In 2019, maybe more than ever before - you need to be able to evaluate properties, market for deals, negotiate with sellers, and have reliable funding in place to close. As I've mentioned before, I started my Real Estate Investing career in 2015, which admittedly was a better time to have started than 2019. In fact, I'd say I was about 5 years late. Had I started in 2010, its possible I'd have 10 times the number of properties as I do now. But like the Chinese Proverb says...
"The best time to plant a tree was 20 years ago. The second best time is now."
Welcome to Episode #6 - Evaluate, Market, Negotiate & Fund - What It Takes To Succeed As A Real Estate Investor In 2019...
Having started my Real Estate Investing career in 2015 instead of 2010, I'll try not to lament only catching the tale end of what may prove to be the greatest opportunity to acquire deeply discounted properties in mass that may occur within my lifetime. Likewise, YOU should not use the current market condition as an excuse NOT to get started or to grow in YOUR Real Estate Investing business in 2019.
Sure, 10 or 20 years ago would have been a better time to start, but would you say that someone just turning 18 now (so they were only 8 years old 10 years ago) has missed the Real Estate train due to their "bad timing of birth?" - and so they should not even bother with Real Estate Investing now? Of course not!
Regardless of the decade or year; irregardless of the current market condition - (and what is the difference between "regardless" and "irregardless" anyway? Nevermind...) - THERE ARE ALWAYS OPPORTUNITIES in Real Estate! You just need to know how to recognize them, how to take them down, and how to perform to profit.
This requires certain skills - but the good news is that it can all be learned... So how do you go about finding and acquiring rental property deals in a market like what we have today - where everything appears to be overpriced (at least from a positive cash-flow prospective)? At the start I said... In 2019, maybe more than ever - you need to be able to evaluate properties, market for deals, negotiate with sellers, and have funding in place to close.
So let's start with evaluating properties...
Among other things, I've spent the last 4 years learning how to evaluate properties. Remember that one of the key indicators of a potentially good rental property deal is where the likely monthly rent is > 1% of the purchase price + any rehab needed and other expenses. So if you are buying it for $80,000 and it needs $15,000 of rehab to be rental ready, with maybe another $5,000 for closing, holding and other costs, totaling $100,000 all-in; then you'd want to be able to rent that property for $1,000 or more per month. That's called the 1% Rule and it's a strong indicator of a likely great deal - or at least certainly worth your further consideration.
Now from 2010 to 2015 and a few years thereafter, you could almost throw a rock and hit a 1% deal in most markets - they were all over the MLS. It was not even uncommon to find 2% deals, and I've heard of some people bragging of 3% deals or better that were just been sitting on the MLS for months. My personal best is just a little over 1.5%, but my properties also tend to appraise (post-rehab) far above what I had in them, thus allowing me to pull out most (if not all) of my cash upon refi; and in many cases also pull out a nice profit for myself; having equity remaining in the property; and also still maintaining positive monthly cash-flow.
What this means for you is that while the 1% Rule is a great rule-of-thumb consideration, it does not represent the sole-method of profiting from rental property. There are certainly times when it makes perfect sense to buy a property that is < 1% on the rent to cost consideration. The lowest I've gone is just above 0.6% - but I also have no cash remaining in that property (thus an infinite return); pulled out additional cash as profit at refi (free money, tax free); have a ton of equity remaining in the property (I refinanced at 65% LTV); got great tax benefits (due to the expensive rehab finishing the attic into a second 2BR unit); and it sits in an ideal location with progress all around (so massive appreciation potential). I also got the vacant lot next door where we start construction next month on a home with $300,000 comps all around. With all those benefits, do I really care that it failed to meet the 1% Rule? So don't treat the 1% rule as if it were written on stone tablets coming down from a mountaintop held by an old man with a white beard.
