Episode 90: Buy Rentals

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David: Alright guys, welcome back to the Discount Property Investor podcast. I’m you host David Dodge, co-host Mike Slane.

Mike: Thanks, Dave.

David: How you doing, bud?

Mike: I’m doing good, how are you?

David: I’m well, I got up early this morning, feeling good, little workout. Rocking and rolling, man.

Mike: Workout before starting the day, I love it, that’s great, I always do that. It makes me feel like I am not starting the day off wrong. When you have got that done it’s great. Awesome, man, what are we going to talk about today? We are kind of delving into our shift in topic. Normally we talk about wholesaling. Wholesaling is when you– in real estate is when you purchase a property at a great price, and you sell it at a good price, and you make a little spread. That’s our normal topic, we love that because it is a great way to start investing in real estate, you learn all the numbers. We have got a free course on that, freewholesalecourse.com, we have a book out there.

David: We’ve got a book out there.

Mike: That was recently published in audible so we are super excited about that.

David: It is on audible now. Very cool.

Mike: — and either search for one out names, probably the easiest way to bring it up, or the title–.

David: That’s how I found it. Searched my own name.

Mike: ‘The ultimate guide to wholesaling real estate’.

David: Book one, we are coming out with multiple more though.

Mike: We really liked it. It was fun to put together, and really fun to record the audible version.

David: Last week we talked about why rentals. This week we are going to talk about how.

Mike: The plan is to talk about what to buy, and kind of how to buy it, how to fund it. So if you started out wholesaling like us, you hopefully know your numbers, and that is kind of a recurring thing with rentals is you have to really sharpen that pencil, and know your numbers much finer when you are executing the BRRRR strategy, especially when you are trying to leave as little money in the property as possible. In this market with interest rates low, and prices kind of slowly climbing here in the midwest, we definitely want to leverage our money as far as we can. So we are trying to leave as little possible in the houses and just keep repeating. So that BRRR strategy is Buy, Rehab, Re-finance, Rent, Repeat. That repeat is what we have to keep harping on.

David: Correct.

Mike: So what do we buy, Dave? What are we looking for?

David: We are purchasing rentals. What is very important to us– obviously Mike mentioned know your numbers, so you need to know your numbers. But also the location. The location of the property is going to greatly affect those spreads and those numbers. Certain parts of town as we know– you might have class A properties, or class B or class C or even class D. Sometimes you can buy a property in an area that you might find in another area that is the same sized house, but it is double the cost. So the location is very, very important. Next we really want to get familiar with the city and county rental laws. So there are particular areas in St Louis that will charge a fee to have a rental property, you have to have a licence. There are other parts in towns where if there are too many rentals in that neighbourhood, or on that street already, you can’t even rent that house. So you definitely want to be familiar with the local laws before you jump in and spend money buying a property that you might not even be able to rent out.
Mike: That’s a good point. So here in St Louis, I want to talk very specifically so– in St Louis county, we have– if it’s an unincorporated area– so St Louis is a very– I would say complicated market for a lot of new people. In St Louis county that are many other municipalities under it. The municipalities have their own jurisdiction and their laws on stuff. So if you–. If you are in unincorporated St Louis county you deal with St Louis county inspectors. If you are in a municipality that is incorporated such as Berkley, then you have to deal with Berkley’s inspectors. So Berkley is what Dave was referring to. They have this law past that says you can only have a certain number of rentals on this street. You think to yourself, that sounds pretty near, that’s a great idea to keep up property values. You don’t want a whole bunch of tenants moving in that are going to drive down property prices. That may be the case had Berkley done this 50 years ago. But the problem with Berkley is– already has– is a rental area, it has already turned kind of slummy. Now you are discouraging investors from even buying a property.

David: Well it’s a catch 22.

Mike: It is.

