SPC110 – My Story – Evictions, Flip Project, Market Updates

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Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Dealing with an eviction:

“Hi Lane! I delivered an evection notice to tenants yesterday and had the opportunity to speak with husband at the door. He stated that he and his wife had both started new jobs and would be able to make one full payment in a week (this was the story for seemingly a month or two) and would be able to make a partial payment in 10 days. Before we proceeded forward with an agreement, wanted to see if that works for you. They are currently $3,000 behind before for a total of two months.  

Here is what I did…

I okayed the concession to give more time. I requested some sort of proof of new job status (a hire letter or email). I am more than willing to work with people… These have been long tenants of almost a couple years and B+ /A- home that rents for $1500 a month.

Caveat… I am really near to selling these properties this year and don’t really want to rock the boat in terms of enforcing long-term behavior.

Revamping my turnkey rental content – simplepassivecashflow.com/turnkey

I have currently sold 2 of 10 SFH rentals (P&L offer)

One of them Columbia is had $27K to get back online. Going to pay 37K to sell retail.

Another property Riverwood just went vacant. Going to pay 20-30K to sell retail too.

  • Talked with my team – PM, Contractor, couple other hui members
  • Is it a good area to go retail
  • Will I recoup capital overlay based on comps

Soon I will unrolling my private lending platform. CrowdfundAloha.com! So if you are looking for a 1st lien property with my partners let me know. We are talking about even providing turnkey services.

This is not really a money making things cause the margins are just really tough these days.

After over 1000 strategy calls with investors and coaching clients over the past couple years here is what I tell W2 employees… For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool/good for you… but just remember why we got into this… To be free from a JOB. A lot of us (80%) who stumble upon simplepassivecashflow.com and start drinking Kool-Aide will be financially free in 4-7 years pending taking action. So I always urge people to start with the end in mind and take a more passive approach.

Do the math here… you with 300 dollars per property (2 months of work to buy a turnkey rental) you are going to need 20-40 of these to replace your income. I have 10 of these and have systems in place but have 1-2 evictions a year and 3-4 big things that happen. Image if I had 30, just 3 x those numbers.

Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard-working efforts of the middle class.

Looking at some deals. So folks in the Hui Deal Pipeline Club (who have reached out to me and built a relationship) will see those really soon. 😛 I hope I have enough liquidity… I might need to borrow some money 😛

Single Family Homes becoming a legitimate asset class – Spring 2018 Conference

The lending requirements and new loan products is slowly changing. I know a lot of you have heard that Short Term Rentals (Air Bnb) income is starting to become part of the loan calculations.

Something I’m following is lending on large portfolios of single-family homes. Some of the highlights:

1) up to 10-year term with 1.25 DSCR

2) portfolios minimum size of 50 properties

3) assumable

Pilot program details download here – https://drive.google.com/open?id=1aTIbru2HEPbw_KLHTvU5-Iyk0aoQB8Gx

Look even a SFH conference – https://drive.google.com/open?id=1cI15DnBUn8LRA54NTCh667exeR3OtlIu

Other Fannie Changes – https://drive.google.com/open?id=1WumUWsduuLnHqDi6IJXNipX7IsT9AUFa

AirBnb lending requirements loosening

I read this following article that described rent concession in a few major cities that I like as apartment markets.

http://www.nreionline.com/multifamily/more-apartment-landlords-offer-free-rent-lure-tenants

Here is another article citing industrial as the sector to be in:

http://www.nreionline.com/industrial-cre-market-study/exclusive-research-clear-sailing-industrial-sector-through-2018

My takeaway is that this is important to monitor especially if you are developing because this is a leading indicator of softness in the market. It might be economic reasons or just because a bunch of new build inventory is coming online in that area. Either way…

Robert Kiyosaki has a saying, “there are three sides to a coin”.

People argue that its a good time to buy or bad time to buy. For example “mfh” is overheated or commercial is getting killed by Amazon and e-commerce. I think these are mental justifications by tire kickers not to do anything.

Sophisticated investors live on the edge of the “coin”. They buy deals out our reach of amateurs due to the lack for network/knowledge. These opportunities are undervalued, with undermarket rents, with value-add opportunity.

They are patient and don’t stray from standards that make them get crushed in a market correction. (Cashflow from other investments make this possible) They invest following the macro and micro trends and don’t gamble on gimmicks such as guessing where Amazon’s next HQ is going or where the hurricanes just crushed a market.

The trouble is as an outsider is figuring out which of these deals transcends the two side of coin and is on the edge. And starting out its going to be slim pickings due to lack of network but you have to push through this rough part.

I am from the camp that you need to become an expert or get beyond the surface level investor stuff in some freebie pdf guide or video. Or just find the right people to work with. To many people get shinny object syndrome and float from sector to sector, from a money-making activity to another, read book after book and never get anywhere. You see these people at a lot of networking events. There is a lot of movement but no tangible results. This is where coaching comes in but for some people not able to get over having another person call them out on their BS you need to get laser focused and take massive action or quit fooling yourself.

I’ll be at the notebuyerbootcamp on the panel for syndication in Chicago next week. Notebuyerbootcamp.com

Turnkey Guide: Wisdom gathered (2012-2018)

Dear prospective turnkey investor,

The following is my constantly updated guide to turnkey. (Updated 4-2018) Email me for any additions or feedback. In the spirit of the Hui Deal Pipeline Club where we crowdsource due diligence together!

I don’t flip or wholesale or do any of that. I have a w-2 job and not looking for another job or chore. I am all about leveraging my money and more importantly, time. For people like you and me who live in places (Seattle, West Coast, Hawaii, East Coast, to name a few) where the Rent to Value ratio is 0.5% or less we have no other option. It drives me crazy when the Real Investor Peanut Gallery (internet forums know for big pockets small wallet) say we are overpaying… well if I didn’t have a life and I had the time to lick stamps and swindle distressed buyers I could buy a distressed property at discount too and probably do it better 😉

I don’t know about you, but I have full-time professional job that earns more per hour than most folks even in real estate and more than these Turn Key providers do. So I’m like sure… I’ll pay retail and rely on their volume and expertise. But you have to find the right ones. Investing for cashflow is not a get rich quick schedule but a prudent way to build lasting wealth a few hundred dollars at a time.

