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Video: PCS Webinar Recording – Our Best PCS Tips in 30 Minutes!

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Full Video Transcript

Hey, everybody. Thanks for tuning in. My name is Pat Wilver. I’m one of the co-owners of Trophy Point Realty Group. I was a third ID veteran stationed here from 2014 to 19, and I decided to stick around Savannah after I got out of the army. We’re here today to talk a little bit about some things to consider when doing a PCS move. So we’re gonna start off with selling a home. We’re gonna, we’re gonna assume that you’re selling a home wherever you’re coming here from, and we’re gonna go over some, some tips and tricks in that regard. If that’s not the case, if you’re not selling, feel free to go ahead and skip ahead past this section, because it’s not gonna be super relevant to you. Now, when you look at selling, there’s a couple things to consider. First of all, is the, is the, the money factor, the monetary factor.

And that is, “Hey, if I sell this house, can I take the equity that I have in that house and take that cash and go put it to use somewhere else that’s gonna make me more money than if I were to hold onto this house and rent it out?” And if all you care about is the money, that’s the only question you wanna look at. If the answer is “yes, I can find a better use for that money elsewhere,” then you should sell you should sell or you should at least refinance and pull out some of that money. Also personal preference comes into play. Maybe you don’t want to be a landlord. Being a landlord can, can kind of be a pain. And some people just don’t want to do that. And that’s perfectly fine. There’s nothing wrong with that. So that’s the reason to sell. And then third, you might have to sell maybe you can’t qualify for a second mortgage.

Maybe you can’t you can’t qualify for a second mortgage or maybe you’re having a divorce or changing your financial situation where it’s just not feasible for you to to actually keep onto that house and then buy a second one. So those are the three main considerations. So let’s take a look here. Next slide. Alright. So factor one that we look at is money. So we already kind of talked about this a little bit, so let’s just go ahead and go to the next slide, but we’ll get a little more detail. So this is an example. Let’s say you can sell your home and put $50k in your pocket or you can rent it out and make $5,000 in profit each year. And that’s, let’s just say that that’s your cash profit. That’s your, your cash flow. The cashflow of about $450/month.

That’s a, that’s a really good cash return on your equity. Actually, that’s, that’s really good. You, if that was me, I’d probably wanna look at, hold on. How do I hold onto that rental and buy something else? If I was making that much cash that’s, that’s pretty solid. Especially if you bought that home with a VA loan and you don’t have any money down, that’s, that’s pretty sweet. So, but let’s say you’ve got that $50k of equity and you know, you’re not gonna cashflow or maybe you’re gonna be cash negative. That’s gonna be a situation where, you know, look, look possibly to selling that property. And, and there is some other options too, we’ll talk about later. You don’t necessarily have to sell, if you have a lot of equity in your home, you can look into into a cash out refinance perhaps, and you can pull out some of that money, not all of it, but some of it and your cashflow will probably go down a little bit, but that’s, that’s a way to hold onto your property.

So personal preference, right? So we, we kind of talked about this. Do you want to rent, even if the numbers don’t necessarily add up? You can, you can do a HELOC which basically you know, as a line of credit, that’s tied to your home, that you can, you know, take out money. A lot of people use those to renovate homes, people who flip houses like to use HELOCs for those or cash out refinances, put a new 30-year loan on, pull out some cash. Other personal preference – do you wanna be a landlord? There’s property management, there’s answering tenant questions and issues quickly, there’s covering maintenance items. You know, it’s, the air conditioning goes out, you know, boom, there’s probably a $7,000 bill that you, you have to cover. So that’s, you know, some people don’t wanna do that.

And then, you know, maybe, maybe you have a use for that equity outside of, outside of making money as an investment. Maybe you’d need it to make a down payment on your next house. You about to send your kids to college. Maybe you have some credit card debt that you’d like to pay off. That’s, that’s a use, that’s a good use of that equity. And that might be a reason to sell outside of, you know, looking for a better investment. So necessity, right? Maybe you need to free up your VA entitlement. It is possible to have two VA loans at the same time. I actually myself have done that. There are some things you need to go to. You’re gonna want to talk to a good lender about your situation and, and ask a question. Can I get a second VA loan?

And if so, you know, in my case, when I got my second VA loan, I had to bring some money to the table as a down payment. So you, you may have to do that. Especially if the house you currently own on your VA loan is, is worth a good amount of money. So maybe you need to free up that VA entitlement. Maybe you need to maybe you just can’t qualify for two homes at the same time. Maybe you’re starting out your career in the army. You’re not making a ton of money yet, or maybe you’ve got a lot of other debt obligations out there or your credit’s not so great. Again, that’s a lender question – you have to ask if you can even qualify for a second mortgage. Like we kind of talked about maybe you need to access home equity in order to make the next purchase. And then of course changing your financial situation, divorce, things like that. Sometimes will make it necessary to, to sell a house, even if you don’t want to.

All right. So let’s look a little bit into renting out your home after you move away. So let’s say that you decided you want to rent out. What does that look like? Here’s the bottom line up front. If you, if you want to self-manage, if you want to not have to pay a property manager, then you need to already have connections with handyman, contractors, and other vendors that you’ve worked with and you trust. It’s very difficult to, to self-manage from a distance, unless you already have these relationships built. And there are people that, you know, you’ve worked with before and you trust them. So if you’re going to PCS in three months and you’re trying to self-manage and you haven’t built any of those relationships, yet, it, it might be a little bit too late to do that. So that’s important. So let’s talk about, you know, what are some landlord duties, right?

Well, the hardest one is really placing a tenant. It’s finding that tenant placing in under property. This is very, very difficult. I tried to do it once from a distance and it just didn’t work out. I ended up hiring a friend of mine who is an agent. This is before I became an agent and I was still in the military, and I just hired him to find me a tenant. It’s gonna be very, very difficult to do from a distance, not necessarily impossible, but you’re gonna have to pay somebody to do something. If you pay an agent to do it, and they’re doing this as a one-off I’d probably expect to pay one month on rent and commission for them to do that work. Maybe if they do you a solid, they do it for cheaper, but you know, me personally, I, I don’t really even like to place tenants.

It’s a lot more work than it’s worth to me. Unless it’s a rental property, that’s really close to where I live and it, and it’s not a burden for me to drive over and show it. So we’re also, you know, figuring out tenant issues and questions. Tenant calls you, Hey you know, the, “the sink’s clogged” the, you know, “I locked myself out” or, “Hey, I think there’s something wrong with the, with the stove”. These are things that come up. And, and what makes it difficult, this is the important contingency plan, right? You know, what, if you’re at NTC, what if you’re deployed? What if they can’t get ahold of you? Who, who a) is gonna answer the phone when you can’t and b) who can make a decision, say if you’re out in the box at NTC and say, you just went out and you got 10 days and air conditioning goes out and it’s summertime, you know, who’s, you need to have somebody who can make that decision for you while you’re not around, because your tenants are not gonna wanna wait 10 days for you to get back from the box to approve a $6,000 repair, right?

So that’s important. That’s very important. That’s something, if you don’t have a good answer to that, you should just have a property manager to handle that for you property management, typically a low-margin business. So it’s a natural incentive for property managers to cut costs. There’s, there’s some good ones. There’s a lot of bad ones, most real estate people who do property management, they typically do it as a way to keep their their past clients kind of in-house and top-of-mind, because eventually down the road they’re gonna want to sell. And, you know, you want to be the first person they think of. So a, a lot of the incentive to do property management, it’s not so much to make money on the management. It is just to kind of keep your past clients kind of in the, in the circle, right?

So get recommendations – investor Facebook groups are a good place to go, you know, find your local area and search on Facebook for real estate investors. Ask some, ask some people there. You know, if not, Google, call around, I find referrals typically to be the best. And then cost, you know, in this market is typically 10% plus tenant placement fees. And the Savannah market is typically a half a month rent is tenant placement. Other markets are as high as a full month rent, tenant placement. And you also need to vet these people, right? So interview a couple, don’t just go with the first person you talk to. Go meet with them, check out their offices. It look organized, you know, do they, do they speak well? Do they write well? Ask them, you know, what kind of software did they use?

Are they using a professional software like Appfolio, or are they, you know, old school or, or no software at all? How many properties do they have under management versus how many people on staff? Right. If they have 300 properties under management and only one person on staff, that person is gonna be overwhelmed and they probably won’t be doing a good job. And then it’s also good, I think, to call as a tenant. You know, look up a property they’re advertising, pretend to be a tenant. “Hey, I’d like to see this property.” How responsive are they? Right. do they get back to you or do they kind of just, you know, let things slide? Because I, I see properties sometimes, you know, listed for rent that are at a good price that should have rented. And they don’t. And I, a lot of the times it’s because the property managers are just not following up with those leads. So you don’t want that to be your house.

All right. So let’s, let’s say you decided to sell, let’s say selling’s the best best decision for you. And instead of going that route. So hey inventory is super low, right? The pretty strong seller’s market, even with rates going up as they are we still find it’s a pretty strong seller’s market. So you think the house will sell itself. Right? And that’s not always the case. There are a few things that you can do to get every dollar of equity possible out of the sale of your home while – and this is bold and underlined – making the process smooth and easy. Because you got a PCs move. You there’s a lot of, there’s a lot of steps and a lot of moving pieces that go into selling a home. And it’s, you know, a lot of work when you’re also trying to clear post and, you know, figure out the, the kids schooling situation and find a new house where you’re moving, et cetera.

So the first steps, right? So we have here, number one, call trusted agent, as soon as you can. Of course, I’m an agent I’m incentivized to get you to use an agent, but there, there are really two big reasons why I recommend that. And one is I myself will use an agent in a market that I do not understand. Other markets that I invest in. I use an agent, even though I’ve done a hundred plus transactions here in the Savannah/Fort Stewart market. I just do that because there’s so many different things and it’s not just, you know, figuring out what the market value of the home should be, but there’s different customs and different things that people do in different markets. That if, if you don’t know how those things work you know, it’s, it’s, you’re gonna be missing out on some things making it difficult on yourself and possibly leaving money on the table as well.

If you don’t know an agent, like I said, I always say, ask your friends for recommendations first. Right? That being said, your friends might have worked with a dud and not even known it. So you still want to vet these people, but, but ask and always talk to a couple different agents. You want to, you want to interview them, you wanna make sure that they return your calls, right? If you’re talking to, if you’re talking to somebody who say they take, takes them a day to get back to you, right. You know, typically either they’re, they’re too busy, you know, to take you on or they’re just lazy. One, one or the other. And I’ve been there before where I’ve, you know, sometimes forgotten to text people back. And that’s when I decided to start bringing on new agents onto my team, because I knew that I was getting busy to the point where I myself could not provide the level of service that I need to.

So I hired more people and, and now we do that. And take a peek at some of their listings. Right. you always wanna ask them “Hey, can I see some of your old listings?” Or if you go on Zillow and you search that agent you’ll, you’ll see their old listings the ones where they represented the seller, look at some of the photos. Did they, did they look professionally down or were they cell phone pictures? How did they sell? Did they go under contract quickly? Things like that. You know, the good thing about when you’re trying to vet a real estate agent is it’s very easy to look at their past work, because it’s on Zillow, it’s on realtor.com for you to see, you know, how they are. And how much deal flow they have. Are they doing 20, 30 deals a year or are they doing two or three?

You probably don’t want to work with the guy that’s doing two or three or the person that just started. Unless that person is working with a, you know, a team like mine, where they have people that they can reach to for guidance and, and wisdom and things like that. Our, our younger agents, we always take them under our wing and their first few months in the business, until they’ve established and they got rock and rolling, we, we help them every step of the way. So not necessarily bad to work with that rookie, as long as that rookie’s got a mentor, that’s helping them out, right? Sometimes I find rookies are the best because they have the most time and they’re putting in the most work. And they’re so scared about doing a bad job, that they can be very, very, you know, really very good.

As long as they’ve got some guidance. So what it’s next, right? Call your agent and look at some look at some, what are some home improvement projects that we can do, right? What, what’s some stuff that we can do to add some value? There might be some very easy things that you could do to add a lot of value to your home, um depending on what you’re looking at. So here’s some examples, you know, you can mulch the flower beds, replace your beat-up doorknobs, fixing dents in the drywall, touching up paint, easy things. This is something, if you’re a little bit handy, you know, you can take, you know, the two months before you go to move and you can just work on that, you know, Saturday afternoons and get that done. And I think it’s good. That’s why you wanna call an agent sooner rather than later, because you can agent in your house six months before, you know, you’re gonna move, um they can go over some of that stuff. And that way you’re not stressed out trying to get all these projects done right in the last month before you PCS. And then there’s some bigger projects too that you might want to hire out to a contractor. Maybe your flooring is really beat up and it’s time for some new flooring. Maybe your kitchen cabinets are just trash and maybe you want to, you know, do a little bit of a bigger project. That might be worth it. That might not. That’s why you want a listing agent’s help. So your agent should be able to ballpark you what it’s gonna cost, estimate how much value it’ll, it’ll add to the home and then provide recommendations for good contractors who will do the job, right and at a fair price.

So there’s some things not to do, right? If you’re, if you’re in a cheap, cheap, old starter home and all the homes around you are cheap starter homes it’s not gonna get you a bunch of money to put in stone countertops. Okay? It’s just probably not gonna be worth it. Go for butcher block. It’s gonna be a lot cheaper. It looks nice. Like for real also the real hardwood flooring, you almost never, it almost never makes sense to put real hardwood flooring. I met a couple sellers who wanted me to sell their house and they were just bragging, “oh, I put this real hardwood in, it costed so much money. It’s gonna add so much value,” and it’s, they never want to hear it when I tell them it’s not, it’s not gonna add value because every other house in this neighborhood has the laminate floors, the vinyl plank floors, buyers here are totally satisfied with that.

They’re not gonna pay you $15,000 more for their hardwood that they don’t really care about anyway. Right? so yeah, take a look at recent sales in your neighborhood. You know, what, what do they look like? And of course, again, talk to your agent. They should know. And you know, anytime you’re thinking of any home improvement project, maybe you just moved into your house and you’re thinking, “Hey, you know what, if I do this?” Call your agent, ask him, “Hey, is this gonna add value?” and just because it won’t add value doesn’t necessarily mean you don’t do it. If you want to do it for you because you would enjoy it. But that way you at least know you know, how much money are you gonna invest in this project versus how much will you get out when you sell it?

So getting to the market, right? Talk to the lender and figure out how much your debt to income ratio can support a second mortgage. If you can get approved for second mortgage, I recommend buying your new home and moving into it. Before you sell the old one and that way vacant houses typically are able to sell for more 1) because you are going to, it’s gonna be a lot easier for agents to schedule appointments. They can just show up versus having a schedule, makes it easier on you as well. Also you can really do a deep clean, you can really make sure everything’s perfect. And you know, especially I know when, when I was in the military and even now to an extent, because I’m kind of cheap. I had just had all this beat up furniture because I was PCSing all the time and it all looks terrible.

And sometimes it, I haven’t, you know, sold a house PCSing. I kept everything I bought as a rental. But if you were like me and have beat-up, ratty furniture, it’s better if that stuff’s out of the house, right? Staging, staging is sometimes good even in this hot market. I recently did a, a renovation project, a flip it was a beautiful, gorgeous flip. And I spent, you know, about $2,000 staging and I think it was worth every penny. Sometimes it makes sense. Sometimes not – depends on your situation and you don’t necessarily have to stage all the rooms. Sometimes just a few little decorative pieces can go a long way. Your agent should know who a good stager is. So let’s take a look. This is the timeline. This is a rough timeline. So let’s say, you know, June 1st is your move-out day, right?

These are your kind of big touch points here, right? So you want to do the cleaning after you move out. You want to do the staging after that if, if that’s something you’re gonna do. The day after that, professional photos, photos take a day or two to get back, boom, listing’s live on the seventh, right? If it’s priced well in this market, you know, if it’s priced well, you typically under contract – say you list on a Friday morning. Typically by Sunday night, Monday morning, you figured out who’s gonna buy your house. Right? Couple days later, buyer’s gonna do their inspection, a couple days after that they’re out of due diligence. And that means basically they’re buying the house unless it appraises low or they somehow don’t get approved for the loan. Takes another week after that, and then we can typically expect to close typically in 30 days.

So June 10th, July 10th, typically 30 days is that that’s most contracts that we’re seeing, right? So we’re looking at about a 40, 45 day period between the time you move out and the time that that house is being sold, more or less. Now what this doesn’t account for is sometimes an, an inspection happens and a buyer backs out. Well, that’s gonna add, you know, five days, five to seven and days on your timeline or it doesn’t appraise and the buyer backs out. That’s gonna add about 20 days onto this timeline. Those are things that happen. It’s it’s, you know, anytime you go under contract on that house, just keep in mind that it’s not, it’s not happening until the, the money hits your bank account, right? So always, you know, don’t start making big plans until you’re getting closer to that, to that closing time.

Alright. So getting to the market, so hey, most people won’t be able to move out before listing that’s okay. We just modify that timeline. You know, you get the, you get the cleaning done while you’re still living there and we just work around the schedule. That’s not so big a deal. The big thing is, try to take it down some of your trinkets some of your different photos and stuff because you want to have the house be as neutral as possible to appeal to the widest amount of people. And so that they can imagine themselves living in the house, right? If it’s all, you know, all your personal effects and all your trinkets, well, they’re gonna come in and that’s still gonna be your house, not theirs. You want them to walk through the home and, and imagine their own personal effects on the wall. Also, you know, try to keep the moving boxes, put them in a garage, put them in a spare bedroom. It’s much better if all of your random junk is in one spare bedroom and, you know, buyer can open a door and say, oh yeah, this is where they’re stashing all their stuff versus having moving boxes all over the house. So yeah.

All right. So here we go. There’s a couple things that we can, we can look to do to make the, make the transition easier. Right now in this market, sellers are pretty successful in getting a seller rent-back period. And what’s good about that is you can, you can basically sell your house, say you sell your house on June 30th and you still live in it until July 30th, right? That allows you to do two things. One, it makes your move less stressful. And two, the biggest thing is it makes purchasing your new home in your new duty station a lot, lot easier because it is very difficult right now, if you make an offer, say you’re going to Fort Carson and you make an offer. And in that offer, it says, “Hey, this is my offer and it’s contingent on my house in Fort Stewart selling”. That offer is probably not gonna go anywhere.

It’s probably not gonna get accepted. So if the house is already sold, you don’t have to make that that contingency, right? So that’s a good thing about that. Especially if you can’t qualify for that second mortgage without selling the first home, that’s a great thing to look at. And that’s, that’s why you want, you know, we see this next bullet point, lots of moving pieces, right? The agent helping you sell your home and the agent that’s gonna help you buy your new home and the lender that’s gonna give you the money to buy your new home, should all be kind of touching base about your situation, because you know, the, the, the agent that’s gonna help you buy a new home and the lender are gonna have information that the agent agent who’s helping you sell your home needs to know. So make sure that, you know, you trust both these people. If you don’t know someone, you know, in a duty station you’re going to you know, ask, ask your agent. If you ask me, “Hey, do you know a good agent in Carson?” “Yes, I do.” “Lewis?” “Yes, I do.” Bliss, Hood, you know, Bragg. I, you know, so especially if your agent does a lot of military PCS moves, they I’m sure they know somebody where you’re going. Somebody who’s good.

So what’s the relationship look like? You know, you can be as involved as, as you want to. Most of the time, you know, our clients don’t wanna be involved cause they have a bunch of stuff going on. They don’t have time to worry about it. That’s why they hired us. You should hear from your agent at least once a week typically, you know, at least once a day, your first weekend on the market just kind of keeping you updated, “Hey, we got these offers,” this, that, “let’s, you know, let’s pick a time to talk about all of them.” and then you sit down and you go over all the offers and the pros and cons each one, you pick one, you go under contract. Once you go under contract, you know, it shouldn’t be an everyday kind of thing, just as things come up you should hear from your agent. Um you know, it’s best to let your agent do the job that they’re good at, but always trust with verifying.

Don’t be afraid to ask why. It’s something sometimes I forget to explain why upfront. I just assume that people know things that, you know, they shouldn’t know, or they wouldn’t know. And so, you know, I like when my clients ask me, “Hey, why are we doing this?” “Oh, well, this is why we’re doing it because of, you know, this thing.” never talk to buyers. Don’t talk to buyers, do not talk to buyers, do not talk to buyers. I have never seen a seller talk to a buyer and do anything but give the buyer information that the buyer can use as leverage. It’s best not to talk to them. Really, whenever buyers are looking at the house, you should not be in the house. Couple reasons – one, you know, they’re not going to, they’re going to feel rushed. They might feel like you’re looking over their shoulders.

They’re not gonna say the things to their agent that they want to. But two, the biggest thing is you never do anything good by talking to those buyers or especially their agent. I love when I’m working with a buyer, I love when the seller’s in the house and I just love to talk to them and I put on my friendly face and I’m I’m friendly, but I’m always trying to get – what kind of information can I get that’s gonna help me negotiate the deal? You don’t want to be there. All right, so, Hey, let’s move on to buying, right. How do we buy? So when do you make your money in real estate? It’s not when you sell. It is when you buy, right? You make your money when you buy. What that means is if you pay too much now, it doesn’t matter what happens in the market, you’re gonna be in a tough spot later. You know, why I like owning real estate is the homes tend to appreciate over time. And every month, you’re paying off your mortgage balance instead of paying off your landlord mortgage. And you, the other good thing is too, you buy a home, you own a 30 year fixed mortgage. Your payment’s not gonna change. Whereas rents have traditionally always increased. So how do we do it remotely? When we look at some, some quick things, let’s say, you’re, you’re gonna be somewhere for only a year. Maybe you’re going to you know, Fort Benning for the captain’s career course or something, probably don’t buy there. Right. I, I didn’t buy when I went to the career course. It’s probably best to rent. Unless you just find a smoking good deal, which are kind of hard to find in this market.

