All Forum Posts by: Kyle Thomas

Thanks @Austin Fruechting for such a thorough explanation. Three years later and these posts are still helping people. 

Everything you're saying makes sense. I'm starting to scale quickly, but I'm a little stuck on structuring partnerships like a new investor when they're trying to decide whether to use an LLC or not. I see that you're saying you have a partner in the LLC and they have voting rights, so does this essentially bypass having to syndicate because they're sharing risk and control? Also, since you're offering a preferred return, does this raise any potential issues with the SEC or usury laws because of the fixed income characteristics? I realize you're not an attorney, and I'll certainly consult mine, just wanted to bounce this off of you.

I hope this post helps some of you out there apprehensive to put together a deal without knowing how to do everything up front.

I bought my first deal and waited a year to do my second deal because I didn’t know anything about creative financing. After learning about it thanks to BP, I had the funds and found my third deal before the second one closed. This presented a problem as the bank didn’t like the idea of me simultaneously financing another property, so I hurried the process and delayed the third from going to the bank.

I found this property on Craigslist. I saw the listing after combing the site several times a week. I called the owner immediately. She said that there was another interested party that had looked at the property. We moved quickly to look at the property and make an offer. She thought she might be able to get more than my max of 65k, but our value became clear when I asked her if the other party had a contract, settlement company, financing arranged or cash to purchase, etc. This was how I was able to get the deal: taking care of everything in an expeditious manner while having or finding the answers I didn’t have. For instance, I didn’t have my own contract, but I knew that a good attorney could help me with this.

The seller had recently lost her husband. She knew very little about the property because this was his project. Additionally, she didn’t respond to calls or emails for days on end, so just getting the contract signed was daunting. I had to take some heat from the banker and other parties that were trying to get things done, while at the same time being patient with a seller who was clearly having tremendous personal issues after the loss of her spouse.

The property was a duplex. We purchased it for 65k. One unit was vacant and the other was rented for 575. I knew the market rent was 750. My only other experience inheriting tenants at this point was on a fully occupied duplex. One unit was rented at 750, market rent, and the other was rented at 580, not market rent. The below market rent held a below market tenant that was almost a disaster, but that’s another story. I estimated that I could successfully increase the rent to 675 or end up with a vacancy for a month that would then end up renting for 750 a month. I projected a 19% cash-on-cash based on the as-is rent and a projected 650 on the vacant unit. The cap rate was just over 11.

Fast forward a year and the results are in. The tenant moved out after we gave them a 2-month notice that the rent would increase 100. It was a relatively smooth process compared to the first property we bought. The vacant unit was our most difficult to date. It was my partner’s greatest objection to this property. It took us about six weeks to rent it if I remember correctly. The tenant told my property manager that he plans on dying in it, so we hopefully won’t be repeating the renting process again during our ownership. The cash-on-cash came in at 29%; the total return was 33.5%.

The most valuable part of this property comes from the value-add. Using our going in cap rate, we added $24,364 to the property value, or 36.9% in the first year. Since the property is stabilized with market rents, it would be more appropriate to lower the cap rate as a lot of the risk has been removed from the asset, so this is probably a conservative valuation.

This purchase led to our current strategy: finding hybrid value-add opportunities that are off-market. We find the best properties are held by guys that are electricians, plumbers, engineers, etc. because they take care of these properties above and beyond what the landlords in the area do, driving down repair and capex expenses. We also find that there are quite a few properties that fit this description, which is another reason why we think this is a scalable strategy.

Let me know what everyone thinks or if you have any questions/comments.

I worked with Terrana Law a few times. One transaction was off market so they set up the contract and walked the seller's attorney through it, which most likely kept the deal alive. On a different property, they transitioned me from a personal sale to an entity while saving me a considerable amount on the structuring of the deal. 

Thanks, Nathan!

I wrote about my first buy and hold purchase almost a year ago. I can link to it if you find this post helpful.

My second purchase was much more involved than my first for two main reasons: I learned more about investing from BiggerPockets and my foot was broken. I was home from work for several months and had plenty of time to invest. 

I found the second property on the MLS just like I found the first. I learned several things from my first purchase that I wanted to capture in my second one. I buy properties in a tertiary market, so it was critical that it had to be a value added deal. At the least, I knew I wanted to hit the two percent rule on the front end and be two units or more. There aren't any properties like this available, so I combed through at least 50-100 deals and looked at about 10-15 before I found one. The first lesson from this is that you have to look at EVERY available property. I had skimmed past this duplex many times because the front of it didn't look great. It was actually as simple as a little worn out paint on the bottom of the foundation that made it look unappealing. The property also had to be in an area with a high inventory of possible future properties since scale is a very important consideration to growth.

Once I took a look, I saw that the numbers could work if I could get it for 80k or under. We settled on 77k. This was possible because we had a great realtor who is an investor himself. The utilities were split, except for the water and sewer. Each unit had three bedrooms (or two since there were walk-through bedrooms on each side) with one bathroom at about 1400 sqft a side. I underwrote it to 750 in rent/side, 10% vacancy, management at 5% (that's low for most management), and capex and repairs at about 250/month. The cash-on-cash return was just over 18% with a total ROI of just over 21%.