Turnkey rentals are a PITA but if you don’t have much money or time you don’t have any other choice. Have more than $200K? Start thinking about transitioning to being a passive investor.

Update – 8-2018 – Almost done selling the rentals on Roofstock!

Today I buy apartment buildings like this 193 unit in San Antonio where I work with deal finding specialist on my team but it took me almost ten years to get there.

 

When I started this blog/podcasts I was totally into these Turnkey Rentals. I even started to blog on a couple of them in detail:

Rental #4 – Birmingham

Rental #5 – Birmingham

I moved onto bigger more scaleable assets mostly because of stuff like this happening every few months:

“I do have some unfortunate news.  My crew showed up this morning and there was an empty police car in the driveway along with a note from the officer.  Overnight, the outdoor section of the AC unit was cut and stolen (no sign of breaking in).  My crew said he spoke with the neighbors (to the right of the home) and at about 1-2 in the morning a black truck was going around the neighborhood cutting AC units and taking them.  The neighbors called the police and they came out to do their work.  I called the Dekalb County Police and asked them what I would need to do and what the next steps are.  They said, if we want a copy of the police report to come down to the office and present them the case number and if there is any news they would let us know.  I have attached photos of the card the police officer left along with photos of the damage.  It is very unfortunate and I do apologize this happening.  The AC just got inspected and serviced yesterday and everything else is running smooth.  I am waiting to hear back from the HVAC tech about what it is going to replace the missing unit and repairs to the lines, once I receive the service report.  I will be sure to keep you up to date with any news or information.  Please let me know if you have any questions.  Once again, thank you for your time and I do hate that this has happened.”

As much as I poke fun at the asset class and jokingly call it “turkey” instead of turnkey rentals it all started here and is the foundation of my investing portfolio.

 

When I first started buying the rehabs done by the turnkey guys in the blue collar areas, if you posted “hey I’m looking for turnkey” in the forums you get the usual suspects soliciting you for marked up properties. It’s off market because they rehab it for the investor with more durable and less visually appealing materials than your normal retail product. I’m all for the wholesaler to make money because they do spend a lot of time and money on mailers and advertising but the layers of middlemen who add no value is excessive and is almost as bad as Wall Street.

I bought my first couple rentals back in 2009-2012 in Seattle (Primary market/no cashflow). As the prices started going up I was forced to go out of my comfort zone and purchase out of state rents because I needed cashflow in order to achieve my goal of replacing my W2 income as an engineer. I bought one I Birmingham, without seeing it and set up a professional property management company to manage the day to day. That was proof of concept for me to sell my two Seattle rentals and buy 9 Properties in 5 Months via 1031 Exchange.

I work with a lot of engineers and a lot of them say they get analysis paralysis because they like data. I call them out of it and tell them they are just scared and losing $500 of opportunity costs and time per month! A real engineer would look at the numbers. IF rent minus expenses (with contingency) minus mortgage is greater than THEN fricken do it!

Example of capital expenses that need to account for in your expenses and contingency.

Let me be clear, I don’t flip or wholesale or do any of that. I have a W2 job and not looking for another job or chore. I am all about leveraging my money and more importantly, time. For people like you and me who live in places (Seattle, West Coast, Hawaii, East Coast, to name a few) where the Rent to Value ratio is 0.5% or less we have no other option.

It drives me crazy when the Real Investor Peanut Gallery (internet forums) say we are overpaying… Our time is better spent at our high paid professions that we busted out buts going through a couple decades of schooling for.

My full-time professional job that earns more per hour than most folks even in real estate and more than these Turn Key providers do. So I’m like “Sure… I’ll pay retail and rely on their volume and expertise.” Its all about leveraging your highest and best use, which maybe your day job.  Sorry.

The problem is that you have to find the right property and people to work with. And have a mentor so you are not getting screwed. Investing for cashflow is not a get rich quick schedule but a prudent way to build lasting wealth a few hundred dollars at a time.

When I first started buying the rehabs done by the turnkey guys in the blue-collar areas, if you posted “hey I’m looking for turnkey” in the forums you get the usual suspects soliciting you for marked up properties. It’s off market because they rehab it for the investor with more durable and less visually appealing materials than your normal retail product. I’m all for the wholesaler to make money because they do spend a lot of time and money on mailers and advertising but the layers of middlemen who add no value is excessive and is almost as bad as Wall Street.

“I don’t work with top tier turnkey providers…. For the same reason I don’t buy a Dyson Vacuum.. I’m cheap and buy value and buy the sub-100 dollar Shark brand from costco with the excellent return policy.”

These days’ people in the Hui Private group are not on internet forums. They say its 95% of active people who are not high paid professionals and marketers. Here is some of the chatter:

 

The most important thing to do is to grow your network.

So you can bounce ideas off other investors and not a salesperson. I still do free calls but please review the free content I have put on this website first. No, I do not just give recommendations to good people to buy from because things change and I am not going to throw my brand around like that. And by the way that’s an “ask-hole.” I know your character and the trajectory of your success but how you add value to others first instead of taking first. Some people are unaware of this which is why I’m saying something so I aplogize. This could be the reason why people are not helping you out and you feel like a lone wolf.

Webinar with 2018 trends is sent out to Hui Deal Pipe Line Club members sign up below:

I don’t really see much difference in the secondary markets with robust economies (Memphis, Kansas City, Birmingham, Atlanta, to name a few). I have tried to set things up so my different markets complement each other. For the most part I buy in the 1.1-1.3% RV range. I take home 70% in 2015 but now in 2017, I buy in the 0.9-1.1% RV range and take home 60% of the rents after all expenses (vacancy and Cap ex).

