We help a lot of clients and new investors to get financing for their turnkey rental properties, rehab projects or construction loans. I have done all of these things personally and I’ve helped a lot of people do them as well. One of the questions that I get asked all the time is should I use a national lender or a local bank. There is no right answer but I will discuss both options below.
National banks are great for buying turnkey rental properties, and the reason why is they don’t touch anything that needs rehab or is not in livable condition. These national banks are banks like Wells Fargo, US Bank, Bank of the West, etc.. The reason why they don’t do loans on rehab projects or anything like that is because these are national banks, they typically lend on investment properties or give mortgages in all 50 states, and there’s no way that they could figure out all the different neighborhoods and cities and know a ton about them.
They focus on stuff that’s already been completed so that they can do appraisals, verify the value, and then they just look at your income and see if you can support that mortgage on your debt-to-income ratio. That’s how they come up with the mortgage for you and see if you’re approved or not.
These national banks are great for buying turnkey rental properties, not much else. If you don’t have a W2 income or solid W2 income job over the last two years, then you’re going to have to look at some different options because national banks are not going to work for you.
The other benefit of using these national banks is that it allows you to buy and diversify your rental property portfolio into multiple different states because they are national banks. For example if you use Wells Fargo you get a mortgage in Tennessee. Two months later you want to diversify and buy a house or duplex in Cleveland, you can still use Wells Fargo. You just need to provide them the last two months of your bank account and just a little bit of information, but they already have your whole personal record.
I do recommend many of my clients to national banks for that reason. Many of my investors and clients like to buy properties in different states, they like to diversify their portfolio and using the same national lender over and over makes that possible.
The other benefit of using them is they provide the best terms that I’ve seen. Many of these banks don’t have loan minimums, they charge very low amount of fees. They will just look and see if your W2 income supports that mortgage, and that’s how you’re approved, it’s nothing much about the property or the cash flow of the property.
The downside of using these national lenders is that they do a ton of research about you, maybe to a point where it becomes annoying. They’re going to ask you everything, all the dirt under your fingernails, everything you’ve done the last two years, ask you why you have these certain large deposits, they’re going to ask you a ton of different questions like that. It is a pain in the ass, but for that 5-6% interest rate on a 30-year amortization there’s nowhere else that you can get that. I’ve talked to many hard money lenders, local lenders, and nobody that I’ve seen is offering exactly what those national banks are offering with very low amount of fees. They’re a great solution for the turnkey rental properties if you have a W2 income and a solid job over the last two years. They’re a great resource to use especially for financing those turnkey rental properties.
The second group that I’d like to talk about is local lenders. Local lenders can be small commercial banks, like Bank of Memphis, Bank of Bartlett, Cleveland Bank, etc. There are going to be many of these little banks in the cities that you are investing in. They’re great for rehab projects and construction loans. The reason why is because these lenders are local they can actually go to the job site, they can go visit the property, they have post-renovation appraisers and do things like that to protect their investment.
The national banks on the other hand won’t even touch it, they’re not going to touch anything that needs a rehab. Only these local lenders are great for those rehab projects and construction loans. If you do use them for these loans you are going to have some fees. They’re going to be a little bit more expensive and a little bit more strict about the property but not so strict about you and your W2 income.
For example, I don’t have much W2 income because I run everything through my company, so when I went to a local lender it was very easy for me to get approved because the property was cash flow positive. I just showed them the financial statement for the property and that was it. They didn’t care that I didn’t make any W2 income over the last two years. It was all about the property and how much cash that property was producing.
The only other thing that these lenders look for it to make sure the income of the property will be able to pay for the debt service, this is called debt to income ratio. Typically they want a rate of 1.2 to 1.5. This means that they want the income to pay the debt, plus 20%, or plus 50%, if that makes sense.
It’s also important if you’re investing in a city where you live in to make a connection with those people at the bank. Trust me, it goes a long way. You can get stuff done that you never think would be possible, you can get rates that maybe you’ve never seen before. If you build that relationship with those people and maybe open a bank account with them and put in some money into a savings account with them so that they could use it. Doing so is really going to increase your chances of getting a great loan.
Many new investors go and look for hard money. Hard money is great for rehab projects, they’re great for construction loans, they do some turnkey rental property financing as well. Personally I’ve never really used hard money, I’ve never been a fan of hard money, and the reason why is it’s so expensive. Hard money lenders charge three points, and a 12% interest rate.
Hard money lenders are also going to do a ton of due diligence on you and the project. Especially if you’re doing a construction loan, they’re going to be very diligent, especially with some of the national hard money guys. They’re very diligent about your draws, about sending photos for verification, about doing all these kinds of things to verify that a draw should be paid out to a contractor. That’s because these hard money lenders are national guys and they’re not local. If you have a local construction loan, the guy from the bank is going to walk over to the property and make sure that the stuff was done and pay your draw for the construction. But if you’re using a hard money lender who’s a national lender then they’re not going to be able to verify that information. So you’re part of the verification process and it becomes an extreme headache, especially after paying three points and 12% interest rate.
Of course there are many other ways to raise money for your real estate investmensts. The two that I use the most are private money lenders and joint venture partners. You can find these people through networking. Go to meet-ups and network your ass off on biggerpockets.
