All Forum Posts by: Faisal Sami

@Jay Hinrichs,, I almost dropped a significant amount of money in the very same GO Zone investment post Katrina. I am very glad I did not. The guy who was pitching the deal to me on the phone had some very pie in the sky numbers and a just walked away from that.

NO ONE has the best government tenants. They are all pretty much the same. My tenants are decent people,, but only after me and my team started screening them ourselves. When we had property managers do it, it was nightmare city. It comes down to management, relationships and how you run your business. I don't want to give the impression to the reader that EVERY business model in real estate will work everywhere all the time. It just simply can not be true. BUT with some due diligence, study of the market and screening of tenants it IS possible.

My market is not different. My team, my management, and the way we run our business is. I could run a similar business in other markets as well. The key is NOT the market although the market is an important factor. The key is how you run your business.

My last thought would be that even as a turn key landlord, get involved in your business. Hold your property manager accountable. And don't let months go by without knowing what is happening at your properties. ;)

I hate to say this but since I am in a tell all mood here it goes.

Some of the best properties to buy are turnkey carcasses. If you are lucky, these properties were rehabbed correctly, stripped down to the studs with new electric, plumbing, drywall, furnaces, water tank, and if VERY luck maybe even a roof(many times its just a junker that was lipstick on a pig, i.e. carpet paint). It's when this type of property goes south and starts to LOOK and SMELL very ugly after the tenants have moved out, is where there is opportunity. 

Many times the out of town landlord has no idea what was done to the property and what it is truly worth. It looks like a junker and a junker becomes a junker becomes a junker. Anytime my team finds one of these our pulse goes up a few beats. We make a reasonable offer and sometimes we get the deal.

But having come across several turn key carcasses, I can tell you it does not leave you with a good feeling to know that some young couple with a baby in California or an elderly person investing retirement funds bought into the turnkey dream and now only has what appears to be junk waste to show for it. The whole deal was set up wrong and now there is no one left to pick up the pieces except the professionals and real practitioners of real estate.

How do you prevent this from happening to YOU? You have to learn the game. You have to pay the price if you are going to become a portfolio investor and learn one property at a time. The rewards are well worth it.

All the best !

Faisal 

@Mike D'Arrigo,, I have only found the maintenance on lower end properties to be a higher percentage of rent when I used property managers. All the downside risk was from the property management companies themselves manufacturing their own repairs. Its an area that is rife with abuse and most landlords who get into these properties are afraid to go to their own properties (hence the need for a white knight property manager) but got suckered into it because of the glossy numbers(perhaps from a turnkey company?). I have government tenants and the amount I spend on repairs on their properties is VERY low as a percentage of the rents compared to our higher end rentals.

@Michael McCormack,, if you are talking cashflow,,I am a big fan of government tenants. The first and most pressing issue a landlord needs to deal with when considering any rental income property is how is the venture going to be funded? I like section 8 tenants because it allows me to reverse engineer my whole investment. I start with the going market rents in the area I am looking at. Section 8 will have a table for your local area and where they payment standards fall, usually between 90% to 110% of going market rents. They in fact have people who sit in these bureaucracies who JOB it is to figure out what rental offers will be made to landlords. I met with the local head of my section 8 agency who does this job and I have her email in my favorites contact list.

Anyway, lets say you will get $1000 in rent for a single family home in your target area. Minus about 50% in costs(debt service,taxes,insurance,repairs) for a net cashflow of $500/month. For that much cashflow, I am looking at buying at $30or $40k, with another $15k in rehab for a total cost of $45k to $55k acquisition. Works the number in your area. it may not work if property values are sky high, but then I have found that very high end rentals can actually hurt you big time when there are big repairs.

My bottom line: I like doing the cashflow game with lower end rentals and guaranteed government rent. And I let my team handle it as I sure do NOT use a property manager. If you are adding a property manager to the mix you might as well add another 30% or more in downside risk to your monthly cashflow.

my two cents

All the best!