I made this diagram in 2016 and it illustrates some of the popular “secondary markets with robust economies” that a lot of out of state turnkey buyers like to invest in. Things have changed a little but as you can see you can either have appreciation or cashflow. It’s tough to get the best of both worlds.

I stress NOT to spend too much picking a market. If you sign up for the newsletter as a Hui member you will get more than enough data to create analysis paralysis. The biggest thing you can do is vet the people. As you can see the same principle is what I use in my syndication due diligence: 50% people & 50% the numbers of the deal.

There are three ways to purchase a turnkey rental:

  • Marketer – I would not recommend going through a marketer, they don’t even invest themselves and they did not add any value. The only one I can recommend is Marco but that is because I know like and trust the guy. By the time I bought my 3rd rental I knew way more than those folks did. Unfortunately, I probably overpaid by a few grand on each of those first few properties not knowing what I don’t know, Work with me only if you want to compress time and want me to look over your shoulder to get my unbiased opinions and guidance. Plus you will be setup with a plan and not shoot yourself in the foot like I did by buying a dozen non-scalable investments.
  • Direct from Turnkey Provider – You cut out the middleman and go direct to the source, theoretically getting the best price. Just know that you are not represented by a broker who supposedly has a fiduciary responsibility to you. (BTW never trust a broker) The transactions are done with their paperwork and their rules. They are the pros and it’s dangerous for a newbie to go down this route. There are household Turnkey Providers (TKPs) out there but I call them the “Prada of Providers”. You pay for what you get and often times more than what it’s worth – I’ll just say you are paying over 105% of retail.
  • Hybrid method – When I was going through my buying spree in 2015-2016, I was going (off market) via an agent that had a fiduciary responsibility to me to check all the BS that the providers give you – this is what I recommend only after going through the process a few times. Usually, the agent helping you is not an investor and does not really know what type of amenities/floor plans and locations are best for rentals. You will need to drive the ship. Note: I see brokers all the time trying to sell junk to new investors.
  • Another cool site out there is Roofstock which is where I sold my turnkey rentals to step up to syndications. Use the link get a $500 credit when you register… They give me $50 credit but I don’t think I will buy another turnkey rental again ;P

You seemed bored reading… There is no such thing as turnkey. Check out these disaster photos from an eviction that ended up being a $37K repair bill… https://photos.app.goo.gl/R4PZLuOLGHONO5Rl2

As I was in the middle of my 1031 buying spree (#6 of 11), a lot of TKPs started to come out of the woodwork and offered their properties to me and gave me the royal treatment (discounted prices from what they normally offer). I got to meet a lot of them via meetups and national conferences because I had this podcast and they were interested in getting at the Hui Deal Pipeline Club ecosystem. Since I was pretty experienced and they liked working with me they offered me referral fees to simply send guys like you over to them with a simple “CC’ed” email. Sort of like a referral source where they would give me $1000 per home sold. I thought it made sense for them because it was a lot cheaper than paying $6000+ to a Marketer (#1 above), but as you know when you go with a marketer or this sort of referral program the buyer (you) don’t really get any value add. That said if you want $500 credit at Roofstock use this link.

Personally, I’m not really into picking up $1000 referral checks and passing you off to the TKP (never to hear from you again) since I’m more looking to give back to other investors and build my network for my larger syndication deals in the Hui Deal Pipeline Club. I think turnkey rentals are ok for people starting.

After over 1000 strategy calls with investors and coaching clients over the past couple years here is what I tell W2 employees… For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool/good for you… but just remember why we got into this… To be free from a JOB. A lot of us (80%) who stumble upon simplepassivecashflow.com and start drinking Kool-Aide will be financially free in 4-7 years pending taking action. So I always urge people to start with the end in mind and take a more passive approach.

“I have B- class rentals and high that rent for at least $900 a month and I am still having a hard time selling dang properties to other cheapo investors”

 

Do the math here… you with 300 dollars per property (2 months of work to buy a turnkey rental) you are going to need 20-40 of these to replace your income. I have 10 of these and have systems in place but have 1-2 evictions a year and 3-4 big things that happen. Image if I had 30, just 3 x those numbers.

Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard-working efforts of the middle class.

I currently work with one business who I can align with because they offer sort of a hybrid between the marketers (I know you know the reasons why to stay away from them) and going straight to the TKPs since you lose a lot of the protections when you do that and it’s sort like signing agreements in the “wild wild west”. The reason I do it this way is that I get a licensed agent that has a fiduciary responsibility to your best interests and guides you through the transaction as you buy through the TKP. Basically, it’s like having MLS agent to cover you for the off market deals. All the properties are aggregated from only the good TKPs and the same price that you will find on the weekly digest that is sent out by the local TKP. This is the way I buy my properties and if nothing else it’s good for browsing what’s out there.

Can you please recommend a good turnkey provider? You said you would help…

The short answer is not really. A provider will try to size you up and try to pull a fast one on you when they get the chance. I will not endorse anyone! The only way to protect yourself is to network with other investors by providing value first – if you are a cheapo. If your net worth is over $300K, have at least $50k liquid, and have a time crunch (kids) I think it’s a no brainer get me on your team and stop screwing around.

There is really no reason why you cannot put in an offer on a property and start collecting $300 a month with a $25K down payment in under 90 days. Someone who is still “reading”, “contacting investors”, or “picking a market” frankly lacks focus (finish one course until success) or scared of making a move. Every day you don’t do anything is $500 a month of opportunity costs!

My rentals in Seattle were cash flowing each with $600-800 a month but it was because I bought at the right time and I did not look at the numbers like a sophisticated investor does. Although my cashflow was good (bad in terms of percentages) I realized that my return on deployable equity was very low, in fact it was under 5%. Now each rental I get typical cash flows by $350 but I think of it like $250 to be conservative and more importantly, my money is not being lazy. I think if you’re making less than 8 percent you’re better off in the stock market despite my aversion toward stocks or mutual funds. A sophisticated investor does not say “well… at least I’m able to cover my mortgage”. They are constantly monitoring their return on equity.

