House Hacking in Seattle

Successfully house hacking in a high cost of living market

Many investors' first foray into the real estate investing world is through house hacking. It's a logical first step to reduce your largest expense and is arguably one of the more immediately impactful investments you can make. I wouldn't be surprised if someone told me that house hacking is the most common entry point to real estate investing and FIRE. For those who live in a low or medium cost of living (COL) market, house hacking is straightforward. You purchase a 2+ unit, live in one unit, rent out the other unit(s), and completely cover your PITI. I consider this the "traditional" house hack. But what about high cost of living (HCOL) markets where the math doesn't quite pencil out?

House hacking in a HCOL market - V1

When we lived in San Diego, Kat bought a condo and house hacked by renting out the other 2 bedrooms. We had roommates, shared common areas and even then, still paid some housing costs. This was a common setup at UCSD and other colleges in expensive neighborhoods: Students would routinely post on Facebook looking for roommates to share bedrooms, living rooms, and even walk-in closets. But it's not just budget-conscious college students doing this. On the BiggerPockets forums, you'll often read about how people rent out all sorts of makeshift living spaces to reduce their housing expense. It seemed like the key to house hacking in a HCOL market was to sacrifice some amount of personal space and comfort.

Roofstock released an article analyzing the U.S. cities with the highest rent-to-price ratios. To save you a click, these numbers were calculated "assuming a 30-year fixed mortgage, 20% down payment, and a 5.22% interest rate". As expected, in low and medium COL markets rents fully cover the mortgage and homes are significantly more affordable. The data is interesting to look through and further illustrates the difficulties with house hacking in a HCOL market compared to more affordable ones.

Moving to Seattle

When Kat received her Microsoft offer, we had to decide if the compensation bump was worth moving to Seattle and giving up a successful house hack. We reasoned that even with higher living expenses, the higher pay and lack of state income tax would allow us to save more and funnel more into our real estate business.

In the beginning of 2020, we moved into a $1,550/mo 570 sq ft one bedroom apartment in Capitol Hill. The unit was cramped, especially so with our three cats, but we planned to spend most of our time outside. The most important thing was that the apartment was affordable by Seattle standards and in a great location. Of course, no one could have predicted a global pandemic and shutdown. Within weeks, our world shrunk to the 570 sq ft we called home. When our lease renewal came in the mail 9 months later, I told Kat we needed to find a larger place.

Traditional house hacking in a HCOL market

At that point in the pandemic, rents had started to increase across the board. For a 2 bedroom apartment near Cap Hill, we were looking at spending $2,200-$2,500/mo, a sizable increase compared to our current 1 bedroom. We brainstormed ways to house hack in the expensive Seattle market. Given the following criteria, what was possible?

• buy a home with 2+ units or a MIL (no roommates)
• buy in an appreciating & safe neighborhood
• live near our workplaces and/or convenient public transportion (for when we had to return to the office)
• be near downtown in a walkable neighborhood
• fully cover our living expenses

In late 2020, a duplex in Queen Anne, Cap Hill, or Central District would cost you at least $1M. We'd be looking at a $4200+/mo PITI payment. Compared to a 2 bedroom rental, we'd be paying >$2,000 more every month (not including additional maintenance, capex, and other general home ownership costs). At 20% down, did this even make sense? We'd be diverting cash that would otherwise be used to purchase BRRRRs in the Midwest.

House hacking in a HCOL market - V2

Kat had always wanted to try running a short term rental but we never had a good opportunity to do so. Our real estate business was all out-of-state and we weren't sure how well you could automate the processes required. On top of that, would we even do a good job?

When she suggested trying the strategy in Seattle, I'll admit that I was skeptical. It sounded like a lot of hands-on active effort, antithetical to our efforts to build a passive cash-flowing business. But the more I researched, the more feasible the strategy sounded. There was automated pricing software and automated messaging, and whatever didn't exist, I could fill in the gaps with hands-off scripts -- I might as well make use of my software development skills!

Most importantly, the numbers looked promising. We planned to put 15% down and targeted an 8% return on the down payment which equated to a net of $3,000/mo. An 8% return is the minimum we would accept for a real estate investment and we were very conservative with this one because it was going to be our first time operating a short term rental. The 8% return would cover most of the housing expenses and we would be building equity in the home so we believed it was still going to be a good investment. This is a simplified equation that neglects to take into account capex, maintenance, and appreciation but paints a good general picture of our analysis.

Details:
Purchase: $1,000,000 @ 2.75%
Down Payment: 15%, $150,000
PITI: ($4,500)/mo
STR Net (Pre-PITI): $3,000/mo

Scenarios:
(S1) Housing Expense: ($4,500) + $3,000 = ($1,500)/mo or ($18,000)/yr
(S2) Equivalent Rental: ($2,500)/mo or ($30,000)/yr

Calculation:
Savings (S2 - S1): $12,000/yr
Year 1 Return: $12,000 / $150,000 = 8%

In early 2021, we closed on a 4/2 single family home in Central District. The home had 2 units with separate entrances, a 2/1 upstairs and a 2/1 basement unit. More importantly, the home was in a great location for running a STR and even came with private parking. As with most deals, this home was not without its faults.

Even though the home was fully renovated, it was not selling because the basement unit only had a ceiling height of 6'4". Many buyers must have considered the basement "unusable" space and passed on the home. We recognized that low ceiling height might negatively impact our STR strategy but we found similar basement units in the market doing well. On top of that, we had a few options if things didn't work out.

Exit Strategies
Option 1: Rent out the entire home. We could likely get $3600+/mo.
Option 2: Lift the house to increase ceiling height.
Option 2: Move into the basement unit and use the upstairs as the STR

Given these options, we thought the home still made sense and we were bullish on the original STR strategy. Even if we failed, this would provide great education on what it takes to run a STR and house hack in Seattle.

The results

Given the lack of buyer interest, we were able to purchase the home for under asking.

Details:
Purchase: $935,000 @ 2.75%
Down Payment: 16%, $155,000
PITI: $4000/mo or $48,000/yr

We've been running the STR for 1.5 years and feel that we have enough data to compare our performance against our expectations.

As you can see, we were able to consistently do better than our minimum monthly net of $3,000. Before taking PITI into account, on average year over year we net an average of $56,000. Repeating a similiar equation as before.

Calculation:
(S3) Avg. Net after PITI: $8,000/yr
Savings (S3 + S2): $38,000/yr
Year 1 Return: $38,000 / $155,000 = 24.5%

Even when we take into account the STR set-up costs, we still have a respectable return year 1.