We help a lot of investors make their first investment in real estate, and many of those investors do have W2 income. They have good, solid jobs, they don’t have the time to go and manage these properties or find the deals, etc., so I’m that resource for them. These investors who have full-time jobs are able to get conventional financing due to their W2 income. If you are an employee at any company then you do have some W2 income. The other type of income is called 1099 which also counts and makes you eligible to get Fannie Mae financing from these conventional lenders which lend on 30-year terms at the lowest interest rate possible, around 5%-5.5%.
I have been helping these people get regular conventional financing but I recently just helped one of my investors buy a couple of rental properties without W2 income. So this gentleman owns his own business, he doesn’t have any W2 income, he runs everything through his business so he doesn’t take any money out of the company. He does have cash in the bank account that he has available. So what can somebody do when they aren’t a regular employee? You own your own business, you’re making good money with your business and you want to invest in real estate and you can’t gain conventional financing, that’s what I’m going to answer for you.
The first thing that I did for my client was I went and found an asset-based lender. An asset-based lender is a company who will give you a loan based solely on the financials of that property. So the cash flow that that property generates, they’ll pretty much just look at the cash flow, the profit and loss statement for that rental property, then they’ll do an appraisal, make sure the property is worth that amount of money, and then they’ll lend you based on that appraisal that they get back. That is what we did with this investor. I have an asset-based lender that I referred them to who has great terms, 30-year amortization, a little bit higher interest rate, but they were actually able to give one of my clients a loan based on just the appraisal and the cash flow that the property generates. They didn’t ask for any tax returns, they just wanted to see that they had enough money in their bank account for the down payment, and that’s it.
So one option is using those asset-based lender, and that was terrific. It was probably the fastest and most seamless property purchase that I’ve ever encountered. Just did the appraisal, made sure he had the money in the bank account, and that was it. It was incredible. And it was also pretty good terms for being a non-conventional lender.
The second option would be finding a commercial lender who lends on portfolio loans. There are many of these banks out there. Some credit unions are actually like this where they will do portfolio loan. So what you want to look for when you are doing your research is commercial lenders who do portfolio loans for whatever type of asset class you’re looking for. If you want to do a small multi-family, then type in multifamily portfolio loans. A portfolio loan is a loan that is typically on one or more units. What we’ve done in the past where we’ve had four single-family homes and we’ve done a portfolio loan cash out refinance. So it’s anything that’s over one unit.
Typically these commercial lenders won’t help you get financing on just a single-family home, most of the time it’s because the purchase price is just too small for them. They want to lower the risk for themselves, and many of these portfolio lenders do have loan minimums. The reason is because many of these commercial lenders who do these portfolio loans have pretty high fees. So something that you do want to watch out for when talking to these portfolio lenders is their fees.
Many of these lenders do have loan minimums of $75,000 or $100,000. That’s why it’s a good idea to actually find a couple of single families or find a small multifamily property and then begin using these lenders to fund those deals, because then the fees are going to start to make sense. If you’re just trying to buy a single-family home for $70,000 and you have $5,000 in fees, it doesn’t really make much sense. You’re now going to have to pay 7 or 8 points on that loan and it doesn’t make sense anymore.
The way that I found these lenders was just going through Google. I typed ‘asset based lender’ in the city that I was looking to help my client buy that rental property in. I just went through Google and just typed asset based lender, or portfolio loan, and there’s a ton of lenders that you can find that way.
What I would do is I would just start cold calling them, letting them know that you’re a real estate investor, you’re looking to buy rental properties, you want to know what their loan minimums are, you want to know what their fees are, you want to know what their loan-to-value ratios are, and that you’re interested in buying some properties. The catch is that you don’t have any W2 income, so you need their help with that, you want to make sure that they don’t do conventional Fannie Mae loans, you want to make sure that they’re a commercial lender and that they don’t really care about your W2 income.
I called probably twenty or thirty companies and found seven or eight companies who didn’t really care too much about the W2 income, they just cared about the asset, and that’s exactly what you’re looking for. Once I went through and found those twenty or thirty lenders, I just gave them all a call, then I created a spreadsheet to keep track of all their term sheets.
What you’re going to ask these companies for is their term sheets. Those term sheets will show their fee amount, how much the interest rates will be, and then what their loan-to-value ratio is. You want to have a very high loan-to-value ratio, probably around 70-80%. Some of these commercial lenders will lend you LTVs of 50-60%, and LTV stands for loan-to-value. For example, the bank is going to underwrite your property, they’re going to do an appraisal on that property, and let’s say the value comes back at a $100,000. Some banks are going to lend you $60,000, which be a 60% LTV, and some banks are going to lend you $80,000, which is going to be an 80% LTV. You’ll only have to come up with $20,000 out of your pocket, which is great.
To reiterate, you may want to find some bigger deals before actually going and talking to these commercial lenders, because if you’re just trying to finance a single-family home without W2 income in the $70,000 price range, they may not be worth it due to the fees. The lender that I’m personally working with, who is an asset-based lender, they have a loan minimum of $100,000. And I found out a lot through my research, through calling these companies that they do have loan minimums. And if they don’t have loan minimums then they do have points or fees minimum. For example they will have fees of 3% of the loan amount or $2,500, but if you’re doing a loan for $50,000 that $2,500 in fees is five points now, which is really expensive.
