How to Strategically Select an Ideal Investment Property

Episode 170 March 28, 2024 00:21:23

Show Notes

Investing in real estate can be intimidating, but the right strategies will empower you to move forward with confidence. In this episode of The WealthBuilders Podcast, Karen Conrad Metcalfe and Frank Pulley discuss what to look for in an investment property. 


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Get ready to level up your real estate acumen so that you can avoid common mistakes and maximize every opportunity.



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Episode Transcript

[00:00:15] Speaker A: Hello and welcome to this week's Wealth Builders podcast. I'm Karen Conrad Metcalf. I have the honor and privilege of being the vice president of wealth Builders, working with Billy and Becky Epperhardt. And as you can see, we've got a brand new format. We are so excited to really be going into 2024 here with a video podcast. So we are just so thankful for all of you that have been downloading the podcast, and you can continue to just listen to it. But now you've also got the option of a video podcast, and I can't think of a better guest to kick off our video podcast with the Mister Franklin. Holy Frank. Welcome to this brand new Wealth Builders video podcast. [00:01:05] Speaker B: Thank you, Karen. I'm really excited about this new, this new format. So let's go for it. [00:01:12] Speaker A: Yeah, me, too. And we just, if you're listening to this, we just got finished with the Wealth Builders conference, which was February 16 to the 18th in Denver. It was an amazing event. Those of you that joined us, we are so grateful. And today what we're going to do is really get positioned to get into the real estate part of investing. And we've got a conference coming up in April. You can learn more about [email protected]. Events but today, Frank and I want to talk about what to look for in an investment property. There are certain things that you look for, and, Frank, there's a lot of exit strategies, too. So we're really talking to both beginning investors or people that want to get into investing and even some seasoned investors that are looking for the opportunity to pivot or even maximize their return. So, Frank, why don't you give us a recap on, first of all, what does the investment market look like today for rentals and maybe give people an introduction to what to look for in an investment property for either a short term or what we call a long term rental. [00:02:32] Speaker B: Okay. Well, I think the market is looking great for rentals. Not like right now. All over the country, there are pockets that aren't as great, but in most cases, it's great for rentals. And one of the reasons, because interest rates are high and a lot of first time homebuyers can't afford to buy a new home, and so they're, they're becoming renters. And that really is a great opportunity for a real estate investor. You just have to know what to look for. You have to educate yourself, and that's really important. And that, yeah, learn at the April real estate investors conference that we're going to have. So educate yourself, even if you're an experienced investor. Now, what do we look for in an investment property? Well, it depends on what our exit strategy is going to be. [00:03:29] Speaker A: It's going to be a short rental. [00:03:31] Speaker B: Yeah. It's going to be a long term rental. I mean, it's going to be a fix and flip. I mean, I think, Karen, those are all viable options, don't you agree? [00:03:39] Speaker A: They really are. They're really viable options. And I think now even more than ever, when a lot of people started with investing, the short term rental or the vacation rental wasn't so much in the mix. And there's actually a difference between executive rental and the vacation rental. But I think, too, going into a market, you know, there's different strategies in different markets, but also just based on cash flow and the needs of us as investors. You know, a mix of different types of properties is a good way to look at it, too. And so when we go into a market and we analyze a market, it's important to know what criteria to look for. And we want to find some, something that's viable in one, two. But it would be amazing to have three exit strategies going into it so that, you know, wherever the market might move in the process. If you're doing a burr, having to do some updates, or if the market changes down the road, that you can make a transfer or a transition from maybe a long term to a short term. So I'm just going to kind of repeat those points that you were talking about, frank, with the different types of properties and exit strategies. Strategies would be fixed and flips, long term rentals, short term rentals or vacation properties, executive rentals. Did I leave anything out? [00:05:04] Speaker B: I don't think so. I mean, really, the sky's the limit. You know, it's interesting because not too long ago, I did a couple of rehabs in Colorado Springs, and the market just kind of, it didn't tank, but it went down a little bit. And I wanted to get as much profit out of those fix and flips as I could. So what we did was we went ahead and rented them out for a year or so, and then the market came back. And also it was now a long term capital gains. We paid less taxes, went in, put a couple of $1,000 painting and cleaning things up and sold those right away. So it was a good thing we had those exit strategies, were able to make a ton of money on those versus not a lot of money. [00:05:51] Speaker A: Wow, that is so great, Frank. Congratulations, by the way, doing such a great job on those. But we've used the term exit strategies, and I just kind of had this thought that there might be some people listening that aren't really clear what we mean by that. So when we look at a property, can you kind of explain what those exit strategies mean and how you might just on a, you know, 30,000 foot view, might look at a property to determine what's the best in backups? [00:06:19] Speaker B: Well, it's like being locked in a room and you've got either one, two or three doors that you can get out of. And so, you know, the first door might be you fix up a property and you rent it out. But if that doesn't work out, well, maybe what you can do is you can make a short term rental out of it. Or the third door, you could make it executive rental. You do the same thing