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.

I'm interested in the financing portion. You mentioned in a previous thread that typically banks want 30% down but are indifferent to where it comes from. From this you would typically try to get the owner to take a 20% second mortgage on the property. What type of give/take do you do with him to get him to accept these terms? How is this done? Could you elaborate the process a little more using an example property. Do you just ask him, "Hey man, would you mind taking a 20% second mortgage so I can buy this thing?"


Can you recommend some texts in each of the above areas or otherwise helpful resources to get a more in depth knowledge of the subject matter?

what kind of houses should you look to flip (i know u said thats not ur think) but just wondering do u know anything about it, and is this the worst time to try flipping with thw way the market is now?

I understand that low income neighborhoods provide the best cash flow but do you ever draw a line on a neighborhood being too rough? Would you typically shade away from areas that wouldn’t be the safest places to walk around at night? When looking at said neighborhoods do you look at the potential growth of the area and future appreciation gains?

Also I know it is crucial in REI to buy properties at under 30% of FMV but it just seems so hard to do. Obviously one isn’t going to stumble upon such places in the MLS system or loopnet. What motivates these sellers to sell their properties at such a discount and what would be the first step you take in finding them?

One more thing, when buying distressed properties I’d imagine the cost of repairs as a crucial factor in determining buying price. So how do you go about figuring out the cost of repairs needed to get the building up to code?

i just posted a request for advice on a new thread, would love to hear your thoughts. thanks

I just ask the owner "Are you willing to carry a note for a portion of the purchase price," or "What kind of terms do you need?" Sometimes sellers need to get the whole purchase price in cash. But lots of times they don't. This is particularly true if you've got an older landlord that is selling off his properties to retire. He doesn't need all the money in cash and he's not going to 1031 the proceeds into another property.

There is an old adage in REI - I'll pay any price for a property if I can choose the terms (and vice versa). So your give/take negotiations w/ the seller should reflect the relationship b/t price and terms. Like if a seller indicated that they would consider carrying a note, I would offer them whatever super-low PP I decide and ask them to carry 30% at 0% interest.

Now, naturally, that offer is ridiculous and will be rejected out of hand. Here is another adage - When negotiating, the first person to mention a number loses. By making a ridiculously low offer, I can get the seller to counter without having really tipped my hand for the price/terms I want. I reveal nothing, and now psychologically his 'turn'.

Anyway, say he comes back at his full asking price and agrees to carry 10%. Well, thats progress. And I'd keep going just like that. I'd write out all the numbers on the property and tell him, "look, if i were to pay this price my cap rate would be X. Unfortunately that cap rate is just too low for me to feel comfortable taking the risk. However, I would be willing to pay your price if you carried 30% of the purchase price as a note at 0% interest".

Well, now its his turn again. So now say that he comes off his price by 5% and agrees to carry 15% as a note at 9%. I'd say to him "Well, if i pay you 9% interest and have to put up 15% of my money, my cash on cash return won't be where I need it in order to make this deal worth my time. I can put up 15% and pay 9% on your note if you can give me the property for $X."

Etc.

I recommend that new investors start with very general books that they get for free from the local library. If you're not sure where to start, check out the work of John Reed. Reed's website, www.johntreed.com has a recommended books page. I DO NOT recommend that you spend hundreds and thousands of dollars on bootcamps, mentoring programs, audiobook courses, etc. That is a waste of money for anyone first starting out.

The best way to learn about REI is by joining a local REI club. Most REI clubs have a library where you can get the use of a lot of free information. Plus, you can meet people that can give you a realistic perspective on REI and its discontents.

I'll start this answer by clarifying an absolutely FUNDAMENTAL issue in REI. RE investors do not make money over time. Well, they do, but that is not normally the primary focus. Successful RE investors make money when they BUY properties. You do that by buying for less than the fair market value of the property, OR by buying properties for fair market value and adding additional value to those properties.

For anyone that doesnt' know, 'flipping' a house is the process of buying a property for realy cheap, fixing it, and reselling it at a profit. This works because normally houses that can be bought really cheap need some significant amount of work in order to be resold at any reasonable price. What is a signifcant amount of work? Well, normally flippers need to have some fundamental issue - foundation problems, termites, structural problems including roof, water damage, mold issues, etc. Those fundamental problems make the property essentially unsaleable.

