Active Duty Passive Income - Military Real Estate Investing Blog
ACHIEVING FINANCIAL FREEDOM WHILE SERVING Hi, my name is Markian Sich, and I am an Active Duty Marine with a passion for Military Real Estate investing and passive income. This course and community is for those who want to achieve financial freedom through passive income by investing in real estate.
As a real estate investor who is just getting started, it’s easy to be consumed by the idea of financial freedom. The first deal you do is absolutely terrifying. The whole process is filled with fear, doubt, and anxiety. But, once you get proof of concept and start to receive the almighty cash flow all of that begins to subside. Those emotions never disappear, they are always lapping against the shore of our mind like a gentle wave even in the best of times. Eventually, you will do whatever it takes to get that next deal under contract. There is a definitive psychological as well as physiological response from closing that deal and getting closer to the goals that you have set.
Most people begin the journey for financial independence for the right reasons. They want to take back control of their time and experience life to the fullest with those they hold most dear. During the journey, these can become competing demands. I have often times found myself trying to decide whether or not to spend time or money on a trip or a purchase and contemplating how it will impact my ability to move forward on the path. It’s safe to say that I have become so focused on achieving my goals as an investor that I have forsaken the very reason why I started the process in the first place. At these moments I have to ask myself who is in control. Am I allowing myself to be driven by the impulse of achieving my goals? There are certainly worse things in life, but that is not how I want to live.
We recently made the decision to have my wife stay home with our two kids and we would not have had the courage to do this without the income we have created through real estate investing. It was a difficult decision and we certainly sacrificed the speed of accomplishing our goals in order to do this. If she had stayed at work our path to financial freedom could have potentially been faster. However, we know that it was the right decision for us at the time and we don’t regret it at all.
When we decided that she would stay home we knew that we would have to be very intentional about how we spent our money. Up to this point, we were not consuming any of the profits from our investments, rather we were using those funds exclusively to acquire more property. Last week we were discussing trips that we wanted to take and I knew that we couldn’t do everything based off of the income from my salary. My wife suggested we use some of the income from our investments in order to pay for the trips. I immediately balked at the idea because it would slow down our journey, but told her I would think about it. I came back to the same question “Who is in control?”
Ultimately, we will not do everything. We discussed the trips and decided which ones were truly important to us and then made the decision to use some of the cash flow to plan those trips. Even though there is a slight tinge of disappointment at the prospect of pushing back the date of achieving our ultimate goal of financial freedom, I know deep down that this is the right decision. These have been the hardest decisions to make on my path to financial freedom, but I know that I will never regret creating lasting memories with my family and friends, even if it does extend the timeline of that path.
It would be easy to stop at this point and realize that you will need to have the difficult conversations to decide what is most important to you and your family. The less obvious path is to figure out how you can create more value and thus increase your income to minimize these discussions. The ultimate goal is to be able to freely pursue all of your passions without the hindrance of monetary concerns. It will not be an easy path and you will constantly have to ask yourself who is in control. There are infinite ways to create value for others and dollars will follow that value. This is the path less traveled and it will also be the most rewarding if you are doing it for the right reasons and you can maintain your underlying reasons for pursuing this path in the first place.
Kevin Brenner, ADPI Hero, Capt, USAF / @investorkev
The Dadism That Got Me Off My Butt
Everyone loves a blog to begin with the phrase, “My Daddy used to say, [insert cheesy life advice tagline here].” Well, strap in everyone, because this next cheesy tagline could be the anecdote that motivates you to get off the couch and into the real estate game.
My Daddy, a fantastic entrepreneur and business owner, used to (and still does) say, “You can hope in one hand and piss in the other, guess which one you’re going to have more of.” Before you run off to the lab to experimentally prove this Dadism (I don’t recommend it, but if you must, wear latex gloves), hear me out. What I mean is that at some point in your investing career, whether you a newbie, or an experienced commercial real estate investor, you will hit a plateau. For a lot of Buy and Hold investors out there, this plateau comes right around the time you apply for your 10th conventional home loan. Or maybe it comes earlier when the bank tells you your Debt-to-Income (DTI) ratio is too high.
So banks won’t lend you money any more. What are you going to do about it? On the one hand, you could hope that the bank will come to its all mighty senses and realize that you know what, you really are a good person at heart and look like a straight shooter who will pay back this loan (good luck with that). On the other hand, you could pee. No wait, that’s not right, don’t do that - Pee is a metaphor people. A metaphor for taking action and being creative to raise private capital to fund your next deal!
Why Banks Suck Sometimes
Banking institutions are the backbone of many real estate investors’ assets. Leverage is a wonderful tool that every investor should take advantage of at some point in their career. How else can you scale your business? Unless you have a supremely rich uncle who is willing to grant you a ton of start up capital, then you will most likely have to lean on the old bank - and your VA Loan is a great place to start.
Banks are successful because they have mastered the art of risk mitigation. Since the early days of Babylon, banks have been shaping the way money is distributed and recycled in nearly every society. Banking institutions have paid for wars, built nations, shaped laws, and influenced nearly every human on the planet in the process. Do yourself a favor and learn how banks really make their money - spoiler alert - it’s not from the meager 5.5% interest rate they are charging you on your mortgage. While I can pull my pants up to my chest and deliver a finger waving rant about the racket of modern banking and fractional lending, I’ll digress to how I learned I needed to begin finding other funding sources for my business.
My lender had just notified me that my DTI was too high and that I’d never qualify for a loan. I was looking at purchasing another quadplex in my market. The problem was, not more than 6 months prior I had purchased my first quadplex using my VA loan. I was in the process of rehabbing it using the BRRRR method. While the rents in some units were double what they were when I purchased, my lender told me that I didn’t have enough seasoning time.
In other words, the bank needed proof that I wasn’t just a lucky landlord who suckered in some tenant into paying super high rent...insulting right? I thought so too. Well you see the bank has rules. And they must be obeyed. I mean they are the one’s lending you the money, so as investors, we are kind of stuck here. So what did I do when my lender served up this devastating news? I went home, sat on my couch, and cried uncontrollably. No not really - instead I got creative and began educating myself on Private Capital.
What is Private Capital?
Private capital is not Hard Money or Cash. It has nothing to do with seller financing. It doesn’t come from your savings account. And it certainly doesn’t come from the bank. Private capital is exactly as it sounds - private. It can come from family and friends. It can come from a co-worker or a business partner. In commercial real estate, private capital comes mostly from accredited or sophisticated investors who put up their funds to get a piece of a large profitable deal. Investors who coordinate and manage these deals are called syndicators and can be regulated by the SEC. I am no syndicator. I am just a guy looking to build a real estate company and expand his rental portfolio to build wealth and achieve financial freedom. If you are like me, then you keep reading to learn the 5 Keys to Raising Private Capital.
Find the Deal
It’s pretty hard to rally private investors to your cause when you have nothing to show them. For one, they won’t really take you seriously. It’s much easier if you find the deal first. Show them what you are looking to purchase. Draw up a professional proforma that details the deal and what you plan to do with it. You have to excite potential investors into giving you their hard earned money. Remember, when you are raising private capital, you aren’t, asking for money. Instead, you are providing your investors with an opportunity to make a significant return on their money. Put their money to work - get it out of the low yield savings account and into the profitable real estate game!