David: They put the rule into place because a majority of the area was rentals already. They thought by saying, hey let’s not allow investors to buy here any more, because they don’t care of the properties, let’s make it so only the owner occupant, the primary resident, people that are wanting to move into the home and own it can do it. But the problem is there is not that many people in that area that want to do that. Investors are really the only choice. So the catch 22 is that they did it because they wanted to make the area better. But the law in my opinion is actually making the area worse.
Mike: Right. And the secondary issue is that the property values are probably top and outed at around $60,000 top. Most of them are probably $20-30,000 properties. So you are not going to get many banks that are willing to lend on $20-30,000 properties. So there are many areas, or many issues with the area. Again, I don’t know if they necessarily made a smart move in doing that. But again, that is why it is very important to know your local area pretty well. Not your local area, to know your investing area. You don’t necessarily need to invest in your back yard. If I was in– we will pick an area here in St Louis. We will say if you lived in [00:06:54.18 – inaudible], and you are looking at million dollar houses, driving by million dollar houses each day. It doesn’t necessarily make sense to buy something close to you just because you like that area and you are comfortable with it. You have to get out your comfort zone and invest in an area that is going to make sense from a numbers perspective, so you can make better cash flow. Really comes back to that knowing your numbers thing. It is very important. So we are going to invest in areas, in our north county areas and our south county areas, some of our west county areas we can find some good homes where the numbers make sense. So that is very important. We suggest starting in your backyard, looking at your local area, because again you are going to be more familiar with it hopefully. Educate yourself, go out there and attend REIA’s and find out where other people are investing. But I do think that is important. Let’s talk about the type of property, Dave, if you want to jump in.

David: Location is very important, type of property is another thing we are always looking at. Are you buying a single family? Are you trying to buy multiple family? Knowing what you are looking for in advance is going to help you tremendously, don’t just go out there and start shopping without knowing what you’re doing. So again, you need to know your numbers. Having a bed and bath count. Typically we are looking and searching for three plus bedrooms with at least one and a half bathrooms. Those are the best houses for us, if we can get more great. We own rentals have have two one, of course, do we one one ones, no we don’t, because those houses do not make sense. If we come across those we try to wholesale them, or wholetale them, but we are not interested in buying those to keep because they just don’t work for us. So you have to have– a parameter set for what you’re looking for, okay?

Mike: Let’s talk about– let’s dive a little bit into that. So why do one bedrooms not work for us, Dave? What’s the–.

David: Well it’s impossible to charge them enough rent to cover the mortgage– whenever you end up buying it, rehab it, you have to pay for that. You have to borrow money to pay for that. Then you have to get all that money back with the BRRRR strategy. So you are going to have a very high mortgage after you do those first two steps. Well the next step is to find a tenant that can pay you at least $200-300 more than that. It’s very difficult on a one bedroom to get 800-900 bucks in rent unless you do a really nice job on it.
Mike: It’s interesting because that gets into your construction quality which you mentioned, kind of your construction costs. So a one bedroom still has one kitchen. A one bedroom still has one bathroom.

David: It still has one roof too. It has all of the components, all the systems, electric, plumbing, water, you name it.

Mike: You have to repair all those things, but you only have one bedroom.

David: Collecting rent, yeah.

Mike: — bedroom is relatively cheap in the whole scheme of construction.

David: It’s the cheapest part.

Mike: Exactly–.

David: You could build a bedroom for eight grand.

Mike: So to have another bedroom is very inexpensive. You can’t add onto a property that cheaply, you can’t add a second bedroom on that cheaply. But again, when it is enclosed already, it is very cheap to replace flooring, paint and a light fixture, or flooring, doors and you know– so bedrooms are relatively inexpensive to rehab. That’s why the one-bedroom– the cost of rehabbing it is higher per bedroom essentially, and that’s not necessarily the way I look at it, but it’s a higher cost to rehab it and only get one bedroom worth of rental.

David: Dollar-cost average of two bedrooms versus one, all your costs are half.

Mike: Right. So that’s why three-bedroom is a good– where a lot of investors like to play. That is not to say that one-bedrooms are not going to make sense for you. I’ve heard of– I don’t actually know the person, but it was a friend of a friend. They solely invest in one-bedroom units. Why? Well because not many people do. There is less demand for it. So a one-bedroom unit–.

David: It’s a strategy I guess you could go with.
Mike: Well the one-bedroom unit– there isn’t as many people competing. So you can go in and offer much less money and hopefully get some relatively good deals on it.
David: Right.

Mike: Then who is going to rent a one-bedroom? The one-bedroom might be rented by a single person.

David: It could be a couple, but mostly a single person. Typically they are not going to have kids.

Mike: Exactly they are not going to have kids. A lot of times it is going to be an older person, they are not going to move that often. I was told this person–.

David: There are certain strategies with that.

Mike: This person has had some success with that because he is able to keep tenants in place for a longer period of time, and he is able to pick up properties for a little bit less because there are not as many people hunting for those one bedroom houses. So again it’s different strategies, but for us– again, our metrics is that three-bedroom. So Dave, do you want to keep going on with the type of property?

