Long-Distance Real Estate Investing by David Greene

Rating: 6/10

Read More on AmazonRead the OriginalGet My Searchable Collection of 200+ Book Notes

Long-Distance Real Estate Investing by David Greene

Rating: 6/10

Read More on AmazonGet My Searchable Collection of 200+ Book Notes

High-Level Thoughts

It’s a useful book for getting your head around the idea of investing out of state, you can skim through a lot of it but there are some useful nuggets and heuristics.

Summary Notes

Don’t settle on one backyard. Investing in many backyards is a great idea, meant to help you grow wealth strategically. The best real estate investors will invest in areas where demand is growing, not just in what is geographically close. Understanding different areas, emerging markets, and price-to-rent ratios is a crucial aspect to real estate investing well!

If you’re using a real estate agent (which most investors do), you can have a custom search for homes that meet your specific criteria sent directly to your e-mail inbox.

Use this easy-access technology to find out exactly what kind of property taxes you’ll be paying before you buy the house.

In addition to property taxes, you’ll also want to know how to determine your homeowner’s insurance.

Another huge factor you’ll want to consider before buying something in an area you aren’t as familiar with is the desirability of the property. Owning a rental property doesn’t do you any good if people don’t want to rent it.

If I ask a property manager what the schools are like in an area, and he or she tells me they are top-notch, it would raise some red flags if Trulia shows the schools are ranked very low.

I don’t want to buy in a high-crime area.

I don’t want to buy in an area with low-ranking schools either.

Properties in big cities or major urban areas will often have a rental demand that is determined in large part by their walk score

Another helpful tool is Trulia’s crime Heat Maps, which put together a map to provide a quick visual portrayal of crime that is easy to interpret and universally understood (plus they’re free). You can avoid the “hot” areas (areas portrayed in red and orange) and stick to the “cool” areas (green) to get a really good idea of what kind of neighborhood your property resides in.

You can use this same technology to see maps of commute times, schools, and proximity to amenities like grocery stores and banks.

In addition to using the Internet to help you determine what a property will cost to own, use it to calculate rent.

Rentometer.com has become my go-to tool when it comes to getting a rough idea of what I can expect for rent on any property I’m evaluating.

Once I’ve checked out Rentometer, my next stop is Craigslist.com. By searching for homes for rent in an area similar to your subject property’s, you can get an even better idea of what others are paying for rent and what types of properties are available.

Curious about the vacancy periods for a two-bedroom unit in an area? E-mail some of the people with homes listed for rent and ask them how long the properties have been vacant. Want to know how many renters are actively searching for somewhere to live? Ask how much activity their rental is getting. If you find out the people with houses for rent are struggling to get them rented, that’s your first clue not to buy in the area.

If you keep checking and never see the same property available for more than a week, that’s a good sign that the neighborhood is experiencing a lot of demand and units are going fast.

The contractor won’t mind taking thirty seconds to show off his or her handiwork. Plus, my contractor is already taking pictures to show other clients how great the work is. If your contractor won’t send you pictures or videos, there is something fishy going on.

I just ask my rep to start on the sidewalk in front of the property, start the video, and walk the exterior of the home before entering. As my agent or wholesaler walks the house while recording it with a smartphone, I have him or her audibly point out the features of the home I should take notice of, the areas I may miss, and the problem areas I will want to note for later.

One of my all-time favorite apps is called Mortgage Calculator Plus. This app allows me to enter a mortgage amount, interest rate, and amortization and quickly see exactly what my mortgage will be. I

Another app I love is a voice recording app called Rev. It allows you to record messages and label them to listen to later. One thing new investors never take into consideration is how many properties they will be looking at and evaluating, as well as how hard it can be to remember which info went with each property.

I also use my free Keller Williams home search app to find the price of nearby homes or search for homes available in specific areas I’m interested in.

If you think about it, the most efficient investors are those who have learned how to:

  • Find properties below market value
  • Prepare those properties to be rented or sold by adding the most value for the least money When taking that into consideration, it’s crucial you have a competitive advantage in your business.

Long term, the price-to-rent ratio is one of the most important metrics you’ll need. Price-to-rent ratios are very quick and simple units of measurement that indicate how much a property costs to buy versus how much rent it is likely to produce. The stronger this metric is, the easier it will be for you to buy properties that will cash-flow positively.

The more podcasts I listen to, and the more successful investors I meet, the more it becomes clear that they accumulated these portfolios in areas like the South or Midwest, which are notoriously popular for having strong price-to-rent ratios and the existing infrastructure (property management companies, investor-friendly lenders, and so on) that goes with that.

One of the most common rules is referred to as the 1 percent rule. The 1 percent rule states that if a property can rent for 1 percent of the purchase price each month, it is highly likely to be profitable and cash-flow positively.

If you’re just starting out, don’t tackle a 2 percenter unless you have help from someone else who has had success—things can get out of hand very fast.

The 50 percent rule states that you can count on 50 percent of the income that the property generates to go toward repairs and holding costs other than those associated with debt or the mortgage. Though many investors really like this rule, I am not a fan because it’s too general.