I wasted a lot of time in 2012-2013 looking for rentals in King, Snohomish, and Pierce County (Washington state) and nothing cash flowed. I still have the spreadsheets where I underwrote how crappy the Cashflow was. Now prices are even worse.

I helped dozens of people with this out of state investing game and have pretty much figured it out after making a bunch of mistakes that I didn’t realize till later – this is why it makes me laugh with the “do it yourselfers”.

One mistake I see people making is going after these sucker properties that only can be sold to “Californians,” “Hawaiians,” or any rich person not from the area perceived to have trees that money grows on, from a trust fund, and drink seven Mai Tais on the beach everyday. (Personal Note – I have lived in Hawaii for about six months now and I have only been the beach twice).

These types of people (not follows of SimplePassiveCashflow.com) like to pay a plumber for ten hours to fix a small toilet leak.

Sucker properties are in the wrong area that none of the locals would touch with a ten-foot pole. They are C or D class properties that the Broker calls “B-Class or good area” and usually cost sub $60K for $750 rents a month.

“It may look good on paper but stick to rents that are higher than $900 a month”

Rent-o-meter – a good service to getting rent comps.

The second thing I see newbies doing is buying 2-8 unit properties after hearing all the good things about multi-family and scaling. I think most highly paid professionals will graduate to syndications (which is why I structure business and own investing around them) and therefore will need to sell these SFHs to move up. The exit strategy on selling 2-8+ just is not there. They look good on paper but the exit strategy kills you. If you are thinking you are going to hold on to these properties for cashflow for 7+years think again because that is not what sophisticated investors do because they monitor their ROE and they know the cap-ex tidal wave will hit them in year 5-12 taking back all those profits from the earlier years.

How many turnkey homes are people buying. Here is one data set I found from one popular turnkey provider. Takeaway – most (82%) get a few properties and the rest don’t get it or are too lazy.

The main thing is building the relationships and knowing who has the integrity out there. More importantly, you have to buy a few and go through the process of buying/selling and operating a while to learn how this mouse trap works. Tactically, it’s no different than what I have learned in corporate America (although I’m trying to leave the rat race) by setting expectations and keeping people accountable via email remotely. Trust but verify and financial freedom will be yours.

 

Frequently asked questions:

FAQ from past coaching clients and questions you ask:

Where is your spreadsheet with turnkey providers because I am lazy and want to just copy what someone else does?

That might have been smart a few years ago but things have changes and good providers have gone out of business or more expensive. You don’t need to be a super active investor but by not putting a minimal amount of effort you are shortchanging yourself the necessary lessons that will minimize a big mistake down the road. If you need the provider list sign up for the Hui Deal Pipeline club and it is in that share drive.

What’s the deal with REI Trader and the partnership with Simple Passive Cashflow?

I would do your own due-diligence and learn about rentals by talking to as many people as you can.

I know eventually, you will find that working with my team is the going to be the optimal path forward as I am committed to mentoring you as an investor so you will continue on this investor journey to bigger and better deals.

I stand behind REI Trader and support you through the entire buying process – I don’t just pass you off to the Turn Key provider and say peace out…

The properties have good value for the purpose of rental real estate. The due-diligence that we do after the purchase contract is signed is the secret sauce and the unfair advantage over other turnkey options. Yes, there are a few perennial Turn Key companies however you will pay over market rates (110% retail).

The broker that helps you with boots on the ground with REI Trader is property agnostic. In fact, they don’t care if you buy that property or not.  We know you will buy the right one eventually.  We want to build a relationship with you the investor. Most clients buy one property, come back for more, and tell their friends.

Where do I find tax information in Birmingham?

http://eringcapture.jccal.org/caportal/CAPortal_MainPage.aspx?IsHTTPS=0&IFrameURL=CA_PropertyTaxSearch.aspx

Should I be concerned about a septic system?

Do you know if it was inspected after you purchased? What future maintenance should I expect? Will the property management company know when it needs regular maintenance?            A lot of properties have septic in Center Point and most PMs have this down to a system. We went through this including myself as before.

On another property the investor hired his own septic tank inspection. They checked in and said it was not working but when we sent our own service out to reconfirm, it was working as required. Often some of these third-party services are not as honest as they should be with out of state buyers. Regardless, the home warranty you receive covers septic service. This is just an FYI for future purchases where a septic tank is involved. This property is on city sewer so we don’t have these issues.

How much and what comprises the attorney’s fees that will be split 50/50?       

Typically, on financed transactions it’s about $650 split 50/50.

What if there are issues getting an inspection(s) completed with tenant in place?           

This is an issue with the seller not being easy to work with and could be grounds for you to back out.

If there are delays, we then have both parties agree to an extension of the inspection period with an addendum. Only time this happens is if your inspector can’t inspect and provide report back within the 14-day period.

Sample inspection report

How do I decide on an offer price?

Property in good condition and in a good area that meets the preliminary numbers go fast. Dude, it’s a sellers’ market and anyone can swoop in and grab it. I have seen the amount of turnkey buyers go up exponentially in the past few years as everyone is jumping on the band wagon. News flash incase you missed it… Real estate has been good for the past decade.

From the rehabber/flippers prospective to complete project geared more toward the retail buyer to take part of the emotional buyer market. Selling to cheapskate and annoying investors like us just does not make sense on many fronts. So don’t we a whinny investor and don’t try to make like you have leverage.

Properties that have a tenant in them are often owned by investors and non-owner occupied owners. The good thing is that it’s a numbers game and they have a profit that they are looking to get. The bad news is that the property performs as an income producing asset (that’s why you are buying it) and the sell is content holding on to it indefinitely – after all it cashflows.

Turnkey sellers will allow minimum flexibility on their pricing. Remember, they don’t have to sell and sometimes it does not make sense so move on if that’s the case. That being said, the average discounts I have seen is about $1500 off asking price. Seller is asking $69,900 and I would suggest initial offer of $67,000 and see how he responds. Point is know what is a deal and know the price.

