great post by Frank.
it nicely illustrates the fact that it comes back to objectives and constraints. Different objectives (e.g.cash for income or not worrying about current cash flow but long term appreciation) and different constraints (i.e. high tax situation, limited amount of time due other occupation(s), etc) will ultimately mean different styles of rental property investing.
interesting topic…
Or simply go to your local courthouse and get records of all evictions filed in the last month. Contact each landlord who has had a bad time with tenants and make them an offer to ‘take the problem off their hands’.
You’d be surprised just how many bites you’ll get.
V
That’s a good trick too, I forgot to mention that one. Far more effective than doing direct mail to ALL landlords, much better results targeting ones having problems at this time.
I think there has been very good analysis by Frank and others on this topic and I don’t want to beat a dead horse here but some of the recommendations that keeps coming up that I have a hard time believing are:
Pardon me for being blunt about this but do you guys thing people are stupid? If I was a landlord and I was sick of it do you really think I give my property away? If I inherited a property do you really think I’m going to be stupid enough to sell it at %60 to %70 discount when I know I’ll have people lining up at %5 below market value? Desperation sets in when there’s not much demand for what you are trying to sell.
We novice investors have provided some examples of our novice buying. May be some of seasoned guys on this board can provide us with examples of some of their purchases… Please include any rehab costs after the purchase as well.
Thanks!
No, actually 3. Depreciation can also be considered a value income on properties for those needing a tax break.
V
Pardon me for being blunt about this but do you guys thing people are stupid? If I was a landlord and I was sick of it do you really think I give my property away? If I inherited a property do you really think I'm going to be stupid enough to sell it at %60 to %70 discount when I know I’ll have people lining up at %5 below market value? Desperation sets in when there’s not much demand for what you are trying to sell.
Oldmandate,
No, I don’t think people are stupid. Well, in all honesty, some people are stupid but that’s another story. However, in this context the issue isn’t being stupid, it’s being desperate. What makes a seller desperate? STRESS! A person buys a rental or maybe several rentals without understanding the business. Before long, it is evident that they are losing money every month. This puts pressure on them which builds month by month. Then, they encounter the tenant from hell. On landlord that I bought several properties from had a convicted felon that wouldn’t pay the rent and another tenant that not only wouldn’t pay the rent, but he just about disassembled the other half of the duplex and sold it for scrap. The furnace was gone, the copper piping was gone, the kitchen cabinets were stolen, etc, etc, etc. She was not only desperate, she was literally sick. She told me that she couldn’t sleep. She would do ANYTHING to get rid of the nightmare.
Who is going to pay 5% below retail for a property like that? NO-ONE! I bought it (a duplex) for $45,000. Market value for similar duplexes in our area are $90K to $110K (one side is 3 bdrm, the other side is 4 bdrm). What did it cost me to fix the place? Very little! I put in electric baseboard heat, which is what everybody wants now in our area. The heaters and wiring cost a few hundred dollars. I replaced the stolen water lines with PEX (less than $100). I painted the interior and put new Berber Carpet in 2 rooms (about $400). I got some used cabinets (in excellent condition) for free from someone that was remodeling. To fix both sides, it might cost me $5,000. That means that I got this property for 50 cents on the dollar!
I have people say all the time that they can’t find properties at a big discount. However, when I ask them what they’ve done to find them, the answer is almost always the same - ALMOST NOTHING. Good deals don’t fall out of the sky and land in your lap. In the beginning, you’ve got to put in the work to get them.
WHAT HAVE YOU BEEN DOING TO FIND GREAT DEALS?
Mike
Mike,
How did you come across this landlord and learn of her property? If possible, could you tell me about the first deal you did and the methods you went through to locate it?
Thanks,
James
I met this particular one at my REIA. She was there desperately trying to unload her rentals and I was happy to oblige. My first traditional rental was also a desperate landlord and my realtor found that one for me. It was owned by another landlord who didn’t screen the tenants and a drug dealer really trashed the place. Every door was broken; every window was broken; and every wall had a hole in it. There had been a drug bust and the owner was at his witts end.
There are a BUNCH of ways to find great deals and they all require getting out of the house and meeting people.
Mike
It’s good to see this kind of exportation by the investors on this site. Kudos to the original post. I screen my tenants very carefully and I’m pretty uncompromising. I’ve found that 3/2s and 4/2s do a lot better from a maintenance standpoint because the tenants for these properties tend to be families who move out in the name of buying a house, and they want their cleaning and security deposit back. I’ve also found that nice properties in nice neighborhoods have almost no vacancies. I’ve also found that operating expenses go up as buildings age. I’ve never worked with apartment buildings, but I’ve been told that overhead costs on apartment buildings are higher than single family homes and duplexes.
