Posted Tuesday, November 28th, 2023 by Enterprise Property Management
In part 2 of our investment rental property buying guide, we explore real estate investment strategies, focusing on buying properties requiring improvement for increased value. We cover negotiation tips, the role of Realtors, and the crucial significance of home inspections. We will also discuss the necessity of insurance, leveraging equity, and provide diverse examples of exit strategies. Emphasizing regular evaluations, our discussion outlines options such as the 1031 exchange and family trusts for long-term planning in real estate, urging careful consideration and planning for the future.
Richard
0:00:19 – This is the second episode in a three-part series on how to buy rental property. And today we’re going to start by talking about understanding the market and location and based on the goals that you’ve established what property should you buy and what market should you go into in order to meet those goals. So Aaron when you’re having a conversation with an investor about a specific goal and you’re trying to decide which area of Memphis they should invest in, what are some of the considerations and how do you guide them in that process?
Aaron
0:00:48 – Well so the first thing that I ask every investor is what are your goals? What are your goals for this year, this round of investment? What are your goals for five year or a ten year plan? And then the second question that I would ask after their goals is what their financing is like. Are they sitting on a large cash reserve where they could buy maybe two properties or maybe three at once or do they just want to start with one. The next question I would ask is, what are their cash flow expectations? Are they looking for a break even? Are a lot of investors think they can get into investment real estate and get a tremendous amount of monthly cash flow? And I’m here to tell you that if you’re basing the bills that you need to pay on a $500 per month positive cash flow, you better be ready to put down 50% or 40% on that loan in order to get there. You also need to take into consideration not just expenses, but also things like vacancy. You need to be able to time, if you can, and budget for when you won’t have that $500 per month positive cash flow. I think most people listening to this podcast right now know that that is a pie in the sky kind of cash flow over whatever financing note it is, on average, I would consider that to be a success. And then in my opinion, I think that positive cash flow needs to immediately go back into a reserve account where when you have repairs, that those repairs are paid out of that reserve account. So that’s just being smart smart budgeting. As far as what and where an investor should purchase it’s based on their cash situation
Richard
0:02:30 – As I’ve thought about this in preparation to talking about this today That’s potentially gonna be a new investor in the next year myself One of my consideration is deciding what kind of tenant do I want? Hmm do I want an individual do I want a couple do I want a group of students, do I want housemates? I mean what am I looking for? Am I looking for a family? Because that’s going to play into what type of property I can actually buy. If I’m looking for single people I can look at duplexes and multifamily, but if I’m looking for families specifically, single family homes are going to be an important aspect. Can I reach my goal and get the type of tenant I’m looking for?
Aaron
0:03:08 – I think you can. Obviously, you know, when you’re talking about purchasing an investment with the anticipation of having a specific type of tenant, like demographically, the demographics of course cover a huge range of factors. I would say that you need to be flexible. So my parents owned rental property for a long time. They always wanted families. They didn’t always get families. Sometimes the roommates or housemates you’re talking about behaved and took care of the property better than the families. Sometimes the families just did a very poor job of maintaining the property. So if your concern is mainly demographic, I would say let’s discuss what your goals are with those concerns. If your goal is proper and appropriate property maintenance or responsible living, then we should probably not be looking at university students. But university housing is usually built and outfitted in such a way to where students can’t screw up too many things. If they need to paint after the student is gone, you can paint. It’s not an elaborate paint. The size of the interior of student housing is usually relatively small, not ornate, very basic. And so the cost for making that unit ready after a neglectful college student moves out is very reasonable If you were to take that same college student and put it in one of our houses that we have for rent right now in Lakeland it’s a 3,500 square foot home it rents for about $3,500 per month and you were to put that college student in there That would be a much more expensive venture to make it ready again for lease.
Richard
0:04:44 – So those insights you gave me where some families have been not quite so good tenants as the single or multi-housemate situations. Have you seen a reflection of that throughout the city or are different communities presenting in a different way?