Adjusted for STR costs:
Furnishing: $18,000
Adjusted Year 1 Return: $20,000 / $155,000 = 12.9%

Through this strategy, we were able to completely remove our housing expense and bring in some additional cashflow. It turned out to be a great return on our down payment! As the cherry on top, after holding the home for only 1 year, we were able to open a 90% LTV HELOC for $140,000 @ 3.49%.

Conclusion

I'd be remiss if I didn't take a moment to address the unique market conditions and advantages we had. In 2021, interest rates were at a historic low and I was fortunate enough to have a down payment to take advantage of it. In markets all across the country, we were seeing record year-over-year value increases. There was certainly an aspect of luck but I also believe that there is always a viable investment strategy or opportunity no matter the market cycle. When Kat and I talk to seasoned and successful investors who were around pre-2008, the common denominator is that they continued to invest day in, day out. Optimal strategies may come and go but they always looked for new opportunities and markets at every phase of the cycle.

Real estate investing is a huge space. In my opinion, the most successful investors are creative and quick to adapt. Is it possible to house hack in a HCOL market? I'd say yes! It's certainly not as straightforward or simple compared to other markets but if I was able to find a workable solution, there must be many more creative strategies out there.

Annual Goal Setting

The importance of annual goals and how they direct your actions

As a relatively disorganized person, the thought of setting goals for the year and then actually following through seemed laughable to me. It seemed like a clever way to rewrap the concept of a New Year’s Resolution. I'd now argue that there are important distinctions between a resolution and a goal. What I found was that by thoughtfully selecting my annual investment goals, I was able to make consistent progress and be intentional about my actions.

What are resolutions?

Goals and resolutions may have the same intent of picturing where you want to be in some timeframe, but the thought process is entirely different. In my experience, resolutions tend to be broad statements about your desired future without much consideration for the path. They are a daydream, crystalized into a single feel-good statement, swiftly abandoned following the lackadaisical holidays.

What are goals?

Goals on the other hand are specific and actionable. They are intentional and measurable, constantly assessed and kept in the front of your mind. Intentional goals represent not just the end destination, but also consider why they’re important and how you can make them happen.

Imagine you were told to run an unknown distance on a treadmill with no display. Without any idea on how far you’ve run or how fast you’re going, how long can you stay motivated and focused on the task at hand? Goals provide direction while milestones provide actionable steps. They serve as mile markers to judge past and present growth and progress. They are personal affirmation that you are on track and making progress.

At the end of the day, you may end up deciding that there really is no distinction between resolutions and goals. That’s okay. What really matters at the end of the day is properly framing your mindset and planning actionable and measurable steps that logically lead you to your desired destination.

Setting your goals

When setting your investment goals, think about how a 1 year goal might play into your 5 and 10 year plans (I wrote about how to identify larger overarching investment goals in this post). Given that context, does the goal align with your long term plans? On top of that, your goal needs to be specific. Clearly and objectively define what success looks like so you don't move the goalposts when the outcome doesn't go your way.

When defining your milestones, go as granular as you'd like. We all have different preferences for how we work best. For myself, I prefer creating larger milestones that can be assessed and completed every few weeks. I find that too many small tasks causes me to get lost in the laundry list of items. On the other hand, Kat enjoys checking off and completing todo list items every day. For her, it makes sense to break down goals into bite-sized daily or weekly milestones. Consider how you work and create milestones that push you to perform at your best.

Lastly, be intentional about your goals and pursue personal growth. I challenge you to challenge yourself. Set up stretch goals and think through what is missing that prevents you from taking that extra step. For example, I've found it's easy to claim capital is a limiting factor, but the reality is most successful real estate investors utilize creative methods to fund larger and larger projects. With that in mind, you might have a stretch goal to make a foray into OPM (other people's money).

How to use your goals

Be consistent. Now that you've set your goals, you need to use them. Life is busy and priorities are constantly changing. Unless you consciously make mental room for your goals and milestones, they can easily fall to the wayside. It is crucial to be consistent about your effort week to week. By intentionally thinking and working around your goals, you are also building a lasting habit and mindset.

Review your goals and progress regularly. Kat has her goals and current milestones tracked at the top of her "12 week year" spreadsheet (book link; she believes it helps her maximize productivity). I write my goals on our whiteboard so I see them every day. In both cases, we keep our goals in plain view at the front of our minds so that we’re always thinking about what needs to be done. If we start to stray, we can correct course and realign before we invest too much time and energy on something entirely unrelated. If we feel we are starting to fall behind, we take some time to think about why. Are there unforseen obstacles that we are actively working through or have we mentally deprioritized the goal? Be conscious about your direction and recognize when adjustements need to be made.

Suggested goals

While many of the goals we set may be different from person to person, I advocate for these common goals:

1. Constant education. Read 5 books a year or listen to an investment podcast weekly - anything to further your knowledge. You don’t know what you don’t know.
2. Network and meet like-minded people. We are all on the same general investment path. Provide value to those before you and connect with those ahead of you. This also plays into constant education.
3. Find an accountability partner if you haven't already. Someone with similar investment goals and mindset can help tremendously in motivating and propelling you forward.

What Comes Next?

Getting Started in Real Estate 5/5

I've been putting off writing this blog post. Truthfully, this final part of the series is the most open ended and most difficult for me to crytalize. I don't feel like my own processes have been perfected; I am constantly making mistakes from deal to deal. What can I share when there exists mountains of real estate knowledge that I haven't even begun to tap. But... maybe that's what I should write about. The neverending journey, the constant education and the highs and lows that come with investing. At this point, you've gotten your feet wet. After your first deal, what things should you think about and consider?

Are you a believer?

At the end of the day, the most important question is whether this investment strategy works for your purposes. Is the effort vs return trade-off what you expected and will continuing this process help you achieve your investment goals? Do you enjoy the journey and/or have the grit to grind out however many deals needed?

For many, it is easy to rinse and repeat the same investment strategy and gradually build up a respectable portfolio. But often times, the next logical step is how to scale faster. Everyone is familiar with Aesop's The Tortoise and the Hare. The classic lesson of slow and steady wins the race. But truthfully, I'm not the most patient person. Is it possible to take the best traits from both the tortoise and hare?

I've spent the last year thinking about scaling and increasing cash flow; the BRRRR process is easy but it feels so slow. With finite personal funds, you are limited in the number of deals you can do. By observing other investors, I've found that the key is acquiring more capital; whether that be raising capital from friends, family or other investors. In this way, I see the first year of investing as a proof of concept. I've found that your experience serves as a badge, allowing easier and cheaper access to private capital. However, before you rush off to use other people's money, make sure to identify and fix any problems in your processes.

Fool me twice, shame on me

With every completed deal, I try to identify what went well and what went poorly. Where are the opportunities for improvement? What can I do next time to help me scale? And more importantly, why did I make that mistake?