To use this rule of thumb, simply take the expected rent (in this case, $1,000), cut it in half ($500), and then subtract your mortgage payment. If you’re expecting to borrow $50,000 at 4 percent interest on a thirty-year loan to buy a property, you know your mortgage payment will be $238.71 monthly

By subtracting this $238.71 from the $500 you have left, you can quickly determine that the property will cash-flow around $261.29.

While some areas are specifically suited only to a certain investing model, others can work for several. These “hybrid” areas are the most ideal to begin your process. If you find yourself with a competitive advantage in an area where rentals don’t make sense, don’t give up! Start asking yourself what you can do with the deals you find.


VACATION RENTALS

This model has become increasingly popular in areas with high corporate rental demand. Large cities, downtown areas, and vacation locales have been awesome places to own vacation rental property,

A perfect way to pick an area out of state to start investing in, is to look for ways to create a competitive advantage for yourself in areas you have existing knowledge of.

THE DEAL FINDER

Traditionally, this has been a real estate agent. As investing has evolved, the effectiveness of wholesalers has emerged as a viable and sometimes even superior alternative. While I’ll likely refer to the deal finder as an agent, please keep in mind it could be anyone (wholesaler, Realtor, probate attorney, turnkey provider, and so on).

When you’re buying investment property, and especially buying property out of state, I highly recommend using an agent as opposed to a wholesaler or other means, at least in the beginning.

As an investor, you are almost always targeting situations that indicate some form of distress. People do not sell their home under market value unless there is some compelling reason for them to do so.


FIND HIGH-PRODUCING AGENTS

When it comes to real estate, few websites or programs can compete with Zillow, the easiest, most convenient, and most useful way to kick-start this process.

While number of sales is definitely not the most important factor to consider when looking for an agent, it is usually a great indicator that the agent works well with others. It also indicates the agent is less likely to waste your time and is more likely to have resources you will need later.

Just go to Zillow.com/agent-finder. Zillow provides us a list of the high-producing agents in the area with all the things I would want to see if I were looking for an agent there.

Earlier I mentioned it’s a good thing to find an agent who runs his or her own team. Agents with teams typically had so much success, they needed to hire others to help them manage the volume of clients they were receiving.


AGENTS WITH A TEAM

There are many reasons why these agents will benefit your business. There is also one big disadvantage: They are stinking busy.

When searching for top-producing agents, consider narrowing your search even further to those who run a team, like the “David Greene Team.”

Put that name on the list you are compiling of agents you want to interview. You’ll want to keep this list of names, phone numbers, and e-mails handy for later.

I reached out to Joshua, told him exactly what I was looking for, and let him know how great I thought his business was. I also told Joshua if he was too busy to be taking on new clients, I would love if he could refer me to someone he trusted.

Once you’ve done a little research to compile a list of the top-producing agents in your area of interest, you want to do a quick Google search of the agents’ names for their websites.

BiggerPockets has also become the number one platform for networking with real estate investors and those catering to their needs.


WAYS TO SAVE TIME ON YOUR SEARCH

I recommend sending an e-mail to the agents on your list to reach out and make your initial introductions.

When it comes to what to put in your e-mail, there are a few main topics you need to cover. The most important things to include are:

  • That you are an investor who understands real estate
  • What specifically you are looking for
  • How you intend to purchase (loan, cash, and so on)
  • How you heard about the agent

The first thing you want to make sure you address is whether the agent has experience working with investors. While it isn’t an absolute deal breaker if the agent hasn’t, it is likely to slow things down for you a bit.

In general, it is much more favorable to have an agent who has experience working with investors and even better if the agent is an investor himself or herself.

For many of us who have done this for a while, we remember the initial temptation to buy in less-than-reputable neighborhoods because the deal just looked so good.

Don’t be afraid to ask whether the agent has ever owned any rental properties or currently owns any.

Usually accompanied by some form of distress or a motivated seller, hot leads are worth much, much more than cold leads.

Lastly, you’ll want to ask your agent how he or she plans to find you potential properties.

In the beginning especially, it will take a significant amount of your time to do so. You don’t want to be looking at automated searches full of properties that will never work and waste your precious time in the process.

THE LENDER

In just about every situation, you’re going to want a good lender working for you. Period.

The first and biggest metric a lender will look at is your debt-to-income (DTI) ratio. DTI is a simple equation that compares how much money you are obligated to spend every month to cover your debts with how much money you are bringing in.

Most banks don’t want a DTI higher than 3–6 percent. While debt itself makes up only half of your DTI, it’s still important to work to keep your debt obligations as low as possible.

The income side of your DTI works similar to calculating the debt. The lender will look at the income you are bringing in every month and ensure this income is consistent.

The next metric a lender will be concerned about is your loan-to-value (LTV). While DTI is a measurement of how likely you will be to make your payments and pay back the loan, the LTV is a measure used to ensure the bank can recover the money it lends you if you stop making those payments.

The lower an LTV is, the safer the investment will be. Interest rates are often based on a direct relationship to the LTV. The lower the LTV, the lower the rate, because it’s a lower risk for the bank.

