Setting Expectations on 2-4 Family Deals

by | Jan 26, 2017 | Blog

Since I’ve been in real estate, I’ve seen investors infatuated over 2-4 family dwellings (i.e., duplexes, triplexes and fourplexes). The reason: these properties have the ability to produce high cash flow, and conforming loans are available (30-year, fixed-rate mortgages) for long term financing.

When a real estate investor finds one of these deals where the returns look compelling, they are often frustrated by the fact that the ARV is not proportionate with the income it produces, and many times that blows up their deal. How does this happen? Most of the time the investor is using a rental multiplier approach or the NOI approach to determining the value, and that gets them into trouble.

Consider the following example. Our client John was recently looking at a duplex that had 3 bedrooms and 2 bathrooms on each side and would rent for $950 per side per month. With $1,900 per month in total rent, John assumed the value could be based on a gross rent multiplier (GRM) of at least 100 (meaning 100 X rent), making the ARV worth $190,000. Although appraisers do look at the GRM on investment properties, it’s not going to be used to determine the value for a conforming or conventional loan.

Even worse is when investors start to analyze fourplexes as small apartment buildings using a net operating income (NOI) calculation, which is the commercial property approach. This approach to value takes the total rent minus total expenses, not including the debt service. Although it’s always good to know what the NOI is, the lender in the transaction will not allow the appraiser to use this method to determine the value.

The Challenge and Reality

Although they are multi-family by nature, 2-4 family properties are considered 1-4 family from a lending perspective. This means they will be appraised just like a single-family property does use a sales comparable approach. In many markets in Texas, there are not enough sold comps to support a value equal to what you would get by taking either of these approaches. Why is this the case?

To answer this question you have to ask yourself: who buys these types of properties? With some exceptions, most of the time the buyers are investors. How do investors buy? Most investors try to buy at a discount to the market value, and many times are buying off-market. When there is not enough sales data available, the value becomes more difficult to determine, and this, in turn, tends to lower the value of the property.

Conclusion

Many times (but certainly not all) we see the value in the 2-4 family deals coming in at the purchase price plus the repairs. In the scenario above, John’s purchase price was $152,000, with $16,000 in repairs. The appraised value was $170,000. However, his positive cash flow is almost $800 per month with a cash-on-cash return of 24%. He had to bring $40,000 to closing but wanted the returns this deal offered. The point here is don’t get too disappointed if the value is not where you think it should be for these types of properties. Just set your expectations upfront and know what returns you need to make the deal happen for you. You might end up finding a deal that works.

Make Goal Setting Easier On Yourself

by | Jan 11, 2017 | Hard Money Lender

Many of you may know that there have been studies that show that those who write down their goals accomplish significantly more than those who don’t. I know I’m preaching to the choir with some of you here. While others might be thinking this is so cliché and such a waste of time.

If you think it’s a waste of time, follow me for a minute here: How are you ever going to get where you want to be with your real estate investing if you don’t have some idea or goal in mind? How will you be able to measure if you are getting there? Do you really want to leave it up to chance? Wouldn’t it be better to take charge and have a plan?

If you want to go to the movies, do you just hop in the car, start driving and hope you end up at a place with the movie you want to see? Of course not. How much more important is it then, to have a goal for the really important things in your life—like building real income and wealth?

So you need a goal to plan your path and measure your progress. For your goal to be measurable, it needs to be specific. The hard part sometimes can be figuring out what your goals should be. Hey, I get it because I have struggled with this too.

Keep in mind that there are basically three types of investing strategies for single-family real estate: buying rentals, flipping houses and wholesaling. Utilize one, two, or all three of these strategies, with a singlegoal for each like:

  • Buy one rental house this year to increase your positive cash flow each month by $400.
  • Flip two houses this year for a combined net profit of $40,000.
  • Wholesale three houses this year for a combined net income of $25,000.

These are just examples and you can use them, tweak them, or write your own. These are good goals if you are just getting started. If you already have your own goal, great! The important thing is to write it down. Just don’t get bogged down into having too many goals and then never accomplish any of them. Keep it simple and specific.

The best advice I can give you if you don’t know what goal to set is to make it easier on yourself by starting with a single deal, with one investing strategy, and write down one goal to accomplish for 2017. This will give you some momentum, which will only build the further along you get. Hope this helps you have a successful investing year.

If you are into Real Estate and you have a deal in hand and looking for a Hard Money Lender in Texas, please contact us today and we will discuss the details accordingly.

The Power of a Mastermind Group

by | Jul 20, 2016 | Blog

Most of you have probably heard the saying, “No man is an island” by John Donne, a 17th Century English author. I heard someone say this at the first mastermind meeting I attended as the reason they wanted to be part of it. It has resonated with me to this day. Translation: no one person is 100% self-sufficient. We all rely on others at different points in our lives. Not only in our personal lives but also in business. Having a team that you can depend on in a business environment is critical to your success.

