OPENING REMARKS
I was halfway through my senior year in college (1978) when I got a job at a law firm (Allen, Matkins, Leck, Gamble, and Mallory). The firm was located in one of the tallest buildings in downtown Los Angeles. It seemed that half the building was occupied by other law firms.
My job was simple: make copies of legal briefs, put away law books, and keep the office area clean. Making copies of the legal briefs was the office manager’s priority. When I was hired, the office manager took me to a large room that had a Xerox copy machine. It was a large copy machine. Not like the sleek compact ones you see in offices today. In the room was a wooden counter, about three feet wide and ten feet long. On the counter were dozens and dozens of legal briefs; some consisted of a few pages, others were two inches thick, with every size in between. Each of them had a note on them with the name of an attorney along with the number of copies needed to be made. I was hired on a part-time basis, so it took me the better part of a month to catch up.
At the end of the school year, I graduated, quit my part-time job, and went and got a full-time job. Fast forward ten years, and I am working with the police department. I am married and have two beautiful kids.
One evening, I am sitting at home reading Fortune magazine (a business magazine). In it was a story of a company that made more than $250 million the past year. The company’s business was making copies of legal briefs for law firms. I remember reading the story and thinking, “Oh no! I was there. I was making copies of legal briefs but did not have the vision to figure out that there was a need for what I was doing.”
If only I had realized back then that all the other law firms in the building also needed someone to make copies of their legal briefs, I could have turned this simple job into a successful business.
I tell this story because I believe that many of us have been in this situation. You have done or are doing something with the potential to make you successful, but for whatever reason, you have not turned what you are doing into a successful venture.
Today, all of us walk by or drive by real estate properties, residential and commercial, that can be turned into money-making machines. If the properties in your area are too expensive, we have the internet that lets us find properties in other parts of the country. Maybe you have thought about investing in real estate but are not sure how to get started, or worse, you think you cannot do it. Maybe you think that if you tried you might not be successful.
Remember what Wayne Gretzky said, you will miss 100 percent of the shots you do not take. As a result of a lack of vision and knowledge, I missed a shot back when I was in college. Don’t be like I was. Start getting educated, and start taking your shots. Become part of our investment team. We have all missed shots, but we can also score. You will miss 100 percent of the shots you do not take. But if you start taking shots, you will score enough to make up for the ones missed. If you want to get more information on how we invest in multifamily properties or want to find out how to become part of our investment team, email me at sergiosais14508@gmail.com.
In the “THIS WEEK IN REAL ESTATE” I included a Wall Street Journal article that discusses the best small cities in the U.S. to invest in. Not only are there opportunities in your area, there are opportunities across the United States. Read the article and start looking in some of these areas for great deals.
THIS WEEK IN REAL ESTATE
Small U.S. cities dominated The Wall Street Journal/Realtor.com Emerging Housing Markets Index in the third quarter, as high housing costs and remote-work opportunities drive many home buyers to seek out more living and outdoor space.
The housing boom sparked by Covid-19 has been widespread, with prices surging in major metro areas and small towns alike. While the number of home sales has moderated in recent months, demand continues to outpace the supply of homes on the market.
Many smaller metro areas around the U.S. benefited in the past year from inward migration, as residents of bigger cities took advantage of remote work to seek cheaper housing and a different lifestyle. Vacation destinations also boomed.
Elkhart, Ind., which bills itself as the RV capital of the world because its region is the country’s leading manufacturer of recreational vehicles, topped the housing index this quarter, followed by Rapid City, S.D., Topeka, Kan., Raleigh, N.C., and Jefferson City, Mo.
The Elkhart area has about 206,000 residents, and the top 10 housing markets in the latest ranking have an average population size of about 330,000.
The index identifies the top metro areas for home buyers seeking an appreciating housing market and appealing lifestyle amenities.
The top-ranked markets this quarter had faster-growing populations and more shopping interest from shoppers outside their metro areas than the market as a whole, said Danielle Hale, chief economist at Realtor.com. News Corp, parent of The Wall Street Journal, operates Realtor.com.
“There’s a lot of flux in the housing market because of the flexibility people have,” said Ben Ayers, senior economist at Nationwide Insurance. “We’ve seen huge demand for homes in suburban and exurban areas, as many people decided they want to move out from the center cores.”
