower and putting about 30% ($24k) down to cash flow properly.

You may be able to BRRRR in to this position from a cash acquisition and rehab from a wholesaler or distressed MLS property, and refinance $50k out, but if you are just looking to invest a max of $25k from the begining with conventional finance... you would be looking at financing a $75k deal with 30% down for a $1,000/mo rental.

My basic rule of thumb when working with my investors is to look for 80:1 rent ratios or lower, but rents higher than $900/mo. It won't quite get you to 10% the first year, and these ratios only produce about $1,200-1,800/year in cash flow, but they are good homes, easy to rent to decent tenants, better homes with lower maintenance costs, and usually retain tenants longer.

The lower you go in the market your numbers get altered by things like:

• Shorter tenancies
• Longer vacancies
• More expensive maintenance (especially on older homes)
• More late payments
• More likely evictions
• Drama... Drama... Drama... (I've seen stalkers, drug arrests, break-ins, bed bugs or other pests, pitbull breeding, domestic abuse, vandalism, theft, etc.)

Basically, the more cash invested, the larger the cash flow, but the lower the ROI. The more leveraged applied, the higher the ROI, but the lower the cash flow. Finding a sweet spot of 10% and $200/mo from the beginning isn't something that you are likely to find very easily. I have seen several deals that started at 8% COC ROI and with annual rent increases (because the homes are in the desirable area) the ROI is going up 1-2% each year as well as the 2.5-3.5% annual equity increase. As the equity continues to increase on decent homes, you will find ways to leverage that equity once you start building your portfolio and will be able to "absorb" homes in to your portfolio with the annual equity build each year, but the doesn't usually happen until you get to around 10 homes that appreciate $2k-$3k/year.

Hope that gives you some insight :)

@Tiana Engstrom - I've talked to several investors who are starting to build a rental portfolio with their HELOC's. I don't know all of the in's and out's of it, but typically it's used for short-term money for acquisitions, rehab's, or as leverage for private/hard money in a deal. Once the project is complete the equity is captured via sale or refinance to payoff most or all of the HELOC. Typically, you will not have your entire line taken up so the monthly payments should not be terrible, but a 30 year mortgage will most likely be a lower payment if you are holding the property. Basically, BRRRRing the property and recycling the repaid credit line for future growth.

First recommendation is to get David Greene's book - Long Distance Real Estate Investing. It really is a good resource and wealth of information.

Secondly, you are going to want to identify some target markets. After that, try to find some local Investor Groups. For instance, we have a few Facebook Groups for Investors in Indianapolis. I recommend checking out the Indianapolis Out of State Investor FB Group. Most of the local providers and investors are engaging there and there are a couple hundred out of state investors there as well. It's a great place to meet providers and investors and build your team. Even as a local provider and investor myself, I have added several new people to my personal network to assist my clients in team building. It's a great place to ask questions and learn about the local market and they admin's are very proactive in keeping the spammy BS out of the feed.

I think the most important thing to consider when investing out of state is having a great team.