Theoretically the idea is to find properties that are in poor condition, but where market OVERVALUES the cost of the renovations. That way you can make renovations and there is still room for profit. Obviously flipping hinges on the ability of the flipper to resell the property later on.

The best time to be a house flipper is the time at which there are lots of motivated sellers trying to get rid of properties. That time is now. I know what you're thinking - the market is real slow, i'll never sell my property. Not true. Granted, you may have to hold the property longer than you expected. But you will sell it. Just be sure to factor that longer holding period into your purchase price.

Many successful RE investors make a business out of 'flipping' properties to themselves. They buy and fix, but rather than selling they refinance and rent. IMO, this is the best way to make money in RE. This is essentially what I do, just on larger properties like apartment complexes and mobile home parks.

You're right - low income neighborhoods do provide the best cash flows. As to a neighborhood being too rough...I dunno. I've never rejected an investment because the neighborhood is too rough. Look, being a successful RE investor is very much about solving problems and being creative. If you find a killer deal in a very rough neighborhood, you gotta figure out how to solve that problem (which is likely why the seller is giving you such a great deal to begin with).

So what might you do to solve the rough neighborhood problem? Well, you could carry a nonconcealed fire arm. You could also hire a uniformed off duty police officer to escort you on rent collections [note that in low income housing many of your tenants won't have bank accounts and cars so rent collections will have to be done in person and in cash].

I do consider the growth potential of areas as an aside when I analyze properties. However, my primary objective in REI is to buy income producing real estate. Potential growth and projected appreciation and stuff like that is all too esoteric for me. I prefer to make my money each month in cash and force appreciation by increasing the bottom line.

That reminds me. Appreciation works differently for commerical property and residential property. Residential property (i.e., anything less than 4 units) is normally appraised based on comparable sales. Commerical property is appraised based on income, (i.e., cap rates, COCR, gross rent multipliers, etc). There are sometimes anolmalous situations where the commerical property market gets crazy and income/price ratios are insanely out of whack.

Yes, it is hard. Thats why most people who start in REI get so sick of the meager returns and hard work and give up. As to seller's motivations, I've given up trying to understand them. The most common things that I see in motivated sellers are: people moving out of area, people retiring, people SICK of their tenants, problems w/ the property, lack of capital for improvements, bankruptcy.

The best way that I'm aware of to buy property for less than FMV is to know other investors. Joining an REI club is so crucial to success in REI. At my club the first 10 minutes of each meeting are devoted solely to people annoucing deals that they have avaiable for sale. At last night's meeting I must have heard about 20 properties for sale well at 30% OR MORE below FMV. Sometimes the seller is a wholesaler and just wants to make a few bucks on flipping a contract. Sometimes its a seller that bought the house to flip and got caught up in other deals. Sometimes its a guy retiring that wants to get rid of his properties.

I've built up a reputation. People in my area know what I'll buy and the kind of returns I expect. They also know that I'm experienced enough and have the kind of relationships to make deals fast and painless.


Ask a contractor to go through the house with you and estimate repairs. Or make a detailed list of needed items and then have some contractors ball park it. At this point I can usually make a fairly close guess at repair costs. If I'm doing renovations, I expect to be paid well for that time so I usually factor that profit into my purchase price.

in dealing with tenants, lets say i live 10 minutes from my rental house. is it most common to just drive over and collect rent checks every month? Couldnt they just mail it? also, i hear a lot about how it takes so much time when your renting out a house and you will always have to be there dealing with tenants. when something goes wrong lets say dishwasher breaks, couldn't you just call the repair man over without you ever have to be there?

Great thread. Thanks for the all of the info.

One of the points you list being open to discussion is “Buying property for 20% under fair market value.” You discuss negotiating and participating in RE investment clubs. What are other tactics you use?

Do you personally manage any of your properties? I mentioned in a thread before that I owned a duplex and couldn’t stand being a land lord. Every time my phone rang I hoped it wasn’t a tenant. I learned that I am not cut out for being a property manager.

You say you don’t user a mortgage broker. How do you finance the non-seller financed part?

