Rentals: The better way

[Tom Olson]

Recently, I sat down with an investor and went through everything he would have to do to be an active buyer of rental properties. Starting from the beginning, we went through the whole process and outlined exactly how much he would have to do to become successful with just one house. The following is the list…

You have to: learn about managing rentals, learn about contractors, learn about building codes, build relationships with realtors, build relationships with wholesalers, and educate yourself on where to buy and were not to buy. At that point, you have to look at houses, submit offers on houses, deal with realtors, make sure you comply with government regulations, estimate repairs, find comparable properties, fill out contracts, deal with counter-offers, deal with asset managers, and at the end of all of that, you might get one out of every one hundred properties under contract. After getting a house under contract, you have to get the house to closing, manage the title company, make sure you are getting a clear title, make sure there are no judgments on your property, make sure there are no liens on your property, and deal with city regulations. After that, you fix up the property, manage the rehab, find the contractors, learn enough about construction to vet the contractors, and manage the contractors. Assuming you make it through that part of the project, you then need to market for tenants, screen applicants, show the property to applicants, run credit on the applicants, call references for the applicants, run background checks on each applicant, Learn enough about leases to create one for the property, hire an attorney to proof the lease, and then meet with the tenant sign them up.After you placed a tenant, you need to collect the rent each month, notify them when they are late, take their phone calls all all hours of the day, deal with payment plans, learn about eviction policies, and evict tenants that will not pay. Finally, when a tenant moves out, the process starts over again with the rehab.

Needless to say, after telling him all of this, he wasn’t nearly as excited about this as when he walked into my office. I call all this mess brain damage. It’s like hitting your head against a wall and hoping to get somewhere. Sometimes it works out for you, but you always end up with a headache.

There is good news, however. It’s not a trick or a new-found secret, it’s likely not anything you haven't considered yourself, it’s not revolutionary, it’s just the easiest way for you to make great returns without actively having to manage everything. This plan doesn’t have a fancy name, doesn’t have a flashy marketing plan, and it doesn’t have a cool logo. All it has is the potential to make you incredible returns and save you hundreds of hours of work.

Here’s how: I will help you buy a house at a wholesale cash price, which gets you the absolute best deal. Once you own the house, my construction team will manage the rehab, updating you as the project goes along. The goal is for you to be all in under 75%.

You buy this house in Hammond for $42,000. Repairs are estimated at $22,000, and you pay the $1,400 closing costs. Your money for repairs is escrowed at the title company. This helps the deferred refi work and help you to be able to refinance quicker. We rehab the property, which usually takes 3-6 weeks. For sake of the example, let’s say it takes five. Our contractors guarantee all work performed for a year, meaning you shouldn’t have maintenance costs for the first year.

Repairs are based on a scope of work, and while there is always the risk of something unexpected popping up, we are usually within 10% of the actual cost. While buying wholesale means you are assuming all the risk, the fact that we are vetting the house before you look at it greatly decreases that risk.

This particular house with it’s proximity to Chicago will pull at least $1,100 in rent. The utility cost for the time period during which the house is being rehabbed are paid out of the escrow held at the title company. Typical vacancy for this area is about 3 weeks, so within two months of owning the house, chances are you will have a tenant.

After getting a tenant in the house, the next step is to refinance.

As you can see, after refinancing this house for 70% of the ARV, you have only put $370 into the purchase of this home. At this point, your $822 of cash flow covers your mortgage, leaving you with $477 of monthly cash flow. Taken out over the following 10 months, one year after the purchase you will have netted $4,400.35, plus the equity in the house.

One of the most important things in an investment that carries risk is how quickly you can get your original investment back. Once that happens, your returns are actually infinity!

And that, my friends, is the best way to buy rentals!