“There are only five notes in the musical scale, but their variations are so many that they cannot all be heard. There are only five basic colors, but their variations are so many that they cannot all be seen. There are only five basic flavors, but their variations are so many that they cannot all be tasted.” – Sun Tzu, The Art of War
I’ll throw out a few approaches, nothing is set in stone, and it’s more food for thought than something you have to follow concretely. Try them all and see how they work for you.
Some investors have a goal to acquire 12 single-family residences, one by one. As soon as one deal is closed, they’ve guaranteed they’ll be able to rent the property at positive cash flow plus some equity hopefully, and then they sit on the property until it builds enough equity to acquire a second property. They only pull enough cash out to acquire the second property plus fix-up costs, and then wait until both properties recover sufficient equity without decreasing positive cash flow too much. They repeat this process ten more times, until what they have is a positive cash flowing property for every month of the year, and if they happen to need a big amount of cash, they can just always refinance one of their rentals.
As a single man, I was able to move into the house to be flipped and work on it while I lived there. One agent called it genius saying “you wake up and you’re already at work”. It’s harder, but can still be done with an understanding family. For instance, living with a woman who is willing to live in those conditions, your priorities change in that the first things you’ll need to square away are the kitchen and bathrooms.
Another strategy (if your goal is to live as a full-time investor) is to calculate what your monthly cost of living is, and acquire just enough positive cash flowing rental properties to cover your cost of living and a little cushion for rainy days. Then, your working capital is not having to be shared and carved up with everyday living expenses, so as long as you keep good management of your working capital, you can rehabilitate and turn over properties as money allows.
Maybe you’re in a high tax bracket and need some write-offs to preserve your income. It’s never been said, but reading between the lines, I don’t gather the government really wants to be involved in housing (look at the horrible job they do with projects), so I believe housing always be an opportunity. If you can read between the lines, the government makes it fairly easy for you to maintain position as a landlord. The U.S. is one of only a few countries were mortgage interest is tax deductible (speak with your accountant in-depth first). Pick up one or two rentals with your extra disposable income and leave it at that. You don’t have to get too extensively involved in the landlord business, and it’s actually a plus for you taxation wise if your properties run at a slight negative cash flow, so as long as whatever you lose yearly is right around what you would’ve paid out in taxes. I look at it like this: in a way, you are doing the government a favor by keeping them out of the housing business, so they’re willing to reward you with a big, earned tax break. You take advantage of the accounting concept of depreciation.
Depreciation, in layman’s terms, say you bought a condo to rent for 90K. there’s a number of depreciation schedules, and again, you’ll want to see your accountant to figure out what’s your best fit. For the purposes of easy math, we’ll use 30 year straight line depreciation. Take your 90K investment, divide by 30 years (you get to claim a paper loss of 3K per year in wear & tear), and you end up with 3K off the top that can be written off against your working (active) income as a passive loss.
There’s land subdivision, land assemblage (this is a little more complicated and advanced), acquiring vacant land to build properties ground up, building commercial apartments, business facilities, strip malls. Some properties in specific areas can double in value by adding a bed or bath. You can do an analysis of buyer trends for hot areas and specialize in just being ahead of the curve.
In land subdivision, the goal is to acquire a plot of land in an area that shows promise to be desirable at some point in the future. Make no mistake; you are absolutely, completely speculating. You also have to make sure that whoever the governing body is over your target property allows for subdividing, and if so, what is the smallest parcel that can be carved out? Which means you have to do a little research. Proceed to file applications to have the land broken down into smaller parcels, use a little math, start cutting and advertise your land for sale. Example: you stumble across a 10 acre plot of land on the outskirts of the next oil fracking site. You can purchase this land for 100K. You make a decision to sell 1 acre parcels, and the county zoning department approves. Now let’s take 100K, divided by 10 (the number of 1 acre parcels you could draw out of this); that gives us 10K per parcel as our breakeven number. Let’s add in the county may want say, 1,000 to record each new parcel. So that pushes our breakeven number to 11K per parcel.
Now the fun part! Let’s research the average new home in the area. Let’s say the average sales price is 90K, and this is very affordable in a fracking boomtown. We want to do some more research to find out how many homes are allowed on one acre. At the same time, keep in mind that smaller is not always better. I remember one of the complaints about Las Vegas new construction was lots were sometimes so small there was no yard room left. A good healthy size lot for a SFR is one/tenth of an acre (0.1%). So let’s consider putting 10 homes on each acre. If we could then figure each home can be built for 60K (and resold for 90K by the builder), then we figure builders will want to buy our 1 acre lots at somewhere under 600K (10 homes per lot X building cost to them of 60K). If the value is this good, let’s assume there will be competitors in the area, so we have to price according to the competitor’s planned pricing as well. Let’s throw out a number and say we’ve decided we’ll sell our lots for 150K. 150K X 10 = 1.5M gross profit minus 100K purchase price + 1K in plans. How does 1.4 million dollars sound? One of the major mistakes I see people making (and this is all difference of opinion; some people would say I’m too soft for thinking like this – but it works for me) is they set their pricing so high that now you open yourself to being underbid by competitors, waiting a long time for a sale, and a host of problems that come with trying to wring every buck out of your buyer. When you willfully leave some money on the table for the buyer, you’ve just made a repeat customer, which is priceless. That builder will now continue to call you from time to time to see what else you have available. This is a field that it’s damn near impossible to get repeat customers (most people only buy one or two homes in life); this is a way to get around it. This may not be your strategy, but what works for me is speed. Meaning I want to always see money liquidating, even at a slight discount, that way you never know what may come to you in the form of opportunity to jump on, but you need to be liquid cash to do it.