Aaron
0:05:00 – You know, I love this town. I think Memphis is full of people that want to do the right thing. I think Memphis is full of good people that do want to work and they want to pay their bills. There are always less than desirable persons out there that don’t have those values. Our application process screens the vast majority of problems out so that the applicants that we are putting in our properties for investors are quality. I would say I have probably a 99% ratio of good positive tenant experiences to the 1% negative and the 1% negative often happen because of life situations like job loss, COVID was one, divorce and we can get into weird things like mental illness and drug and alcohol that’s really rare but it can happen probably once or twice a year and in these situations we do everything we can to mitigate that damage as it’s happening we can do that through letters to request that they change their behavior, we can solve it through eviction. But the bottom line is our system is really good at making sure that the quality people are the ones that go into the property and people that have normal issues with their application to where they’re basically conveying that they’re not qualified, those people also rise to the top to where we can see what’s happening and then not include those people in as tenants.
Richard
0:06:23 – I think there’s many things that a screening process can’t pick up on, but when you’re using an experienced realtor like yourself that have been in these communities for decades now, you know the general sense of what to look for and you see the initial signs with people in that screening process. So how would you take somebody’s goals and help them establish which is going to be the right property for them?
Aaron
0:06:48 – Sure. I honestly never really answered your previous question, so having thought about it a little further, can I answer the question of where in the city do we have better behaved tenants? What was your question? What was your initial question?
Richard
0:07:00 – That’s not really what I asked. My question was, based on the fact that you’ve seen some families perform worse as a tenant than single people or student housemates situation, do you see that reflected in all communities? or is that flip where the expectation for the average person I think would be that a family would be a better tenant but the fact that you’re seeing that is it is it across all markets within the Memphis area or there are particular areas that you see that more often?
Aaron
0:07:25 – If we are specifically talking about the tenant and the tenants behavior then I would say that when you get into middle-income housing you see a higher level of expectation for tenant behavior in a property, you see generally better care, and I say generally because I can’t guarantee it, generally better care of the property, generally better care of their financial responsibilities, generally better behavior as seen by the neighbors and experienced by the homeowner and the management company. When you get into higher income, it’s generally great. So there is definitely an income correlation to behavior, but then that’s only in the law of averages. The reality is in my low-income neighborhoods, which I would say is about half of everything that I manage, maybe a little more than half, relationships, going back to a previous comment I made on a previous podcast, relationship is everything. We do everything we can to establish that relationship with all tenants, high-income, low-income, somewhere in the middle, and once we establish that relationship, we find that people will rise to the occasion. They say, oh, okay, this is somebody I want to make sure I don’t ruin the relationship. So they take better care of the property. Trust me, the way that enterprise does business takes a lot more energy and effort than some sort of automated system to where they never talk to a human being. People can get away with all kinds of stuff if they don’t think anybody’s watching. But we watch and we care. So through our application process, I think you could invest anywhere in the city and expect a Relatively positive to a very positive experience.
Richard
0:08:59 – I think in a future episode. We’re going to talk specifically about section, and that obviously brings a different tenant set some of the experiences I’ve heard from investors They’ve had very positive experiences in the section 8 system
Aaron
0:09:10 – I would say so section 8 just briefly for people who are curious about it, maybe they’ve never heard of it, it is a federal government program through the Housing and Urban Development Office. It is implemented by local offices, so here in Memphis we have the Memphis Housing Authority, or MHA, that’s the office through which those federal funds are distributed to people in Memphis, and the way that you get access to Section 8 funds is because you can’t afford to live above the poverty level without federal assistance. Now that’s very general, right? The cool thing about Section 8 is certain people need all of their rent covered, certain people need only half of their rent covered, and so the variable, the amount of money that you get is based on your income and your personal financial need. So we will get back to Section 8. It’s a good program. I want you to know that I endorse it and I’ve seen a lot of investors make a lot of money with Section 8 property.
Richard
0:10:06 – So let’s get back to actually determining the specific property I’m going to buy. You know, I know my investment goals. I’ve assessed my financial situation and I have an approximate budgeting plan which I’m analyzing and refining as we go. But it’s time to determine the property that is going to be right for me and my investment goals. Do I need to determine whether I’m buying a duplex or does that come into it? Is the type of property an important question to ask?
Aaron
0:10:33 – I think so. Every investor that’s out there right now, if you don’t own any real estate, you need to be considering cash flow as your main objective. Positive cash flow, which means better than break-even. And one of the ways that you can get to better than break-even is with a multifamily. Even though duplexes are considered single family, for the sake of this conversation, we’re going to call them multifamily. Typically, throughout the United States, anything that’s four units or less is considered single family. So, let’s just call them multi-unit.
Richard
0:11:02 – That’s something I didn’t know.
