Legacy Wealth Holdings

5 Keys to Investing in Any Real Estate Market

The Fed met recently and decided not to increase or decrease interest rates. So right now, the Fed funds rate is still currently at 5.25%

Inflation hasn’t dropped enough for them to feel good about reducing the interest rates. And at the same time, they want to kind of maintain the status quo.

They do want to increase interest rates and rock the boat for the economy at all, especially in an election year.

So here’s the key to understand: you can do deals regardless of the market.

You don’t need to time the market. You don’t need to be some sort of Nostradamus and understand what’s coming and what’s going and the cosmos and know how things are going to shake out.

That’s completely irrelevant.

The key is to understand the framework and the components to do a good deal regardless of the economy. So here are my five keys to buying in any single market.

1: BUY AT A DISCOUNT OR ON TERMS

What does that mean? That means if you buy at a low enough basis.

There’s a lot of things that are fixed cost when you’re doing a real estate deal. For instance, construction. Construction is not a variable expense. It’s a big mistake for you to try to play around with the construction and the renovation expenses when that is what’s necessary in order to get the rents, in order to get predictable maintenance schedules, in order to get predictable insurance and other expenses.

All those kinds of things are kind of fixed when you’re putting the equation together and underwriting a deal. You know what the only variable is?

What you’re buying the property for.

That is the biggest variable in the equation. The other variable is the terms that you’re using when you’re buying it.

Are you getting seller financing? What’s your cost of capital? What’s the timeframe that you have on your money?

All those things are variable expenses that you can negotiate in order to make the deal make sense for you.

If you can’t make a deal make sense based on buying at a discount or buying based on terms, then you’re making a bad mistake playing around with some of these other components of a real estate deal that don’t really matter.

So make sure you’re buying at a low enough price point where you’re creating appreciation and a little bit of a spread.

Or if you’re paying more of a retail price, just make sure you have good terms. Make sure you have a low cost of capital. Make sure it’s a fixed rate cost of capital. Make sure it’s a longer term. So that way your back’s not against the wall. You don’t have to refinance or put yourself in a position that’s pretty precarious when the market might not be that good.

Would I pay retail price for something? Sure! If I got it at a 2% interest rate, seller financed on a ten-year term with an interest only or a 30-year amortization schedule, I would buy that deal.

Because I know that I can make it make sense.

I know that the cash flow is going to be greater than my cost of capital, so buying it on terms is okay. And to pay a retail price is okay if you have great terms. Otherwise, just focus on the purchase price.

2: LOCATION, LOCATION, LOCATION

You’ve all heard this one before.

That being said, I made some of my best returns and worst returns in rough parts of town. I mean, literally shootings were happening. In these places, if you take the boards off the door, the door gets kicked in, all the copper plumbing gets ripped out, all the mechanicals get ripped out, and you’ve got to redo it all over again.

I’ve invested in those places.

I’ve learned not to buy in D- or F-class locations anymore because there’s not a stability in the tenant base. There’s no stability in making sure the property doesn’t get broken into. There’s a lot of turnover, and there’s a lot of expense because of that turnover.

Then I moved to investing in C-class and that was a little bit better, but there’s still a lot of tenant turnover. I think C class looks really good on paper usually, but it very rarely shakes out to a 94% occupancy over the course of a year. It usually drops down to that 80, 85% occupancy and it’s a struggle to keep tenants in.

I graduated from C-class into more of a B-class and A-class environment. Just solid, workforce housing.

It doesn’t have to be luxury, just solid areas where people want to live and raise a family.

3: FIND MOTIVATED SELLERS

Motivated sellers have historically been found with off-market deals.

I think off-market deals are a great way if you know how to source those off-market motivations.

Typically that breaks into the four D’s: death, disease, divorce, disaster.

Death: somebody passes away, the heirs inherit the property. But they might not care about splitting the money six different ways on a $1,000,000 property.

They just want to get it gone.

