Tag: rental property

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“If you challenge conventional wisdom, you will find ways to do things much better than they are currently done.” – Michael Lewis, Moneyball: The Art of Winning an Unfair Game.

Before I discovered real estate investing, I lapped up the conventional investor wisdom: If you invest for retirement, buy stocks and mutual funds in a 401k.

So I invested in the stock market. While I did ok, I felt out of control. Stocks go up. Stocks go down. I had so little control over my portfolio. I never felt secure in my investments.

I also noticed that my best stocks only paid an annual dividend of 3-4%. That’s puny.

I thought: There must be superior ways to secure my future with higher ROI and steady monthly cash flow. And that is real estate.

Real Estate Is Better

‘Hold up’, you say. ‘You’re carping about the risky stock market, low returns and you think REAL ESTATE is better? Do you know how many people lose their shirts in real estate?’

Let me hazard a guess – when I mention real estate and cash flow, what do you think of first? Probably rental properties. Being a landlord. Repairs. Vacancies. Headaches.

That’s what the conventional wisdom tells us: ‘Real estate investing’ equals ‘rental property investing.’That isn’t what I’m talking about.

What I AM Talking About: Distressed, Owner Financed Real Estate

A major key to success in real estate is finding a good strategy, and then finding property that fits that strategy. That is what I’ve done with a type of real estate investing that just crushes the stock market year after year. And that is owner financed inexpensive single family homes.

This type of investing is steady, safe and low stress:

• I buy under market value houses in town for $40,000-$65,000 – cash.
• I perform a ‘light’ rehab of $5000 or so per property.
• I do NOT rent the property. I seller finance the property to a qualified buyer with a steady job, documented income and a
• $5000-$10,000 down payment.
• I only ‘carry the mortgage note’ on these investment properties.

Advantages:

• Simplicity – Owner financed real estate profits are extremely easy to calculate
• Add up annual cash flow.
• Subtract property taxes and insurance.
• Divide by property purchase price.
• There’s your ROI. 10-14% is common.
• Reliability – Steady cash flow of $500-750 per month.
• No repairs or maintenance.
• I am NOT a landlord.
• Only expenses I pay are property taxes and property insurance.
• No stress and complete peace of mind.

Here are my houses and their returns – after taxes/insurance are paid:

Property 1

$51k purchase, 16.4% ROI.

Property 2

$72k purchase, 12.3% ROI

Property 3

$43k purchase, 16.5% ROI

The bottom line on my distressed property portfolio:

• 3, $50-$60,000 houses
• Bought for cash and owner financed to qualified buyers with
• $5000 down minimum.
• Total return average: 15.06% ROI
• Repairs: None. Ever.
• Total cash flow per year: $23,450.

My cash flow is rock steady and doesn’t vary. In a few years, when the stock market inevitably dives and investors are in a panic, I’ll continue to pocket my 14.1% annually.

Summary

My distressed real estate portfolio simply crushes the typical stock portfolio. It is more profitable, less stressful, and much less prone to market fluctuations than the stock market. It also does not suffer from the problems of rental property investing: vacancies, repairs and maintenance.

Regular investors can stick to the conventional wisdom. Me, I’ll take the unconventional and enjoy 14% per year – for life.

In February, we sold one of our cash investor’s properties in San Antonio by owner finance to a homestead buyer. Are you surprised, given its appearance? Many investors would pass by a house that looks like this – the conventional rental investors at www.biggerpockets.com were outraged that we sold this house to a buyer. But what would you expect from a bunch of landlords with mortgages? Conventional thinkers – enjoy your $200 a month in cash flow and your repairs! 🙂

As the picture shows, this is a rough 4 bedroom, 1 bath located on Colima Avenue on the near west side of San Antonio. It has approximately 1400 square feet and obviously needs a lot of work.

Our investor bought this property one month ago for $20,000 and spent approximately $5000 to make minor repairs and to paint it inside and out.

Many of the investors that I talk to have told me that they would demo this house; obviously, no one would ever live in such a place!

That is an understandable reaction. But it is a mistake and a lack of understanding of the affordable home demand in our city – we should not view these properties from the point of view of how we the investors live, but how our end clients live. This house presents an excellent opportunity for a blue collar contractor who has rented for years and never thought he could own a home.

