End of Year Reflections

As the year winds down, I wanted to take the time to step back and look at the things I've learned and am thankful for over this past year, 2018.

It has been an enlightening year for me. A year ago I knew practically nothing about the real estate investment industry.  I put in a ton of time educating myself to the point where I was ready to take the plunge into my first investment. An exciting time indeed.

I'd like to thank all of the people who have invested time with me and helped me along the way. I have continually been impressed by the caliber of people I have met along this journey, and I believe that real estate allows people to become successful enough to get out of a competitive state of mind and instead genuinely help others.  That is truly refreshing in a world full of industries that are very self serving.  I hope that through this blog I can also pass along the proverbial torch of knowledge and provide equal value to others.  

It has been a great year, but I'm just getting started. Looking forward to next year and continuing this journey with you!

- Ross

Efficient Tools for Remotely Creating a Real Estate Empire

As a high income professional who truly enjoys going to work each day and creating awesome technology, my approach to real estate investing is different from most people out there.  Many people are using real estate to get out of their 9-to-5 and become their own boss.  Don't get me wrong; that is absolutely awesome, but I am coming from a different perspective for several reasons:

• I love my job.  I get to work on some of the world's most cutting edge technology and produce awesome products for people worldwide while also working with some of the brightest minds on the planet here in Silicon Valley. I currently work at Skydio and worked previously at Boosted Boards  (see videos below), working on some pretty awesome technology:

• My job provides high income that I would not be able to replace even with a considerably large real estate portfolio (at least for a while)

• I have substantial equity (in the form of options) in various companies that require me to stay in order to vest and see where the company goes in terms of liquidation events.

Efficiency is therefore the name of the game, and as a software engineer, I look to automate and establish systems through technology to optimize my time while maximizing my profits through scalable processes.

Here is a list of how I maximize my time while still taking advantage of the power of real estate investment. Most of these recommendations come from the mindset of spending a bit more money to maximize time and, ultimately in the long run, returns.

Set Up An LLC

An LLC allows you to borrow from hard money lenders and also provides a great way to consolidate all of your real estate "business" purchases under one entity. It also provides a small amount of liability protection. This saves time around tax season when you need to untangle the huge web of paper trails and maximize your tax savings.

Hire A Property Management Group

I do not have the time to nor would I ever want to manage my tenants. Some people like to squeeze every penny out of the property by managing it themselves.  I think that although it can save you a bit of money it is ultimately a waste of time because it is not scalable  (unless you are a property manager yourself but I'm referring to your own properties here). I am happy to pay someone else to manage my property once I have vetted them properly and obtained references.  There are advantages and disadvantages to using a local group versus a national group. National groups tend to have great pricing discounts on services/parts and can provide discounts in managing multiple properties across the country.  Local groups can offer a better approach to the market strategy (i.e. nail down better rents, provide you with good leads, find better tenants, etc) and if your properties are all local to that area, you can still end up taking advantage of economies of scale.

Wave Accounting Software

Wave is an awesome free accounting tool that I use. Even though I'm just getting started in my real estate career, I plan on keeping good accounting from the start to eliminate headaches later and to maximize tax returns.  This will ultimately save me time and prevent me from tracking expenses in a spreadsheet or trying to retroactively do it around tax time. The tool has a very simple app that allows you to add in expense/income easy and connects directly with your bank account so it can automatically itemize expenses in real time.

Online Property Management Portal

There are quite a few property management tools out there. Make sure you can accept electronic payments, track leases, track property management line items and keep track of rent roll. Most of the time this will be dictated by the property management group you are using, but make sure they use an easy-to-use software tool as part of your vetting process.

Esri Business Analyst

Affordable and powerful analyst tool for location-based market intelligence Esri Analyst. Great for analyzing a new market you are looking to invest in.

Google Drive

I use Google drive to create all of my underwriting spreadsheets as well as to have a cloud based storage for all of my businesses important documents and tools.