Faisal

@Mike D'Arrigo,, I appreciate the feedback

I have a house that generates $1000/month in cashflow in a "high end" area. It cost 2 times as much as two duplexes I own that generate twice that much in rental income. The maintenance costs on the higher end house are actually more than the two duplexes combined because one its a larger house, two the finishings in the house are much more expensive and three things need to be fixed to the standard of a more demanding tenant. Pound for pound the duplexes have demonstrated better return on capital over the years.

I used to believe the thinking that just because a property is cheaper that by default it will cost more in maintenance and repairs. This maxim was only true for me when I used property management companies that would literally nickel and dime me for a screw out of place. The absolute best was when I got a statement back from a property management company that showed they charged $25/service call with 10 service calls to the same property for an ongoing repair that cost $95. What a racket!

It was only after taking  control of my own properties and actually becoming a practitioner of investment real estate that I was able to significantly reduce the costs that property managers were unloading on me. I think thats where the real downside risk is in lower end properties, i.e. not the properties themselves but owners abdicating their roles as leaders/owners to third party operators who have free willy access to the cash til to do whatever they want and justify it with an expense statement at the end of the month that shows all the "work" they have done. 

I don't mean to harp on property managers too much(yes I do),, there is an occasional manager out there that is good but my experience has taught me that they are in the minority. There is simply too much room for abuse.

I almost exclusively rent to government tenants. This means section 8 and the VA. We screen the tenants heavily and have a system in place for doing this. Once done and in place, we have been able to significantly reduce vacancies/turnover. I have section 8 tenants that have been with me for years. They in fact are my best tenants and we are very good to them.

You do have to train the tenants in how to use the property. We don't allow any pets, no smoking and no live in boyfriends. Many properties we look at buying are cases where there has been systematic neglect and neither the property manager nor the owner is aware that the nut jobs are running the asylum. Some basic orientation to policies and procedures and strict governance go a very long way in keeping the properties running well. There is nothing like having an employee spend 5 minutes at each property every month take pictures of the back, front, sides, all bathrooms, all rooms, and common areas,, and then to sit down with the tenant every now and then to review the conditions of the premises. We also charge tenants for damages they do. It could be as small as a $5 charge but they learn quickly that if they cause damage to the property they will be paying. And because they are government tenants, we have additional leverage with their case workers at section 8. Most tenants on the section 8 program won their voucher in a lottery and are loathe to lose that voucher. When you tell them upfront you are very serious about these issues and have zero tolerance policies, they play ball real quick.

It sounds really hard on paper and when talk about it with people, but really for me its a matter of issuing some daily commands via whatsapp to my team on the ground and some purpose oriented phone calls to tenants and my employees.

Do I think absolutely "anyone" can do this? Absolutely not. The vast majority are destined to fail. But that is true with most risk based endeavors. But someone willing to learn a bit, take some lumps, and rebound from those experiences is well positioned to succeed IF THEY STICK WITH IT.

Anyway, my two cents. I could go on and on.

All the best !

Faisal

@Joel Owens,,, agree with most of what you said. I would add that real estate investing is simply not for everyone. It does require skills and persistence. 

The turn key companies would have one believe it is for everyone. Some turn key refugees will come away from the experience swimming. Others will simply sink. 

Everyone has inherent skills. The key is to figure out what those skills are and what you are good at and run with that. 

Turnkey seems like an easy route that "everyone" can take to become real estate moguls. I have seen people walk away from the turnkey experience for the better, more savvy, more grizzled and based in reality. Others simply pack up and go home. I believe for the former there is plenty of opportunity. The latter should have never gotten in the game to begin with.

@Jay Hinrichs,, very interesting. I especially like how you phrased "the mortality rate for those folks is high." Very true. From time to time I come across turn key carcass properties from investors who at one point thought a totally passive real estate investment was a good idea--only to watch their entire investment tank and lose some more. 