I guess its probably pretty common to just go over and collect rents. Thats not what I do though. Rents can either be mailed to my office or dropped off there during business hours. If mailed, tenants are responsible for getting the rent to me on time. The only problem with requiring rents mailed is that you can get caught in the 'its in the mail' trap.

So the tenant is late. You call up or drop off a letter saying, basically, "your rent is late. I'll be evicting you on date X unless you pay. If you want to stop the eviction process, pay up, including all late fees". Then the tenant calls back and swears that the check is in the mail. You'll be tempted to wait it out and not take any action - you want to see if that check comes. Don't do it. Never wait for a nonpay's money. The process is unstoppable: rent is due the 5th, late pays are served a pay or quit notice on the 6th and zapped w/ a 5% plus $5/day late charge, tenant pays by the pay or quit deadline, no problem. But until you get that money the process keeps rolling - $5/day late charge, on the tenth eviction is filed, etc. At any time a tenant can stop the process by paying up.

Just be sure that you enforce all your rules the same for everyone. If you let even one tenant slide on a late fee once you open a can of worms. Now all your tenants that are made to pay late fees can bring discrimintion suits against you claiming that you charge them fees only because they're Jewish or b/c they have kids or whatever.

I don't spend much time dealing with tenants. I've trained my managers to blame everything on me. Managers are to never fight or argue w/ tenants. Everything is MY fault, they're just the messenger. That tends to keep the peace. Tenancy problems are highly correlated to the strength of your screening abilities. I've said here a lot of times that I keep my properties really nice and I've got long waiting lists for all of them.

If you've only got a handful of units, I don't see how you'd spend more than like a few hours per month at a property. It depends on the property obviously. But yeah, like you said, if something is broken you can easily just call a repair man over to fix it. I've got a list of handymen that I call on to fix stuff all the time. I do some of my own renovations, but only b/c I like to. There is no reason that IF YOU BUY RIGHT you can't afford to hire out all the maintenance. I think that the problem w/ most landlords is that they just pay too much for their properties and so they simply can't afford to hire out that work.

Well, its kinda hard to say given the property types that I buy. I don't really use tactics at all. Actually, my properties tend to find me - I hear about a motivated seller from other investors and I move on it. A few times bankers have approached me and OFFERED me properties at whatever the value of the loan is. But I buy bigger properties, so its kind of another ball of wax.

If you're buying single family homes or smaller multis, you can do several things. When someone goes into foreclosure the process if first registered at the county courthouse. If you watch the pre-foreclosure filings you can cherry-pick good deals and negotiate short sales with banks. A lot of people advertise and I'm sure you've seen the 'WE BUY HOUSES' signs everywhere. Those guys are trying to find motivated sellers that have equity in their homes. Another thing that you can do is mail campaigns to pre-foreclosure candidates.

Also watch for properties that have been listed for a long time and haven't sold. Expired listings are sometimes worth pursuing.

I mean, honestly, I don't really go after this market too much. I more or less just hang out w/ a lot of RE people and the deals seem to find me.

Well, I kind of manage the mobile home parks. I dunno...there is some sick Jerry Springer part of me that is fascinated with the MHPs. I do have a part time live-in manager at each park, but mostly they just collect paperwork for me and do some landscaping and repairs and stuff. So I do the rest of the management myself on those out of a sick sense of fun.


I work with small local banks and credit unions for the most part. I find that they're much more flexible and they can close very quickly when the need arises. Also, normally you're only one person removed from the bank president, so you can always get quick decisions.

After getting my first rental house and showing success in that, what is the next step? investing in a duplex or a similar low multi unit property? where along the line are you ready to jump into apt complexes and big multi unit properties.

when should you consider getting a property manager?

Well, that is hard to say. I think that the only thing holding anyone back from commerical properties is money. If you are pretty comfortable with risk and you understand financial analysis of RE and you understand due diligence, and you have the money....why wait?

I guess I don't really see how owning a single family home rental and a duplex and a fourplex and an eightplex and a twentyplex and a 100plex are that much different. IMO, the only real difference is that in large properties you have to deal with stuff like laundry facilities and parking lots. Otherwise, basically the same in terms of operations, just more bodies.

Obviously large properties take more time to manage. But one of the really great things about large properties is that you can hire a full time manager to deal w/ all the tenants and problems.