If you need any more help, if you’re looking for asset-based lenders in your city, I have a couple who may be able to help you. Feel free to reach out to me. I hope this was helpful for you. I know there are many of you out there who own your own business, who are struggling to get financed. My dad and I both own our own business and for us when we first started out before we knew any of this stuff, it was hard for us to get a loan for $40,000 because we’ve ran everything through our company. So we know what the struggles are, we know through our research and stuff like that that these lenders are out there and they’re ready to make loans to you. They’re just a needle in the haystack.
Our business has been very busy over the last couple of months so I’ve been talking to a lot of new clients who are interested in buying rental properties out-of-state. When I talk with them, many of them share with me their experiences with other turnkey providers and a whole laundry list of things that have gone wrong in the past. And when they’re interviewing me and looking to buy rental properties from me they share that laundry list with me and I have been keep track of the ones that appear the most.
I have about six things that I want you guys to watch out for when you’re talking to turnkey providers and are looking to buy turnkey rental properties.
Many turnkey providers are having a very hard time finding inventory. Because the market is so hot right now, it’s very hard to find any good deals, therefore if the turnkey providers can’t find deals it means they can’t give you deals as well. When they’re trying to sell deals to you they want to make sure that you’re hitting a certain percentage return, a nine or ten percent cap rate, but if they can’t find their deals to sell to you then there’s going to be no inventory for you
This is the most recent problem that a lot of investors have been coming to me and saying, “I used to use this turnkey company but they have no inventory.” Therefore, one of the first questions that I would ask a turnkey provider is how much inventory do you have on a monthly basis that I’m able to buy, and is that on a first-come, first-served basis, do you just sell them to your number one, two and three guys, or am I, as a newbie, able to get in front of some of those deals.
There’s some turnkey providers that are really big, who have some VIP buyers lists, and if they have low or no inventory, and especially low inventory, they’re just going to go to the top three guys and you’re never going to get a deal. So you want to go and talk to a turnkey provider who is actually going to share with you some deals. Before you spend your time interviewing them and learning more about them you want to make sure that it’s even possible for you to get in front of some deals and you’re not just there stuck on the back burner.
Many turnkey providers want you to be in line waiting for them to feed you deals. They want you to be in the back of the queue and they want to make sure that you’re interested and that you stay interested, and one way that they do that is by asking for a large deposit upfront. What many of them will do is say, “We know you’re interested in buying rental properties in Salt Lake City, and we provide that, and we do a couple of deals a month. In order for you to get any properties or have any properties shown to you, you need to give us $2,000 earnest money to show that you’re interested.”
I’ve heard many investors in the past do this, give the company two, three, four thousand dollars as earnest money. The money’s not gone, it’s in a third-party account, but that money is stuck there for three, four, five months. Because there’s low or no inventory, so these turnkey providers, while they’re asking you for a deposit, now they don’t have any inventory, and now your money is stuck in this limbo, and you don’t want your money to be stuck in a limbo and have to beg to get it back out.
I wouldn’t recommend working with any companies that are asking for these large deposits upfront. I would just ask to see some deals without that, tell them that you are serious, show them your proof of funds, show them that you have a pre-approval letter, show them that you’re serious in other ways, but there’s no reason for you to put two or five thousand just to see a deal, it doesn’t make any sense.
A lot of the big turnkey providers have been selling their rentals without tenants in place. They’ll actually sell you a property that they just finished the rehab and they’ll say, “The rental rate is $700 to $800” but that’s a big range and your bottom-line return is going to change a whole lot whether it rents out for $700 or $800.
Something different that we do is that we actually sell our properties with a tenant in place so that you as a buyer know exactly how much money you’re going to make every single month. A lot of the other guys are not doing that. They’re selling them for these rental ranges, and a lot of the times what happens is that these properties will sit on the market for a month or two months, and that’s one or two months that you’ve just lost rent. If you want to buy these properties, don’t close on the properties until you have a tenant in place and until that property is making money. You’re supposed to be a passive investor, you want to buy the cash flow, and why would you buy an asset that’s not even producing cash flow yet. I would hold off closing until you do get a tenant in place.
Another issue with buying a rental property without a tenant in place is that that first month rent typically goes to the property management company. So if the property is on the market for one or two months for rent, and then the first month is the fee for the property management company, and that’s three, four months that you still haven’t made money on your investment property. You want to make money from day one, you want to get in the groove of collecting rents and making sure that your property is a valid investment. That’s three or four or five months that you’re just going to be sitting on the sidelines scared to buy another one. So buy a property with a tenant in place, have the turnkey provider pay for that first month’s fee to rent out the property so that you can start collecting rents right away.
This is what happens, the turnkey provider is going to sell you a property that’s vacant, and they’re going to sell it to you vacant because they want to get that first month’s rent for renting out the property. So it all goes back to finding a turnkey provider that doesn’t own the property management company and buy a property that already has a tenant in place, that’s already making money.
Another reason you don’t want your turnkey provider to own the property management company is that they’re going to make recurring revenue from you now, and there are typically a lot of markups on the property management side. You want the turnkey provider to be vested in your success, and the success should be on the purchase. The continued success should be you and the turnkey providers goal. But when the turnkey provider owns the property management company and you have a bad experience with the property management company, then you’re alone, the turnkey provider is not going to refer you to a different property management company.