Aaron
0:11:03 – Oh, there you go. Good. I’m glad I could teach you something today. For the sake of the discussion, let’s call them multi-unit. So, if you have a duplex, you have immediately taken the financial performance of that property and you’ve cut it in half and you’ve said this one half over here is operating independently of the other half. So the better you operate both halves, the more money you make. The most people that I know that have purchased duplexes, cashflow positively, almost monthly, and when one side is vacant or if you have to do an eviction or something like that, it’s underperforming, then the side that is rented helps offset the pain of not having full cashflow. So that is a investment 101. If you can get your hands on a duplex, I recommend that you get your hands on a duplex. Now, sellers know that duplexes are highly desirable, so they’re selling them at a premium. So it’s an interesting thing to watch for. There are probably hundreds of duplexes available for purchase in lower income areas and so there are some specific challenges that come with that but also if you get two section 8 tenants side-by-side then there’s the possibility that both of them will be funded federally for a significant period of time and if there’s one the number one benefit of a section 8 tenant is they will do everything within their power to maintain that funding. They are not gonna screw it up. If they do, it’s out of their control. But for the vast majority of Section 8 voucher owners or holders, they may be Section 8 for the rest of their lives. And so you get a young mother with a family and she’s in her late 20s, early 30s, she could end up being a 10 to 15 year tenant or a 20 year tenant. It’s crazy how long people will stay if funding is not in question. But we will save the rest of that for our Section 8 episode because there’s so much positive to share about that.
Richard
0:12:53 – So let’s talk about property condition. Is there an ideal situation to be in? Is the perfect property going to be the best buy?
Aaron
0:13:00 – It depends on your cash position. So let me go to my wealthy investors just really quickly. I’ve got some great investors out there, guys, that have done well. Either they’ve inherited money or they’ve sold a business or they had life insurance from a spouse that passed or they’re just excellent at making money. There are people out there with money. People with money know how to make money and making money comes with being shrewd about how your money is spent. So my most wealthy investors are still not going to buy a perfect property because they know that there’s no equity. They’re buying a dollar for exactly how much a dollar is worth. A dollar for dollar. And if you pay a dollar to get a dollar you haven’t made any money. So I would say no, especially in this time frame. Perfect properties do not present profit. They’re not as profitable unless you’re in a cash position to where this is simply the buying and the owning and having the expense of the cash purchase benefits you from a taxation standpoint this year or next year or in 10 years. I know that’s all so complicated. I guess what I’m trying to say is the listener to this podcast is not going to be looking for brand new construction. What they’re going to be looking for is properties that need a little bit of help and they can get a discount on those and especially in this marketplace, it’s all about the market that we’re in, right? Especially in this marketplace, if you find a house that needs some help and needs a cash influx in order to improve it, say a new roof, then you’re able to use that point as a negotiation with the seller in order to make more money on the buy. The majority of investors that I work with buy properties that probably have somewhere between a 25 to 20% need for improvement. So they’re able to get it for 70 to 75. And that discount that they get, hopefully, will help them add value back into the property. It will be an expense that they can then use as a tax deduction. So that’s great. And then you get into extreme cases with value add. In a previous episode, I mentioned a buyer that’s buying four wholesale properties. Each one of them are about $40,000 a piece. How did he get that cost, right? Like how did he get the price for that? Well the first thing he did is he took a realtor out of the equation. So now the seller is not having to pay a commission to the seller’s agent and the seller’s not having to pay a commission to the buyer’s agent. Right? That’s 6%. It’s an immediate 6% savings. Am I recommending you do this? Absolutely not.
Richard
0:15:33 – No, that’ll cut you out of the loop. We don’t want to do that.
Aaron
0:15:34 – Yeah, I mean it does, but at the same time you’re not protected you’re not being guided you’re not being watched over there’s probably not a closing attorney involved it’s probably a cash proposition which means if you’re not coming to Memphis to see the properties you’re literally sending somebody a hundred and sixty thousand dollars for properties that you’ve never seen before listeners I’m trying to tell you that realtors help more than you realize.
Richard
0:16:01 – I think one of the reasons of doing this guide is to help people understand the right questions to be asking, because not knowing the right questions to ask is the downfall in any transaction, and realtors know the right questions to ask, the buttons to press, so to speak.