To calculate an LTV, the bank simply takes the amount of the loan and compares it with the value of the asset.

In all the loans I’ve applied for, nothing over 720 (credit score) will make a difference.

LOANS FOR INVESTORS

The goal of a good house flipper is to get in, get it sold, and get out. The goal of a good buy-and-hold investor is to get a great house for a great price and collect small payments for a long time. Think of banks as using the same strategies. Most banks want to get you the loan, make their money, and then sell the loan to someone else and recover their capital for the next loan. This is like flipping a loan. Some banks want to hold the loan long term and continue to collect the payments from you. This is like owning a buy-and-hold property.


HOW TO FIND A LENDER

Institutions like Chase, Wells Fargo, and U.S. Bank are very well known and have strong brand recognition, but it’s also for that reason that they don’t always offer the best rates or terms.

In addition to mortgage brokers, there are also credit unions and savings and loan institutions. I have found these to be extremely useful institutions when it comes to working with investors like myself.

HOW TO REACH OUT TO LENDERS

When reaching out to different banks, credit unions, and mortgage brokers, you want to spell out very specifically what your situation is, what unique challenges you possess, and what kind of loan you are expecting. If you do this right, you can get a yes or a no before ever filling out the loan app.

Some more popular searches that will yield you more specific results for your needs are:

  • Investor-friendly banks (county you are looking in)
  • Credit union (county you are looking in)
  • Savings and loan institution (county you are looking in)
  • Portfolio lender (county you are looking in)


ALTERNATIVE LENDING OPTIONS

Many of these lenders know their target audience is very specific and therefore advertise on mediums, sites, and groups where they feel investors are likely to be. This is a great reason why you should belong to a local REIA or other investment group.

In what should be coming as no surprise, another really easy way to find investor-friendly lenders is by asking other investors.

SUPERCHARGING YOUR EQUITY GROWTH, THE EASY WAY

While it’s slightly complicated to explain, the gist of the system is that the lion’s share of the loan payment goes toward the interest in the beginning. As each subsequent payment is made, more and more starts to go toward the principal. This is important to understand because every dollar that goes to the interest is a dollar lost. Your goal is to get as much of that payment going toward paying down the principal as possible. This grows your equity, and therefore your wealth, faster.

If you continuously make extra payments toward the principal of the loan, you not only pay the principal down faster through the extra payments, but you also ensure a larger percentage of your next payment goes toward the principal.

One common way people take advantage of this phenomena is by making half of their monthly payment every two weeks as opposed to one payment a month. At first glance, this might seem silly, as it appears to be the same amount. Let me tell you, it’s not. Making a payment every two weeks is the same as making one full month every twenty-eight days. Because most months have more than twenty-eight days in them, this leads to your paying more per month.

On a thirty-year loan with a 5 percent interest rate and a balance of $250,000, you can expect to pay $233,139.46 in interest over the life of the loan if you make just the standard monthly payment with nothing going toward the principal. If you take that same loan with the same terms, but you make one half of the mortgage payment every two weeks, you end up spending $190,193.73—a savings of $42,945.73 from making the equivalent of just one extra payment a year.

To speed up the early payoff of the loan (as well as save on the interest you’ll by paying), you can simply increase the amount you pay each month and have the difference go toward the principal on the loan. In the example I’ve given, the monthly mortgage payment would be $1,422.94. If you round this up to $1,500 a month, this reduces the total interest you pay to $201,999.02 ($31,140.44 less) and reduces the loan from 360 payments to only 319 (just under three and a half years). Not a bad return for $77.06 a month, right?

You want to supercharge this technique, consider making one half payment every two weeks and adding a set amount to the principal payment every month. This can really speed up the rate at which you pay off the loan. I use this method myself and typically round the biweekly payment up to a round number. This gives me the advantages of making an extra payment a year as well as the advantages of making extra payments toward the principal.

Whenever I’m considering choosing a new property manager, I always ask whether he or she is willing to make electronic deposits into my checking account.


LEVERAGING FINANCING

The number one thing you can do in your financial life to help make sure you can always get financing is to maintain a very healthy DTI ratio. You want to make sure you always have a significant amount of income rather than money going out.

Once you’ve got an entire portfolio of properties, you will want to make sure that the LTV ratio is at a healthy level. A 70 percent LTV would be a good goal to aim


PROPERTY MANAGERS

Property managers will advertise your unit for rent, find you a tenant, perform background checks on them, coordinate moving them in, collect the monthly rent, and help take care of any issues that arise.

If you are actively managing your own properties, you may be saving a little bit of money, but you aren’t investing anymore.

I pay my property managers an average of 7 percent. On a house with a rent of $1,000 a month, they make $70.

The first thing you should do is start asking around to see who has a good property manager they can recommend.

The next way is by using the search bar at the top of the page and typing in “property manager [name of city you are looking for].” One of my favorite ways to use this site is to do a search like this, click on the person’s icon who made the request, and send a message asking whether he or she found a property manager and, if so, how the person is liking the experience.