Rehab Valuator

RehabValuator is a free tool that helps me quickly underwrite a deal.  I created my own spreadsheets for my deals before finding this tool and was pleased to find that it took into account all of the things that I had added into my own tool that I created. That definitely makes me feel more confident that I'm doing things right, but if you don't already have your own tool, this one is great. 

Listen to Podcasts or Audio Books

I can basically attribute 90% of my real estate knowledge to listening to a handful of powerful podcasts, and I did all of that learning during time that would normally have been wasted.  I spent about a year or so doing this before finally jumping into my first deal and now I'm "off to the races". Audio learning allows you to take back time that was normally sunk and learn a ton during that time (for example, I listen to about 2+ podcasts a day during my commute that I previously was using to just listen to music). My favorite podcasts are:

• Best Ever Real Estate Podcast with Joe Fairless

• REI Diamonds Podcast

• The Real Estate Syndication Show

Calendly

Calendly is one of my favorite tools. It is a free scheduling tool that connects seamlessly to all of your calendars.  It allows you to provide a link that let's others pick and schedule meetings with you during times that you are available.  It then adds the meeting to your schedule and notifies you. This is one of my biggest time savers since I can simply send people a link instead of the back and forth on trying to figure out a time that works for everyone.

Outsource Outsource Outsource

Outsource as much as you can. For example, I outsourced my business website and logo creation (still under construction) through sites such as fiverr.com.  I find the areas that I should not be directing my time towards and pay a very reasonable price to avoid them and invest my time in areas of higher return.

Use a Virtual Assistant

This involves hiring a virtual assistant to handle day to day items that are not key business decisions. I currently don't use this technique yet, but I imagine with a few more properties this will be a huge time saver for me that will more than pay for itself. 

Scaling a Portfolio: Hard Money Loan

First off, what is a Hard Money Loan? According to Wikipedia, the source of all knowledge:

A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans, starting at 7.7%, because of the higher risk and shorter duration of the loan.

In my experience, hard money is often looked at with disdain. Probably because you can get into a lot of trouble if you do not know what you are doing. The high rate, balloon payment at the end of the term, the short time frame, and up front points are all very good reasons to stay away from these types of loans. Let's say you were doing a flip and used hard money to do so. If the market collapses and you do not have enough margin built in (the difference between your total all in cost to the expected value after all repairs are done), you could be left with "the bag in your hand" and your hard money loan due with lots of interest. This would result in a loss even after all of your efforts. 

That being said, with the right team and the right deal, these types of loans can be used to scale your business in a responsible manner.

I used to get confused a lot between Private Money Lenders and Hard Money Lenders.  There are some technical differences, and Private Money Lenders seem to really not want to be put in the same category as Hard Money Lenders, but as far as I'm concerned, they look the same to me, the investor.  
They all:

• Have short term loans that vary from 6 months to 1 year
• Have higher interest on their loans, going anywhere from 7.5% to 13%
• Generally collect some sort of points (generally 1-3) on the loan (an up front fee that goes for usually $1k per point)
• Provide funding percentages for both the initial purchase and the renovations 
• Have the real estate asset as collateral in the loan
• Have annoying fees associated with every step of the way (withdrawal fee, document fee, etc)

Note that when I refer to Private Money Lenders, I'm not referring to investors that you have access to such as family, friends, or your network, which is Private Money (yes, confusing I know).

These types of loans are very valuable and can allow you to invest in new deals with little money out of pocket. Despite the bad rap, this is a strategy that I am turning to. It takes a while to shop around and find a lender that works best for you. You can only do these types of deals if you are purchasing below-market properties and doing some sort of value add with a team that you know can execute, otherwise you should STAY AWAY and just go with a conventional loan. 

My general criteria for these types of loans is to have as few points as possible up front in favor of increased interest (because I generally can purchase and renovate within 1-3 months), at least 1 year term, and the option for extensions should they be needed. The more the purchase and rehab is below the ARV, the less out of pocket you need to bring to the table.  In my case, because I am going through a contractor, my % ARV is a little higher than typical (~80%). I accept that percentage because I can utilize a highly experienced team and have little of my own time involved, but it means that I need to put in a bit more capital into these types of loans. 