Typically when you buy properties from these turnkey providers who own the property management company, you have to use that property management company. So what if you have a bad experience with that property management company and you want to use somebody else because they’re up charging you and they’re not able to rent out the property, you want to go and look for another property management company, you have to go and do that homework yourself because nobody’s on your side.
That’s why we always use third-party property management companies so that whenever the issue arises where somebody’s not happy with the property management company for whatever reason, we can step in and we can talk to the property management company and explain what’s going on and why our clients aren’t happy. And then if they are really not happy and they want to find another property management company, we’re there to help them find another property management company if that’s what the issue is. You’re stuck by yourself if you try to use one of these turnkey providers who own the property management company.
These are two things that you should never sign up for. There are so many different banks out there and many of these turnkey providers who require you to use their banks are doing that for a reason. The reason is that they have a certain appraiser at that bank, or that bank gives them certain referral fees, or compensates them in some way, whether that means increasing the sales price or kicking them back some money for referring clients over. I would find a turnkey provider that doesn’t require you to use their bank. Typically you can find other banks that you’ve used in the past, who can give you a little bit better of a rate.
When you sign the contract with the turnkey company, make sure to see that you’re able to resell the property as you wish and you don’t have to resell it back to the property management company or the turnkey provider. I know it sounds crazy if you’ve never heard that before, but there are some turnkey providers out there who are requiring their clients, when and if they ever want to sell, that they need to sell the properties back to them.
As soon as you close and you own that property, you should be able to do whatever the hell you want to. You should be able to change property management companies, you should be able to evict the tenants, just like it was your own property. You should be able to use whatever bank you want, you should be able to use whatever insurance company you want. Don’t use turnkey providers or property management companies which are forcing you to use certain people. Definitely look at those options but you can also ask them for other recommendations, and they should be able to provide you that information, and they should really be on your team as the turnkey passive investor who wants to make some good cash flow for the next 30, 50, 60 years.
There are a few turnkey providers out there who own the property management company and the property management company manages 3,000 or 5,000 doors. A lot of my current clients have been actually coming from these property management companies. I’d stay away from them because you do get lost in the shuffle, and you become an excel on a spreadsheet.
There’s no more relationship between you and the property management company or you and the property management company and the tenants. Because they have so much on their plate, the company is all spread out, they have a huge office space for all those property managers, and you just get lost in the shuffle.Especially if you’re just getting into turnkey rentals or rental properties in general, I would definitely stay away from these super large property management companies. With the smaller management companies I’ve seen a little bit more hands-on. They will be a little bit more hands-on with you as the property owner and a little bit more hands-on with the tenants. They’ll treat the tenants in the right way. They’ll be very descriptive in their emails between you and the tenants and keep you posted as to what’s going on. You can also pick up the phone and call the property management company. The property manager will actually walk the property and ask them what’s going on, how does it look, etc.
The larger property management companies with 3,000 or 5,000 properties that they manage, that just doesn’t become possible because there’s so many different property managers, and you’ve got to talk to Bill, to talk to Serena, to talk to Kevin, in order to get the information that you want. So you’re playing telephone with these large property management companies to get the info that you want.
This is the most important point. When you’re buying turnkey properties out-of-state, you want to make sure you’re paying market value or less. If you’re buying the property for less than market value, that’s terrific, that’s some built-in equity that you get. Most of the time that does not happen, but you just want to make sure that you’re not overpaying for these rental properties.
Let’s say you have a property under contract for a $100,000, and you’re using a bank. The bank sends out an appraiser to that property, and the bank is on your team, so they want to make sure that you’re buying a property at fair market value so that they can give you a loan. The loan will be for 80% of the total value of that property, and you’ll put down 20%. So they’re on your team to make sure that the property is worth that amount of money before they let you spend that and before they loan against that.
Let’s say the appraisal comes back at $80,000 and the turnkey provider comes to you and says, okay, you’re going to get the loan on the $80,000 but we want you to come up with the rest of the equity on top of that. So not only will you have to put 20% down on the $80,000 purchase, you also have to come up with an extra $20,000 to make up the difference between $80,000 and $100,000.
Trust me, this happens a lot, especially for the large turnkey providers. I’m not sure what they say to get people to do so, but a lot of my clients have come from these companies who have done business that way. Please don’t do that. It means you’re overpaying for these rental properties and typically by a large amount of money. And a lot of the times the amount of money now that you have in those properties is so much that your cash on cash return actually sinks a whole lot.
You may never be able to get that that money out, because if you buy an $80,000 property for $100,000, let’s say a family member gets sick and you need to liquidate, now you can only sell that property for $80,000, your $20,000 just disappeared.
You’ve got to think worst case scenario. You don’t want to overpay for these properties and be stuck holding the bag. Have the turnkey provider come up with a difference or drop the price for you. What they should be doing is dropping the price for you, or they should be complaining about the appraisal being so low and being wrong and they should show you why it’s wrong. We get bad appraisals all the time. I’ve had homes that I’m trying to sell for $70,000 that come back out $40,000, when I have $55,000 in the deal, and I share with my client that I sold this house around the corner for $70,000, here is one I sold for $72,000, this appraisal doesn’t make sense. I show them my numbers on the deal, this is how much I have in the deal, there’s no way that the property is worth $45,000. I have even more money in the property than that.