How to handle property inspection report          

You really need a mentor or have someone look over your shoulder who has done this before and knows what is fair. Here is my advice:

Have a 5-10 minute call with the inspector. Tell him “look I know we aren’t going to get much more than 2-4K of repairs” so…

#1 would you buy this?

#2 what repairs will bite me in the next couple years?

#3 what is the best use of 2-4 of work?

#4 do you have any contractor contracts I can have?

Take this to the seller and negotiate but just know they have a line around the block waiting to buy their property sight unseen. Even without appraisal and all cash.

I want to make my own turnkey company? I know a rehabber?

Here is a spreadsheet with the math behind making your own turnkey company.

I think multi-family properties are my future 1-2 years from now.  Would you start 4-8 units or get a partner and go bigger?  

This depends on your trajectory (how much money you have and earning ability). High paid professionals I work with are going to go into bigger deals I would recommend going with SFH because you will likely sell in a few years and vault into bigger stuff. 2-8 units have a horrible exit strategy as only people who want them are cheap investors. “looking for a deal man!”
My buddy FI Fighter also calls these Turkey rentals too but I disagree with his sentiment about going for the “best assets.” I believe you can invest in undervalued value add Class C and B assets as long as you have a capped time horizon. This is why I like to look for 1975-1990 properties because our business plan is the squeeze out the last of the value of these properties with still having high single digits of cashflow as the hedge to a downward turn in the economy. You can’t really do much with a 1960’s property. You really have to go through 500-1000 deals to find one of these and you are not going to find these being in the game with only 6 months of experience and no track record. This model is not infinitely scalable (and too small for the institutions to bother with) but what small sophisticated investors are quietly doing in the 2-8 million dollar asset range.
A couple of rate sheets for turnkey rental.
Setup a short coaching call because it will be worth it. Don’t be like me and buy 10 of these sfhs because it will be a pain to sell them later to go into more scaleable syndications.

 

Here are more resources:

  1. *The Analyzer Video Walk Through- https://youtu.be/qr8M6NMBhRw
  2. *Download 2018 Buy & Hold Analyzer Spreadsheet – https://drive.google.com/open?id=1kMAn962d52UN-ObKNWmjT11z6gqATR1I
  3. *SPC005 – So you want to buy a Turnkey Rental – http://simplepassivecashflow.com/podcast-5-so-you…a-turnkey-rental/
  4. SPC014 – 22 questions to ask a turnkey provider – http://simplepassivecashflow.com/podcast-14-22-qu…turnkey-provider/
  5. SPC015 – 9 Turnkey listener questions Part 1 – http://simplepassivecashflow.com/podcast-15-9-turnkey-listener-questions-part-1/
  6. All the SFH related material – http://simplepassivecashflow.com/tag/sfh/

Refer me to a friend via email and I will personally send you both my spreadsheets of usual suspects of turnkey providers plus the questions I used to ask them for due diligence. And let me know if you would like a referral to my exclusive partners.

Here are the books I think you should read before moving forward.

***Put a red circle on your calendar 60 days from now and see where you get… and how much of your family’s time you waste as you consume websites, books, and podcasts.

You know what I mean ‘Jelly Bean’

https://www.youtube.com/watch?v=BOksW_NabEk

“I started the Hui Deal Pipeline Club because I want to see each of you get to your goals financially so you can focus on what is really important to you. There are other fundraisers out there that will train their investors down to 10-15% IRRs on crappy deals and do “deals to do deals” or to pick up acquisition fees. Between investing alongside you folks and wanted to grow my track record the right way with the best product I know you guys will keep coming back and bring your friends.”

We have the best “propeller hats” in the Hui Deal Pipeline Club

Over the past year, it has been an honor to get to know you in the Hui Deal Pipeline Club. The average member is under the age of 55, engineers/IT, geek out on data, and very adept at looking up stuff on your own. You guys will balk at deals that get you under 12% a year!

That said if you guys are finding good deals or operators let me know because I know you are Googling this stuff into the night!

Another Hui member built this free web app to get the preliminary data and crunch the numbers automatically for you on an SFH.  Check it out at http://propalyzer.info         

No login required. Please reply back your suggestions so I can give them back to the developer.

I’m working on a concept of buying new build turnkey rentals (getting the financing for you) and working them as a group. Let me know if this appeals to you.

Commentary from the elder Hui members:

 

Podcast #98 – Fundamentals – How I lost $40,000 as a Passive LP Investor

Youtube: https://youtu.be/D7j79XknQqg

I later told this story on The Real Estate Guys Radio show’s annual Halloween Horror Stories – listen

 

Pardon the grammar: I’m an Engeneer, Enginere, Engenere… I’m good with math! Here are the Show Notes:

Summary: I brought a house for $43,000 in 2013 and the operator ran the property into the ground and I sold the property for a net of $7,000.

This is the dark side of investing as a passive.

“Failure is just admitting it and evidence you have learned something”

Timeline:

2013 – Had 43,000 in my SDROTH IRA, The deal 9% and 50/50 split on profits. I got the referral from a Self-Directed IRA company. I asked them where should I invest this money because I did not know any better. If you are looking for a good SDIRA custodian let me know.

2014 – Heard this dude was a scam artist from my network but it was too late. Lets just watch this. I started connecting with other clients via the interwebs and learned they had another market that they did this in to which was MS.

2015 – Heard there MS portfolio went underwater, taxes not paid

Mid 2016 – Got the letter saying they were going under and I had several options,
1) Deed in Lieu – had a lease purchase agreement
2) I did not really understand the other options but basically wait in court forever
For about a few months everything was fine. The tenants were paying their 500 dollar rents and I was pretty lucky compared to the other investors who tenants had trashed the homes. This is when the story started coming out on what this shyster did and the poor property manager that took over these problems.

Note that this was in my SDIRA so you can’t bring in outside funds to help the property or that could throw out your tax sheltered status per the IRS.