No deal goes perfectly and there is always opportunity for improvement somewhere in your process. Of course, there might be some projection but our (my and Kat's) past deals are riddled with mistakes. Many are our fault. Sometimes we were too hasty, too aggressive with our numbers, too eager to rush into our next deal, but other mistakes some would argue were out of our control.

For example, rehabs going over budget or timelines must be the contractors fault. Missing an eviction court date and having to restart the process, blame the property manager. It's easy to look at these incidents and think they're completely out of your control. To borrow a rather cliche metaphor, as investors, we are captains of our investing vessel. Our team makes up the crew and at the end of the day, the responsibility and decisions bubble up to us.

As the owner of a business, you need to constantly be aware of issues before they turn into larger problems. In the prior examples, we could have recognized that our contractor was juggling too many projects and acted accordingly. We could have actively reminded our property manager that the eviction date was coming up. There were plenty of opportunities for us to correct course but we were either too busy or disorganized to recognize them. I look at these occurances as opportunities. What do I need to do next time? What signs do I need to look out for? By accepting my mistakes and improving my mindset, I can hopefully prevent larger future issues and smooth the path for doing more deals.

Unfortunately, there are times where the way you want to operate is fundamentally different than your teammate's. We've personally experienced this with various property managers where their processes work for their business, but in our view are inefficient, or worse, just don't work. In these cases, you should strongly consider moving on and working with someone aligned with your mindset and processes.

Find the giants

I've found that real estate investors have huge egos, some more understandable than others. It's all about who has the largest portfolio, the best cash flow, who's done the most deals. It's easy to trap yourself in the mindset that you are more accomplished than others. You surround yourself with people who are less impressive, to feel that you are somehow "better" at investing compared to everyone in your circle. Rather, look to surround yourself with people who are where you want to be.

In my experience, this makes me stay inspired and focused, constantly thinking about and reevaluating my goals. These mentors have gone through the difficulties of building their business and have made mistakes you won't even think to catch. By listening to what they have to say and observing their actions, you can accelerate your own growth. As the metaphor goes, you can see farther by standing on the shoulders of giants.

Finally, as a quick note, Kat and I are huge advocates for finding an accountability partner. Someone who will regularly check in on you and help you keep your commitment to investing. This person doesn't need to be a giant but arguably are more instrumental in your personal development.

Conclusion

I hope that this series was helpful and not only provided a rough roadmap for getting started with real estate but also my investing mindset. I want to emphasize that these are my personal thoughts about real estate investing. Many of these questions and thoughts were personal ones that I carried with me through my investing journey. I tried to shape my strategies and deals around my investment goals and constantly adjusted and readjusted my course. I accepted that mistakes will happen and I resolved to learn and grow from them. Investing is a journey and there will be ups and downs. Embrace that and trust the process. Trust the numbers.

For next steps, try to start growing your network. Reach out and find a mentor, connect with peers and be an accountability partner. Finally, reach out the Kat and me and schedule a time to connect. I'd love to talk and see if I can help you in any way.

As always, if you have comments, questions or want to chat, reach out using the links in the footer. If you enjoyed this content and want to get notified when we publish a new post, use the mail list form below to subscribe.

Your First Deal

Getting Started in Real Estate 4/5

You can write dozens of offers, go under contract multiple times, yet never close on a deal. Why? Is it just bad luck that there is always some deal breaking issue? Possibly. But you might want to reflect and ask if you are unconsciously sabotaging yourself. Rather than talking about the process of closing on a property, I want to talk about the investing mindset and pushing deals through to the finish line.

The investor mindset

The mindset you approach each and every deal with is crucial to your success. How much do you trust your numbers? How much do you trust your team? How good are you at navigating a deal when things go belly up?

Almost no deal lines up perfectly with your pro forma after completion. There are plenty of places where things can and will go wrong. Even before you close, your numbers can quickly start falling apart. Your inspection can turn up unexpected costs or the general contractor you've been talking to is unavailable and you need to find someone more expensive. Maybe your property manager thinks the scope of work needs additional items to hit the expected rents. What is the right mindset to adapt and successfully close?

If Kat and I had an investing phrase, it would be "if the numbers work." On the surface, it sounds like a no brainer. When you find your returns slipping and the deal failing your criteria in some way, how do you make the "go" or "no go" decision?

When I was getting started, I was afraid of buying a bad deal. I ran the deal numbers very conservatively and was not willing to explore adjusting the numbers to reflect a higher risk tolerance. If the deal no longer hit my rigid numbers, it wasn't a deal for me. I provide an example with numbers below of a deal I passed on. With experience, I can reflect and say that my problem was not understanding my numbers and the amount of risk (or lack thereof) that I had built into the deal.

Understand how your numbers work

I don't mean understand what cash-on-cash means or ROI or how much money you're spending. Understanding your numbers does not mean necessarily understand your criteria. It means knowing how each number affects the "go" and "no go" decision and what is "deal critical" versus "nice to have."

I imagine running my numbers akin to turning various knobs. Pushing the rents up $50 can boost the cash flow just enough to hit the minimum of what we're looking for. Is that $50 increase realistic looking at comps? Perhaps. On the other hand, what numbers are unrealistic to try to control? There's no point stressing over the rate or the exact amount to set aside for maintenance and capex (There's some discussion to be had over what to set aside but most people find a value and stick with it). In addition to all this, adjusting one number can in turn cause your other numbers to change. A classic example would be doing flip vs rental grade finishes. This changes your ARV, rents, and a whole host of other numbers.

Here's a good exercise. For each number that you can adjust, take the time to do the following steps

1. Would adjusting this number change your decision to buy or not buy? To what degree is the deal more or less appealing?
2. How much control do you have over this number?
   • You probably don't have great control over the average vacancy or current trending mortgage rates but you can control rents and rehab scopes.
3. How are you determining this number?
   • For example, some budget the maintenance and capex at 5% rent a piece. Does this number make sense?
4. How does adjusting this number impact your other numbers?
   • For example, larger rehabs can mean more things are replaced. This can translate to reduced maintenance overhead and capex reserves for the first few years. Additionally, a recent rehab can improve rentability.
5. What numbers and adjustments are "no fly" zones? What should you never adjust past a certain point?
   • This is important, make sure that you clearly define your "no gos" and don't compromise on them. These "no gos" should be based on rational decisions and research.
6. At what point will adjusting the numbers be taking on too much additional risk?

