Jon Klaus: So, one caveat: we rent Section 8, which gives us a little higher rent than we'd otherwise get. We LOVE Section 8 (lots hate it), but those reasons are probably for another thread. Our average rent to value ratio is about 1.2%. Good representative property would be one of ours which is a rehabbed 1960s-era 1300sq/ft 4BR/2BA in 75040 (probably the best zip code for rent/value) that we get $1330/month for, and I've only put about $500-1000 servicing the property in the last two-three years. Our Mesquite properties are doing around 1.1%. Now, we never buy off MLS/retail, so our rent to COST ratio is actually much better, closer to 1.3 - 1.4% or better.
We find that the $100 - $125k range (market value) yields the best ratios. Cheaper than that, your tenant and property quality drop off considerably and expenses go up. More expensive than that, the rent/value ratio starts to drop off. Either way, cap rates get squeezed. So, that's why we've chosen our niche. Steven Loveless, properties with those criteria are few and far between, ESPECIALLY in Garland, and we're also wanting an equity play from these, so we never buy anything on MLS. Actually, our first two properties were MLS, and they were ok for cash flow but not initial equity. Fortunately, the market has been good for appreciation, so we've got good equity now, but we now follow the 80% rule, which is that we never buy something where cost of purchase plus rehab is any more than 80% of after-rehab value (ARV). We just purchased and did nominal rehab on a property in Mesquite for 76% ARV. Our purchase price was at $65/sq foot.
Thus, we purchase from wholesalers. Good contacts to make would be Randy Quay with Homewood Properties or any of the guys at Homevestors, NetWorth Realty, or New Western Acquisitions. These are some of the biggest wholesalers in D/FW, so they get the volume but there's also lots of competition. Some of their deals aren't great, but many are. One of my best deals ever was with New Western, so don't write them off just because they're big operators. I've also made contact with wholesalers listed here on BP as well as smaller mom-and-pop wholesalers I've met at investment club meetings. They don't send as many deals, but there isn't as much competition and their margins tend to be less.
Before you jump into distressed properties, be sure you've got a good contractor/rehab team lined up. All of these properties will need to be purchased for cash. Don't let that scare you - you can use a hard money loan to satisfy that requirement, but I personally use private money. Don't be afraid to talk to family and friends about the opportunity to partner with you in real estate! A 10% return in today's market will be very attractive to a lot of people, and you could offer that and still save a bundle vs. a hard money loan. Put the property up as collateral, just like with a mortgage/deed of trust, and their investment is protected. After 6 months (or earlier if you can line up conventional financing with a local/regional bank that doesn't sell its loans to Fanny/Freddie), you can cash out with a conventional loan that pays off your hard money/private loan and likely recover most of what you invested in the first place!
Wholesale is a step up and maybe not the way to go for first-timers, but there's a LOT more money to be made!
Lots of info, but hope it's helpful, Steven! This is a great resource - the BP podcast is great, as well as the Real Estate Guys podcast. I follow and recommend both heartily! Lots of topics covered in this post - search BP for any one of them and you'll learn a ton!!
Ryan