If you want to find good deals in 2019 you'll need more than a strict adherence to the 1% Rule. And in that regard, if you're new to Real Estate Investing, you may even be at an advantage over those who started earlier like myself, as my business partner has to remind me all the time (when we're evaluating deals) that it's not 2015 anymore. For example, its hard for me to even think about paying over $100,000 for a 2BR Townhouse, when from 2015 to 2017, I was buying them for $60,000 - and now they're going for twice that and even more. I have to be reminded to take off my 2015 glasses and see things for how they are TODAY. I've missed out on a lot of properties for this reason, as others are able or just willing to pay more than I am.
You see, everyone has different circumstances... I've recently lost deals to persons who paid what I consider to be ridiculous prices for properties that cannot possibly yield positive cash-flow at what they paid. However, maybe they're in a 1031 Exchange, and the alternative to paying too much for the property is getting hit with a massive tax bill. Better to over-pay for a property than to give the same money away to the government and have NOTHING to show for it. Or maybe they are paying all cash; whereas I must account for the cost of financing. Or maybe they are going to live in the property for a year or more, so they are getting much better financing and low to no down-payment; whereas I must put down 20% and my interest rate may be a point or two higher. Maybe they are going to do most of the work themselves and thereby building sweat equity in the property. Or maybe they are just going to knock the current building down (I'm seeing a lot of that in Durham) and build something new that changes the value proposition entirely. So what one person can pay for a property and have it still be a good investment may be entirely different (more or less) than what you or I can pay for the same property due to differences in our circumstances.
So you'll need to understand all the various means by which you can profit from a given rental property to know if you should buy it despite not having the best rent to cost consideration. Can you add square footage (up or out) to increase the value at refi and resulting cash out? Can you steal space from elsewhere in the house to create an additional bedroom of reasonable size to boost the value and rental rate? Is the property at a location that is almost certain to appreciate - highly distressed but ideally located, maybe in an improving downtown area? Can it be torn down for the land to then build something more valuable for the location? Now some of this gets into more speculation than I'm willing to indulge for myself (I'm an investor, not a speculator), but you may be more risk tolerant than me.
These are all different considerations when evaluating what a property may be worth paying for, as you have to be able to justify paying the prices that properties are going for in 2019... How are you going to make any money!? And will you regret what you paid or even be upside down come the next downturn in the economy? Or will it even matter at all if you still have positive cash-flow?
Now this all assumes that if you are going to be rehabbing the existing property into a rental, that you know reasonably well what the approximate cost of that rehab will be; what the finished property will appraise for at refi; what it will rent for on a monthly basis; and what other expenses will average, such as: Taxes (which may go up based upon what you paid at the next assessment); Insurance; HOA (if any); Vacancy; Repairs & Maintenance; Capital Expenditures; Property Management; Interest Rates; Points; Fees; Closing Costs; etc... You'll need to have all of this down cold when running your numbers. I'll go more into detail on these in another episode when I dive into how I evaluate properties for the BRRRR method that I use - which stands for: Buy, Rehab, Rent, Refinance, Repeat - which I believe was coined by Brandon Turner of Bigger Pockets. And I think they have a book coming out soon specific to the BRRRR method of Real Estate Investing.
Now let's talk about marketing...
Once you know how to evaluate a property for all that its worth (or could be) - you have to learn how to find them... And in full disclosure, I'm still working on that myself. Hey, we'll improve on this together. There are countless ways to market for deals. I've never been one for bandit signs, but you see them blighting just about every street corner anywhere you go... I BUY HOUSES! Well hell, so do I, but I HATE those signs. However, they must work to some extent or people would stop spending money on them. Just say no... I've spent too much money building my "Blue Chariot" brand, to advertise it (directly or indirectly) with cheap signs illegally placed at street corners. I looked into billboards a couple years back, but it was much more than I could justify at that time. I've also looked into advertising on radio and TV, but the timing just wasn't right.