Find Your Potential Investor
I can’t tell you how many people ask me how I find private capital partners. The honest truth is - I don’t. They find me. That’s why I always want to have a deal in hand to present to any potential investor. Additionally, I’m doing everything I can to expand my network from attending (and hosting) local meetups, to crushing the social media game, to writing blogs (like this one). Every step is a baby step towards one of my quarterly goals. My quarterly goals flow into my annual goals. And my annual goals fill in my 5 year goal of reaching Level I financial freedom. Since you have found a good deal, now all you have to do is blast it out to your network. And before you email me, DM me, or comment telling me that you don’t have a network to blast your deal out to, do me a favor - reach into your pocket and pull out that thin rectangular thing that makes and receives telephone calls and text messages. Whether you know it or not, you are staring at your network. You never know who in your phone’s contacts is thinking about getting into the real estate game. Or maybe they got a sweet bonus at work and don’t feel like putting it in low earning mutual funds. Perhaps someone in your contact list just inherited a whole bunch of money from their rich uncle. Unless you can read minds, then you won’t know. Find the deal, blast it out, and potential investors will find you. I guarantee it.
Interview Your Potential Investors
In most cases, your private capital investor is going to be with you for a minimum of 6 months. It all depends on what your strategy is (Fix N’ Flip, BRRRR, Buy and Hold, etc.). I’ve negotiated a 36 month balloon payment with my investor - so he’s on the hook for at most 3 years. It could be more, it could be less. The point is, you need to communicate with your investor and set all expectations ahead of time. The best way to do this is run a Potential Investor Interview (PII). Find out why he or she wants to invest with you. Find out what they are hoping to gain. Inquire where the capital is coming from. Is it liquid cash? Is it coming from a Self-Directed Individual Retirement Account (SDIRA)? What is your potential investor’s risk tolerance? Do they currently own real estate? Communicate your objectives and your timeline with your investor. Both you and your potential investor MUST be on the same page well before closing.
Don’t Be Cheap - Negotiate a Win-Win
The quickest way to deter any potential investor is to promise the world and deliver a turd. Don’t do that. As a Deal Provider you are in a unique position of someone who has knowledge about a real estate investment that can accelerate both you and your potential investor’s net worth. With that knowledge, comes a certain level of power. But remember, you can’t execute this deal alone. If you could, you probably would. But you can’t, so your objective should be to negotiate a Win-Win. I can write an entire blog post on different deal structures, and I just might, but for now the best thing you could do is understand that negotiations are fragile and must be cared for. Communicate your objectives with your potential investor. Listen to what your investor is saying to you. Structure a deal that meets both their requirements and your investment goals. Remember, 50% of a good deal is better than 100% of no deal.
Check Your Work
In grade school I would always be the first one to turn in my quiz. I wore it as a badge of honor. I thought the quicker I can get this thing done the quicker I can turn off my brain and take a nap while we waited for the rest of the class. That strategy worked for me until I reached calculus. I learned pretty quick that I could avoid a lot of potential errors and mistakes by simply checking my work. The same principle applies to your efforts to raise private capital. In this case, however, the person reviewing your work will most likely be your attorney. Even though it might cost you a bit of money, it’s always worth it to have a qualified real estate attorney who specializes in private capital and equity partnerships to review your documentation. Whether you have a simple Promissory Note or a complex Joint Venture Agreement - have an attorney review it. Lawyers are great because they see things through a different lense. They often live in a world where Murphy's Law is the law of the land and the apocalypse is just around the corner. This is helpful, because you may be able to add some language to your agreement that could offer additional protection in the event of a worst case scenario. Remember, risk mitigation is the crux of lending money. It doesn’t matter if you are the borrower or the lender. You established a win-win deal to purchase your next real estate investment and that means that you have been entrusted by your private capital partner to mitigate both your own and their risk. Do it right. Hire an attorney.
Private Money for Scalability
Utilizing private capital can help you scale your business beyond your wildest dreams. Private capital is always more favorable than conventional bank loans because of the flexibility it offers the borrower. Try walking into your favorite lender’s office to offer the bank a principle and interest deferred 36 month balloon bridge loan at 7% interest with no prepayment penalty and let me know how it works for you. If you aren’t instantly laughed out of their office then please do me a favor and share their contact information with me!
Kevin Brenner is an Active Duty Air Force Captain, ADPI Hero, REIA creator, blogger, and an active multifamily investor. You can reach out to him through the ADPI Facebook group!
As part of our commitment to reaching veterans facing PTSD and addiction issues, we are hosting a blog series for vets during and after treatment to share their stories. Our hope is that these stories will help veterans express themselves in a therapeutic way, connect veterans within the community with others who are or have walked through the same experiences, and reach the greater public in a truthful and meaningful way.
Many of these stories will be anonymous. Many of these stories will be intense. They are truthful, they are gritty, and they are hard. They are a real reflection of life as an American soldier, for better or for worse. They are also a beacon of hope and a call to reach out to your fellow humans and create community. If you would like to contribute or connect please feel free to reach out to ADPI Helps HERE.
We also support the National Coalition for Homeless Veterans. Join us!
Substance Abuse and Veterans
by Russell Allsbrook
Substance abuse whether it be alcohol, drugs, or a combination of both is an unfortunate coping skill many prior and active duty service members turn to. These men and women deal with their mental anguish daily by suppressing and numbing out their traumas. In doing so they fail to confront personal strife and subject themselves to even more pain.
I too have been guilty of this for far too long.
Others saw me as a man who was a workout fanatic, who worked hard full-time, and who took 18 to 24 college credit hours per semester. I always sported a smile and cracked jokes.
This guise I wore masked any pain and torment that I was struggling. Internally I was drifting closer and closer to my own demise.
I wish to share a personal story and understanding why sobriety is imperative to myself and may be for many others out there still struggling.
It was December 25, 2016 at roughly 0300. After a week long bender of drinking and using copious amounts of cocaine, my self-pity had finally reached its threshold. Stress of my divorce, PTSD, college, and a lack of direction in life allowed me to indulge in one final act of selfishness. As I stared at the 2nd empty bottle of Jack Daniels on the table my mind went dark.
I turned and focused on my gun safe.
Running my hands over my small arsenal I had made up my mind, but for some odd reason I thought to myself how selfish the mess would be for those who would have to clean it up. Crazy, right? Ignoring the selfish act of suicide, I was weighing the least amount of impact my action would leave for loved ones who would later find me.
So, I turned to the medicine cabinet, and reached for the unopened 100 count bottle of Tylenol. I grabbed a bottle of beer from the fridge, swallowed several handfuls of these into my gullet, washing them down with that one last beer.
I laid down on my couch, and slowly faded away.
The images are faint and harder to remember, but as I lay dying, I remember awful bright lights and coming to, then fading back out.
I later awoke to the sound of a heart rate monitor just beeping away. Staring at me was my good friend Brandon, tears swelling in his eyes. By someone divine intervention, or just sheer luck, he had stopped by my place around 0500 after leaving an after-hours bar. His intent was to keep the party going, but much to his surprise, he found me unresponsive in my bathroom with vomit everywhere.
I am truly grateful for his unexpected visit. Because of him, I am still here today with a renewed purpose.