Your turnkey provider that you’re using should be able to show that information. If not, you’ve got to go and talk to somebody else. So never overpay for your rental properties. Buy your properties for fair market value, get good cash flow from them, make your money on the buy, and you just want to put that 20% down on your loan and that should be it. You’re going to have some closing costs of course, but put that 20% down, you shouldn’t be overpaying for these properties. Buy them at fair market value, with tenants in place that are cash flowing from day one, and you’ll be good to make cash flow for many years to come.
Euclid is located North of downtown Cleveland on Lake Erie. Only 6% of the lake is actually accessible to the public. Because of this, Euclid has been trying to get permits from the city for the past decade to make more of the lake accessible to the public.
This project was finally approved and the $7,000,000 project along the lake is going to begin September 2018 and the project is going to be completed by the end of 2019.
With this amazing project going on along the lake and also with Amazon building a $40M warehouse facility very close to this, we are expecting the values of the homes in this area to skyrocket. There are going to be great tenants moving into the area who are going to have stable jobs and pay their rent on time.
If you’re interested in buying some rental properties close to this development then head over to our current inventory.
If you’d like to read more about this article then you can read more here.
You want to invest in real estate but you’re not sure if you should be buying your own properties or investing in a REIT. Well there are some things that you should know about both of them before you make your decision about whether to investing in REITs VS Rental Properties.
There are two different types of REITs – public and private. Many people know of publicly traded REITs, which are actually on the stock market, so you can buy those REITs on your phone. Private REITs are not on the stock market and are normally just for a small group of investors.
The way that REITs work is that you buy shares of the REIT. Those funds that you have invested allow the REIT to buy real estate. Those investments produce cash flow or capital gains. Ninety percent of the profits that the REIT is generating have to go back to the investors who own shares of those REITs.
There are a couple different benefits to owning your own rental properties instead of investing in a REIT. First, you get to hedge against the stock market risk. When you’re investing in a REIT that’s on the publicly traded stock market, the prices of the REITs tent to move the same way that the stock market does. For example if there’s a stock market correction or collapse, the REITs tend to go the same direction, even though the investments that the REIT is making may not be going downhill.
If you’re already in the stock market and you already have some funds invested there, investing in a REIT, while you think you may be diversifying, you actually aren’t, in my opinion. Just because that REIT is still publicly traded, it’s still on the stock market. If the stock market does have a collapse, you’re still invested into paper assets. You own a piece of paper essentially instead of owning physical assets under your name. So if you think you’re getting into a REIT just because you want to hedge against the stock market risk because you already think you have a ton of money in the stock market, I don’t think that’s a good option.
Therefore owning rental properties which are off the stock market would help to hedge against that stock market risk. For example if you had $100,000, you could use $50,000 to invest in the stock market, you take the other $50,000 and buy yourself three or four rental properties out-of-state and collect some cash flow. That would help you hedge against that stock market risk that you may have if you were to invest in a REIT.
The second benefit of investing in your own rental properties and actually buying properties under your name is they have intrinsic value. Something that I always love to talk about when it comes to real estate investing is that these properties that you’re buying they have some intrinsic value, they’re worth something. They’re made out of wood and nails and bricks. These are all things that have value and can be sold. Whereas a paper asset is only worth a piece of paper and can go down to $0.
Another benefit to investing in real estate and buying your own rental properties is you’re able to use financial leverage. You can use leveraged debt financing to buy rental properties, whereas you can’t with a REIT. For example you could put very little down to buy properties worth way more than what you put down. For example, you’re buying a $100,000 dollar property, you only need to put $20,000 or 20% down and now you own this property worth $100,000. Whereas if you only had $20,000 and you wanted to invest in the REIT, then your equity would be $20,000 and nobody would be growing your equity for you.
By using financial leverage and getting a loan on a rental property, you’re growing your equity every month. Tenants are living in your house, they’re paying down your loan and they’re growing your equity each and every month. REITs don’t do this and instead will just generate you little capital gains. But you’re not using financial leverage to buy properties worth much more than the cash that you have available in your bank account.
The final point about investing in rental properties is that you have control over your investment strategy. You have full control over the investment and what you want to do with it. You can choose how much debt you want to apply to it, when to make capital improvements, when you want to sell your property, etc.. You’re in full control. You’re the CEO of that rental property.
With a REIT you invest your funds and somebody else takes over. So it’s very passive and very liquid in that sense. But if you want to have more control and want to be able to use financial leverage then rental properties are the way to go.
To invest in a REIT compared to investing in real estate, there is a very low cost of entry. You can go invest $20 into a REIT, do it all through your phone, sit back and relax and watch your money grow 6-8% a year. So it is very low cost of entry.
Whereas if you were to buy your own rental properties, you’re going to need $15,000. You’re also going to need to find a property management company, a rehab crew, a realtor, an escrow company, etc.. Or find a turnkey provider who will do all of that for you.
Therefore, REITs not only have a very low cost of entry in terms of dollars but also in time. You can do some research online to figure out what are the best REITs to invest in and their track record and all that kind of stuff. That can take a couple hours, while on the other hand if you wanted to buy a rental property on the MLS would take much more work. You’d have to find a good market to invest in, find a good property, analyze that deal, make an offer on that property, find a property management company, complete the rehab to that property. There is a lot of time that goes into buying rental properties if you’re going to do it yourself without using a turnkey provider.