However, I do think that one should spend a few years managing their own properties. I feel that regular contact with tenants in the early years can give you a good idea of what they're like and the kind of things that they want. You get to know your market. YOu also get used to the eviction process and landlord tenant laws. If nothing else it'll help later on when you want to hire someone else - you'll know what experience is important in a manager.

Any recommendations on how to improve the tenant screening process?

I own a 4-unit, a 2-unit and two single family homes of low-income housing. I have found that I have regular issues with deadbeats and am trying to sort out how to improve my track record.

I need a little more information. Are you working with Section 8 or other community programs? What is your current screening process?

Spex, how about a seriously open-ended and completely vague question?

Suppose you are 23, a few months out of school, living in the northeast. You have a reasonably well-paying job and would like your poker earnings to go into real estate. Say you have ~30K for a possible RE investment. What kind of property would you purchase?

Note: I know virtually nothing about RE and plan on reading up over the course of the year. I anticipate making a move in RE next winter.

We have one tenant that is section 8. I have been trying to find out if section 8 facilitates matching landlords and tenants; do you know anything about this? Are section 8 tenants a bad idea?

Are there other community programs that I should be aware of?

My current screening process is admittedly poor: I confirm employment primarily other than that it isn't very structured. That is why I am really looking for information and guidance.

I have a local guy that does my repairs and such, but he doesn't handle the property management part. He has been the source of a couple of placements that have largely worked out well.

Hi Spex,

Are your investments all within driving distance of where you live? If so, where do you live? I'm in San Jose, CA where the average price of a single family home is around 600k. (The prices haven't dropped too much in silicon valley)

That makes it a bit hard to invest as a new RE investor needs a bit of capitol. I know there are ways around this and it's possible to use other peoples money, but it's still tough to get in.

I currently have a few rentals out of state, 3 SFH's and 2 duplexes. I plan to sell them in a few years and get into a small apartment complex. Something like 30 units or so, probably out of state as well.

Do you have any recommendations on out of state RE investing? Where to invest?

This is what I am trying to get started doing. I'm in SoCal where the prices are dropping steadily, but prices are still too high to yield a positive cash flow.

I really do not want to miss out on this buying period, but I can't see the sense of acquiring several properties with negative cash flow.

What would you recommend in this situation?

I am a college student and plan on living in the area for the next 2-3 years... How much cash would I need up front to purchase a 150k 3 bedroom condo and live in it/ rent it out to two other people, then once I move out I will continue to rent it out

I am 21, will it be impossible for me to get a loan, so basically the answer is 150k?

I was asking about this in another thread, and it was thremp who told me that my parents could not cosign since they weren't living in it, he seems to be more knowledgable about this stuff then me, but just wanted to make sure

are there any other options for me to raise the necessary funds, I figure I could max out on student loans....

basically I am interested in doing this, and I am just trying to learn how possible/impossible this would be for me.... thanks

Great THREAD spex...with spot on answers/ideas/suggestions!

Stephen

Great THREAD spex...with spot on answers/ideas/suggestions!

Stephen

*EDIT: its SO good ...I double-clicked it by mistake...lol

If I had $30k and I was just starting out, I'd start by focusing on mobile homes. I've got a young guy in that works my mobile home parks. He buys the homes for wholesale - maybe $2500 or less. He does minimal repairs to them. He then sells them on a note for the retail price - maybe $6000 to $20,000 depending on the home. Usually he charges 13%+ interest on his notes. When I was starting out, nobody ever thought of financing mobile homes a way to quickly increase your cash for investment, otherwise I would have done that.

Ok, so creating mobile home notes is not exactly real estate investing. But its a good way to take $30k and turn it into 100k in just a few years. During that period you can learn more about REI and decide what you'd like to do with your bankroll. It will also give you a pretty good idea of what being a landlord is like even though technically if you sell a MH on a note you are not renting the home. I think that you're drawing from the same basic population though.

So many poker players have this obsession with buying condos as investments and renting it out.


You buy a condo for standard of life, not for investment purposes.


Buying a condo is one of the worse things you can do as when you start renting it out you will essentially lose money or breakeven for years down the line while you continue to have the headache of maintaining it.

The better idea would be to buy a duplex or triplex and rent that out while you live in one of the units....