What experience they have managing rentals personally, how many doors their company manages, how long they have been in business, and what they feel their company’s strengths are. I also want to ask them how they collect rent, how they enforce late fees, what systems they have in place to make things efficient, and how long they have worked for their current company.

The main questions I’ll want answers for are:

  1. What is the monthly percentage of rent they’ll take?
  2. What other fees are assessed to owners? (Half of first month’s rent for new tenants, advertising fees, yearly walk-through fees, callout fees, and so on.)
  3. How often will the property be inspected each year?
  4. How will maintenance/repair calls be handled?
  5. How will evictions be handled?
  6. What is your average turnaround time for vacancies?

I want to know how it will handle a maintenance request from a tenant. I usually pose this question with an example like a tenant who has called in to complain about the hot water not working in the shower.

Now, what I’m looking for in the answer is for the company to show me some form of initiative to save me money.

It would be easiest for the property manager to simply call a plumber, ask when he or she can go check out the shower, and be done with the issue. The problem is, plumbers are licensed professionals and not cheap to hire. A plumber is going to charge a lot of money just to come look at the problem and a lot more money if it requires work.

What I’m hoping to hear this property manager tell me is he or she would first ask the tenant to check the pilot light on the water heater in the garage.

The next-best answer I could receive would be the property manager’s telling me he or she would send the handyman to the house to see if he can fix the issue.

If the answer I get is the easy, noncreative, easiest-for-the-property-manager-but-most-expensive-for-me type, I am going to look for a way to end the interview and move on.

If the property manager isn’t looking for ways to actively save you money, you don’t want to hire that company.

If property managers are willing to take on a war zone property, they are likely not doing very well financially and are desperate for business.

The answer I’d really like to receive from the property manager is that I shouldn’t buy the house at all.

If you are buying in somebody else’s backyard, you had better make sure you have some advisers on the ground who can tell you which areas are the best for you. The numbers may look good when you evaluate a property from afar, but the locals are much more likely to know whether that area suffers from problems you might not see.

A good property manager very familiar with the area is an excellent way to obtain reliable information to use in your decision making.

CONTRACTORS

The absolute best way to find a good contractor is by finding one through another investor you trust.

Keep in mind that there is a good chance you won’t want the same contractor for a flip job as you may want for a rental rehab. Some contractors have become experts in keeping costs low and finding ways to save you money.

On the other side of the coin you have the contractors who do better with flips. These are the people with their fingers on the pulse of what is popular and contacts at the stores that have the items you will be wanting to purchase.

Once you’re at the point where you have a list of names, it’s time to start whittling it down. Your goal at this stage is to find the person who impresses you the most, gives you the best prices, communicates with you best, and shows he or she wants to earn your business more than anyone else.

A contractor who sees a potential problem and reacts with “What would you like me to do about it?” is not as attractive as one who says, “This popped up. We can do A, B, or C. A will be cheapest, C will be the most expensive and thorough, and B will be a healthy combination of the two.”

With all of this in mind, your first step will be to contact the contractor via e-mail or by phone and explain the plans you have for the property.

You are going to explain to the contractor what types of properties you are looking for, what level of rehab you would like done, and what types of materials you would like to use. You should also explain how he or she will be paid and what your expectations are regarding the level of communication you expect and the way you would like the work to be proved to be done (pictures, video, apps you’ll use, and so on).

If you already have a property under contract, ask the contractors to go look at the property and write you up a bid for the work they think should be done.

If I have already explained to them what my goal for the property is (bare-bones rehab, HUD-approved tenant ready, all major issues repaired and the property brought up to modern-level expectations, and so on), they should be looking to do their analysis based on my needs, not on what will make them the most money or allow them to be done the fastest.

If I’ve told them it will be a rental property that will rent for about $1,000, and they recommend crown molding, I know they are in over their head or are plain dishonest.

If they point out things I had missed, I learn from that, and it is better for my own education.

Once they have finished their walk-through (and you should have sent every single contractor you felt comfortable with from your list to do one), you should ask them to itemize precisely each task they would do and how much they would charge for it.

Consider all the input you have received from all the contractors regarding why you believe the scope of work they provided is appropriate, and choose the one you agree with.

Once you’ve got a list of all the items you want included in the rehab of your property, it’s time to send this list back out to the contractors remaining on your list. Each contractor should get the list and instructions to please fill out a price for each of the items on it.

My solution has been to pay for the materials myself outside the bid the contractor provides until I feel comfortable with the contractor and have used him or her several times.

Much better bet is asking contractors for phone numbers of former clients. If they are familiar with working with investors, there is a very good chance they will be giving you the number of former investor clients.

All you really need to do is choose the contractor you are most comfortable with and begin the process of renegotiating the bid you received.

Speak with all the contractors you are considering individually and ask where there is flexibility in their bids to reduce the price. Find out just what they will be doing, how many hours they anticipate it will take, and how they came up with the number they did. You will be surprised by how much you learn at this stage. When one contractor tells you it takes an hour to hang a door, and another tells you five hours, you’ll get a pretty clear idea of who is shooting straight with you.

