All Forum Posts by: Erik W.

Hi @Clyde Henderson, and welcome to BP!

First, congrats on "finding" the world of real estate investing at such an early age and begin interested in taking actions.  There is a wealth of resources at your fingertips both here on BP and also on countless websites.  Tons of YouTube videos.  My thoughts on those is they are a mixed bag.  BP is better than most, but remember that a lot of the comments posted here are by people who may know very little more than you do, and what's worse there's no guarantee that what they know is accurate.

I recommend a few books: John Schaub's Building Wealth One House at a Time; Leigh Robinson's Landlording; and "Fixer" Jay DeCima's Start Small, Profit Big in Real Estate.  Those books are not about MF, but they contain timeless principles.  Once you've gotten past those, I recommend How to Buy Real Estate for at Least 20% Below Market Value by John T. Reed.  This one will be harder to find since he self-publishes.  You might luck out and get a used copy on Amazon, but otherwise you'll have to go to his website and order it directly from johntreed.com.  He's a no-nonsense, no B.S., "no fluff, all stuff" real estate investor.  In short, he's not a hype-man, which too often a lot of real estate gurus are: tons of hype, but few actionable steps.  He also won't try to soak you for tens of thousands of dollars attending seminars and "coaching" events.  Watch out for those.  The most I've ever paid for a seminar is $300, and I'm a fairly successful investor.

Education is important, just be sure the knowledge is worth it.  Find people in your areas who have put those principles into actions.

Next step, how "deep" do you want to get into this?  Is this going to be a full-time gig, or a part-time supplement while you go to school and/or start a career in something else?  I recommend starting part time, unless you want to dive right in and be an assistant to someone who is experienced.  For example, you could volunteer as grunt labor / "go-fer" for a local experienced investor in exchange for him / her teaching you the ropes.  Do not discount this kind of "apprenticeship" model.  Just be sure you are getting value in exchange for your labor.

Final thought for now: Be CAREFUL of no money down.  Leverage is an amazing concepts in real estate, but that sword cuts both ways.  It can make you rich, or it can bankrupt you.  Odds are, starting at 19 years old and with no cash reserves, you don't want to go that route right away unless you find a strategy where you can toss the keys back with no recourse if you get into trouble.  Something like a Lease/Options or Contract for Deed.  With those strategies, you don't get sued into oblivion if you can't pay the bills as long as you give back the property if the deal doesn't work out.  Real estate is a reputation-based business: if you don't meet your obligations, people will remember that.  Pay your bills and keep your promises, even if that means you live off ramen noodles, spaghetti, and baby carrots for weeks at a time.  Remember: you're in "college" right now for real estate investing: live like a broke college student.  

Hope that helps.  Best wishes!

@Nathan Hann,

Step 1: Be honest, always.  Never embellish or oversell.  In fact, it's often good to underpromise and overdeliver.  They are your family and friends, yes, but that doesn't mean they want to see projects coming in 10% over budget and returns that were hinted at being in the 15% range coming in at the 5% range.

Step 2: Build your resume.  For the first deal, it would be better for you to pitch someone with whom you don't yet have a relationship.  They can give you honest, candid feedback about what works and what doesn't.  Friends and family often sugar coat or don't feel like they can give you a straight answer, especially if they are reluctant.  Prove yourself, then you can show examples of success rather than untried projections.

Step 3: You're a salesman now.  Think like a salesman.  Salesmen who have a "pitch" often lose the sale.  Rather, you need to spend time asking questions and drawing out their levels of interest.  Some might be interested but unqualified.  Some might be qualified but uninterested.

Example: 

You: Hey Uncle Joe, good to see you again.  How's retirement?

Uncle Joe: Oh you know, lots of golf, but not much else.  Kind of wondering about how the economic recovery is going to come around after all this Covid stuff settles down.

You: Yeah, I've been thinking about that too.  We've been looking at houses as a way to help weather the uncertain times and are considering real estate investing.  What have you noticed about housing in this area?

UJ: Yeah, prices are going nuts right now.  Our house went up 15% in the last three months.

You: It would be awesome to get in on some of that, don't you think?

UJ: Well yeah, but I'm not wanting to be a land lord.

You: I know, it sounds like a lot of work.  What ways are you looking at diversifying your investments to create enough monthly income for you and Aunt Suzie?

And so on....create the open environment to talk about real estate, investing, income streams, etc.  Gauge the level of interest.  If he's inclined to chat for a bit, you can run your plans by him for getting other people interested and ask him what he thinks of them.  Who knows?  He might say, "We'd like a piece of that action."

Typically owner occupied MFs qualify for better financing. I'm assuming this is 4 units or less, in which case some lenders will give a fix-rate mortgage for almost the same as a SFH...probably somewhere in the mid-2%s. There would also be less stringent guides on LTV.

