Putting a Team together

[Yusuf Mathai]

So this is my first foray into tapping into the collective wisdom of bigger pockets.

I am just starting out in real estate, and this will be my chosen vehicle towards financial independence. I do have a day job that I love and plan on doing this for a long time to come, but I feel that real estate will allow me to continue doing what I love. 

Over the past year I have tried to do a number of real estate deals, which have not panned out. I have learned a lot. However the biggest lesson for me has been figuring out my investor identity. I have a day job that takes up a lot of my time. Because of that it is difficult to allocate time towards projects like fixes or flips. Also looking for properties requires time that I choose to allocate towards my day job (and getting better at my day job). 

As such I have decided that the only way I can do this business is by first and foremost putting a team in place that will help me achieve my investing goals.

Such a team I am sure has a lot of moving parts. My question (and I know this is very very general) is where do I start with building this team, and who are the most critical members to have in this team.

Thanks in advance to the bigger pockets users who I see helping others on a daily basis

[Eric Fernwood]

Hello @Yusuf Mathai ,

You have learned a lot. Too many new investors decide to do everything by themselves and they end up losing a lot of money, time and effort. Your decision on putting together a team is absolutely the way to go. Before I continue, know that I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. However, what I will explain in this post should be relevant anywhere you choose to invest.

The only way to accomplish anything is to have a clear definition of the end goal and to work backwards from there. In my opinion, your goal should be to consistently buy properties which generate a sustained positive cash flow and are located in areas likely to appreciate over time. Meeting these two goals is not easy. To achieve these two goals (which I will shorten to just "profitability & appreciation") requires a lot of correct decisions . I believe that it is almost impossible to do this on your own, especially if you are just starting. I work with a team and I've owned over 20 investment properties and now I work with investors every day. How do I consistently find the right properties for my clients? An experienced advisory team, proven processes and software I developed. Here is how my process works.

1. My analytic software analyzes thousands of properties and usually returns a very short list of potentially good properties. (usually <20)
2. I visit all properties and evaluate the area, the drive path from the property to the major job areas, the subdivision and the specific property. I also developed software for estimating the rehab cost so I know up front if the property is likely to meet the profitability & appreciation goal. If I think it is a good property, I take a walk through video and send it to my property manager, my partner and my client. If there is any maintenance issue that I do not know, I send it to the contractor I normally work with for his opinion. Unless all these team members agree that this is a good property, I do not proceed. Saying it another way, if one team member does not like the property we eliminate it from consideration. If everyone agrees we make an offer and if it is accepted (offers are based on ROI, not asking price so our hit ratio is low), the second phase of the evaluation starts; the due-diligence period.
3. As soon as the due-diligence period starts, the property manager and a property inspector examine the property. They each generate a rehab list. The list from the property inspector primarily focuses on defects (defective water heater, etc) and the list from the property manager primarily focuses on cosmetic issues (property flow, paint colors, etc.). I combine the lists and my contractor meets me at the property and we go through all the items and he provides me a cost and time estimate. With an estimate of the total rehab cost in hand, we re-run the profitability calculations and if it still meets the profitability & appreciation goal we proceed with the purchase.
4. Once the property closes I work with the contractor and the property manager to get the property market ready as quickly as possible. I also put together a set of marketing photos since photos are what sell the property to potential tenants. Below is a diagram of our process.

Now that I have explained our process, below is the role of each player. Note that the following is a general case which should apply anywhere, not my specific case (as I outlined above).

The key team members:

Property Manger

The property manager is your key team member. Below is a diagram of what I expect from a property manager and below that a brief explanation of the items.

Local Market Knowledge

Most new investors I talk to think that the only function of a property manager is to collect the rent. Not true at all. They are the go-to person from start to finish. When you are first evaluating a potential investment area you need to know what works in that specific local. You will learn more by talking to 3 or 4 mid-sized property managers for 30 minutes than attending a dozen seminars. Why? Because the seminar information, while helpful and important, is general in nature. You need to know what works in a highly specific area. The property manager deals with tenants, renting units, repairs and a dozen other issues every day of the week in a specific area. They probably have no idea what would work 20 miles away but in their area they are the experts.