We have made a very profitable career out of buying houses such as these that other investors pass on. We love the fact that other investors recoil in horror at these houses!

We had dozens of calls from owner finance buyer candidates for this house.

We are able to buy and resell these houses effectively in San Antonio because of our end buyers – mostly blue collar, contractor Hispanics who love to buy cheap, run down homes and fix them up.

While this house looks very rough to most investors, the right owner finance buyer sees it as an opportunity to own a home cheap and to fix it up into a nice little house.

The end buyer on this home was thrilled to get it, believe it or not. He had the $3000 down payment in a McDonalds bag, and has documented income which we carefully verify per the SAFE Act. He already has the keys and is starting to rehab it.

Terms on this deal:

• $3000 down payment
• 10% interest
• $400 per month
• No prepayment penalty, no balloon
• 30 year note
• Final price: $39,900 (FMV)

All Dodd Frank underwriting rules are followed in buyer qualification process.

Owner finance price is FMV and IS NOT ‘predatory’ lending, which is highly illegal.

Our investor is going to make a 12-13% cap rate on this property, after tax/ins are paid. He has no other expenses.

Despite what some investors think, you can do extremely well on cheap, distressed houses, and not maintain them.

Note: This strategy may or may not work in your specific market. The strategy works well in our San Antonio affordable home market, your experience may differ. Any REI strategy has risks, and this one is no different. Be sure that you follow all applicable laws and regulations in your area. Dodd Frank rules require that all potential owner finance buyers be fully qualified to ensure their ability to repay the loan.

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Real estate investing for most investors usually means renting out houses. And for many landlords, they often are tempted to buy cheaper homes with theoretically higher rates of return (with correspondingly higher rates of repairs and headaches).

I used to landlord, but never again. Rather, I now work in residential real estate without repairs, landlording, or any overhead costs at all. What type of investing, you ask?

I buy affordable residential investment properties for cash in affordable markets, and owner finance them to qualified buyers. This was my first house in San Antonio I bought and owner financed to a carefully qualified buyer ($5000 down, $810 per month, 20 year note, income fully documented, stable work history):

My first non-rental property when I bought it in 2013 for $51,000 (see original back porch in photo at top of page). A train wreck. Scroll down to see what it looks like today (Occupant paid for rehab not me).

My focus in real estate investing is NOT asset appreciation, but pure, no overhead cash flow. This type of investing is what I prefer today for three reasons:

First, I provide a philanthropic service to my community with home ownership. My buyers are hardworking families with a stable job and good, documented income, as well as a sizable down payment.

Most of my buyers rent a home for most of their lives. My real estate investing program in Texas provides them with an opportunity to own their home. This in turn helps to raise up entire neighborhoods, as more and more people buy their own homes. Note that TX is an easy foreclosure state, so if they default, I simply resell the house again in 60 or 90 days with another down payment going into my bank account.

Second, I am not responsible for property maintenance. I have no overhead costs as landlords do. As the note holder on this distressed investment property, all I do is collect the monthly payment electronically. The buyer living in the home maintains the house, so I as the note investor sleep like a baby. That family is nearly always a blue collar, contractor type with the skills and desire to fix up their home. This also means that investors need not live in this area to invest. Below is a property I bought for $50,000. The end buyer has poured $25,000 into the house, and it’s now worth over $125,000.

The same house in April 2015. Buyer put $25,000 of rehab into it. If I ever have to foreclose, I will resell the house $10,000 down, $1300-1400 per month, rather than $5000 down, $800 per month as I do now.

Third, I earn a solid rate of return with a cash real estate purchase with no mortgage. Buying affordable homes in San Antonio, Texas means that I can buy a home for only $40,000-$70,000. The rate of return on each property is at least 10%, and can reach 15%. I enjoy passive, monthly cash flow without maintenance costs. Here is a typical deal in our market with a 12.3% ROI.

Currently I am waiting to buy more of these houses until the market goes into the next down turn. A major advantage of this type of investing in distressed houses is that the business only gets better in a crash. The $60,000 house becomes a $40,000 house and I can buy up ever MORE of these for more cash flow :).

When you consider these facts, I think you can see why I prefer to seller financing affordable real estate properties in my market over rental properties. Seller financing your investment rather than renting offers you a high rate of return, no overhead costs, with no property management stress.

