Being #Basic - Deal 3

Summer of 2015 had us quickly marching down our 20-year plan as we held two row-homes in VA Beach and had saved enough for a third. Our mentor who had helped guide us through purchasing #2 was also game to participate on #3 and we felt well prepared to move forward. However, as many others were finding, the local market had warmed significantly resulting in upward pressure on prices. If we had learned anything by this point, it was the value of sticking to our numbers. Poised for action, we walked many homes and made a few offers, but each seemed to be closing for amounts beyond our comfort level. It was during this period that we had to reinforce our mantra to set our metrics first on the cash-flow and cash-on-cash ROI to determine our max offer. By establishing the metrics and committing ourselves to not offering on houses purely for the “win” we ensured enough margin existed for future challenges (i.e. rents dropping). VA Beach has been cited as an area of abnormally high rents when compared to incomes so we were, and are, sensitive to the ability of the market to sustain current rental rates. We had recognized the value of being #basic in our analysis, sticking to metrics, and attempting to remove or reduce the influence of emotion.

How did we determine some of these metrics? The majority of the math we do are factors of the monthly rental rate. Therefore determining the listing rental rate is a vital early step to decide whether to continue the pursuit of a property. We use readily available tools like home search websites (Zillow, Trulia, craigslist, etc.) to help see what was on the market for rent and pricing, and had additional insight from our mentor. We also know we’re in a military town and using the Basic Allowance for Housing (BAH) calculator the US Government publishes. The BAH calculator informs us what Uncle Sam is paying military members based on locality for housing allowance. While we aren’t targeting a set rank, we know most who rent are at least an E-5 and we range up to O-3. You’ll notice a wide spread between those figures for those military ranks. We use those as the boundaries of the potential range. Also, we typically aim to list under this allowance as most military members attempt to obtain housing and cover utilities within their monthly BAH. That isn’t the point of BAH, but people are understandably are trying to get the most for their money, and being a military family, we know our audience.

With these data sources in mind, we then decrement the rent around 10%, or $100, and use this figure as our anticipated rent income. Additionally, one lesson we’ve learned is that many REO properties in townhouses or small developments probably have a HOA, but it’s not always listed as banks try to get property to market quickly. Based on experience we include an estimate for a HOA fee while we determine if we’re going to offer on the property or not. We confirm the HOA’s existence as we prep the offer, but we don’t let a small missing detail slow our initial analysis. This is the game of rapid analysis. If you want to get a contract you have to make a lot of offers and to make many offers you have to analyze a lot of properties. You have to be able to analyze quickly and in the absence of information you have to make assumptions. We err on the side of caution (i.e. always including a HOA when not listed) which means our figures don’t deviate much when we find out later the HOA is $10/month more than we estimated or improve because there is no HOA.

Back to the search for property #3, since the market had warmed we had made at least five or six offers and had been out-bid each time. But our agent was dedicated and knowledgeable (key for any investor is the right agent if you are using one), of our criteria and found a unit the same day as listing. Upon walking it she relayed to us an estimate on required repairs and we ran our numbers. We figured the property needed $10K of rehab – this was also to be the first time that we would need to do major work of any sort. Our formulas showed that we could work with those figures since this property was in a better neighborhood and could demand a higher rent. Balancing the scales, we sacrificed some cash-on-cash returns for cash-flow, but not below our metric.

Our renovation budget was informed from our two previous units and a couple of quotes from vendors we had used before for smaller items. We self-filled the pseudo-project manager role by doing things like procuring the dumpster and materials while reducing labor needs through DIY yard clean-up, fence repair, material delivery, and demolition work on carpet and kitchen cabinets. This allowed us to stay within our budget. We had included an additional 10% of the budget as a line item for contingencies.

With sound fundamentals, a good neighborhood, and sticking to our refined metrics, this property has turned out to be one of our best performers. It taught us further lessons in renovation, allowing us to become more comfortable in doing extensive work as we continue to grow our portfolio. We spent our budget well on things that matter to renters, nice cabinets, countertops, carpet, and neutral yet appealing interior paint that built a home feeling that matches the neighborhood. The most critical component was fundamentally understanding, and then sticking to, our numbers. Without being #basic we were going to be in #trouble.

While this blog may seem trivial in its simplicity, one of our greatest lessons learned is that sticking to the basics, and ultimately your numbers, is key to success. For once, being #basic is a wonderful thing.