I do direct mail and door hangers, which have gotten me a few properties. And I can't NOT do the online methods of SEO / SEM and PPC, when I own a Website business, so I'm into that with varying levels of success. I really should put more effort into that, as I should logically have top ranking for "Durham I/We Buy Houses" (and related keywords)... I'll have to get to work on that.
I like calling landlords, for rent signs and CraigsList rental listings to see if they'd like to sell, but that's time consuming so I'll need to setup a VA to handle this on my behalf. Lists for divorce, probate, pre-foreclosure, tax liens, evictions, code violations, etc... They all work to an extent. Really, almost everything works if executed properly and consistently. But some of it (like direct mail) takes more money than others. You can easily spend hundreds, even thousands per month on direct mail. I'll do an episode specific to marketing for deals; however, I'd like to invite a successful wholesaler on as guest to speak to their methods.
Speaking of which... How do you think wholesalers are getting deals? If you are in contact with wholesalers and they are sending you properties for consideration, you should consider each one a personal defeat, that you let someone in your market who is not even going to buy the house themselves get it under contract! Then they are going to sell that contract to you, when if you were on your game, you would have found and worked with that seller directly and likely gotten a much better deal for yourself in the process - or at least that is how I feel whenever I get a property lead from a wholesaler. But there's certainly a logic to letting others do what they do best and paying them well for a valuable service of bringing you consistent deal flow. Hey, as long as they are bringing value, go with what works. That may prevent you from needing to become an expert marketer yourself and may even remove some of the need to be a great negotiator.
So let's talk about negotiating with sellers...
As I said before, I've spent the last 4 years evaluating deals (buying a good number of them), but the books I'm reading now are often on the topic of negotiation, as it does me little good to be able to evaluate a deal if the ones from the MLS all suck. Having gotten most of my deals from the MLS in prior years, I now realize that to continue my business growth in the current market, I must now go out and make my own deals - BEFORE they hit the MLS or come to me from a wholesaler. But even in that statement, I still feel everything works with the right strategy and proper consistent execution, including the MLS and working with wholesalers - negotiation comes into play in all cases.
So now I'm reading books like: Never Split the Difference (Negotiating as if Your Life Depended on It) by Chris Voss; Pitch Anything (An Innovative Method for Presenting, Persuading, and Winning the Deal) by Oren Klaff; Pre-Suasion (Channeling Attention for Change) & Influence (The Psychology of Persuasion) (two books) by Robert B. Cialdini; and the classic, How to Win Friends & Influence People by Dale Carnegie. These and other such books provide an insight into the human mind, behavior and how to do and say things in a way as to get what YOU want out of most situations in life. These techniques are not always easy to apply, but with practice and genuineness to create win/win situations - they can become a normal part of your personality.
Amazing things will happen for your Real Estate business when you can convenience sellers to give you financing or to sell to you on terms like a lease-option, and do so in a manner that does no harm to (and actually benefits) the seller. To date I've done 3 lease-option deals where everyone benefited greatly, and those sellers now offer testimonials and references as to my ethics in business and personal character - which will just make the next such deal even easier, when I can put that person on the phone with 3 others who've done similar deals with me in the past.
I'll speak more on these and other books and my work to become a better negotiator. One such book is Psyched Up (How the Science of Mental Preparation Can Help You Succeed) by Daniel McGinn, which relates especially well to me, as I've always had a fear of public speaking and presentations. When I went into the house to speak with the first sellers who did a lease-option deal with me, I had to devote a considerable portion of my thoughts and efforts to just not shaking as I explained how it all worked - as I was just that nervous. But by the third lease-option deal I was fine, which built confidence for my first presentation to a Private Lender.
So now let's talk about the money...
Most people think you're not going to buy anything if you don't have any money - and so they rule-out Real Estate Investing as something they can pursue, as they think instinctively that to buy a $100,000 house, naturally you need to have $100,000. But this same person would not think twice about going to a car lot and buying a $10,000 or $20,000 car with no money down... Something about that extra zero creates a disconnect for most people that they cannot easily breach. And even when the extra zero isn't there, such as for a $60,000 house, in 2019 they are harder to find and/or just may not be in an ideal location; or needs so much rehab work that you're right back in that 6 figure zone with the extra zero coming into play again.