Private money loans can be a solid play if you have the right deal and a reliable team to execute the rehab with. With this strategy, I should be able to double the amount of deals I would normally be able to do in a year. 

Scaling a Portfolio: Delayed Financing

According to many sources, delayed financing allows clients who recently bought an investment with cash to take money out against the home without having to wait the required minimum of six months for title seasoning in order to be eligible for traditional refinance. It sounds somewhat too good to be true, and it seems that it may be. I have been asking around many different banks and lenders for this type of program, and I have yet to find anyone who actually participates in it. The other downside to this is that it will only cover 75% LTV and only up to the purchase price (not including renovations, which on some houses could be the larger part of the cost). If getting a private money loan is not an option and you were looking for Delayed Financing, the recommendation would be to just wait out the seasoning period and refinance.

Exploring Ways to Scale

After having my first deal under my belt, I am looking at sustainable and lower risk ways to expand my business and grow at a useful rate.  I have a goal of doing 3 deals next year and need to do something more than just the typical refinance every 6 months in order to achieve that goal. I have been researching and discussing with various people what my options are:

• Delayed Financing
• Hard money loan
• Line of Credit and HELOCs
• Raise equity 
• Private Money Refinance
• Smaller personal loans
• Save up more and increase income through other means

I'll walk through my experience and research on these various topics as separate posts.

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Navigating a Cooling Market

Many top investors are positioning themselves for an upcoming correction in the market. Here are some rules to follow to mitigate risk if buying at this point in the cycle:

Buy for Cash Flow

Make sure your asset is spinning off plenty of cash to the point that you can experience a year at double the average vacancy rate and still be cash flow positive. Know your break even occupancy, compare it to the average occupancy rate from the last recession in your market, and be sure you feel comfortable with it

Long Term Permanent Debt

Look for Financing from the likes or Freddie/Fannie who offer 30 year amortization with 10 year terms. Be very careful with bridge loans at this time. I repeat: Be very careful with bridge loans at this time. Refinancing in a soft market can leave you in a very bad spot if you are not careful. If you do go that route, refinance into long term debt as quickly as possible. 

Adequate Reserves

Liquidity wins when things get tricky. Raise plenty of capital up front and have reserves for any of your current properties.

Do Not Over Leverage

Some experienced investors are purchasing at 65-70% LTV (Loan-to-Value) instead of the normal 75-80% to give them the extra cushion. What this means is that they are leaving in more equity in their investments to mitigate the risk of being upside down if it becomes necessary to refi/sell in a down market.  This also means that with a larger down payment, the monthly debt service is less, thus increasing cash flow. Finally, from a lender's perspective, lowering the LTV percentage increases the DSCR (Debt-Service Coverage Ratio). 

Manage Well

If things get scary, do NOT stop implementing your preventive maintenance plan, as that can lead to a downward spiral. Maintain the property and begin implementing strategies that promote tenant retention before you need it.

Buy in Fundamentally Strong Markets

The temptation is to chase yield in speculative areas without a strong local economy, but don’t fall for it! These types of properties typically only trade when the market is nearing the top, making it a challenge if forced to sell. In addition, these are the areas and demographics that are typically hurt the worst during a downturn. Economic occupancy will suffer, and the asset can be very difficult to sell if forced.

Rehab Almost Finished on First Purchase

It's been almost 6 weeks from my purchase, and as planned, the renovations are set to be complete today.  I've chosen to go with a local property management group and secured insurance for the property.  

For the insurance, I am getting a 500k umbrella policy with a housing value of 150k (about 15k above what I expect my appraisal will come out to be) for about $900/year.  This is a bit more expensive than I initially budgeted for in my calculations, and is almost identical price to the property that fell through previously (duplex in Pittsburgh).

Here are some update photos. It is coming along nicely!

In regard to next steps.

Near term:

We will get all utilities accounts set up and I'll be having an inspection done on the final product (regular, termites, and radon inspections). Once those are complete and any issues addressed, the property management group will begin finding tenants for the property and I'll begin cash flowing!