@Brianne Dylla, #8 is absolutely important, whether or not it is standard.  We who have been in this biz for awhile joking refer to this also as "6 things that kill deals, ruin people, and destroy friendships."  Think about every partnership story you've ever heard that went badly, and I guarantee one or more of those six things was to blame.

Don't count on him to bring it up.  Some people are unrealistically optimistic and figure they are immortal, everyone likes them, and that the sun shines every day.  This is CYA time.  Unfortunately, people don't like to talk about it, so they skip it and say, "We'll figure it out later."  Then someone gets in a car crash or their spouse leaves them, and then we get posts on Bigger Pockets like: "Getting out of a nightmare partnership!"

Seeing your answers, this doesn't really sound like a partnership which is what I assumed at first since you used the phrase "buy into".  You, a novice (nothing wrong with that), are being asked to provide a small portion of the funds needed to make this deal work for someone and won't be involved in the day-to-day or even monthly management of anything.  There's no reason to be a partner.  Rather, this sounds to me like you'll be a hard money lender.  That's good in a way if it's true because it keeps you out of any messes that are standard in partnerships, and the worst that could happen is you lose your investment if any of the 6 Ds torpedoes the deal.

One thing I'll add is that to whomever you wholesale this deal, your Buyer will most likely be bringing somewhere between 10-15% down. Many apartment lenders want no more than 70% LTV. You might luck out and get 75%. How goes progress on your Buyer's list? I know 90 days sounds like forever, but when you talk about needing someone or a group of investors with $1 - $2 million sitting around ready to go that could take awhile if you haven't already built credibility.

Plus, what's your plan if you do find someone and they get in collaboration with the Seller to just wait you out until your deal expires?  You're not a licensed agent with a listing contract, so anyone who you introduce this deal to can just wait for your contract with the Seller to expire and then grab it.  You would be due no commission in that case and they could negotiate with the Seller on the side.  

The thought here is the Buyer can be patient.  You cannot.  Therefore, you need not just one but at least TWO buyers who are ready, willing, and able to tackle a deal of this size.  That way if one tries to short cut you, the other can jump in and get the deal.

Btw, if you don't know how to put a deal like this under contract, I think you may be putting the cart in front of a horse.  Technically, you can do it with a single sheet of paper.  "Seller X agrees to sell property at 123 Anywhere Ave Units A - ZZ for $X,XXX,XXX on or before (today) + 90 days to Buyer Ryan James or Assigns."  Sign and date.  That's really all it takes from a bare minimum standpoint.  However, there are a lot of this's 'n that's such as assignment of contract, due diligence, permission to show, division of closing costs, financing contingencies (if any), earnest money, etc. that also needs to be hashed out.  I recommend you get with an attorney who specializes in large real estate transactions and pay a few hundred bucks to have him/her draft you a form.  He/She will have the experience of many deals to steer you thru the 1,000 "Oh dang, I didn't think about that" scenarios that come up and torpedo these deals.

This isn't the place to go cheap and try to save a few bucks on an online forum, where the quality of the advice varies depending on who gives it, and you don't really know if any of us know what we're talking about other than from our handsome pictures and thumbs up scores.  If you want to play in the big leagues and not lose out, it's time to spend some money!

P.S.  I'm curious, how much Earnest Money is this Seller wanting?  My guess is he won't settle for the typical wholesaler "fee" of $25 - $100 that the gurus tell you to use.

My biggest failures are two:

1) I didn't set specific investment targets. This led me to settle for several sub-par properties out of the starting gate. I wasn't making any money and I was pouring all my time into management and maintenance for little return. This led me to set up very stringent criteria. I can and did (and still do) find the 2% Rule effective for SFH and 2-4 unit residential real estate highly effective in terms of ensuring you make enough cash flow to make it worth you while and to cover all expenses realistically. Too often I see folks who barely hit the 1% rule and yet talk about how well their investment is doing. I'm not saying it's impossible, but I would request they share their Schedule E with me so I can verify it.

2) I didn't get around other happy, successful real estate investors soon enough.  I'm something of a loner by nature in that I like to figure things out on my own and I don't expect other people to be the source of my success.  That said, there's power in getting connected with other savvy, energetic, happy real estate investors.  So as cliché as this may sound, build your network as quickly and efficiently as possible, but do not sacrifice quality.  If all you find are naysayers who hate life, or if all you find are the pie-in-the-sky gurus who sell more books than they ever made $ in houses, you'll either end up with the life sucked out of you from negativity, or you'll end up with all your money sucked out of your pockets and nothing to show for it other than piles of courses and hype-material, but no solid plan on what actually works.

You can work on both of these with a group of trustworthy people in the business sector.  Be open to receive help, but be wise not to take everything at face value.  One person's strategy might not work for you.  Another person's strategy may not work at all, regardless of how excited they are about it.  Then again, another person's might be the thing that blows open the doors on your business.