I believe that we make choices based upon our options. Mike’s deals have always left me with a question. Here is how the scenario plays out for a rent=2% of property value:
Cost $50,000
Rental income: $1,000
Let’s assume that the deal was found for 50% of FMV.
Do tenants have a choice between buying a $100,000 home for $725 PITI, or renting the place for $1000 and choose to rent? WTF? WHY??? Are they stupid? Are they desperate? Do they want to move? Do they fear losing their jobs?
Now, I have to confess, when I bought a Kiyosaki video and sat down to watch it, I almost ripped my TV out of the wall and threw it out the window while screaming explicatives. How could they take me for such a fool? Then I looked at the price of real estate in Arizona, and realized that they weren’t BSing me.
It must just be the economic environment or something.
Go ahead rip the cabinets out, rip out the furnace, throw appliances all over the front lawn, break every window and every door. In my neighborhood, if you put the place on the MLS for 75% of ARV minus the expense to repair it, It would go in a month. There would probably be people lined up just to get it because real estate is so expensive, a lot of people want places that need a lot of repair.
I’ve been to my REI club, and property management classes and asked agents for pocket deals. I have never seen a property for 50 cents on the dollar. The closest I have seen are homes that are practically tear downs that, after an ambitious person did all of the work themselves, they could come in about 75 cents on the dollar. The lowest GRM that I’ve seen in my area (now I’m excluding 3 million dollar apartment buildings) went as follows: 595 sq/ft 2/1 for $120,000. Materials to turn this thing around would be $50,000. Rents would be $1100 to be kind. I haven’t looked at hundreds of properties I’ve looked at thousands. I really wish someone would come on this site and tell me that I’m wrong, that I didn’t consider this or that. I will also mention that I know California real estate investors who are buying property in the rust belt as fast as they can. They run the numbers in that area, and laugh until their faces turn red.
Do tenants have a choice between buying a $100,000 home for $725 PITI, or renting the place for $1000 and choose to rent? WTF? WHY???? Are they stupid? Are they desperate? Do they want to move? Do they fear losing their jobs?
No, the tenants generally do not have a choice between buying a house and renting. Their only option is to rent. Why? Because they consistently use poor judgement and make poor choices. They can’t manage their money and they throw away their money on alcohol, cigarettes, child support, alimony, big screen TVs, etc, etc, etc. When you do stupid stuff like that, you can’t get a loan for a house. In addition, many of these people who did buy a house with the relaxed lending standards of the past few years have already lost them for the same reason. That is good for landlords because these people make good renters.
Also, the true cost of homeownership is higher than just PITI. The property must be maintained; the grass must be mowed; there are still capital expenses, etc. Many of these people have serious character issues and won’t take care of their property. If you live like a pig and have pigs for friends, it doesn’t take long for their house to self-destruct (the same thing they do to rentals). That is the reason they are tenants and deserve to be tenants.
I’m currently reading “The Millionaire Next Door”, which is a book about the reality of being a millionaire in the United States. The book is written by a couple of researchers who have conducted exhaustive studies on this issue. What do real millionaires look like? Boring. The typical millionaire is:
This is a very interesting book and provides a good explanation of how people become millionaires. In my experience, that description is right on, although some of my friends became millionaires in their forties.
At any rate, contrast that description to the typical renter who has no net worth; is not married (and typically chooses to simply shack up); does not have a college education; works are a relatively low income job (if he works at all); wastes his discretionary income on alcohol, cigarettes, and big screen TVs, etc.
Go ahead rip the cabinets out, rip out the furnace, throw appliances all over the front lawn, break every window and every door. In my neighborhood, if you put the place on the MLS for 75% of ARV minus the expense to repair it, It would go in a month. There would probably be people lined up just to get it because real estate is so expensive, a lot of people want places that need a lot of repair.
If you live in one of the bubble areas and prices have not yet come back to reality, then I would not get into the rental business. If the deals aren’t there, do something else. Real estate is NOT the be and end all of the world. It is simply one of a million ways to make money. If it doesn’t work in your area, then the choices are to 1) invest elsewhere (difficult), 2) move, or 3) do something else.
Mike
Well put Mike.
There are bubble areas, and there are those that are not. How could that be??