I wish I could tell you that was the last time I took a sip of alcohol, but that would be a lie. Instead of comprehending the magnitude of its power over me I continued to drink. I was in complete denial that it was a problem. I condoned my own BS and found other things to blame; work, relationships, whatever. I blatantly ignored the problem at every turn.
Even though my career was taking off I continued the destructive cycle. Trying to limit my consumption of alcohol felt futile. I ignored the reality of my problem and my thoughts continued to seep back into those dark places regularly. Places of self-pity, doubt, and self-destruction.
Today, on my own accord, I have made the conscience decision to act, to stop running and fight this mother fucker head on. To fight with myself and my own problems until I unearth the warrior within.
I choose sobriety.
This decision has led me to surround myself and network with many people who are or have been through these same trials.
To all my brothers and sisters in arms out there struggling, “Save One Life” is more than just a catchphrase to the ADPI team, and it has done just that for me. Moreover, I have found nothing but support and a target to aim for through the ADPI team, and I am forever thankful for the drive it has awakened.
You are not alone, and like every war the battle is not won on your own.
In a previous blog, How I House Hacked Into Multifamily, I announced that we’re under contract on a 55-unit multifamily (MF) deal in Spartanburg, SC. A few have asked about the process of purchasing multifamily properties from beginning to end, so here’s my path from beginning to present. I’ll note that a few months ago, I teamed up with a like-minded partner that I met through a forum similar to ADPI, and it’s been extremely beneficial. Multifamily begins and ends as a TEAM SPORT!
Up front, a key step in the process is actually committing to make MF investing work. I will retire in 2021 and am not making any other plans for a j-o-b afterwards. No plan B, just this. I also put some money where my mouth is and took $25k out of my financial freedom account and bought in to a mentoring program through the Michael Blank network. Finally, to get the ultimate partner on board, I told my wife we’d go to Rome on my first 50+ deal. Committed!
Next step, narrow the focus down to a few specific markets. I’m in DC and it’s not easy here to get in to the game. So, I did a comparative analysis of metros in the Southeastern USA. Why southeast? Well, larger trend in the US is that money is leaving the NE for the SE, both in terms of people and jobs. So, I looked at metros larger than 250k population with positive economic and population growth trends. I narrowed it down to 5 metros and decided that my initial focus was Greenville-Spartanburg CSA and Columbia, SC. I really love the dynamics in Greenville-Spartanburg: the recent and projected economic, population and job growth; revitalization of the downtowns areas; and demand for multifamily due to the high percentage of working-class population. Admittedly, the numbers for Columbia were just okay, but my wife grew up there (and the truth is that having connections and KNOWING an area well can sometimes balance out the purely economic reasoning - knowledge itself can be your market advantage when looking for property!).
Start calling brokers. In general, I first email with my deal criteria and bio and follow up with a call within a day or two. I find that most brokers don’t respond, but that about half of the brokers that I speak with actually open the bio. I probably contacted 20 brokerages with not a lot of luck. I was able to get three that were willing to work with me the first time around. Two of them sent me off-market deals they had in the hopper. All it took was an email and a phone.
When you do have brokers send you deals - analyze and provide feedback. There are many tools available; personally, I use Michael Blank’s syndicated deal analyzer. For each potential deal, I did my research, crunched the numbers, and went back to the brokers with questions and feedback. On one in particular, the ask price was $6.4mm. I’d tell the broker something like… we can currently offer $5.8mm, which I know is too low. If we can verify x, y and z, we’ll be able to bring up our offer price. We came close on a few offer for which we submitted LOIs, and the broker kept sending us more off-market offerings.
Next step, visit the property. I was analyzing one I really liked in Greer, SC, so I scheduled a visit. I took leave, drove 7 hours and spent a few days in the area meeting with brokers, property managers, and various professionals. On the trip,one broker asked me if I wanted to visit another property that they had just received and I agreed. I made notes, took a lot of photos, and forgot about it. That turned out to be the property we have under contract now, but at the time, I was more interested in the Greer deal. After a week or so, we had submitted an LOI for the one in Greer. Round downrange, but our shot was in the berm, so I moved on to the next property.
When I finally looked at the details of the 55-unit in Spartanburg, I was surprised that it actually had a higher upside than any other place we’d analyzed. I looked at the area comps online and realized that we could raise rents immediately on most of the units. What’s more, I saw that making some generous upgrades would allow us to significantly increase rents, so I called my favorite PM in the area to get her opinion on the numbers. She confirmed what I had assumed. A few weeks had passed since the deal had been presented and I was worried about competition, so I called the broker. She told me that there was one other interested party. I had already visited it, so we decided to act fast.
Next step, make an offer. Okay, not as easy as it seems. I scheduled calls with my partners and reviewed the assumptions we had made on income, expenses, and renovation costs. I called our lender, lawyer, insurance broker, and made a dozen calls to the PM. We finally felt confident with a maximum purchase price of $4.0mm, so we wrote up the LOI. We decided to offer $3.7mm as a starting point; seller countered at $4.0mm. We came up to $3.9mm; seller held firm. So we agreed to $4.0mm and he signed the LOI.
Deal with Integrity
Next step, contract negotiation. This is where the lawyers get involved. Mine to protect my interests and his to protect his interests. We batted the contract back and forth a few times, attorneys red-lined words, sentences, and sometimes paragraphs, and after 10 days had the deal under contract.
Okay, so we’ve got the contract… now what? We asked for 30 CALENDAR days due diligence plus an a 30 day loan contingency and an additional 30 to close (90 days total) with a built-in 30-day extension. Seller offered 60 BUSINESS days due diligence plus 30 to close and an optional extension. We accepted immediately. Funny thing, a week after we signed the contract, the broker called us because the seller never realized the contract was measured in business days. In our case, that’s 87 calendar days for due diligence. Turns out that words mean things. I digress….
Do Your Due Diligence
Typically document review. In the the contract, we asked for a ton of documents from the seller within 5 days of the contract being signed: bank statements, utility bills, contracts, maintenance logs, surveys, appraisals, leases, rent rolls, legal docs, tax returns, etc. The objective is to follow the money and make sure the deal is as advertised. After, with commercial real estate, you are essentially buying an income stream, so you want to make sure that you can achieve what your projections in the analysis phase. I asked the PM to do a lease audit for us to see what we’ll inherit. I spent hours pouring over utility statements and financials to verify current expenses, and there’s still plenty to get done. So far, so good (except the current PM has paid a lot of late fees on bills. Note to self: do an occasional audit of my PMs performance in paying bills AND get it in writing that the PM is responsible for ALL late payments on accounts that they are expected to manage).
Typically the physical inspections. We scheduled a roofing inspection, got a bid on parking lot upgrades, and walked through every apartment with an inspection team excluding a licensed inspector, my property manager and maintenance guru, and the broker. We made extensive notes and both the inspector and PM company are writing up reports on the general condition of the premises. We also discussed the items that need further inspection, such as plumbing and electrical, and our plan for capital expenses, such as roof repairs, parking lot improvements, renovations, etc. Still a work in progress, but we have finished about half of the expected due diligence activities.
Financing, which includes an appraisal, further inspections, and a lot of paperwork, and
Obtaining insurance quotes and getting policy documentation ready.