Now this might not be intuitive if you’ve never been in a mastermind group before, but I want to make it absolutely clear that one of the most valuable assets you can possibly have for taking your real estate investing (or any business endeavor) to the next level, is a mastermind group. I can tell you in all honesty that I would not have the portfolio, the resources, or the knowledge base I have today, without my mastermind group. In fact, most of what I know about real estate investing came from being part of my mastermind group.

I learned how to buy deals correctly, protest property taxes, find the best real estate attorneys, create special provisions to my leases, find my property manager, find my CPA, as well as excellent tradesman for any type of work—all from my mastermind group. I’ve learned more than I can possibly relate here, but literally, I’ve found resources on anything involved with real-estate investing from difficult situations with tenants and clients, code enforcement, the city, contractors, etc., from my group. I have also done multiple deals with everyone in my group—we all do business with one another. I cannot stress enough how it’s more powerful than you can possibly imagine. So if you are currently not in a mastermind group, I encourage you to get one started ASAP.

So What Is a Mastermind Group Anyway?

The mastermind group concept comes from Napoleon Hill’s book Think and Grow Rich. If you haven’t read it, I highly encourage you to do so. At least read the chapter on the mastermind concept. For now, you can watch YouTube videos where Napoleon explains the concept if it’s completely brand new to you.

Basically, the concept is this: the whole is greater than the sum of the parts. That is, 1 + 1 = 3. The point is that 2 brains together are actually equivalent to 3 brains on their own. This principle works exponentially the more minds you add. So imagine the power of 15 people. This synergy will produce valuable information that will propel your real estate investing faster than anything else.

Who Do You Need In a Mastermind Group?

There is no hard and fast rule about who must be in your group. For example, our group consists of full-time real estate investors and everyone owns rental property. We have agents, brokers, an appraiser, some lenders, an accountant, a financial planner, and some wholesalers as members. However, we weren’t looking for those types of backgrounds when we got started, it just happened to evolve with those individuals over time. Just to give you an idea of the volume of business we do, combined we close over 100 transactions each month.

What’s key is that those in your mastermind group are open, honest, and trust each other. We have no secrets, and no one would ever go behind anyone’s back in a deal! We discuss everything openly and I consider everyone core members of my real estate investing team.

Starting Your Own Mastermind Group

So how do you start a mastermind group for yourself? Begin by networking with people in the real estate investor community (i.e., local investor clubs, meetup groups, etc.) Find those people that are at your level or higher—those that have different backgrounds but share your goal of getting to the next level in their real estate career.

Focus on finding someone with similar interests (wants to build a rental portfolio, flip houses, etc.) and start meeting with them on a regular basis. Then, add a 3rd person that you both agree to bring into your group. Have a meeting or two with them and then find another person and add them. Don’t rush into adding too many people at one time or feel like you have to build a large group immediately. This is about quality, not quantity. You need those individuals where you can build strong relationships of trust.

Setting the Ground Rules For Your Mastermind Group

As with any organization, it’s important to have a set of rules or guidelines that everyone can follow so that meetings will be taken seriously, and you will make the most productive use of time. After a few meetings, it will become easier to get a feel for how you want to structure it. You certainly don’t have to do it the way I am going to describe, but after 10 years of meetings, I have found the following to be most effective:

  • Group Size: No more than 15
  • Frequency: Every other week for no more than 2 hours
  • Agenda: Roundtable discussion where each person has about 5-7 minutes to discuss what they are working on and/or bring up any issues they are seeing or experiencing in the market. Maybe have a guest speaker occasionally that adds value to the entire group.
  • Participation is Key: You want a group where everyone participates in the roundtable discussions. If you have this, meetings take on a life of their own. This is where the real “mastermind” takes place. Once everyone has heard from the rest of the group, the meeting can take on a new form where members can jump into the conversation and share what they believe would add value and benefit the entire group.
  • Attendance Policy: Try to get everyone to commit to attending every meeting
  • Adding New Members: Pace yourself here and do this slowly by getting consensus from the group on specific people to add.
  • Removing Members: It’s important to have the right people in your group to have the most success. From time to time you may need to remove more than one person, so don’t be afraid to do this. Anyone who never shows up, is toxic in the group, is a pessimist, or brings the meetings down, needs to be removed. If you don’t, you will regret it because other members will leave your group. To remove someone, simply send an email with a message like this: We have had some members that have not attended any of the meetings. I am requesting that anyone who does not want to participate, to please let me know and we can remove you from the group email list. Or, give them a call them to explain the fact that you (and your group) feel that they may not be the right fit for the group and that you are going to remove them from the email distribution list.

Conclusion

Find the right people, the right venue for having the meetings, and have fun with this. After your first meeting, you will experience the value I have described, will look forward to every meeting, and will soon watch your real estate investing accelerate to the next level.

If you are a Real Estate Investor, looking for a Hard Money Lender, contact us today!

Real Estate Investors: Greedy Profiteers or Good Samaritans?

by | May 18, 2016 | Real Estate

I am proud to be a real estate investor but in the many years I have been in this business, I have heard the most inaccurate, absurd, as well as offensive things about real estate investors. Things like: we are greedy profiteers, we are slumlords, and probably the most outrageous that was told to one of my real estate friends by his banker – “we are in an evil business”. Imagine that. Who would say something like this, except someone who doesn’t truly understand what we do as real estate investors?