Right. do you believe housing prices would be worth more when you, when you leave? So say you’re PCSing to a duty station that just got word that they’re gonna lose a whole brigade that might make a big impact, right? A negative impact on the housing prices. So, you know, do a little research on the local economy you know, like Savannah Savannah’s growing Fort Stewart’s growing. It’s, it’s the only the only port it’s, it’s the only armored assets on the east coast, the only armored assets within 50 miles of the deep water port. I don’t think Fort Stewart’s going anywhere, right. It they spend a bunch of money modernizing the brigades that, you know, so anyway, I’m bullish on Savannah and on the Fort Stewart market. And then will you be able to cashflow the house as a rental when you PCS?

It’s always something to look at. If, if you expect that you’re gonna be somewhere for five years, that’s not so much of a consideration because in five years, you know, there might be some fluctuations in housing prices, but typically in five years you’re gonna see appreciation not only in housing prices, but in rental amounts. So that should be a, a little safer, but I think it’s always good, like, “Hey, can I at least break even, if I have to rent this place, can I at least break even on it?” “if something crazy happens to the economy and I have to rent this thing for a year or two after I PCS, can I?” And, and at least kind of break even it’s a, it’s something important to look at. So here’s an example. If you’re going to Stewart and you’re buying a house in the mid $200,000 price point in Richmond Hill, those places usually run for $1700 to $1850 a month give or take.

And here’s some of your numbers here. So with your mortgage property management costs maintenance, vacancy reserve, you’re looking at, you know, roughly two to $300 every month in cashflow. So, so that’s good. All right. Awesome. and in addition to, you’ve also got increases in your equity that come from paying off your mortgage every month and from appreciation. So I I’d say that’s a good deal. And, and don’t forget these property taxes and insurance is not the same everywhere. It’s different in Richmond Hill than it is in Savannah. And, you know, it’s, which is different than it is in Texas and North Carolina. So if you’re going to on different market, you know, these numbers might be a little different for you. And also this mortgage payment, I mean, rates are going up, right? I did just edit this, you know, two months ago when I did this slide, it was $1100 a month.

You know, now it’s closer to $1200, it could be more or less whatever. So key players, right? It’s real estate. And we’ve, I, I think I’ve hit on this a lot. They should put your interest first. They should be candid. They should have a decent background with recent transactions. And communicative is, is the biggest thing. If they’re responsive and they get back to you quickly and they, and they work hard and they have some work ethic ethic, that is probably the most important thing that you’re looking at. Home inspector, right? I have my home inspectors that I like and I use over and over and over again for my own transactions and for my clients. I found that every time a client wants to use their own home inspector, it doesn’t go well. I, I had a client use one that he wanted to use and the inspector ended up missing about $20,000 worth of foundation issues that should have been found. So lender, you know, I have lenders that I like to work with. And again, I find when clients bring their own lenders, I’m typically not too satisfied. Although sometimes I am, I have found some good lenders from clients of mine, but I’d say four times out of five, they bring me a, a terrible lender. And now as always trust but verify, right? Look at reviews, Google, Facebook, Zillow, things like that.

So get acquainted with the area, right? If you can, fly out. Even if it’s a couple months before, and you’re not even ready to buy yet, just fly out. Tour some neighborhoods, meet up with your agent, drive around for an afternoon with them and, and get to know what you’re looking at. That’s important. All right. You can’t always do that though. So Google street view goes a long way. If you’re looking at a house and you can’t go see it, pull it up on street view drive kind of “drive” around the neighborhood on street view, and check the check, the date stamp on that imagery. If it’s from 2008, you know, it’s probably not good imagery anymore, right? And then check the overhead map, right? Are you close to an airport, interstate, railroad check the commute, you know, you can go on Google and you can, you can put the commute from that address to where you’re gonna be on post and you can, can actually set your arrival time to say, “Hey, I want to arrive at 0630” or really probably 0615 at least.

And see what, you know, you can see what gate traffic’s gonna look like. And as always, your agent should be able to provide insight as well. So common pitfalls, right? Generally, you know, your homes built after ’85 are gonna be up to current building standards, except some of those between like ’85 and ’90, you’re gonna have polyline plumbing, which isn’t that big of a deal really, but they don’t use it anymore because it has had some issues. If you’re buying something that was built in 2005, there’s probably nothing majorly wrong with it, right. You know, big ticket items: HVAC water heater is, you know, they typically have a 10 to 15 year service life $5k-10k for an HVAC, depending on how large your house is. And typically $1,000-$1500 hundred bucks to get a water heater replaced.

And people always freak out about water heaters. Like that’s really not a super expensive item. And then your roof, 25 to 40 years, depending on the type of shingle. $5K-$10K to replace those roofs, typically different markets are different. You know, I was talking to somebody who’s doing stuff in Virginia and he says, he typically has to pay a lot more than that. This is, this is for, for my market in Savannah, kind of what I typically pay for a roof. So, you know, it’s always the old houses you gotta watch out for. But the newer houses are typically pretty easy, especially for me as an experienced agent who does a lot of renovation projects, I can typically know pretty well, whether the inspector’s gonna find major issues. Virtual tours, right? So you’re, you’re remote. What I like to do is, you know, I got a little stabilizing gyro and I run it on wide angle lines at 60 frames per second.

And I send the videos. I don’t FaceTime because FaceTime gets grainy. I’ll send videos keep them kind of short so they send easily on iMessage and WhatsApp. And I, and I give narration, I can kind of anticipate the questions that somebody would ask on FaceTime and I’ll say, “Hey, these counters are made out of this. And this flooring is made of that. And you know, the flow in the shower is good, et cetera.” you know, some people, especially if you’re a really, really kind of picky person, maybe you want to get some short term rental set up for the first couple months that you are, you know, do your PCS, get a short term rental, and you know, actually go that route. That’s not, there’s not anything wrong with that. And of course, if possible, you know, you, it’s not very efficient for you to fly out when you’re viewing homes, right?

Especially in this market, you’re gonna probably lose some bids before you lock one up, so lock it up. And then during your due diligence period, when that home inspection’s going on, if you want to see it, then fly out or drive out and, and take a look. It’s definitely, definitely what I would recommend. So here’s, here’s how we kind of lock them down, right? It’s like, like I said, this is a seller’s market. So what do we do to win offers? Well, number one is price. I mean, cash is king, you know, how much money you coming in with. That’s the most important tied into that is kind of the escalation clauses. So we can say, “Hey, we’ll pay you $225k, but if you have a higher offer, we’ll go up to $235k to beat it,” something like that. No seller closing costs, right?

It’s hard to get to sellers to pay your closing costs. I, I don’t ever recommend that people ask for closing costs in this market. Typically your average home that people buy here in the Fort Stewart market, you’re looking at $6,000 in closing costs for like a low $200,000 home. And if you up to $500,000, you’re probably looking at closer to like $12k, $13k in closing costs, just to give you an idea of what that’s gonna cost. An appraisal gap, you know, that’s that’s a way to win. You say, “Hey, if it appraises low, we’ll pay the difference up to $10k in cash,” boom, you know. Large earnest money deposits. Your earnest money is a deposit that you make within a couple days of going under contract that gets sent typically to the closing attorney to hold onto. And that’s kind of your good faith thing.

It means, “Hey, first of all, I’m in the financial financially secure enough position to make this deposit. And two, if I don’t fulfill the terms of the agreement that we agreed to, that you get to keep that money. So if it’s the day before closing and I back out of the deal you keep that money, right?” It’s a little bit of security. Option money is that’s an optional thing. And that basically says, “Hey, I have this due diligence period where my earnest money is, is refundable, but you get to keep, you know, $200-300 bucks regardless. If I back out during due diligence, because I find some problems, you still keep that money.” it helps keep your due diligence periods tight. You’re not gonna get a two-week due diligence. Okay. A couple years ago used to be able to get a two-week due diligence. Nowadays, I don’t recommend any more than 10 days and really 5 days should be enough time to get an inspection done on most houses.

This is an important point. You don’t need to pull all the available levers, right? I, I won one. Oh, here’s the most important – seller’s needs and wants, right? So I find out from a seller one time that he needs to sell his house before he can buy a new one. So we offered him a 45-day rent-back and that’s what won us that bid. There were higher bids, but we offered the rent back and we won it. So it’s always important for your agent to ask that seller’s agent, “what do you need? What do you want? What are things that we can do to win this bid that are important to your seller?” so that that’s an important piece as well. Awesome. So that pretty much ties it up guys. You know, this isn’t a live thing, so there’s not gonna be question and answer from the audience.

This is a recording. I encourage you, if you have any questions leave us a comment. Send us an email or, or a text. We’ll put some contact information up. We would love to talk to you. And there’s a lot of, this is a very general try to make this somewhat fast. There’s a lot of information in your specific situation that we probably didn’t cover. So hopefully now you at least know what questions you should be asking. Please reach out to us, ask us the questions, ask how we can help. Even if you’re not doing business in Savannah or Fort Stewart. And you’re trying to go somewhere else. If you happen to see this video and maybe you’re moving from Carson, to Bliss, give us a shout. We’re happy to recommend friends of ours out in those markets and help you out. Thanks, guys!
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Investing Loans & Financing Rentals

Rental Real Estate Investing Basics

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Full Video Transcript

Pat (00:00:01):

All right, we are recording. Hey good morning everybody. It’s Wednesday here. We are gonna do a little agent training and we’re recording this. We’ll put it up on YouTube. Anybody will be able to watch it. My name is Pat Wilver. I’m a co-owner at Trophy Point Realty Group. Been an agent for a couple years, investor for a couple years more, um in real estate. We’re gonna go over today investing real estate investing metrics kind of with a focus on single family rentals. So that’s the topic of discussion I’m gonna share my screen, because we’re gonna be pretty pretty Excel-heavy on this. So here we go. Actually, Google sheets. Same thing as Excel though. So this sheet I made specifically for this class and you’re gonna see me looking off this way. That’s because that’s where my screen is.

Pat (00:00:50):

So we’re going off this screen. All right. So everybody, if you’re here in person you should be able to pull up this sheet in the email I sent you. So this is, and you can use this to evaluate any rentals if you want really, but I I’ve kind of tried to strip out all the, all the detail, like here’s the sheet, this is my detail sheet for like, you know, big projects and stuff. So we will, you know, eventually maybe get there, but we’re starting off simple. Everything you see in blue here is inputs. So these are the things that we know about the property or, or we need to find out about the property. Everything blue is something that’s an input, you know, we can edit it. Everything in black is all calculation cells and various things going on. Right?

Pat (00:01:33):

So there are some key metrics that we’re gonna try to arrive at at the end of the day to show our investor. And these are basically them right here, right? We’re interested in what’s our cashflow, right? What is our return? And this is just for one year what’s our cash return on investment and what is our total return on investment? These are like the, the big things that somebody wants to look for, but it it’s, it’s a, it takes steps to get to these values. So how do we get there? Right? Let’s go through it. So here’s our property. In this case, we’re just gonna keep it simple, just simple numbers with saying, Hey, here’s, here’s a great, you know, right. So we found hundred thousand dollars can buy it. Right. and I’m gonna, I’m gonna click through here repair estimate $10,000, right?

Pat (00:02:22):

This is what we do. You know, we go look at a place, what’s it gonna cost to do this? That I’m not gonna get into how to estimate repairs. You know, just now if we have some time later on in the class, we’ll get there. But we need to know what a purchase price is. How much is it gonna cost to repair it? We need to know what else about a property. If it’s a rental, what what’s a, well, yeah, what’s, what’s it gonna rent for? Right. And again, I’m not gonna in this particular class get into, how do we estimate a rent? We’re just, we’re just saying, Hey look, this is, this is a rent estimate. ARV, do we all know, Elizabeth, you know what ARV stands for? After Repair Value. Yep. ARV. So that’s after you do your little $10,000 in repairs, what’s it gonna be worth?

Pat (00:03:02):

I’m saying $120,000, right. You know, whatever we hope that the money we put in is gonna get us a little bit more. And typically it does appreciation, right? How much what’s the appreciation? I’m using 3% in this particular model this last 12 months, it’s definitely been higher than that. Like in places like Richmond Hill, it’s probably been closer to 10%. Which I think is a little unsustainable. We never wanna use 10% as our appreciation estimate. That’s just unrealistic unsustainable. I like 3%. If I’m trying to be more conservative, like maybe two, you know, that’s kind of standard, you know, inflation I think Savannah might end up being higher than 3% going forward, but it’s a good number. All right. So that’s our property inputs. Those are some things that we need to know, um when we are, when we are looking at a deal. Financing, right?

Pat (00:03:53):

Most of the time people are taking on a loan, right? So there’s certain things about the loan that we need to know whenever we’re running these numbers. So loan to value, right. LTV, right. You’re familiar with that term. Our interest rate, right? Our term, is it a 30-year, 15-year? You know, what’s the term of the loan points. Right? You know what a point is Elizabeth? You, you run across that yet? So a point lender point yeah. Lender point. Right? So it’s it’s a charge it’s basically paying interest upfront. A point means 1%. So an $80,000 loan, if you’re paying one point, you’re paying $800 in points. It’s just, it’s just something to know. And then of course closing costs and whenever we’re running these numbers for the purposes of this shoot, we are not gonna be doing the portion of closing costs that are held in escrow for like property taxes and insurance.

Pat (00:04:50):

Alright. So you probably haven’t run into that yet, but you’ve probably seen it on a settlement statement. Yes. Where they’re the prepaid. So that is stuff that, yes, you’re paying it at the closing table, but you it’s gonna end up going toward expenses that we already model. Right. We’ve already, we’re already modeling property tax. We’re already modeling insurance. If we count it here, we’re gonna be double counting. So closing costs is just your attorney fees, your appraisals, you know lender costs, but not points because points are separate. Right. That’s what I’m saying. The closing costs, I typically do $2,500, maybe $3,000 is what your what’s your what’s your closing costs are gonna be, alright. So those that’s our financing inputs, right. If you’re modeling a cash deal, we just do LTV and we just change it to zero. Right. Boom. All right. And that’s it. So this one we’re, we’re doing this, like it’s a rental property. Alright. So expenses, we have some expenses in a rental property, right. Property tax is one of them. So do you know what a millage rate is? This is something

Agent (00:06:00):

Actually, I’m not very familiar with.

Pat (00:06:01):

Okay. So, and this is, this is something when you’re looking, you know, it’s very important to know what your property taxes are gonna be if you’re looking at a rental property purchase. Mills is how we, we pay property taxes. So in Chatham county, city of Savannah Chatham County, it’s 44 mills, right? 44 mills is the tax rate. The mill is stands for like a thousand. So this is like 44 divided by a thousand, you know is what that means. So if you look at this, this little formula here, right, you can see the formula tab and the sheet, right. Basically that shows you the equation that we use in, in Chatham county. So we have B2 purchase price, right? Times 0.4. All right. So Chatham county, they only take 40% of the property value as the assessed value. And they typically will reassess it. If you purchase a property, typically the next year, they’re gonna change the assess what you paid for it a lot of the time, right? So purchase price times 0.4, and that will give you the tax assessment value. So it’ll be, in this case, a purchase price of a hundred thousand will give you 40, 40,000. And then they will take 40,000 times the millage rate. And you see how I have F2, that’s the proper rate, 44 divided by a thousand mil. What is mill like Latin or something? Mill

Wynn (00:07:26):

It’s like a mill it’s

Pat (00:07:27):

Yeah. One mill is 1044 mills is 44,000. So I think it’s, I think it’s a or something. Right. I think that’s the yeah. So that’s that math equation. You don’t have to remember it necessarily. If you have a sheet that just does it for you and that’s what

Agent (00:07:42):

I normally do. I just plug it in there. I’ve never

Pat (00:07:45):

Analyze it. So Chatham county, city of Savannah, 44 mills, Richmond hill, I think is like 36. So you can see, you know, how does that change without we’re out in Richmond hill? You know, save a little bit, it’s not, you’re not saving a ton of money on a hundred thousand dollars house, you know, that’s up.

Kelly (00:08:01):

Are these sheets accessible to us?

Pat (00:08:02):

Yes. Okay. You should be able to follow the link in your inbox. I think you’re already in there.

Kelly (00:08:07):

I see now, I’m in there. I’m saying there’s like a shared document that we can get in.

Pat (00:08:11):

Well, I I’ll, I’ll make sure everybody has everything at the end of the yep. So property tax, right. Everybody understand. Perfect. All right. Property tax. Insurance, you know, this is something like I got an insurance guy. He gives me a quote. I don’t ask him for a quote on every house I look at because I know a $100,000 house is gonna be $750 roughly, you know what I mean? $200,000 house, probably $1,000. $300,000, I don’t know, $1300. Right. You know this doesn’t factor in flood insurance, you know, I’m, we’re talking to standard standard house, standard insurance, nothing crazy about it. Right. That’s what we’re looking at. Maintenance and CapEx. Right? normally these are separated into two different buckets for the purpose of simplicity and like an introductory course, we’re just gonna talk about, ’em like, they’re the same. So maintenance and CapEx. Maintenance is just routine stuff. Hey leaky faucet, you know, Hey some paint, you know, whatever CapEx is like a serious investment like a roof or you know, new floors or HVAC system. The difference,

Agent (00:09:22):

What’s CapEx?

Pat (00:09:22):

You know it?

Agent (00:09:22):

No, actually I don’t know.

Pat (00:09:23):

So it’s a capital expense. Oh, okay. Yeah. Capital expense. The big difference, the first is how it’s treated from a tax standpoint. So maintenance, you write off your taxes on an investment property in the year it happens. Capex has to be depreciated like you depreciate, like you depreciate your house every year. If you have a rental property, you can depreciate it every year, you know, and, and basically not have to pay taxes on depreciation. Same thing. If you put in a brand new HVAC, that’s supposed to be depreciated over a period of like seven years, I think on your taxes. So if you install a $4,000 HVAC, you can write off, you know, probably $500 this year, $500 next year, et cetera. Right. That’s the difference. So they are different, but for this course, we’re just, we’re just trying to keep it simple.

Pat (00:10:10):

We’re talking about these as if they’re the same. I would typically do, um if it’s an older house like these old cement of housing stock, typically $1500 a year and per unit, if it’s like a 4-unit, you know, big 4-unit, I’d say $1500 per unit per year. If you got like a newer build in Richmond Hill on a slab, it’s typically gonna be less, you know, in this case I’m doing $1,000 or saying maybe it’s a newer house or something like that. Right. So some years you spend a lot more, some years you don’t spend any, this is an average right. Vacancy, right? We always want to factor in vacancy. The place is not always gonna be full. Tenants, move out. It’s gonna take some time to find a new one. I typically use 5%. If you’re running your properties well, your vacancy showed on average, be lower than that. But especially as busy as I get, sometimes I just don’t have time to get around the show, the place. So, you know, shame on me I guess. But so I typically do 5% vacancy. All right. Property management, typically 10%, right? I have these little, these are just some math cells. All right. So these are all of our inputs. This is everything we need to know. Do we have any questions about what these mean or how we figure them out before I start moving on?

Agent (00:11:25):

I think the property tax rate, how do you just know that?

Pat (00:11:28):

Yeah. so you just, if you wanna just Google, like yeah, like, yeah.

Agent (00:11:33):

That’s what I,

Pat (00:11:34):

City of Savannah.

Agent (00:11:35):

That’s why, I don’t know,

Pat (00:11:38):

Say Savannah city of Savannah property tax, like at this point, I just know it’s, you know, so right. So the city, so this, it gets little confusing because the city rate is 12.86, but there’s a Chatham county rate as well. It’s somewhere on here. Just if it’s in the city of Savannah, it’s 44. Except for some parts of southside Savannah, like Georgetown is less, but you have to pay a fire thing as well. You know, whatever, that’s where you find that. So any, any place and any, if anybody’s watching this, you know, on YouTube or whatever you know, any city you’re looking to invest in, it should be a pretty quick Google search go to the city website county website. You should be able to find that stuff. All right. Any other questions? Gonna start moving along. All right, cool. So the first thing we’re gonna look at you see, I’ve kind of broken this down into four different buckets, income metrics, property evaluation metrics, debt metrics, and return metrics. Right. And, and I’ve structured this because we’re gonna kind of go in order down the line. So gross rental income. It’s easy, right? Let’s gross. Gross rental income is our rent estimate times 12. That’s our yearly gross rent. All right. So $12,000 that’s gross coming in. Vacancy loss, right? 5%. So that’s just 5% of our gross, yearly rents, give 600 bucks other expenses. All right. So that’s, that’s our maintenance, CapEx, property management, taxes, insurance, all that stuff. That’s our other expenses every year.

Pat (00:13:19):

And then we arrive at net operating income or NOI, right? This is a very important, you know, kind of, kind of thing to remember. I’m gonna just like highlight it. You know, NOI is important, right? NOI is, is how much money you’re making. Like if you bought this thing straight cash, no loan. That’s how much money you’re gonna make in a year. That’s gonna be your cash flow. Right. is that gonna be your total return on that investment? No. Why not?

