Buying the Right Asset

Transcript:

Hello! Andrew Fidler with LaPlante Real Estate coming to you as always from Toledo, Ohio. We are discussing the most important topic: the success of your asset and how that’s going to form the cornerstone of your portfolio.

The first threshold to get through is cash flow. We have to be able to achieve a realistic amount of money going into your bank account every month because that will define success. It will define your level of comfort and it will define how smoothly and easily your portfolio operates.

Let me contrast for a second. If you purchase a property improperly, overpaying for the asset and deciding, I’ll go with an occupied property, you have a resident who has lived in the property for 10 years. You paid a premium to buy the property and the only way that this property makes money, in your opinion, is for the rent to be increased on the resident by 40 percent. The resident most likely is going to feel like they’re being taken advantage of, they’ve lived here for a long time and, in their view, if we look at the same money equivalent, they’re owed new carpet, new paint, new doors, and so they’re just as likely to want to move and then the owner is doubly hit because now you have to renovate the property and put all those things in and re-rent.

The goal is that we’re going to make our money upon sale when you purchase the property. That’s where we’re locking in our equity, and that’s where we have the potential for appreciation. That is also where, if we have an occupied property, we are able to take a methodical approach. We want the new resident to recognize that sure, some out of town investor, right? The big shadowy figure purchased their property; however, rent is going to go up in a very small increment. Typically I will give the resident a trajectory out two or three years so they have the comfort of knowing that we’re not looking to do anything drastic with our property. That also means that we purchased the property knowing that we wanted to do incremental changes and if the resident stays in place the owner and the property manager need to be completely happy with the performance of the property.

Additionally, we need to ensure that when we have a vacant property that we’re making it as attractive as possible. When you’re looking at a vacant property to purchase, you’re looking for the deck on the back, you’re looking for an open kitchen concept. A lot of times I’ll find a pass-through countertop area, an island built between the dining room and the kitchen. Any of those items are going to be attractive as compared to the standard three bedroom houses that are going to be in the area.

You want to be able to avoid functional obsolescence. Typically, if you bring an existing home to me, and you say look I’ve always had problems renting this house; it doesn’t take too long for us to enter the home and get you video of – hey, if we go upstairs to three bedrooms on the second story, the stairs are narrow and the stairs make a 90 degree turn halfway up. It’s impossible for us to get furniture upstairs of any kind, like a king size mattress set. So you want to avoid items that are just not cost effective for us to try to expand the stairs or rebuild the stairs going to the second floor. That would be functional obsolescence. Another good example is walking through a bedroom to get to another bedroom. You’re going to end up with one bedroom in that case. So we try to look at a property that residents are really going to be excited to live in for the long term.

Be careful of your neighborhoods. Anyone who’s investing in the Washington Local School District; 43623 is the predominant zip code and then the suburbs you’re pretty much able to buy anywhere you can afford and it will make a competitive rental product. It’s not going to earn as much cash flow when compared to lower zip codes. However, the quality is very easy to do if anything you’re priced out of the majority of the zip code because it’s too expensive.

You move into the standard cash flowing zip codes that we recommend and operate in every day 43612 43613, again you can buy anything in those zip codes and you will be fine. There are also areas where it’s oddly 30 percent more expensive than the rest of the zip code and those are predominantly homeowner areas. Anytime we can end up with a rental in that vicinity it’s a great buy.

Then you move into our single digit zip codes north side 08, south side 09, east side 05, and a few more out there the single digit zip codes are your Pareto principle the 80/20 rule you want to be in 20 percent of that zip code. They’re nice streets. They’re maintained. If we get you wheels down here in Toledo I can drive you around and show you those neighborhoods but ultimately you want to be careful of moving even a block over and moving down in the quality of the neighborhood and the quality of the houses around it if you get into any of our blighted neighborhoods you’re going to see a lot of board ups and missing houses. Those are properties that have been damaged beyond salvageability and the zip code is also low property value as well so there’s a point of diminishing returns, but those areas are pretty easy for us to detect and steer you out of we want to do it before you buy the property.

Lastly, I am careful operating multi-family properties. This is speaking from my own experience. I try to avoid one bedroom and two bedroom apartments in those single digit zip codes they are a challenge to keep rented for the long term. I’ll make a separate video about that. But ultimately, your asset, especially your very first property, the property that you are judging the basis of our town on, needs to be successful. I recommend you retain me to advise you to look at properties to see what my personal experience is, my personal preference, as well as what we can do to ensure that when that property comes on board, your property manager is going to be successful.

If we get all that in order you’re going to be receiving the cash flow you expect every month that makes the relationship with your resident very smooth and simple, and it also prevents you as the owner from having to hand pick your property manager to drive the rent and revenue so that you can achieve the cash flow you feel is entitled for that property.

As always thank you for investing here in the city of Toledo. We truly appreciate your business. Thank you.