This Investor Occupied His Rental Property in 6 Days! Find Out How…
For Deep, deciding on a deal is pretty easy…
Using probabilistic economics and his cash flow calculator, he simply plugs in the numbers. If the deal fits his specific economic parameters, he goes for it…and if it doesn’t he moves on. It’s an elimination process that saves him a lot of time.
Deep works full-time, but started investing about 4 years ago. He is focused on long-term rentals and creating passive income. When he adds an investment property his portfolio, he’s looking for an internal rate of return of 10% or greater… And the property should have positive cash flow by year 2.
His most recent investment property only required cosmetic repairs. Once it was on the market, the property was occupied 6 days later! That is quick!
Listen to our conversation with Deep to hear more about the deal he found on MyHouseDeals, probabilistic economics, and his tips for new investors plus…
- How to find neighborhoods with low days on market
- How to quickly occupy your rental property
- Why you should always budget more than you think you’ll need for repairs
NOTE: Deep S. is a premium member, he received a FULL refund of his upfront membership fee for simply doing a deal! Find out more about our premium membership here.
Tell me how you got into real estate investing.
I started off just looking for some passive income opportunities. I wanted something that would be hands-off. After buying a single-family house back in 2011, in the Dallas-Fort Worth area,
I gradually started to build my portfolio.
At the time I also had a full-time job and learned about real estate investing as a way to earn passive income. My mom has been pretty active in real estate investment in the past so it was one of those learned by osmosis situations.
Did you have a strategy in mind when you first started?
If it met my economic parameters, I would go for it and purchase the property.
I was mostly looking at IRRs (internal rate of return), looking for long-term growth; not fix and flip by any means. I was looking for properties that would give me a 10% or greater rate of return.
How do you determine which properties met your economic parameters?
I have my own cash flow calculator excel spreadsheet and try to look at pretty much everything that goes into a rental property; appreciation, rental rates, cost escalation, depreciation, and Taxes.
When trying to get the most realistic picture of what the property is going to provide as a cash flow engine, I usually run probabilistic economics on it so I can get a better idea of the low side and the high side as well.
Tell me a little bit more about probabilistic economics.
Probabilistic economics deals with trying to look at the low, mid, and high using different combinations. For example, price escalation is increasing by 2.5% but the property values are decreasing by 2.5% a year. It will take a combination of every potential economic scenario and give you a good idea of what the lowest you can expect your economic return to be; the highest; and a pretty good mid-case scenario as well.
When using this tool, you’re looking at the low, mid, and high rate of return.
What is your cutoff point for saying, “This is a good property,” or “This is not a good property for long-term rental”?
I’m usually looking for my mid-case to be 10% return or more and my low to be 5% or more. I don’t ever want to be at or close to inflation then I can be pretty confident that I’m going to be making money. At least by the second year I want to have a positive cash flow.
My background is engineering. I’m not a real estate expert by any means. For the comps, I usually have a Realtor in the area run those for me because I feel like they have a better expertise doing that. I’ll take a look at their data and try to figure out if I agree with their analysis. Also, I think the economic side of things is more my expertise so I tend to hinge my investment decisions on that.
There are other factors that I look at when I’m investing. I’m a small-time investor not a big-time investor. I usually try to look at the number of rentals in the zip code. If there’s 90% home ownership and only 10% of the households are being rented, usually days on the market is much higher. If you have an area with a lot more rentals, days on the market are usually lower.
I try to look for properties near universities, colleges, or some economic center.
What’s your ultimate goal?
I think when I can comfortably replace my cash flow with what I make at work, I’d like to make that a full-time career. Right now, it’s just getting all the pieces in place to help me get there. I started in 2011, actually quite close to when I started my career and just bought this last one a couple of months ago.
Tell me about the deal that you recently did at MyHouseDeals.
This is actually my first wholesale acquisition and I didn’t know much or anything about wholesaling. I was just talking to a friend about it, and he mentioned that there’s a completely different market to purchase distressed homes. In the past, I was looking for a lot of turnkey properties because most of my purchases were remote—in a different city.
I went and took a look at this house but unfortunately, somebody had beat me to the offer. Fast forward a week later…the offer had fallen through and a wholesaler contacted me. It turned out pretty good because I think they were asking $145K for it, but he agreed to sell it to me for $138.5K
What was the process after that?