Agent (00:13:47):

Because you get equity in the home.

Pat (00:13:49):

Because you got equity in the home. Right? So what do we have building our equity every year?

Agent (00:13:56):

I mean the, the payments going to

Pat (00:14:00):

Say, say there’s no loan, own in cash. What do you got running value your home every year?

Agent (00:14:05):

Our appreciation

Pat (00:14:06):

Appreciation. So that appreciation that’s like, if you, if you buy stocks, right? Say you go buy Amazon, you know, stocks are on sale there, might go buy some, you know? So you buy some Amazon. Amazon does not pay a dividend. I don’t think maybe they do now. Say you buy a stock, doesn’t pay a dividend, you know? But the value goes up, right? Did you make money? If you still hold that stock, did you really make money?

Agent (00:14:32):

Not unless you sell it.

Pat (00:14:33):

If you don’t, if you don’t sell the stock, you didn’t really make money. It’s just, it’s on paper. It’s fake. It doesn’t exist until you sell it. Same thing with the house, you might buy a house for a $100,000, 10 years later, it’s worth $200,000. Did you make a $100,000 in profit if you still have the house? You didn’t make it. You have it. It’s equity. Right. But it’s not, it’s not really yours. You know? Because the house is not a, you know, it’s not cash like cash in the bank, you know, that’s that’s cash. Now, if you’re getting rental income, you’re making that money. If you, if you made $3,000 in rental income, yeah. You made that money. That’s in your pocket. That’s cash. You go buy stuff with it. You know what I mean? So we’ll, we’ll get there. That’s why I, that’s why there’s a cash return on investment and a total return on investment. But this net operating income is how much money you make if you don’t have a loan against a property and it doesn’t factor in appreciation. And if you do have a loan, it doesn’t include your loan payments. All right. So net operating income. Why is that important? If you’re gonna get a loan? Why, why do we need to even know? Why is net operating income matter for getting loan?

Agent (00:15:33):

Got to get it paid off? So you wanna pay it off at the end.

Pat (00:15:37):

Right. But you know, you’re gonna, so here’s our, here’s our, if we go down, here’s our principle and interest, right? $5,200 a year. So you know, $6750, $5200. Okay. We got enough to cover it. But this, this NOI doesn’t really matter a whole, whole lot necessarily if you’re getting a loan except for cap rate really. So who knows what a cap rate is? Who knows what a rent multiple is? This, this is where this is the new stuff, right? So this is property valuation metrics, right? So, um, a cap rate is a term that an investor will use to value a property. Right? So cap rate, let’s just, let’s just jump right into cap rate. All right. I have it 3rd, but let’s jump into it. Cap rate equals NOI divided by purchase price or sometimes we’ll do.

Pat (00:16:31):

Sometimes people do NOI divided by the all-in cost, right? In this case I did the all-in cost. So we are factoring in the purchase price plus our repair cost, your all in cost is $110,000, right? That’s in the denominator of that equation and the numerator is our NOI, right? So that cap rate is 6.14%. Right? What that means is that kind of means two things. First, that’s your return. That’s your cash return on investment. If you buy it straight cash, if you buy this house straight cash, you’re gonna put in a hundred, $10,000, you’re gonna make $6750 of NOI, $6750 divided by 110, gives 6.14%. So that investment yields you 6.14% every, or at least your 1st year, typically rents go up. So we expect that to increase every year. But 6.14% cash you put in 110, here’s $110,000.

Pat (00:17:25):

I know a year from now, I’m gonna have 6.1, 4% of that $100,000 in the bank account cash. Also, hopefully I’ll have some appreciation as well, but that’s not in my bank account. That’s just fake. You know, it doesn’t exist until I sell. So that’s cap rate. So that one it’s important. And the second reason that’s important is it allows you to compare investments in an apples to apples kind of way, right? Because you can change up a lot of stuff depending on your financing. So like, let, let me compare a cap rate. Like I said, that’s your cash yield. If you buy it straight cash, here’s our cash yield here with a, with a, with debt against it. It’s actually lower. 4.64%. Typically we expect to be high. Right? There’s some reasons I’ll explain why this, you know, I wouldn’t buy this deal, looking at these numbers.

Pat (00:18:14):

I wouldn’t, you know, I wouldn’t buy it, but that’s our, that’s our cash yield with the loan, but check this out. So it’s 4.64, right? But what if I come up here and I drop the interest rate to 3, 3.5 look how much I jumped up 7.21, all right. Now our cash ROI with debt is better than our cap rate. But what, but what I’m saying is you, if you play with your financing, you can change these numbers so much. You know, that’s why you always wanna shop around for different debt. And, you know but the cap rate ignores financing. It’s just let me look at this property. You know, and if you got a property, that’s a that’s, if it’s the same, say you got two houses that are exactly the same, same neighborhood, same, same everything. You know, and if, if you can get one at a higher cap rate, buy that one, right.

Pat (00:19:09):

It doesn’t matter, you know, you might, you might, for example, there’s a bank I like to use in Savannah, they only lend in Chatham county. They don’t do Hinesville. Right. So, you know, say I had a deal in Hinesville and a deal in Chatham county. I’m like, which one of these do I wanna buy? You know, I, I look at the cap rate, you know, now I have this as a property valuation metric. All right. So we’re, we’re all talking like, how does this, you know, relate to the value of the property? So the way it does is investors and this cap rate applies more to like bigger multifamily investments. You can still look at it on a single family. It’s not as applicable, but on a big, like a 50 unit building, they’re not doing a comparable sales analysis. They’re not looking at, you know, like, like when you do, when you’re looking at a house, right.

Pat (00:19:56):

They’re looking at cap rates and they say, Hey, look, a class, a multifamily building and a tertiary market like Savannah, Georgia should be selling at a x cap, you know, probably 5 cap. Right. And that’s how they value. And if it’s a class C multifamily in Savannah probably want it at a 7 cap. Right. So as the property gets shadier, investors expect a higher cap rate because it’s a shadier place. They wanna make more money on it. Does that make sense? You’re yes. If you’re investing in like a great office building in a great city and it’s just great tenants or like an Amazon warehouse, like Amazon warehouses right now, investors are paying a load of money for them. Because it’s like, it’s Amazon. You know what I mean? So you look at that equation, it’s NOI divided by, you know, your purchase price, right? So as as purchase price gets bigger, what happens to the cap rate? It’s gonna get lower, right. For the same NOI. So you see how this is a property valuation you know, an Amazon warehouse that somebody will pay a 3 cap for say it generates, you know, $10,000 in NOI. Right. Let’s let’s just, lemme just set up a new, I’m gonna set up a new cell, right. Just to kind of illustrate this. So,

Wynn (00:21:25):

While he’s doing that, is everybody tracking with all this getting broken down? Any questions?

Pat (00:21:30):

No questions.

Pat (00:21:33):

So I’m gonna, I’m gonna illustrate this is important, right? I, I might be diving a little bit too much into cap rate for like a introductory course, but it’s an important, and it’s, it’s something that a lot of people don’t understand. And when you’re dealing with an investor, you know, especially somebody who kind of know they’re doing, and you don’t know what a cab rate is, like, you’re gonna automatically lose legitimacy with them. Right. So, so let’s say there’s a, there’s an Amazon warehouse you can buy for a million bucks. Did I put enough zeros in there? Let see for a million bucks and let’s say the NOI is you know, 50,000, I don’t know. So that would be a 5 cap. Right? You see that. So you know, maybe, maybe three years ago, people were buying Amazon warehouses at a 5 cap, but you know, things have changed now.

Pat (00:22:28):

People are really into that kind of asset, but say, you know, say some, say somebody bought it for a million bucks three years ago, 5 cap, right? Well say investors, and this, this has happened. Investors all around the world are more interested in that kind of asset than they were three years ago. That makes it more valuable even with the same amount of NOI. So maybe say that you can sell that for a million, five now, but it’s the same NOI that cap rate went to 3.33. Do do, do we see how? Yes. All right. So say you got a rental, say you got a rental out in the hood, say this, thing’s getting you what $6750? $6750. And all-in for $110k or 6.14 cap. Right. so say, you know, if, if you’re getting this much NOI let’s say the place is like, like in a rough spot, you know, and it’s a rough place and like you’re gonna have transient tenants, whatever.

Pat (00:23:27):

You probably wanna pay a little bit less for that. Right? Yes. You know, maybe you wanna get it for 90. Cap rate goes up. That makes sense. Right. Say it say it’s in a great, super, you know, like gated, fricking suburbia, whatever, you know, the kind of tenants are gonna be there for 5 years, you know, easy investment, newer house, worry free. Right? Yeah. People, people pay more for that stuff. So, you know, say it’s that same NOI, but say they pay $200,000 for it. They probably wouldn’t but say they would, all right. That’s a 3.38 cap super low. Right. but you see how, how it changed things. Right. So that’s why it’s a property valuation metric. All right. Does that make sense? It does. Yep. So you can typically expect in better neighborhoods to have a lower cap rate, because people are more willing to pay for the same amount of rent as they would buy somewhere else.

Pat (00:24:20):

Right? Now, single family homes. It’s not super applicable. Right. It’s just kind of something. When I’m looking at a single family home, I’m not looking at the cap rate as a valuation because people value single family homes based off the one next door that sold, they don’t, most, you know, that market, you’re not just competing with investors. You’re also competing with just Joe Schmo who wants to buy a house. So it’s not really a super, you don’t really use it to value a single family home, but I just, you just look at it like, Hey, that’s if I bought this in cash, this is what I would make on it. It’s cap rate. Cool. So that’s why it’s a property evaluation metric. Now we also have the gross rent multiple. So that is your purchase price, the bottom by your gross annual rents. Right. So that’s something that a lot of people use. I prefer to use it based on like a monthly so I just call that the, you know, my rent multiple, right. So this one would be a hundred. Right. so that’s, and I actually, I typically do that for all-in cost. So let me just change that.

Wynn (00:25:24):

Um say, say that multiple part again, what are we looking at with rent multiples?

Pat (00:25:29):

Yeah. The, the rent when you say, I always say like, oh, that should sell for a hundred times rent, right. Is something I say a lot. That’s typically what I use and what a lot of other investors looking into single family home, or like something, it it’s more like a, you know, shoot off the hip kind of thing versus cap rate. You got to like do math and stuff. You know what I mean? To figure out

Agent (00:25:51):

The 1%.

Pat (00:25:52):

Yeah. So this, so the 1% rule 1% rule will correspond to a rent multiple of a hundred, 1% rule means that your monthly rent, you know, if your, if your monthly rent’s $1,000, your purchase price should be $100,000. It’s the one per people like to use this 1%, 10 years ago was a 2% rule. Because you could buy them that cheap. You can’t buy them anymore. You can’t even buy one – people call me, I’m looking for oh I want a 1% rule house in the suburbs. Okay. Good luck. You know, like that doesn’t exist. So rent multiple is a way that, that I really value a lot of my deals. It’s it’s off the, off the cuff kind of thing. It’s something you don’t have. You don’t have to calculate NOI you don’t have to calculate property tax. It’s just, it’s just a much quicker way to come up with a value and

Agent (00:26:48):

Because this is the way I’ve always done. Just real quick. Yeah. Off the hip. And that’s where like I fail at this side of it. Because I haven’t really dug into it.

Pat (00:26:55):

Both, both are important. Now you don’t wanna spend all your time plugging stuff into a spreadsheet. If you can look at a deal and be like, that’s a deal. Yeah. I’m not gonna spend any more time on it. Yeah. Once you find a deal that you’re like, that might be a deal, then, then you do all this. Right. So rent multiple. And I’ll just tell you, city of Savannah, if I’m buying in Kyler Brownsville, west Savannah, some parts of east side, places that like, there are a lot of condemned houses, it’s run down, you know, I’m looking like 80 times rent. This is where I wanna buy. Right. And that’s where a lot of people wanna buy. So 80 times rent. So if say, say this right now, this is 110 times rent. Right. Which isn’t bad for some neighborhoods, just depends on the neighborhood. But if we were over there in you know, say I found a place that I knew would rent for $1,000, typically a 3/2 anywhere in Savannah is gonna rent for at least $1,000. Right. If it’s in decent shape. So say it’s $1,000. Well. And I gotta put $10,000 into it to get that $1,000. I need to buy it for how much, if I’m, if I’m looking for an 80 times rent kind of neighborhood,

Agent (00:28:07):

90?

Pat (00:28:07):

  1. When buy it for 70, Buy it for 70, I’m putting $10,000 into it. It’s gonna rent for $1,000. Here we go. Rent multiple 80. Right. so the lower, the rent multiple, it’s kind of the opposite of, of cap rate, right? The lower, the rent multiple, like the, the more like NOI you’re getting, because you or the more

Agent (00:28:37):

Ah I added 10 instead of subtracting them.

Pat (00:28:38):

Um yeah. So, so anyway, you’re, if you’re, if you’re buying in a, you know, if it’s a sketchier asset, you know you need, you want to have a lower rent multiple, right. If it’s a safer asset, you can have a higher basically 80 times rent right now in this market is like super hard to find. So, but I, I still try to stick to that. Like, and if I’m buying something a little rougher what I’m seeing right now is 90 to a hundred times rent, even in like some of the worst places we’ve seen a lot of people buy a hundred times around right now. Okay. I’m seeing like a nice Starland duplex, you know, and like a nice part of Starland fixed up. It’s nice. 150 times rent they’ll sell for. Anywhere from one to already to one 50 kind of, depending on, you know, some, some specific details. I mean, you’re kind of seeing that too, right? Yeah.

Wynn (00:29:41):

I wasn’t involved with, I kind of came a little late, I apologize. So one of the things for,

Pat (00:29:48):

Hey Wynn speak up, because I’m recording this too. Yeah.

Wynn (00:29:51):

Yeah. So pat and I, we do this all the time. So it, it becomes second nature. We throw out these numbers, we throw all these terms to throw everything for, for you guys. If I were to ask you, what would a, what would a monthly payment be on a house that’s worth 50. You, if you contract on hundred 50,000 house today and somebody ask you, what’s your mortgage one, would you know that answer? And two, do you know where to go to find that answer?

Agent (00:30:23):

I just always Google it.

Wynn (00:30:25):

You can Google. It’s a great way to do okay. Same thing. Right? So all of this is predicated on payments, right? For an investor. They wanna know how much can I make every month? Well, in order to know how much you’re gonna make every month, you need to know a couple baseline things. How much am I paying and how much can I get, right? Those are the two biggest ins and outs, right? Regardless of the underwriting, which is this best underwriting is fantastic. But all, all the you know, NOIs and cap rates and all these various things really don’t, that’s digging way deep for, for your entry level thing. If I’m buying a house for $150,000, your 1% rule is gonna say, I want to try and get $1,500 rental. And pat had said, it’s very difficult to do, right? So at what point is it not a deal for somebody?

Wynn (00:31:17):

And the answer is you’re gonna take a mortgage payment, wherever that is. Whether it’s through financing, say you get a 30 year, you can go on to bank rate, you can go on to all the various websites and do a mortgage calculator, right? You factor in there’s hundred, $50,000, a down payment. And you get a ballpark, right? For like a 30 year loan. A lot of investors don’t do 30 year loans. They’ll do shorter term loans. They’ll do balloons, they’ll do arms, they’ll do private money. They’ll do hard money. They have a whole bunch of different financing, which if you’re talking to investors, we need to be aware of all of that. But I mean, they deal with a lot of that stuff themselves. So you really don’t get too much into the weeds there, but you need to know. So let’s do real quick exercise. Let’s find out what a $150,000 house kind of mortgage real quick. I don’t wanna take time away. Yeah.

Pat (00:32:06):

Let’s but so I’ve got, I’ve got, we’re gonna talk debt here the next little. Yeah. It’s good time to move on that, I guess. So let me let sit back down and get

Wynn (00:32:16):

I’ll just let’s check. So if we’re looking at

Pat (00:32:22):

So let’s we jump into the mortgage payment. Do we have any more questions on the rent multiple on, on cap rate? Or are we, are we making sense here? Yeah,

Agent (00:32:34):

It makes sense. Because I’ve always just done like general percentages and I think I’ve always done like 5% for like closing costs to calculate all that, but I’ve never dug this deep.

Pat (00:32:43):

Yeah. So yeah. So, you know, there’s our property evaluation, right? The biggest ones I use, I’m just gonna like, honestly, I think rent multiple and for what we’re doing, single family home, that’s more important than cap rate, honestly. So I would say that’s your more important from a valuation standpoint, if you’re just, what’s the value here, rent multiple right. Nicer neighborhood gets higher, you know, you’re in Richmond Hill. I mean, if you’re buying a single family house to rent in Richmond hill to open market, I think you’re probably a little crazy you know, unless you’re just sitting on buckets of cash, like some folks you’re sitting on buckets of cash, Hey, you know, if you can make 4% on that cash and, and get appreciation sweet, you know, because otherwise the Fed’s just printing all that money and it’s, you know, inflation, right.

Pat (00:33:28):

Everybody’s got different things they’re looking for, you know? So rent multiple, right. I also put in here free equity, right. That’s not like an official term. That just means, Hey, we bought it for $100,000. We were putting $10,000 into it and we think it’s gonna be worth $120,000 when we’re done. So we got $10,000 of free equity. Right. I just like to see that, you know, it’s not an official, like you’re not gonna see it on bigger pockets. You know, there’s probably a more, you know, fancy word for it. You know, whatever. Appreciation to year 1, 36, hun $3,600, 3%. And that’s, that’s going off our ARV of $120,000. Right. Because we already got our free equity and then we’re getting some appreciation to it. Right. Sweet. So so I just got it in there. I don’t know if that’s really should be in property valuation, but that’s where I put it.

Pat (00:34:11):

So debt, right. We were talking about debt. How we looking at debt? You know, you got your mortgage payment right now, your mortgage payment typically a traditional person includes your taxes and insurance as part of the payment. But we already accounted for that as an expense. So we’re not going to double count it here in our debt metrics. Because we’ve already accounted for that expense. Right. And we have to account for that expense before we calculate NOI. Why? Why do we look at proper taxes and insurance? Even though we’re paying it in the mortgage, why do we, why do we look at it before we get to the mortgage in this analysis?

Agent (00:34:52):

We’re trying to calculate our debt that’s going out.

Pat (00:34:55):

What do we do with NOI? What’s NOI used for

Agent (00:34:59):

Valuation? What,

Pat (00:35:02):

What do we use that? What formula do we use NOI in. Cap rate? Yeah. So let’s let’s refresh cap rate is what, what is cap rate before I wanna make sure we really drill this, you know, before we keep going, what is the cap rate?

Agent (00:35:23):

I mean, I, I think I’m getting confused now because we’re kind of going through it.

Pat (00:35:28):

Yeah.

Wynn (00:35:29):

It’s a lot, this is kind some heavy lifting that we’re going over with. They all important concept. So is

Agent (00:35:37):

Is it the percentage of money that we make?

Pat (00:35:40):

It can be,

Agent (00:35:41):

I don’t know how to articulate.

Pat (00:35:43):

So it can be the percent of money we make. If we do, if we buy the property, how? All cash, all right. If we buy the property and all cash, that is our in official work for that money, make we call it yield. Right? We can call it the cash ROI, cash return on investment. Some people call it cash on cash return. Right? Couple different words for, it means the same. You know, cash on cash, return cash on cash ROI. If you buy the same straight cash equals cap rate equals 6.1, 4% in this right. In this equation. Right. That’s why we have to look at taxes and insurance, even though it’s part of the mortgage payment. That’s why we have to look at that first as part of NOI, because that’s something you’re paying, whether you have a mortgage on it or not, you’re paying that. So that’s why we talk about it here, even though, you know, for, you know, and I, I do have a mortgage that does not have an escrow. I got to cut the check for insurance and taxes. Right. That’s investor stuff. You know, you’re not gonna deal with that with your regular buyers. Anyway, we refresh cap rate. All right. Remember that? So here’s our debt mentions, right? So we, we inputted all this stuff, you know, up at the top, everything about our loan. LTV stands for

Agent (00:36:58):

Loan to value?

Pat (00:36:59):

Loan to value, all right. Typically on an investment property, conventional investment property, it’s gonna be 75 to 80%. We’re doing 80% for this, our interest rate. Right. I think right now there as good as like 4% is probably as good as it gets right now

Wynn (00:37:17):

For investor. Yeah.

Pat (00:37:20):

Yeah. so 4% the, the term, typically 30 years, right. If I have any client, I always recommend don’t do a 15-year loan. Why’d you do a 15-year loan. This kills your cashflow. Right? 30-year, you know, I would always push people towards a 30-year, especially an investor. Everybody’s got different things, but yeah. 30-Year, alright points. Do you remember what the point was?

Agent (00:37:44):

Yes. That is like interest you pay upfront.

Pat (00:37:47):

Yeah. And if I’m paying one point on an 80% loan to value loan for a purchase price of a $100,000, what’s that? $800. Yep. All right. So cool. So we have all that stuff and all this is just being calculated automatically. So we have our finance amount, right? 80,000, 80% of a hundred thousand. We have our principal payment. Do you see that formula here? PPMT all right. Excel has a principal payment formula. And it amortizes for you. So yeah. It’s pretty cool. So, and they also of course have one for IP Mt. All right. Interest payment. All right. There is a formula. Right. You do not need to look up the formula because this will do it for you. Right. you know, and so here’s, here’s, here’s something that, that I have to explain here. Right. when, when you, when you buy a loan or when you buy a house and you loan typically have you guys you’re in a house, right?