Aaron
0:16:16 – And we’re a great sounding board, so for first-time investors, we’re going to give some suggestions, we’re going to make some recommendations, and we’re going to try to connect you with the people that work very well with us. Licensed persons assisting you, licensed inspectors. This guy didn’t get a home inspection on these four houses. Listener, please listen to this. This guy is buying four houses, sight unseen, from a wholesaler without a realtor on either side, without a closing attorney, and without a home inspection. His risk tolerance is through the roof. It’s insane. I would never do that. Now, he may be able to take those four houses, improve them, he might get lucky and they not be terrible as far as like the current condition. He may hold them for 10 years. Obviously they’re not worth 40,000, that’s just the list price. I don’t know what they’re worth and I don’t know what their after rehab value is going to be but let’s say that each one of these houses in 10 years is worth $150,000 a piece. Well, yeah, that’s a tremendous return on his investment. For that guy, I would say, how much cash do you have on hand because you’re going to need it.
Richard
0:17:19 – Okay, so you’ve helped someone through the process of identifying a property, you’ve talked about location, and now they’re at the point where they’ve got to start their due diligence for the buying process. So you just mentioned inspections. Let’s talk about that in a bit more detail, why that is so critical?
Aaron
0:17:36 – A home inspector is a licensed individual. They have been through several different required educational courses required by the state of Tennessee. There is also oversight. We can do a deep dive into home inspections later. I think that needs to be a standalone podcast. But the home inspector’s job, especially for an out-of-town investor, which the vast majority of my investors are, I’ve never met them in person. That home inspector is the eyes and ears of that investor. They are going to take pictures, they’re going to be testing all the systems, they’re going to be giving the recommendation on the remaining lifespan. In certain systems in the property, such as the roof, home inspectors can tell you that this roof has one year left, this roof has five years left. They can tell you the age of the appliances. This is great information that every buyer needs for every transaction. When you bypass a home inspection, it’s like buying a car on eBay and wanting it shipped to your house and expecting that you can just turn the key and drive it right off the bat without doing any sort of inspection, without checking out a car fax, without investigating that car. You don’t know what you’re getting. Everything needs an inspection. A home inspection should be read by the homeowner and should be read by the realtor. As a realtor, I can’t advise on what a buyer should do with a home inspection. I can give them some insight, I can make some recommendations, as previously mentioned another episode, for credits during the escrow process, that they get a credit for the current condition of the property, stuff like that. But in the end, we need for our buyers to feel like they’ve asked all the questions they need to ask. We need them to fully digest the home inspection and we need them to tell us what their concerns are so that we as Realtors can then go and find solutions.
Richard
0:19:22 – So what would be the next process? I guess that would be dealing with making sure it’s got a clean title, that kind of thing?
Aaron
0:19:26 – Yeah, so the closing attorney the entire time that the sale is going, is operating, the closing attorney has been designated once the contract is bound, And the closing attorney is going to be doing a title search. They’re going to be making sure it’s a clear title, clean title. They’re going to be looking for liens and encumbrances. They’re going to be looking for lawsuits or other things that could affect the seller and the property. Most of the time, they find it to be clear. There’s not a question of who the proper owner is. Quick tip to be looking out for when you’re doing a title search, when attorneys are doing a title search, is to find out if the person who currently is selling the property received it from some sort of inheritance or trust or death of a spouse, death of a parent, and if they are truly, fully allowed to sell that property. A lot of times people will receive a property after the death of somebody close to them that wills them that property and that property is still in probate, then the seller has to go through a number of steps in order to have the property authorized by the court to be sold. I only bring that point up because that happens more times than people realize. You gotta make sure that the seller is completely legally clear to sell that property to you. Otherwise, what you may find is that you are buying a property with some entanglement to previous owners. The other thing to search for clear title is that the closing attorney or the real estate attorney is gonna be looking for either encumbrances or leases. They’re going to be looking for land leases, property leases, where else is the seller obligated to do certain things or to work with certain people or to provide certain services with that property and how might the sale of that property interrupt those services. If that’s the case and there are previous commitments that are made by the seller to other people that have nothing to do with the buyer, then an attorney may say, we can’t close. We have a clouded title. We have unreasonable encumbrances. If anything can be worked with, they will work with the buyer to see if they’re willing to inherit those encumbrances. If they’re not, then that’s a dead deal.
