5 years ago this month I embarked on my journey into real estate investing by purchasing my worst deal to date (Needed way too much work and went over budget). From that time on I have purchased 8 properties and renovated them. Most were winners, 1 or 2 losers, but what I would like to share are the indicators for strong returns.
Before all this I had a plot of land I was going to build a house on but determined that to be financial suicide. I would be paying for interest, property taxes, and insurance out the ying yang and maybe breaking even if I sold the house 30 years later with average appreciation. Instead I took my funds and began a hybrid method of house flipping called BRRR, but instead of selling the house and being highly taxed you hold it and rent it out.
The top 5 indicators are, and if you come across a house with all 5 you better buy it sight unseen, or tell me about it: (this excludes mobile homes & section 8). Also doing self management and planning to hold units for 20+ years.
1. COC > 15%
2. Cap Rate >10%
3. Before purchase you have determined the rehab cost, the 15 year CAPex forecast cost, and how much sweat equity is possible. The sweat equity must be greater than 15 years projected Capital expenditures (new roof, siding, window, ect).
4. (Rehab cost/sweat equity) ratio > 70%
5. (Rehab cost/(sweat equity + 15 year capex cost)) ratio > 50%
5 years after my worst purchase I bought my best deal to date during the covid lockdown (closed via drive up window at bank). The rehab cost was only 25K which generated 40K sweat equity and raised rents from $1925 to $2500. I knew it was such a good deal that I offered full asking price without even looking at the property beforehand, but had a hefty inspection clause.
Looking forward to another 5 years of hunting for deals and hopefully not a housing crash. Though if a crash does come I wouldn't care with strong COC returns. Also I plan on turning my focus to less overturn units than the student rentals and more long term units as the June 1st turnover period is getting crazy busy.
If you want to become a Student Rental Landlord prepare for the negatives, but beware of the positives. You'll get the late night phone calls when someone has locked themselves out. You're tenants may stuff disposable wipes down the toilet and cause a sewage back flow, A brick way go though your window, a door kicked in. You may rehab a house into such a nice condition that you are ready to move in yourself but you don't and rent it out to someone that gives you a one star rating on google and calls your house trash and you horrible for not dealing with the inter tenant fights. Friends and family may tease you and call you a slumlord just to stir the pot of something that they do not totally understand themselves or have no idea the long hours and cost you have put into a piece of property. No pet polices are not followed and a dog as chewed on some nice 100 year old vintage woodwork. You play nice guy and lower the rent to a struggling group that hasn't paid their $2500 excel bill or $1000 water bill but you don't evict and Subsidize their living. You get threaten to be taken to court because you didn't pay back the security deposit which the security deposit transmittal states exactly why. Oh yea and the positive, your net worth increases 572% over 5 years, and the cashflow from your rentals is greater than your living expenses. Cheers!