Pat (00:38:53):

Yes. You’re in a house you, you have before. So you, did you notice how your principal payment part of your payment goes up every, every month? Yes. All right. That’s that’s because of the way it amortizes. Right. So, you know, typically most regular home buyers and most regular investors will have a 30 year fixed, fully amortizing loan. Right. So starting out you know, the bank, the, the banks know that you sell your house on average, every, you know, seven years, right. Every seven years on average, somebody will sell their house. Like you buy a house on average, seven years later, you’re gonna sell it. The banks want to get their interest front. So they take more interest when you first buy a house. If you got a $1,000 payment every month, $700 of that is gonna be interest, 30% is gonna be principal. And, and on your very last payment, it’s gonna all be principal.

Pat (00:39:44):

Right. And that’s how it rolls. Right. This formula in Excel automatically does that. Right. Automatically does that calculation. Make sense? Yes. All right. So that’s why you’ll see. And this is for the whole year, right. I have this set up for the whole year. I’m not gonna really get into how I do this formula. But you, you can see, you know, there’s the good thing, the cool thing I like about this you know, you can fricking click on the question mark. Oh, and it’s tells you exactly. What’s in this, what’s in this formula and how it works. Right. So you can read that if you’d like if you wanted to set this up to be a monthly payment all you’d have to do is take take the number of periods. And take these two, basically these two here and just multiply it D4 times 12, B24 times 12.

Pat (00:40:45):

And that would give you your monthly payment. We’re doing this yearly, we’re doing a whole yearly thing. So this is yearly. Hey, that year I’m paying, you know, this much principle, this month’s interest. This is my total year, one principle and interest on this note makes sense. So more, more is interest less is principle year one. All right. If we freaking go in here and we do, what’s your 30 look like we just changed that number. Oh, that’s really cool. Yeah. Look how much more, you know, look how much more principle it is versus, you know, interest is barely any that last year. Right. So that’s pretty cool. So that’s how we change that. Right.

Agent (00:41:22):

I didn’t know you had a formula in there, I’ve always done everything online on this little calculator.

Pat (00:41:26):

Yep. I, I used to as well. I actually had I, like, I had a sheet I didn’t about this and I like did my own math to get it. Yeah. It was a freaking nightmare. It was the nightmare. That’s what I still struggling with. Yeah. So yeah. So here’s our principal and interest, right? Boom, debt metrics. There we go. That’s our debt. Right? So principal, what happens to that principal payment? Over time, yeah. Goes up. It goes up and that principal payment does that money go away? Are you losing that money? Are you losing that? The value of that money? No. No. Why not? Because you’re gaining equity. Because that’s going towards paying off your loan. Right. That’s kind of like that appreciation, right? The appreciation happens for free. This principal payment is you paying down your loan.

Pat (00:42:20):

So that $1400. Yeah. You don’t have it in cash anymore, but it’s in that house. You know what I mean? The interest payment, of course, that’s just money you spend, which you can write off on your taxes and investment property. Right. So that’s our principle and interest. So now we get to our return metrics. All right, here we go. This is our cash flow. All right. Our year one cash flow, all this equation is, is NOI minus principle and interest. Right? That’s our cash flow. All right. After all expenses are paid, that’s how much money the investor puts in their pocket because they own this asset. Right. It’s not bad, right. Face value, you know, something close to $200 a month. Right. And, and remember too, you know, we’ve got this $1,000 of, of maintenance. Maybe they didn’t spend any money that year, you know?

Pat (00:43:12):

So they might have, you know, $3000, maybe they spent $5,000, you know what I mean? That’s it. So, and then this year one total return is the cashflow plus the appreciation plus the mortgage principle pay down, right. So $7,100 of total return. But it just so happens that most of that is, is in equity in that house. Right. And that’s why you have it broken up so you can explain, that’s why I have it broken up. Right. So here we go, cashflow, total return. There we go. Right. And you can see how playing with the debt, you know, changes. Well, let’s go through all the metrics and then we’ll, we’ll get in a little bit about how you can play with debt, right? So here’s our cash invested $33,000, right? That’s our down payment. Plus our loan costs plus our rehab budget, right?

Pat (00:44:09):

So, you know, our down payment was $20,000. We had $13,000 of other costs, $10,000 of that was in rehab. And then we had closing costs and points as well, involved in that. Right? So that’s our cash invested. That’s how much money we had to, we had to wire to close on that deal. There it is. And then this is our total equity. Not at the end of the first year at, you know, once that rehab’s done, that’s how much equity is in it. Right. $40,000. All right. That’s the that’s the, this, and then the total equity is the down payment plus the plus the rehab on budget plus the pre equity, right? $40,000, $20,000 is our down payment. $10,000 is our rehab budget. And we all have that 10,000 of free equity. You remember, you remember how we came over with that 10,000? So we were, we bought it for what, $100,000, we put $10,000 into it.

Agent (00:45:08):

We expect,

Pat (00:45:09):

And it’ll be worth $120k. So it, that’s how we got that $10,000. And just, you know, that’s our free equity, right? That’s equity. We didn’t pay for. It just exists because typically a house that needs to be fixed up, you know, if it’s worth $120k as is, and it takes $10,000 of work, typically people aren’t gonna pay $110k for it. Because most people don’t wanna do that work. They just wanna buy a shiny new house. Right. That’s how investors can sometimes find some value if they know how to do that work. And they’re not afraid of it. Right. So that’s, that is our equity makes sense. You got it. Perfect. So knowing all of these numbers, we can now calculate these numbers, right? Cash return on investment, right. 6.38%, Right. That is our cashflow here divided by our cash invested. Right. So buying this property, we had to put up $33,000, right on that $33,ooo, we make a cashflow of $2100, 2100 divided by 33 equals 6.38%. Right. So that’s a pretty decent number, right. That’s not, that’s not crazy. You know what I mean? A lot of times, you know, if I’m buying something, I like to get double digit cash ROI if I can. Right. It’s, it’s hard to find those deals, you know, like, and a lot of times you’re gonna have to like, do you know, work for ’em and you having and stuff. But that’s not bad. I mean. What are you getting in your savings account in the bank? Probably 0.15%. Right?

Agent (00:46:43):

You lose money.

Pat (00:46:45):

Yeah. I mean yeah, so that’s not too bad, you know, that’s, that’s your cash ROI. Now your total ROI is down here. That’s 21.47%. Right. So that is our total return. $7,100 divided by that same $33,000. Right. So a 21%. Do you see where that’s coming from?

Agenda (00:47:15):

Is that at the end, as it’s all said and done, like if we were to sell the home

Pat (00:47:20):

That, so this sheet does not take into account selling costs. Right. So would you, if you sold the home, I mean, if you didn’t pay any commissions, if you didn’t pay any closing costs, then yeah. That’s what, that’s what you would get if you sold the house at the end of the first year that would be, you know, your, your return. I see. And so and what, what that, what I did not include on that is the free equity, I’m only including this year one total return. Oh, okay. Right. I, I have other sheets that we’re trying to keep this simple. Okay. Right. so in this case, you know, that’s actually, you know, really pretty good. Yeah. That’s pretty good. That’s a pretty good return on your cash invested. Right? So I see that 21.47%. Now check this out. This is why, this is why leverage is. So is so you know, big you

Agenda (00:48:15):

Cash down.

Pat (00:48:16):

So if you’re doing this straight cash, look at that number. It’s it, it, it, it’s cut in half, right? It’s cut in half. It goes from 21 down to 9. Do you understand why that’s so different? What changed? Right.

Agenda (00:48:32):

Get more money outta pocket. It’s you’re not using other people’s money.

Pat (00:48:36):

You’re not using people’s money. Right? You see this Elizabeth, you see total, total cash invested. You see cash invested. If we do it straight cash is $112,500. Right? And you see year one, total return, if we do it straight cash is, you know, $10,350. Right? You see those two numbers now stay looking at those. I’m gonna change that back up to 80% loan of value. Watch how those numbers change. You see that change? So your total return dipped about $3000, not too big, but your total cash invested changed massive, right? That total cash invested is in the denominator of the return on investment equation. That’s why that number changed so drastically, right? That’s called leverage. All right. You, you take out debt to buy an asset. It will juice your returns typically. Right? typically it should, if it doesn’t use your returns, you shouldn’t take it out.

Pat (00:49:39):

Because it’s not doing anything for you. Right. But in this case, it more than doubled our return on investment. Right. Did not change the cap rate, did not change anything about the property itself, did not change the rent. Nothing. All it changed is how much money we, we had to bring to the deal. Right. And when the interest rates are as low as they are, it, you, you don’t have to pay a lot of money. Right. Let’s look at it. Let’s look at it. You know, traditionally interest rates have been like, you know, like my, my parents bought their first house and they’re paying like 13%. What does that look like? 13%. Oh my God. I mean, you’re losing tons of money. Right? That’s leverage. That’s what leverage does. And that’s why, you know. Yeah. That’s why I like, in a nutshell, people like, why do you like real estate? Leverage is why I like real estate.

Pat (00:50:27):

Right? If I could take out a 30-year loan to buy Amazon, I probably would. And if it was at 3.5%. Problem is, and you can take out loans to buy stocks. But if your, if your stock starts going down, they liquidate it. They sell all your stock and they take your money. They don’t do that with real estate. If you buy a house, the guy, you can go down 40%, as long as you still make your payment on time, doesn’t matter. Right. And it’s 30 years, it’s a low rate. That’s why real estate is so powerful is because of leverage

Wynn (00:50:59):

Run that by. Like if you wanna buy a car. Like people aren’t paying cash for a car.

Pat (00:51:04):

Yeah

Wynn (00:51:06):

People, people don’t credit cards, everything you buy, like how many people pay cash when they have a credit card. Yeah. Leveraging credit cards, money to buy what you want today. And you’re paying them back at some point, whether you want pay back that full amount, you don’t have interest whether you want paying back a little bit and then they make money. But like the world revolves around leverage.

Pat (00:51:27):

So leverage. Right. That’s that’s and, and, and, and we went through all of that basically to get down to, you know, kind of showing the power of leverage. Right. Makes a huge difference. So this cash and, and, and, you know, you evaluate enough deals for whatever reason, you know, this one, the total return on investment looks pretty pretty juicy the cash isn’t sometimes it’s the other way around. Right. But that’s, that’s what you make that year right? Now, of course, this is simplified. Right. You know, if we look at, you know, my big sheet here, I’m looking every single year, year 2, 3, 4, 5, 7, right. And I’m looking, you know, you don’t ever have to get this, this complicated. Right. If it’s something you’re interested in, great. If not, don’t worry about it. Because you know, this is a part of real estate that I like, you don’t have to like it, you know, but I think you should understand the, the basics. Right. So, you know, that changes, you know, I’ll just show you internal rate of return, you know, is a metric that we look at. That’s basically this that, that’s what you’re making every year. So in this case, you know, a pretty good approximation. I can’t come on, go away, go away. Come on, here we go. Right.

Pat (00:52:43):

You know, this would be like 21. Like you can expect to probably be making 21% every year and it should go up as rents go up. Yes. Right. So, I mean, that’s sweet. I mean, you don’t find 21% in the fricking stock market.

Agent (00:52:57):

Well, we did it with, uh, an FHA

Pat (00:52:58):

For, oh, and if you do FHA, we’ll check it out. So, so if you buy this thing, so say you do an FHA 3 you know, 96.5%, how’s that gonna change it? It’s gonna be massive. Right? Look at that, that one up to 38%, because you barely put any money down. You know, if you, if you, yeah, if you do a VA loan,

Pat (00:53:23):

You know, it’s 40. Now we have these. If we cut out the, if we cut out the repair costs as well, 181% total return on investment, even though our cash flow is only $960 a year. Right. Because as we take out more debt, what goes up our loan payment, right. But 181% total ROI, 27% cash ROI on a measly $967. But why is that? Because what’s our cash invest at $3,500. That’s why a VA loan is so sweet. Now, now this is, this is kind of a dangerous place to be because you don’t have, you know, if your rents go down, if you misjudge your rent by a $100, right, which isn’t impossible to do. What do we look like now? We’re losing $59 a year, right? So, you know, this that’s another effect of leverage, is it amplifies your gains,

Pat (00:54:17):

It amplifies your losses. Right? So, but the reason I like real estate and especially rental properties is it’s typically pretty easy to, to estimate what your rent should be, right? Especially you got enough time in the market. Like you should know about what it’s gonna rent for. You have your expenses, the biggest thing, when you’re, when I’m talking, you know, especially with your investors, I say, you know, you kind of go over this and you say, look, you’re gonna be a landlord. It’s a business. It’s not a passive investment. It’s a little more passive than some, but you still need to be involved. You know, and if the HVAC goes out, like you need to have, you got to tell these investors, you got to have money set aside for repairs because it’s gonna happen. And it could happen the first freaking week you own it. Yeah. And you know, when you have this kind of leverage, if you’re only cash flowing $1,000 a year, and you got to spend $5,000, you know, like that, you know, that’s gonna hurt you a lot. So that’s the leverage, but you, you see how that, how that changes things. And why that’s important. Now, let me, let me set everything back to where, where it was

Wynn (00:55:25):

Before, while you set that back. Quick, quick pause – we’re an hour in, right? This is pretty heavy lifting. Some of the, the words, concepts, everything that pat talks about, he talks at a different level than most people. I mean, are we, is this still somewhat? I know it’s gonna be new, over our head.

Agent (00:55:45):

Yeah. This is something I’m going to have to watch again, especially.

Pat (00:55:52):

I wanna make sure that you’re understanding, you know, from the basics, like the building blocks, right. Like Pat didn’t get to this level overnight. Like he joined us, I started walking him through some stuff and then like you, once you got good footing, you kind went off on your own. Yeah. You kind of built your own stuff. You wanna make sure and it’s recording, which is good. We wanna make sure we understand the, like I said, I mentioned earlier mortgage in or rents in mortgage out. If that doesn’t make sense, like none of it matters. Like you have to make sure that you get a, get a kind of investing 101. Yeah. You know, most people want 200. Right? So your cash flow. Back to the napkin stuff. So you have $150,000 house the mortgage payment on that is gonna be what what’s the mortgage payment on a $150,000 house?

Pat (00:56:44):

Probably, probably gonna be around $1,000 at 4%.

Wynn (00:56:49):

Right. That’s let’s do it real quick. Let’s find. Let’s go to

Pat (00:56:52):

To, well here I got, I got, I got everything in here right now, so let’s just so equals yearly principle and interest plus property taxes, plus insurance divided by 12. Oh. It’s I need to do minus, minus.

Wynn (00:57:20):

Yeah. It’s probably be about 1,050

Pat (00:57:24):

I’m coming up with $590. Oh, that’s $100,000. Which would be about right at this interest rate. So

Wynn (00:57:31):

$150, $860

Pat (00:57:34):

That’s at 4%,

Wynn (00:57:36):

4% that’s included? Principle and interest? Everything?

Pat (00:57:39):

Yep. Yeah. That’s also, that’s on a, you know,

Wynn (00:57:46):

30-Year,

Pat (00:57:47):

Your yeah, your, your insurance is probably gonna be a little bit more. That’s 30-year. Yeah. $860. That, that sounds about right. I think that’s about right.

Wynn (00:57:54):

Yeah. So, so if you buy a house, if someone wants to buy a house for $50,000, their mortgage payment, because they have to pay every month to the bank is gonna be

Pat (00:58:02):

$860.

Wynn (00:58:04):

Let’s round that up to $900. So your 1% rule is gonna say, I would love to get $1,500. I’m buying a house for $150,000. I would love to get $1,500 bucks in rent. It doesn’t happen. Right? Not, I mean that, those are kind fair rents, right? So at some point it’s a good investment. Some points it’s not. So say it’s $150,000 and you can get 80% rents. Right. 80% rents would 80% of hundred $50,000 is $120,000 or we’ll do it the same way there 80%. So you’re looking at $1200 a month at your 80% or your,

Pat (00:58:42):

Your not. 0.8%.

Wynn (00:58:45):

0.8% so 80x, 80x rent

Pat (00:58:47):

No, no. That’ll be like a 120x rent

Wynn (00:58:49):

Or yeah. Yeah. Right. So you say that’s, you’re, you’re looking in here. Okay. So The, so if, your mortgage payment is $900 a month, how much more than that does an investor need to say it’s good deal? Right? If you, if you pay out $900 a month,

Pat (00:59:13):

Probably $1300.

Wynn (00:59:13):

When you bring in $900, is that a good investment? If you’re paying out $900, bringing in $900, is that, are you gonna wanna do that? No. No. Right. If you’re bringing in, if you’re taking out $900, and bringing in $2,000, is that a deal? Of course. Now somewhere between not a deal and a deal, every investor has a different threshold of what they’re comfortable with

Pat (00:59:36):

Yeah.

Wynn (00:59:37):

Right. And that’s where we need to make sure we’re kind of working in the back mapping numbers to see, even if I wanna show it too, because you don’t wanna drive all the too. And you’re like, Hey, rents in this neighborhood are $700, your mortgage payment’s gonna be $900. [unintelligible]And they’re Gonna look at you like [unintelligible]. So when you do it enough, like Pat does it you just, you know, when you look at neighborhoods, you look at houses, you just kinda, it runs in your head and like deal, not deal, deal, not deal. But this is the, the, the basis of where he and I are getting more repetition. When we look at 10 deals a day, 20 deals a day. So you got you mortgage $900/mo. Most people wanna make minimum $300 or $200 a month on that. Right. So if you have $200 you wanna make, and then you have little backwards math on you have to set a little bit aside right, every month for your, your expenditures and your maintenance, which is, we already talked about, about $1,500 per for per year.

Pat (01:00:40):

Yeah. I mean,

Wynn (01:00:42):

So that’s about $125-$150. So pack that on top. So you got $900, you wanna make $200 that’s $1100 tack on another $150, $1250. And you had said $1300, right? So the scenario ran quick. Boom. If I can run it for 1300, is the deal. If I can run it for $1,000

Pat (01:01:04):

Not a deal

Wynn (01:01:04):

Not a deal. So anything over $1300 would be a juicier and juicier deal for your investor.

Pat (01:01:11):

Yeah. And, and I’m, I’m typically you know, people, you you’re talking, 1%, people throw around 1% and 100x rent. That means the same exact thing. 1%, it depends on whether you’re applying it to the purchase price or the rent. So if I’m saying, Hey, it’s $100,000 house. The 1% rule means I probably want to get at least $1,000 in rent, 1% of $100,000, or if you’re looking at the rent is $1,000 and you apply the 100x, you know, that it’s, it’s the same thing. So it just depends on whether you’re going from purchase price to rent or from rent to purchase price. But typically like if I’m looking in a nicer, maybe Georgetown, maybe Richmond Hill, you know, southside Savannah, some of the nicer places, like 120x rent might still be a good deal.

Pat (01:01:59):

You know, that, and that would be like, what about 0.8%? Right. You see how that it goes. So, you know if it’s renting for, you know, 1300, you know, and you’re, you’re 120x rent, you know, what’s the Wynn’s a better mental math guy. 1300X120, $156,000. Right. That makes sense. That’s in like a little bit of a nicer spot. But if you got the same 1300 and kind of a nastier place, so you want 80 times rent 1300 times, 80, $104,000, right? Same rent, different areas, different price you wanna pay for them.

Agent (01:02:39):

Makes sense. Yeah.

Pat (01:02:40):

Different neighborhoods. Yeah. There, there are two different, there, there are 3 different ways that most people invest. I just had a conversation with an investor outside. Right. Who wants to get in – a lot of, a lot of people want to get into investing. They’re like, “Hey,” they’ll call Pat, they’ll call me, jump on the phone with these guys, “I wanna get into investing but I don’t know how to do it. Like can you help me out and explain more,” and I tell them the basics or the three ways to invest. You can do a cash flow investment strategy, which means you want cash the most amount possible, most amount of money possible every month. You don’t care about appreciation. You don’t care about other stuff. You just want cash.

Pat (01:03:14):

If you’re looking for that, probably Hinesville

Wynn (01:03:16):

I was going to say, there are certain markets and certain neighborhoods that if you want to make a ton of cash, that’s the way to do it. Right? So an example would be you buy house today for $100,000 and you can make $500 a month in cash flow. And in five years you sell that house for $100,000. Because it doesn’t appreciate certain neighborhoods won’t appreciate, right? Some investors would like that. They don’t care. They, they, they want as much money on a monthly basis as possible. I don’t care what I sell it for, that’s food. Right? Your option B is I don’t wanna make monthly money. I don’t want any cashflow on the equity game. I’m playing the long game. As long as my rent coming in covers my note, I don’t care because I don’t need it. I don’t want it. I’m looking for a equity long game. So that’s, if you buy a house for $100,000, your mortgage payment is $700, as long as I’m making $700 of rent in five years, that’s worth $200,000. And that’s what I’m looking for. I’m not looking for the monthly payments. So you got your cashflow option, boom, you got your equity play, boom. Now most investors wanna be right in the middle. Right. They want the equity and they want some cashflow. And that’s where

Pat (01:04:30):

You typically got to give one to get the other. Yeah. You know what I mean? Like you can get way more cashflow in west Savannah, but the appreciation, in my opinion, I know some people who think that that’s gonna be a hot place. I’m not really sold on it. But anyway, typically like Hinesville Hinesville, for example Hinesville appreciates, whenever the BAH goes up, you know what I mean? Like that’s what it depreciates. And it’s not much, you know, but you can get some cheap houses out there. You can make some cashflow, you know, whatever. But then the kind of in the middle is kind of why like eastside Savannah because you’re still getting decent cash flow better than Starland. And I still think there’s good appreciation potential over there. So, but I think like a straight appreciation buyer they’re buying, you know, Starland typically nicer places and they’re typically from out state, like, you know, people who live in Savannah have been investing in Savannah. Like they don’t want buy something on Bull and 33rd,

Wynn (01:05:25):

But they wanna buy in a neighborhood that’s seeing appreciation. So look at 33rd – your place on 33rd, right? That’s a, that’s a transitioning neighborhood. Right. And pat has a personal investment. That’s like, Hey, I’m gonna hold onto it because I think this neighborhood is gonna appreciate, and it’s gonna be a good, long term investment.