Richard
0:21:39 – Over the course of our conversation, we’ve talked about the negotiation process of price and the purchase price, ultimately taking into consideration some of the work that might be need to be done for the property. Is there anything specific you want to talk about on that topic as to how you help an investor negotiate the best possible price as a realtor?
Aaron
0:21:59 – Where we can benefit a buyer really starts at property identification. If I understand a buyer’s goals, if I understand their financing, the financing that they have at their disposal and what their intentions are, I understand what their cash flow expectations are, then sourcing the property, where am I gonna find the property? How does my knowledge of their personal situation direct me as to where to look for that property? And I keep saying where, because in our city in general we have lower income areas and higher income areas. I think that’s probably the case with most cities. If the investor is going to invest and they need to buy a lower income property, I’m going to be looking on the western side of our county, western side of our city, and we’re going to find a lot of lower income properties available there. If they say that they want something that’s newer, that has newer systems and is going to be durable for 5, 10 years without major repair, then we’re going to be looking more in the center of the city, trending towards the east. And also there are some new construction product that are out on the western side of the city, like we had talked about in a previous episode, have warranties, newer materials, and that should be a more predictable investment for that investor on the front end. And then risk aversion, like if an investor is risk averse, then we’re going to want to put them in a more predictable Community when we move into lower income you are moving into a less predictable community You don’t necessarily know what’s gonna happen.
Richard
0:23:29 – Do you have a specific closing company that you use or multiple closing companies? What kind of relationship do you have there?
Aaron
0:23:31 – We give the option of who is going to close the property who’s gonna close escrow on the property and who is going to be the real estate attorney. If we’re working for the buyer, which in this is this context, then we say we work with these three companies, we do a lot of work with one of them, and we let them choose. Buyers often say, I don’t know these people, I’ll go with whomever you want to go with. Sellers are generally the same way. If we’re representing a seller in a situation, we ask them who they want to have as their closing attorney, where they want to sign all their paperwork and who they want in charge of the process. To answer your question, we have three closing attorneys that we work with.
Richard
0:24:06 – So beyond the title search, are there any other legal considerations that need to be looked out for?
Aaron
0:24:10 – I think a closing attorney is going to be looking out for the vast majority of the legal points in a transaction. You know, they have a set, a very carefully designed, very well practiced process that they work. It is exceedingly rare that a closing attorney will make a mistake. As a realtor, I want to look over the paperwork, I want to look over the ALTA or the closing agreement that we have. I think that the client that we’re working with should also be looking at it. All eyes should be on that. If a mistake is found, then the attorney will be alerted and that will be corrected. But the mistakes that they make are usually computational. They’re usually a fee or an invoice that wasn’t yet included in that final closing statement. It’s usually not whether or not a title has a cloud over it. You know what I’m saying? It’s usually not rights of transfer. It’s usually small stuff.
Richard
0:25:02 – So another aspect of the buying process would be considerations of insurance. In a previous episode that we did with Cassie Robinson, she shared an experience she had where one of her properties burnt down. So what is your advice when it comes to insurance and making sure that you’re well and truly covered?
Aaron
0:25:23 – There are different types of insurance out there for investment owners, real estate investment owners. There is the standard insurance across the board. I’m going to try not to mention names. So let’s just say big names. I work with one of those bigger names. The reason that I work with one of those bigger names is because I want the security of knowing that I have a strong sound policy. There are cheaper policies that are out there both for owner-occupants, homeowners and investors. I think as long as you understand what the risks are with that particular policy and you’re willing to take on those risks then I think you’re fine. Let me give you a couple. With my investments I have a very reasonable deductible for each one of my properties for a claim should I have a claim the way that I structure my deductible is that it would be not the highest deductible right like I don’t want to pay ten grand for a deductible but I’m willing to pay five grand for a deductible on a property that’s worth over half a million because when are you gonna use it like when are you I mean it’s got to be a catastrophe right so yeah on a bigger one I would say $5,000 maybe even $7,000 as a set deductible. Insurance companies these days will often use percentages of the overall value of the home. So in that case with the half a million dollar building, for me, that would be 1% that I would pay as a deductible. 1 to 2% is becoming more and more common for deductible. The higher the deductible, the generally the lower the monthly premium. The lower the deductible, generally the higher monthly premium. So now we’re bringing cash flow into consideration when buying insurance. One of the things that Cassie ran into wasn’t her fault, you know, it just crept up on her, is that the value of her home that she purchased 13 years ago had doubled right about the time that her house had a fire and burnt. The insurance company that she was working with had the house valued at, and these are real numbers, they had the house valued at $85,000, and because it was a total loss, they wrote her a check for $85,000. The house was actually valued at $150,000 to $165,000. By the way, listener, it is not my responsibility to keep up with your insurance and how much you’re insured for. That is your responsibility as the owner. So, she didn’t know this. She has a ton of investments, she has a busy life out of state, so the last thing she’s thinking about is, huh, my house has doubled in value since I purchased it, maybe I should insure it for more. She’s not thinking about that, but you should, always, like every other year at the very least, be evaluating the insurance policies you have on your properties to see and be certain that you can be made whole in the case of a catastrophe, which is what she experienced. And then the last thing is, and this is just general advice, I am not licensed in insurance. So talk to your insurance person. Don’t rely on this podcast for every decision about insurance.