So let me start by saying that if you can barely pay your existing bills; do not own your own home; have no money in the bank, no savings (no retirement, no insurance); and your combined score from a few frames of bowling is higher than your credit score - you may not be ready for Real Estate Investing (just yet). In that case I suggest you start listening to Dave Ramsey or Susie Orman and get your financial life in order. They provide great advice for that. Because while you may not need a lot of money to be a Real Estate Investor, it helps to have some - and it is even more important to be able to show at least some recent history of managing well what money you do have.
Unless you have some special circumstance, you're likely to need about $5,000 to maybe $30,000 of available funds for down-payment, fees, closing costs and reserves. This can be cash in the bank (ideal), or a Home Equity Line of Credit (HELOC), a loan from a retirement account (IRA / 401K), etc... And your credit score will likely need to be somewhere in the 700 range for the best rates, but some lenders will go lower. You'll also likely need to be some distance in time away from your last late payment, judgement, lien or bankruptcy. But this all relates to your first purchase or maybe your first few using conventional funding, such as from a bank.
You can lessen or eliminate most (if not all) of these requirements, by using 100% OPM - Other People's Money. In the beginning, OPM will likely come only from family and friends - as their love for you may overcome the reluctance to fund what is your first time Real Estate endeavor. But you may also find a seller willing to offer some period of 100% seller financing or a lease-option - it happens, and you won't know if you don't search (market for deals) and ask (negotiate).
But the real fun is once you've established yourself as a knowledgeable and trustworthy Real Estate Investor - because then OPM will come from those who were strangers just days, weeks or months before. It is also when sellers are most likely to be willing to sell to you on terms, which might include 100% seller financing. Further, it is when Hard Money Lenders (aka Professional Private Lenders) will bend over backwards to give you the best terms on money for your deals.
Once you have a few Private Lenders and a Hard Money Lender or two on your team, along with a few conventional lenders, each day that you wake in this business feels different, as your biggest problem is no longer finding money for deals - it is finding the deals in the first place. And then the dilemma shifts from concern about finding money to buy properties to finding enough properties that meet your criteria to keep your Private Lender's funds in-use.
You don't want to have funds committed to you by a lender and not be able to find suitable properties to leverage those funds continually. You'll also have Hard Money Lenders calling and emailing you each week to ask if you've found another property yet. So this becomes the primary reason for needing a highly effective marketing machine and then being able to negotiate win/win deals with those potential sellers. I'll have a future episode about finding and working with Private and Hard Money Lenders - and there's a great book on the topic called "Raising Private Capital (Building Your Real Estate Empire Using Other People's Money)" by Matt Faircoth of Bigger Pockets.
So how do you become and grow as a Real Estate Investor in 2019?
YES, its much harder than it was from 2010 to 2018... You'll need to be able to evaluate deals properly, quickly and from a number of perspectives. You'll need to be a proficient marketer to find properties (off market deals) to evaluate and buy. And once your marketing efforts are bringing you a steady stream of deals to evaluate, you'll need to be able to negotiate effectively with those sellers to take the deals down at a price that creates a win/win for YOU and the seller. And regardless (or maybe is it "irregardless") of all that, you won't be able to buy anything if you do not have your finances and business in order such that banks and individuals are willing to lend to you at rates and terms that make the numbers work.
Your lenders are a part of your team, and on many deals it may seem as if the lender is benefiting more than you are - which is why I seek to become a lender myself. But without the lender there is no deal to be had, as even the richest person does not have enough money to buy every property that comes their way. EVERY REAL ESTATE INVESTOR USES OPM... But outside of family and friends (and often times even then) it requires you to position yourself as a Real Estate Investor who is knowledgeable and trustworthy - as no one has any money they will be OK with losing. People work hard for their money, so it is an immense responsibility when using OPM to fund your deals.