Pat (01:05:47):

I’m still making good cashflow on that. That was a total. That was a total like a total gut job rehab. And that’s something you talk about investors. Like if you really want value, you got to buy a stinkhole and you got to make get nice because, because the buyer pool for a crappy house is just so much less competition. But more risk involved, more things can go wrong. I went $15,000 over budget. You know, it happens. Right?

Wynn (01:06:12):

Question that you can ask if you’re talking to an investor, ask them up front – are you looking for a cashflow strategy, or are you looking for an equity play, or do you want kind a hybrid, right? One, that’s gonna give you credibility that, you know, show you know about you understand the three basic buckets of what it is, and just because you or me or somebody might be all about this strategy that the person you’re talking to that investor might be all about another strategy. So we can’t assume that what we want in our own personal investment is what the investor might want. Because you have to ask them that, are you looking for maximum amount of cashflow every month? Are you looking for a long play kind of equity play? And most of them come back say I’m looking for something in between. And that’s where getting into the spreadsheet and the underwriting can try and maximize in between because you are gonna sacrifice one or the other, right, there’s no, there’s no way to, you know, you’re gonna be, you gotta balance it. So, and the balancing, the, the threshold of every respective investor is gonna be different on what they wanna do. There are deals that I think are deals that other people don’t think are deals. And there are deals that other people don’t think are deals or that do think are deals. And I don’t. Yeah, because we all have our own,

Pat (01:07:26):

Everyone’s got their own thing and, and everybody sees, I, I always tell people, you know, like, like I always talk about eastside. I’m big on it. I tell my people, Hey, I’m big on it. I own stuff over here, but I might be wrong. You know, there’s other people who think this is the thing, the thing about real estate, you know, people think real estate’s gonna be, oh, this is safe investment. This is, you know, and I think in some respects it is safer than, I mean, it’s certainly safer to buying, you know, crypto. Yeah. Right. But nothing’s safe. I mean, nothing is safe. A freaking category five hurricane could come in and just totally, you know, frick Savannah. And if you look at what happened in New Orleans, I mean, there’s still neighborhoods in new Orleans that never recovered. Never. Yeah. So, yeah.

Pat (01:08:01):

And so like, nothing is safe. You never know what might happen. Managing expectations, this job’s managing expectations, but like to Wynn’s point, like, you know, Wynn’s got a buyer, that’s got $2 million in cash that she’s got to get in something. And she’s buying deals that, you know, I wouldn’t buy, you wouldn’t buy, you know, but like for her, for that investor, it makes sense. You know, I’ve got another client, you know, who has a lot of money that he’s got a place, um and for him he doesn’t need, you know, we did manage it, I actually found him a deal. I kinda wish I would’ve bought it myself. You know, last year we put them on a duplex on market, you know, something that I probably wouldn’t have bought myself, but like still a good deal. It’s in a good appreciation spot, you know, whatever. Everybody’s got their own thing. So we kind of went off on a tangent, but you know, this is, this will help you help give you kind of the tools for your toolkit.

Agent (01:08:52):

So I got A question for you. Yep. So for us I’ve done a few of these, but I’m still having issues going through understanding like the property valuation metrics, that section of it. What would you recommend for us to just get this and train and practice?

Pat (01:09:13):

I would just, I would, you could just use this for a different properties. I mean really you know, let’s, I mean, why don’t we

Agent (01:09:22):

Like, can we do a real one? Just like,

Pat (01:09:25):

Yeah. Yeah. Why don’t we, why don’t we do one? I’m gonna do, I’m gonna share my whole desktop here. So,

Wynn (01:09:36):

Because I understand it. It’s like, I’ve, I’ve done it a different way and it’s never been this accurate.

Pat (01:09:43):

So I’m gonna share the whole desktop here. So anybody watching this should be able to see both windows alright. Here’s my money out money here. Yeah. I made I made almost a almost a dollar today. Right. Let’s look let’s look at let’s just look at a regular, regular house.

Pat (01:10:19):

So let’s, let’s, let’s do one. Actually dude, let’s do one that… This is a house I sold. Yep. Alright. So this is a house I sold a guy about a little over a year ago. He paid and he didn’t even buy this as an investment. I mean he intended to rent it out later, but he needed to place to live. VA loan buyer, right. Sold for $289k. So let’s plug that guy in $289k. That same condo would sell for probably $330k right now. He got, he got, we actually bought that in like April, went under contract, like the worst of COVID times when like everybody thought the, yeah. So good, good timing on this part. Alright. So $289k, right. Repairs. I think he’s put, he’s put some money in there maybe $5,000 odds and ends, you know rent estimate.

Pat (01:11:18):

So I think back then I told him it would probably rent for $2000. I think he’s got a little more than that. He’s got it rented out. Let’s just say $2000 ARV, you know, we’re going back then. It’s worth about $300,000. All right. Loan to value. Like I said, he’s, he’s VA, so 100% technically the VA loan because of that funding fee, they tack on the funding fee. We’re just gonna keep it 100%. We’re just gonna keep it simple. His rate looks like cheap. I think it was, I think it was like, I think it was 2.5 30-year, 30-year loan. I don’t think he got any points on that. All right. For, yep. All right. Insurance. he’s probably paying $1200. Insurance is higher when you’re living in it than when it’s rental property, by the way.

Pat (01:12:14):

So maintenance, that’s $1500 in a house like that. Vacancy 5%, property management, 10%. Okay, cool. So let’s go through our numbers, right? We’ve got a net operating income, $12,000, right? We’ve got our rent multiple $147. That’s a high rent, multiple that’s, you know, pretty good that’s Ardsley park. Like that’s a nice single family home in Ardsley park. You’re you’re gonna have to pay, you know, you’re paying a premium, like the cap rate 4.3%. That sounds about right. I mean, that’s, you know, it’s, it’s a nicer property in a nicer neighborhood, you know, you, how that changed, you know, that, you know, if that same house was in west Savannah, somebody probably went like an eight, like, like double the cap rate, which would mean if we doubled a cap rate, what happens at the purchase price? By how much?

Agent (01:13:09):

Oh I don’t know how much,

Pat (01:13:14):

I mean, we cut in half. It just cut in half if it’s the same rent, you know what I mean? If it’s the same rent coming in and a double cap rate, you know? So like, yeah. So that’s, that’s how we’re valuing that particular property. I see. Okay. So the rent multiple is higher. Now, and this is a deal that like a straight investor, you know, is not, you’re probably not gonna buy that house to rent it out. Right. This is a guy who was VA loan. He’s gonna live in it. He had to buy house anyway, you see how we’re looking at this? He had to buy house anyway, so all right. So what are we looking at? Principal and interest. All right. So here’s his here’s his payment every month, principal interest taxes and insurance $1674, right. Instead it’s renting for $2000.

Pat (01:14:02):

That’s what we estimated. So when I, when I ran the numbers for him you know, if we go through here’s our cash flow: -$1,000 bucks. Right. So I, you know, I told him, I was like, look, you know, like you’re probably lucky to break even on this. You know, if you move out. Now in, you know, two years timeframe as rents go up, you know, you’re, you’re looking better. He was gonna live in it for probably three years, but he ended up getting moved somewhere else, like pretty quickly. So he ended up having to rent it out. I think he’s getting $2200 now. So he’s making little money, not much. Right. but even with that negative cashflow, look at his total return. Sweet, because he’s paying down his mortgage, right. How much? $6,000 a year. Right. He’s paying down his mortgage $6,000 a year and he’s got the appreciation. So you know, his cash ROI, -14%. Right? Talk about, talk about leverage, right? -14%. And, and the less money say he didn’t spend anything on repairs, that cash ROI is now -42% on the same exact cashflow. Just because the denominator, that equation is so small. That’s how, when I talk about leverage, can amplify gains and losses in this case, it’s greatly amplified his loss, even though it’s the same dollar amount, but when compared to his initial investment. Right. Makes sense. Yes. But his total return on investment 580%. You can see how you can lose money in a cash basis, but make money in other ways.

Agent (01:15:38):

Right. Actually that’s a lot more, it’s probably over 600%.

Pat (01:15:41):

Yeah. so, but he did, I know he did spend about $5,000 fixes some stuff, so, you know, whatever. So I mean that’s, that’s leverage, right. But that’s, that’s that deal that’s Ardsley Park, you know, and, and for him, like I said, that’s something I wouldn’t buy that as a rental. He probably wouldn’t buy that as a straight rental either, but he had to have a place to live and he didn’t wanna pay rent. He wanted, you know what I mean? So like, and here’s something else that I didn’t even think of that I want to bring up, look at this principle and interest. Right. It’s pretty similar. They’re they’re both pretty close. As the interest rate gets closer to zero, right? Say, say your interest rate’s 1%. It’ll never happen. But alright, now, look at that. Now you’re actually paying more principle than interest. Even though I just talked about what did I, I just talk about? I said, usually they’re, you’re gonna charge more interest. Say that, say, say it goes up to 10%. Alright. You’re barely paying any principle. You’re paying so much interest. That’s just how it amortizes. That’s. So the lower, the lower the interest rate is obviously good because your payment’s lower, but it’s also good because the lower, the small, the, the, the closer that rate gets to zero, right? If it was all the way at zero, say you got a loan, no interest rate. Well you’re paying nothing but principal at that point. Because there’s no interest to pay.

Pat (01:17:04):

You see how so you get a lower rate. That’s also juicing, not just a lower payment, but it’s also increasing the portion of your payment that goes to principle. So that’s why low rates. This is a little bit of an aside, but like if rates go up to 10% tomorrow, there will be a massive real estate crash. I mean, prices would, would cut in half prices would cut in half overnight. Right. If, you know, the, if you’re one of the people that believes in like a global conspiracy of, you know, the elite and they all got together and they said, you know, we’re gonna crash the housing market today. Set rates of 10%. Yeah.

Agent (01:17:40):

It’d be great if you have cash on hand,

Pat (01:17:41):

It would be great. Yeah. If you were like a global elite and you had a much of cash on hand. Yeah. Yeah. So, so yeah, that’s, that’s rates, that’s a little bit of an aside on interest rates. You know, some, some movement in rates 1%, 2%, not really that big of a deal, you know, to most people. Anyway, so let’s put that. So yeah, that’s, that’s always a part of deal, so you can see those valuations and all those metrics and stuff. So we talked about valuations rent multiple 147, that deal. Let’s look at a different deal.

Agent (01:18:20):

Let’s let’s go to

Pat (01:18:21):

Where do you wanna go? Where do you wanna look at a

Agent (01:18:22):

Deal? Let’s look at a nice deal.

Pat (01:18:26):

Is that

Agent (01:18:26):

That’s the I’m looking at quite a few like New Mexico street. You

Pat (01:18:32):

Wanna look at someone in New Mexico? All right.

Agent (01:18:35):

Yeah, I wanna check out some of

Pat (01:18:38):

How about

Agent (01:18:40):

I was going through that area. It looks really, really appealing.

Pat (01:18:44):

Why don’t we look at actually,

Agent (01:18:47):

There’s a nice small

Pat (01:18:50):

You know what? Lee, oh, well, Lee, I got that deal really, really good.

Agent (01:18:56):

But there’s a couple of them over there. I’m I’m

Pat (01:19:00):

Let me call up. Let me just call Lee real quick. See if he’s got a second. Because he got a really, really good deal.

Agent (01:19:08):

I think that was the one I went over

Pat (01:19:10):

And check this one. Yeah. It’s the one you looked at? Well, the one that’s finished.

Agent (01:19:13):

Oh, okay.

Pat (01:19:14):

Let me call Lee,

Lee (01:19:22):

Hey, what’s up man Hey

Pat (01:19:23):

Lee, how you doing? Hey I’m gonna head out shoot pictures at your place here pretty soon, but we are, I’m finishing up an agent training. We’re going over investing math and I just wanted to, that rental. You just did. Yeah, I wanted to analyze that for them. Can you tell me like what, what you got into it and, and what it rents for, if you got a minute?

Lee (01:19:44):

Yeah. You talking about the — that we just renovated?

Pat (01:19:47):

Yeah, yeah, yeah, yeah,

Lee (01:19:49):

Yeah. So this is an odd — because it’s got a clouded title. It’s, it’s. The math is gonna be different on that. So I bought it for $20k. Yeah. With no title insurance. Yeah. Put $35k into it.

Pat (01:20:05):

Yep.

Lee (01:20:05):

And it’s currently listed for rent at $1300. I’ve probably had 10 people want to submit apps already.

Pat (01:20:11):

So you’re gonna get, you’re gonna get your $1300 sounds like,

Lee (01:20:14):

I think so.

Pat (01:20:15):

That’s awesome.

Lee (01:20:16):

At least 1250.

Pat (01:20:17):

That’s a what is that? Is that a little 2-bed bungalow or is that a 3?

Lee (01:20:22):

2-Bed 1-bath

Pat (01:20:26):

Sheeeesh! That’s incredible right. I’m gonna, I’m gonna run through I don’t wanna take up too much of your time, but I’m just gonna I’m I’m just, you know, teaching them. Yeah.

Agent (01:20:34):

So do you have insurance and all that on that one?

Pat (01:20:37):

Okay. Yeah. I’m sure he’s got insurance. Yeah, yeah, yeah.

Agent (01:20:39):

Um because I didn’t know what the clouded title.

Pat (01:20:40):

I’ll talk about clouded title. Yeah. Lee, I think that’s, I think that’s all we needed. Appreciate you taking a quick minute. Right on. Yep. Awesome. Thanks man.

Lee (01:20:48):

Well then I don’t know if you wanna share this or not. You can talk about it a little bit. But with the clouded title also, so, and I got two options. I can either run a quiet title to be equitable, be simple. So it’s marketable. Yeah. Or even if we don’t do that in Georgia, since I do have a quick limited warranty deed, I don’t have title insurance, but I do have a limited warranty deed. In seven years I can use adverse possession to also get marketable title on it. So the equity can be realized, it’s just gonna take longer.

Pat (01:21:22):

Yeah. Yeah. I’ll explain that to them after we hang up what that all means, but yeah. Man, that’s a sweet deal. That’s a sweet deal.

Lee (01:21:31):

It’s a freakin money maker, man

Pat (01:21:32):

Yeah. Yeah. Good job Lee. Awesome man. All right. Appreciate it. Alright see ya.

Pat (01:21:38):

All right. So Lee, this is Lee’s deal. So I’m not gonna it’s it’s it’s over here. It’s one of these streets. I forget exactly which one already. So Lee bought this place and he’s holding this in cash. Lee, you know, you would think Lee would be like levered up on everything. That’s when, when I say levered up, that means leverage, get a loan. Lee talked about different investing strategies. Lee wants to maximize the cash in his pocket. He doesn’t care about the percentage cash return. He just cares about how much money’s coming into my pocket, because he’s trying to put together a smaller portfolio. That’s not leveraged that he can basically, you know, retire in five years and just make money. Right. That’s a different strategy. You know, me, I, I wanna, I wanna use leverage, like that’s different things, right? So for him, he doesn’t have a loan, so he doesn’t have a loan on it. He doesn’t have a loan on it. So, but what I’m gonna do is a deal like this. If an investor does like a significant rehab, they’re typically not gonna leave this repair budget of $35,000 like tied up in equity in the house, they’re gonna refinance it. Oh. So what I’m gonna do is I’m just gonna set this purchase price to $55,000.

Pat (01:22:51):

All right. And I’m gonna set the repair to $0.

Agent (01:22:54):

He’s all cash.

Pat (01:22:55):

Well, he’s all cash. But if, if another investor was doing this, typically they’ll do the repairs and then they’ll refinance it to pull the repair budget back out. It’s called a cash out refinance. Right. When we’ll talk more about that strategy later. Yeah. Yeah. Just, just to run numbers on it. So say $55k, th- that’s incredible. I mean, that deal does not exist on the open market. Even that’s an incredible, incredible deal. Right. But let’s run through the numbers on this incredible deal. Right. What’s it worth, you know, he could probably sell for $150k today. So say, say an 80% buyer, you’re probably at 4% property taxes, insurance is probably gonna be $750. Um so what is this deal? This deal is an incredible deal. It’s it’s wow. So yeah. So your… 42 is his rent multiple 42, right?

Pat (01:23:51):

That’s super low that’s. That means the rent’s $1300 times 42 equals his $55,000 purchase price. Incredible. That neighborhood really 100-110 is what the equity multiples should be. So that’s, that’s a way to evaluate if you see this deal and you’re like, holy shoot. I mean, that’s buy, buy, buy, like buy it now. Like don’t even, don’t even look at it, just buy it. You know what I mean? And, and, and really, you know, deal like that. I’d be happy paying an a rent multiple, like say you buy it for a $100,000, 76, I’d be happy to pay a hundred grand for that deal. I’d probably be happy to pay $120,000 for that deal. 92. Right? Yeah. You know, and, and, and most investors for $1300 in rent over there, they’d probably be happy to pay $140,000, 107. That’s what I said, 110x rent for that neighborhood, you know, so you can see, and that’s the other good thing about real estate is in the stock market, a stock like Amazon, there’s so many buyers and sellers that the price, you know, it’s very rare that you’re gonna be able to get a sweet discount on Amazon, Amazon shares because there’s so many buyers and sellers in that market.

Pat (01:25:07):

And it’s an easy, it’s a liquid. When I say liquid, I mean, it’s easy to buy and sell. And now the only opportunity you had to buy Amazon at a steep discount was during a Corona crash last year. Yeah. If you were, you know, smart enough to buy some, right. So the, the other cool thing about real estate is you can find deals like that. Lee sends out all his mailers. He found a deal. This deal has clouded title. That means no regular buyer. You have to buy that cash. Nobody’s even gonna lend on that, on that house. Like he, you can’t even take out debt. No lender’s gonna lend you money for that house because it’s got clouded title. Now he can go through a legal process. There’s things he can do. This is not an investor. You don’t know for sure who the owner is.

Pat (01:25:54):

Basically.

Wynn (01:25:54):

We don’t know who owns.

Pat (01:25:55):

Yep. Right now Lee’s got possession of it. He kind of has ownership, but it’s disputed. It’s kind of in dispute and it’s not somebody disputing Lee. Somebody’s disputing an earlier seller at some point in time. Who knows, could have been the guy who owned it three, three times ago. You know what I mean? That’s clouded title. In a couple years, Lee should be able to fix that and then he could sell it, you know, once he gets that fixed or there is a slight chance that somebody can make a legitimate claim against the property and take it that’s he rolled it for those kind of numbers. He rolled, he rolled the dice. Right. and that’s how he was able, you know, he sends out letters. He’s, he’s got websites, he markets. So he finds these deals off market. He goes to the seller, he establishes some rapport. He finds out what their problem is, how he can help. He finds these deals. Right. He found this, this sweet deal. So he’s on go back to his numbers. 55. Yeah. So he’s making $7,000 in cash. If, if he’s got it, you know, he turns around if he’s got a loan against it, if he doesn’t have a loan against it, what’s his cashflow gonna be?

Pat (01:26:58):

If he doesn’t have a loan, what’s his cashflow?

Agent (01:27:04):

Cashflow would be his rent minus

Pat (01:27:07):

Minus what?

Agent (01:27:08):

Insurance

Pat (01:27:09):

Minus expenses. Yeah. What do we call that metric?

Pat (01:27:13):

There’s a word for it.

Agent (01:27:22):

We call that metric. Why am I drawing a blank?

Pat (01:27:27):

It’s an income metric, right? Because we’re talking about an income.

Agent (01:27:30):

Net operating income?

Pat (01:27:31):

Net operating income, NOI NOI. So if he pays and he did pay $55,000 straight cash, his NOI is $10,000. He, he has $55,000 invested his, his NOI because it’s straight cash is $10,000. Now, if he did take out a loan against it, right. 80% of $55,000, his cashflow would then be $7,500 because he’s paying $2,500 in principal and interest. Right. So let’s just say he has a loan and it’s still pretty good. Here’s his total return, right? Which is cashflow plus appreciation plus principal pay. Now $12,000 total return on $55,000 invested. So if he’s got this loan, let’s run the numbers like he doesn’t have the loan because he doesn’t. Yeah. Let’s, let’s take a look. 0% loan to value. So Cash ROI, 17%. He’s making 17% on his cash without a loan. It’s incredible. Total ROI, 25% on that $55,000 investment, basically he’s got if with the 25% ROI, how many years does it take for him to get his initial investment back? At a 25%?