Richard
0:28:16 – Let’s have someone on in the future. An insurance agent.
Aaron
0:28:20 – I know. We got that. We got that. Coming up within the next five episodes, we’ll have an insurance person. Coverages, guys, if you are over the age of 40, then you can remember how homeowners insurance policies outside of your premium and your deductible pretty much were full coverage. I know some of you are nodding right now. Big name company that I have worked with in the past and I still am working with, they have rebuilt whole houses that have burnt down other owners, right? And this would have been back in the early 2000s, back when these full coverage policies were around, okay? Had another house in Millington, Tennessee, had a house fire, burnt all the way to the slab because it was not a brick house. Boom, burnt down, all I have is a slab. Man, that insurance company paid for the entire new construction of that property. These days, you’ve got to look for what is covered. Sometimes tenant-related behavior is not covered in your insurance policy. Man, tenants can cause damage. I don’t see catastrophic damage often, but I have seen pipes burst, I have seen vandalism, I have seen property crimes, I have seen drug and cigarette use in the property to where we have to remediate the property. These things are most likely not going to be covered in your policy unless you ask for that level of coverage. So really investigate with your insurance company. For instance, if you were to say, Aaron, Memphis is on a fault line, do you think I need earthquake insurance? My response would be, you need to do what you’re comfortable with, but in the 47 or so years that I’ve been alive, there have been no debilitating earthquakes here in Memphis. So it’s a matter of a risk that you’re willing to take. I’m not going to advise you on that. I’m just going to say, what are you comfortable with? I mean, we live in a changing world. One of the common factors that I see in insurance these days are internet crimes and terrorism. Okay, both of those things are listed as an option for coverage in most insurance policies that are worth, you know, the money you’re paying for them. Have I ever seen terrorism affect any one of my properties? No. Do I have terrorism coverage on our commercial building that we’re in right now? Yes. I need that. This is a big investment I need to know that if some sort of terrorist related activity were to cause damage to our property that I would be covered I don’t always recommend that to everybody especially if the property that you’re purchasing is 50 or 60 thousand dollars I’m not necessarily sure that a terrorism rider is going to benefit you long term. We’ll talk more with an insurance agent when they come on.
Richard
0:30:45 – So at this point we’ve gone through the whole process and we’ve actually purchased a property at this point, but how do you help me determine my long-term strategy in buying more property and building my portfolio within my initial goals? There’s many people out there that can define their goal. For me, buying rental property will be funds for retirement. But the strategy to get to that point, do I just basically rinse and repeat this process to buy more properties and just do that over and over again.