The goal of this exercise is to start thinking about your criteria and numbers as a series of knobs that can be adjusted in various directions to achieve the same result - getting the numbers to work and closing the deal. At the same time, the more you fiddle with the numbers, the closer you get to the line that separates a deal and a disaster. If you understand your numbers, you'll not only run deals faster but also be more creative and capable of closing them.

How risk-averse are you

Your risk tolerance will play a big role in determining your cut-off point that separates an ok deal from a "no go". This varies from person to person and will change with experience. By adjusting your numbers to make the deal work, you're trimming fat off the deal and adding potential risks. Unfortunately, this is often necessary to get a deal to the closing table.

When we were starting, we adjusted our numbers less and therefore ended up building larger returns into those deals. These deals had less risk but were also much more difficult to acquire. In doing so, we passed on dozens of solid deals that would have worked. As we've gotten more experienced, we are more confident in our process and numbers and are willing to take on more risk. This is our current investing mindset but find something that works for yourself.

My "first" deal (but not really)

My first deal we got under contract would be a great example of hindsight being twenty twenty and what happens when you're too conservative with your numbers. 2428 Sickle Rd, I still think occassionally about this one.

This was a 3/1 tri-level with potential to turn it into a 4/2. On paper, it looked like an amazing deal. It was in a great rental neighborhood, minimal crime, and more importantly a perfect BRRRR. The only downside was the relatively poor cash flow due to having a suboptimal rent to price.

Initial Pro Forma	Amount	Final
Purchase	$55k	Cash flow	$72/mo
Rehab	$25k	Left in deal	+$2k in pocket
ARV	$115k	Cash on cash	inf.
Rent	$1050

Given this was our first deal, we had three contractors bid on the price. None of the numbers were close to $25k. We got two $33k bids and one $55k. The first hurdle, this was not a concern as the deal still hit our 12% minimum cash-on-cash.

Post SOW	Amount	Final
Purchase	$55k	Cash flow	$72/mo
Rehab	$33k	Left in deal	($6k)
ARV	$115k	Cash on cash	15%
Rent	$1050

Here's where things started to get fuzzy. Our sewer scope report came back with a huge hole in the line. The cheapest quote to replace the line was $10k. This made our return look significantly worse because we were leaving more money in the deal and the property didn't have great cash flow.

Post Sewer Scope	Amount	Final
Purchase	$55k	Cash flow	$72/mo
Rehab	$43k	Left in deal	($16k)
ARV	$115k	Cash on cash	5.5%
Rent	$1050

We did the standard back and forth with the seller, asking them to cover the $10k unexpected cost of the sewer line repair. They offered to meet us halfway at $5k concessions which put the deal as follows.

Closing Table	Amount	Final
Purchase	$55k	Cash flow	$72/mo
Rehab	$38k	Left in deal	($11k)
ARV	$115k	Cash on cash	8%
Rent	$1050

If you put this deal in front of me today, it's a done deal. There are so many places to push the return that I was too risk-averse to consider. Here are a few of my options:

1. Adjust the rent: Pushed the rent to $1100 for a 12% return or $1150 for a 15% return. Even if the rent could not be pushed this year, we would have the opportunity to increase it down the line.
2. Adjust the taxes: Marion County taxes non owner occupied homes at 2% tax assessed value. Because of this, we were running our tax amount at 2% of $115k because we were concerned about the worst case. The assessed value was $80k. Realistically even with a 10% increase, we would be nowhere near the $115k taxable amount. Using 2% of a more modest $90k assessed value would have yielded 13% returns.
3. Adjust the ARV: This one is somewhat out of your hands but still a valid case to consider. When you're doing such a large rehab, you can afford to be more aggressive with your comps. The home will show better and the newer finishes will be reflected on the appraisal report. While increasing the ARV to $120k actually lowers the return slightly (7.7%), does it really matter when you are only leaving $7k in the deal? You've gained the 25% forced equity, equivalent to $30k.

Starting out, I was afraid of buying a bad deal. I was constantly looking for a home run and making mountains out of molehills as a result. I scrutinized every problem and did not understand my risk tolerance or how to adjust the numbers. In reality, pushing the rents or adjusting the taxes would not add a significant amount of risk. Rather, I had built far too much safety into the deal, even for someone who is very risk-averse. I didn't truly understand how recent rehabs may influence rents or vacancy. Instead of having the mindset of making the numbers work, I had the mindset of not buying a bad deal. As they say, hindsight is 20/20.

The importance of the first deal

Not every deal needs to be a home run and the majority of your deals won't be. It's a huge milestone to close on your first deal and get to first base. This is especially crucial when it's your first deal because it signals to your team that you are serious about investing in that market. Not only that, it opens up the path to testing the rest of your team and processes. Up until then, the only truly tested member of your team will be your agent.

Conclusion

Get into the mindset of doing what needs to be done to close on your first deal. Understand your numbers and learn what knobs you can and can't turn. When you do walk away, reflect on what made you walk away. Be aware of when something is a deal breaker because you can't take on more risk versus when you're looking for reasons the deal won't work. If you're approaching deals with the mindset of making them work and you understand your numbers, you'll be more creative and find that the "mediocre" deals look a lot more attractive.

Homework

For every deal we closed on, we wrote offers for a dozen and analyzed countless more. When the opportunity does come around, make sure you are prepared to act quickly. Understand your numbers and what makes a deal "go" or "no go."

1. Review your numbers. See the section "Understand how your numbers work" above.
2. Run deals every day. Set up Redfin and Zillow alerts. Have your agent put you on an MLS search. Get familiar with the neighborhoods and make running numbers a habit.
3. Start writing offers. If you're not writing offers, there's no chance you're making it to the closing table.

A word about turnkeys -- Despite the negative associations investors have with turnkey companies we personally know investors who got started buying a turnkey property. In a way, it makes a lot of sense. Getting started, there are so many variables to consider that it can get overwhelming. Turnkey properties allow you to reduce that and focus on building a solid relationship with two key members of your core team, your agent and property manager. They serve as a halfway point where you can stabilize and better understand the market before fully diving in.

As always, if you have comments, questions or want to chat, reach out using the links in the footer. If you enjoyed this content and want to get notified when we publish a new post, use the mail list form below to subscribe.

Building a Team

Getting Started in Real Estate 3/5

You have a market and a strategy in mind, how do you start putting the pieces together? The answer is you need a team. A team who you trust and who are far better than you in their specialized field. Without a competent team, you will find yourself rolling the dice far more than you'd want.

There are plenty of resources that walk you through the vetting process. We particularly like David Greene's detailed blueprint in his long distance real estate investing book. While I could use this post to summarize his methodology, it would be a poor substitute for actually reading the book. Instead, I'd like to use this post to explore why finding the right team is the single most important thing you will do in real estate.

Why does it matter?