The recreational-vehicle industry is a major player in Elkhart’s economy. The Covid-19 pandemic spurred more RV demand, as households wanted to travel while keeping their distance from others. Wholesale RV shipments in the first eight months of 2021 rose 53.8% from the same period in 2020, according to the RV Industry Association.
Unemployment in the Elkhart area stood at 3% in August, compared with 5.1% on average for the 300 metro areas included in the index. Weekly average wages in Elkhart were $1,118 in the first quarter, above the $1,049 weekly average for all the metro areas in the index.
Elkhart sits at the junction of the St. Joseph and Elkhart rivers. The region’s attractions include kayaking and canoeing, and an arts scene with community theaters and galleries. It also boasts both a superhero museum and an RV hall of fame.
The city of Elkhart, with a population of about 52,000, is more diverse than the broader metro area. Elkhart’s population is about 26% Hispanic and 15% Black, according to census data.
Low mortgage-interest rates have fueled strong demand from first-time home buyers, said Patty Miller, president of the Elkhart County Board of Realtors.
The median home-sale price in Elkhart County rose 12.3% in August from a year earlier to $209,900, according to the Indiana Association of Realtors. There were 163 homes for sale that month, down from 220 a year earlier.
Market activity has slowed slightly in recent weeks, but “anything under $250,000 still goes very, very fast,” Ms. Miller said. “Those are the hardest to come by and the fastest to sell.”
About 65% of page views on Elkhart-area property listings came from outside the metro area in the second quarter, up from about 61% a year earlier, according to Realtor.com. The top metro areas for interest in Elkhart listings were Chicago, South Bend, Ind., and Detroit.
North Carolina had three metro areas in the top 20 of this quarter’s ranking: Raleigh, Burlington and Durham-Chapel Hill.
Crystal and Richard Haynes moved from Connecticut to Durham about three years ago for a lower cost of living. They bought a four-bedroom house in Granville County, near Durham, in September for about $223,000.
“I didn’t know how hard it was going to be” to compete in the frenzied housing market this year, Ms. Haynes said. “I would see a house on the market, and the next day it would be pending.”
The Wall Street Journal/Realtor.com Emerging Housing Markets Index ranks the 300 biggest metro areas in the U.S. In addition to housing-market indicators, the index incorporates economic and lifestyle data, including real-estate taxes, unemployment, wages, commute time and small-business loans.
Median listing prices in the top 20 markets in the index have risen 13.4% on average in the past year, outpacing a 6.6% rise for all 300 areas, Ms. Hale said. The top 20 markets had a median price of $392,800, higher than the overall market’s $359,100, she said.
REAL ESTATE TIPS
We are continuing in our back to basics series. In this segment, I want to answer the question, “How do you know if you are paying to much for a property?” In other words, if you are buying a six-plex for $750,000 how do you know that this is a good price. The best way to know if you are overpaying or not for a multifamily property is to know the price per unit.
Knowing the price per unit will help you gauge your offer price. It will help you make sure you do not overpay. And, it will help you determine if the seller’s price is realistic.
So how do you do this. Well, the first step is to take the price of the property and divide it by the number of units. In our example, if the asking price is $750,000, when we divide this amount by six units, we get $125,000 per unit.
The next thing you want to do is to research properties sold on the Multiple Listing System (MLS) to see if similar properties are selling for the same amount or close to it. You want to make sure the properties are within a one to five miles from the property in question.
Another thing you can do, is ask three to four multifamily real estate agents for comparable sales. You can also look at propectnow.com for closed transactions. And, as a last resort you can use loopnet.com to see what properties listed on that website in the area are selling for.
Use as many of these methods as possible. The better sense you get for what properties are selling for, the better decision you will make as to what to offer and ultimately what property to invest in.
OPPORTUNITY ZONE
Number 1804 Indianapolis, IN. This is a triplex near downtown Indianapolis. It is within walking distance of many restaurants and other entertainment venues.
Sale Price $120,000.00
Down Payment $30,000.00
Closing Costs $3,600.00
Hedgehog Capital Investment $1,200.00
Total Out of Pocket $34,800.00
Loan Amount $96,000.00
Annual Mortgage $5,837.01
Annual Rent Income $16,800.00
5% vacancy rate $840.00
Annual Expenses $6,072.80
Net Operating Income $9,887.20
Annual Mortgage $5,837.01
Annual Net Cash on Cash Return $4,050.19
Annual Percent Return on Investment 11.64%
MY JOURNEY (Sergio Sais)
For those that are following this newsletter, you know that I am under contract to buy a triplex in a small town outside of Indianapolis Indiana, called Shelbyville. This past week we had the property appraised and had an inspector conduct an inspection of the house.