That's my last thought: 3) Run this like a business, because it is.  Make sure to charge appropriately for the service you provide.  Bill tenants for damages.  Insist on timely rent.  "No Pay = No Stay."  Yes, even during Covid.  Value your time properly.  Don't swing a hammer or a paintbrush just to save $20/hour, because as an investor you should be making decisions that will return 10 - 100 x that amount.  It's too easy to buy yourself an unpaid job as a manager or a handyperson to try to save a few bucks while deals worth $10s or $100s of thousands pass you by.  Real estate money isn't made hammering nails or slinging a paint brush.  That's relatively low-compensation labor.  Your brain and creativity will determine how much you make, because that's a skill fewer people are able to tap into.

@Brianne Dylla, hi and welcome to BP!

There are a lot of questions, so I'm only going to talk about some of what I believe are the more critical ones:

1) How much experinence does you friend have in apartments?  You did say he has "multifamily units and other commercial property", but what does that mean?  Multi-family can be a duplex.  Commercial can be a small store front.  That is a whole different ball of wax than building a 200+ unit apartment complex from the ground up.

2) How big is the complex?  Again, as in #1, the size and scope of this project may be a 10 unit or 200 unit complex, and while those are both "apartments" they are two totally different worlds in terms of financing, lead times, marketing, managing, etc.

3) What other investors besides you and your friend are involved in this deal, if any? Will is be a syndication, a limited partnership, a multi-member LLC, etc?

4) Are you only investing money or will you be performing any duties like design, contracting, managing, etc?

5) Is there a clear scope of works, or is this idea just being kicked around?  In other words, if you say, "Yes", how soon are the backhoes breaking ground?

6) What are your experience levels with construction?  Ground up building is a whole different animal vs. rehabbing existing structures.

7) How is the property and constructions costs being financed: cash only, construction loan, conventional bank financing, multiple partners?

8) Have you got a partnership agreement in place that covers the 6 D's: Drugs, Dementia, Disinterest, Divorce, Dissolution and Death?

9) What is the time frame of the project?  6 months, 18 months, etc.  How will the carrying costs of any financing be handled?  Who is managing the timelines?  What happens if timelines aren't met?

10) What are your exit strategies from start to finish: If things don't go according to plan, how do you get out?  If things do go according to plan, when do you get out?  This is probably the most important thing.

Low end has been my bread and butter for 16 years.  It weathered the housing crash and the recent "Rona slump" just fine.  In fact, demand has never been greater, but that's due to a shortage of rental in general.

To be clear, I don't rent in war zones.  I have to feel safe going to the neighborhood at any time, day or night, without carrying a weapon.  That said, my houses I define as "clean, safe, and functional."  They are not updated with the trendiest colors and appliances.  The fact that I PAINT my walls once every 5 years with touch ups in between puts me miles ahead of the competition, most of whom still have stained and/or peeling paint...or maybe gross wallpaper from the 1970s.

My experience is that there will always be good tenants who don't make a lot of money that can always afford my houses.  My job is to find those and screen to avoid the walking disasters.  Section 8 fails to qualify for my properties because they are always too slow.  My houses get rented within a week of coming vacant most times.  Section 8 takes weeks to do their inspections and process their paperwork.  I won't lose money sitting vacant when I have market-rate tenants ready to go quickly.  Also, on those rare occasions I do have to evict someone, Section 8 would not cover damages or late fees, and the cost of going to court plus cleaning plus lost rent more than consumes the deposit.  I do not want to take that kind of risk.

My advice if you want to do low end is find properties that need some work, but are otherwise in decent neighborhoods.  Screen diligently.  You'll get 100 responses, out of that 10-20 will tour, out of that 3-5 will apply, out of that 1 will actually rent.  Set up systems to automated self-guided tours and online pre-screening that quickly weeds out anyone who is obviously unqualified.  It's a numbers game, but can be done profitably.

No one is building more low income housing these days.  It's a niche market and therefore always in high demand.  Your job is to find the good people who simply don't have a lot of money.

@Jim K., alright .... you're right.  We don't agree.  You were lucky.  We shall now all shake our fists in rage at the system that has cheated so many out of their rightful share of luck.  Burn it down, Baby!
.
Btw, "educated by abject failure" is another phrase for....  wisdom.  ;-)

I'd wish you good luck, but it appears you already have it.

@Jim K.,

Once again, we agree (and are similar) in many ways.  I have both a Bachelors Degree in Secondary English Education and an Associates degree in Computer Information Technology, with a Software Engineer emphasis.  Small world.

It sounds like we're both self-taught real estate investors, thus proving it's not the specific degree that is important, but rather seeking the wisdom and using it diligently over long periods of time that lead to success.  You're welcome to argue a contrary position if you like.