I financed the property using a conventional residential investment loan and wrapped 2% of the closing costs to lower my capital outlay. I had a small minority equity partner with a family member. I won't go into the creative financing in this post, but it's important to learn the laws and how to find potential partners. This enabled me to almost simultaneously move into my next deal. The interest rate was just over 5 with a 30 amortization and no origination fees from a local, portfolio lender.

We bought the property vacant as this is often desirable because you get to screen your tenants and train them your way. We ended up putting several thousand more into the property to get it ready, but as BiggerPockets taught me, I was conservative with my pro forma, so the actual rents came in at 775 and 795. I was also conservative enough to have enough cash flow for an unsuspected new roof (insurance covered most of it) and water heater that had to be done throughout the first year, just to name a few things. This is probably my favorite purchase, but has come with some unexpected capital expenditures. This demonstrates why you absolutely have to have capital or access to capital for reserves in the first year or two before they build organically. We still managed to cash flow at about 15% in the first year. I think over the next 5 years that we will comfortably be at a 20% cash on cash. 

We also learned considerably more about management and operations, which I'm happy to talk about if anyone is interested. We lived in Virginia and the property is in northern Pennsylvania if that expands on the logistics of managing a rehab and tenant placement of a new property as a new investor. 

If you have any questions, insights, or feedback, please comment below as there's always something that gets overlooked or could be improved upon. The most important thing to me is to take action even if you make a few mistakes.

Thanks Jay!

@Anthony Angotti Thanks! House hacking is definitely a great way to get investing for low money down. It sounds like we're buying the same kind of properties. I'm currently under contract on my third duplex in Pennsylvania. 

@Amanda G. We read @Brandon Turner's book on managing rental properties. The main thing that we do is to screen people with a credit, income, and background check. Seeing this on the application weeds people out pretty quickly. Our current challenge is that people will view a unit thinking that we're going to change our requirements even when we tell them before they view it what the requirements are and that we aren't flexible.

This is lengthy, but I've been enamored with the BP podcast and blog for about a year, so I've built up a few things to talk about. Well, let's get to with how I got started in real estate investing...

Before I discovered BP, I had a friend who bought some houses in Lansing, Michigan. He had read Rich Dad, Poor Dad, which was possibly the only RE book he read before he jumped into investing. So, when I read it, I understood why he started investing. I told a few people my plan to invest; then I was off to start an empire. However, the bank disagreed with a college student who thought he could be a real estate investor: they had no vision.

Two years later, and my first year out of undergrad, I had a down payment saved and was ready to jump in (Rich Dad, Poor Dad was still all that my RE education consisted of). I had no network: real estate agent, bank, or deals. I didn't know what a pro forma was. Did I need an LLC?

Enter my first mentor. He had eight houses and the likes of Donald Trump wanted him to work with them. He opened my eyes to an umbrella policy and a pro forma. Cash-on-cash became the answer to the question I never asked: how much should the offer be. Since I had all of the answers, it was time to go shopping.

I did some analysis, and Washington D.C. and the surrounding metro areas were too pricey and didn’t seem to cash flow. I decided to buy in Northeastern Pennsylvania because it was my hometown where I knew people and the properties were affordable. Next, we contacted a realtor who was a family friend of my wife’s. I started by looking at some houses that were in the $35-45k range, before quickly and reluctantly moving to the 80-100k range. I found a duplex near a small college next to a family run grocery store. It was a great location for a rural area; one half of the building paid the note and escrow; and it was already tenant occupied. All I had to do was adjust the price to match my desired cash-on-cash return. I also simply moved the rents up to what they could be in order to find the price I could pay.

Next, it was time to start operating the property. I found a lease off of the internet (don’t do this), which was promptly signed by one tenant; the other tenant didn’t seem to exist. Now I knew when I viewed the property that a mattress on the floor of the one unit probably didn’t bode well for prompt rent payment or lease signing, but the previous owner had to have been getting rent, right? Once we tracked the people down, they said they didn’t want the unit anymore. I was fine with this if they simply packed their stuff and left. Well, I must’ve asked too much because they left the bathtub running. They put a circular piece of plastic over the drain and a wash cloth on top of that. The water thankfully managed to drain through and didn’t flood the apartment, which I imagine was their intention. The water bill was split and in their name. The good news: we immediately got another sub-par tenant in there because we didn’t do any sort of a background check.

What is this bill? Sewer. I saw on each lease that there was contact information for heat, electric, and water, but I can’t remember if I even called the utility companies as it’s been over a year since we bought the property. I certainly never thought of the sewer bill. I’m not really sure how I overlooked this, but regardless, I did. The cash-on-cash return just went from about 25% to about 20%. Still, not a bad return. I would later find a few other critical pieces of information that needed to be added to the pro forma I started with, bringing my return to somewhere in the neighborhood of 13%. But, I’ll stop there since this article is meant to show the good and the bad of jumping in with minimal education on real estate investing. This is how the first six months went until I stumbled upon the BiggerPockets podcast while I was looking for something more mentally stimulating than Bill Burr’s podcast. I was also bored because I was only halfway to saving for my next property because W2 income is how you invest in real estate.