Watching this discussion here, a better understanding can be made if the issue is looked at on a macro economic vs micro economic view. The “New York Times” did an excellent article on it a few years ago, with the thesis “there’s TWO real estate markets” in the US. According to this, from the late 70’s in one market, properties started in values form below 100K for a SFH, and after a few bubbles, reached at that time $500,000 in places like NYC and San Francisco. In other places, in the USA midwest, prices moved up slowly, if not at all.
Why is that??
On a macro economic basis, true throughout the world, true in China as well as the USA, coastal economies grew as inland economies stagnated. Worldwide, populations live along the coasts. The USA has a bi-coastal economy.
This means 50% of the population lives within 10 miles of the coast leaving the other half to occupy the other 2980 miles of a 3,000 mile wide continent.
We see bubble economies in NYC and San Francisco. In inland areas where Mike is, economies stagnate. Of course, you make money in RE in either one, though the strategies can be diametrically opposite.
With bubble prices in NYC, I’m placing a property on the market with a FMV of $715K, indicating I’m happy at $650K, cashing out over $500K, compared to netting $15K/year in rent. Agents laughed and said “Frank, if you want $650K, I’ll write you a check today for it, as I can sell it for $700K in three weeks”.
If I’m a tired landlod in NYC, do I have to sell at 50% FMV and go to a RE club to look for Mike??
I looked into the contrasts of coastal vs inland RE economy. Examples are Springfied MA, vs Boston Ma, 90 minutes by car. The other was 20 years ago, NYC vs Philadelphia, 2 hours by car.
Coastal economies of Boston, stretching halfway across the state of MA as far as Worcester, including the “128 corridor” consists of job creating industries, high skilled workers, and opportunities created by the global economy, import export, banking, finance etc. Industry and people want to move there, demand created, and the highly paid and educated labor force pushes up land, housing prices, and rents.
Inland economies of Springfield Ma are also called “Walmart” economies. I had investments there. and looked into “cash flow” investing. They are called “Walmart” economies because there is no NET contributin to the nations’s “goods and services”. This means, I go to a service job, clerk at Walmarts, earn a few dollars, get my haircut, and the barber takes the money, go to Walmarts and spend it back there. The net cash inflows are “government spending”, government subsidies, such as social security, schools, section 8 subsidies.
I go up there every so often to check my investments, and once skipped a year, drove around and around, couldn’t find Burger King. Apparently they closed for the lack of business. The shopping mall on Main Street was half torn down, also for the lack of business.
Opposite of what was happening in NYC and Boston at the time.
I could pick up vacant six-plexes for $60K. There was a 200 unit apartment building for sale at $600K, and I beleive overpriced, and only 35% occupied.
Why then does industry not invest and locate in inland economies??
I worked once at a large US industrial firm, Ingersoll Rand. They produce industrial goods, and tried locating plants into the inland areas where the cost of land and labor is cheap. Overall, it was a bad decision.
First, the complaint was the labor pool. The workers turned out more to be Mike’s tenants. Workers from NYC, and Boston would not relocate there. And goods produced there had to be trucked to the coasts, increasing the cost.
Recently, I read of a midwest city, I don’t reccall if it was Detroit, that depopulated to the extent that the city decided to downsize. If a home is vacant, tear it down, deed the land to the neighbor. Stop fixing streets leading to vacated neighhoods. Poeple and industry is not coming back.
Then a few years ago, the Census Bureau announced the “frontier” has returned, the first time since the late 1800’s. The frontier was defined as an area with less than “one person” per square mile, and areas of Montana, due to depopulation, has reached that number.
So while places like NYC, San Franciso are bubbling along, others stagnates, and depopulates.
It is true that without immigration, NYC, San Francsio, and Miami may depopulate, but historically, first generation immigrants also settle in coastal cities. Creation of ethnic enclaves is another factor affecing prices on the coasts.
So “bubble” investing and “cash flow” investing will be interesting topics of discussion. At least, we should understand the differences and know where it comes from.
If I'm a tired landlod in NYC, do I have to sell at 50% FMV and go to a RE club to look for Mike??
If you’re a tired landlord in Ohio, you don’t have to sell your property to me at 50% FMV either. The vast majority of rentals here in Ohio are sold at FMV. In my previous example, the previous owner could have spent $5K and several days of her time to fix all the broken stuff and then sold the property at retail (although it might take a year in this terrible market). She didn’t do that because she was in too much pain. The only thing that was important to her was getting out of pain - NOW.
If any of us were in a terrible accident and were in a lot of pain, we would give almost anything to stop the pain. The same is true of desperate sellers. They just want to pain to stop.