When I get to this step, I ask him or her to be very conservative and allow for plenty of setbacks. Once I get a number—say, eight weeks—I ask whether there is any reason the contractor shouldn’t be able to finish this project within that time frame. Once he or she has said no, I include in the contract (which conveniently is now just your itemized list of the scope of work—score!) that if the work is done before eight weeks is up, I will include a small bonus to the contractor (typically 2–5 percent of the total job cost). Furthermore, I include that if the job goes over the allotted eight weeks, there will be a 5 percent reduction in the overall cost taken from the last draw. If the job goes over an additional week, another 5 percent will be withheld.

When you find you have increased equity in your home, one of the first things you should consider is refinancing into a better loan. As your loan balance has dropped but your home’s value has increased, you’ll find yourself with a LTV ratio much more attractive to banks than it was before.

Another great perk to increased equity in your property is the ability to access the equity through a home equity line of credit (HELOC). HELOCs are low-interest lines of credit secured by the equity in your property.

One of the great things about owning real estate is that even if prices drop, it doesn’t hurt unless we sell.

In general, a property’s income-producing qualities are not very affected by its sale price. This is why a positive cash flow is so important. It is a hedge against unfavorable conditions and allows us to wait out the storm until it makes sense to sell.

What’s interesting is that by the year 2015, almost every one of those same properties was worth more than it was in 2005. If the homeowners who had let their properties go had held on, they wouldn’t have lost a dime.

Prices can go up, or they can go down. I don’t care as long as the rent covers my expenses.

By asking your property manager what upgrades tenants are paying more for, what level of materials are expected, and what your competition is offering, you can pass that information along to your contractor to make sure you get a finished product that tenants will want.

Another metric you’ll want to follow closely as a real estate investor is employment trends.

If you’re considering investing in an area where tech jobs are moving, it would be foolish to buy the house in the suburbs with a three-car garage and a large backyard for playing catch.

Knowing what kinds of jobs are moving into your area helps you determine what types of tenants are too.

You have assets on your team you’ve constructed. Use them. Your property manager is a great way to accomplish this. He or she is more likely than you to know which employers are moving into an area because your manager will be the one fielding the phone calls from the prospective tenants.

So with a house that generates $500 a month in rental income profit where we put $50,000 down, it would look like this: $500 x 12 = $6,000 divided by $50,000 = 0.12 (12 percent) This investment’s ROI would be 12 percent.

If you put $30,000 into a property and it’s bringing you back an ROI of 15 percent, you may be very pleased. But what if the property has appreciated $100,000 since you bought it? That’s a lot of equity sitting there that is doing nothing for you. If all you did was calculate ROI, you would have no idea how vastly your property was really under-performing.

Your ROE is determined by taking the amount of money your property makes you a year and dividing it by the amount of equity you have, not the amount of money you originally invested.

Assuming I would have to pay a Realtor’s commission to sell the house and some closing costs as well, if I were to sell it, I would likely walk away with about $225,000 left over. If I use this number as my equity, I can calculate the ROE of this investment.

My ROE would be: Yearly income ($685 cash flow x 12 = $8,220) divided by equity ($225,000) = 0.036. The return on my equity is 3.6 percent.

If I were to sell this house and buy somewhere where I could achieve a much more modest 12 percent ROI, my cash flow would jump up to $2,250 a month. Compare that with the $685 a month the property is making me now.

If I were to take my initial cash flow of $685 and move the $225,000 in equity into five different properties that each cash-flowed at 12 percent ($45,000 down on each), I would end up with the $2,250 a month I mentioned earlier. This is more than a 325 percent increase in my monthly cash flow.

That being said, there are usually signs an economy shows before it collapses.

  • A significant increase in the average number of days that available homes are sitting before going into escrow
  • Abnormal lending practices such as more adjustable rate mortgages, 80/10/10 loans, negative amortization loans, and interest-only payment periods
  • A noticeable pattern of companies leaving the area
  • Sellers’ having to offer significant concessions to buyers

Concentrate on building equity first, then turn that equity into cash flow later in your career when you need to live off it.

Before I ask what a property will rent for, I want to know what kind of neighborhood it’s in. Don’t chase rents; chase information, chase desirability, chase equity.

Sometimes (and by sometimes, I mean usually) it’s better to take a modest return on your money over the sexy return that never works out.

Here are some examples of things I’ve found that people who are operating in difficult markets fail to consider while continuing to invest in their present market:

  • Some states have much, much friendlier landlord laws than others do.
  • In some areas, there is a much higher “pride of ownership” when it comes to the tenant base. While the tenant may not own the home, there are certain cultural environments where it’s socially unacceptable to let your house get trashed,
  • Some areas are better known for having businesses that want to retain their employees. These good jobs keep their employees and want them to be promoted and stay with the company.
  • Many cities limit the number of new homes that can be built per year.
  • When you’re buying in rough markets, housing inventory tends to be older. This leads to higher repair costs.
  • Newer homes tend to have better technology. Better insulation, better foundations, better roofs, newer appliances, upgraded electrical systems, and so on, are all likely present in newer homes.
  • In markets with more expensive homes, you find that capital expenditure becomes a smaller portion of your rental income. A roof costs roughly the same for a $30,000 house as it does for a $200,000 house—but the percentage of the gross income is much different. Appliances, plumbing systems, paint, flooring—they all tend to cost the same
  • When you invest in better markets, you tend to find better support staff. The very best contractors, property managers, lenders, and agents don’t want to spend their time in low-profit, high-headache areas.

