[Dec/2022-Archive-Feb/2022 | RE] Building a rental property empire – Mark Ferguson

Chap1

  • DONE

Chap2

  • Current goal : >15% CoC
  • Don’t compare just real estate appreciation against stock market
  • Rental property mortgage interest tax-deductable
  • Typical number: 100K PP, 20% down, repair 5-15K

Chap3

  • Fact
    • For negative cash flow, rent have to drop 20~40%
  • Strategy: SFH, age<50
    • House whose age>100 has all issues that could wipe out all equity

Chap4 Underwrite cashflow

  • Underwrite cash-flow
    • Vacancy
      • SFH 5%
      • Multi 10%
      • College rental 10%
      • Vary on location
    • Maintenance
      • Repair all rental before rent out
      • Age is big factor for big item expense
      • Tenant’s care
      • Table
        • Age < 10
          • Good system – 5% gross rent
          • Avg System – 10%
          • Need work system – 15%
        • Age between 10~50
          • Good system – 10%
          • Avg System – 15%
          • Need work system – 20%
        • Age > 50
          • Good system – 15%
          • Avg system – 20%
          • Need work system 25%
        • 30% for house 100 years old, outdated system with no recent remodel
  • Results can vary wildly vs. 50% rule
    • Colorado has extremely low vacancy
    • Maintenance
      • Multifamily more wear&tear, college rental even more wear & tear
  • 2%/1% rules?
    • 2% – very very hard to find
  • Appreciation
    • Volatility
      • High volatility: California have more appreciation when market good (more volatility)
      • Stable volatiliy: Dallas
    • Appreciation factors:
      • Building supplies – cost of new construction
    • Relatively easy predict which housing market will not appreciate
      • No/Negative growth
      • Midwest no appreciation
  • Cashflow
    • Cashflow target 
      • Author want $500 / each property, PP $80K-140K
      • Author want > 15% CoC, ideally 20%

Chap5 What type of property

  • Multi vs. Single
  • College rental
    • Higher rent, but more management / maintainence
    • Zoning need correct (legal restriction on max X unrelated people living in same unit)
    • More likely college renters destroy a house
    • Rent during specific time – if not rented out, sit a year
  • Condo / Townhome
    • HOA
    • Special Assessment! – example $30K!
      • Flip risky!
    • Condo / Townhouse first to lose value in down, last to increase in up. Just appreciate less than SFH
    • FHA rules
      • If investor own more than 50% – FHA not lending 
  • Buying Cheap Rentals vs. Medium-ish priced rentals
    • Author prefer slightly below median price rentals
      • Median $200K – PP $80~140K, ARV 150-200K
      • Whereas cheap rental 30-50K
    • Return different for cheap rentals
      • Rent-to-value is higher for cheap rentals, but cashflow maybe not
    • Detail study
      • Age – cheaper property tend to be older (more maintainance)
      • More stable tenant ins normal property, eviction is costly for cheaper
    • Disadvantages of cheap rentals
      • Higher turnover – less than ideal tenants
      • More maintenance – older house
      • Less appreciation
      • Earn less equity when you buy below market value (per house)
      • Harder to get a loan (i.e. for 30K house)
    • Advantages
      • Smaller houses (makes maintainance cost less)
      • Can buy w\ cash
      • Less capital at risk LOL 
  • Vacation Rentals
    • PM cost – 20~50% of the rent!
    • STR – vacant more frequently
    • Active management needed
    • Beachfront condo’s HOA can be very high
    • Ocean front property – flood zone! Big flood insurance
    • Misc expenses
      • Credit card fee
      • Travel agents (?airbnb?)
  • Commercial Real Estate
    • More complex
    • Cap-Rate ~ NOI, cap-rate tells about a neighborhood
    • Cap-rate lower for stable tenant

Chap6

  • ARV
    • Adjustment
  • REO
  • HUD
    • from FHA
    • FHA insurable vs. FHA uninsurable
      • FHA insurable – only owner-occupant, nonprofit, gov agency can bid on first 15-day
    • Investor don’t pretend to bid as owner-occupant
    • Colorado, usually >90%
    • Inspection fail cannot cover EM
  • Short-sale
  • MLS
    • Agent send offer fast via Docusign
    • Indication of motivation
      • Aged listing : > 60 day
      • Comments
      • Fast price change
      • Back on market
    • Low price – usually 70 to 80% ARV
  • Auction
    • Foreclosure is fast and have little room for DD
    • Foreclosure auction vs. Online REO
      • Online auction
        • HUBZU, Homesearch.com, Auction.com, WilliamsandWilliams.com, HudsonandMarshall.com, Xome.com,
  • Wholesaler
  • Off-market
    • D4D / Direct Mail / Networking / Bandit Sign / Website / FSBO
    • Direct mail
      • At least five cards
  • Investor-friendly agent
    • Agent have backup when unavailable?