So that’s a great place in order to go out and source deals. I know people who go and find deals on probate all the time.

Disease: unfortunately, sometimes people need to move out of their home, but that’s not always necessarily because of a disease. For example, my parents are looking to downgrade their house. It’s harder for them to get up and down stairs now, so now they want something all on one level.

My parents aren’t necessarily money motivated. Right? They have the house paid off. They’re in a good financial position. They just don’t want the headache anymore and they want to move into something that’s more comfortable for them.

Divorce: one of my early first deals was a couple that was selling a four bedroom house right here in Mount Pleasant, South Carolina.

And by the way, Mount Pleasant is a town of like 130,000 people. There’s not one single- family house here today that sells for less than half a million dollars.

One of the first deals that I did in Mount Pleasant was a wholesale deal about 15 years ago. I bought it from a couple that couldn’t finalize their divorce until they liquidated all their assets. So they had a single family house thatI put on a contract for $100,000.

But that’s a big motivator, right?

In this case, the people didn’t care as much about money. They just wanted to be done with each other.

Disaster: I remember when that hurricane came through Panama City, all these people got these huge insurance checks because of the damage.

They didn’t they didn’t give a rat’s ass about the property any longer. And they were just launching these properties at 20¢ on the dollar, because they got the big insurance check.

All those things are motivating factors that you could find off market.

But you know what else is a motivating factor?

Somebody who picks up the phone, calls a real estate agent, and tells them that they want to sell their house.

They have the real estate broker put it on the market in order to tell everybody in town that they’re motivated and they want to sell their house.

I know some people don’t like going on the MLS or on LoopNet in order to find deals. I find deals there all the time!

The difference is you’ve got to swing the bat, you’ve got to make an offer.

4: HAVE A SPECIFIC BUYING CRITERIA 

So here’s what I mean by that.

I used to flip single-family houses, somewhere between 80 to 120 houses a year. We did it on a turnkey basis. And I realized, the majority of my wealth, and the majority of what I liked doing was in the multifamily space.

So in 2017, I drew a line. I said, we’re no longer flipping houses, we’re only buying apartment complexes.

And guess what happened?

We started only seeing apartment complexes. 

When we stopped wasting our time looking at single-family homes, there were more and more and more commercial deals that came across our desk.

It’s kind of like the new car you just bought, right? You didn’t even know that that car existed until you bought it. Now you see it all over the road.

Because you’re focused on it.

The same thing happened for me when I stopped doing crappy deals, right when I started only looking for apartments.

If you’re only focused on that type of asset, you can sort faster, which is number five.

5: HAVE A SORTING MENTALITY

New people get so committed to a singular deal, they get so emotionally attached to it.

And that’s a mistake.

When you sort past deals, you get to the next deal faster than maybe your potential competition would.

By the way, make an offer on everything, make an offer on every single deal out there.

I’ll give you an example. I just listed an apartment complex with creative financing and terms, and I had over 500 people reach out to me on social media saying that they were interested in seeing more information.

I sent them all the information.

Less than 15 people actually made offers. 3%!

You might think you’re competing with 500 people, but no. You’re competing with 15 people.

I was flexible on my terms. I was able to work through it. I was able to make a deal happen that worked for them and that worked for me because they were willing to swing the bat and just get the conversation started.

The other 485 people didn’t even swing the bat. If you don’t swing the bat, how are you ever going to get a base hit, let alone a home run? You’ve got to swing the bat. So have a sorting mentality.

Make the offer, and then quickly sort past that. If it doesn’t work, don’t get emotionally attached to it. It’s all data, right? Don’t be dramatic.

It’s all metrics. It’s a math equation.

Does it make sense? Does it not make sense? Move past it. Move to the next one. Move past that one, go to the next one.

So those are five rules of the road in order to go out and find deals, regardless of the real estate market, regardless of the economy, regardless of interest rates, this is how you go and do deals in any real estate market.