Title search and insurance.
Legal work, including entity formation (two LLCs and one LLLP), private placement memorandum, SEC filings, etc.
Oh, did I mention we need to raise over a million dollars. My partners have a lot of friends with above average wealth. Not my strong point, so I partnered with people that can perform this function.
Getting everything across the finish line in the time allotted. Should be reasonable in the “obscene” amount of time granted us in the contract (broker’s words).
One thing I’ll stress is the value that a mentor has provided throughout the entire process. He’s closed on over 500 units and is under contract on his first retail deal. Next key is the synergy between me and my partners. We all play key rolls and have different strengths. Among other things, I’m the attention to detail guy who can analyze with the best of them; Eric is a master at finding deals and is a natural salesman; Brian raises funds and can PowerPoint like a staff officer; Todd raises money and gets us over lending hurdles that dictate total net worth and liquidity; Josh has syndicated before, partners with even bigger fish, and brings knowledge and experience to the table.
I hope you’re all able to find value in this. At least you’ll get an appreciation for the amount of effort it takes to get this far. It’s definitely not for the faint of heart (but we’re all in a profession that requires strength of character). Now, stop waiting to get in the game. Figure out your next 2-3 steps and then go and do.
Brian Briscoe is a LtCol in the Marine Corps, father of five, and husband to Angie for over 20 years. He is an advisor in Michael Blank’s Deal Maker Mastermind and a member of Michael’s Elite Investing Club. He is also an active member in the The Church of Jesus Christ of Latter-Day Saints. Brian can be found checking in frequently in ADPI’s #StartTheSpark and will sometimes even Facebook. If you have questions about multifamily or want to know how you can passively invest in multifamily, contact him at firstname.lastname@example.org.
By now I’m sure most of you have heard the term BRRRR which stands for Buy, Rehab, Rent, Refinance, Repeat. Famously coined by BiggerPockets’ Brandon Turner a few years back, the strategy itself has been around forever. Remember, buy low and sell high. It’s kind of like that, except in this case, the end buyer is actually the bank.
Investors from all walks of life love to BRRRR because it offers a lot of flexibility, as opposed to standard fix and flip or buy and hold deals, and a significant marketplace competitive advantage (more on this in another blog). Like most real estate investing (REI) strategies, a profitable BRRRR hinges on the After Repair Value (ARV) and your Estimated Rehab Costs (ERC). If you can master evaluating these figures, then you are one step ahead of your competition and well on your way to some solid deals! The topic of calculating ARVs and ERCs is so important it needs its own blog post, website, and maybe college curriculum. I think I’ll start with the blog post, but not now. For now, let’s dig into the basics of the BRRRR and how to master it in order to build out your rental portfolio!
It’s pretty obvious that in order to be a successful investor of literally anything at all, you need to figure out how to buy something, specifically how to buy it right. In REI, we buy...you guessed it, Real Estate! So you are in the market for a new deal and you are thinking about implementing the BRRRR strategy - what should you look for?
Remember the crux of a successful BRRRR lies within the ARV. When evaluating deals, you should be asking yourself, “What’s my ARV? Is there enough room in the ARV to cash out a minimum 75% Loan to Value (LTV) with a bank after all rehab and residual debt service is paid off?” Traditionally, BRRRR deals are used with cash purchases of single family residences (SFRs). As an investor you put down the cash to purchase a home outright. You then rehab the property thus forcing appreciation and resetting your Capital Expense (CapEx) clock.
After that you find a tenant and rent the property out for cash flow while you enter your “seasoning” period with the bank. Finally, you refinance and pull your residual cash out to use on another BRRRR project. When it’s all said and done, you are left with a beautiful home that is tenant occupied and still cash flowing - even after your refinance! Hold onto that sucker for 10, 15, hell maybe even 30 years and ride the cash flow wave all the way to the bank! But wait folks...there’s more.
What if you wanted to apply the same BRRRR strategy described above to buy a small Multifamily (MFH) property? Because you are a savvy military investor you already know you can use your VA to purchase up to 4 units. So what’s stopping you from BRRRRing that 4 unit and multiplying your cash out refinance profits by 4 - absolutely N-O-T-H-I-N-G! Oh did I mention the cash flow from a 4 unit is much better than an SFR? Well it is, even after you refinance, you could still be looking at $200-$300 positive cash flow...per door! This all depends on finding the right deal and buying it intentionally at the right price of course.
I already touched on the importance of ERCs early in this blog. I cannot overstate how important these figures are. They can literally make or break your deal. Below are some tips to help you come up with a more accurate ERC:
1). Walk Each and Every Door
Once you have the property wrapped up under contract, make sure you are doing your Due Diligence. Walk each unit with your contractor, handyman, and property manager. Having a great team of professionals is a must! If the seller won’t let you in, it’s probably because they don’t want you to see it. Demand that you see each and every unit before your Due Diligence period ends. If you are approaching the end, ask your agent to coordinate a Due Diligence extension with the Seller. If they refuse, then assume that there is a major problem with that unit that could completely throw off your numbers. Walk away and be happy that you dodged that landmine.
2). Create an SOW and Get Some Quotes!
Most newbie investors skip the necessary step of creating a Statement of Work (SOW) while calculating their ERC for a project. A lot of contractors will walk through a unit, write some things down, point some other things out, and then mumble to themselves while they try to come up with their version of math in public aka contractor math. For the record, contractor math is always skewed high. Very high.
Do yourself, and probably your contractor (unless you are working with Will Hunting from Good Will Hunting) a favor and draw up a legit SOW. I have an excel form that I share with my contractor and my property manager when they walk a unit. My manager and contractor fill in things that they noticed during the walk through that need to be addressed. I have them work together on this because while my contractor may want to fix every little thing, I am only interested in fixing things that will draw in steady working class tenants (aka no gold plated toilets in my units). The SOW is automatically saved and uploaded to my cloud. I verify the fixes with my property manager and negotiate labor prices with my contractor. Then I begin to order the materials. Because I have a few rehabs under my belt, I have a decent idea of what things in my market costs (both material and labor). This helps prevent any contractor math from screwing with my overall numbers.
3). Add in a 10% Contingency Reserve
Forrest Gump said it best, “Shit Happens.” Well that same principle applies to rehabs. As an investor, you have to be prepared to foot the bill for any unintended expenses. Once you complete your SOW and have a solid idea of what your ERC for the project is going to be, do yourself a favor and tack on an additional 10% contingency reserve. This 10% will help cover the costs of some unexpected work that needs to be accomplished. For example, the plumbing under the kitchen sinks in my quadplex was pretty much dry rotted through. I had no idea until we started tearing out cabinets and replacing sinks. Well as you can imagine, we sprung a leak and had to get an emergency plumber out to the site ASAP. Not cheap. Also, not accounted for in my initial rehab budget - Ouch! Luckily it didn’t kill the deal, but you better believe that I learned pretty quick that I need to be making legitimate SOWs and actively implementing cost control measures to keep these projects on time and on budget.
Once you have your ERC and SOW in place. You are ready to proceed with the deal and begin the rehabbing phase. Remember to also account for delays in construction. This could be due to a myriad of factors - just don’t be surprised if your project isn’t complete on time. Depending on how you are funding your project and your rehab, this could throw a wrench into things (e.g. using expensive hard money to fund your deal). Create an SOW, get some quotes, calculate your ERC, and keep an eye on your holding costs and you should be fine.
