comfortable.
People feel uncomfortable buying a property they can’t see. You aren’t buying a home, you are buying a small business. An investment. Investors focus on numbers; consumers focus on feelings.
Investing is about finding deals, plain and simple. You make your money when you buy. Go where the deals are. Use price-to-rent ratios.
Real estate investing is a get rich slow game. Most production isn’t right out of the gate, but isn’t until years later, when rents have risen, inflation has lifted the property’s value and created significant equity. You don’t want to buy a job, you want to own an investment. Understanding the headache factor of an area is crucial.
Understanding different areas, emerging markets and price-to-rent ratios is a crucial aspect to real estate investing.
Property Taxes - You can access property tax records directly from the Internet. Property taxes are one of the bigger expenses in real estate investing and they really do matter.
School Rankings - The worse a property’s school rank, the less chance of seeing a good long-term appreciation.
Crime - Use Trulia’s crime map.
Rent prices - Use rentometer.com or craigslist.
Permitting / Upgrades - Can look online on city or county records to make sure work to the house was permitted.
Mortgage Calculator Plus - App shows you full amortization schedule over the life of the loan and equity in the property.
1% Rule - A house that rents for 1% of the purchase price should make its money. $1,750 per month should be purchased for $175,000.
70% Rule - Used for quickly determining a price to pay for a potential flip property. If you multiply the ARV (After Repair Value) - the price of a home is expected to sell for once it’s ready to hit the market - by .80 and then subtract estimated repair costs, you can come up with a consercative number to offer for the property. (ARV x 0.70) - Rehab Costs = Offer Price
Capital Gains Exclusion - If you live in a property for any 2-5 year period, you are likely eligible to sell the property for a profit without having to declare it to the IRS for taxes.
---How to find deals --- as you grow as an investor, stop looking for deals and start looking for the people who have / know the deals. Leveraging relationships and building on a foundation already laid is much more efficient than trying to start from scratch.
Robert Kiyosaki - “The richest people in the world look for and build networks; everyone else looks for work.”
-when looking for agents:
Note you are an investor who understands real estate
What specifically you are looking for
How you intend to purchase
How you heard about the agent (zillow agent finder - for example)
Does the agent own any rental properties themselves?
What additional support can the agent provide? Who do they know?
How do they intend to find you properties?
Sample email on page 71
The ones who win are the ones who create win-win scenarios that meet everybody’s goals, not just their own.
Supercharging Equity Growth -
When extra payments are made toward the principal, it changes the formula that determines how much of the next payment goes toward interest and how much toward principal. If you continuously make extra payments toward the principal of the loan, you not only pay the principal down faster through the extra payments, but you also ensure a larger percentage of your next payment goes toward the principal.
One common way people take advantage of this phenomena is by making half of their monthly payment every two weeks as opposed to one payment a month.
Another way is to round payments up. If you round a payment up from $1,422.94 to $1,500 per month, this reduces total interest on the loan by $31,140 and reduces the loan from 360 payments to 319.
Return on Equity -
ROE is determined by taking the amount of money your property makes you a year and dividing it by the amount of equity you have, not the amount of money you originally invested. It is a much more accurate way of determining how your property is performing than simple ROI.
“I bought a property in 2009 for $195,000. I put $48,750 down. As of today, this property cash-flows $685 a month after all expenses and the mortgage are paid. This is effectively an ROI of 16.86 percent ($8,220 a year divided by $48,750). However, this property has appreciated to a value of approximately $380,000. My current loan balance is about $130,000. This gives me approximately $250,000. Assuming I would have to pay a Realtor’s commission to sell the house. I would likely walk away with about $225,000 left over…
My ROE would be:
Yearly income ($685 cash flow x 12 = $8,220) divided by equity ($225,000) = 0.036.
The return on my equity is 3.6% NOT quite as impressive as the nearly 17% I was making on my ROI. If I were to sell this house and buy somewhere I could achieve a much more modest 12% ROI, my cash flow would jump to $2,250 a month.”
When you invest in different markets, you can take the properties that have appreciated a good amount, sell them, and move the money into a market that is primed for a good run. If I were to sell my property with approximately $225,000, I could buy five new properties with $45,000 down on each. If each of these new properties eventually increased by $50,000 (or I forced dthat equity with solid buy prices and skillful rehab work), I would have grown my initial equity from $225,000 to $475,000.
The same concept works for cash flow. If I were to take my initial cash flow of $685 and move the $225,000 in equity into five different properties that each cash-flowed at 12% ($45,000 down on each), I would end up with the $2,250 a month I mentioned earlier. This is more than a 325% increase in my monthly cash flow.