With REITs you can buy and sell whenever you want to. You can invest your $20 today and sell it tomorrow and pay your buying and selling transaction fees. But you’re able to get that money out when you want to. That provides a benefit if you’re investing a large sum of money and you don’t know when you’re going to need it back. You want to make a little return on that money and just set it into that REIT as it grows.
That’s a benefit of a REIT over rental properties. You can’t buy a rental property for $70,000 and then go and turn around and sell it the next month. I guess you could, but it takes time to sell. So as you can sell shares of your REIT instantaneously just from your phone, selling your rental property could take 30 days, 60 days, you never know how long, until you find the right buyer to buy at the right price. And you may even need to sell that property at a loss if you need to get your cash out fast.
If you’re buying your own rental properties and those properties need rehab and you need property management, all those things take time and energy for you to go and find, whereas investing in a REIT is very passive. You give your money to somebody else, they’re already doing all of those things, they’re finding the properties, analyzing the deals, finding contractors, finding teams on the ground, and property management companies to manage those deals.
You can just buy these shares through your phone with as little or as much money as you’d like and you can sell whenever you want to as well. However, with less risk comes less reward. While REITs may generate 6-9% cash-on-cash return, buying rental properties and using financial leverage where you can put $20,000 down to buy an asset worth $100,000, there’s no other investment like that. With rental properties your cash-on-cash return can be 15-20% compared to the 6-9% return and having a little or no control over your investment.
Do you want passive income where you don’t have to lift a finger but therefore get a lower return? Do you want to be completely hands-off? Do you want to take a couple hours out of your month to do some work to get a much larger return?
You also have to think about some personal items to see if you can even buy rental properties right now. Are you financeable? Do you have good W2 income? Do you want to be a landlord? Do you want to manage tenants or even manage a property management company?
If you’re not financeable and you don’t have good W2 income, then maybe you look at other options. Maybe it’s looking at buying properties all-cash or investing in REITs until you save up $60,000 so you can buy properties all cash.
REITs are definitely a good option if you don’t have $15,000 to buy your own rental properties. They’re definitely a great option to take a little bit of the risk off. There’s going to be a much lower return, but they are very liquid and are very passive. It really depends on what seat you’re sitting in and what your goals are for the future.
Reach out if you have any questions. We’re here to help!
The question that I get asked a lot by new investors and experienced investors who want to learn how to invest out-of-state is how do you find a good real estate market out-of-state and what qualifies a good real estate market out-of-state. I’ll walk through different ways that I analyze a real estate market out of state.
A couple of major things I look at are unemployment, population growth, major employers, diversity of workforce, the mayor’s mindset, colleges, and then I dive into the neighborhood.
You want to make sure that there are good, solid jobs in this city. You want to make sure that there is not a lot of unemployment. You can go and find these unemployment number by going to the Bureau of Labor Statistics. You’ll see there’s a ton of information there about different cities. The website is BLS.gov.
The BLS will show things like unemployment, population growth, and information aboud the diversity of a workforce. You can download reports from the website and they have certain data tools that you can use to look up exact information about each city.
I don’t necessarily want to find a city that has had extremely massive population growth over the last couple of years. Typically that means that the city is really hot, and you’ll see that for cities like Austin, Texas, Nashville, San Francisco, LA, etc.. Since the crash of 2008 these cities have really increased in population. I don’t necessarily want a city that has had some exuberant amount of population growth and influx of people. I’d rather have a city that’s been fairly stable but is just starting to go on the incline. That’s a city that I would focus on, and there are plenty of cities out there like that.
If you buy right before those markets begin to spike, that is when you’re going to get all that extra equity for all the properties that you’re going to be purchasing in that city. I want to buy in cities like Nashville a couple years ago, before they get all this momentum. Or imagine buying in Austin, Texas, before the city completely exploded and blew up and all these investors and people started to move there.
I also look at major employers when analyzing a market out of state. This can be found just with a simple google search online. Typically the website that I go to is Forbes.com and just type in the city. It shows all the major employers. You can actually just type it into Google and look up major employers for a city.
The things that I’m looking for when doing this search is major employers that are going to be here for the long term. I don’t want companies like Blackberry or Mattel to be the major employers for a city. I want companies that are going to be here for the long term, and even better if they’re S&P 500 companies or S&P 10 companies. I want companies that I personally believe will be here in 30+ years.
Something that I dive into after looking at the major employers is the diversity of the workforce. This can also be found on the Bureau of Labor Statistics. They actually have these two-page reports that you can find for certain cities, which show the diversity of the workforce.
The reason why I look for diversity of the workforce is because I want to hedge against what happened in Detroit when all the jobs were in the automobile industry. You want all the jobs to be diversified into five or six different industries. You want to make sure that no industry owns more than half the jobs or 1/3rd of the jobs. Because then if that industry does leave, it won’t tear down the entire economy and leave a city bankrupt and without jobs.
Another thing I look into is the political climate and the mayor’s mindset about the city. And interesting and probably the most fun part of doing all this research is finding the mayor’s mindset about the city and talking to the economic development committee. Each city is going to have what’s called an Economic Development Committee, or something similar. If they don’t, I would recommend not investing in that city.
