Property Management Homeowner

​Anatomy of a real estate rental investment in Raleigh NC

MoveZen purchases a large residential rental house in Downtown Raleigh NC. Join us from start to finish and see how it plays out in real-time.

For this program, we are going to break down and analyze a purely investment realty purchase for our followers’ entertainment, and perhaps so they can learn hopefully what to do, but at least what not to do when buying a rental property for investment purposes. Clearly, there are all types of investments and this will only cover one. In the future however we plan to use this real-time update approach and hopefully our followers can get a little knowledge on a wide range of investments from single-family, to multi-family, vacation rental, boarding house, and finally perhaps trailer parks. One of the best investments on earth in my opinion. It’s possible we’ll venture into commercial but unlikely and if so certainly distant. We’ll keep things informal and be happy to answer questions so get involved! For background information on who we are and where we’ve come from to get here please refer to the about me page. Finally, we’re getting a late start on this one and are now well into the Due Diligence phase with closing set for July 1. Below is an outline of issues we will touch on.

Decision Process: Raleigh NC skyline

I was an early bear on the housing market. I’m not ashamed to admit I was way too early, and therefore missed out on huge opportunities in the mid 2000s. My background in building and current career offer huge benefits for investing in real estate both intrinsic, and financial. For instance, in the current housing market you’ve had no problem finding deals straight from the MLS. In times past, and I’m sure at some point in the future that won’t be the case, but for now, there have been some great deals. As a licensed agent I typically save 2.5-3% on the purchase price. Many primary home buyers are finding financing for 5% down relatively easily.

This means that after closing I could make the same purchase for about 2.5% down yet ending with the same equity. As a property manager we have discount contractors as well as a wealth of knowledge necessary to purchase homes in need of repairs and updates. This sweat equity will vary dramatically but needless to say it’ll be a tough proposition for me to purchase a home that has already been updated and would therefore be priced accordingly.

Typically with a few very simple and cheap changes I would expect to add 10% net value on a smart buy immediately. Finally, as a property manager we typically charge around 10% of gross rent. Therefore if the gross rent equals $3,000 a month that’s $36K per year with $3600 in savings. Finally, as a full time real estate professional I enjoy significant tax benefits most others would not. What this means is that I have a significant margin for error before ever making an offer on a home. Bowing out of the market in 2005 there is no question I saved myself the potential for massive stress.

I made a couple of offers after that time but was flat out turned down. I’m happy to look back on those experiences and note that had those offers been accepted, I would have weathered the downturn quite well regardless. This has left me with a confidence in my judgment I would not have otherwise had. More importantly is that I sold homes during the bubble period that to this day have worked out quite well for my buyer clients. Advising clients only to buy the rarest gems that could be found led to a mediocre career in sales at best, but that’s okay because I never liked it anyways. I sold primarily fix up vacation rentals, and the rent and sweat equity my clients enjoyed from those purchases has paid off well despite the crisis. I was also sneered at by listing clients when I passionately insisted that they get serious with their asking prices or pay dearly. Time has a way of bringing the truth to the surface.

That said though, it’s time for me to really put my skills to the test and make full use of my advantages. The current market is perfect for this. While there is a ton of risk out there, this is a benefit. All negative, or all positive feelings about the market both leave limited opportunity unless you have a massive amount of cash. Preempting a change in the economy is a suckers’ game, the key is managing cash flow and reserves, and reacting quickly when the facts prove things have changed. This was my mistake. I attempted to preempt the downturn and missed huge profit as a result. I encourage you to research the history of economic predictions by organizations such as the Fed and World Bank. It’s shocking how clueless history has proven these people to be in forecasting. Throughout the downturn I reinvested nearly all of my capital into growing our management company. While I do somewhat wish I would have taken advantage of one or two deals I’m happy with how our business has grown and don’t really have regrets.