Picking an Investment Market -
Some states have much, much friendlier landlord laws than others. Tenants know this and won’t cause trouble, because they know they will likely lose in court.
In some areas there is a higher pride of ownership and certain cultural elements where it is socially unacceptable to let your house get trashed.
Some areas are better known for having businesses that want to retain their employees.
Ensuring Projects Finish On Time-
When it comes to a rehab, there are two things that tend to go wrong.
The cost of the rehab goes up
The time of the rehab runs too long.
Projects go over projected timeline costs in several ways:
Any hard money costs associated with the project are extended.
Your vacancy periods are extended for a rental.
Your holding costs are extended for a flip.
Your velocity of money is slowed.
Your opportunity cost increases as you miss out on other deals before you can reinvest.
The people managing your projects get worn down the longer the project lasts.
Psychologists have found that negative reinforcement is much more powerful than positive reinforcement. People respond more strongly to the removal of adverse stimuli than they do to the addition of pleasant stimuli.
Offer contractors a bonus if they finish early and a penalty if they finish late. 5% bonus or 5% penalty - for example.
Make sure bids include time frames.
Create accountability for the contractor by letting them know you have connections, referrals may happen and pictures will be shared on the internet.
Pay for Materials Yourself-
One of the easiest ways to handle this is by choosing and paying for your own materials outside the contract.
Collect receipts - tax write-offs. Also you can return extra materials. Credit card purchases offer cash back. Also if you have contractor accounts, you can finance projects for a time.
Another benefit is you will learn a lot more about construction, materials, and design when you take the burden on yourself to pick the materials.
Look for the best, discounted materials you can get for your money. Including upgrades like tile floors and granite counter tops. Make the property as aesthetically pleasing as possible.
Ask for free delivery to the jobsite. Customer service reps usually have permission to make these types of calls with repeat orders or larger orders.
It never hurts to ask for a discount or reduction in the price, the worst they can tell you is no.
Paying Contractors-
Use AIAs and hold retainage until work is checked. Have this in the contracts.
Keep and store all contractor photos.
Make sure your money is safe with someone you don’t know well yet and make sure the contractor is motivated to do great work quickly.
Check online reviews and how long the contractor has been in business.
View contractors as team members, make the partners, not employees.
Know what you need permits for and what you don’t need permits for.
How to Decorate / Renovate Interrior-
Use websites like Houzz, Pintrest and Tumbler for ideas… they usually show the items too, or you can call a supply house to ask them for similar products based on photos you like.
Ask friends, family members and people on social media what they like better when trying to decide what to purchase for the home.
Post before and after photos and videos.
Don’t overdue the rehab, don’t be the champagne house in the beer bottle neighborhood. Point of diminishing returns.
Upgrades / Where to Invest-
New flooring, stainless steel appliances, new vanities, granite countertops…
NEEDS:
-Roof
-Cabinets (can paint up cabinets and replace fixtures or doors to make them look new)
-Appliances
-Flooring (a great hack is to change floors in small spaces like bathrooms, floors are per SF price)
-Paint (paint is almost always the biggest bang for your buck)... choose two-tones and neutral colors.
-Countertops (granite and quartz is now cheaper and worth replacing in many cases).
-Windows
-Showers (people love showers even though they are pretty inexpensive in the whole home to upgrade - small area)
-Vanities/Bathroom cabinets
-Lighting
-Fences
-Screens on windows
-Blinds
-Sinks
-Toilets
-Doors
---Kitchens and bathrooms make houses / values go up.
EXTRAS:
-Outside Fixtures
-Built-in Fixtures
-Accent Walls
-Upgraded Mirrors
-Kitchen Backsplashes
-Upgraded baseboards or crown moldings
-Alarm systems
-Landscaping upgrades
-Skylights
-Heated Floors
The primary goal of a renovation is to make sure money is going toward projects that add value to the property.
Upgrade Hacking-
When you upgrade an item you already have to replace anyway.
Four Factors to Determine Value-
What is the location?
How many SF?
How many bedrooms and bathrooms?
Is it upgraded?
Homepath.com-
Can find REO houses / foreclosures.
Agents-
If you don’t have an agent, you can try to leverage the selling agent for a better deal by using them as a transaction broker.
Provides additional incentive for the selling agent to close the deal.
Give your agent additional incentive, by providing a finder’s fee for finding deals and let their people / other agents know.