What these committees do is they’re people who are going to bring jobs and businesses to the city by giving them incentives. They’ll give them tax incentives, they’ll give them other reasons to move to the city, they’ll provide them with ease of finding places to work and places to build their new warehouses, and all these kinds of incentives for moving to their city. They are committees within cities that help make this possible and make it easy for companies to move into the city and grow and develop their businesses there.
Typically for the cities that I’m investing in, these cities actually have their own websites. For the Economic Development Committee of St. Louis, you can see all the companies that they’ve helped bring there, what incentives they’ve given, etc. If you’re a business looking to move into St. Louis then they show you what incentives can they give you. Looking at those incentives and matching them up against other cities is very interesting because you can see which city is providing the best incentives for businesses.
In Memphis, the Economic Development Committee is giving all these tax incentives for companies to move and build there. For example, Memphis gave Amazon 15-years tax-free for building and developing and hiring over 1,000 employees.
Looking at what companies are taking up these incentives from the cities is also very important. A young company like Amazon taking up a 15-year tax incentive from the city of Memphis, that’s good news.
In addition these projects are very long. For Amazon it’s a two-year project of developing the warehouse before the jobs are actually going to come to the market. That’s something to take into consideration, tracking all the companies that are moving in, when are they moving in, when are the projects going to be completed, and when are the jobs actually going to be there is important. Then you can figure out where those developments are going to be, where the jobs are going to be, and then acquiring real estate around those places. You have a two-year time gap to jump on before those jobs actually hit the market. So buying as much as you possibly can in those markets before those jobs actually get there could be a good strategy.
Another thing I look for is learning a little bit more about the colleges there. Are there any major universities there, how many universities are there, how many students are going to college in the area, how much are they paying, where are those students living, etc.
Student housing is something that a lot of investors are looking at. These tenants turnover every year but sometimes they live there for four years and then they move out, but typically they turn over annually. You can slowly increase rents over time because these tenants are leaving. You might have a little bit more maintenance expense, but a lot of investors have seen that there’s also a lot of good students out there who are not going to trash your place.
I like to look at where the colleges are, what types of degrees these students are getting from these colleges and what kind of jobs are they getting after graduation. Also knowing where the students are moving after graduation is important. Are they going to this side of town for college and then moving over here after graduation to go work in the medical district (or some other district), that’s important to know.
Neighborhoods are super fun because there isn’t a lot of information about neighborhoods online and they’re changing all the time. One large project can change an neighborhood. I like to find up-and-coming neighborhoods in every city that I invest in.
Typically in the Midwest, the cities that I am investing in are cash flow markets. But what I try to do is find the appreciation in the cash flowing markets.
How do you do that?
Well…. it’s a ton of driving, walking, and talking. I personally drive or walk the up and coming neighborhoods. I go into the coffee shops or pizza shops. I eat the food, I leave Yelp reviews. I want to know what it feels like to live/work/play in my neighborhood. I talk to people who I interact with and ask them where the spot to go is. There is so much that you can pick up from actually just walking around and talking to people.
Once you’ve found a neighborhood that you like you have to make sure that the numbers make sense there. Rent-to-value ratio is you want to calculate. You want to find anything over a 1.0 rent to value ratio. A 1.0 rent-to-value ratio would be a purchase price or a property values of $100,000 and rents of $1,000. Typically for my neighborhoods I’ll find properties worth $70,000 and they rent for $800. So it’s like a 1.1, 1.2 rent-to-value ratio. 1.0 rent-to-value ratio or higher means that that neighborhood is going to cash flow and it’s going to cash flow nicely. You really want to stay above that 1.0 line.
I also look for neighborhoods that have low crime. You can find crime on Trulia. There’s a bunch of other crime map websites, but Trulia is probably the best. You can type in any property and it’s going to show up the crime map. It’s going to say, “Crime is extremely low in this neighborhood.” So you want to look at that and look at the surrounding crime too. If there’s a property that’s surrounded by crime but right in the couple blocks where it is there’s no crime, I would still stay away. You want to be on the better side of crime. You want to move away from it as much as possible. Crime is something that you can’t really control with your properties, so it’s something that I try to stay away from. I’m fine with a little bit of crime, especially near the downtown areas, but I try to stay away from it as much as possible.
Schools are something that a lot of investors talk about, but it’s not really a big factor for me. I am in blue-collar neighborhoods that I make sure are close to jobs. In neighborhoods that are appreciating in these c-class markets or c-class neighborhoods, there are not going to be very good schools anyway. Typically if you find a neighborhood that does have good schools, the property values are going to be well over $100,000 or $150,000, and cash flow tends to not make sense anymore. I just threw good school’s out the window when doing my analysis. Students still go to these schools even though they’re not top rated, or whatever it may be, but sometimes neighborhoods have private schools when there are not very good schools around a neighborhood and a lot of students do go to those private schools.
I try to find neighborhoods that have 60% or higher owner occupancy rates. That means 60% of the people in the neighborhood own their home. The reason is, people take care of their home if they own it, so it becomes a neighborhood thing if everybody takes care of their home, and if somebody doesn’t take care of their property they’re going to be looked down upon in the neighborhood. Everybody wants to have a good social interaction with their neighbors. So they tend to take care of their properties if everybody around them is taking care of their property as well. This information can be found with city-data.com. You can find owner occupancy rates for any zip code.