Pretty self-explanatory stuff here. The goal of any investment property is to cash flow. If you are not buying for cash flow then you are buying for appreciation. And if you are buying for appreciation you are not an investor. Instead, my friend, you are a speculator. The sad truth is that speculator’s usually lose their money, especially when they bet on factors that are completely out of their control (aka the real estate market)!
Consult with your Property Manager to calculate an average monthly stabilized rent roll BEFORE closing on your deal. You need to know what you can expect to cash flow each and every month after you place your tenant(s). Look at rental comparisons (aka comps) in your neighborhood to get an idea of what things are going for. Remember, if you rehab your property right, you will have a beautiful rental unit with new low CapEx and a long cash-flowing life. Run your rents a shade below what the market is calling for. If you can get these rents to cash flow decently, then you can position your property for sale (instead of refinancing) by marketing it as an “under-rented” asset. Investors will jump all over that and you will still laugh your way to the bank with a solid post BRRRR profit. Again, you need to consult your Property Manager to get these numbers figured out. Don’t be afraid to reach out to some other investors here too. Especially if you feel like your Property Manager is overestimating rents. It’s always good to get an extra set of eyes on your deal. Besides, what do you care, you have it all wrapped up under contract anyway!
Now we’ve reached the step that most investors dread. The mostly unnecessary and fully invasive refinance process. Remember that the goal here is to refinance your property at a minimum 75% LTV. That leaves you at least 25% equity in the deal. Some investors will hedge their risk even further by refinancing at a more conservative 60% LTV, leaving 40% equity in their deals. The higher your LTV, the more cash you can pull out of your deal, but the lower your cash flow. The opposite holds true for a lower LTV. Of course, all of this depends on the bank’s appraisal of your property.
I mentioned in the beginning of this article that the success or failure of a BRRRR depends on the ARV. Well this is the step in which that ARV calculation comes to light. During this phase, the bank will order an appraisal for your property. Depending on the property type and lending procedures, the appraiser will utilize various methods to determine the new value of your property. With SFRs and small MFH properties, you can expect the appraiser to use a comps analysis to assign a property value. The bank will then use this value as a basis to lend you money - the more accurate your ARV the better off you will be. Maybe you’ll even hit the jackpot and your newly fixed up and shiney property will appraise higher than your ARV estimate. In this case, don’t get greedy. Stick to your plan and just refinance your property at a lower LTV. It’s always good to have a little more equity in case things go south in the market. Remember, we are investors not speculators. Cash flow is a REQUIREMENT, not a hope, dream, or wish list item. You may be able to get more favorable terms if you choose to refinance with a small community bank who will hold your loan on their books, as opposed to selling it on the secondary market. While calling around to a thousand banks and filling out countless loan applications isn’t my idea of a good time, it’s necessary to complete your exit strategy and advance your rental portfolio.
You’ve cashed out your deal after a successful refinance. You may even have some extra equity in your home...and it’s still cash flowing like a champ! That’s what you want to see with each and every BRRRR project. Now you just hold on to your investment, keep it occupied, and collect that mailbox money! Oh, and take that cash from your first deal and repeat the process with a brand new deal. If done properly, the BRRRR strategy can lead you to consistent passive cash flow over time. Consistent passive cash flow - isn’t it a dreamy phrase. Use the BRRRR strategy with SFRs or MFH properties to build your portfolio, multiply your cash flow, and pick away at your financial freedom goals!
Kevin Brenner is an Active Duty Air Force Captain, ADPI Hero, REIA creator, blogger, and an active multifamily investor. You can reach out to him through the ADPI Facebook group!
Whether you are commonly reading financial blog posts or catching the occasional Grant Cardone video, you have probably heard the debate about home ownership. Some, like Warren Buffett, think buying with a 30-year mortgage can be an attractive option for many American families. Others, such as Grant Cardone, think buying your personal residence, especially a single family home, is a ridiculous proposition. Why is there such widespread disagreement? Who is right?
Like all things, it depends!
But let's dive deeper into this and why I think your home is an investment.
To begin, let's determine what an investment is. Merriam-Webster defines investment as, " the outlay of money usually for income or profit." The definition of profit is, "a valuable return," or "net income usually for a given period of time." To state that another way, using money in a meaningful way to increase NET income is an investment.
Home ownership IS an investment.
First, it is within an asset class (real estate) with a long standing history of appreciation.
Secondly, it is an asset backed by real property.
Third, ownership over the long term has the potential for significant increases in your household cash flow by locking your housing payment.
Let's look at each of these a little closer.
Real Estate Has a Long History of Appreciation
When investing in real estate, it is impossible to predict future appreciation. Historically speaking, appreciation in home prices results in a positive yield by outpacing inflation. According to Investopedia, "A $100 investment in the average home (as tracked by the Home Price Index from the Federal Housing Finance Agency (FHFA)) in 1975 would have grown to about $500 by 2013. A similar $100 investment in the S&P 500 over that time frame would have grown to approximately $1,600." In this 38 year period of time, it's fair to say that stocks vastly outperformed homes. However, YOU NEED A PLACE TO LIVE. You cannot live in your stock fund. For that 38 year period of time, home owners enjoyed a 3.7% annual increase in value, slightly outpacing inflation. Renters lost 100% of their rent paid. That does not mean renting is always a bad option, more on this later.
Real Estate is An Asset Backed By Real Property
Calling your personal home an asset is definitely highly debated. Those in the Rich Dad, Poor Dad camp would discourage calling anything an asset if it doesn't directly make you money. Those siding with Dave Ramsey or traditional banking would consider your house an asset based on its position on your balance sheet. For the average American family living paycheck-to-paycheck, a home may be a significant portion of their net worth. Do I think this will provide better returns than investment real estate or equities? No. However, is your home an asset that grows your net worth, decreases your long term expenditures, and if necessary, provides a means for borrowing? Absolutely.
Long term Ownership Locks Your Home Payment and Can Increase cash flow
This is where the 30 year mortgage becomes a powerful tool. Let's say you lock in your house payment today at $1000. In 30 years, as inflation devalues your dollar, your payment is still that same $1000 until it's paid off. At that point, your monthly payment drops significantly and you have the home value in equity. If you were renting for this same 30 year period of time, assuming 2% rent increases annually, your rent payment is now $1800 monthly with no increases in equity or net worth. In this scenario, not only would you have equity, but also if your monthly expenses are less than $1800 per month, your household is cash flow positive every month compared to renting!
The home can be a powerful part of your long term plan, but like with all investing, using a short-term viewpoint can be dangerous. Let's look at some popular arguments against home ownership.
In the short-term, it is often more expensive to own a home. Owning a home comes with closing costs, improvements, repairs, taxes, insurance, etc. Additionally, if you refer to an online amortization table for a 30-year fixed mortgage, you will notice most of your payment in early years goes toward interest. There are great calculators online that can assist in a projection on whether renting or buying is a better option for any given time frame.
The other major factor in this category is the price. This may seem obvious, but it is too important to skip. Whether you are buying or renting, if you overspend because you WANT something better, you're likely to end up "house poor." If you stay on budget and only purchase what you NEED, you are much more likely to have free capital available to enjoy other aspects of life including hobbies, trips, and investing.
