Ask me about real estate investing
A few people have asked me to start a Q & A thread about REI. Well, here it is.
I've been investing in RE for about 15 years. My father, stepfather, and uncle were all RE investors. Over the years I've done a little of everything. I've owned retail, warehouses, large and small residential rental properties, and rooming houses. I've subdivided land, had properties rezoned, moved houses, developed land, bought and sold and brokered RE notes, and just about everything else.
I consider myself a buy and hold investor. Generally I don't flip and I don't really like to sell my properties unless I'm selling to move up to a larger investment.
My primary investment type is in low income housing. I work closely with my local housing authority and other community service organizations. I own 48 apartment units, 4 single family homes, 3 duplexes, and one rooming house. I also own two mobile home parks - about 80 lots total. I employ one full time manager, two part time managers, and I contract cleaning and lawn care services with local companies. I'm also developing a manufactured housing subdivision. Right now I work about 18 to 20 hours per week.
Well, I'm not sure if anyone will have any questions or not. Perhaps people have questions but don't know what to ask. Here are some general RE topics that I could respond to:
Where to find the money for investments, or how much do you need to start?
Estimating expenses
Due diligence
Buying property for 20% under fair market value
comparing like investments
hard money loans
buying, selling, and creating paper
Insurance issues
investment criteria, cap rates, cash on cash returns, how to manipulate ROI
Cash flow
Literature
Lease options
mobile home parks
credit issues
finding & screening tenants, including fair housing issues
Section 8
negotiating purchases
finding deals
dealing with tenants
land banking
Please don't ask me about taxes. Taxes are too difficult to cover in this forum. If you are interested to know more about taxes I highly recommend that you buy the book "Aggressive Tax Avoidance for RE investors" by John Reed.
I recommend that you buy a financial calculator. they cost about $15 at WalMart. Every investor should have a financial calculator.
something that a lot of people don't really understand about REI is that its not really about properties at all. Lots of people think that location is the most important part of REI. Its not. To paraphrase Donald Trump, buying the best locations and best properties won't make you successful in REI. Making the best deals makes you successful. Gorgeous properties in great locations are expensive, have negative cash flows, and will show small or 0% returns over time.
What I look for is properties that other investors won't touch - rooming houses, run down apt complexes, half empty mobile home parks, that kind of thing. These are the properties that 1) are inexpensive and show decent returns over time as is, and more importantly 2) the investor can add significant value to by increasing the bottom line.
What I want to do is buy a property that is underperforming due to bad management. I then transform the property by improving management, making improvements, increasing rents, filling the property, and lowering expenses. Remember that at a 10% cap rate, each additional dollar netted is equal to $10 in additional equity. So finding properties where we can add significant value is important to getting rich in REI.
I'm getting tired right now, so I'm going to stop typing. I hope that this thread can help people get a better understanding of REI. I don't know everything about REI. But I know a little about a lot of areas of RE investing.
1 Reply
something i've read about and don't totally understand:
say you have a 5m capital base and BRRRR with an average ARV of 500k.
how do you think about your port when the sum of your property ARV's becomes north of your capital base? you're obviously still cash flowing (w whatever slippages from vacancy and maintenance are priced in) but when you're north of 5m ARV is that starting to feel like leverage? or no
i'm still at the drawing board phase and i know it would take years to even scale to that d
I'm not totally sure I'm following your question. But I'm going to take a crack at it based on what I think I'm picking up.
If you put $5M to work on BRRRS, you're *expecting* your property values to surpass your capital base. Otherwise you wouldn't do the deal. So with an ideal BRRR, you're looking for a property that you can keep no to minimal cash in after the refinance. That's really the only reason to do a BRRR. Which means, you want to be able to acquire and renovate for like 70-80% of the ARV, then use debt to pull your cash back out. To put it another way, you're *making* the 20-30% in profit (in the form of equity). That 20-30% increases your net worth, but it doesn't increase your capital base until you turn that equity into cash (by selling or refinancing).
Once you have all of this profit in equity on your books, you want to start looking at your return on equity to see if you're actually getting a good return. In real estate, your equity (less transaction fees) is the same as cash -- treat it as such. I think what you will find is that most professional investors either 1) renovate and sell, or 2) buy stabilized for cash flow. So why don't many professional investors BRRR? Because once you book the big equity gain from renovation, the RoE almost always looks pretty bad. There's no sense in holding a property that is yielding 5% RoE when you can take that cash out and put in risk free treasuries at the same rate of return. Make sense?
I run a similar process in my new construction work (but I don't call it BRRR bc no serious professionals in RE use buzz words like that lol). I build duplexes with 100% cash from investors (no debt), stabilize them, then refinance to 70% market value. That pulls back about 93% of investor capital, but leaves the equity gain of 19% in the property. I'm doing this for now on a cyrstalization structure designed for long term hold. But admittedly, I don't think this will solve the fundamental RoE problem unless we can reliably get property appreciation every 5 years that allows us to pull out more cash.