A 1031 like-kind exchange is a way to sell an asset and move the gains into a new asset without paying taxes on them. In essence, you’re just deferring paying these capital gains taxes

Upon selling your property, you have forty-five days to identify new properties with which to close on. You can’t buy just anything.

You then have 180 days to close on one or more of the identified properties.


MANAGING OUT-OF-STATE PROPERTIES

If you want to add built-in equity to your properties (which you should), you are going to have to learn how to rehab a property well. The best deals can often be found on the worst homes.


GIVE YOUR CONTRACTOR INCENTIVE AND MAXIMIZE YOUR RESULTS

When it comes to a rehab, there are two things that tend to go wrong: (1) The cost of the rehab goes up, and (2) the time of the rehab runs too long.

“Full scope of work to be finished and approved by owner in [however many] weeks. If the project is finished ahead of this deadline by a certain number of days, contractor will be paid a 5 percent bonus based on the total job. If the work runs past this deadline, contractor will be assessed a 5 percent penalty for the first week. If the job runs longer than a week over schedule, contractor will be assessed an additional 5 percent penalty. Owner to retain final rights of approval for quality of work completed.”


CREATE ACCOUNTABILITY THROUGH ADVERTISING

Once we have an agreed on a contract, my next step is to share with the contractor that I am a real estate investor and there will be professional pictures taken of the project once completed. The pictures will be top quality and highly detailed. They will be heavily advertised through multiple media. I make sure the contractor knows that the property will be listed for sale and his or her name will be given should anyone ask who did the work.

My real intent of these conversations is to build up my contractor subconsciously so he or she really wants to wow me.

PAYING FOR MATERIALS YOURSELF

While this may take some more time and effort on your part, there are several advantages to doing so. I recommend that if you’re just getting started with buying out of state, or just getting started with an individual contractor, you order and pay for the materials yourself.

Some credit cards offer substantial cash back. This starts to add up when doing $10,000 to $13,000 renovation projects.

Don’t necessarily want to go find some tile that is under $3 a square foot just to stay within budget. I want to find the best tile that is as close to $3 a square foot. Again, my goal is to add as much value to the property as possible.

As a rule, you always want to be looking to add as much value, for as low a price, as possible.

Should you come across a store that has a gorgeous travertine on clearance for $3.25 a square foot, when it is normally $7 a square foot, do you think it would be wise to turn it down because it’s “over budget”?

If you want to save even more money, ask your contractors whether they have an account at the store you’re buying your materials from. Many contractors often have accounts where they are registered, like Lowe’s and Home Depot. These accounts offer them a discount as high as 10 percent sometimes.

My favorite way to approach this with a new contractor I’ve never worked with is to ask which of the jobs in our contract he or she will be performing in the first two weeks. This is usually work like the demo, installation of cabinets or countertops, exterior paint, or plumbing or electrical.

When you include only enough money to pay for the first phase, the contractor knows you’re going to be checking his or her work and will be performing it under the mind-set that someone is going to be checking it.

To verify the work was completed, you’ll need some way to know. The easiest method is to ask for photos and video. While video can give you more of a bird’s-eye view, pictures allow you to really get an up-close and intimate view of the work itself.

Since I know someone will be stopping by the house to check on things, I want to take proactive measures to ensure this will be easy for that person to do. The simplest method I’ve found is to have either the agent or the property manager leave a combination lockbox on the front door of the house and to text me the combo to get into the house without a hitch.

Ask your property manager what you can do to help his or her business.

If learning the process of rehab is like climbing a steep mountain, it makes sense to follow the path of those who have gone before you. Hence the process of R&D. While most people understand the popular acronym to stand for “research and development,” I have to give credit to my good friend Andrew for sharing his version with me—rip off and duplicate.

When you think about it, there are very few people who are more qualified to give you a great design idea than a good contractor.

My favorite method is to call the store, ask for the kitchen specialist, and e-mail or text him or her the pictures. Once the specialist knows what I’m looking to do, that person can go take pictures of the product on the floor and send them back to me.

Asking to have the materials delivered for free on a large order is likely to be accepted by the place you’re buying from and is a nice gesture to show your contractor you are looking out for him or her as well.

This is what separates real investors from those who just bought well during a recession—namely, the ability to buy an underperforming asset (the property) and make it a performing asset while simultaneously adding value through increased equity.

ARV (after repair value)

Always ask, “What is my best option?” By best, we mean what will add the most value for the least amount of money.

I’ve learned to differentiate upgrades into two categories.

