Transcript:
Finding deals, even if you have an established portfolio or you are a basic investor just starting out acquiring deals, is an ongoing challenge.
Now this is compounded by the fact that real estate is infinitely variable. We have bedroom size, we’ve got the way kitchens have been updated, bathrooms updated, backyard space. You have block by block changes inside of neighborhoods, you have zip code distributions across cities, and don’t even get me started on the concept of investing in other towns and other states across the United States or internationally. None of that is for me personally. I found enough opportunity here in Toledo, Ohio, that for the last 16 years, I have focused on that exclusively. I don’t know how you value all those other variables.
The challenge is when you look at realtor.com and Zillow and you look at the data points that are on the marketplace available on the MLS, (mind you that is ignoring wholesaling and auctions; they’re a whole different beast. They’ll be a future video) however, you need to quickly be able to look at the data points that are available online and separate the chaff from the wheat, the deals that are actually going to be good to add to your portfolio.
So on the first level, you simply need to be able to compare investments, and I would say the simplest, yet the most important, is a one percent rule calculation, basic cash on cash return. If you have a hundred thousand dollar house that hundred thousand dollar house must perform at one thousand dollars a month in rent rate in order for the cash on cash return to be recognized. City of Toledo abounds with deals in excess of the one percent rule that’s why we’re nationally recognized.
Beyond that, you begin to get into net income of the property minus your expenses. What amount of money are you going to be left over with at the end? Recognize that this allows you to begin looking at heavy cash income properties like multi family and compare them to basic meat and potato single family, where your expenses are much lower, but you want to be able to do an apples to apples comparison.
So you need to be able to take additional sources of income – for example washer/dryer, charge parking garage fees, if you’re in a multi family setting perhaps. And you need to be able to compare that to the additional income – water bills, landscaping, community areas, like hallways, that need to be cleaned or maintained.
The challenge is to take the net income calculation and use that to give yourself a quick apples to apples comparison for what deals are on the market – whether they’re single family and multi family – and as they differ across zip codes with different costs and different rates of return.
And then also compare that to your historical decision-making. In my portfolio, my first property was a six unit on Stickney Avenue. So what I generated was a Stickney value equivalent. It means nothing to anybody but this investor right here and what I was doing was saying if I was looking at a new investment house – forty two thousand dollar, three bedroom house. That forty two thousand dollars per thousand dollars generated a rate of income and then when I bought my six unit each thousand dollars there generated an amount of income. By comparing those two I would know that the forty two thousand dollar three bedroom house is a twenty percent improvement upon my prior decision thus I was getting smarter; I was coming up with better deals in the marketplace.
Recognize that your use of your historical comparisons are going to begin strengthening your resolve in a niche for your portfolio. Like what is your portfolio focused on? What does your portfolio seek to grow on that is going to allow your phone to ring one day and we say “hey, the property across the street from one of your performing assets is available”?
That conversation then can lead into whether the current price is worthwhile and don’t feel bad if that twenty percent comes into play. That is actually twenty percent more expensive than I bought my house for and the market for this example hasn’t really changed. And let’s say it was just a year since and the market hasn’t really moved twenty percent but the property across the street is trying to charge an extra twenty percent.
I have a legacy of successfully letting that listing agent across the street know that when they want to reduce by twenty percent I have a buyer who’s ready to purchase the property. They’re vetted. They’re across the street. They have property management in place. However, we need that price to come down and, very commonly, once they’ve done a reduction or two, that agent lets the seller know “look, if we just want to ring up this guy again, he can get the property under contract and closed”. There’s going to be a discount in effect and it gets us to the negotiating table. You end up with your property. I’ve done it personally time and time again.
Additionally, having a niche and having a known performance for your portfolio gives you confidence. Real estate is going to have mistakes. There will be residents who need to be evicted. There will be repairs, new roofs, new water heaters, things that are going to go wrong in your portfolio. The responsibility is by knowing what is performing and staying the course, you are able to confidently weather those storms and you avoid getting in and out of real estate repeatedly.
Real estate, unlike the stock market, is expensive to get in and out of. You definitely can’t get in and out of it quickly so all of your metrics and your definition of deals is going to allow you to quickly and effectively decide what deals are worthwhile. And then we can follow up to be able to make offers and then follow up with inspections again. Those will be on future videos.
Thank you very much for your interest in Toledo, Ohio and retaining LaPlante Real Estate for your portfolio.