Mike
I agree 100%. Here’s in SoCal, you have a half stupid to buy rental property right now as its soooo cash negative its obscene and the market it pretty unsteady. I have not bought anything in nearly 4 years. I fish in other waters for away from the bubbles of Calif., Vegas and other headliners.
I guess the key is how LONG it’ll take to get FMV in Ohio. The last rental I sold here took me two showings in 20 days.
Talking about pain, one investor I know specaiized in taking over mixed use properties from tired old owners who can’t let go for tax purposes. He would NNN properties for say 20 to 30 years from owners in their sixties, too tired to chase after tenants, but too unwilling to pay large capital gains, and would like to leave the place to their kids.
His method is simply driving around looking for not well maintained properties, figure out from public record how long the owners had the place, and if he sees an owner in possession of a tired looking property for 35 years, he know he found his target.
His solution is is to take over via a master lease, collects the rent. and take care of all the headacjes of management, and with NNN lease can even be a no down deal, though a “non taxable option” payment would ease the pain.
How does he come out ahead collectinng some rent, and then pay the master lease, making a small spread??
First, in mixed use properties, when the commercial tenants leave, the new ones come in at a much higher rate, increasing his spread.
Often the old owners die sooner than expected, though the heirs got a deed, but is stuck with a long lease. Many want the money NOW. He offers them a way out at 50% of FMV or or they can buy out his lease. Better than trying to pick up deals at probate as you already got the heirs over the barrel.
Here in NYC, it’s so much easier to unload the “pain” that what this guy does appear to be the next best thing to “ease someone’s headache”, and avoid the other pain of taxes at the same time.
Now that my dad is 85, owned a commercial property since 1963, I can see the difficulties of someone getting around on a walker trying to manage a property. And it’s nice that he’s hanging on to it for his kids, though he also hates the thought of paying taxes on close to $1MM in capital gains…
The NNN works in other cases too. Some guy who murdered a tenant during a dispute got 15 years to life in prison, and as was reported in the papers, NNN the property to an investor for the next 25 years. While someone can hire a PM, it’s hard to hire and fire them from prison.
With the RE maket bubbling along here, this imprisoned landlord would leave prison with a paid up mortgage, and hopefully a nice property to retrun to, easing his PAIN.
Frank,
I’ve considered the same thing myself, I even have a master lease that was written by an attorney to do something similar. I like the approach of finding older folks that just don’t want the hassle. I’ve got mine set up a little different though and its got an option to buy built in and a section for rent credits. I figure I can get myself started with nothing out of pocket, build payment history and build equity all while letting natural appreciation happen. Best case scenario I buy it at the end of the lease term with equity already built up. Worst case it has depreciated and I have an OPTION so I am not stuck with it, I just don’t purchase. In the interim while its leased I would get some cashflow.
It can get even better.
What he does is if he can talk the lease terms to 29 years, it’s considered a long term lease that can be mortgaged.
After holidng it a few years, with increased cash flow, he found he can even sell it to folks needing to do 1031, or 1033 exchanges, as NNN leases qualify as “like kind property”.
He concentrated more on mixed use and commercial properties because he found typical homeowners clueless about NNN leases, and there’s greater cash flow in commercial deals.
Long term NNN works for residential properties as well, as the imprisoned landlord did one on a Manhattan townhouse he owned.
Rich - I saw you mentioning that you purchase properties based on being able to get 2% in rents of the purchase price. This method works for you?
Frank,
Newbie here in Commercial but have had a SFH rental in North Jersey for 15 years.
I am trying to understand how this guy who does the NNN master lease gets a mortgage on a property with a 29 year lease. He doesn’t own the property himself, right? How does it work?
Your macro/micro analysis of the coastal/interior markets is really interesting. What has always intrigued me is that you always hear the old Northeast losing population. I haven’t looked at the stats lately but people have been moving out of NY and NJ for years. I think on the whole they gained a smidgen because of external immigration but these states have done a poor job in respect to net migration with other states. Then you look around…darn the whole place is completely built out!
So what do you think is hiding behind all these numbers? The high coastal prices are often way higher than local income figures. A bigger trade-up market?? More wealth?? Why do the coasts sustain much higher prices for so long?? OK they don’t move to Ohio but they do move to the southeast, Arizona and Nevada in droves!
You picked up good bargains in the last slump back in the early '90s. What does your crystal ball when we can go bargain hunting again the NYC?
Rich,
How much upfront cash in exchange for the purchase option in your NNN master lease? Have you made any proposals yet? Give us some ideas how things are going.