I started seriously changing my tone on housing less in light of purchase prices, but rather due to the ridiculous cash flow potential I began to see daily as a rental manager. Being a long term planner in everything I do, short term gyrations have never concerned me. It was cash flow that led me to advise clients not to buy in the late 2000’s, (even the best investments showed a huge loss relative to rents) and it was cash flow that caused me to do a 180 degree turn and advise even the most inexperienced investors to get out and buy as soon as possible in 2011. One employee that took my advice has most likely doubled the value of her purchase in 2 years.

More importantly she closed with $2000 out of pocket and the same payment she had as a renter. This means that she made nearly $80K in 2 years from her 2K investment at closing. With values still rising she stands to enjoy one of the best low risk cash on cash returns the world has ever seen. We’ll analyze this purchase in a future post. I however don’t pay a ton of attention to appreciation as I don’t intend to sell very often. Cash flow is my love, but even this can get you into trouble if you fail to consider the entire situation. A problem I’ve seen lately is that investors will buy anything if the cash flow figures match their predetermined models.

Often these purchases though are in neighborhoods where there are still several foreclosures or evictions each week, as well as national home builders still offering brand new homes for only slightly more. Often these neighborhoods offer very little unique characteristics or scarcity as you can simply build them until the end of time. While cash flow is great, I still look for unique properties that cannot be easily duplicated either as rentals, or sales. Falling home prices actually contributed much less to the recovery than most people realize. In fact, falling interest rates and rising rents played at least an equal part. In fact, if interest rates had even held at a historically low figure of 6% I think prices would have fallen by nearly twice as much. Monthly payments certainly came close before things began to reverse. You will hear a lot in the media about “all cash buyers” dominating sales and this is somewhat true. What they don’t tell you however is that most of these buyers rely heavily on debt in other ways. Most are corporations and sell new issue stock offerings, bonds, or outright borrow in bulk from commercial banks. Yes they bring cash to closing, but in most cases they borrowed it at some point.

Take Blackstone Group, they are one of the most infamous institutions devouring rental homes. A quick check of their public stats shows they have slightly over $2 in cash per share, while trading at $21.50 per share. They have over 12 billion in debt, on yearly revenue of 4.23 billion. That’s actually better than some, but clearly not all cash buyers. Even Mark Zuckerberg took out a mortgage on his primary residence. When money is practically free, always be weary of those claiming no debt. We’ll address the astounding impact interest rates have had in a later post but here is a quick example

1981 Mortgage 2008 Mortgage 2013 Mortgage

Loan Amount: $300,000 $300,000 $300,000

Interest Rate: 18.45 percent 6 percent 3.51 percent

Monthly Payment: $4,631.56 $1,798.65 $1,348.81

Interest Over Life of Loan: $1,367,362.81 $347,514.54 $185,571.33

While rents overall dipped during the crisis, they recovered quickly, and in most cases now sit as high, or higher than before. I’m not a raging bull at this point. I do think we’re in the early stages of a long recovery, but I also see most of the bad habits from 2008 coming out all over again, and my inclination is that we will have another massive downturn in the next 3-8 years as a result.

Debt got us into this mess, and it’s poised to get much worse. In later posts I’ll discuss why I think we will see a huge run, and what I think will be the pin that pops that bubble. Enough back story though, let’s talk about the Raleigh market and our latest purchase. Keep an eye on our blog for the next post coming soon…

Part 2 here-

Decision Process
Benchmarks / History of tracking the market
Cash flow
Value add options
Margin of safety. Unique props.
Macro trends
Micro trend
Owner retaliation
Tenant relations
Due Diligence
Tenant interviews
Clear title
Micro changes- Community support, city changes, nearby development
Assess first month
Rent collected relative to estimates
Expenses relative to estimates
Tenant relations relative to expectations
Assess second month
Rent collected relative to estimates
Expenses relative to estimates
Tenant relations relative to expectations
Final assessment
Rent collected relative to estimates
Expenses relative to estimates
Tenant relations relative to expectations

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