You Should Rent and Invest the Difference
You should also eat more vegetables and watch less TV. This is excellent, in theory. The issue is most people do not do this. Instead, whether they rent or buy, they spend extra money on things or experiences. If someone has the self-discipline to invest the difference, then I would argue they should probably buy. If your rent payment is $1000 or your home payment is $1000, you still have the same amount of capital left over to invest after the payment! Owning does come with the risk that you may have more capital expenditures, meaning you do need additional cash reserves for your home. Renting comes with virtually zero risk, which is exactly why it comes with nearly zero long term financial reward.
Equity Is a Poor Use of Capital
Equity in your home is the result of a down payment, forced appreciation, and years of paying your mortgage. If you have $100,000 sitting around, is it better to invest it or payoff your house? That depends on too many factors and is beyond the scope of this article. The worst option would be to spend the entire thing on rent. Long term renting neither builds assets nor reduces liabilities.
Buying Results in Less Flexibility
I totally agree with this one. Renting is superior until you're ready to "set roots." If you don't know where you are going to live or work, the last thing you want to do is commit to a large home loan. This is the reason why advisers like Dave Ramsey recommend that you don't buy while on Active Duty, but in truth the right time to buy a home is going to vary for each situation and will largely depend on your personal strategy for building wealth.
Once you are settled in a location with relative certainty you will not be moving and have a stable source of income with cash reserves, a home purchase can be a great investment to your future wealth.
How I House-Hacked Into Multifamily
Investing Strategies for Military Families
There are a lot of good strategies that work well for military families. VA house-hacking is on the top of most people’s lists – and was on mine too. For some people, hacking into a few investments is enough; but many active duty members are driven with a big, burning “why” that leads them into bigger and better investments. [Feel free to share your "why" in Start the Spark] In my case, my "why" led me from house-hacking to 55-units in Spartanburg, SC, and will soon have many more. Along the way, I hope to highlight some of the benefits of multifamily investments.
I hacked into my first investment property before house-hacking was even a thing. While I was a young Devil Dog stationed in Okinawa, I read Rich Dad, Poor Dad. I know, cliché, right? I figured it would be difficult to invest from Japan (I now realize this is a limiting belief), so we decided to wait until we were back CONUS. We got PCS orders to San Diego in 2006 and I was committed to buying a house.
Until I got there, that is.
We looked at everything available in our price range, but with two kids, we just couldn’t fathom paying $800 per month over my housing allowance for 900 square feet and no yard.
We decided to rent and continued looking for an investment property in my hometown. After looking at dozens of homes, my father-in-law offered to sell his home for 10% under the appraised value. We were able to purchase the home from out-of-state. It’s been a stable rental ever since.
Within a few months, both the economy and the housing market collapsed. Our first house still cash-flowed, so we went shopping in the Great Real Estate Sale of 2008.
Bargain Hunting After the Housing Market Collapse
We bought a house in San Diego that was in pre-foreclosure, a short sale, and a steal at $305k. Lending was a bit tighter, but I borrowed from my TSP for a 3% down-payment using an FHA loan. We lived in that home for a few months before I had PCS orders to North Carolina.
We moved to Cherry Point, NC and again searched for an investment property. This time, we hit a snag. After calling several lenders, I was told the same story: with two mortgages and a single income, I was over-extended and could not get a loan to buy a third house. You see, as good as house-hacking is, there is a ceiling to how many personally guaranteed loans you can get. On a captain’s salary in 2010, it was two. End of house hacking for me. So we settled down and enjoyed our home.
Recently, I deployed on a MEU (a bunch of Marines on Navy ships floating around the ocean). I was getting the real estate itch again, so I began researching. Among the many great books that I read was The Millionaire Real Estate Investor by Gary Keller. His strategy was to use single family homes to buy a million, own a million, receive a million, and give a million. So, since I had more time than I knew what to do with, I started spread-sheeting.
I modeled purchasing one house per year valued at $150k at a 20% discount. I indexed my numbers for inflation, calculated amortization, and appreciation, and made projections for many years to come. The results? Starting with a portfolio valued at over $600,000, it would take 3 years to “buy a million”, 8-10 years to “own a million” (become a net worth millionaire), and 20 years to replace my annual income. “Receiving a million” in annual income wasn’t even in sight.
Then I read a book on apartment investing and the light went on. Instead of purchasing one unit at a time, I could make one single purchase and get 8, or 12, or 24, or more. At my next port call, I downloaded just about every multifamily book I could find and read every single one of them. I came home from deployment and discovered podcasts like Apartment Building Investing with Michael Blank, Best Real Estate Investing Advice Ever with Joe Fairless, and Lifetime Cashflow through Real Estate Investing with Rod Khleif. These became my daily commute, my gym time, and even my lunch hour routine.
I loved every minute and started planning. I moved to the DC area last year and now live in Maryland. As it turns out, Michael Blank, host of one of the better multifamily podcasts, lives about 25 miles from my house. I signed up for his online course, went to his networking events, and then paid for his coaching program. That was 5 months ago.
After selling my single family homes to jump-start my multi-family machine, I now have 55 units under contract in Spartanburg, SC, an offer in on another 104 units in Columbia, and several other opportunities that my team and I are pursuing throughout the Carolinas.
Could I have done it without Michael’s coaching?
Yeah, probably, but not as fast.
I had been thinking small and trying to do it alone. Michael Blank opened my mind to partnering and provided a forum to do so. Much like Active Duty Passive Income does for active military and veterans.
Now, enough about me. I want to share more.
1. Multifamily scales. Buy one, get 100.
2. Multifamily reduces risk of loss. If one person moves out of a SF home, you have 0% occupancy. If one person moves out of a 24-plex, you have 96% occupancy.
3. Multifamily acquisition is about the same as a SF purchase. You find something you like, get it under contract, conduct due diligence, get a loan, then close the deal.
4. Multifamily is recession resistant. When the market crashed 10 years ago, people who lost their homes moved into apartments. Additionally, multifamily valuation is based largely on its income stream, not on public sentiment or the neighborhood comparables.
5. Multifamily allows for economy of scale. I’m purchasing two buildings with a combined total of 55 units. I have two roofs and two boilers and two yards and two parking areas. If I were to purchase 55 single-family homes, I would have 55 roofs, 55 HVACS, 55 yards, and 55 driveways.
6. Multifamily financing is safer. Properties that are 5 units or greater and over $1M qualify for non-recourse, commercial loans. That means, if you default on the loan, the bank can repossess the property, but can’t touch your other stuff.
7. Multifamily puts you in control. Since multifamily properties are valued based on their income stream, increasing income increases value. New countertops, new laminate flooring, and fresh paint can be done for a few thousand dollars, but the returns are much higher.
8. Multifamily allows for similar leverage that exists with SF homes. With the above example, if you have 25% down and raise the NOI by 10%, you increase your equity by 40%.
9. Multifamily has the same tax advantages and what not as single-family homes.
10. Multifamily is a great way to passively invest in real estate (ask me how).
Hopefully, you’ve begun to think about this asset class. In my next article, I will show how anyone can invest in multifamily. Can’t wait for my next blog? See below on how to contact me.