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Many real estate investing beginners see the flashy ads for real estate guru programs and are tempted. These programs usually entail a free or low cost seminar on house flipping, for example, which really is just an up sell for the next part of the program — the $20,544 program where they will teach you ALL of the secrets to become a wealthy real estate flipper or investor.

(Oh, and don’t worry, they’ll say: You’ll make that $20,544 back on your VERY FIRST DEAL!)

You should be very cautious about buying into one of these guru programs. Very frequently, such seminars are nothing other than a sales pitch to sell you more seminars, coaching and media.

I’m sure that you can learn some useful things at some of these guru programs, but they carry very expensive price tags for a lot of things you can learn for free or nearly free.

And here’s what the gurus won’t tell you – Spending $20,544 on a real estate investing seminar isn’t going to come close to assuring you’re going to make money in real estate. You’ll make the GURU plenty of money, that is for certain. But will you? Questionable. You could even end up in one of these 4 real estate investing train wrecks.

Here are some straight real estate investing truths to remember:

• Becoming a successful investor takes a LOT of work.
• Let me say that again: Becoming a successful investor takes a LOT of work.
• Most people who want to be real estate investors never do a deal, including many of the people who pay $20,544 to gurus.
• A big part of being a successful investor involves developing a good reputation in your local market – that’s years of work.
• Being a successful investor comes from building a large network of real estate professionals – rehabbers, title companies, attorneys, closers, agents, fellow investors, and on and on.
• Most successful real estate investors are experts in their niche of real estate in their local market. They are local market EXPERTS.

That can’t be learned in a 10 day real estate class.

Here’s a good example: I know several investors who have been in the investment property business in San Antonio for 20 years. Many of them have developed prosperous real estate careers and retired early with cash flow every month.

These investors are experts city’s residential real estate market for affordable homes. They know what their houses are worth day to day and never pays more than needs to for them. They always make a good profit with their owner financed deals.

These investors have a stellar reputation in the city; people know who they are in residential real estate investing. When it comes down to buying a property, they do it with cash in 10 days. And their word is there bond. That’s pretty rare in real estate, and that’s why the real ‘deals’ often find them – deals you don’t pick up at the auctions with hordes of new investors fresh out of their $20,544 real estate class. People know these investors are serious and those reputations took years to build.

That’s not something you get from putting $20,544 on a credit card for a real estate guru class.

So How to Become a Successful Investor?

So if you shouldn’t shell out the big bucks for a guru program, what to do? Here are some tips:

• Don’t go it alone – Many starting investors try to find their own deals, do their own rehabs and so on. That is a nearly certain path to failure.
• Ask any successful investor friend where they learned their business. They probably can connect you to someone who can show you the ropes, and hopefully for a low cost.

• If you want to work with an experienced investor, bring something to the table. What can YOU do for the investor? Maybe you can help her find investors or do some leg work on finding new deals.
• Figure out your niche – This is important: There are 10001 directions you can go in in real estate. Choose a niche and STICK TO IT. If you focus on too many things, you lose focus. For example, I only focus on affordable, single family homes in San Antonio from $40-75k, usually with owner financing. My focus is long term buy and hold cash flow with these houses. That’s it.
• Get a (free) mentor – Not every ‘guru’ charges big bucks. You can have a mentor who charges you nothing, as mine does. Another benefit of having a free mentor – he or she may be able to help you find the good deals, ones that are hard for rookies to find. I have been able to purchase several excellent deals through mentors that I never would have gotten on my own.

As you look for a mentor, look for someone who has done several hundred deals and has been successful through real estate downturns. Those are the guys to work with.

So, you certainly can become successful in real estate without paying $20,544 to a real estate guru! And one last thing – real estate gurus selling classes and books are good at marketing more than anything. Nothing wrong with that.

But if you want to really learn real estate investing, shouldn’t you work with an active and successful real estate investor?

The market crash of 2007-9 caused many people to be leery of real estate investing generally. This is easy to understand: For most of us who were not around during the Great Depression, the Great Recession was the worst economic time we’ve ever seen.

Tear it down? Heck no! Investor makes 12% a year on this $20k wholesale house with no maintenance costs (end buyer is rehabbing it).

There continues to be a lot of residual fear of real estate….we run into people who think that the next downturn is going to make all real estate ‘worthless’ and consequently, investing in real estate is too risky to consider.