Why does it matter who your agent or general contractor or any other member of your team is? You're the one making the decisions, don't you just need someone who will do what you ask?

The truth is that if you build your team right, they will be there to fill in the gaps in your knowledge. They will be there to tell you what cross street to avoid and what street to buy on. They will be there to tell you that the deal is crap even though it looks perfect on paper. If you find the right people, you'll find your investing journey much easier.

You are not going to be the expert at finding propeties, the best at managing a rental or ensuring a flip is progressing on schedule. Why would you be when your agent, PM, or GC does this for a living? No, your superpower is going to be growing your business and finding the right people to execute on your vision. Lean into that.

I seriously cannot reiterate how important it is to find the right people, especially making sure to do it properly when you get started. Once your process is in place, it becomes more and more difficult to adjust on the fly. Your team is there to make things easier for you. They will ensure your processes are running smoothly so that you can spend your time on what YOU are best at. Don't cut corners or your future self will not think kindly of present you.

In no way are we experts at putting together a rockstar team. Similar with any passion project, real estate requires constant self-reflection, education, and improvement. Kat and I are constantly learning from our own mistakes.

Trust but verify

I've spent the last section telling you to find the right people and trust what they tell you. Unfortunately, it's a bit more nuanced than that. At the end of the day, it is still your responsibility to verify what they're telling you. They may believe it but that doesn't always mean they are right.

If our agent or PM were to tell us not to invest on a certain street, we would almost always listen to them. If they told us our ARV or projected rents were off, we'd ask them to provide the numbers to support their opinion. When there's a significant difference in expectations, it typically indicates some problem in the process. Maybe your agent will have more recent comps or your PM will have a non-public facing database. Or going the other way, maybe they missed the comps you are using. A difference in opinion is an opportunity to understand what we're doing differently that causes us to reach different numbers. This allows us to recalibrate and ensure future analysis is done properly.

Don't get upset if your team member told you something that ended up being untrue when you could have gotten a second opinion. Everyone makes mistakes, the most important thing is catching and learning from them. Trust what you're told but verify and mentally file it away so that it's available next time.

Building a relationship

Another unfortunate truth is that it's going to be difficult to build a team when you're just starting out. You're a little fish in a very very big pond. Everyone is looking for a rockstar agent but that agent is probably spending the majority of their time on their rockstar investor. For that great PM you've heard about, why should your one property portfolio get priority when your PM has an investor with fourty doors?

Instead, think about finding a "good" agent who is hungry to grow and expand. It may make more sense to work with someone who believes in you and will dedicate their time to your success. The key question is how do you convince someone to seriously work with and for you?

The vetting process is not a one-sided affair. Just as you're there to make sure they tick all your boxes, they are checking boxes on their own end. Real estate is a relationship based business and it's incredibly important to build good rapport with your team members. Respect goes a long way. People will naturally prefer to work with who they like.

Your responsibilities to your team

Just as your team has responsibilities to you, you have the same to them. You're the horse they hitched their cart on and that means that you need to contribute to their success as well. I'm going to break up this section and walk through some of the more important responsibilities I see myself having with my team.

Show them respect

By respect, I don't just mean it in the conversational or relationship sense. While that is important, it is also necessary to acknoledge everything else they do for you.

They are putting in effort and time to run numbers and provide opinions. Make sure you're also doing the same. Before you send that listing to your agent, consider sending your projected ARV, renovation numbers and comps. This signals to them that you respect them enough to not want to waste their time unless you believe the deal is worth their time as well. Show that you respect their time, knowledge and effort.

Have productive conversations

When you disagree, be open to the fact that you may be wrong. The discussion does not need to be adversarial, instead frame it as collaborative and educational. By the end, you both should walk away with a better understanding of how the other person comes to their conclusions and can therefore be faster on the next deal.

Make them a lot of money

At its core, your team prioritizes working with you because you make them money. Our agent likes to say he's the only agent who will talk us out of buying a deal. While that may be an exaggeration, the sentiment is generally accurate across the industry (and to be frank, all industries will have this problem). Your team makes money even when you lose money on a bad deal. For them to talk you out of a deal, it means they believe long term you will continue making them money. It indicates that they see the long term future of the relationship and are looking out for your best interests.

Say thank you

Finally, make sure to thank your team. Take them out for a meal, wish them happy birthday, get to know them. Money may be a great motivator but there are plenty of intangibles that create a great relationship. Respect, likability, friendship, etc. After all, we're all human.

Conclusion

By the end of this post, you won't have the tools to find and vet a team. In fact, even after reading David Greene's book, you won't have the perfect process. Instead, you'll understand the mindset that goes into building a great team. Personally, I think that that's pretty important. If I had to distill our learnings into one paragraph, it would be as follows.

Trust but verify. Take the time to speak to each potential member of your team on the phone. Do your personalities and business styles match? Do you respect and understand each other? Just as you are counting on your team members to make you money, they are counting on you to do the same for them. Constantly iterate on your process and identify failures. Was it an isolated failure or something that can happen again, and if so, what can you and your team do to ensure it never happens again. Commit to building a long term relationship and constant improvement. And finally, if it isn't working out, don't be afraid to move on.

Homework

Don't expect to be able to find and vet a team quickly. Plan to set aside at least two months to read, learn and start the process. This should be a rough blueprint for how to start.

1. Read David Greene's book, particularly the chapters around vetting various members of your team
2. Write up a blueprint of key questions based on the book.
3. Reach out to investors and professionals in the market (see previous post). Ask for recommendations for team members and start vetting them

As always, if you have comments, questions or want to chat, reach out using the links in the footer. If you enjoyed this content and want to get notified when we publish a new post, use the mail list form below to subscribe.

Researching and Determining a Market

Getting Started in Real Estate 2/5

You have a vague idea for what you want to do in real estate, but where should you buy? There are hundreds of markets in the United States alone, how can you be sure you're investing in the best one?

Best places nationally for real estate investment right now?

I see some variation of this question all the time and it almost never sparks a meaningful discussion. Everyone's understanding of "best" depends on their investment criteria and this makes for wide sweeping opinions that other investors roll their eyes at. Before you start gathering opinions, you need to first define your strategy and criteria.

Some of this ties back with the previous post about identifying your investment goals and target strategy. Your investing "theory" will form the basis of your market search. With that in mind, ask yourself:

• Are you comfortable investing out of state or does it have to be within driving distance?
• What strategy are you targeting? (e.g flipping, short term rentals, long term rentals, storage, brrrr, etc...)
• Are you looking for appreciation or cash flow?
• Do you want to buy single family homes or multifamily homes?
• How much do you have to invest?
• What return are you looking for? You can quantify this as cash flow per door, cash-on-cash, return on equity, or some other measure - just keep it consistent.
• Are your previous answers reasonable when considering them all together?