Early 2017…The property went offline

From the Property Mangement:
“The home is in pretty bad cosmetic shape. Keep in mind it looks worse than it really is. The photos will be shocking but most appears to be cosmetic repairs. The exterior just needs cleaned up (cut grass, trim hedges, clean and small repairs to gutters and down spouts). However, the interior had a bathroom leak on the second floor, there is alot of trash. It will require new flooring throughout, a new vanity in the bathroom as well as new caulking around the tub. It will need some patching and painting of the interior walls, a new drop ceiling tile and about a 30-yard trash out. I could not test the mechanicals but they appear serviceable. No way to really know until you have them up and running though.”

Summer 2017 – The city had a lot of complains about the grass not being kept.

We could not find these lost Western union checks – they were written out to my personal name.

August 2017 – House listed 25,000 with the broker fee 4000. Average days on market 180 days for a retail ready.

Average days-on-market for homes between $10,400 – $15,600 = 138 (in zip code 16101)

Time suck!

A couple offer/counters.

November 2017 – Property sold and I walk away with $7,000 after sales commissions 9

I only had about $12K in my Roth IRA. I could have kept building that amount via a fund or private money lending (although that was a small amount) because my contributions were 20-40K range. In a Roth IRA you can take out contributions any time. I used to do this for an emergency account but because I am pretty good at finding good deals I would rather have the cash and minimize administrative headaches that takes time away from deal finding, networking, and making podcasts. The fees were about 25 a quarter so that would have been 1% a year. Each transaction I would have done would have been an additional $50 dollars to execute along with the time it consumed.

More information on my recent transitions to syndications please check out my previous podcast.

QRPs

Lesson learned: don’t invest with anyone you don’t know, like, trust, or outside 1 degree of separation. There are deals out there being passed around via daisy chain style where no one really knows who each other are.

http://www.selectcranberry.info/remaxpade/modules/internet/search/search2.asp?p=findahome.asp&listing=true&mlsid=2196&mlsnumber=1301374&officeaccountid=182667&rnmid=171559122112164824&rnmsob=true

https://www.biggerpockets.com/forums/517/topics/490254-913-warren-ave-new-castle-4th-pa-16101

See pictures

Podcast #97 – Investing via Crowdfunding Sites to open the country club – A Chat with Reality Shares

Here are the Show Notes…. But first please leave me a review: http://getpodcast.reviews/id/1118795347

Reality Shares came from the Jobs Act
April 2013 Reality Shares began
Accredited only
14-20% Class B MFH estimates
Also have preferred equity options 10-14% IRRs
1st lien debt or 2nd lien 7-12%
If you are not connected Crowdfunding options
From a syndications view, they are charged an origination fee
1% asset management team (from cashflow) from reality shares
1% Funding Fee, 1% Asset management fee
Some crowdfunding is taking equity upside
Due diligence – credit checks, background checks, 3rd party check of purchase price verification, then look at the deal (market, pricing)
Less than 5% of deals make it to the platform
There is a max the crowdfunding site with one syndicator (2-3M) to diversity risk for the firm
Reality Shares is a Broker-Dealer

Attached is ALN Market Stats

Attached is ALN Market Stats
 
https://drive.google.com/open?id=1sD7E8Z8rY_3W3WZmDBIlrf7xDBYi_pYE
 
-Occupancy
-Rent Increases
 
I personally don’t read too much into these stats because they are for typical deals. You should be buying deals with stories behind them that transcend these stats. But you can rank on MSA from another so there is some value to doing that.

Podcast #94 – Fundamentals – Ask Lane: MFH latest underwriting hacks, GP/LP Splits, reading an executive summary, mobile homes

Stories from my SFH portfolio… Show notes below:

One of my longest tenants went AWOL. 🙁

“They did send in a partial payment of  $965 that we received on Monday..  They now owe for January and $385 past due.  for a total of $1,263  I am not sure why they are being so uncooperative for the inspection”

A couple weeks later…

“She has been in the hospital again.  I gave her our direct number and she said she will call.  She is also supposed to bring the late part and will bringing last months rent in about a week and half.  She apologized for the trouble of getting her, but she was not able to return calls.”

I like to work through and with my property management.

They alerted me of the issue.

“Seems like valid reason for being late. Maybe we can ask for hospital invoice or doctor note just for record keeping. We might submit to the potential seller to explain the gap in the rent rolls. That way we can verify it too. “

Rats!

The dishwasher stopped working in this home.  It looks like it needs a new sprayer arm and wire harness for $285.89.  But the bigger picture is there are rodents in the home that chewed the wires.  See pictures.

We will need the approval to repair the dishwasher but first, we will also need to get a quote for rodent removal.  The quotes for rodent removal are free so I will send someone out to see how extensive the rodent issue is.  I will keep you updated and we will go from there.

Our tech went to this property and reported the following:

dishwasher model# gz8945pg35 wire harness was chewed by rodents also spray arm has burn spots estimate for repair $285.89

Sign up for the Hui Deal Pipeline Club to get access to a Sears pricing list to see how my you are getting screwed for by your property management.

Our tech made a temporary fix to wires so dishwasher is working now.  We also recommend to do something about rodents otherwise they may cause more issue….

But hey just got my AHP and private lending not monthly payment J

Mold in one of my properties

Buying a drone-

For the past few years I have been amazed the amazing drone shots.

J Martin posted some shots in Changmai, Thailand and I started to ask him which one he used. Basically there are two of them that everyone gets one that is mobile and in 1080p (300) the other which is larger and in 4K (1000).

I’ve been adding videos to our YouTube channel and think that the 4K is where the future is. I’m making the leap to get the 1000 dollar version. I also am going to consider it a business purchase so I can get a nice entrepreneur discount too. Sometimes I think in amazement how crazy that would be to buy such a toy for a miser like myself. But then I figure I would take cool shots for our investor club when I do due diligence. How cool would it be to take shot of drilling rigs for exploratory drilling? Yup we are going there.

A couple of years ago when we were working our first project in Iowa which we ultimately dropped we did some video and it really brought the project to life.

As a side note, I had shinny object syndrome kick in and thought I would be able to make videos for other companies. Imagine I could go to a CrossFit and record their outdoor workout or go to a wedding (and get free food).