We agree that some types of real estate investing are risky, such as typical boom/bust retail markets, including parts of California, Las Vegas and Florida among others. If you buy retail property at or even above market prices in a booming economy, especially with a mortgage, you are indeed taking a risk that can come back to haunt you in a crash.

However, investing in distressed single family homes such as we do in our city is not risky. We owner finance them to carefully selected blue collar buyers, so we do not do any maintenance (renting out these kinds of houses is another matter entirely). In fact, rather ironically, buying ‘junky houses’ in some markets is very profitable and safe, in up and down markets, with owner financing.

There are four reasons why:

#1 We Buy Distressed Homes Under Market Value

We usually buy houses at 70% or less of market value. If the house is worth $80,000, we seldom pay more than $55,000 or so for the property. If we cannot get it at that price, we move on to the next deal. Buying cheap means that we are protected in a down turn. It also means that there is plenty of room for us to make a profit, AND for our investor to make a profit as well.

#2 The Prices of Distressed Homes Are More Stable

A distressed house priced at $60,000 in today’s market in our city may fluctuate some in a down market. But the fluctuation will not be nearly as severe as in higher priced, middle class homes of $200,000 or more. In the last crash, the prices of distressed homes did drop 20-30% in San Antonio.

HOWEVER, the price drop can benefit the wise investor who is liquid. If you have planned ahead for the downturn and have cash, then you can buy up properties when the prices drop. You will be able to pick up a $60,000 house for $40,000 or even less in some cases.

#3 The Demand for Distressed Homes Goes UP in a Market Crash

The drop in distressed housing prices doesn’t last long in a down market. The reason is that as middle class homeowners lose their jobs and homes, they have to live somewhere. They turn to cheaper, distressed homes to provide them a place to live. In the last crash, we saw demand for our homes increase after a brief downturn in prices.

#4 Our Market Has Endless Demand for Affordable Homes

Our city’s high number of blue collar, Hispanic, cash-only buyers means there is never a drop in demand for affordable homes. It only increases in a downturn. There always will be credit challenged owner finance buyers seeking to buy an affordable home. We carefully qualify these buyers to ensure that they pay you on time month after month.

Our profits from 2007-9 only increased in distressed houses in our markets.

In summary, run down or ‘junky’ houses can actually be surprisingly good investments, especially if you owner finance them to carefully selected buyers with good income and 10% down payment.

This article is now on Inman News.

Takeaways:

• There are approximately 28 million real estate investors in the U.S.
• Trying to invest on your own is a surefire way to overpay and lose your profits.
• Your real estate profit or loss is locked in the second you sign the contract, so you must make sure you have the best deal possible.

My first real estate investing career in 2005 ended in smoldering ruins. I lost money on every property and eventually sold them off at a $150,000 loss.

My second foray in real estate, however, has been highly successful. The difference: I have avoided two ugly real estate investing train wrecks that derail many aspiring investors:

Train wreck 1: Going it alone

Many real estate investors — there are approximately 28 million in the U.S. today — enter the business in haphazard fashion. They lack both a plan and guidance.
There are approximately 28 million real estate investors in the U.S. today.

The sad story goes something like this:

• The investor earns $100,000 in home equity and wants to make money with it. So they take out a line of credit.
• They think real estate investing sounds like a good idea.
• With no experience or idea what to do with the house, they buy a house that costs too much. Then they pay $10,000 more than they should for rehab, take four months to rent it out, and then they have to evict the tenant, which takes three months.
• By the end of year one, they lost money and think real estate investing is a terrible idea.

Real estate investing on your own without a plan is an awful idea, and it will cost you your profits.
Real estate investing on your own without a plan is an awful idea, and it will cost you.

I avoid this train wreck now. In my current investing, my plan is to buy under-market-value properties in San Antonio, Texas, from $40,000 to $80,000, do $5,000 in rehab, and resell them with owner financing.

I earn 12 percent return on investment (ROI) typically with zero property maintenance costs.

That’s a plan. To execute it, I work with an expert real estate investor who finds me deals that match my model. If I can’t get the house at the right price, I move on to the next deal.