Aaron
0:31:16 – That is a strategy. In fact, if you’re going to remain by yourself in this investment process, let’s say it’s you and your spouse, ok, then that is a great investment strategy. Let’s say this, goals are usually higher than what we can actually attain. I’ve got a goal to become a small aircraft pilot. Now, I haven’t even started down the road to that goal. That’s a great goal. That’s something that I’m holding out there. I’ve got friends that fly. We’ve flown with them. I want to do this, right? It’s going to take me some serious steps and concentration to get to the point and time where I can be doing that. It’s a goal that I have and I’m moving toward it and the moving toward that goal is actually benefiting me quite a bit. In real estate I would say the same thing. Okay. Let’s say that your personal goal is to buy another rental property every two years, just a round figure. Then if you can sometimes hit that two year mark, sometimes if it takes you 30 months, that’s okay because you were shooting for that goal every now and again, you’re going to get a great opportunity and you’re like, Oh, I got to take advantage of this, but it’s only been 12 months. Well, if you’ve got the capital to do it, and man, on paper and everything we talked about previously, that works, then you’ve exceeded your goal. You’re washing, rinsing, and repeating on regular intervals. So for the individual buyer that doesn’t have any real partners, I would say buying a house every 18 months to two years, washing, rinsing, repeating through the BRRRR method, right, which is buy, refurbish, refinance, repeat. So if you’re using BRRR, then yeah, you could acquire another property every 12 to 24 months. Partnerships are very, very different. So I’m in a partnership right now with two other guys. I’ve worked with partnerships and still work with partnerships. Partnerships can draw off of all kinds of different means for financing. They can build private equity. If they own multiple properties in the name of that corporation, then they can lend to themselves, which is awesome. That’s when you become the bank. And they’re able to grow their portfolio significantly faster. They have to do that. Let’s just do some basic math. If you want to get to 10 properties in 20 years, you absolutely can do that. And you’ll probably accelerate. I think you can get to 10 properties in 10 years if you really focused on it and were good with your money. And that’s enough for you. That’s an excellent retirement, excellent cashflow. These investors, if there are three people in a group, they have to buy 30 properties to get to that same level of dependable cashflow. That’s a lot more work. It’s a lot of thinking, it’s a lot of meeting, it’s a lot of discussing, and it’s a lot of risk. It’s a lot of discussion, and it’s a lot of trust. Gotta have trust in your partners. But if you have that group, and I’ve seen partnerships expand and do tremendously well, you can do more with more people around you. It’s not required, but there is a benefit to that.
Richard
0:34:08 – What new opportunities open up once I own one, maybe two properties and I’ve got equity in them?
Aaron
0:34:14 – You know, a lot of people take the cash flow that they get from their real estate, especially in the context of appreciation, which is what you’re talking about. Let’s say they have three properties and there is $50,000 equity in each one and you can cobble together that equity, it is possible that you can do that and take that to use as a down payment for something else that you want. Here’s a couple of scenarios. I’ve had investors that have owned 10 properties in Memphis for 10 years and then they retired, they found their retirement property in Idaho or Montana or Wyoming and they want to sell or refinance the rental properties that they have in order to fund either a down payment or the entire purchase. I’ve seen investors do that a lot. So they’re taking the equity that they built in these rental properties, they’ve liquidated it or refinanced it, and then they’ve put that equity into something else. So that’s one thing you can do with equity is to get something that you want that’s not an investment property. Another thing you can do if you’re our age, if you’re in your mid 40s, is to continue to use that equity to acquire more and more and more. There’s a point at which you’re going to say, I think I’m done buying houses. For this one gentleman that I work with and I’m going to call after this podcast to strategize over acquisitions, he really is comfortable between 30 and 50 houses. And right now he’s right at that 30 range. He uses the equity that he houses in the houses to influence the financing of the property. Alright, so here’s something else you can do with equity listen up Let’s say you’ve got a great portfolio and 50% of it is paid off So you’ve got 50% equity in your portfolio and let’s say that you have cash as well and that cash is pretty significant Let’s say it’s a quarter of a million dollars You can get financing and use the cash as a down payment and the loan company the lender the mortgage broker is gonna look at your personal financial statement and they’re gonna see that you are 50% paid off on 10 houses and they’re gonna say wow You know what you’re doing. You have experience. You’ve got a grade credit You qualify for a very specific loan program for investors And I know that you’re gonna probably put down 25 to 50 percent on your future Investments that lender is gonna give you some great rates the best rates that they can get their hands on They’re gonna get that for you and you didn’t even have to touch the equity that you built. So we talk about cash flow and monthly cash flow. Listen, that is running after pennies. You need to be looking at building equity because that’s what’s going to help you grow your portfolio.
Richard
0:36:37 – So let’s move on to exit strategy. What are some of the exit strategies that you’ve seen so that people listening can have an understanding of different ways you can go about this?
Aaron
0:36:49 – Cassie and I talked about her exit strategy recently a little bit on the podcast but then privately a little bit more. My understanding just with Cassie as an example is that she is at a place in her life where the properties she’s holding which I believe are about 20 across the United States and I think it is 10 with us let’s just say 10 it could be a little bit more. She’s using those properties as a retired person to live and to live her life and to live a great life and it’s because she was smart with her money. We heard previously that her first husband passed away in the 80s I think she said. Left her some money she invested that in real estate all over the country. She later told me on a phone call that she sold everything outside of Memphis because it wasn’t working for her. Other cities didn’t work for her we did and Memphis worked really well for her so she said well I’m just gonna put all my investments in Memphis if I want to buy something else it’s gonna be in Memphis.