I have not received the appraisal yet, but I did receive the inspection report. The house is about 100 years old, so it has a number of issues that need to be fixed, most of them cosmetic in nature or fix it type of issues that can be handled by a handyman.
However, the main issue is the roof. According to the inspection report, the property will need a new a roof within the next three years, which means it needs a new roof now. I will be discussing these issues with the real estate agent this coming week to develop a strategy on how we are going to handle the inspection report issues. My though is that we will get three estimates for the roof, choose the one that makes the most sense and ask the seller for a credit in the amount of the estimate.
This will make the money for the roof available right away and we can get the roof replaced as soon as possible, thus ensuring that the tenants will not have to contend with a leak roof and the property is protected against the elements. I will keep you posted on the process and the outcome of the negotiations.
MY JOURNEY (Sam Yin)
Real Estate Investing should be a profitable business. Investors should track their business to minimize inefficiencies/costs and maximize profits. In the “buy and hold” rental space, the Property Manager (PM) should recognize problem patterns and work to prevent them. Common problems are late rents, leaks, clogs, etc., which I call the “LLC” of the business. In the end, passive income is the goal for “buy and hold.” As an owner/PM, I put focus on preventative maintenance in this people business. Understanding how to generate or calculate cash flow will help you select the best rental property and unlock hidden value that other investors missed.
I purposefully concentrated properties in one general area to minimize travel time from one property to the next. It is just as important to know the tenants as it is to know the properties where they live. In both cases, preventative maintenance can save the PM precious time and money. I quickly adopted new business models and continuously reevaluated what my time was worth when I decided to make REI a business and not just a hobby.
Rental property generates “gross cash flow,” the total rent/fees collected, and “net cash flow,” the money left over each month after bills (operating expenses) are paid. To calculate “net cash flow,” subtract operating expenses from gross cash flow. If you finance the property, subtract the mortgage as well. It is important to remember that cash flow can change from month to month and year to year, so keep track of your performance.
Many new investors ask what is considered “good” cash flow. The answer varies from one investor to another some look for minimum returns on their investment, and others have cash flow goals they want to meet to achieve Financial Independence and Retire Early (FIRE). For those that have never heard of these concepts, I need to clarify that the “FI” in FIRE is separate from the “RE.” The FIRE movement is very popular in recent years with the Millennial Generation. They strive to retire before they are 30 years old and use the remainder of their time to add enjoyable life experiences. Although I am a little too old to fall into the Millennial category, I quickly adopted the philosophy when I stumbled on it last year and refocused my investments efforts to achieve FIRE.
We have discussed Returns on Investment (ROI) in a past article: ROI = Net Cash Flow/Property Cost. Most investors want to see an ROI of 8% or more for any given asset. At times, it is acceptable to see an ROI of 5% if there is hidden value. The other investment concept is Cash-on-Cash (CoC), which is Net Cash Flow/Cash Invested. CoC is a good tool to use when you are looking to invest in a property with low rents but the average in the area is much higher. As with ROI, the rule of thumb for most investors is to aim for 10% CoC. Another measure that investors rely on is return on equity or its performance, but we will leave that for another day.
This past Wednesday, the 10-plex in escrow was subject to appraisal and the report should be completed in two weeks so the deal can close. I met a contractor at the property to discuss what it would entail converting the carport into 10 separate enclosed garages. Additionally, one tenant from the 10-plex where I increased rents by 20% sent their 30-day notice to vacate early Saturday morning. This allows me the opportunity to fill that unit with a new tenant at market rents, increasing the NOI and forcing its appreciation.
I have chosen to be a hands-on investor because my “why” is to build a legacy. Being hands-on allows me to involve my children from time to time so they understand the business. It is also quality time spent for any child to work alongside their parent, to build their work ethic as they converse about their hopes, dreams, and fears in life.
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If you want additional information on what Sam and I are doing or would like to partner with us on a deal, email me at sergiosais14508@gmail.com. Have a great week.