with a fix and flip. You can either rent it, short term rent it or executive rent it. And, you know, those are all viable options. They add protection to your investment because let's face it, the investments, if the numbers are right, they're going to be good. It's just that you got to make sure your numbers are what they actually are, not what you want them to be. [00:07:11] Speaker A: That's good. And I think, you know, most people, when they get into investing their first thought, and we agree, it's kind of the core of your investment portfolio, is the long term rentals. And that means a lease. Usually it's a year lease or longer. I mean, sometimes you might do a six month lease, but when looking at a property, frank, there are four things that we look at to help people to determine if a property will, will work with a long term rental. And can you go over that, those four criteria? And we can visit a little bit about each of them. And if you're listening, get your pad, a paper out and a pen and write things down because this is going to help you a lot. [00:07:54] Speaker B: Number one, the property should rent for at least 1% of the purchase price of the property. So if you have a hundred thousand dollar property, which you're tough to find now, they should rent for at least $1,000 per month. Okay. Number two, on single family homes, you should have a net cash flow, free and clear, after everything, of at least $300 per house. When you're purchasing the property, you should spend no more than two to four times the median household income for that particular area. And finally, you should have at least a ten to 12% cash return, which is also known as return on investment on each property. [00:08:45] Speaker A: Yeah, that's great. And we usually say like, I'll say ten to 20%, 12% is in there too. The more that you can get it towards 20, the better. But those are, there's a lot more that we look at in, within those parameters. But this kind of gets you started to just look around the areas that you're interested in and see if it fits the criteria so that you don't waste a lot of time driving around looking at properties. It's just a great way to get started and get a quick analysis. [00:09:17] Speaker B: Yes. [00:09:18] Speaker A: So just to share story, I'm sitting in South Lake, Texas today, and when we first started deciding we were going to invest in Texas, we first of all just looked around our neighborhood thinking like, wow, we wanna invest here. And as we started to look at the properties, they were nowhere near that 1% rule. Plus they were, you know, minimum investment was about a million dollars and we didn't wanna put all our eggs in one basket. So a way that you can quickly tell if an area does is not gonna work for that 1% rule is looking at a property here is about a million dollars. And then I went out on comma Zillow. There's different things your real estate agent can help. And saw that houses our size were renting for five to $6,000. So when you see that, that is a half percent to a 0.6% return, not a 1% return. So we traveled a couple hours south to a little town near Waco, Texas, and we were able to purchase properties still at that time for 140 thousand dollars. And our rent was 1400 to 1700 a month. Now there the 1% rule would be at 1400 a month. And that market worked for us. So when we visit with coaching clients or many of you that are looking at investing, we get a common question like my gosh, can we look somewhere outside of where we live? Because the numbers don't work and you absolutely can. And so frank, if someone is just wanting to analyze, just to see what type of markets could work, what are a couple steps that they can take to practically begin to dive in and see where they might start investing? [00:11:14] Speaker B: Well, I think you can use, I mean, gosh, we have so many resources now. I mean you've got zillow, which is good for sales. I wouldn't use this estimate so much, but it's good for determining rents and also sold properties., comma Redfin, these are all great sources and you can look at an area and take a look at what the pricing is in that particular town or neighborhood or whatever, and then go ahead and look at either the price of the house, is it within 1% or is the rent within 1%? Then I might check it on another website. If it doesn't, then I'm going to move to another area. One of the things, though, is if you find property or two, then keep investing in that area. It doesn't make sense to buy a property in California, which is unlikely, by the way. One in Arizona, one in North Dakota. I'd rather have a whole bunch in North Dakota where I can have control of them a lot easier. [00:12:19] Speaker A: That's really good, Frank, thank you so much for that insight. And so we kind of touched on the long term rentals, which is great. And let's just briefly talk about the difference between an executive rental and a vacation rental. And we do a lot of vacation rentals, and we have done executive rentals, too. So I'm going to describe a couple scenarios for you. Executive rentals are rentals that are usually about 30 days. And sometimes when people go and they look to buy vacation rental, the hoa is a minimum of 30 days. So this is a good alternative for you. If you are in an hoa, perhaps has those restrictions that you have to have the longer term. But what really a good audience for this is a lot of people do traveling nurses. If there's a business in your area that has executives that come in, that's a good opportunity. I'll give you a super example of that. Down in Florida, one of the areas we invest in is cocoa beach, which is right next to Cape Canaveral. And there is a SpaceX that is located there. And we were looking at properties and actually visiting with someone that had a really beautiful property on the canal, which was a very expensive luxury property, and they had just purchased a property right next door and were rehabbing it well on the outside. We know those numbers really well. And we knew, like, this is not going to work as a long term rental. And the vacation rental, while you can get the numbers to work, it kind of goes up and down. So we were just curious, like, what are you doing with these properties? And what the gentleman, gentleman shared with us is that the executives from SpaceX were renting out his properties and they were, you know, staying there when they were doing business and coming