So in any case, investors know what they’re worth. They know how to price them, and I knew how to price mine. Guys were looking at my properties and looking at other properties, and realized they could make good cash flow on mine.
I knew how to price them, and I gave them all the data, not just projections. I gave them actual data, so they could make good, fact-based educated decisions.
When you’re working with investors who sell their properties, you’ll learn to buy them turnkey.
Turnkey properties are properties that are already rented out. They are in service so they are usually up to code, safe and reliable. They may not look pretty but they are usually in fundamentally sound shape.
I started making my fortune buying turnkey properties. They had solid foundations, separate gas and electric (or were easy to separate, in the case of multi-units), and the main systems—heating, hot water, electrical, roofing, siding and windows were not in any immediate danger of needing replaced. However, these properties maybe in need of cosmetic care. This is what we call ‘lipstick and rouge’, i.e. paint and carpet.
I can find these properties in every town on the planet. I can usually strike a good deal with the owner because most consumers don’t believe or agree that if they put a little money into the property that it would sell easier and for more money.
They usually don’t understand the psychology behind perception and value. When a traditional consumer walks into a house that needs a little TLC (something that may cost you or I as investors $1,000) the traditional consumer will perceive it as costing double. Worse yet, they begin to look for and see other issues requiring more money—all of which results in them walking away or making unreasonably low offers.
On the other hand, if you spend a little money and put some TLC into a home for sale, essentially eliminating obstacles to a purchase, the traditional consumer will think more highly of the home and may perceive more value than may really be present, resulting in a nice offer. The latter approach also results in a home being sold more quickly.
The point is that we can use this psychology to our advantage when buying or selling a home. I have become pretty comfortable at guesstimating the cost of lipstick and rouge. I have also become comfortable at guesstimating the cost of rehabbing a property. This becomes valuable when purchasing a property well below the values in the surrounding area with the intention of rehabbing and then refinancing (if I choose to do so) after I rent the property out.
If you think back to what we were doing five and ten years ago, we were buying a lot of properties that were in foreclosure, so they were empty. They needed a lot of remodeling before we could go in and put them up in service and rent them for profit, for income. Now, you want to buy properties that are already rented,already occupied, already up and running, and showing a cash flow.
This is extremely important in today’s environment. For you, personally, the day you close, rents will be pro-rated. So if you close on the 15th of the month, you’re going to get rents for the second half of the month, given to you on the HUD 1 Settlement Sheet. Whether they were collected or not, doesn’t matter—if you have the right closing attorney, that is. Don’t ever let a seller convince you that because somebody didn’t pay rent that they should get to keep the security deposit. That’s not how security deposits work.
There are rules about security deposits, and you have to have a judge tell you that you can keep a security deposit in lieu of rent. Those owners would basically handicap you if you take over a property where tenants were behind on rent and they leave you with no security deposit. Never, ever, ever, let them do that. Show them on the sales agreement. “Hey, this doesn’t say ‘collect rents’ it says ‘rents.’”
So, in any case, most of these turnkey properties are fundamentally in sound shape. Many will need a bit of cosmetic updating. We know you’ll be able to do that. When tenants move out, you can easily paint and carpet.
You can obviously upgrade the landscaping and the common areas to make your place look nicer. I like to buy places that already have separate gas and electric. I have bought places where I had to separate gas and electric, but I built it into my financial project plans, so I made the right offer.
You only want to go for those properties which have solid foundations. I would never advocate buying a place with a really bad foundation, although I’ve done it, but I got a really sweet deal on it. In these situations, you want to buy properties where you don’t need a lot of capital improvements right out of the gate. It’s okay to maybe have to put a roof on, in five or ten years. I understand that, but these are places where you’re buying the best properties you can for the money, and for the best cash flows.
The main systems of these properties: heating, hot water, electrical, roofing, siding, windows—should all be in decent shape—functional, operational, and not in any immediate danger of needing to be replaced or repaired.
In the fifth session of this module, we’ll go over how to physically analyze a building. So don’t worry, we’re going to be covering that.
Sometimes these properties are in financial distress. The owner might be over-leveraged, or sometimes they have management distress because of not knowing how to screen or manage tenants properly. I look for these properties because they spell opportunity for me to make more profit. I know how to go in, make renovations, manage tenants, and keep my financial ratios in check.
Rent something that looks nice and you will attract nice tenants at nice rents.
Now, I do not currently recommend the old approach of buying properties to rehab, and then rent and refinance. I’ve done this a lot of times, but the more complex your project is, the more you rely on third parties to get things done… the more risk there is in your project—risk of taking longer than you think, risk of costing more than you think.
Those are real risks because every day that goes by that you own a piece of real estate,if you’re not living in it, and you’re spending money to renovate it, you’re losing. You’re bleeding money every single day. That’s why I love buying properties that are already rented, already showing a cash flow on the day I close on it.
Now I know there are still a lot of television shows out there that glamorize all this stuff. They say you can get all these great deals… but trust me… these gurus, they make you think these awesome deals are on every street corner, and you can make millions of dollars.
And you can, but what they don’t show you is what happens when things go wrong. Projects get delayed, costs overrun. If you’re not on your game every day, managing your projects, I promise it’s going to be rare that you have a project go on time and under budget.
Build some cash flow…build a solid base before you go on to try other strategies. Just master the skills, and take the simple approach first. I don’t mean it’s easy, but it is simple.
When you’ve become good at estimating costs of smaller items, like replacing a toiletor faucet, painting and carpeting, you’ll have a basic idea of what things cost and what guys charge per hour. After that, you’re in good shape to try other strategies.
Now, I’m going to show you the process that you want to go through to actually find these properties.
This is what I developed for myself to be able to buy 250 units in five years, and this is the process I used when I taught investors and took them out as clients to do 110 transactions a single year without any assistance—administrative or otherwise.
The first thing we do when we meet together—and you’re going to do this with the agents we’re going to pair you up with—is you first have a phone conversation. You have to determine what ammunition you have. What do you have in the way of cash and credit?
When you pass that test you email, whether it’s me or the agent we assign to you, your basic demographics: name, email address, phone number, and we will set you up on the multi-list system.
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