Property Evaluation

Once you find a property that appears to meet the profitability & appreciation criteria, send a video of the property to the property manager. What you are seeking from the property manager is their opinion on:

• Is this a rentable property? Recently, I found a property that looked good and had a reasonable rehab cost. I liked it, my partner liked it, the client liked it and the property manager rejected it. She stated that that specific floor plan just does not rent. I did not see it but I did some research and found the same floor plan for rent in a few areas in the city and they all took 30 to 45 days longer to rent than other properties in the same area. Listen to your property manager! I do. The last thing a property manager wants is another unrentable property to deal with.
• Estimated monthly rent and time to rent. I do my own calculations but I want the property manager's independent opinion. Most times we are pretty close but occasionally we are not. And, it is the times when we are not close that is the most beneficial to me and my clients.

Due Diligence

Until the property manager and the property Inspector walk the property and provide rehab lists, I only have a guess as to the rehab costs. As I stated earlier, the property manager's list and the property inspector's list are very different. We re-calculate profitability with the total estimated rehab costs before we decide to proceed with the purchase.

After Close of Escrow

While I can find what should be profitable properties for my clients, only the property manager can make them profitable. It starts with marketing the property through multiple channels and having dedicated people to show and promote the rentals. I will not elaborate further on this but this is critical.

A rigorous tenant screening process. The process must include:

• Financial - Note that a high credit score alone does not indicate a good tenant. And, a low credit score might not indicate a bad tenant. For example, a recent applicant had a high 500's credit score. When the property manager looked at the details she saw that there were medical collections. It turned out that the daughter got sick and needed a lot of care. The money they owed was way over what they could hope to pay and they lost their home. If you removed the medical collections and the foreclosure, they had a low 800's score. So, the property manager needs to really look at the numbers.
• Criminal - If the applicant appears on the nation, state, county, or city's sex offender list, has court orders on back alimony or child support, reject them.
• Past landlord reference - You can usually ignore their current landlord. If they are bad tenants, the current landlord will give them a positive reference just to get them out of their property. However, prior landlords are likely to provide solid information. Especially if you were to ask them, "Would like the tenant back?"

Realtor

While the property manager knows "what" will rent, the Realtor knows "why" people select a property because they get feedback from buyers every time they show a property. And, the reasons people choose to buy a property are the same reasons people will choose to rent a property. This kind of knowledge comes from experience; showing thousands of properties and closing hundreds of deals. I could add a lot more here but I will summarize it with the following points that the Realtor on your team must provide:

• Property Access - You need to get into the properties so you can see them in a timely manner. Good deals tend to go fast. Also, you need to see both properties for sale and similar properties for rent. You want to see the rental properties so you understand your competition. Look for the best competition in your rent range, prospective tenants will.
• Buyer View - They know which floor plans, configurations and characteristics are desirable and which ones are not. If homeowners are reticent to buy a property, renters will not want it either.
• Information - You need sales and rental comp data as well as market trends.
• Patience - They must understand that you are not going to buy the first property you see. This is difficult for many Realtors. Also, the Realtor needs to understand that you are not looking for a "home". You are looking for an investment property that must meet very specific criteria in addition to being a property that future buyers would find desirable.

Property Inspector

A good property inspector can save you a fortune by finding problems during the due-diligence period. Here is a recent example: I found a property, everything looked good, everyone approved it and we entered into contract. The property inspector discovered that the large back patio had a negative slope; it sloped towards the house. Sooner or later a big rain would come from the right direction and the house will be flooded. The insurance company adjustor would discover the negative sloped patio and promptly cancel the policy and no benefit would have been paid.

In summary, I believe that if you want to consistently buy properties that are profitable and likely to appreciate you need a good team. The minimum members of that team are:

• Property manager
• Realtor
• Property inspector

Yusuf, I hope the above helps to get you started. Feel free to contact me with questions.

Best regards,

Eric Fernwood