Pat (01:28:52):

Four years. So in four years he’s got all his money back. Right? Now. Yeah. Let’s, let’s put the loan back on it though, because most are gonna have a loan. So we put the loan on it. Hey, look at the numbers. Now 56% cash ROI in two years, you’ve got all your money back from your down payment. Two years. Right? Now, two things first. I’ve not, not talked about ROE yet. So I’m gonna talk about that. But I’m also gonna to talk about this purchase price of $55,000. Not a lot of lenders will give you a loan for that. Most lenders. I actually had a deal. I found a guy, an awesome deal on New Mexico street a little over a year ago. Killer deal, smoking. Good deal. Just as an owner-occupant, right? It was off market. I had to get Denise to do it because nobody wanted an assignment contract.

Pat (01:29:40):

Like all the other lenders where I talked to, were like we don’t do assignment contracts. Denise was like, we’ll figure it out. I was like, Denise. You’re awesome. Yeah. So, so you know, it was, it was so complicated to get all the contracts and everything, but we got it straight. She closed on it, but the price we were under contract for like $65,000 and she was like, it’s got to be at least $75,000 or I won’t lend on it. I was like, you telling me that we have to spend more money? And she’s like, yeah. And I, you know, I- I called my client. I said, we got you this great deal, but you have to pay more for it. And I walked him through it. He still did it because he was like, well at the end of the day, you know? So basically the seller got some more money. You know, and I think, yeah, I was like, all right, well I’ll buy you like a nice Home Depot gift card or something. You know what I mean? But anyway, that’s the other thing you could probably get private money, but you got to pay more for private money. You know, I’m talking your regular conventional loans, right. So, but return on equity, you see how low these two numbers are? Yeah. Why are, what, what is if return on investment is return over cash invested, what’s return on equity?

Agent (01:30:49):

Return on equity. I mean, that’s just getting money from the house itself.

Pat (01:30:54):

What, what’s our equity? So, so what, what is, what is the equity

Pat (01:30:59):

That, that Lee has in this property?

Agent (01:31:03):

So he has, I mean, it’s right around a hundred, a little less $95k. Because of it’s after repair value? $95K?

Pat (01:31:15):

So that is his free equity, right? That we talked about $95k is his free equity. But his total equity is, is what? How much equity

Agent (01:31:31):

Would just be $150k?

Pat (01:31:33):

Would not be $150k. So, but he’s got well for him because he doesn’t have a loan. Okay. For him it would be one $150k because he doesn’t have a loan. If you have a loan, your total equity is basically that ARV minus the loan amount. Okay. Right.

Agent (01:31:50):

That makes sense.

Pat (01:31:50):

Yeah. Equity, um when you, when you look at a you know how a company has like a balance sheet, you can look at the balance sheet of a company? Are you familiar with that at all? Like and on a balance sheet you have assets, you have liabilities and then you have equity. Right? Are, are you familiar with that terminal? Yep. So you have, and, and it’s the same thing with a company or real estate. It’s a very similar thing. So if you look at the balance sheet for this property, you have assets of $150,000. That’s the asset that’s worth $150,000, right. Asset, $150,000 boom. Liability is your loan. What is your loan? What’s 80% of 55? $120. Well, no um

Agent (01:32:36):

Oh wait, what? Oh, 55

Pat (01:32:38):

  1. So $55k is the purchase price. 55 times 0.8 equals 44. Because

Agent (01:32:44):

I was going on theARV, which is incorrect.

Pat (01:32:47):

So $150,000 asset. Liability, $44,000. Right. and then we have equity. What is, what is our equity? All our equity is, is 150 minus 44. All right. So $106,000. So

Kelly (01:33:08):

Equities, ARV…

Pat (01:33:11):

Minus loan amount. Right. So whenever you look that that’s, that’s how you figure out your equity. Right. and any, any business, if you look at their balance sheet, right? You, you, the, the assets are gonna equal liabilities plus the equity, the shareholders equity, right. And any property it’s, it’s the same thing. It’s, it’s a, it’s a balancing. So you know, the more you pay down the loan, that’s why you have more equity. You see what I mean? Yep. Yep. So

Speaker 7 (01:33:42):

I was just doing it off of the ARV, which is incorrect.

Pat (01:33:45):

Well, no ARVs, correct. That’s that’s what it’s worth. That’s the asset value. It’s worth 150,000

Agent (01:33:50):

Or originally loan to value. I wasn’t taking it off the purchase price.

Pat (01:33:52):

Yes. You take loan to value off the purchase price.

Agent (01:33:54):

That’s where I messed up.

Pat (01:33:55):

Yeah. Loan to value isn’t. I mean, in this case, there’s two different ways when, when the difference between the asset value and the purchase price is so different, a more correct way to say would be loan to cost.

Speaker 7 (01:34:08):

Oh, okay.

Pat (01:34:09):

But for this, we’ll just leave it loan to value. It means to the lender LTV 80%, they’re gonna, they’re gonna lend on 80% of the purchase price or the value of the property, whichever is lower for your standard investor. It’s a little different when we do a cash out refinance, that’s a little bit out of the scope. Right? So anyway, equity, he’s got a shoot load of equity in this deal. Right. That is the bottom of the return on equity equation. So even though right, both of these equations have an enumerator cash flow. When, when the denominator of equity is so much greater than the cash invested, that’s why that number so low. Why do we look at return on equity then? Why does it, why does it even – because it’s good. It’s good that he got so much equity, right? Why do we wanna look at this return on equity? What happens as our equity goes up? Watch this let’s let’s say it’s worth $200k, say, say in five years, it’s worth $200,000. Look how much our return on equity went down. It almost cut in half, right? As your equity goes up

Pat (01:35:17):

And you’re making the same amount of cashflow, your return on equity gets lower. And so what that is telling at least me as an investor is I have a lot of equity that if I pulled this equity out, I could put the equity into another property. And as long as I’m making more than 3.68%, that’s a better use of that money.

Pat (01:35:38):

That’s why we look at return on equity. Right. I have, for example, an investment property with about $50,000 worth of equity in it. Right. somebody wanted to buy that off of me. And so what I looked at is what’s the return I’m making on my equity in this property, you know? And I ended up not selling it because I said, well, I have a lot of equity, but I’m still making a good return on it. I don’t think I could take that equity and put it into another investment and make a significant amount of extra money.

Pat (01:36:06):

Make sense? Yes. What are our two ways to free up equity? There’s two ways to do it

Agent (01:36:13):

Refi,

Pat (01:36:14):

Refi, or

Agent (01:36:17):

Only to refi

Pat (01:36:18):

Or sell the asset. Oh, okay. All right. Yeah. I guess the other one. Yeah. So that’s why return on equity is more important. When you already own the asset and you’re gonna see that return on equity, probably go down as the, as the asset becomes more valuable. At some point in time, the investor’s gonna say, you know what, let me free up some equity, either in a sale or in a refinance or you could even do a HeLOCK, you know, perfect. That’s why I keep it in here. It’s not super important when you’re, when you’re gonna buy the place. You’re more interested in your return on investment, but if you already own it for 10 years, run numbers on something you already own. What’s my return on, oh, it’s not that great. I should sell this. Maybe buy something else or refinance it. And so, you know, yeah. Return on equity. There we go. Make sense?

Agent (01:37:06):

Yes. Now, now that does.

Pat (01:37:07):

Yep. So, alright. So before we wrap it up, this is a sheet that I made and I’m gonna change my screen share now. So anyway, we did this neighborhood 110x rent kind of in this, in, in the states In the state streets, 110x rent versus Ardsley park, 150x rent, right? Two different neighborhoods two different valuations, right? What’s what would the cap rate be? Let me, let me do the cap rate on

Pat (01:37:51):

So what did I say for $1300 somebody would probably pay $140k for $1300 in rent. Yeah, we were right there. So cap rate, 6%, 6% cap, 6.16% cap rate versus what was the one in ours? It was like 4.3. It was, it was lower 4.3. Right? So Ardsley, more desirable neighborhood, more desirable asset, lower cap rate. Makes sense. Yeah. So that’s why if you’re looking in a deal in Ardsley park and if you can get a deal in Ardsley park, that’s a cap rate of 5%. That’s good. You say, you know what, this is a better investment than most of the other investments in this neighborhood. And you could say to your investor, Hey, this is a better deal than most of the deals that you can buy this neighborhood. Meanwhile, over here in the states now to think about the state streets and in this here I’ll point with my mouse. So anybody on the video can see it. And this side of Savannah is it can be, it can be very block to block. So you, you have to drive the block, you really have to drive the block. And that’s what I was doing down there. I was checking out that whole area. And, and like, for example, like some of these parts in Mississippi are, are kind of gross, you know what I mean? You know, if you’re buying something in some of these parts, you probably want to get 90x rent.

Pat (01:39:08):

Whereas, you know, so this is Mississippi there’s where’s that Vermont. All right. Just right over here, just a couple streets. This is a lot more desirable over here. Um a lot more desirable over here, a lot more desirable over here. Then you even got Gordonston, which is like, you know, nice, nice. You know, and that’s just a couple of blocks. That’s how Savannah is. Ardsley is more homogenous. Like all this is pretty solid, you know, but Parkside, you know, on this street you would pay 150x rent for a place on street, 100, 110, couple streets, really just crossing 52nd street. That’s something you get, you, you just get a feel for it. I mean, there’s, there, there there’s a block, um you know, one of my clients bought a place I think like right here just a dumpy block.

Pat (01:39:52):

There’s a fricking like a literal trap house on this block. You know what I mean? But you know, just over here, so bad. You know, and that’s yeah. So property evaluation metrics. I’m gonna, I’m gonna jump back to just this one screen real quick. Because I want to go over, this is a spreadsheet I put together my rent versus own spreadsheet. So made this a little more little more user-friendly, I guess, you know, for like a, this is not, this is more home buyer, but still wants another getting a good deal. Right. So, you know, let’s look at well, let’s look at the one on Columbus. What did he pay? 2, $294k I think. You know, he was all in it for I think he got a lot of his closing costs. Let’s just leave it at $3000 and then he did, you know, $5,000 of work.

Pat (01:40:54):

All right, cool. No down payment, no PMI. Because it’s a VA loan. Yep. Interest rate long term. Perfect. All right. Now we say, Hey, if you’re gonna rent this place or if you were gonna rent any place, what would you paying to rent? You know? Right. Maybe $1500. I don’t know. You know, $1500. I think you said $2000. Yeah. Well that’s that’s current market rent for the property being analyzed $2000. I’m just, you’re gonna have to talk to your buyer. Hey look, you’re renting right now. What’s your rent. Okay. It’s $1500. Cool. Right? You know so Hey, how long do you want to own it? This only goes out to 8 years. So it says I gonna hold on it forever. All right. 8 years. How long you gonna live here? Two. Okay, cool. And then we have, you know, appreciation 3% property taxes. I got a little calculation here, Savannah tax, $5,100.

Pat (01:41:44):

You see the islands is a little cheaper because it’s yeah. So HOA dues, nothing in Ardsley maintenance. So you know how on the other sheet I had maintenance and CapEx together? On this one, I broke it apart. Um because your CapEx, if you spend $10,000 on a new roof, right. And you had an old roof before and now you have a new one, typically your house is gonna be worth close to $10,000 more. So CapEx is kind of like paying down your, your, your loan it’s that goes out of your pocket, but kind of back into your house, whereas a repair or regular maintenance, that’s not making your house more valuable. That’s just stuff you’re supposed to do anyway. You know what I mean? So now, all right, here’s the results. If you live in this house for two years and you own it for eight, you will be better off to own right.

Pat (01:42:30):

It doesn’t always say this. I don’t rig it. You know what I mean? This is how much money has, how much more money you’ll have. When you sell versus if you never bought it: $153,000. In eight years, he’s gonna have 153,000 more dollars in his pocket than if he just rents and doesn’t buy anything. Pretty sweet. Right. and this is the check he’ll get when he sells it, right? Why is this number so different? A couple of reasons. The biggest one is that’s $1,500 every year he’s not paying him rent. $1500, you know, $1500 times, 12 times 8 is $144,000. Right now he’s paying anyway, but this that’s why that’s so different. It now here’s, you know, here’s his cash flow. So why is still living in it? He’s actually kind of losing money cumulatively because his mortgage payments is, is more than a rent he was gonna pay.

Pat (01:43:29):

Right. So, so I’m saying, Hey look, year one, you know, you’re $3,600 in the hole, you know, year two, you’re 7100 in the hole cumulatively, you know, that, you know, say, say, we’re say we’re on 5 years. Right. You can see how that, how that changes. So I say, look, you’re paying a little more in rent. You know, whatever, if, if you were already paying $2000 in rent, there you go. You got more, right? Why is that? Because your mortgage payment’s lower than $2000, right? And then this is how much profit or loss you get every year when you’re renting to somebody see, and you see he’s got $1100 bucks in cash and it goes up every year. Why? Because typically rents have increased more, you know, your rent goes up, your mortgage payment stays the same. Right. so this is the sheet that I use for people.

Pat (01:44:23):

And this is a good, like, I, I don’t send this to everybody. Not everybody wants to see this, you know what I mean? But some people do you just kind of feel out the client, you know, like, Hey, is this something they wanna see? Maybe if you got somebody who’s on the fence, like, oh, these prices are so high. You say, look, I mean, here’s yeah, the prices are high, but what do you, you know, and it might not, it might not work out for everybody. I, I run into some people and I’m like, you know, for what you want to buy, you know, sometimes, typically it comes out better to own, but for some people, you know, like say, say he’s like, I don’t want to ever rent it out. I just wanna sell it. So he’s gonna sell it in two years.

Pat (01:44:56):

All right. Well, he is still better off owning it, but he is gonna have to cut a check to sell it, you know? Because basically the VA loan, you don’t have any equity. So when you sell it, you got realtor expenses and stuff like that. So, so you can see you can see the difference. Most of this is from appreciation though. You can see if we change appreciation. So we set it to zero, you know, that changes the number quite a bit. But yeah, that’s a good spreadsheet. So we are, we’re basically at two hours now.

Pat (01:45:30):

I don’t expect you to know. I don’t expect any of you guys to know it all. I mean, this is, you know, we can do more of these and get into more detail, but you should now have a baseline. If you wanna go do your own reading and your own research, you know, hopefully it’ll be more productive. Yeah, it’s good stuff. So there it is. So for the Wynn’s, Wynn’s listening in here for the for the YouTube watcher I will put contact information for me and, and my company and the comments. We are Trophy Point Realty Group located in Savannah, Georgia. My name is Pat Wilver. I’m co-owner of the company. This was a regular agent training. We try to do this once a week. We’ll be putting this up on YouTube. So got any questions you’re interested in talking about Savannah or real estate investing or whatever. Please do not hesitate to reach out. Awesome. Alright. Take care guys.
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Advanced Real Estate Investing Info

REAL ESTATE INVESTING

info for seasoned investors
Savannah Real estate investing

There are a lot of advanced strategies for real estate investors, realistically too many things to cover in one blog post. But let’s go over some of the most popular strategies together in general terms.

1. Short Sales

A short sale is when a buyer purchases a home for less than the seller owes on the mortgage AND gets the mortgage lender to write off the difference between what is owed and what is paid. These were more common in the aftermath of the housing crisis and are not commonly done now because most people have positive equity in their homes.  

Short sales can be easy or very difficult depending on how organized the seller’s mortgage lender is. I’ve done one that went very smoothly, and I had another that we were never able to get done because of how borderline impossible it was to communicate with the seller’s lender.  Even the easy one took close to three months to complete from start to finish, and there’s no guarantee that the lender will ever approve the sale, even if you spend all that time working through the process.

If you want to buy a home in a short sale, you will need to be able to respond quickly once you get approval to complete the sale, typically within two weeks. You’ll need to do these transactions in cash or with a lender that you know will be able to get the job done quickly once you get approval, and you’ll need to be patient.  You’ll also want to work with an agent who knows how to navigate these things if you haven’t done one before.

2. Foreclosures

Like short sales, foreclosure auctions are not as widespread as they used to be. In Chatham County we’ll usually see 10-30 houses at auction in the courthouse steps in a given month.

To buy a foreclosure on the courthouse steps, you’ll need to come in with straight cash. Well, cashiers checks. Literally – show up to the auction with cashiers checks in different denominations. They usually won’t give change.  

You also typically won’t get to tour the house prior to the auction – you must buy sight unseen. You must also do a title search before bidding. You can do these in the courthouse, or you can pay an attorney to do one for you.

Some foreclosure auctions are done online and work generally the same way as on the courthouse steps.

3. Subject To

Sub-to means that you are taking ownership of a property “subject to” an existing mortgage. Like short sales and foreclosures, these also have somewhat fallen out of usefulness, especially as mortgage interest rates are at record lows.  

The major risk with these is that most mortgages have a “due on sale” clause, meaning that the lender can call due the entire balance of the note if it is sold. In practice, this almost never happens as long as you continue to make timely payments. It is possible to purchase “due on sale” insurance, though I have never explored any of these policies.

4. Assignment Contracts/Wholesaling

Wholesalers are essentially real estate agents who operate without a license. It’s a bit of a seedy business that relies on the ignorance of sellers as to the true market value of their properties. But I’ll be honest – I’ve bought more than a few deals from wholesalers.  

To buy a deal from a wholesaler, you’ll almost always need to use cash or a hard money loan.  You typically won’t get the opportunity to conduct a typical home inspection, so you’ll need to be confident about estimating rehab budgets on the fly. If you’re not – team up with someone who is, like an experienced business partner or agent.  

One key thing to remember about wholesalers is this – many of them are absolute amateurs, but the good ones will be damn good and are few and far between. In Savannah, two or three wholesalers control most of the deals that get done off-market. Do not back out of a deal with them if you go under contract, or you may never see another from them.  

5. Multifamily (5+)

Investing in multifamily properties under 5 units is just like buying a house. The lending process is very similar. For 5+ units, or mixed-use buildings, you will need to get a commercial loan or a loan from a private lender. These loans typically take 60 days or more to close, and require more expensive commercial appraisals, environmental assessments, and other inspections.  

6. Renovations (BRRR or Flip)

There can be a lot of risk involved in renovating a property, especially a house more than 30 or 40 years old. These renovations are typically done with hard money loans, which I will talk about later.

There are also conventional, VA, and FHA rehab loans that can be used. The process for getting one of these loans is more onerous than a regular mortgage, and many lenders do not offer these kinds of products.

7. Management Agreements/Novation

These are uncommon and you will need to find an attorney experienced with them. When selling a home with a management agreement, you will basically enter into a binding contract with the seller where the seller will give you power of attorney to do whatever you want with the property, in accordance with whatever you both agreed to when signing the management agreement.

Typically, management agreements are used to flip houses where the profit margin is too small for the flipper to actually close on a sale. I’ve only seen them once or twice, and typically the flipper agrees to put at least a certain amount of money in the seller’s pocket when selling the home, and profits in excess of that amount will be split in some way.

I would generally not recommend undertaking an extensive renovation with something like this, because if the relationship goes sour after you dump a bunch of money into a renovation, you might have to go through a nasty court battle while your money is tied up in a house you don’t technically own.

8. Direct to Seller Marketing

Direct to seller marketing is basically what wholesalers do to get deals off-market. You can send mailers, set up websites, market on google, facebook, and instagram, run radio ads, cold call, get billboards – the sky’s the limit.  

Direct to seller marketing is hard to do right, and to do it right typically requires a large budget. The best wholesalers I know spend 10 to 20 thousand dollars monthly on marketing – but they routinely gross 100k in assignments. They also usually spend 40-60 hours a week making calls, following up with leads, and checking out properties.  

You can direct to seller market as an investor too. I maintain a list of shitty houses that I want to buy and routinely send letters to these specific properties. I also occasionally make cold calls to owners. Propstream is a great resource for this.

9. Seller Financing

Seller financing is great in some circumstances. A seller will need to own a house free and clear in order to extend seller financing, or you will need to make a down payment to the seller large enough for the seller to pay off their existing mortgage.

Seller financing can be beneficial to a seller because it allows them to extend their capital gains tax burden over a period of many years instead of taking a large gain all in the same year.

It can be beneficial to you for a few reasons: maybe you can negotiate a great interest rate, maybe you can negotiate interest only payments for a period of time, a much lower down payment, or maybe your credit sucks and nobody else will extend you a loan.

10. Mobile Homes

The thing that makes buying a mobile home interesting is that the mobile home may be on a vehicle title instead of a real estate title. If it’s on a vehicle title, you won’t be able to get a standard mortgage on it, but it is possible to turn a mobile home into “real” property during the closing process.

Mobile home parks are a different beast, which I will not touch on in this blog.

11. Land Investing

Land investing basically means buying a piece of land and hoping it’ll be worth a lot more later. This is a rich person’s game, and also a game you play when you’re connected and know where development will be moving. I do not recommend buying anything and hoping for appreciation unless both of these apply to you.

12. Short-Term Vacation Rentals

Everyone and their mother wants to buy AirBNBs. They’re really not the money printing machines that everyone thinks they are unless you are prepared to WORK for them, or hire an AWESOME property manager. Additionally, it’s damn near impossible to get a permit to operate one in Savannah. There are a few exceptions, like if you are planning on running a STVR outside of city limits, or plan to owner-occupy a duplex.

13. Executive Rentals

Executive rentals are like AirBNBs, but with terms of 30 days or more. I like these a lot in Savannah because you don’t need a permit and the demand is pretty high. There are a lot of traveling nurses and movie industry folks who rent these for 2-5 months at a time and they pay good money for them. The management is less intense than a STVR, but it will still take up much more of your time than a long term rental.