Brian Briscoe is a LtCol in the Marine Corps, father of five, and husband to Angie for over 20 years. He is an advisor in Michael Blank’s Deal Maker Mastermind and a member of Michael’s Elite Investing Club. He is also an active member of The Church of Jesus Christ of Latter-Day Saints (#becauseofhim). Brian can be found checking in frequently in ADPI’s #StartTheSpark and will sometimes even visit Facebook.
If you have questions about multifamily or want to know how you can passively invest in multifamily, contact him at email@example.com.
To cash flow or to appreciate? This is the million-dollar question of rental property investing. And one that has been examined, debated, and studied six ways to Sunday. These two different schools of thought on how to make money on rental properties have often been argued as a matter of preference. At ADPI, however, we’ve got our own reasons why one is better than the other, and we’re here to tell you about them.
First, though, here’s a quick introduction to each of these money-making options:
If you’re getting into the rental property market, you’re in it to make money, right?! Well, let’s hope so.
One of the most popular ways to do that is by collecting monthly rent from tenants that exceeds the property’s monthly expenses. This leftover profit is called cash flow. Though cash flow on a single property averages a couple hundred per month, most investors have more than one rental property they’re cashing in on. If you’re making $200 each month on 10 properties, that’s $24,000 of net income through cash flow per year! This profit took some time to accumulate, but it came with minimal risk.
Another way to bring in money via a rental property is through appreciation of that property. This is when a property sees an increase in value, and it can come with high profits if the value increases rapidly. For example, if the real estate market in a certain area is booming, property values could in theory increase from $200,000 one year to $300,000 the next. Sounds awesome, right?! Well, this approach to real estate investing is also extremely risky.
No property is guaranteed to increase in value quickly, or at all, and as everyone saw in the recession of 2008 properties can decrease in value significantly in difficult times. When this happens, investors continue to lose money each month on these stagnant properties. At best you can find a renter to pay the mortgage amount and break even, at worst, you lose money every month, even with a renter in place.
So, which one is better?
Honestly, we think cash flow is the best option when it comes to rental property investing. Even though appreciation can set you up for financial success in one go — if it’s a big one — it can’t be accurately predicted. Its potential is high rewards, but it can also come with high losses. By choosing the cash flow method, however, you’re able to guarantee money each month. Appreciation is a gamble on the potential of the future - Cash Flow is guaranteed monthly income, with the additional opportunity for appreciation as well.
As you contemplate the best course of action for your rental property game, here are some things to think about:
What is your financial freedom number?
Here at ADPI, we talk a lot about your financial freedom number. This is the amount of money it would take for you to reach your financial goals — getting out of debt, early retirement, having a diverse investment portfolio, living the yacht life. Whatever goals you have for your life, how much money is it going to take to get you there? From a real estate standpoint, the formula to determining this number is pretty simple: what are your expenses and how many properties will it take for you to not only cover them, but profit and reach your goals.
In our No. 1 bestselling book Military House Hacking, we talk more extensively on this topic, even including a forward by real estate powerhouse Rod Khleif, whose “The Lifetime Cash Flow Through Real Estate Investing Podcast” has been downloaded more than 3 million times.
Is investing for appreciation like investing in the stock market?
Yes, yes it is. The stock market’s motto: high rewards come with high risk. Sound familiar? If not, scroll up to “Appreciation” for a quick review. With the stock market, a down cycle means profits are lost, and with an upcycle, profits are increased — sometimes dramatically. Though the risk is worth it to many stock investors, even the best in the business have a hard time predicting which way the market will turn. This is exactly the same concept of appreciation. With cash flow, however, rental properties are going to keep netting each month despite any negative market dips.
How finding good cash flowing investments can help you overcome market corrections
Market corrections mean loss of money, and it’s a hard thing to avoid if you’re serious about your investing game. Weathering these corrections depends on your ability to find good cash flowing investment options. When it comes to rental properties, it’s not that hard to come by, but it will certainly take some research to make sure you’re investing wisely. MashVisor has a great article that discusses the best strategies for finding cash flow investments. A few highlights include:
Perform a real estate market analysis to select the right city
Consider multi-family homes
Enter into a real estate partnership
Take advantage of rental property tax deductions
In the words of Grant Cardone, “Cash Flow Is King." Coming from this multi-million dollar investor, I’d say that’s a pretty telling statement on which way to lean in the cash flow vs. appreciation debate. You already knew that real estate investing was the best way to grow your wealth and generate passive income, and now you know the best way to do that is through cash flow. But how can you take the complexity of compounding cash flow to buy more rental properties? Lucky for you, we’ve created a cash flow calculator app to do the hard math and show you how your wealth and income can grow through cash flow.
WHY YOU SHOULD FIRE YOURSELF AND HIRE A PROPERTY MANAGER...AND HOW TO DO IT
Kevin Brenner, Capt, USAF
Just Fire Yourself All Ready
Well, you’ve reached the top. You spent months, maybe even years, educating yourself about all the wealth-building power of REI. You’ve spent late nights scouring online forums and reading every REI book you could get your hands on. You’ve asked all the right questions to all the right people at all the right meetups. And finally, you were rewarded with the ever elusive opportunity that all true investors chase - the Deal. Because you are educated in the ways of the Deal, you instantly recognized its value and wrapped it up under contract. After spending weeks working with lenders, lawyers, title companies, and real estate agents, you finally closed. Now what? Well, that’s easy - it’s about time you got yourself fired.
I Don’t Need A Property Manager, I’m Handy...
Before everyone loses it tells me how much they love their jobs and their careers and that they could never imagine being fired - hear me out. I mean you need to fire yourself from managing your investment property. While being a landlord has its charms, it’s not an ideal path to follow, especially if you want to continue to grow your investment portfolio. In fact, it’s a tremendous time sucker that frankly isn’t really worth it. But, as a hard-charging Airmen myself, I figured I was different. I thought, “How difficult can it really be? I’m handy around my house. I spent a few summers in high school working for a contractor, so I know my way around a reciprocating saw. Besides, if I can hold out and self manage for a few months before I PCS I’ll save a boatload of cash. Plus, I’ve been a tenant for years, so I have a pretty good idea about how this whole operation works.”
After landlording a 100% occupied Quadplex for the summer, my attitude towards property management took a complete 180 and I was ready to throw in the towel. Between the maintenance requests, the constant complaints, the moldy drawer cheese (another story for another day), the smelly neighbor drama of 2018 (also a hall of fame tale), and the stolen door knobs - I was about ready to tear my hair out! Just before my PCS, I finally wised up and hired a professional Property Manager (PM). At first, the idea of property management seemed silly to me. Why should I pay someone 10% of my gross income to manage adults in their homes? Turns out, there’s just a lot more that goes into it all. More importantly, hiring a quality PM allows you to focus on your next deal. No investor gets rich off of their first deal. It’s there 50th or 100th deal that they finally begin to develop real wealth. So how in the heck are we going to get to 10 or 25 deals, let alone 50 or 100 deals, if we are bent over our tenant’s toilet, in full plumber regalia, addressing its “low flushing capacity?” Simple - add a PM to your team!
Is It Really Worth It?