Action plan

• What to do: Scout local real estate investing meetings for an expert real estate investor.
• What to look for: He or she should have done at least 500 deals and been in the industry for 10 years.
• What else to look for: A long track record of success through real estate crashes.
• The pitch: Offer to help the investor with their business (answering phone calls, posting bandit signs, gofer work) in return for mentoring you.

Train wreck 2: Paying too much

Most rookie investors lose money because they pay too much for the property.

Remember that your real estate profit or loss is locked in the second you sign the contract. If you overpay, you are probably going to lose money.
Remember that your real estate profit or loss is locked in the second you sign the contract.

The worst-case scenario is that you pay out of your savings account to keep the property afloat and to keep you out of bankruptcy court.

Lesson

You must perform a thorough analysis of any property you might buy. If you are renting property, you need to know:

• Mortgage payment
• Down payment requirements
• Rental income for you to qualify for a loan
• Price-to-income ratio
• Price-to-rent ratio
• Rental yield
• Capitalization rate
• Total monthly cash flow after all expenses

Action plan

• What to do: Work with your expert real estate investor to ensure that the property will generate cash flow after all expenses are considered.
• Consideration: Owner finance the property to a qualified buyer, instead of renting. This strategy saves you rehab costs, maintenance costs and eliminates cash flow worries.
• Another consideration: About 24 percent of U.S. real estate investors buy properties in cash. Owning investment properties without mortgages provides peace of mind and more cash flow.
• You can buy investment properties with IRA or 401(k) funds, as do about 4 percent of U.S. investors.

Hopefully, sharing the train wrecks that I incurred and the strategies to overcome those wrecks will keep you on track with your investments.

This article is now on Inman News.

Key Takeaways

• Zillow states on its website that it is a “useful starting point” to assist homebuyers with valuing real estate properties.
• Although most investors say that Zestimates seldom reflect what’s happening on the ground, some new real estate investors seem to rely on Zillow as their main data point on property values.
• Rather than relying on Zillow, it’s better to find local agent investors who operate in the real world and can provide accurate values of homes based on many factors, including comps, buyer and seller motivation, damages and more.

Zillow states on its website that it is a “useful starting point” to assist homebuyers with valuing real estate properties. Some real estate investors say that though Zillow is indeed a data resource, it can mislead investors about the real value of property.

They claim that Zillow Zestimates seldom reflect what is happening on the ground in neighborhoods that they know well. However, some new real estate investors seem to rely on Zillow as their main starting point for property values.

Close examination suggests that Zillow might not be a good tool for gauging real estate investment property values.

The Washington Post reported in February that the error rate for Zestimates “can be high.”

Another article in the same paper states that Zillow’s predicted values “are wildly inaccurate and inconsistent.”

The fact is that the Zestimate utilizes data pulled from public records and some homeowners; even Zillow states that its values are mere estimates. However, many investors fail to scrutinize the fine print and take those numbers at face value.

Those investors should note that Zillow is primarily a listing aggregator. It might be pulling sales data from many secondary databases that are not frequently updated. Therefore, it might take a month or longer for local neighborhood prices changes to show online.

A good example of the skewed data that Zillow can rely on is shown in the following example. This house in San Antonio, Texas, in the 78201 was bought by an investor for $65,000 cash in July 2015:

It sold with owner financing for $99,000 five weeks later. Zillow stated that the value is $74,100. That price is more than the investor paid by $10,000. And the owner finance sale was not reflected in the Zestimate because it was an off-market deal.

Many real estate investment purchases might be done in this fashion: off-markets are not reflected in Zillow data.

This article on Zillow.com states that has a median error rate of 8 percent. This statistic suggests that Zillow might not be an effective way to price real estate investments.

Zillow can be a useful starting point for property values, but if a real estate investor wants to obtain accurate real estate investment property prices, there are better options:

• Obtain access to local, brokerage-based sites in your desired cities. They will provide you with fresh property data that might be more accurate.
• Locate an extremely experienced investor and real estate agent in your city. Local agent investors operate in the real world and can provide accurate values of homes based on many factors, including comparable listings, buyer and seller motivation, damages and more.
• You should target an active investor who does 50 or more deals per year in your chosen neighborhoods. He will most likely have a bead on what prices are like right now.
  You should target an active investor who does 50+ deals per year in your chosen neighborhoods.
• An experienced and successful investor in your market could be the ticket to getting a real estate deal at the best price.