People are more likely to participate and provide thoughts when your market criteria is well defined. Something like the following drives the conversation far better than sounding utterly rudderless.

"I am looking to invest in single family BRRRRs out of state. Ideally the market has moderate appreciation at or above inflation rate and solid $150/mo cash flow per door. I'm looking for a 12% cash on cash and have $100,000 to invest. What markets are you [other investors] able to hit those numbers?"

If you ask around and start looking for keyword searches that match your market criteria, you will quickly see that some markets are mentioned more often than others. We suggest starting with BiggerPockets and setting up keyword alerts and searches. The more precise your criteria, the smaller your list of potential markets. It is best to start narrowing down markets before you spend significant time diving into the nitty gritty details.

Market Research

Let's say you now have a short list of markets, even though you've managed to eliminate most of the country, you still need to whittle down the list to one or two finalists. You've done as much surface level research as you can, what you need now are the numbers. The goal is to use metrics to gauge market health and discard markets that are weaker in areas you care about. When Kat and I were doing our initial market research, we had nine markets and a laundry list of potential metrics broken into major categories. Here are some examples of what you can consider.

Demographic

1. Average wage
2. Average age
3. Average education
4. Population growth
5. Poverty rate
6. Percent of population that own a vehicle

Employment

1. Employment rate
2. Top industries
3. Top industry growth
4. Average commute to work

Real Estate

1. Median property value
2. Property value increase
3. Median rent
4. Rental rate increase
5. Property taxes
6. Percent of homeowners vs renters
7. Number of new build construction permits issued

Other

1. How landlord friendly is the market?
2. Average crime rate and type

You can easily debate yourself and others in circles on what metrics are stronger indicators of market health. Instead, try to pick metrics that make sense in context to your investing strategy. For example, Kat and I cared most about cash flowing long term rentals, so we wanted to determine markets with the best rent-to-price ratio (one percent rule), friendly landlord tenant laws, all in price of sub $100,000, brrrr-able, and good growth. We didn't care as much for property value appreciation as long as it kept up with inflation.

Thankfully if your market is in the US, the government collects this data and makes it available to the general public for free. There are a few sites that display the data within a friendly UI, we used Data USA. One thing to note is that government data denotes markets by Metropolitan Statistical Areas (MSA). MSAs are defined by the U.S. Office of Management and Budget as having at least one urban area with a minimum population of 50,000. More broadly, you can think of an MSA as a region consisting of a city and surrounding related (societal, economical, etc) communities.

Just be sure to keep in mind that data is gathered and reported on an MSA level but your market may be more specific. As an example, the MSA containing Indianapolis also contains the surrounding submarkets Carmel and Anderson. If you are more interested in the major market [Indianapolis], the data should be relatively accurate as Indianapolis is the main metropolitan market. If instead you are interested in a submarket [Carmel, Anderson], the MSA data can be skewed and may not accurately represent those markets. You may need to look into other data sources more specific to your submarket.

Once you know what market metrics you care and you have all the numbers on a spreadsheet, you can quickly start crossing out weaker markets until you're left with three or fewer choices. If you're lucky, you'll have one standout market. It's time to start networking and getting some boots on the ground opinions.

Networking

You're in the final stretch. The goal is to network and talk to people in your chosen space to get an understanding of whether the actual numbers match your research. By talking to investors and real estate professionals executing your strategy (and many others), you'll have confidence that your investment goals and criteria are possible.

Use BiggerPockets to determine the market expert that shows up or is referenced in every conversation. Is there a popular investor focused agent? Is there an investor who is constantly sharing knowledge and insights? Reach out to them and introduce yourself. Make sure to prepare a loose script so that your conversations are productive and comparable. Most importantly, show that you've done your homework about the market. Seasoned investors and professionals are busy and want to see that you've taken the initiative to do some legwork. You'll find that showing your research, thought process, and due dilligence will open more doors and show you're serious about your investment goals. The more Kat and I have learned and grown, the more we realize that people are really passionate about real estate. We all love to talk shop and are happy to share what we know.

At the end of the day, it's entirely likely that your final markets are still neck and neck. That's ok, we had the same problem when choosing between Indianapolis and Kansas City. The truth is that both markets would have worked out, we just needed to make a decision and commit. We encourage you to do the same. In fact, your decision can be as arbitrary as flipping a coin. In our case, we chose Indianapolis simply because I went to Purdue and had some friends in the area. Don't get paralyzed with indecision so close to the finish line.

Homework

Hopefully this post lays out the steps for how to research and determine your target market. By the end, you should have a chosen market and confidence that you're in the right space. To help you get there, I've come up with a few assignments.

1. Form your market criteria statement.
2. Using your statement, do surface level research and create a list of twelve or fewer markets.
3. Identify what metrics matter most to your investment goals. Remember that these can be based on well-thought-out personal opinion.
4. Compile market specific numbers and pick your finalists.
5. Reach out to investors and professionals in your final markets.
6. Finalize a market.

As always, if you have comments, questions or want to chat, reach out using the links in the footer. If you enjoyed this content and want to get notified when we publish a new post, use the mail list form below to subscribe.

Identify Your Investment Goals

Getting Started in Real Estate 1/5

A question we often get asked is "How can I get started in real estate?" Often times, people are aware of real estate and actively educate themselves but are still lost on where to begin. This can be due to a variety of factors but usually the heart of the matter is that there is so much you need to know to get started. With this five part weekly series, we will try to break down the learnings from our own journey in the hopes that it makes your climb less daunting.

1. Identify your investment goals
2. Determine a market
3. Build a team you can trust
4. Complete your first deal
5. What next?

Our experience is primarily based on on-out-of state long term rentals but most of our learnings will still apply if you are doing something different. Many of our processes were based on David Greene's Long-Distance Real Estate Investing: How to Buy, Rehab, and Manage Out-of-State Rental Properties and then further refined to fit our personal needs. We plan to share our high level core learnings but the book will provide additional nitty gritty details. We highly recommend using the book as a template for developing your own processes.

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Identify your goals

Why start here?

There are countless ways to get started in real estate and no one has mastered everything. The general partner (GP) you see doing huge 100+ multifamily syndications may have no idea how to underwrite and put together a storage facility deal. It can take a lifetime to try every real estate investing strategy, let along master them, and that makes it very difficult to know where to start.

In my personal experience, when you're starting at the bottom, it is easy to get overwhelmed and lose motivation. By narrowing down your goals and therefore your initial investment strategy, there is a significantly smaller subset of things to learn and master.

