I was asked the other day what methods I use to find properties, and why it takes so long. “If your plan is to have 12 properties, why does it take you so much to find new ones?”
Well, I live in Germany and my RE is to be bought in Portugal. This limits my opportunities to actively look for new properties, but this is not what consumes the most time. It is actually the rules that I use to buy new properties. Remember, saving 20% now on a 40K property (8K) will have a tremendous impact in even 5 years from now. I am not just trying to get rich by doing smart financial decisions, I am on a hurry to retire! This means that I need to be extremely savvy and get the best of the best deals! I am also a goal setter, so I have a lot of goals to meet. Let us discuss what I do to buy new properties.
Studying the market is not an overnight job, but this is done and I know exactly what I am looking for. If you’re considering going into real estate, study and re-study your market (I will post something about this in the near future – stay tuned there is a lot to come up in March). So if I know my market, what else do I need? Here is what you need:
- Consider start time and establishing a long term relationship with one or two contractors. They will be crucial for you to have substantial gains now but mostly in the future. This is especially true if you decide to buy undervalue, distressed properties. This is also done in my case.
- Determine the type of property that most of the market wants. Typically, 80-90% of the market wants ONE type of property. This is what you go after. Determine how much those 80-90% of the people are willing to pay in terms of rent. In this process, honest real estate agents are a MUST. This is also done in my case.
- You need to buy undervalue. And this you won’t find overnight!!! Get the 3+ best real estate agents of your market and tell them you’re only interested in undervalued properties. If they come back with reasonable, market-value deals, tell them they’re wasting your time and you only go into excellent deals. In parallel, look for good deals in foreclosures and auctions. Find distressed properties that owners want to get rid of (e.g. there is a big chance heirs want to get rid of the properties they inherit). This is what I do all the time, but it takes a lot of time to find what we want.
- Based on the max rent, determine the maximum price of a property in order to pay it in 15 years, if no fixes are necessary. Remember to deduct all costs, like condominium fees, property manager fees and, of course, taxes. Try to buy properties that fit what the mass market wants, at 20-30% what the maximum price could be. Rent it out for 10-20% less than what the masses are willing to pay. But why does this take so much time? Sellers are usually emotional, get away from those because they think their property is worth 50% more it actually is. But they are 80% of the sellers. You’re left with 20% of the market, where 95% are market-value deals…
- See value where others don’t. This is my favourite way of doing business. You just saw a condo you think you can rent out for a nice rent. I am sorry to tell you that chances are you are not smarter than every guy what inspected the property. You may well be right, though. But if after a lot of time you’re the first to see value in the deal, think it through. Even if you’re this gifted, this will take time.
- You found a nice property. The owner needs cash and doesn’t really care selling 30% undervalue because that property doesn’t mean much for him. You think you can tweak it a little and turn this black duckling into a beautiful swan. The deal seems great and you are about to close it. You’ll be able to rent it out at 10% below market and make a good profit. Because you don’t know the area that well, you decide to ask around one last time before you complete the purchase. You end up finding out that the next factory is about to close. You need to restart the process because soon enough your property will worth 35% less and you won’t find no tenants. Restart the process may mean 3 another months.
- Be a good landlord. Not good, exceptional. Look after your tenants, they will stay longer. Don’t look like a charity entity, but treat them well and evaluate if it pays off to improve your properties. [I usually pay a 1-rent commission to my property manager to find new tenants. I’d rather spend it on a new dishwasher and keep the current tenants in than on finding new tenants.] Some tenants try to move because or minor reasons like noise-proof windows and what not. You gain by upgrading your homes and keep them there opposed to have them leave and have a vacancy. Although this looks easy, it is the first mistake of new landlords. They ask 10% more they should, and they end up experiencing vacancies. Vacancies are expensive! One year of 10% above-market rent will cover one month of vacancy.