The drawback to this is that lenders usually will want a significantly higher down payment for undeveloped land, somewhere in the neighborhood of 50% of the appraised value. So for the above example, just guesstimate the lender will want to see 50K down, but if you shop this to other investors properly, you may not have all that hard of a time raising the money. If you have to go to investors, make sure everything is spelled out in clear terms on a contract, and best to have that contract approved by an attorney. You may obviously have to cut your profit up, but so what once these investors feel they can count on your skill and word, their checkbook will always be open so as long as you treat them fairly AND remain accountable. I’ve never understood thievery when people will willingly GIVE you what you want/need as long as you repay your debts.
Land assemblage is the same ballgame but in reverse. It’s somewhat difficult to explain if you don’t get the concept of “synergy”. The best way I can illustrate this is from my personal life. I had a plot of land that at the time I thought was landlocked (meaning the parcel was sitting in the middle of a block with no access to the street, or so we thought). So on paper, even though the lot comped at about 60-65K, I’d have to take a significant discount because of the lack of street access. So in order to get full value, I’d have to somehow acquire a neighboring lot with street access, and then merge the two parcels together as one.
Another form of assemblage, using the same lot, would be the following: My lot measured at 11,000 sq. ft. City ordinance only allows for a storage facility on lots in the area less than 11,000 sq. ft. Now if you have 11,500 sq. ft. or more, a gas station is allowed on the lot. Let’s say a gas station is far more profitable than a storage facility or warehouse. So what I need to do to make this happen is somehow acquire a suitable neighboring parcel 500 square feet or more at a reasonable price. Then I can build my gas station. The first thing you’ll want to do is locate the owners around you from the county recorder’s office or website. You’ll want to get in touch with a real estate agent once you have the neighboring owners’ contact information and ask them to put you in touch with a title company that can go further into getting current contact information. Contact them by letter or phone if possible and make them an offer. You may even have to go as far hiring an attorney to do the research in making contact with the owner. Once you reach the owner, make them an offer that works within your budgeting without sending your project overboard.
A way to get into real estate from the sidelines and minimize your risk is REIT’s (Real Estate Investment Trusts). A large number of properties are grouped together under one business entity, and then investors can simply purchase shares, and receive profit in the form of a shareholder dividend. Of course, your profit depends on the management team that is handling the day to day operations, so I would compare several, and do a ton of investigation before putting my money into someone else’s operation. You will not get rich quick this way, but it can be a small, steady, stable income to supplement your regular income.
There are tax sales which I have heard people making quite a bit of money at. In principle, tax sales work like this: The government always holds the “zero” position on every property within its county. They are ahead of you, the first mortgage holder, second mortgage holder, so on and so forth. Unpaid property taxes trump everything first and foremost. The government can even seize property away from the bank for unpaid taxes. The theory is that you find out when and where the local tax seizures are being sold at, you can place your bid and then winning bidder walks away with control of the property so as long as they pay the back property taxes. Lender and every other debt attached to the property are instantly wiped out. The problem is that the previous owner still has a certain amount of time designated by each county to reclaim the property, even if you have paid their back taxes. However, they will have to pay you back all of the money plus interest at rates around 12-16%. How long they have to pay you back depends on each county’s policies. So you don’t lose either way but it’s hard to make a living at something you’re not in 100% control of. Tax sales may be a good place to shop if you have extra cash laying around unused.
There is also the note buying market. I think this is a tough way to make a living, and you should have a steady income before attempting to invest in notes. In theory, this is how it works. An owner agrees to sell a property to a buyer that can’t quite qualify for the entire amount of the property. The owner agrees to take a trust deed to cover the difference of the gap of the sales price and what the buyer can qualify for. Let’s use a random number of $20,000.00. The owner needs to draw up the trust deed with a higher rate of interest than the first mortgage (high enough to make it attractive for resale), the right to collect monthly payments from the buyer, holding interest in the property as collateral with a right to call the note due after a certain number of missed payments (foreclose).
The owner can choose to keep collecting payments as a second lender, or package the trust deed up for sale on the note market, where presumably, a buyer will pay the owner, using our above number of $20,000.00, $16,000.00 for the note. Again these are not hard and fast numbers, just an example. So the owner gets out of the property altogether now, and although they lost $4,000.00 in the total sale, they still got the majority of their profit and a release of liability to the property. The new note buyer/second lender spends $ the 16,000.00 cash, and their goal would be either to wait on collecting the payments from the buyer, the payments should obviously total more than the $16,000.00 spent to obtain the note, or sad but true, hoping the buyer cannot maintain the second note and foreclose, therefore taking over the property and only being indebted to the first mortgage. Now the property is theirs to rent or sell.