14. Historic Tax Credits

There are federal and state tax credits that you can take advantage of. To use them in Savannah, typically you will need to be doing work in one of the historic districts and/or your building will have to be designated as a “contributing” structure, basically meaning that it is itself historic in some way. There are over a thousand contributing structures in Savannah.

Actually using these credits can be a real pain in the ass. They’re probably not worth it unless you are spending a TON of money on the rehab. Many people actually hire consultants to help them navigate the process of using these credits.

15. 1031 Exchanges

1031 Exchanges are super cool because they allow you to defer paying capital gains when you sell a property as long as you buy a new, more expensive property within a certain amount of time after selling the old one. You will need to hire a lawyer who specializes as a 1031 intermediary to do these, and typically you can expect to spend about $2k on the exchange portion of the transaction.

There’s a lot more to a 1031 than this, but now you know enough to know that this program exists. Give us a shout for more details and recommendations to some good intermediaries!

16. Federal Opportunity Zones

Investing on o-zones is a rich person’s game. The overhead and legal costs involved in running one of these funds means that the fund realistically needs to be more than $10M. You can invest in a fund as a limited partner, but to do that you’ll almost certainly need to be an “accredited investor”, meaning that your net worth needs to be over $1M excluding your primary residence, or you need to be making $200k+ a year.

17. City of Savannah Tax Advantaged Zones

The city of Savannah also has tax advantaged zones. You’ll need to be taking on a major development and to qualify for the tax credits you’ll need to increase the tax assessment more than 5x. More info at this post.

18. Tax Auctions

Tax auctions work a lot like foreclosure auctions, except the property being auctioned is delinquent on property taxes instead of a mortgage. Here in Georgia, you’ll buy the house and then cannot touch it for a year, during which time the former owner can get the property if they pay you what you paid for it. After a year, you can undertake a process called quiet title, which means that you pay an attorney a few grand to get you a legitimate deed to the property that you can then sell to someone else.  

19. Hard Money

A hard money lender is basically a lender who falls outside the traditional mortgage lending system. They typically lend their own money or money from a small pool of individual investors, and usually do 12-month loans for rehab projects. But there are a thousand different ways to structure a hard money loan, and there are a thousand different hard money lenders.

Typically the process of getting a HM loan is easier than a regular mortgage. With my preferred lender, I basically send him a quick summary of the deal by email, maybe a couple comps, and a rehab budget and he tells me yes or no and some terms. That’s about it. Most are not quite this easy and, especially starting out, you’ll probably need to jump through a lot more hoops.

A good hard money lender should be able to close in two weeks, though you should budget for a month until you get to know them.

Typically, a rookie investor will pay 10-13% and 2-4 points on the money they borrow, and will probably need to put down 10% of the purchase price. The lender should fund the rehab budget. As you get more experienced, your rates should come down and you may be able to get 100% financing.

20. Note Investing

Note investing is when you buy a mortgage loan that is probably in default (the borrower stopped paying). This isn’t so common anymore, but back in the housing crisis days folks were buying these things for 10 cents on the dollar or less (meaning that if the borrower owed $100k, investors could buy their mortgage for $10k). Then, once you own this note, you can restructure with the borrower to get them back on track with their payments. Once they’re back on track, you can sell the note for much more than you bought it, or you can just hold onto the note and keep collecting checks.

21. REO/Hud Houses

REO means a house that a bank foreclosed on. Sometimes these get auctioned, sometimes they just get listed on the open market by a real estate agent. Bidding on these can be a pain in the ass because the bank is going to want things on their own contracts, they may stipulate that owner/occupants have a period of time to bid before investors, etc.  

As with all other types of distressed property investing, REO is not so common anymore.  In 2010, REO was a ton of the houses for sale.

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Info for seasoned investors.
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There are a lot of advanced strategies for real estate investors, realistically too many things to cover in one blog post. But let’s go over some of the most popular strategies together in general terms.

1. Short Sales

A short sale is when a buyer purchases a home for less than the seller owes on the mortgage AND gets the mortgage lender to write off the difference between what is owed and what is paid. These were more common in the aftermath of the housing crisis and are not commonly done now because most people have positive equity in their homes.  

Short sales can be easy or very difficult depending on how organized the seller’s mortgage lender is. I’ve done one that went very smoothly, and I had another that we were never able to get done because of how borderline impossible it was to communicate with the seller’s lender.  Even the easy one took close to three months to complete from start to finish, and there’s no guarantee that the lender will ever approve the sale, even if you spend all that time working through the process.

If you want to buy a home in a short sale, you will need to be able to respond quickly once you get approval to complete the sale, typically within two weeks. You’ll need to do these transactions in cash or with a lender that you know will be able to get the job done quickly once you get approval, and you’ll need to be patient.  You’ll also want to work with an agent who knows how to navigate these things if you haven’t done one before.

2. Foreclosures

Like short sales, foreclosure auctions are not as widespread as they used to be. In Chatham County we’ll usually see 10-30 houses at auction in the courthouse steps in a given month.

To buy a foreclosure on the courthouse steps, you’ll need to come in with straight cash. Well, cashiers checks. Literally – show up to the auction with cashiers checks in different denominations. They usually won’t give change.  

You also typically won’t get to tour the house prior to the auction – you must buy sight unseen. You must also do a title search before bidding. You can do these in the courthouse, or you can pay an attorney to do one for you.

Some foreclosure auctions are done online and work generally the same way as on the courthouse steps.

3. Subject To

Sub-to means that you are taking ownership of a property “subject to” an existing mortgage. Like short sales and foreclosures, these also have somewhat fallen out of usefulness, especially as mortgage interest rates are at record lows.  

The major risk with these is that most mortgages have a “due on sale” clause, meaning that the lender can call due the entire balance of the note if it is sold. In practice, this almost never happens as long as you continue to make timely payments. It is possible to purchase “due on sale” insurance, though I have never explored any of these policies.

4. Assignment Contracts/Wholesaling

Wholesalers are essentially real estate agents who operate without a license. It’s a bit of a seedy business that relies on the ignorance of sellers as to the true market value of their properties. But I’ll be honest – I’ve bought more than a few deals from wholesalers.  

To buy a deal from a wholesaler, you’ll almost always need to use cash or a hard money loan.  You typically won’t get the opportunity to conduct a typical home inspection, so you’ll need to be confident about estimating rehab budgets on the fly. If you’re not – team up with someone who is, like an experienced business partner or agent.  

One key thing to remember about wholesalers is this – many of them are absolute amateurs, but the good ones will be damn good and are few and far between. In Savannah, two or three wholesalers control most of the deals that get done off-market. Do not back out of a deal with them if you go under contract, or you may never see another from them.  

5. Multifamily (5+)

Investing in multifamily properties under 5 units is just like buying a house. The lending process is very similar. For 5+ units, or mixed-use buildings, you will need to get a commercial loan or a loan from a private lender. These loans typically take 60 days or more to close, and require more expensive commercial appraisals, environmental assessments, and other inspections.  

6. Renovations (BRRR or Flip)

There can be a lot of risk involved in renovating a property, especially a house more than 30 or 40 years old. These renovations are typically done with hard money loans, which I will talk about later.

There are also conventional, VA, and FHA rehab loans that can be used. The process for getting one of these loans is more onerous than a regular mortgage, and many lenders do not offer these kinds of products.

7. Management Agreements/Novation

These are uncommon and you will need to find an attorney experienced with them. When selling a home with a management agreement, you will basically enter into a binding contract with the seller where the seller will give you power of attorney to do whatever you want with the property, in accordance with whatever you both agreed to when signing the management agreement.

Typically, management agreements are used to flip houses where the profit margin is too small for the flipper to actually close on a sale. I’ve only seen them once or twice, and typically the flipper agrees to put at least a certain amount of money in the seller’s pocket when selling the home, and profits in excess of that amount will be split in some way.

I would generally not recommend undertaking an extensive renovation with something like this, because if the relationship goes sour after you dump a bunch of money into a renovation, you might have to go through a nasty court battle while your money is tied up in a house you don’t technically own.

8. Direct to Seller Marketing

Direct to seller marketing is basically what wholesalers do to get deals off-market. You can send mailers, set up websites, market on google, facebook, and instagram, run radio ads, cold call, get billboards – the sky’s the limit.  

Direct to seller marketing is hard to do right, and to do it right typically requires a large budget. The best wholesalers I know spend 10 to 20 thousand dollars monthly on marketing – but they routinely gross 100k in assignments. They also usually spend 40-60 hours a week making calls, following up with leads, and checking out properties.  

You can direct to seller market as an investor too. I maintain a list of shitty houses that I want to buy and routinely send letters to these specific properties. I also occasionally make cold calls to owners. Propstream is a great resource for this.

9. Seller Financing

Seller financing is great in some circumstances. A seller will need to own a house free and clear in order to extend seller financing, or you will need to make a down payment to the seller large enough for the seller to pay off their existing mortgage.

Seller financing can be beneficial to a seller because it allows them to extend their capital gains tax burden over a period of many years instead of taking a large gain all in the same year.

It can be beneficial to you for a few reasons: maybe you can negotiate a great interest rate, maybe you can negotiate interest only payments for a period of time, a much lower down payment, or maybe your credit sucks and nobody else will extend you a loan.

10. Mobile Homes

The thing that makes buying a mobile home interesting is that the mobile home may be on a vehicle title instead of a real estate title. If it’s on a vehicle title, you won’t be able to get a standard mortgage on it, but it is possible to turn a mobile home into “real” property during the closing process.

Mobile home parks are a different beast, which I will not touch on in this blog.

11. Land Investing

Land investing basically means buying a piece of land and hoping it’ll be worth a lot more later. This is a rich person’s game, and also a game you play when you’re connected and know where development will be moving. I do not recommend buying anything and hoping for appreciation unless both of these apply to you.

12. Short-Term Vacation Rentals

Everyone and their mother wants to buy AirBNBs. They’re really not the money printing machines that everyone thinks they are unless you are prepared to WORK for them, or hire an AWESOME property manager. Additionally, it’s damn near impossible to get a permit to operate one in Savannah. There are a few exceptions, like if you are planning on running a STVR outside of city limits, or plan to owner-occupy a duplex.

13. Executive Rentals

Executive rentals are like AirBNBs, but with terms of 30 days or more. I like these a lot in Savannah because you don’t need a permit and the demand is pretty high. There are a lot of traveling nurses and movie industry folks who rent these for 2-5 months at a time and they pay good money for them. The management is less intense than a STVR, but it will still take up much more of your time than a long term rental.

14. Historic Tax Credits

There are federal and state tax credits that you can take advantage of. To use them in Savannah, typically you will need to be doing work in one of the historic districts and/or your building will have to be designated as a “contributing” structure, basically meaning that it is itself historic in some way. There are over a thousand contributing structures in Savannah.

Actually using these credits can be a real pain in the ass. They’re probably not worth it unless you are spending a TON of money on the rehab. Many people actually hire consultants to help them navigate the process of using these credits.

15. 1031 Exchanges

1031 Exchanges are super cool because they allow you to defer paying capital gains when you sell a property as long as you buy a new, more expensive property within a certain amount of time after selling the old one. You will need to hire a lawyer who specializes as a 1031 intermediary to do these, and typically you can expect to spend about $2k on the exchange portion of the transaction.

There’s a lot more to a 1031 than this, but now you know enough to know that this program exists. Give us a shout for more details and recommendations to some good intermediaries!

16. Federal Opportunity Zones

Investing on o-zones is a rich person’s game. The overhead and legal costs involved in running one of these funds means that the fund realistically needs to be more than $10M. You can invest in a fund as a limited partner, but to do that you’ll almost certainly need to be an “accredited investor”, meaning that your net worth needs to be over $1M excluding your primary residence, or you need to be making $200k+ a year.

17. City of Savannah Tax Advantaged Zones

The city of Savannah also has tax advantaged zones. You’ll need to be taking on a major development and to qualify for the tax credits you’ll need to increase the tax assessment more than 5x. More info at this post.

18. Tax Auctions

Tax auctions work a lot like foreclosure auctions, except the property being auctioned is delinquent on property taxes instead of a mortgage. Here in Georgia, you’ll buy the house and then cannot touch it for a year, during which time the former owner can get the property if they pay you what you paid for it. After a year, you can undertake a process called quiet title, which means that you pay an attorney a few grand to get you a legitimate deed to the property that you can then sell to someone else.  

19. Hard Money

A hard money lender is basically a lender who falls outside the traditional mortgage lending system. They typically lend their own money or money from a small pool of individual investors, and usually do 12-month loans for rehab projects. But there are a thousand different ways to structure a hard money loan, and there are a thousand different hard money lenders.

Typically the process of getting a HM loan is easier than a regular mortgage. With my preferred lender, I basically send him a quick summary of the deal by email, maybe a couple comps, and a rehab budget and he tells me yes or no and some terms. That’s about it. Most are not quite this easy and, especially starting out, you’ll probably need to jump through a lot more hoops.

A good hard money lender should be able to close in two weeks, though you should budget for a month until you get to know them.

Typically, a rookie investor will pay 10-13% and 2-4 points on the money they borrow, and will probably need to put down 10% of the purchase price. The lender should fund the rehab budget. As you get more experienced, your rates should come down and you may be able to get 100% financing.

20. Note Investing

Note investing is when you buy a mortgage loan that is probably in default (the borrower stopped paying). This isn’t so common anymore, but back in the housing crisis days folks were buying these things for 10 cents on the dollar or less (meaning that if the borrower owed $100k, investors could buy their mortgage for $10k). Then, once you own this note, you can restructure with the borrower to get them back on track with their payments. Once they’re back on track, you can sell the note for much more than you bought it, or you can just hold onto the note and keep collecting checks.

21. REO/Hud Houses

REO means a house that a bank foreclosed on. Sometimes these get auctioned, sometimes they just get listed on the open market by a real estate agent. Bidding on these can be a pain in the ass because the bank is going to want things on their own contracts, they may stipulate that owner/occupants have a period of time to bid before investors, etc.  

As with all other types of distressed property investing, REO is not so common anymore.  In 2010, REO was a ton of the houses for sale.
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Buying & Owning a Home Investing Loans & Financing Savannah Market

Why Investing in Real Estate is a Great Decision

WHY INVESTING IN REAL ESTATE IS SO GREAT

for beginner real estate investors
realtor savannah ga

There are thousands of different ways to invest money, but I believe that investing in real estate is the surest way for someone to find financial freedom and create generational wealth. There are quite a few reasons, but they mainly deal with 3 core concepts: leverage, necessity/utility, and tax mitigation.

1. Leverage means that we can use debt to buy real estate. Often this debt is at a very low interest rate that is fixed over a 30 year term, making it safe debt to have, unlike your credit card.  

Leverage is the most powerful thing about investing in real estate, here’s why:

Let’s say you want to buy $100,000 in a company’s stock. Typically, this will be done in an all-cash transaction.  $100,000 in cash will get you $100,000 in stock. Simple.

You can use leverage to buy stock. This is called buying on “margin”. The problem with margin is that if the value of your stock goes down, your margin lender can require you to send in more cash in what’s called a “margin call”. Basically, let’s say you use $50,000 to buy $100,000 in stock, using a margin loan for the other $50,000.  If the value of your stock goes down to say, $80,000, your lender can say “hey asshole, pay me $20,000 by 5:00 PM today or I sell some of the stock in your account.”  With real estate, your mortgage lender cannot call your note due, even if the value of your house drops by 99%.  As long as you continue to make payments on time, the house is still yours.  

Anyway, back to the example. We bought $100,000 in stock straight cash, because we don’t want to mess with a risky margin loan. Let’s say that a year later, our stock is 10% more valuable, making our investment $110,000. Awesome – we made $10k! Let’s also say that this stock was paying a dividend yield of 1.5%, which is pretty typical. This means that they also paid us dividends equal to $1,500. Great – our investment is worth $111,500! Cool – that’s a 11.5% return on investment. Pretty good for a year!

Now, let’s apply that same example to a real estate investment, and let’s look at the power of leverage. Let’s say it’s a $100k house. Typically, you’ll be able to get a mortgage loan for 20% of the purchase price, so we need to come to the table with $20k. Factoring in closing costs, that’ll be about $25k. So we buy a $100k house for $25k in cash, taking out an $80k loan for the rest.

Let’s say that our house appreciates the same 10%, making it worth $110k at the end of a year.  Let’s also assume that our tenant paid enough rent to cover all expenses, and on top of that we were able to cash flow $2k on the year – not bad!  Let’s also assume that we paid down $3k worth of the loan balance over the course of the year.  So that makes our total gains on the year equal to $15k.

Here’s the fun part – you might be thinking that our return on investment is 15%, since the house cost $100k – but our investment was actually only $25k.  We made $15k on a $25k investment, which makes our return on investment a whopping 60%! Incredible!

Now of course, leverage works both ways: just as leverage amplifies our gains, it amplifies our losses. This is why it’s important to make sure that we can collect enough rent to cover our mortgage payments, and then some. Time heals all wounds in real estate, and even folks who bought a rental in 2005 are now sitting pretty if they’ve been able to hold onto the house through the housing crisis back in 2007-08. The only way to hold through the bad times is to make sure that the property can be rented. This ties into the necessity principle.

2. Necessity or utility means that people need a place to live. Shelter is right up there with water, food, and air. As long as people prefer sleeping in a house over the cold hard ground, they will be willing to pay for it.

This is pretty simple: everyone needs a place to live. The principle of necessity does not mean that you can never make a bad real estate investment. Far from it. What it does mean is that the value of real estate will never go to zero. Whereas a company can go bankrupt and the value of your stock goes to zero, real estate will always be worth something. Furthermore, people will always be willing to rent it (unless you never make any repairs). Rent is relatively inelastic, meaning that the prices do not typically fluctuate wildly. And they almost never go down more than 10%, even during a bad recession.  

Now, catastrophic local events can have a serious impact on values and rental rates. A town that is anchored by one major employer will see rental rates and real estate values collapse if that employer leaves, for example.  

3. Tax mitigation means that owning real estate provides some great tax-reduction benefits that we can use to lower our tax bill.

The tax benefits to owning real estate are huge. When you own a rental, all expenses can be written off your income, which is nice. The biggest thing about owning a rental is depreciation – let’s talk about it.

You know how when you buy a new car and drive it off the lot it’s instantly worth less? That’s depreciation. Got it? Good.

We can also depreciate real estate on our taxes, regardless if the house actually becomes worth less or notWhat does this mean? Basically, the IRS tax code says that, every year, we can deduct from our taxes an amount equal to 1/27th of the purchase price of the home. So that home we bought for $100k depreciates $2,700 each year in the eyes of the tax man (even though we know the house actually worth more now than it was when we bought it)! We can take that $2,700 and deduct it from our taxes. You remember that $3k of profit that we made from our rent? We can wipe out all but $300 of that on our taxes and only pay income tax on that $300. How cool is that!

Now, the flip side of that is a nasty little thing known as depreciation recapture. Say we sell that house 10 years down the line, after depreciating it a total of $27,000. The IRS is now going to want us to pay capital gains tax on that $27,000, in addition to whatever additional profit we made. That stings, but there are ways to avoid it. The first is never selling until we die, and then our kids can step-up the cost basis of the house when they inherit it (unless we died incredibly wealthy, which would be a great problem for our kids to have).

The other way is what’s called a 1031 exchange, which is a cool little tax trick where you can sell your rental and turn around and buy one that is at least $1 more expensive. You will then roll all of those capital gains that you would have had to pay tax on into your new rental. Then, just keep doing 1031 exchanges until you die and boom! Now your kids can deal with that shit!

And here’s one of my favorites. Say you want to take a trip to California. Great. Now, let’s say you’re interested in checking out some deals out there, or just getting to know the real estate market. All you have to do is set up an afternoon to tour around with a real estate agent and look at properties and boom – now it’s a business trip! You can write off your flights and you can write off hotel and meals for the day or days that you actually do real estate investing-related activities. Can’t write anything off your stock gains just by looking at the New York Stock Exchange! There are some other cool tax strategies, but way too many to list out. It’s best to know your situation and chat with someone who knows more, and to do your own research.

Other benefits

Leverage, necessity, & tax benefits all go a long way to explaining why I love real estate investing, but let’s hash out one more crucial thing: cash flow.

When we talked about leverage, we saw that our rental property was bringing in $3000 each year of cash flow after all expenses were paid. This $3000 accounts for about 12% of our initial investment of $25k. This 12% is what’s known as our “cash on cash” return, and can be compared to dividend yield on a stock. 12% is an incredible number to get on a rental property, and this means that in a little over 8 years, our rental income will have paid us back the $25k we initially invested (assuming you keep the rents the same, but in reality, you’ll probably raise rent). 

Here’s the cool part: if we’re diligent, we can save that cash flow to apply to a new purchase.

Let’s say it took us three years of saving to save up the $25k to buy that rental, and let’s assume that we continue to make the same exact salary from our job, and save at the same rate. That means we saved about $8,300 each year. Now, if we add on that $3k in cash flow from our rental, we are saving $11.5k each year, which means that we would have saved enough for the next rental after only 2.2 years instead of 3.

Then, we add another rental, making us an additional $3k each year. Now we’ve saved the $25k in only 1.7 years, and we buy another. In 1.4 years we’ve saved enough for another rental, then it takes 1.2 years, then 1 year, then .9 years. The more rentals we buy, the faster we can buy more. Ownership of rental properties snowballs, and as you build more income and learn more about investing, you will be able to turn your growth exponentially.

Written by: Pat Wilver

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Buying & Owning a Home Loans & Financing Rentals

Should I Rent or Own?