Longer term:

I have been investigating various ways to get my money back out of this deal as quickly as possible, ideally before the seasoning period (generally 6 months after purchase). There are some interesting options, such as delayed financing. Most of them look like they'll be much more expensive than they'll be worth and also are a bit more risk. With today's cooling off market, I'd like to stay as risk adverse as possible. I will make a separate blog post on the options available in the future. 

Most likely, I'll just cash flow without any mortgage payment (i.e. double the monthly cash in my case) until the 6 months are up, at which point I'll finance the property.  I'm already a few months into the seasoning, and it takes a while to establish a relationship with a banker and setup the finance anyway, so at the end of the day I won't be waiting much longer than I originally anticipated.

First Deal in the Bag!

Closed on my first property ever today! Duplex in Philly that I bought with cash and will refinance in 6 weeks once the renovations are complete, after which I should be able to still cash flow ~$500/month while also getting almost all of my initial investment back. 

Oh, and as a bonus, the closing costs have come in under $1k than initially predicted, increasing my cash on cash for this property by a few percentages!

Here are some before photos:

Will post after photos once our renovations are complete! My goal is to then close on one more property this year and 5 properties next year. Hold me to it!

Getting That First Deal...

After my first deal fell through on Roofstock, I began to reach out to individual wholesalers to learn about more opportunities. I researched quite a few without success when, seemingly out of no where (actually through a targeted ad), I was put in touch with the group I am now currently working with.

This group provides more of the "turn key" approach that I was looking for.  I am interested in turn key because it:

1. Allows me to invest out of state
2. Saves me the most time, which is currently valued at a much higher rate at my software engineering job than any real estate deal would get me (for now...)
3. Allows me to leverage other's experience while still being able to participate in a large chunk of the upside

The approach is simple. 

• Buy undervalued/distressed properties in a very focused area that will cash flow after refi.
• Pay all cash up front to avoid any hard money loans (at least for now in order to greatly reduce risk)
• Renovate or fix up those properties with 2-4 months
• Rent out the unit(s) at a market rate
• Conventionally finance at the after repair value, shooting for an ARV that is 20%+ the original investment so that I can pull out all initial investment at that point.
• Take original investment and repeat

I was in contract for a property with this group, but it ended up falling through again because the wholesaler went behind our back and sold it to a higher bidder after we had entered escrow. This was definitely shady on the wholesaler's part, but all things happen for a reason. In losing that deal, another opportunity for an even more profitable deal opened up, and this is the deal I am currently looking at. 

This property requires more investment, but I like it for several reasons:

• It has much higher appreciation upside. We're getting in earlier on the gentrifying neighborhood, so the medium term upside is significant outside of the forced appreciation we'll be adding through the renovation.
• It is a duplex, so I have higher cash flow and more doors, reducing risk slightly.
• The repairs will be much less substantial, so I'll be able to purchase, renovate, and finance within 6-10 weeks, meaning I'll be quicker to the next deal.

In order to raise the money for this purchase, I ended up taking out 2 small personal loans with excellent terms on them. I ended up raising $70k at around 6.35% APR with no money or collateral needed. I was also able to procure these funds within 2 days, thus significantly expanding my purchasing power while also avoiding any sort of high interest hard money loans. Also, because the rates are so low and for fairly long terms, I'll most likely be able to roll these funds into multiple deals before paying them off. First payments have been sent, so we should be closing on this deal in the next few days. The numbers for this deal are as follows:

Acquisition, Construction & Income Overview
Purchase Price					$90,000.00
	Estimated ARV			$135,000.
Estimated Closing Costs					$4,445.00
	Builder's Risk			$750.00
	Transfer Taxes			$1,845.00
	Title Insurance			$1,350.00
	Misc. Fees			$500.00
Construction Costs					$25,000.00
Total Investment Cost					$119,445.
Income Details		Monthly	Annually		$19,000.00
	Rent	$1,600.00	$19,200.
	Other Income	$50.00	$600.00
	Vacancy	$66.67	$800.00
Target Annual Gross Income					$19,000.00