Talk to nearly every business owner and entrepreneur out there and you’ll hear the same complaint over and over again, “It’s just so hard to find quality workers out there!” Well, the same principles apply to REI. Remember, as an investor, you own and operate real property - and that’s a business. If you want to be successful, you have to treat your properties like the business that they are. And as you can imagine that takes a lot of work. So you need to hire out some help to join your agent, lawyer, and lender. Enter the PM.
A good PM can literally make or break your investment portfolio. If your PM isn’t responding to tenant requests, or worse off, isn’t even placing tenants then you don’t make any money. And if you don’t have any tenants to pay the mortgage, taxes, and insurance, then guess who’s paying that bill...you are. Additionally, PM’s are also regulating the income and expenses for your property. They collect rent, handle maintenance requests, maintain an operations budget, handle your property’s bookkeeping, disburse owner payments and statements, and summarize the performance of your building through the use of advanced management software. My PM also handles project management on my remote rehabs! PM’s really come through during tax time when your CPA is asking you for a summary of all deductible expenses for your Schedule E. The first time I went through this I was freaking out, but like a stork delivering a baby, my PM sent me a complete yearly operations summary with all expenses clearly identified and labeled. Sent that off to my CPA and Boom! All done. Essentially, my PM does all the annoying work that I can’t do because I live 600 miles away from my investments and honestly wouldn’t want to do if I lived 1 mile away! Along with your lawyer and CPA, a great PM is a key part of a real estate investors team. So is it worth 8% per month? 100% Y-E-S.
PANIC! I Can’t Afford a Property Manager!?
Because you are an educated and savvy investor, you know that you should be calculating management expenses into your expenses when analyzing deals. Even if you want to self manage for a while, you should still run your numbers as if you were going to hire a manager. This way, when your business inevitably takes off, you aren’t stuck scrambling looking for a super cheap PM. The problem is, that PM’s do not have standard prices. So how do you figure out what to include in your deal analysis? It’s easy, just call some in your market and ask them what they charge. While the monthly rates are relatively standard, usually between 8%-10% per month for small multifamily and single-family residences, the fees can vary widely. Some PM’s may charge a tenant placement fee - sometimes it’s an entire month’s rent! Others may charge a fee if your tenant resigns for another year. If you are looking for project management on a rehab, expect to pay your PM to oversee everything. Every market is different, so do yourself a favor and call around. Google is a great tool to find some PM leads. Also, lean on your network to find PM’s that come highly recommended. Typically, any given market is chock-full of management companies. So how do you filter out the good ones from the nasty ones? Keep reading…
The Good, the Bad, and the Ugly!
Saving yourself, your hair, and your business from a bad PM is all about the interview process. You have to ask the right questions. Some PM’s tantalize out of state investors with below market rates and fees. Investors who sign on sometimes find out that these “sharks” are taking their money and not even placing tenants. Or worse, they are telling the investors that their units are unoccupied when in all actuality they are occupied and the PM is skimming all the rent off the top (cough cough Clayton Morris). Never fear, just utilize the list of questions below when interviewing your PM’s. Pay attention to how they answer these questions. If you are not comfortable, then dig deeper and ask them for more information. If you get the feeling that they can’t provide that information, then they probably haven’t been in the game that long, and may not be worth it - especially if you are an out of state investor!
How do I hire a property manager?Behold - The List
Essential questions to ask during an interview with a potential PM.
1). What are your SFR/MFH rates? What are your fees?
Pretty self-explanatory here. Get an idea of their fee structure before you waste your time asking about the nitty-gritty details.
2). How long have you been in business? How many units do you manage? How many employees do you have?
It’s important that your PM company has been around for at least a few years. I like to see a company that has been in business for a minimum of 3-5 years. This way you know that they aren’t a flash in the pan start-up operating out of a garage somewhere. Having employees and associate managers is extremely important. A professional PM company should have a few managers, a bookkeeper, a secretary/office manager, and multiple contractors and handymen on staff (more on that later).
3). Have you ever evicted a tenant before?
It’s important to know that your PM knows the local and state tenant-landlord laws surrounding dispositions and removals (evictions). Bad things happen, and while a lot of tenants are good people, sometimes a major life event like the loss of a job or medical situation stops them from paying rent. Your PM should be prepared to handle any and all of these and other similar scenarios. Ask your PM if they charge late fees? Do they keep the late fees in house, or do you get a piece? Also, ask them when a disposition will be filed in the event a tenant fails to pay rent. Who pays for the court fees? Who attends court? How will they coordinate with the local sheriff during an eviction? All of these questions need to be asked. If your PM hasn’t dealt with this yet, it’s probably time to hang up and find someone who has. As an owner, you don’t want to be worrying about all of this stuff - especially if you are paying a PM!
4). When do you send owner disbursements? What PM software do you use? Who manages the property’s bookkeeping?
Be clear with your PM that you expect regular owner disbursements. Remember, you are running a business here and your income pays for the property’s mortgage and enables you to purchase future investment properties. If they cannot guarantee consistent owner disbursements then do yourself a favor and walk. Additionally, your PM should be using some sort of advanced software that offers an owner’s portal (Appfolio, PropertyWare, Buildium, etc.). Do some research on the big software companies and find one that you like. It’s a lot easier to keep tabs on your investments if you can easily navigate the owner’s portal of your PM’s software. If your PM doesn’t use software then W-A-L-K. In today’s day and age, it’s unacceptable for PM’s to not leverage the power of the internet to manage properties. Plus, you need to be monitoring your investments and have 24/7 access. You can’t do this if your PM has a massive bookkeeper’s ledger circa 1953 locked in their office. To that end, your PM should have a professional bookkeeper on staff. Ask who will be handling your books and how much experience they have. You definitely want a pro who knows how to handle property expenses. They will save you so much headache come tax season.
5). What type of clients do you typically take on? What grade of properties do you typically manage? I have a D- property, would you help me manage it?
Disclaimer - this is a trick question. If the PM you are interviewing even considers taking on a D- property, then you need to hang up immediately. Think about it from their perspective for a moment. A D- property is probably in a war zone that collects bottom dollar rent with a lot of crime or at a minimum, trouble tenants. The PM would have the most headaches and be making the least amount of money with this property. As a professional investor yourself, you know that investing in war zones and D neighborhoods is a bad move, so you obviously don’t have a property there. If your PM stumbles on this question, then they are clearly super desperate for your business. If they are desperate for business, then they probably have screwed up with past clients and are frankly not worth your time or money.
Making the Leap…
Take a moment to reflect why you got into this business. Remember that real estate is one of the best ways to achieve financial freedom and build wealth over time. If you want to continue to pursue your dream of achieving financial freedom and early retirement then do yourself a favor and get FIRED. We all know you have more pride than that, so QUIT first. A wise woman once gave me some of the best advice: Don’t trip over dollars to pick up dimes.
In short, it’s okay to shell out the money to hire a PM. Remember, you are hiring a professional who has the time, resources, and staff available to take care of your investment and facilitate massive growth in your own business. I promise that if you account for management fees in the front end of your deal and use the above list to hire smart, you will be well on your way to advancing your REI portfolio and career.
Kevin Brenner is an Active Duty Air Force Captain, ADPI Hero, REIA creator, blogger, and an active multifamily investor. You can reach out to him through the ADPI Facebook group!