If you have any other questions about analyzing a market out of state reach out to me.
To see a list of our available properties click here. To see some more information about the markets that we are investing in click here.
Last month a truck manufacturing company called Autocar announced that their assembly plant opened and they will be hiring over 700 people in the Center Point neighborhood. These 750 jobs are just direct jobs, but the total amount of jobs that will be created from this plant are over 2,500.
Autocar is now the state’s fourth major auto assembly plant. Alabama already has plants for Mercedes, Honda, Hyundai and Toyota. Now with Autocar moving in to Birmingham, it just makes the auto assembly section that much stronger in Alabama.
This Autocar assembly plant will create over $120M in earnings for households in Birmingham. With this new income we believe that the amount of tenants will increase in this neighborhood. We also believe that with this higher demand for rental properties, the price people are willing to pay will also increase. Higher rents means that property values will also increase because investors like you and me are willing to pay more money for properties which rent out for a higher amount every month.
We’re excited for this hiring process to be complete and for these new jobs to move into the neighborhood. This could be the first of many more companies to move into Birmingham in the auto assembly space.
If you’re interested in seeing the properties that we currently have available view our current inventory. If you would like to talk to us and ask us more questions, feel free to schedule a call with us.
To read more about this move click here.
Over the weekend I had a call with a family who is interested in buying a rental property from MartelTurnkey. They asked me whether they should buy this property in cash or finance it. While this is a very lengthy discussion, there are a couple of key points to keep in mind when you’re thinking about using cash or financing.
The first thing is to look at your personal situation.
I know that a lot of people buy with cash because they have no other option. These are people who don’t have W-2 income, have bad credit, or are not financeable. Therefore, the only way they can create passive income with rental properties is by using cash. However, there is one workaround to that which I have done personally.
Since I own my own business, I don’t have a very high W-2 income, so it doesn’t allow me to get conventional bank financing. What I have done in the past, and what others can do, is buy properties with cash and then do a cash-out refinance on those properties later and bundle them up together. You can do what is called a portfolio cash-out refinance commercial loan.
Local banks normally do portfolio loans, so you can reach out to them. The difference between the commercial loan and the conventional loan is that when a bank underwrites a commercial loan, they take into account the cash flow of the property heavily. Unlike a conventional loan, it’s less about you and how much money you make, it’s more about the properties, and how much cash flow they generate. In addition, make sure when you’re doing this that you use a local bank. They know the market, they know the neighborhoods and the market and the properties that are in these neighborhoods. They’ll tend to care less about you and they’ll care more about the properties and how much they’re rented out for.
Looking at the return on investment for your rental properties is an important part of deciding wether to use cash or financing. Let’s say that you are financeable, so you have some W-2 income, you have good or average credit, then the discussion moves more towards the returns that you would be making on rental properties. Let’s say you had $100,000 in cash and you wanted to buy a $100,000 property. That would allow you to get one property and let’s say that property cash flow is $500 a month. So from your $100,000, you would make $500 a month in net cash flow.
Let’s say then that you wanted to use financing, so you would be able to buy that $100,000 property with 20% down. With $20,000 you would be able to buy that property, and that property is going to cash flow $200 a month instead of $500 a month because you’re going to have debt service. But you would be able to buy five rental properties instead of just one rental property. So you would be making $200 a month per property, times the five rental properties that you have just bought, so you would then be cash flowing $1,000 per month.
The difference here between the returns is that if you use financing you’re able to buy five rental properties, which cash flow $200 a month, so your net cash flow for month is $1,000. If you’re just using cash, then you will only be able to buy one rental property, and that property will then cash flow $500 a month. Therefore by using financial leverage and by using conventional bank financing or some other type of financing, you’re able to double your net income.
This of course is a very generic example, but with the properties that we sell all the time, this is a very basic circumstance that we often encounter with people who have $X amount of dollars in cash and want to invest in real estate. If people are financeable, we tend to recommend that they go with the financing route, just because it allows them to acquire more rental properties and also increase their net cash flow per month.
The other benefit of using financing, is that you build equity and have many tax advantages. Using financing allows you to build equity, while buying a property with cash does not allow you to build any equity. When you’re using financing and you finance five rental properties, the tenant pays their rent, which pays for operating expenses, property management, and then it pays for debt service. And every month that the tenant pays for rent and you pay off the financing, that’s just growing your equity, that’s growing your net worth each and every month. And you’re normally going to get these properties on a 30-year fixed loan, so in 30 years you’re going to have a ton of equity in these properties since the loans will be paid off. If you’re buying five properties, each worth $100,000, that’s $500,000 of net worth that you’ve created just over time.
By buying more properties and using financing, there are also some other tax advantages that you get. You’re able to write off the interest payments. So at the end of year when you report the income for the property, you’ll be able to deduct those interest expenses. This will then show to the government that you’re making less cash flow than you actually are, because you’ll be able to write off certain things. It will also give you a lower income tax because you’ll be able to write off certain things, and there are other expenses and stuff that you can depreciate.
I am not a tax professional and this is not tax advice. Please consult a tax professional with your tax related questions regarding cash or financing rental properties.
If you’re interested in seeing the properties that we currently have available view our current inventory. If you would like to talk to us and ask us more questions, feel free to schedule a call with us.