Your goals will also shape your initial strategy and growth. Someone who's interested in cashflow with low to no money down may become an expert at identifying and executing short term rental arbitrage opportunities. Or they might learn about cold calling and buying seller-financed rental properties. If someone else is interested in fast growing appreciation, they may go down an entirely different path.

Identify your goals and use them to direct your energies. Focus your efforts and energy on one goal and you will find yourself growing faster than you thought possible. Build a solid foundation and then build outwards.

What to consider

Goals

As obvious as it is, I dont think many people take enough time to think about their goals. So many people want to buy in the "hottest" market or they want to buy a rental... but why? I don't mean that in the way where those strategies don't work. Instead, how does buying a home in a hot market or buying a rental bring them closer to their goal. Have they actually chosen the ideal strategy for themselves?

Imagine where you want to be in 10 years. What do you need for this to happen? As an example, if you want live very comfortably, you might say you need $20k a month in disposable income. Someone else may imagine that their children's college funds are 100% funded. Whatever your 10 year goal is, identify it and what you'd need if it were right now. Hold the thought, we'll revisit it in a bit.

Time and Energy

Now let's consider how much time you're able to put aside every week to pursue your goal. It isn't realistic to think you can be a general contractor (GC) overseeing your own rehabs while holding another full time W2 job. Some people may be able to do it but consider your situation and come up with a realistic number.

I consider energy to be separate from time. Some people may be looking for a very passive strategy while others need to be calling and coordinating every little part of their operation. How much effort are you willing and able to put into the time set aside? Are you able to floor the gas and then bring the same level of effort to your full time job?

Putting it together

At this point, you should have an idea for you want to be in 10 years and how much time and effort you are willing to devote to getting there. Just like how companies plan their roadmaps, you should create one for yourself. As an example, I'll fill it in with my personal goals.

Let's say I want to be financially independent outside of my W2 income. To do this, I decide I need an alternative income stream of $6k a month.

Note that what I consider medium energy or risk, you may consider low or high. What really matters is having a consistent and reasonable view of what is achievable based on the time and energy spent.

We start with what I very creatively call a "10 Year Roadmap".

Timeline	Goal	Needed to achieve goal
Year 10	Financial Independence	$6k per month
Year 5
Year 1

Logically, we could fill in the remainder of the columns as follows assuming linear growth.

Timeline	Goal	Needed to achieve goal
Year 10	Financial Independence	$6k
Year 5	No longer fully reliant on W2 income	$3k
Year 1	??	??

From this point, you should be able to determine what strategy may work best for your goal. You need to ask yourself questions such as whether your goal is more cash flow focused or appreciation based? Take the time to understand your goal and underlying motivations.

What options exist?

Once you understand your real estate investing goals, it becomes easier to filter out strategies that don't fit your requirements. For example, I may not look at flipping homes if I think there is significant risk and effort involved. Instead, I might look towards rentals.

Read forums, listen to podcasts, go to meetups. Expand your understanding of what's possible and keep in mind the effort and time you are willing to spend. Is it enough?

At the end of the day, the most important thing is to pick something that aligns with your goals and run with it. There is no right answer, if it were that simple, every investor would be doing the exact same thing.

Final steps

Once you've determined a potential road, breakdown your 1 year goal into more achievable chunks. What can you accomplish in 1 week or 1 month to reach your 1 year goal.

In "The 12 Week Year" by Brian P. Moran, he advocates for working with 12 week goals in mind to avoid low productivity and increase urgency. This is very similar to how programmers work in sprints. Goals and deadlines expand to the alotted time. By setting shorter and more achievable goals, you are able to push yourself further with less complacency.

Continuing the example earlier, I decided that I wanted to build a rental portfolio. With this in mind, I can finalize my "10 Year Roadmap" and break down the first year into managable sprints.

Timeline	Goal	Needed to achieve goal
Year 10	Financial Independence	$6k
Year 5	Build a sizable rental portfolio (10+ properties)	$3k
Year 1	Buy my first property	??

Now let's set short term achievable goals.

Timeline	Goal
Month 12	Close on my first property
Month 7+	Start writing offers regularly
Month 5+	Start networking with investors and building a team in my chosen market
Month 3+	Finalize a market
Month 2	Start researching a market
Month 1	Continue reading and accumulating knowledge, start identifying criteria for markets
Now	Find resources and books

Motivation

Look over what you've come up with. Are you motivated to get to work? If not, you need to ask yourself why. If you're not excited about the investing strategy, understand why and reevaluate if it is the best for you.

If you're the type of person who needs motivation from external sources, go to meetups, find an accountability partner, listen to a podcast, ask a friend to check in on you, there are plenty of options.

Real estate investing returns are tightly coupled to the effort put in. If you aren't putting your 110% forward, why should you expect to get 110% back?

Homework

You've made it to the end... now what? I challenge you to do the following things and take your first step.

1. Identify your 10 year goal
2. Create and fill in a "10 Year Roadmap" tailored to your goals.
3. Go to a meetup or talk to investors.
4. Come up with 3 investing strategies that can help you reach your 10 year goal.
5. (Stretch) Create your "1 Year Roadmap"

As always, if you have comments, questions or want to chat, reach out using the links in the footer. If you enjoyed this content and want to get notified when we publish a new post, use the mail list form below to subscribe.

BRRRR Deal Analysis

The goal of this deal walkthrough is to provide an idea for what a realistic BRRRR deal may look like. The word realistic will depend on the investor, their criteria and the market. Some investors will be more concerned with pulling out their initial capital and be okay with a cash flow neutral property. We prefer looking at cash flow and cash-on-cash rather than recovering the all-in. I’ll walk through the entire BRRRR process and finally review performance and learnings.

If you’re not familiar with BRRRR, it has likely been a real estate investing strategy since the mortgage industry started. It was finally given the “sexy” acronym by Brandon Turner and simplified and made accessible by David Green in his book, Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental. This BiggerPockets article by David Greene is a good starting point but both Kat and I highly recommend the book.

By the end of this post, I aim to educate and encourage you to take the first steps into the real estate investing world. You may have different investment criteria compared to us but it’s a diverse market with a niche for everyone.

BiggerPockets Glossary of Terms.

Timeline

Overall, the project lasted 6 months. Typically, a conventional loan will require a 6 month seasoning period before you can refinance. We have since discovered ways around this requirement. I’ll list some numbers below and will go in depth in the following sections.