Income, Expenses & Cash Flow
Expected Annual Gross Income				$19,000.00
Operating Expenses				$12,985.17
	Licenses & Inspections		$50.00
	HOA Fees		$0.00
	Utility Expenses		$50.00
	Property Insurance		$750.00
	Property Taxes		$1,285.00
	Leasing		$800.00
	Management		$1,330.00
	Repairs/Maintenance		$950.00
	Refi P&I		$7,770.17
Net Operating Income				$6,014.83
Net Operating Income Per Month				$501.24
Total Investment (less interest)				$119,445.00
Total Initial Cash Investment Required				$121,540.22
Refi Cash Profit				$13,459.78
Refi Down Payment				$27,000.00
Cash Remaining In Investment				$13,540.22
Months to Recover All Investment After Refi				27.01
Years to Recover All Investment After Refi				2.25
Annual Cash-on-Cash Return				44.42%

Top 10: Rent Growth, Hottest, and Price Growth

Interesting top ten lists from across top listing sites. What do you think?

Roofstock Property Purchase: After Contract Was Disolved

About a week after the contract fell through, Roofstock contacted me with more details on the property. It seemed that the seller originally thought that my counter was a final offer (which it was not). He notified Roofstock that he would be open to a compromise on price between the initial offer and the appraisal value. This would have worked for me, but I had already entered into a separate deal through a different source. 

This was another positive on Roofstock's end by following up and attempting to still make the deal work after the fact. Had this happened a few days earlier, I probably would have accepted a counter offer and closed.

I also learned that within Roofstock, they have separation between buyer and seller representatives so that there is a more clear separation between the two than I originally thought. This makes me much more comfortable about using them in the future, although I am currently looking into a separate deal that involves the classic BRRRR strategy. I'll post more on that in the future, but this concludes my case study on my Roofstock Property Purchase.

Roofstock Property Purchase: Review of Overall Experience (total of 41 days)

In general, my experience with Roofstock was positive despite the fact that the deal fell through in the very end.  There were no big red flags throughout the process and they professionally guided me through my first purchase experience. Furthermore, had any counter offer from the seller been made, I'd have had my first property that had some nice cash flow numbers. I think I would use Roofstock again if I can find another property with similar numbers to the one I was in closing on.

I'd list the pros and cons of working with the company as follows:

Pros

• Great customer service. Both Alexis, Jason, and Zach were very helpful, quick to respond, and generally nice to work with. 

• They are in the Bay Area, which is also where I live/work 

• The process was super easy. They took care of putting together all of the paperwork and keeping track of timelines specified in the PSA. They also scheduled both the inspection and appraisal. 

• They provided recommendations for home insurance, bank loans, and property management. I used their recommended bank and one of their recommended PM companies, but got a better deal with home insurance through the loaning bank. They provided options but you are completely free to shop around and choose your own for any of those categories. 

• The Roofstock marketplace is like any other online shopping, so it is easy to take a look at a lot of properties quickly. 

• Roofstock graciously refunded me back my marketplace fee due to the disappointing outcome of the deal.

Cons

• It's really hard to find any deals that are, in my opinion, worth buying. Most of the properties listed on their site are at or above market price and in areas where appreciation will be a very small factor. I've been looking at their site for months now, and only found maybe 2-3 (including the duplex I entered into contract) that would cash flow above 8-9%. 

• There is that strange feeling with Roofstock being the middle man between both the buyer and the seller. There is no fowl play here, but it definitely feels weird having one entity representing both buyer and seller.

• You never get any direct contact with the seller/broker. Roofstock handles all correspondence between seller and buyer.

• Due diligence on the property was still difficult despite getting inspection reports and pictures. Their reports were fairly detailed but still left me wanting a bit more. Generally, with only a few days to respond after receiving the inspection report, there is not much that can be done unless there was something super obvious in the report. 

• This one was specific to my deal, which was a bit tainted due to the final outcome. The seller failed to respond within one of the contract deadlines so we had to extend the timeline. Once the seller finally got back 12 days after my counter offer, he did not counter again and instead terminated the contract. I felt a bit helpless through that whole time period.