Shortly after that Hurricane Harvey hit Houston.
It was a little nerve-racking, but luckily, I was high and dry. I think the biggest difficulty was getting a contractor during that time because most of them were really busy with repairs for the City of Houston. When I found one, we got all of the work done.
I shouldn’t say there wasn’t much to do in the house per se. It was mostly cosmetic. He knocked that out in about a month. It took him a little longer than I would have liked, but we got it on the market and six days later it was occupied.
How do you think you were able to get a tenant so quickly?
I think it was actually just a combination of being in an area of high rental occupancy and the hurricane as well. There was a lot of demand at that time because several thousand homes had been inundated with water. It just worked out.
A lot of people lost their homes, but it was just a very interesting situation. It’s a busy market in Houston for this time of the year because of Harvey.
How did you feel about your first rehab?
Overall, I think that it went really well. My IRR was higher than my cutoff; I think at about 15%.
What I learned from this is that usually when you have a rehab, you should budget for a few thousand dollars more than you think you need because you really don’t know what needs to be done until someone moves in. Plan for about $2,500 more in repairs than the initial estimate.
I financed the property with hard money, which is also a first experience for me. Then I refinanced into a conventional mortgage. The other rentals that I have were just conventional 30-year mortgages. Because they were turnkey, and didn’t need anything special or interesting, the process was much simpler.
Tell me how you discovered that whole process of buying a turnkey rental.
I started with a couple of the turnkey rentals in the Dallas-Fort Worth area. It was one of those situations where you research how you think the market trends are going, where you think there’s going to be growth, and where there’s a high demand for housing.
I was lucky to have found a really a good Realtor out there helping.
She was the boots on the ground. I went down a couple of times to see the first house I purchased. We actually did everything remotely to close on the second deal. I haven’t even seen the property yet, and I’ve had it for almost three years now.
It was just one of those things where you build a relationship with the Realtor and get to know who you can trust.
I think the benefit of the turnkey rentals is that you can do them remotely; you don’t need to be there. Generally, they’re pretty straightforward. You have an inspector come in, take a look, and see if anything is wrong. If everything looks good then you can, with a lot of certainty, say that there isn’t going to be much money that needs to be put into the house. All of my remote rentals, including one actually in Houston, are under property management.
That makes my life a lot easier. I think those are the most complete passive income engines.
Now that you’ve worked on both turnkeys and wholesale deals for your rentals, do you have a preference?
Maybe it’s my greed a little bit, but I think I’m going to look for more wholesale deals.
I think that does limit me to looking within Houston. If I’m going to do something remotely, I don’t want to spend any time or effort rehabbing the property. I think it requires a lot more time and effort. I don’t have that luxury of having a property in Dallas and I’m in Houston. It’s a slightly different investment strategy. I mean, there is more time and effort that goes into it; but I also think the return is a lot greater.
I picked out this property for $138.5K and initially only put in $8000, but it ended up being $10,000. My out-of-pocket was $148.5K plus all the refinancing fees. Let’s say an additional $6,000 to $7,000 which brings my investment to $155K. ARV, or after rehab value, was $180K.
Still, you’ve got that increase in equity immediately after rehabbing the house.
What advice do you have for new investors?
I think this entire wholesaling thing sounds a lot more daunting than it is. I’ve talked to a few people about it and they always say “That whole refinancing thing sounds like the thing that caused the crash in 2009.”.
I think when you get into the numbers, it’s quite straightforward. It’s just that you use hard money to buy the house and do the repairs—then you refinance. You do less cash out-of-pocket by the end of it. ut of pocket cash for me was $30,000 on a $180,000 property. That’s 17% of the property value out of my pocket.
Equity-wise when I refinanced, I owned 25% of the house. That’s an immediate equity increase of 8% or 9%. You can’t be completely certain on the numbers either. It’s a lot easier for me to peg a number one year from now than it is 10 years from now.
That’s another thing to consider.
What looks like a good investment in the first five years could turn into a disaster in 10 years. I’m just not yet at that 10-year time frame. I haven’t sold an asset yet. Until I do that, I’m still speculating it’s a good investment.
So far, they’ve been good; but something could go wrong in a couple of years. I think the one strength of my strategy, which I don’t think is noble by any means, is just trying to understand the worst case, the best case, and the most likely case scenario. At least you can mentally and economically prepare yourself for how the investment might turn out.