I'm just starting out, so linked below is a short member introduction post that outlines my goals and general background.
Linked Here
I decided to test the waters in my own local community first, a small college town comprised primarily of single family homes, condos, and large apartment complexes. Given the small size and limited inventory, it appears that it may be largely saturated with other real estate investors who quickly snatch up most inexpensive properties often with all-cash offers as soon as the property hits the market; which would force me to primarily focus on off-market deals and direct marketing to potential sellers to preempt the properties hitting the market.
As for financing, my options include conventional lending and HELOCs. I don't currently have the connections to potential private or hard money lenders to help finance a deal, though I may make more of an effort on establishing a list of potential lenders if/when I find a deal that would be worth their time. I do not have the capital available to fully finance a deal. It all boils down to finding deals and once a deal has been has been located then creatively financing the acquisition becomes the focus.
The first thing that I did was reach out to a realtor that was recommended to me as an investor. After introductions, she essentially asked me as to what price range I was looking for. At that point, my budget was uncertain and I simply wanted some prospective properties that I could run the numbers on and determine their viability as an investment therefore I told her as such and to simply keep me in her rolodex of buyers for anything that came down the pipe. She informed me that there were some investors that were potentially offloading their inventory soon and that she would send me more information via email (which I provided). It has been a month and I haven't heard anything from her since that initial phone call. Which is fine, my lack of budget or concrete requirements probably sent the message that I wasn't that serious of an investor.
Therefore I decided to take a proactive strategy instead of relying on realtors to bring deals to me. First I decided to list out many of the neighborhoods (~30 odd neighborhoods) of the town and determine which ones held the most potential for rental investment properties (affordability and age of properties primarily). My thoughts were that older homes held the most potential for forced appreciation and the more affordable homes would provide the best opportunity for cash-flow. This rough criteria narrowed the list down to around thirteen neighborhoods.
So now I have narrowed my focus on the thirteen neighborhoods where the homes would more likely satisfy the 1% test (the 2% test is even more difficult). The market rent rate is unlikely to go above $1500 for your typical 3BD/2BR SFR and your typical rent-ready property will cost at least $100,000. These are also the neighborhoods that would potentially have homes that could be purchased and rehabbed at 75% ARV, thus a candidate for a BRRRR deal. These are older neighborhoods with smaller houses but they are also close enough to the town.
Using available public-facing information, for each neighborhood, I have a spreadsheet with information on each property and its owners. I am right now focusing on absentee owners of multiple properties that may want to sell off some of their portfolio. I also have an extensive list of properties with tax sales history that I can intersect with my neighborhood-specific information to focus on properties with a history of tax delinquencies. I haven't reached out to the local municipality for information on pre-foreclosures but that is a possible future option. Right now, I'm simply surveying my current information at hand to determine the feasibility of deals in those areas.
My criteria for a deal is pretty simple:
- If the acquisition/rehab/holding costs are 75-80% of the ARV; I feel like this would be essential for the cash-out refinance portion of the BRRRR method.
- If the cash flow is greater than $200/mo.
- If the cash-on-cash ROI is 15% or greater.
Now using the neighborhood information that I have available, it's simply the process of seeking out possible deals.
Priority is given to physically distressed properties or properties with a history of tax delinquency. If there are no obvious candidates in the neighborhood, I have decided to choose potential investors or absentee owners that may be looking to offload some of their properties.
Here is an example:
In this neighborhood, this owner has roughly six properties built between 1974 - 1995. Cursory surveyed listed rent rate information from recent years (2018-2019) details that tenants are likely to be paying anywhere from $1000 - $1150/month. There isn't any recent sales history, the only history spans the prior decade with noted listings from 2011 to 2015 with anywhere from $80k to $110k as the listing price (sold in some cases). This information is from Zillow.com and/or Realtor.com . All properties have 3-4 bedrooms and 1.5-2 bathrooms and range anywhere from 1200 - 1350 square feet in size.
In a hypothetical situation, let's say that these properties rent, conservatively, for $1000. I subtract the vacancy expenses (5% or $50), repair expenses (8% or $80), property management fees (estimated at 10% or $100), capex. expenses (estimated at $340), and a cash flow profit of at least $200; that would be $770 allowing for $230 to be used for property insurance, property taxes, and mortgage/interest.
This seems incredibly difficult to achieve unless I can finance the deal completely myself thus removing the mortgage/interest component.
Am I missing something?
The expense percentages and amounts are based on Brandon Turner's The Book on Rental Property Investing. Even if I use the more relaxed 50% rule, you're looking at $300 after the $200/mo profit to handle mortgage/insurance/taxes.
Of course, I will need to repeat this analysis for each neighborhood and each property in each neighborhood. If I find a property that potentially satisfies the criteria mentioned above then it becomes a matter of contacting the current owner and informing them of my interest to purchase.