SHOULD I RENT OR OWN?

I tend to write too much in these blogs, so I’ll cut to the chase: The average homeowner who buys a starter home in the Savannah area will be $80,000 richer after eight years of home ownership than the average renter living in the exact same house.

Seem too good to be true? I don’t blame you — click here to see the math!

There are very few circumstances where it’s better to rent real estate than own it. They are:

  • Houses in the neighborhood you want to live in cost more than 200 times more than the average monthly rent in that same neighborhood (for example, if you could rent a house for $1300, but it costs $260,000 to buy, you may be better off renting that house, or looking for a cheaper neighborhood.)

  • You expect that you will have to sell within two years (even then, it’s usually 50/50 whether it will be better to rent or own)

  • You don’t have the ability to set aside a bit of money in case a large repair needs to be made

In my opinion, the chart below says it all. The middle column shows the median net worth of Americans in a certain age group. The column on the right shows the same median net worth, but excluding home equity. The median American of retirement age is worth $223 thousand — and almost $140 thousand of that is home equity. If you aren’t a homeowner, you’re missing out on the single biggest driver of wealth in America today.

hunter army airfield housing
American median net worth with and without home equity. Data from census.gov.

 

FACTORS TO CONSIDER IN THE RENT VS OWN EQUATION:

Deciding whether it’s better to rent or own is part emotional and part hard numbers. I can’t help you with the emotional aspect, but I can help you look at the numbers. First we’ll have to collect some data. We need to know:

– Where you want to live, how big a house you need, and how nice of a house you want. This will help us determine how much it would cost to rent or buy a house that will fit your wants/needs.

– What kind of financing you can qualify for. We must determine your down payment and interest rate, and whether you will have to pay any mortgage insurance.

– How long you plan to live in the house, and whether you plan to sell when you move or place the house up for rent.

– Local data, including average appreciation per year, property taxes, insurance rates, and maintenance expenses that you can expect.

 

The Math

Let’s look at two example rent vs own calculations. In the first case, our prospective buyer wants to live in the heart of downtown Savannah. He’ll need a three bedroom townhouse. He’s got decent credit and will be using a FHA loan, which means he will make a down payment of 3.5%. The place is gorgeous and won’t require any repairs, and our buyer plans on asking for all his closing costs to be paid by the seller. He plans to live in Savannah for three years, and will probably sell after six. Let’s check out some screenshots from the Microsoft excel spreadsheet I use to run my rent vs own calculations to see if our friend should rent or buy.

hunter army airfield housing
hunter army airfield housing

The results: This one is a mixed bag. While it’s true that our friend would be better off in the long run if he buys, he will have to spend a lot of extra money for the six years he owns the house before he can realize that hundred and twenty thousand dollar profit he’ll make when he sells.

Next, let’s look at a more typical case study. Our buyer wants to buy a simple three bedroom home out in Georgetown (a neighborhood in the Savannah suburbs for you out of towners.) She’s active duty military, so she’ll be using her VA loan and not making a down payment. She’ll probably sell when she moves away from the area, which she thinks will be in five years. Let’s run the numbers to see if our friend should rent or buy:
homes for sale near fort stewart
homes for sale near fort stewart

This case is pretty much a slam dunk — our friend should definitely buy instead of renting. She’ll be $42,000 richer at the end of five years if she buys instead of renting. It sounds too good to be true, but it’s not!

 
WHAT ABOUT ME?

Most people are better off buying. Want to see the numbers for yourself? Here’s the options:

1. Make your own badass spreadsheet.

2. Ask me for a copy of my spreadsheet here.

3. Fill out the form below and I will reach out to you with an answer!

Author: Pat Wilver

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Buying & Owning a Home Investing Loans & Financing Military Selling a Home

Building Wealth with the VA Loan: Cosmetic Repairs and Appreciation

BUILDING WEALTH WITH THE VA LOAN

Today’s post is a guest post from our friend Jonathan Lee of Military Money Matters. Jonathan studied economics at West Point and has made it his mission to provide high quality educational content to help the military community invest their money wisely. This particular post is an introductory post geared toward those who wish to buy a property, conduct some cosmetic renovation while they live in it, and sell once they have orders to a new duty station. I’ve included some of my own commentary in italics.

The focus of today’s post will be the accumulation of wealth from a powerful tool available to you: the VA loan. For details on how to use your VA loan, see our post here. Today’s topic will be understanding how to generate wealth from the loan. There are two ways to do so: cash flow on rental properties (after you’ve moved out) and appreciation. Today we will talk about appreciation.

Appreciation is an increase in the value of the home you purchase over time. For example, if you purchase a home for $120,000 and sell if for $150,000, it has appreciated by $30,000. Bear in mind that there are significant closing costs associated with selling a home so all of that money doesn’t necessarily go to you. You can typically expect to pay between 6% and 10% in commissions, closing costs, and maintenance expenses on the sale. Here’s a 3 step look at how to make money through appreciation with your VA Loan.

 

Step 1: Choose the right home!

If you’re looking to make money from appreciation this step is essential. Certain areas appreciate more than others. Hawaii, for example (where I purchased my first home) tends to appreciate rapidly. Look at historical data for the community to see what drives growth. The Zestimate (see Zillow.com) may provide a good tool at predicting prices as well, but given the number of factors that drive house prices, it’s not always accurate.

Editors Note: Realtors hate Zestimates, but if you aren’t a real estate agent or haven’t been tracking the local market, Zestimates aren’t a bad place to start. Just don’t be surprised when your agent tells you that the Zestimate is wrong.

fort stewart homes

Other things to consider on this step include the specific neighborhood and the quality of the home. If you’re trying to flip the house, you never want to purchase the nicest house in a bad neighborhood. It’s already been flipped! You also don’t want one that’s already entirely redone. Try to avoid those granite countertops when purchasing a home you intend to add value to.

Additionally, look at big projects in the area. Is a new shopping mall going up? Is the city undergoing a huge re-imaging campaign and building new parks and recreational areas? If the answer is yes, that’s a good sign.

Editors note: Check out our post about future development in Savannah here and here. Jonathan gives great advice when he says to avoid the nicest house in the neighborhood, and it’s also not wise to renovate into becoming the nicest house– spend enough money to make your house as nice as other recent renovations in your area and no more. It’s also important to note that when buying a house that needs work with a VA loan, cosmetic repairs are fine but if there is anything wrong with the home structurally or mechanically, the VA will not underwrite the loan.

 

Step 2: Renovate!

If you’re looking to increase the value of your home, certain upgrades pay off more than others. As a rule of thumb, minor kitchen and bathroom improvements drive up the value of homes, but don’t shoot for anything excessive. Top of the line granite countertops do just about as much as generic granite. The top value producing renovations are listed here.

If you’re really looking to generate wealth through appreciation, this can be a powerful step if you purchase older homes, foreclosures, or short sales. In these homes, however, check to ensure that the home is available to purchase with a VA loan first! Also, make the home look good for staging. Prior to selling, consider a new paint job, modern light fixtures, or other small repairs.

Editors Note: You don’t always have to renovate to see a nice appreciation on a home. If you PCSd to Stewart in 2013 and bought a nice three bedroom home in Georgetown, for example, you likely paid about $135k. That same home would sell for about $165-170k today even if you did no renovations. However, if you only spend two to three years at a duty station, it is unlikely you will see great appreciation in that short amount of time– but you’ll still have more money in your pocket than if you rented!

 

Step 3: Timing the sale

This is probably the hardest step but can significantly impact the sale price of your home. While you need to do what’s right for you, (maybe you’re about to PCS) timing the sale can make thousands of dollars in difference. In certain markets, for example the summer moths cause a boom in housing prices of 2-3%. People like to purchase homes in the summer because their kids are out of school or they’re PCSing to a new location.

Editors Note: The Savannah market specifically does see these shifts, and they are more pronounced as you get closer to Fort Stewart. I think 2-3% is a tough high for the change in pricing here, typically prices will remain similar but days on the market may increase during the winter months.

If you purchased in that up-and-coming neighborhood, the time to sell might be when 50-75% of the homes in the area have also been renovated or “flipped.” Maybe the new park down the street has been built and you’re ready to sell.

Editors Note: To me, the best time to sell if you’re a novice is when it’s time to PCS. If you’re interested in making money by flipping houses, then I recommend buying a second house to work as a flip from day one. Flipping houses is part science, part art, and to really make the best returns you have to buy a dump of a place, fix it up to be line with what the market wants, and sell quickly.

Trophy Point Realty Group would like to thank Jonathan for letting us cross-post this blog, and we look forward to some more collaboration the future! If you are in the military or a veteran, you really need to go check out his blog — he’s got great insight on everything from real estate, the TSP, blended retirement, GI bill, transition, and everything in between. www.militarymoneymatters.org

Interested in using this plan to build wealth here in the coastal empire? Trophy Point Realty is owned by military veterans who have used the VA loan themselves and are experienced in renovations. We’d love to be your trusted advisors and we work in Savannah, Hunter AAF, Fort Stewart, Hinesville, Richmond Hill, and Pooler. Get in touch with us today!

Author: Jonathan Lee

Editor: Pat Wilver

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Buying & Owning a Home Loans & Financing Rentals

Buying your first home

BUYING YOUR FIRST HOME

Are you tired of your landlord? Sick of forking over a thousand bucks a month or more in rent?

You should be.

Do you think buying a house is beyond your reach?

It’s not.

Keep reading to find out how you can take that money out of your landlord’s pocket and put it back into yours.

 

“A JOURNEY OF A THOUSAND MILES BEGINS WITH A SINGLE STEP.”

 

LAO TZU

 
Buying a house is a big deal and there’s a lot that goes into it, but if we break the process down into its individual steps it starts to look much easier. Check out the chart below that illustrates the process of becoming a first time homebuyer. Blue text is steps that you will need to take, and the text in black is what your agent will take care of on your behalf. The red arrow running diagonally from bottom left to top right is your timeline, starting months (or years) in advance and culminating at the closing table when you get the keys to your new home.
Savannah Realtors | Trophy Point Realty Group

Don’t be intimidated by all of those steps, real estate agents like me exist to help you along the way. The biggest things that you need to worry about is building credit, building income, and saving your down-payment. What does that look like?

  • Building Credit — Your credit needs to be at least 580 before a lender will lend to you, and ideally it should be over 620. It’s best to get over 740 though, because that’s when you can begin to get the best interest rates. I won’t get into too much detail on how to improve your score in this post, but please get in touch with me if you have any specific questions!

  • Building Income — When a lender evaluates your ability to pay back a mortgage, he or she will look at your debt-to-income ratio. Generally, if your monthly take-home pay is three times greater than your monthly mortgage payment, then you will be able to qualify. There’s more to it than that and if you have car payments or other monthly payments your income may need to be higher, but that’s a good general rule of thumb.

  • Saving your Down-Payment — Most people believe that the down payment needs to be 20% of the purchase price, and that’s just not true for a first time buyer. Military veterans can buy a home with 0% down with a VA loan (read more here), and anyone else can buy with 3.5% down with what’s known as an FHA loan.

Not sure how to get started with any of that? Call an agent! Any agent worth their salt will talk to any potential buyer, even if that buyer won’t be ready to buy for years. We can answer questions and get you in touch with lenders and credit repair specialists who will be able to help you get ready to buy. Once you’re ready to buy, your agent will help you get the best deal possible. What does this involve?

  • Searching for the right home. In the age of Zillow and Truilia, buyers typically come to agents with a list of possible houses in hand. Sometimes we’ll find the right house together out of that initial list, but more than half the time we end up working together to refine our screening criteria before we find the right one. I’ve found “the house” in thirty minutes, and other times it’s taken months. There’s no right or wrong answer here. An important thing to note is this: your agent should not be trying to sell you on a house. The house should sell itself. When I’m representing a buyer, I like to point out everything wrong with a house for my buyers, because I’ve found that many times buyers get caught up in the initial euphoria only to sour on the house later in the buying process (or worse, after closing!)

  • Negotiating. This is your agent’s bread and butter. Sometimes there might not be too much room for negotiation, like when a house is newly listed for a competitive price. In that case, you better come in strong. When a house has been on the market for a while, or when it is over-priced, then it pays dividends to have an agent on your team that will fight to get you a good deal.

  • Earnest Money. Once the deal is agreed upon by you and the seller, you will write a check for what’s called earnest money, which is basically a deposit that tells the seller you’re committed. This is usually 1% of the purchase price. You can get this money back if you back out of the contract during your due diligence period, but if you back out after then the seller will keep it. Due diligence is usually 10 to 14 days, which is plenty of time to complete your inspections.

  • Inspections. Once you get a contract on a home, you should hire a home inspector. Your agent should keep a few on speed dial. This generally costs $300 and will generate a 30 to 60 page report detailing everything about the house that the inspector can see without tearing down walls. This leads into the next step.

  • Negotiating (part two). With your inspection in hand, you might want to negotiate again. Chances are that your inspector found issues with the house that even a savvy agent might have missed. Will you ask for the seller to complete repairs, will you ask for a price reduction, or will you ask for nothing at all? You still hold most of the cards here because you’re in your due diligence period, which means you can kill the deal and get your earnest money back. Work with your agent to determine the best course of action.

  • Paperwork. Your lender will need you to turn in and sign a lot of paperwork. Your agent isn’t involved in this process. Do your lender (and yourself) a favor and fill out paperwork as fast as you can. Your lender will also order an appraisal, which will typically cost you between three and five hundred dollars. If the house appraises for the price you agreed to pay, then you’re good — if not, then you will have to work with your agent to determine the best course of action. This usually means getting the seller to agree to a lower price or walking away from the deal.

  • Closing Costs. I want to include a note about closing costs. As of this writing (Jan. 2, 2020), an FHA or VA buyer can expect to pay about $6500 in closing costs in addition to the inspection and appraisal fees. These are paid at closing and do not include up-front mortgage insurance or VA funding fees. I’ve seen lenders stick buyers with over $9000 in closing costs — this should send up red flags. As a buyer, you should talk to a few different lenders and shop around for the best interest rate and closing costs. Closing costs can be paid for by the seller and often a seller will pay at least some portion of those costs.

  • Final steps. You will select a homeowners insurance policy, do a final walk-through, sign some more paperwork, and get the keys to your new house. Congrats!

  • After the fact. Now that you’re a homeowner, there’s no landlord to call when things break. Make sure you have money set aside to deal with these things. If you need a contractor, give your realtor a call — he or she probably keeps a few on speed dial! Don’t forget to file for your homestead exemption — if you live in Chatham County, GA, check out this blog written by my friend and trusted closing attorney Joel Gerber here(Note: this was published in January 2019 and might be out of date.)

 

That’s it! When you look at buying a house step-by-step, you’ll see that it’s a totally manageable process. I believe everyone should strive to own their own home because I believe that home ownership is the best way for average Americans to build wealth. Why?

  • When you pay a mortgage instead of paying rent, it’s really like putting money into a savings account — a portion of every payment goes toward paying down the balance of your loan.

  • Compare that to paying rent, where your landlord is using your money to pay of his or her mortgage and pocketing the rest.

  • Unlike rent, your mortgage payment will never go up if you get a fixed-rate loan.

  • Once your mortgage is paid off, your housing expenses will only be property taxes, insurance, and maintenance. This will average about $5000/yr for an average starter home in Savannah. Your average rent payments on the same house will be closer to $17,000/yr.

Ready to break up with your landlord? Trophy Point Realty Group serves Savannah, Fort Stewart, Richmond Hill, Pooler, and Hinesville — we’d love to be your trusted realtors. Call us today!

 
Author: Pat Wilver

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Loans & Financing Military

Understanding your VA Loan Entitlement

UNDERSTANDING YOUR VA LOAN ENTITLEMENT

a guide to selling your home.

If you’re a veteran, you’ve got a multitude of benefits available to you that you might not even know about. You shouldn’t feel greedy for taking advantage of them.

When I decided to serve my country, I didn’t do it for 10% discounts at Lowe’s, tax free booze at the class six, or any of the other Veterans benefits I have access to, but I’ll be damned if I don’t take advantage of some of those benefits today.

How might some of these benefits help you achieve the American dream? How about the ability to qualify for a loan for no down payment at all? If you haven’t heard of the VA loan, or you’re not sure how it works, keep reading.

The VA loan is a loan that’s guaranteed by the Department of Veterans Affairs (VA). Under this program, a bank will lend money to a veteran to buy a house and will not require the veteran to make any down payment at all. The banks can take this risk because the VA will issue a guarantee to the bank that essentially says: “if this veteran becomes unable to make payments on this loan, we will cover your losses.”

It’s a bit more complicated than that, but that’s the bottom line. What you, the buyer, need to know about a VA loan is this:

1. You must still qualify for this loan (if your credit is trashed because you bought a V6 Camaro after your first deployment and later had it repossessed, you’re probably shit outta luck until you fix your credit.)

2. There are certain service requirements a veteran must meet to qualify. Check if you qualify here

3. You must purchase a house that is move-in ready — fixer-uppers will generally not qualify for this program.

4. You can purchase single family homes, duplexes, even quadplexes with this loan.

5. You must agree to live in the property for at least one year. This requirement is waived if you come down on orders after your purchase.

6. Generally, in order to use your VA loan entitlement again, you must sell your VA financed house or refinance your first VA loan into a non-VA product. This is not always the case, especially if your first VA loan was for a small amount. Consult with your lender if you would like to use a second VA loan.

7. The limit on the amount you can finance with a VA loan varies by county, but in Chatham County, GA, that limit is $484,350.

8. If you want to purchase a property with a VA loan for more than this amount, you can. You just have to make a down payment equal to at least 20% of the cost over this amount. So, if you want to buy a house in Savannah for $484,450, you have to make a $20 down payment.

9. If you go into foreclosure, the VA may negotiate to help you out, but at the end of the day they’re not going to save you. Don’t buy more house than you can afford, and leave some cushion in your monthly payments in case your life situation changes. And don’t finance that new Camaro at 20%.

 

Was this really worth it?

fort stewart homes

 

Why should you use your VA loan entitlement? Because you can!

Look, if you like paying your entire BAH check to live in on-post, that’s cool. I’ve lived on post before, sometimes it’s convenient, and if you’ve got a big family it can be the cheapest option. Here’s why I think it’s better to use your VA loan to buy than to live on post or rent off-post:

– Every time you make a mortgage payment, a portion of that payment goes toward paying down that loan. In 30 years, your loan will be paid off and now your only housing expenses are property taxes and maintenance. If you rent, you’ll just paying off your landlord’s mortgage until the day you die.

– Your loan payment will generally be less than your BAH. With interest rates as low as they are I could buy a $240,000 house and my payments would equal O-3 BAH.

– Generally, GENERALLY, housing prices only go up. This obviously didn’t happen from 2006-2011, but check out my previous post on why I don’t think that is likely to happen again here.

– If you’re into saving for retirement (which you should be), owning real estate is one of the most powerful ways to do that for two reasons:

– As discussed earlier, having a paid-off house is huge. In Savannah, a 100 thousand dollar house will generally cost $1200 each year in property taxes and $1000/yr in insurance, and maybe $1000/yr in maintenance. Compare that total of $3200/yr to the $12,000/yr or more you would pay to rent a comparable property here.

– If you are interested in investing in real estate, the VA loan is the best way for a veteran to get started in this game. I currently rent out the first house I ever bought, and make roughly $500 each month in profit on that house. I made no down payment on that house because I used my VA loan – I’m turning a profit every month on an investment that cost me nothing to buy. My wife bought a duplex with her VA loan, and now we live in downtown Savannah and our tenants’ rent covers our entire mortgage payment. You gave Uncle Sam a blank check when you joined the military, why not take advantage of the blank check your deal old Uncle Sam is willing to give you in order to build your wealth?

Here are the steps to using your VA loan:

1. Establish credit. If you’ve never had a loan or a credit card, you don’t have any credit. Open a credit card and use it responsibly! Pay off the entire balance each and every month to avoid unnecessary interest charges. Generally, the more credit cards and loans you have and have had, the better, as long as you make all of your payments on time and maintain a low credit card balance.

2. Check your credit score. A score over 750 is the best, and you generally want to have at least a 580 to buy a house with a VA loan. Start here to check your score. If your score is not where it needs to be, that doesn’t mean you can’t reach out to an agent or a lender — a good one will help you

3. Get pre-qualified for a mortgage. Reach out to a local real estate agent or lender for help with this. Tell them you would like to use your VA loan.

4. Start looking at houses with your agent. Make sure your agent understands your needs and wants and isn’t just trying to earn a paycheck. If he or she doesn’t point out parts of a house that could be problems, he or she probably doesn’t have your best interests at heart — almost every house has something wrong with it. Don’t be afraid to fire your agent if they are not working out for you.

5. Find a house you like and get it under-contract with your agent.

6. Under contract – Once your house is under contract, you will need to complete inspections, loan paperwork, and appraisals. Your agent and lender should help you every step of the way.

7. Closing day — this is the day you sign the paperwork and officially take possession of your new home. You may have to pay some closing costs, but these will generally be no more than a few thousand dollars for a VA loan. In most cases your seller will pay for the majority of these costs, especially in the Savannah market.

If you have any questions or are interested in using your VA loan to buy a house, please leave a comment, reach out, or look me up on Facebook!

Sources:

https://www.benefits.va.gov/homeloans/purchaseco_loan_limits.asp

https://www.fhfa.gov/DataTools/Tools/Pages/Conforming-Loan-Limits-Map.aspx

Written by: Pat Wilver

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