Richard
0:37:43 – That goes back to the statement I made earlier I mean I’ve heard from more than one investor where their experiences post-purchase of the property hasn’t worked well in other cities and they found that in Memphis they’ve got the the right kind of people around them to manage it when they’re absentee they’re in another state well I mean you’ve got investors that are in other parts of the planet. You’ve not got any investors on the moon yet?
Aaron
0:38:06 – I was thinking, how many investors do I have that are off planet? No. But I have investors that are on the opposite side of the planet. I have investors who live and work in countries where they don’t have free speech, so I have to be very careful what I email and what we say on the phone. I want our listeners to understand I have worked with every continent except for Antarctica. Everyone. And so I understand the cultural differences of each location, each nation, and we speak their language. We do everything we can. Thank goodness for Google Translate. If they need to speak in their native language, man, I translate that to the best of my ability and do my best to convey in their language what it is that they want to know.
Richard
0:38:47 – You quickly find out the difference between translation and interpretation. There’s a lot of nuances of language.
Aaron
0:38:53 – And as you’ve heard, not very many investment realtors, investment real estate focused realtors have a podcast, so communication is clearly important to us. Clarification is required. If I don’t understand what you’re saying, I’m going to say, I don’t quite understand that, can you help me? And we want our buyers and sellers to do the exact same thing. We need for you to say, I don’t understand this clause in this contract, or if I take this step, what’s gonna happen? What are the outcomes to that step or that risk?
Richard
0:39:22 – That’s an important factor when looking for the right realtor to work with. Sometimes you can be with someone that the communication just isn’t there. It’s finding the one that’s gonna be a good fit for YOU. It’s all about YOU.
Aaron
0:39:36 – And what’s great is I’m not a good fit for everybody. I’m a good fit for a lot of people. But I want to meet you, I want to know your goals, and I want to have a steady dialogue with you, with all of my investors. That’s one of the reasons why enterprise property management after 22 years of existence only works with about 500 investors, which sounds like a lot, but my friends that are owners of other management companies here in the city can manage for 2,000 or up to 3,000 investors. And that is too much. You know, I can take a call and pretty much speak with all of my 500 investors once a quarter if I needed to. There’s no way that other company can keep up with that. Quick side note for me is that we love to grow, but what I find is that the people that I’m perfect for, they want to have a conversation. They want to convey their goals and ambition, and I want to join them in meeting those goals. Another exit strategy that I’ve seen happen is we talked about the liquidation strategy right? That’s a 1031 exchange opportunity big-time. I’m going to liquidate everything I got, I’m going to put it over here in this vacation place. I’ve had investors buy in in the Mountain States, I’ve had investors buy in Hawaii, I’ve had investors purchase out of the country. There are all kinds of opportunities to take that equity and the reward for your hard work and put it into that thing you really want. We talked about people who are using their rental property in their retirement years simply to live. I think that’s probably the smartest exit strategy. For people like that, I would really recommend talking to a tax professional, but considering, not necessarily just jumping right into the pool, but considering a family trust or a living trust. There’s a little bit of work up front, but if you are retirement age, then a family trust will allow the properties to be transitioned over to your heirs without a huge ton of legal craziness. Like you do the legal stuff on the front end before you pass so that your family can gain access to it much easier and benefit from that good planning that you’re doing, because we’re not going to live forever. And these investments, if you choose to hold onto them up until you’re gone, they need to easily go to the people you love and care for. So a family trust, living trust, talk to a CPA about that, about how to get one of those going, and then what’s required of you. If we’re talking about exit strategy, that’s the ultimate exit strategy is, I’m doing this for my family. I’ve lived on it, sure, I’ve had a great life, but I want everybody that I love to benefit from all of my hard work. Put it in a trust. It will keep you from a lot of the complications of probate.
Richard
0:42:08 – In an upcoming episode we’ll talk more specifically about post-purchase and how you can effectively manage your properties, and we’ll talk about property management and whether you should hire a professional company or try to do that yourself.
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