  1. What are the aspects of this rehab that I need to do for the house to be livable and in line with my competition?
  2. What are the aspects of this rehab that would be nothing but additional perks? Nice but not necessary.

Items in category one would typically be as follows:

  • Roof
  • Cabinets
  • Appliances
  • Flooring
  • Paint
  • Countertops
  • Windows
  • Showers
  • Vanities/bathroom cabinets
  • Lighting
  • Fences
  • Screens on windows
  • Blinds
  • Sinks
  • Toilets
  • Doors

Items in category two would be more like the following:

  • Outside fixtures such as birdbaths or other water features
  • Built-in bookshelves
  • Rock, stone, or brick decorations on accent walls
  • Rainfall showerheads
  • Upgraded mirrors
  • Kitchen backsplash
  • Upgraded baseboards
  • Crown molding
  • Surround sound speakers in house
  • Alarm system
  • Exterior landscaping
  • Heated floors
  • Security cameras
  • Skylights

The category-two items are not necessary for a property to be livable but may be just what you need to impress buyers, or, in rare cases, renters.

In most situations where you, as an investor, are rehabbing a property, these items will be overkill, and you should stop dead in your tracks if you find yourself wanting to include them, and seek outside counsel to ensure this is wise.

It rarely makes sense to upgrade an item that is still working and has life left in it.

If you want to get the most use out of your contractors, start by asking them what work they can do themselves and what work they have subcontractors for.

If your contractor tells you he or she has a killer tile guy, you might want to ask how cheaply he can do the kitchen or bathroom floors. If your contractor tells you he or she has a landscaping crew that works cheap and fast, you may want to consider asking how cheap that crew can landscape your backyard and what design options they have.

Do ask how they got started and what they like doing most in a project. Don’t ask this during the initial interview phase or with a judgmental or investigatory tone.

Upgrade Hacking occurs when you already have to replace an entire item (countertop, floor, shower, and so on) or make some form of change on your property that is going to cost you money. The concept is based on the premise that since you’re already going to be spending something, sometimes spending a little more can get you a big difference in quality.

This is a mixed neighborhood, where some of the properties are worth over $200,000 and others are worth $50,000. Putting in stainless steel upgrades will push me closer to that upper echelon of houses I want to be compared with when the rehab is completed and it’s time for the appraiser to come.

It would be foolish to spend $1,800 just to upgrade the appliances on a property likely worth $110,000. Normally, this would be true. However, if you take into account that I already needed to replace the appliances and my base rate was going to be $1,500, buying $1,800 worth of appliances suddenly becomes possible for only $300 more.

Paint is almost always the most bang you’ll get for your buck. It hides bad smells, creates modern style, and makes an old home look new again.

Consider going two-tone. Two-tone paint schemes look more professional and noticeable.

If you want to Upgrade Hack your flooring, there are several ways to do it. One of the very easiest is to use beautiful, amazing, high-quality products whenever you have a small portion of space. This creates the appearance of massively high value but doesn’t cost you much money.

Use this technique most often in bathrooms.

In my experience, most investors don’t fully understand the impact a beautiful shower can have on a home buyer or a tenant. Some buyers make up their minds to buy the home as soon as they see the master bathroom.

A tile shower is the nicest option you’ll have in a rental. Because the area that needs tile itself isn’t large, going for nice, expensive tiles won’t cost you a ton. A nicely tiled shower will really make a difference to your buyer or tenant, and if you already had to rip out the shower, it won’t cost you much more to use the upgraded materials.

Another great idea that is surprisingly cheap when you Upgrade Hack is to add a rainfall showerhead. On my last project, the plumber charged me $60 to run the pipes over the shower because we had already ripped it out. The rainfall showerhead and diverter pipe were $200. For $260, I was able to add a luxury item like a rainfall shower-head to my master bathroom shower.

You can either replace the cabinets or reface the cabinets. As a buy-and-hold investor, you will almost always find that if the cabinets are still in serviceable condition, it is better to reface them.

After painting them, buy new fixtures for the doors. Matching them to your appliance color is easy and really makes the cabinets look great for very little extra money.

Freshly painted cabinets (dark paint works best for this) can make a kitchen look a thousand times better.

If the cabinet doors are too worn, consider buying only new doors and painting the existing frames.

Beautiful counters can sway a buyer to want the house on sight.

Upgraded countertop materials like granite and quartz have become much cheaper over the years and in many areas are now downright affordable.

In many areas, I’m able to buy the granite for an entire kitchen for $1,200 to $2,500. Not that bad!

I typically pay $700 to $1,500 for installation depending on the size of the kitchen and the number of cuts needed. This means that for $1,900 to $4,000, I’m able to put granite countertops into a project instead of cheaper, uglier materials.

Adding bedrooms in the right situation can turn a good deal into a home run, and experienced investors know this.

FOUR SIMPLE FACTORS TO DETERMINE VALUE

  1. What is the location?
  2. How many square feet?
  3. How many bedrooms?
  4. Is it upgraded?

In general, the more bedrooms (that are usable) your property has, the more money it will be worth.