Then I thought that I could get a dime a dozen (commodity employee) or Millennial good with computers to do the tedious editing for me.

But then I stopped myself. But the whole mental exercise brought insight about what I want to ultimately hit my Simple Passive Cashflow number when you work on things for joy and engagement. What better to help people share awesome visuals and be around people on their special day like a wedding or birthday party.

So I heard Uncle Buck Joffrey started intermittent fasting a few months ago and lost 40 lbs. I started doing IF when I started renting out my first home in 2010. I can remember reading the ebook “eat stop eat”.

Ralph Waldo Emerson
“The first wealth is health.”

I needed to step my game up so I decided to find a personal trainer. So stay tuned for that. After spending 60k in 2016 and 30k in 2017 on training and mentorship I truly see the value of it. Of course, as you know I am someone who takes action. I can also say being on the other end mentoring you guys in my paid coaching program that it’s neat seeing the barriers broken. Honestly, I don’t feel like I do much but the results are amazing. As an ex crossfit coach myself, if you would asked me if paying someone 90 dollars to count my reps and pass me the weights… I would have thought you were crazy. But now I get it!

Wanted to share a trend that I have been seeing in the past 6 months in MFH (idk how it manifests in sfh?)

The class c assets are getting beat down by cap rate compression (delta between cap rate and interest rates) and therefore a lot of the experienced investors are getting into class b because the per cost unit is getting pretty much the same. This is moving away from the normal business plan for turning class c to b. The thought is… heck might as well go for the 1980s build instead of 1960-1970s stuff for the same price. Having a newer asset might also be a little more conservative way to go with this stage in the market cycles because in a correction A will move to B… And B will move to C and the lower class D/C in the tertiary areas will see most of the vacancy or rent concessions.

Hurricanes:

I got to pondering looking back when New Orleans was hit by Hurricane Katrina there were short-term disruptions to gas prices especially since Houston is a major think tank for the metro industry. I expect Federal money which might have been focused on (helicopter money) be spent on infrastructure spending or tax cuts NOW be redirected to damage recovery.. Which will manifest as tax breaks, loan subsidies, or other incentives offered to entice investment capital to flow into affected markets.

Definitely an opportunity in the short term to go in there and develop to take advantage of the fiscally earmarked casually funds.

As a long-term buy hold investor what I am keying in on is what the big institutional players (like insurance companies) will do. I suspect they will actually have to pony up and pay claims in Houston and Florida which will divert funding away from their Plan A: financing new class A multi-family apartments in other markets. This results in less new developments coming online which is great for Class B and C mfh investors who have been struggling with the recent cap rate compression.

Other random thoughts:

  1. Low / no equity homeowners will walk from their properties and focus on rebuilding their lives as renters for the next 2 years. These foreclosures will certainly impact values in numerous communities throughout Houston.2. Many insurance companies will re-think the coastal markets and their policy premiums for same. This, along with the inevitable increase in flood insurance premiums will also impact buying power for future homeowners.3. Landlords will be in demanding higher rents as there will be a shortage of housing for the next year or while properties are rebuilt.

    4. Long-term impact can only be speculated on since this was an epic storm that caused billions in damage to homes, autos and businesses but those purchasing SFR’s better buy very, very low or they could be the next distressed sellers.

Changes in MFH Underwriting and getting deals

I’ve had some hurdles here.  It seems the standards in submitting LOI’s have been changing the past 9 months. What changes have you been seeing from the front line?

1/ Business conditions are dictating POF with the LOI.   Based on the latest sophisticated investors are underwriting deals with 80/20 terms,  1% interest only and 1.25 DSCR.

It’s becoming more common for brokers to review the buyers’ underwriting before accepting an LOI to present to the sellers.  The brokers view these terms as aggressive and are reluctant to submit my LOI.  It matters who your lender because it comes down to team and a portion of it is your lender.  Large deals have been falling out of escrow due to over-aggressive underwriting that cannot find financing.  Las Vegas lenders are underwriting at 65/35 LTV, 1.3 DSCR.  You can change your underwriting to match Las Vegas standards, giving brokers more comfort, and therefore remain on the ‘A’ list or do nothing.

A lot of time you will needs POF with the LOI.  Use an angel… anyone who is an ‘Angel’ on the LOI, will be given the option to KP and co-sponsor ( if qualified ) the deal if the LOI is accepted.  The average $/unit for a C-class, value-add, stabilized asset in a C to B- area is $55-85K.  The POF for a 200 unit property at the top end is $5.95M.

2/  Post close liquidity equal to 10% of the loan.

3/  Proof of net worth equal to the value of the property.

4/  Hard money; the standard is becoming 1% of the purchase price (I haven’t submitted an LOI with hard money yet; .5% hard money and see if that places me in best and final).

Question: I heard you say in the podcast that you have a team in Atlanta. How did you go about building a team there? Is there a podcast episode on that?

I think it’s no secret that as the sellers market matures, turnkey properties not in war-zones are becoming endangered species. When I began picking these things up in 2013 you could get inside the loop highway (under an hour commute to the city center) and get a 1980-1990s product. Now you are looking outside of the loop highway and in 1940-1960 properties. The good turnkey providers are frankly making more money selling to retail buyers than us cheapo investors who has got a million questions. The stuff I see coming out on most lists are properties that you would not want to buy. Unless you have someone boots on the group (who is not trying to sell you) and is agnostic to the transaction, you are going in blind to a loaded minefield.

I am beginning to leverage my contacts and finding investor focused real estate agents who know what to look for in a rental property. This effectively cuts out the middleman in the transaction but it requires you to know what you are doing in the first place (two to four transactions or a mentor) so you can coach your agent and arrange for contractors. You find one person who is good you find the others because good people associate with good people.