11/16/19: Listed for $45,000 (FSBO)
11/17/19: Pending
12/02/19: Purchased for $37,000
   |
   |----: Rehab for $28,000, All in for around $68k
   |
02/15/20: Listed for $970/mo
04/07/20: Rented
04/24/20: Appraised at $79,000
05/20/21: Listed for $1,100/mo
05/27/21: Rented
06/03/21: Refinanced at 75% LTV, 30 yrs at 4%. Monthly $283

B · uy

We had been looking for properties in the neighborhood as we liked the rent to price ratio and rental demographic. Prior to the listing, we were already familiar with expected rents and after market value (ARV) for properties in the area. This allowed us to quickly run numbers and come up with an immediate “go” or “no go” decision.

Listed

When this deal was listed, we immediately had our agent at the property the same day. From her walkthrough, we didn’t see any structural issues with the property. It needed a refresh all around but the foundation was solid and the walls were in good condition. Our general contractor was able to walk the property shortly after and quoted us around $25,000 to get the home to a rent ready state.

We went in with a $40,000 cash offer and appealing closing timeline and the seller accepted.

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The entire home was incredibly dated

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The kitchen needed to be entirely redone

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As you can see, the home was in a state of disrepair

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The bathroom was the best looking part of the home

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Even the shed had seen better days

Inspection

We had an inspector walk the property and he didn’t see anything beyond what our GC had mentioned. The property needed a new roof and had an outdated breaker box but the foundation was solid. These were all items that we had expected and accounted for in the original offer.

Similar to many aging American cities, most of the older sewer lines connecting homes to the main sewer line are made from clay. Over time, roots can create cracks and eventual breakages in the line. While Indy’s utility company is responsible for the main line, the portion from the house to the main is the owner’s responsibility. Due to this, we always get sewer scopes done. The sewer scope revealed a broken sewer line that would cost $3,000 to replace.

At this point, it was relatively easy to negotiate the seller down from the $40,000 to the final purchase price of $37,000 given the major structural issue we discovered.

R · ehab

We prefer doing larger scale rehabs because it allows us to control most aspects of the home. When everything in a home is brand new, you aren’t thinking about a 15 year old furnace potentially dying. On this rehab, while the home had good bones structurally, most of the interior needed to be redone. Some of the major items were:

• new roof

• rewired and updated breaker box

• replumbed with pex

• new kitchen

• paint and vinyl plank

• new sewer line

We also ended up having to do a new AC and water heater as the existing ones died due to old age. At that point, what else can go wrong?

(Sorry about the photos in advance, our GC isn’t winning any photography awards in the near future)

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New paint and flooring throughout

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New cabinets and counters

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We were able to clean up the bathroom

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Overall a fresh look for the home

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Even the shed got some love

R · ent

Unfortunately, the rehab timeline put us square in winter when the least number of people are looking to rent. The property sat vacant for just shy of 2 months. Because the property was purchased with cash, there was no mortgage to pay during this time so we were only responsible for the small utility charges.

“If you want to do a few small things right, do them yourself. If you want to do great things and make a big impact, learn to delegate.” - John C. Maxwell

Real estate investing (business in general), is all about delegating the right task to the right person. Find what you do best and what you should be spending your time on and delegate the rest of the work. The entire rental process is handled by our property manager, we try not to interfere as long as they’re doing what we expect them to. We suggested the rent was $900, they suggested it was $970. That would have been $840 less per year, potentially more if the tenant continues to renew at a 5% rent increase.

This concept really extends to the entire process. Your operation is only as good as the weakest link - try to make yourself the weakest link.

R · efinance

We have a rockstar lender, his team is the best in the business for closing on investment loans (We’re happy to make introductions). Overall, this was a standard refinance. The appraised value came in at just above what we were expecting. $79,000 compared to the expected $75,000. The timing was also great as we were able to take advantage of the low rates.

$59,250 (75% LTV) at 4%, 30 year amortization

R · epeat

I’ll split this up into two sections. What the return was and my key takeaways.

Return

Money left in the deal

Purchase:              $ (37,000)
Rehab + Closing Costs: $ (31,427)
Cash-Out Refinance:    $  59,250  *75% of the appraised value
----------------------------------
Left in deal           $ (13,432)
25% Remaining Equity   $  19,750 
----------------------------------
Forced Appreciation    $   6,318  *The extra equity is forced through value add opportunities

Net profit

Rent:                  $   970
Mortgage:              $  (283)
Taxes:                 $    (5)   *Underwritten with $50 but kept the homestead exemption for Yr 1
Insurance:             $   (43)
Property Management:   $  (126)   *13% of the rent considering all the fees
Vacancy:               $   (78)   *Indy's average vacancy is around 8%
Repairs & Maintenance: $  (100)   *$50 apiece
----------------------------------
Net                    $   335

Cash on cash

Annual Net / Left in deal = Cash on cash
  $ 4,020  /   $ 13,432   =    29.9%

While we like to look at cash on cash (COC), it’s really best as a year 1 return calculation. It may make sense to look at return on equity (ROE) as you start to pay down the loan and see moderate appreciation. (I say moderate but covid has caused crazy appreciation across many markets). A year later, the property taxes went up to the expected $43/mo but we were also able to rent the property for $1100, a 16% increase. You can do the math, hint, it works out in our favor.

To provide some context on how COVID-19 affected Indy, we refinanced a property in the same neighborhood the same year in December for $105,000, 33% more than it appraised for in April. Some of that was due to getting lucky with the appraiser but no one could foresee the appreciation across the real estate markets.

Take Away

At this point in time, the market was not as competitive as it was in mid to late 2020 and 2021, however, it was still a huge boon to have gotten our offer in so quickly. It’s entirely possible that someone else could have put in an offer a day later that would lead to bidding and lower returns. We were able to make a fast decision due to a few factors

• Educating ourselves early on and knowing the neighborhood and prices very well

• Having the right people who could jump in immediately

• Offering attractive purchasing terms (e.g cash and a fast close)

In general, a lot of the work in real estate is done up front. We spent hundreds of hours educating ourselves, doing market research, building a deal analysis pipeline, networking, the list goes on. However, once everything is in place, it becomes very easy to rinse and repeat. The question is whether you want to continue doing the same thing or scale.

The first step is always the most daunting and often people get stuck. The industry calls it analysis paralysis. You know the numbers work but your mind may whisper, “It’s $70k… what if I’m wrong… what if I lose it all?”. One book that helped me was Set for Life by Scott Trench. He talks about saving money to take a risk, do something you wouldn’t normally be able or willing to do.

In my case, I framed my initial investment with this mindset. If I were to put $70k into a property and my numbers are wrong, the worst case is that I sell for a loss. Let’s say prices drop 20%, I sell for $56k and pay $3k in realtor fees. At the end of the day, I spent $20k for front row real estate education. For some, that would be too much but for me, it was an acceptable risk and helped me mentally get over the initial hurdle.