The simplest way to determine whether adding a bedroom is a good idea is to ask your agent or a reliable team member whether four-bedroom houses are worth much more than three-bedroom ones, or whether three-bedroom houses are worth more than two-, and so on.

Remember to remind your contractor that you’ll need a closet made and a window possibly added, as well as wall, and a door frame and a door installed. With this info, your contractor should be able to give you a decent rough estimate on how much it will cost.

I’ve also included some good ideas for areas where I’m actively looking now to add bedrooms and therefore add value to real estate. Some of the best are:

  • A large storage area added onto the square footage of the house attached to the laundry room
  • A den in a home with sufficient space to put a computer or work desk elsewhere
  • A bonus room with no door
  • A playroom that is large enough to split in half to create a bedroom and still have half the playroom
  • A family room/living room/great room combination with multilevel flooring
  • An unfinished attic
  • An unfinished basement
  • A large mudroom
  • An unused California room (an indoor-outdoor living space)
  • Any Florida room (or sunroom)
  • The third-car space in a three-car tandem garage
  • A large sitting room near an older home’s front entrance

The point of this Upgrade Hack is you are taking an area without much inherent value (many of the spaces listed above are nice additions but not crucial) and replacing it with an area with massive value—an additional bedroom.


MAXIMIZE ROI

The most commonly exercised method is knocking down walls to expose the kitchen to the rest of the home. Often done to create open floor plans, knocking down walls can be a cheap and easy way to make a house more appealing to today’s home buyers to make the space feel bigger.

Another way to add value by tearing down a wall is to look for a way to add space to an area that could use it by taking space away from an area where the space isn’t important.

This is a trick known by real estate investors for a very, very long time. Some of my very first mentors told me to always buy the smallest house on the block or the ugliest house in the best neighborhood.

There are three factors that lead to buyers finding good deals.

  1. Market distress: when a market is full of inventory or too much supply, and homes can be purchased below market value.
  2. Property distress: when a property is in such bad condition that it can be purchased under market value. Think bad houses we are discussing now.
  3. Owner distress: when the owner of a property is dealing with financial, emotional, mental, or other problems that allow you to buy a property for below market value because the owner doesn’t want to deal with it anymore.

One thing you do not want to do is upgrade your property so that it’s nicer than the surrounding homes. This is a surefire way to waste your money and efforts.

A quick and simple way to make sure you’re not over-upgrading a property is by simply looking at the pictures of comparable properties that have sold in the area you’re looking to invest in. Ask your agent to send you a list of the comparable homes that have sold within a half mile of your property over the previous six months.


TRICKS TO FIND MORE DEALS OUT OF STATE

When it comes to finding distressed property where you have the best chance possible to buy it for under-market value, nothing is going to beat offering on REO, short sales, NODs, and half-finished projects.

REO: REO stands for “real estate owned.” This is property owned by a bank that has had a title transferred back to the bank when the owner stopped paying the mortgage. Often used synonymously with foreclosure, REO refers to the state of a property after the foreclosure process has been completed.

Short sale: A short sale refers to a seller’s attempting to sell his or her property for less than the amount owed on the mortgage. The process is called short because the seller is short the amount of money he or she would need to pay off the note.

NOD: NOD stands for “notice of default.” A notice of default is issued by a bank when a note holder becomes delinquent on his or her payment.

Half-finished projects: This one isn’t a technical term; I just didn’t have a fancy way to refer to these properties. A half-finished project is just as it sounds. Somebody attempted a rehab but did not finish, and the house is now being sold.

You’ll want to know whether there are any liens for obvious reasons, as you’ll have to pay them, and this will affect your bottom line.

Be sure to ask your agent about the biggest housing expenses in the area you are investing in. A roof is a common one. So are frozen pipes.

A good rule of thumb is to ask whether a house has an inspection period right off the bat. If it does, make sure you give yourself enough time to perform the inspections. If it doesn’t, ask whether offers have already been made.

HomePath.com is an awesome tool. This website is a place where Fannie Mae sells its foreclosure inventory directly to investors.

Because by law NODs must be made public, it isn’t very difficult to learn how to find when they’ve happened and send the sellers a note stating that you’d like to buy their home.

The value you bring to this situation is your ability to buy their house before they are foreclosed on.

If the home in question is worth $150,000, and the homeowner owes $100,000 on the mortgage, you can offer to buy the place for $105,000.

If their home is twenty to thirty days away from being foreclosed on, it may just not be feasible to try to work out a traditional sale with a buyer who needs the traditional time of an escrow period to get inspections, due diligence, and loan requirements in order.

A half-finished home is exactly what it sounds like—a flip or a rehab that someone started and ran out of money or lost the desire to complete. I just can’t pass it by without stopping to show it a little attention.

Hello. My name is David, and I’m an investor in California looking for investment opportunities in [agent’s town]. I’m looking to buy cash-flowing rental property at about 70–75 percent of market value that I can fix up and rent out. I’m an [all-cash or type of loan and down payment] buyer and looking to buy X amount of properties there this year.

I then let the agent know that for anything he or she brings me that I flip, I will let him or her list the sale.

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