I want to set the record straight so when you hear things like this you can respond with the facts and be proud to call yourself a real estate investor. Real estate investors add more value to a distressed community than anyone else. I can also argue that real estate investors maintain and improve the value of vibrant communities as well. This may sound bold, but it’s absolutely true. Whether you wholesale, flip or own rental properties, you are adding tremendous value to the community by taking risks others won’t. And guess what? You should make money doing it! If there were no incentive, and no one willing to put their time and money at risk, entire communities would deteriorate.

When you drive through a neighborhood and see that awful house on the street (you know the one I am talking about), the one with 3 foot tall weeds, 15 newspapers in the yard, mail covering the front porch, broken windows with stray animals going in and out, etc., you see opportunity. The neighbors see a bad situation that won’t go away fast enough because, from their perspective, no one cares enough to do anything about it.

Even worse is when the city takes action and boards up the house, creating a false impression that this is a bad neighborhood. Think about this for a minute. If you saw 2 houses like this on the same street, what would you think? How about 3 on the same street? I have seen this many times. When this happens, the value of the neighborhood can completely erode (along with the property tax revenue, affecting schools, hospitals, and even essential services like police and fire). There is less desirability for a homebuyer to purchase a home in a neighborhood with 3 boarded-up houses on the street. Safety becomes the #1 concern in these situations and fear will make buyers look elsewhere.

I once had a tenant from Detroit who retired to Dallas because he had family here. I remember asking him what it was like living in Detroit. He said he was scared all the time as he lived in the inner city and most of the houses on his street were vacant. Moving here for him was a blessing as he said he escaped the cold weather as well as a dangerous neighborhood. This happened because no investors were willing to take on the risk where he lived.

When a real estate investor finally steps in to improve a property the value of the property increases, the tax assessed value increases, the neighborhood feels safer and more desirable, and families want to live there. For you to take on this level of responsibility, you need to be rewarded financially and need to feel great about what you are doing. So when you hear anything negative about real estate investors, remember to counter back with what I mentioned, in a way that is confident, courteous, and professional, because no one is doing more for distressed communities than real estate investors.

How To Get Stuck In Hard Money with 4 Rentals

by | Apr 21, 2016 | Hard Money Lender

Creating cash flow is one of the many benefits of building a rental portfolio. Just like starting any new business, taking it one step at a time, in the beginning, is important as you will make some mistakes and learn as you progress. Rental properties are no different.

If you are reading this you most likely understand the benefits of owning rental properties and how it is the most powerful tool for building wealth. However, before you decide to ramp up your portfolio at lightening speed, consider the following situation I have seen with many of my clients and what has prompted me to share this with you.

A Common Rental Scenario

Ready to take it to the next level, Joe buys 4 houses within a 45 day time period (with 2 different hard money lenders) and begins the improvements. Joe is building a rental portfolio and these were the first 4 deals he has purchased. Although he is part of a real estate investor training program that provides coaching and mentoring to real estate investors, Joe decides to do it his own way.

Because he is new, he doesn’t understand that buying this many at one time is going to prevent him from refinancing into a lower interest, longer-term, conventional loan (like you can get from Fannie Mae) as soon as his rehab is completed. Why? His limited experience has exposed him to risk that an underwriter is going to reject. The underwriter’s response to someone like this is – “Joe purchased too many properties at one time and we are not comfortable financing them as he has no experience in the rental business”.

The reality is, Joe was told by his lenders not to buy more than 2 properties and ended up being stuck in multiple hard money loans paying high interest for over a year. After a year (meaning after 12 months of what is called “title seasoning”) the level of perceived risk by most underwriters is reduced and Joe can try again. At this point, he is so frustrated with the ongoing process of getting a conventional loan (by going through this same process with 3 other lenders, only to experience the same rejection for the same reason) that he finally goes to a small bank who is comfortable with the risk and is willing to do a single portfolio loan with all properties under 1 note and lien.

However, instead of getting a 30-year note with a low-interest rate, they have a 15-year note with a much higher interest rate (cutting his cash flow in half). Also, the only reason this bank is going to finance Joe’s deals is because he has waited long enough, is creditworthy, and will base the financing off the value and not the purchase price (most small banks will not do a portfolio loan based on the value of the property until after 12 months). Had Joe tried this with the bank 2 months earlier, they would have either said no or would have based the loan on his cost (or value) whichever is less.

I think you get the point here. Be patient with your investing and take it one step at a time. Be sure to get approval from a conventional lender, or a hard money lender who works with multiple conventional lenders, and get their feedback regarding your financial situation and creditworthiness as a borrower. It’s not just credit score and income that determine your qualification. Your reserves and experience impact the number of deals you will be able to refinance at one time. These lenders will be able to tell you what you are qualified for in terms of dollars as well as the number of deals you can do simultaneously.