in from out of town and they needed more space. Well, that's a perfect example of somebody really tapping into an executive rental market. There's, like I mentioned, traveling nurses. We've had people in our properties that come in as engineers. They're not luxury properties, but somewhere to stay. But those are often built on relationships with the organizations, the companies. One of our friends in Denver owns an executive rental, and he doesn't advertise at all. He simply takes a sheet of paper with a picture of the property and puts it on a hospital nearby on their bulletin board. And his occupancy stays high. Vacation rentals, if you want to get into that market, we have a whole series on that. And I'm just going to touch at a very high level here for these purposes. But you want to look at those areas and check to make sure that the HOA allows it, that the community allows it, any guidelines you have to follow. And then we use a website called that really helps you analyze what the occupancy numbers are and what those projections would be for you. Plus, that is in no way a passive investment if you're going to be managing those on your own, ask me how I know. Right? Thank you, Levi and Carly, for taking care of ours, but that's just something to consider. And then the fourth one is. And. Go ahead, Frank. We're going to mention something about the executive and vacation rental properties. [00:15:47] Speaker B: Yeah, the executive rentals are great because actually, one of our real estate coaches, Mike Davis, just converted a property or two in Pueblo, which you wouldn't think is, you know, a good destination for that. But the steel market has opened up there, and so he has opened up a couple of his regular rentals for long term rentals. Executive rentals. Not long term, but executive. Where, you know, these executives, they don't want to stay in a hotel. They don't want to stay in some little dinky house. They want something nice. And so they're going to stay in the executive rentals. The beautiful part is that you can charge almost double the monthly rent than you would just for a regular single family home. The downside is you have to furnish it and you make sure that the furnishings are nice. But gosh, that's not that big a deal. And returns are unbelievable. [00:16:52] Speaker A: Yeah, that's good. And Frank, that brings up a really good point here, is that when you go in and look at a market, you might start out with a long term. I had to do that in Minnesota, actually. And then the market shifted. And then I shifted to short term to make the cash flow work. And that's exactly what you're describing. And that's the beauty of real estate. You are in control of your property. And so when you're aware of these things, you're able to look at it and say, what is the highest and best use of this property initially or down the road? Just like your first example of, we rented it out for a year and then we sold it. So let's just talk a moment here. We're just about out of time, but let's just touch on fix and flips. And Frank, if you were to provide a short list of things for people to look for to make sure that they go in strong and don't lose money on a fix and flip, what would that be? [00:17:47] Speaker B: Well, what you got to do is make sure you don't pay too much for the house. And in our coaching program, we have formulas and worksheets we can help run you through to make sure you're going to make a good profit. The other thing is, you got to know what that house is going to sell for fixed up in 30 or so days in that neighborhood. The other thing is, you got to know how much exactly your materials are going to cost. And then the final thing is, if you need to finance it, you need to put into place you know how much you're financing. And finally, your selling costs are going to be because you're probably going to use a realtor on the back end to sell it. [00:18:32] Speaker A: Yeah, that is so good. I mean, those holding costs can really, that's a lot of money. And if that's a miss, you know, that can really make a deal backwards for someone. Also, you know, with the market fluctuations a bit. I know one of the couples in our coaching family, they went in, they started a flip, and the market had changed so much that by the time they got it done, they were like a $60,000 step backwards. And so we can't predict all the things that are going to happen with the market, but that is why, and it all worked out well. Just so you know, we visited with them and, and they got through that situation just fine. But that's why those exit strategies on the front are important, so that you can move properties around a bit if you need to between the exit strategies. So this has just been kind of a high level introduction on things overall to look for. If you are someone that is interested in beginning real estate investing or maybe you've had a little experience in it and you want to take it to the next level, and I would encourage you to join us at the next real estate workshop, wealth Builders Real estate workshop in April. Again, you can go to events and get the details. But we keep those two pretty small group. We try to keep it at 100 or less that are actually there in person. You're also able to join us by live streaming, and we've got a special that's going to be coming out here shortly where you're going to be able to get in at a good price. And that will be available on the website. You want to get signed up as early as possible and you will meet a lot of people we get to visit with you. And really, it's a great place to either start or really build your real estate investing journey. So Frank, any final thoughts before we sign off today? [00:20:36] Speaker B: Well, the first thing I want to let everybody know, thank you for joining us today. You know, real estate is not rocket science. It really is a matter of knowing what to do and knowing how to do the numbers. But it's more than just trying to go out there and do it on your own because you can really make some, some bad errors and that could cost you. And that's why I recommend that you get educated and you can learn a lot more about it at our upcoming April real estate workshop. So thank you for joining us today. [00:21:09] Speaker A: And thanks all of you for joining us. Part of the wealth Builders family. God bless you and make it a great rest of the day.

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