I feel like the SimplePassiveCashflow Facebook group has reached a tipping point where everything you need from a peer investor network is here. You just have to go about it the right way. One wrong way I see it done and I see it done in other groups and BiggerPockets is being an “ask-hole”. Asking a one off question and not contributing to the community is a sure way to get crickets and a one off answer. But you miss the point, which is to build a relationship. Put your perspective goggles on and think… how can I add value to someone or others? What do they need?

So my call to action is if you want to team up with me and help me source properties and teams let me know. The rest please stand by for PML deals and others on the Hui Deal Pipeline club.

We need to stick together and work collectively. As a Hui. I know what happens when you read a few websites and podcasts and go it Rambo style because I did it myself when I first got started. You will get eaten by the sharks and you won’t know what got taken from you. You leave so much money on the table that you don’t realize a couple years down the road.

I don’t want to discourage anyone from not buying because at the end of the day even with the prices as they are it’s still better than the equity markets. I currently believe that there is a 50% chance we will see a recession in the next three years so keep investing just as long as the numbers make sense. If you don’t know the numbers or think you know get someone to help.

Where do you think the crossover point is?

I am talked to over a couple hundred people over the past year and for those people SAVING less than 30K per year after their day job should invest in rentals or turnkey rentals in a market like kansas city, memphis, atlanta, birmingham, not seattle, san francisco, california…

The short term goal is to gain landlord/acquisition knowledge and build a cashflow base of a couple thousand every month. But once you achieve that you should step up to larger passive partnerships/syndications because the return to pain in the butt ratio is greater. People who call/email/write on forums fail to see this two phase journey. People hear the benefits of MFH and come up with the ridiculous 1000 unit goal when they have not even see if they are borrowing material on their first buy and hold. Eventually, a lot of people quite a fizzle out while starting out on the MFH road when they should have done sfh and this insight.

As much as I advocate for “simple” I am really an advocate for the minimal effective dose to maximize returns with minimal effort.

So I’m trying to learn how to evaluate syndications as a passive investor. I was looking to a deal that was presented to me near your last one and I ran a quick analysis. What do you think?

CONS:

– 1990s build A class than B/C Class @ 120k per door and value-add reposition is from B/C to A, risky at this market cycle in event of a recession and rent contraction (Usually we are buying at 45-65K a door with a stabilized building that have over 90% occupancy)

– Loan is 80.25% LTV -> too high? – (This is not really a factor – you want to be borrowing as much as you can and this is why you are going with such syndication to buy in bulk with others and get better terms. When looking at the loan you need to look at the term such as loan length, if it is recourse or non-recourse, and pre-payment terms)

– Loan is 36 months -> dangerous in this cycle (5 years and less is dangerous, just closed on a property in OKC for 10 year 4.22% 3 year interest only)

PROS:

– Sponsors experienced – how did you verify this? (Talking to investors who were in past deals. Relying on my network to discuss reputation and character. Note: This is not going to be completed by emails or phone calls.)

– Investor waterfall favourable – (Waterfalls create complexity and typically they mean less returns for the passives. Generally, the best terms for investors is a simple 80/20 or 70/30 split. Waterfalls raise a red flag for me. I have seen people balk from a high sponsor fee but that is just one thing, if it’s a deal then the sponsor should be able to take what they want. A deal is something that is underwritten very conservatively – see below)

Based on my limited and growing knowledge, I wouldn’t invest in this deal if I had the funds. What do you think?

(You are scratching the surface of these: A true analysis of the deal requires you to have income and loss statements and rent rolls going back 12 months and possibly 36 months. This is where analysis totally differs from SFH or units under a dozen. Another part is to analyze the rental comps because 90% of the projections are based on the proforma rents per square footage. A lot of smoke and mirrors can be used by leads and brokers to inflate this number. Comps need to be verified and it is really a touchy feely thing. It cannot be a feeling on hey this 1985 property looks like this 1987 property on the westside of the train tracks looks like I can get $1.12/Rent per SF. Warning…I have see a lot of garbage underwriting play with annual rent increases 2.5%+ a year, expenses increase less than inflation – under 2% annual increases, and total rent increases of over 18% – this is something Patrickherbig.com has really opened my eyes too.  Past performance is not an indicator of success and 2012-2016 anyone could have made money if you were in the right place.)

I saw the last deal you did was at a 70/30 as opposed to 80/20, which is what I understand to be the generally accepted industry standard for syndications.  How do you think about evaluating deals with respect to the profit split, both from the investor and the sponsor perspective?  I’m trying to understand the situations where a “below market” upside would be acceptable and how the sponsors decide what structure to use – is it just based on supply/demand and the reputation of the deal sponsors (ie the sponsors/GPs will make the deal as favorable to them vs the LPs as possible while still being able to attract investors)?

I see a lot of yahoos doing 70/30 splits with silly assumptions like 1% expenses increases and expectations of over 20% bump in rents. I also see a lot of 80/20 and 90/10 deals that are run by folks with long and short track records. Beware of a person with a nice suit. I think I need to personally show up better because of people never the less associate a shinny pdf deck and cool bio page as reliability or perceived value. I would not really look at the GP/LP splits. The way I see it if it’s a great deal then we as LPs should have a large room for error and heck yea the GP should be taking a large cut. But things get muddled by the assumptions the GP is using and quite frankly unless you have analyzed 100-200 large MFH properties and put in a few LOIs I don’t think you will be able to see where the red flags are. There is a YouTube video “Bear and basketball awareness test” https://www.youtube.com/watch?v=Ahg6qcgoay4 where you get fixated on this split stuff and forget the fundamentals of the deal.

Thoughts on mobile home parks/ self-storage?

I recognize as both still being in the real estate category as a good way to diversify away from Real Estate in a heated market. I admit I don’t know much about the two, especially self-storage. From what I have gathered from other investors the Cashflow in Mobile homes is a little higher but there is not as explosive upside as apartments. This upside is really never captured in a conservative proforma anyway. Mobile home parks are a not being made and in times of correction, they are going to be in very high demand.

I have been looking at some mobile home parks and talking to a bunch of you if you are more interested in either a single asset higher risk/reward mobile home park or a more diversified play of multiple parks in one.