David: So bed bath count is very important. Construction quality you mentioned, Mike. Also, does it have a basement, does it have a garage? These things are going to be very different from market to market. I know some cities have no basements at all, right? Well in St Louis where we invest, 99% of the houses have basements. But they might not have a basement that is a good basement. It might be a partial basement, they might even have a crawl space. I shouldn’t say 99%, probably about 75%. There are some slabs, but if you have a basement to offer, it is either more living space or it’s more storage space for the tenant. Again you have to go into this understanding that you are buying something you are going to be renting out. You want your tenant to have– or you want to be able to provide your tenant with all the possible things they may need. So storage is going to be something you can provide them. Going beyond that to a garage, that also creates storage, or it can create parking. A lot of people don’t want to leave their car out on the street, because the sun is going to tear up the paint, deteriorate the car as well as water. But on top of that, it is more likely to get broken into. So being able to offer somebody covered parking or even secured parking, which is what a garage can provide, it is also going increase the value of the home, and allow you even more to increase the value of the rent. You can charge more and make more.

Mike: The way my mind works, I am just kind of wandering off here, Dave. I am thinking, why do we have basements in St Louis? Why are basements so common in the midwest? Do you know? When I was growing up I thought it was because we have severe storms and twisters. The tornadoes come in and everyone wants a basement.

David: That’s actually a really good–.

Mike: Question? I actually have no idea why we have basements because we can I guess?

David: Right. I guess in some places they don’t, you can’t, either the water table is too high, or you live– in some places, it’s all just rock, like in Austin Texas. Unless you want to spend $100,000 to put a basement in, it’s just not worth it. But here everything is just soil, you can dig down real easy, that’s probably the reason. It also adds square footage, not necessarily square footage that is on the tax records, but it adds additional–.

Mike: — liveable space, storage space, basements are awesome. But again I don’t know, I guess you’re right, I guess it’s because we can, yeah I guess the storm thing is a little bit of an issue.

David: Absolutely. Let’s circle back though to knowing your numbers. The last part of what we are looking for other than location and of course type of property– type of property also condition, which we will get into in later chapters or later episodes. Condition makes a big difference too. But for this particular episode, it’s the rent. We want to figure out our cash flow. This goes into knowing what we are going to be paying for the property, how much it’s going to cost to fix that property, then knowing what we are going to be bringing in rent. So you want to be able to buy properties that are going to have a good cash flow. That just means all the money that is left over after you pay your bills, okay? Again, we talked about this a little bit earlier, you have classes of properties. You have A, B, C, in certain areas you may have negative cash flow. The amount of money it costs to buy that property for the amount of money it costs, or that you can collect in rent could be a negative number. You want to find areas that provide high cash flow. Not necessarily bad areas, but the areas that are lower quality than A in terms of class, but are still desirable nice areas. We try invest in B and C areas.

Mike: A lot of people define asset classes differently. But I would say that is how we define it definitely is B and C kind of areas, which are desirable areas, people are working class, people want to live there. It’s a good mix of homeowners and landlords. That way property values stay up and hopefully have other landlords that maintain their properties, so property values remain stable. So know your numbers though, rent estimate like Dave said, very important. Where can you find that? Well one of these big players, Zillow.com, Zillow is great for giving you an estimate.

David: It basically pulls all the neighbours– people who have posted their property for rent on their own website. It averages all those numbers. It is actually a pretty good understanding.

Mike: Other ways to find it is to go out and look for a property to rent.

David: That’s the best way.

Mike: Like you’re a tenant or someone looking for a property and search property management websites. Search for rent.com, places like that. Google property for rent in your municipality or your zip code that your property is in, and see what’s available.

David: Zillow is a great tool too.

Mike: Definitely and you want to compare the quality of the insides of that property and the rent on each of those.

David: Cool, cool.

Mike: Next thing, let’s jump into funding your purchase, okay? We talked a little about what to buy, and we will recap real quick; location, type of property and knowing your numbers, find out the rent and all that stuff. Now we want to talk about how to fund your purchase, okay? So our target audience is usually the wholesalers, but we are going to circle back and kind of talk from a beginning investor’s standpoint, how do you get started? I won’t– remember that’s our audience, but the first way–.

David: Good point, Mike.

Mike: You know what I mean? I always like to try and–.

David: Not everyone has a bunch of private lenders waiting to give them money.

Mike: Or five million dollars sitting in the bank and I will just go buy rentals and make my money off the cash flow. It doesn’t work like that and we realize that. So this is hopefully written a little bit more for the real world.

