Note: This is the latest blog post in my series the ABCs of buying, selling and investing in real estate. Each post I select a letter (L this post) and write a fictional story about it. The story is fake, but the advice is very real(ty)
This post continues the story found in Three Lousy Reasons for Investing in Real Estate.
Larry had come to me some time ago wanting to get started in investing in real estate. I hadn’t heard from him in awhile when he called me one Monday afternoon as I was about to start showing homes. Larry was an accountant and had saved up quite a bit of money to start investing in real estate. His delay in getting back to me was because his 9 to 5 job was so demanding and he had been reading all he could on the industry. He felt he finally had a good grasp on the state of the market and that he wanted to keep with his plan for investing in turn key rentals, but he had recently started second guessing himself. He knew that investing in real estate would get him a better return than investing in other things like bonds or the stock market, but he wanted to be a 100% sure before he launched into his new career. What should my next step be? He asked me.
This is what I told Larry….
I told him that it sounded like to me that he had “analysis- paralysis” and needed to be ready to take the next step. Real estate investing had become such a “niche” way to invest your money that there were dozens upon dozens of people who have made some money doing it and were now trying to sell their methods and systems to other people. Agents did the same thing for other agents. In my time as an agent, I have been told by at least a 100 agents, either online or in person, that their system was the one system that was going to make me rich. It got to a point where I simply ignored all these ads for the next best thing and focused on the task at hand: helping customers buy real estate, sell real estate and invest in real estate. A newbie investor should also reach a point where it is time to take some serious steps towards actually doing something versus planning. I did suggest one final planning exercise for Larry to undertake and that was to write a solid business plan for their real estate endeavors. Real estate is like any other business and it can be difficult to succeed and evolve your business unless you know where you are going. I am required by my broker to submit a business plan to him every year. He then tracks my progress and gives me hints on how best to achieve them. I suggested that Larry do something similar with an veteran investor that could show him the ropes. He told me that he wanted to know my ideas on long range planning strategies for investing in real estate. I told him that my investor clients generally approached their real estate investing business from three long range planning strategies.
1. Buy and Hold Rentals – I have several investors that buy properties to hold onto them as rental properties. On the internet, you will find people using buy and hold in many different ways. For the sake of this discussion, I am going to be using it properties that are bought with the intent of renting out for a number of years and reselling when conditions allow for some good return or when cash is needed for another transaction. Many of my investors who deal in rental properties will have a solid plan in place that they want to acquire a certain number of rental properties annually providing a certain level of return. Every investor is slightly different in what they want to see out of a rental. Some do not care about anything except how much net cash flow they will be getting on a monthly basis. Other investors want a certain cap rate on their properties while still others want to see a certain performance with the cash-on-cash statistic. I have others who want to see a certain amount of equity in the property before purchasing it. If you want to do buy and hold properties, my suggestion is to look at your ultimately goal is and design a plan around the metric that gets you to that ultimate goal. Are you looking for passive income for the next ten years? Net cash flow or cash on cash wold be the biggest concerns for you. Are you looking to cash in on the equity in a decade while getting positive cash flow when possible? In this case, you want to find a property that is marked down 10 to 20 percent so you have some equity built into the property from the get-go. Almost all of my investors that work rentals follow one common guideline when it comes to the property itself. They will only want a property that has three bedrooms and two bathrooms over 1500 sq. ft. These are the property characteristics that most renters look for in a property so it only makes sense investors will look for the most in demand property.
2. Flip and flip again – Flipping property to me has always been the sexy thing to do when it comes to investing in real estate. I love watching my investors clients take a horrible property and turn it into something highly desirable and livable after 30 days or so. It really is a wonder the good work that these investors do on these properties. Check out some of my recent listings to see some of the results. These listings are results of a flipper program we run. We work with investors on finding “flip worthy” properties in the MLS (and off-market to a lesser degree) and then give them a break on the commission on the sale side so they can realize more profit when selling the flip. Most of my investors who flip homes for a living do it for the large capital influx into their businesses. They can then take these funds and either invest them in additional flip properties or branch off to another aspect of investing in real estate. Long range planning for flips should be centered around how to get this large capital influx and what to do with it once you have it. Some flippers are content with just doing flips and living off the profit realized from them. I have met other flippers who have plans to start off in the single family home arena and branch off to more profitable ventures like multifamily and apartment purchases. The flipping of homes for these latter investors are just a means to get to the ultimate pay off. When it comes to the property itself, the same criteria as the buy and holds apply here as well (3/2, 1500 sq ft). Most of the investors I work with do not purchase properties for more than $150K as they do not want to tie up their funds too much in one property. I have met some very successful investors, however, who deal in high end flips where luxury rules the day.
3. BRRRR Method – Brandon Turner over at biggerpockets.com came up with this methodology for real estate investing. It stand for Buy, Rehab, Rent, Refinance and Repeat. Check out this article for a very detailed look at the process. It is very similar to the buy and hold method mentioned earlier. Refinance, however, is one of the aspect not mentioned before. Investors have gotten very savvy in finding ways to get cash out of their properties. Banks are now working with investors more readily on cash out refinance packages for homes that have been rehabbed and rented out. This is a good way to “in essence” buy properties with no money as you get out everything you put into it and still have a cash flowing property. Be sure to read the article I mentioned before as well as this one written by Turner himself. Since I do not currently have any clients working their long range plans through this method, I can’t really speak on it beyond what I have read myself, but I believe this is a great way to build some long term growth and wealth when investing in real estate.
Larry was thrilled with my three examples and promised to do some more research into each. He was really more initially interested in rentals, but he said he would consider flips if he was able to realize his goals of living off his passive income. He was especially interested in the BRRRR method as it seemed to combine some great parts of both holding rentals and flipping properties.