Very intrigued by timber ground in the Northwest. Not my area of expertise but very interesting

@Alex Craig,, in the lower end rentals a toilet repair is usually a toilet repair is usually a toilet repair. In our higher end rentals we have had some toilet repairs that have turned into bathroom remodeling jobs. The wax ring had gone bad which led to rotting of the wood beneath the floor and we had to rip out the a fair amount of the tile only to discover more rot and the sink had to be taken out and replaced. Tenants in the higher end rentals tend not to complain as much and may not even realize that a small problem is getting bigger. 

When a tenant in a higher end rental complains about a problem we tend to take it very seriously and repair it to the 9's to maintain the high end nature of the home.

@Jay Hinrichs,, thank you for the informative response. The 350 house buy sounds amazing. 

I get people from time to time asking me to set them up with a "turn key" rental and even make offers on my properties. I have resisted so far if I think the investor wants a totally passive income source. I just don't think it would be doing them a service to set them up to fail like that. I have only sold to investors who I feel are going to take an active role in managing their properties and are willing to follow systems and management for the tenants.

The answer to the question of "why buy rentals at all" is the same answer to any of the other investments you mention: to make money.

The true wealth in real estate investing is to buy and hold for the long term. That has been said ad nauseum by many. I would submit that buying and holding positive cash flowing rentals actually represent LESS risk to an investor as they are continually DECREASING their cost basis in the investment and will eventually represent a great stream of income once the debt is paid off or all the capital has returned home. And yes I do have rental properties where I have spent less than $2500 in maintenance over the years. It does happen.

Waiting on or betting on equity increases over time can and does happen. For me personally I have not been able to make that model work, but heck I am willing to learn that too.

 Buying notes is a unique niche business. I deal with notes all the time. What do you do when a note goes bad? In Ohio where I invest, you can do a land contract but if the buyer has paid 20% or more in equity into the note or has lived in the property for 5 years or more you have to foreclose on the property instead of evict the tenant. A foreclosure process is a very lengthy legal process. Buying mortgages also leaves you in a similar situation if things go south and from time to time Murphy's law WILL kick in.

My best rentals in the midwest are cash flow duplexes which generate reams of cash year over year and don't require a whole lot in repairs. Because I govern the tenants and have systems and processes in place to address small problems before they become big ones these properties do really well. 

Conventional wisdom is that this is some sort of elaborate rocket science and these properties require ICU level care..... but that simply is not the case. 

Some basic common sense, a willingness to learn and some persistence are all that are needed. And by the way, I am NOT an onsite landlord. I don't even live in the city I invest in. My model is distance landlording and its been working. I do go to the properties once every three months for two days and do walk throughs with my employee and contractor through every property.

Most people who enter into real estate investing are entering into a business that DOES require the active involvement of the owner if they hope to make money. I really do not believe there is such as thing as a PASSIVE real estate investment if you are going to own and attempt to profit from rental investment income property. You may be better off investing in a mutual fund or REIT.

I have yet to see consistent net CAP rates in excess of 10% on turnkey rentals managed by a property manager. But again, I am open to learning what people are doing that is new and effective. That is why I am here.

All the best!

Faisal

@Jay Hinrichs, what you are saying is true. You CAN buy in higher and higher asset classes however this significantly diminishes cashflow. 

And it does not mitigate downside risk. A $30 toilet repair in the hood could run into the several hundred dollars uptown. So with a $200k property cash flowing at an anemic $200/month, any number of small repairs like a furnace repair, garage door not working properly, or a sprinkler issue could wipe this out and more in a high end property.

While it sounds logical to buy more expensive properties and get higher class tenants, from the investors prospective this does not bode well if the higher class property remains an alligator over time.

I own "higher class" rentals as well. The issues are different and MUCH more expensive. It's more of an appreciation game with higher class rentals. Buy now, break even for 10 years and sell for maybe a $50k profit in 10 to 15 years. Its a very long investment horizon. I think from a purely investment point of view its somewhat counterintuitive but true to think that a well managed portfolio of lower class rentals will outperform the higher end rentals over time.

I think the thinking that just because someone is poor means they will destroy property is not entirely true. Yes there is risk there. But it can be managed. There are tools and ways to do this.