Well, that's it for now... I'll talk more about all these things, but let's bring this episode to a close, as it is already the longest so far. Get into the Real Estate Investing business and if you are already, then grow your business in 2019. And if you have no desire to learn how to evaluate properties, and market for deals, and negotiate with sellers - then maybe you should be the bank for others if you are in a position to do so. Being a Private Lender can be very rewarding. I'll talk more about accredited versus non-accredited investors and ways of adding Private Lenders to your team in a future episodes, but reach out to us at BlueChariot.com/invest - if you'd liked to learn more about being a Private Lender on a coming project by Blue Chariot Properties.
In this Episode (#6) of the [... and Landlord] Podcast titled "Evaluate, Market, Negotiate & Fund - What It Takes To Succeed As A Real Estate Investor In 2019." - I speak briefly on each of these four skills that are especially critical in today's "Hot" market. 2019 has been a difficult year for "deals" on Rental Properties for people like myself who are looking to buy cash-flow positive properties, but it seems to be a great year for sellers. From the buyer's prospective, everything appears to be highly overpriced if there is to be any chance of having positive monthly cash-flow. If you're looking to be one of the successful Real Estate Investors, then it's going to take some extra hard-work and manoeuvring on your end to ensure that possibility!
Prior to this year, most (but not all) of my properties came from the good old MLS, and many were short-sales or foreclosures. Having started my Real Estate Investing career in 2015, there were no shortage of these back then, so I could take my pick - and through 2018 I never had a shortage of properties under consideration at prices that easily met the 1% Rule.
In this episode I explain what the 1% Rule is, and how properties meeting this rule are almost certain to yield positive monthly cash-flow. The problem is - they are so much harder to find in 2019 than they were from 2010 to 2018. Occasionally one may hit the MLS, but you'd better act fast, or it will quickly enter a multiple-bid situation where the price gets bid up well beyond anything that will yield 1% in the rent to all-in cost comparison that is the 1% Rule.
Thus, in this episode, I explain how strict adherence to the 1% Rule may not work as well in 2019... Instead, you'll need to be able to [Evaluate Properties] for other possible methods of profit and return; and understand the circumstances that others may be working within that could allow them to justifiably pay what may seem to be ridiculous prices for a so-called "Investment" Property.
In addition to understanding the full profit and return picture and the motivational factors of others willing to pay more, this episode of the [... and Landlord] Podcast goes into aspects of [Marketing for Deals] so that you'll be in a position of working directly with sellers to obtain a potentially better deal than may be possible once a property hits the MLS. And to this end, I explain that you'll need to be skilled at [Negotiating with Sellers] en-route to obtaining your best possible deal, which may even include some aspect of Seller-Financing or a Lease-Option.
And since you'll not be able to close on even the best negotiated deal if your funding is not in place, in this episode I speak on the subject of OPM (Other Peoples Money) for needed [Funds to Close] - which can be from: Conventional Lenders / Banks; Private Lenders; Hard Money Lenders (aka Professional Private Lenders or Rehab Lenders); the seller (in the case of Seller Financing or a Lease-Option); a HELOC; a loan from an IRA/401K; etc... Being a Real Estate Investor certainly takes money, but it does not have to be YOUR money. So here I speak a little on making yourself credit worthy and otherwise appealing to potential lenders and sellers, such that they may be willing to help fund your deals.
Now these skills are always needed and always have been / will be; however, in a seller's market as appears to exist in many locations around the USA in 2019 - you especially need to have the skills to: [Evaluate Properties]; [Marketing for Deals]; [Negotiating with Sellers]; and have ready [Funds to Close]. This 6th episode of the [... and Landlord] Podcast touches upon each of these points in offering my thoughts on "What It Takes To Succeed As A Real Estate Investor In 2019."