David: That’s correct.

Mike: So step one would be cash. If you have a bunch of cash and you are just looking for a high return on your investment, rentals are a great way to do that. So again, you can go out there and buy cash, leave all your money in it– done. Pretty easy, invest 100k, we like to see about a thousand bucks a month for a 100k property. So again, you are going to make– what’s that? 12%? Return on your investment.

David: If you don’t have the cash, go meet a banker, alright? That’s what banks do, that’s how they make money, is they lend it to you. Most people don’t have a 100k laying around to just go buy a property cash. So cash is the first way you can do it of course. Bank loans is the second way. You just need to go talk to your banker. If you have a W2 job, or you have a job that pays you a salary, that is going to help you tremendously getting a bank loan. A lot of people don’t realize it, but banks are willing to give five to ten loans to any individual before they want to start seeing a business buying this property. I think actually the law allows you to buy ten homes in your own name right now. The banking requirements I should say not the law. Go meet a banker, you can get a bank loan relatively easily to buy a rental property. Maybe even get the amount of money you need to purchase it and to rehab it from your bank. You won’t know until you go, so go talk to your bankers. Another way would be using private money, or hard money, which is in this case the same thing. But all private money is someone you know that has money to invest, and they don’t want to go out and buy the home, they don’t want to manage a portfolio, they don’t want to day trade in the stock market. They want to lend it to you at a fixed interest rate, then you take that money, you go buy it and you get a refi from a bank and you pay it back, okay? There are lots of private money lenders, go to local REIA’s. The one I just went to last week, I had four or five different people handing out business cards, and telling me that are hard money investors, which is a private money investor essentially. So what is hard money? Hard money is a lender that lends on a hard asset. That’s it, it’s not hard to get, it’s just that you have to have a hard asset, aka real estate in order for them to lend on, on it. If you can get it at a good deal, you can show them that you can add value by fixing it, and sell it for a profit, they are going to want a piece of that profit. They are going to give you the money to go do it, it’s really really easy. Go to a local REIA, got literally four or five people handing me a business card to give me money to go buy a deal at the last REIA I went to.
Mike: When times are good money flows, man. Especially if you find a good deal.

David: It’s everywhere.

Mike: People are willing to give it to you. So don’t have that scarcity mindset, definitely have that abundance mindset when you are in this business, because there are plenty of deals.

David: Private money 2.0 will be you can create yourself a fun. We have a course on this actually, called Savvy Leverage. But you can actually put together up to 25 I think people’s money and do a fund, make a business out of it, then that fund that you control can go buy properties. So lots of ways to fund purchase. We talked about cash, we talked about bank loans, private money which is also hard money, funds, what am I missing? Anything else? Transactional funding? But that’s not going to help you with a rental.

Mike: Cash, bank loans, private money, private lenders versus hard money.

David: It’s the same thing essentially.

Mike: Varying interest rates. So again, in private–.

David: All hard money lenders are private lenders in my opinion. Not all private lenders are hard money lenders though.

Mike: So like think about LongHorn Investments, they are pretty big here, based out somewhere in Texas. They are a hard money lender, and they are– what I would consider an institutional investor.

David: You’re right.

Mike: Again, hard money just looks harder at the asset than it does at your creditworthiness.

David: Whereas a private money lender is going to look at whatever they want, so each to their own.

Mike: So private money lenders is what I like to think of is like, hey I have a rich uncle– hey can you lend me some money?

David: Or maybe you might have grandparents who have a big retirement account, or they can lend out of their account to you as well.

Mike: Exactly.

David: Something along those lines.Mike: Or again, a brother or whoever. Somebody with money who is willing to lend you money because they have seen, hey you are flipping houses, you are wholesaling and renting and making some good money, you are just looking at trying to buy rentals. So again, you have got some experience, you can show them that you are doing this real estate thing.

David: That’s it, know your numbers guys. Always when it comes to what to purchase, always be looking at your location, have metrics in place for the type of property, and know what your rents are going to be so you can determine your cash flow, very important. When funding you have several options; cash, you can get a bank loan, you can get a private money loan, you can use a hard money loan, or you can even create a fund, which is kind of a more advanced strategy. So that’s kind of– what it comes to when– you’re determining what to purchase, and how to purchase it. Anything you want to add, Mike?Mike: Let’s go buy some rentals.

David: Let’s do it, man. Let’s go look at some, I am actually excited to do so. Alright, guys, we are signing off, thanks for listening.

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