Chap7 Financing

  • Repair – minimal repair $5K for author
  • Portfolio Lender
    • Ask everyone you know
  • What Q to ask for banks
    • Commercial-loan department
    • Do you sell your loans/keep in-house
    • Investors with 4+ mortgage refi?
    • What terms? ARM / 15-30 fixed / balloon?
    • Interest rate / initial costs
    • LTV for purchase / refi
    • Seasoning requirements?
  • Nationwide portfolio lender
  • LLC?
    • One LLC per house
    • have a portfolio lender who will lend to an LLC
    • If you don’t have a portfolio lender like that, risk of loan called due and not able to refi
  • Turnkey company have “low down (5%) high interest rate” program
    • What’s the purpose in view of turnkey company? High interest? Waiting for buyer’s Bank Refi?

Chap8 Less money down

  • Less Money Down
  • Down payment assistance program (Colorado – CHFA)
  • House hacking
  • Hard / Private money

Chap9 Repair

  • Paint Color – biege + gray (widest audience liked) and carpet color
  • How much to update/upgrade – especially kitchen and bath
    • Avoid kitchen upgrade if possible especially in rental – stainless steel appliances
  • General rule of thumb – never put an addition because land isn’t valuable enough in his area
  • Cost
    • Painting – 1.5 ~ 2.5 per sqft, $2500 for 1500 sqft
      • Paint Exerior cost more, $3 / sqft
    • Floor replacement
      • Install hardware floor cost 3x as carpet
      • Replace carpet for 1500 sqft house – 3 to 5K
      • Vinyl / tile in kitchen/bath another 0.5-1K
      • Refinish hardwood less expensive than install new carpet, $2K for 1500 sqft house
    • Fixture replacement – $1~1.5K
    • Appliance replacement – stove $500-600, dishwasher $300, microwave $250. Don’t buy fridge for flip but buy for rental. 
    • Cosmetic update – above four category for a 1500 sqft house $9500
      • New paint $2500, New floor covering $4500, new fixtures $1200, new appliances $1300
    • Other repairs
      • Kitchen – he can do it under $5K including labor
      • Bath – Full gut, $3K, replace vanity/toilet/bath less than $1k
      • Roof – $6K
      • Electrical – $5K major rewire while several hundred for minor repair
      • Plumbing – $5K for replumb the entire house. Minor is very cheap
      • Sewer – sewer line replacement – $3-10K
      • Foundation – $10K+
      • Windows – $300 each
      • Doors – $100-150 each
      • Stucco /siding – $8500 stucco for a 1250 sqft house, less for siding + paint
      • Drywall : 500 sqft for $3K
      • Furnace / Hot Water Heater – $7K furnace including all new vents, replacing furnace cost $2.5K, hot water heater $800
  • Recent flip – 18K for cosmetic + minor electric work + some drywall
  • Another flip – $50K+ for new plumbing/electric/paint/siding/windows/doors/drywall/bath/kitchen/floors/fixture/trim etc.
  • Find great GC
    • Don’t rely solely on recommendations
    • Manage GC – communication and oversight is key to performance
    • Write everything down / need written bid / don’t pre-pay
    • Phone Interview GC – hourly rate, team size, how long it takes for an avg job, how busy they are, what other people they’re working with
    • Always get multiple bids
      • If they cannot send a bid, they cannot do a job LOL
      • Contractor hourly rate $20-100
        • Best contractor is not the cheapest but also not the most expensive
        • Usually end up $40/hr
        • Handyman $20/hr not as skilled but labor
    • Find GC online 
      • Vineyard services – do REO maintenance nationwide
      • Angie’s List 
      • Also Thumbtack / Home Advisors
    • Constant contact – on schedule? on budget?
  • Holding cost – If hard money interest=15%, for 75K loan, $31/day
  • GC vs. Subcontractor
    • Subcontractor jobs
      • HVAC / Electric / Plumbing / Roof / Landscape 
    • Contractor : non-specialized 

Chap10 Manage rental

  • Property manager : good vs. bad
  • Property Manager interview:
    • Calculate Vacancy Rate via their vacant listing, ask how many units they manage in interview
    • Call PM as renter – ask common questions (how old the house is, how many sqft it has, how many parking space included, what type of heating it has)
      • PM that don’t call back lol
    • How well property maintained – drive-by
    • BBB checking – at least need to respond
    • Do they own rental / what percentage of portfolio is their own rental? – Conflict of interest of renting out first

Chap11 Exit Strategy

  • Cost of selling a house – 7~10% of selling price
  • Fix & Flip cannot 1031 unless criteria met
    • Rented out at least one year after fixed
    • If IRS think you’re professional house flipper trying to cheat IRS out of money -> in trouble

Chap12

  • Turnkey 10-15%

Chap13

Chap14 Commercial RE

  • Very different – including leasing
  • Contractor expensive!

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