Author: milliondollarmarine

One of the most frequent questions I get as an active duty military member and real estate investor is “How do you evaluate rental properties in a military town when income levels are so varied and how do you know you can get it rented when you leave?”  The answer is a long one, but one that is extremely easy to identify, in my opinion.  I believe I have come up with a plan that takes almost all of the emotion out of the process and allows me to make a very informed decision to maximize my opportunities.

My plan has always been to buy a property to live in and then turn it into a rental when I leave.  However, this doesn’t (shouldn’t) affect my process.  If could make it more difficult, because we all want to live in a perfect house in a perfect neighborhood with a perfect yard, etc……Stick to the numbers and it will keep the emotion under check!

First, get to know the BAH rates.  Not just for you, but for your target audience.  When you leave, who do you intend to rent to?  Are you looking for two or three E-4s or E-5s to rent your place or do you want an E-7 or O-3 family.  Once you determine who you want to rent to after you leave, then you can start to work your numbers.  One thing that is really nice about this method is it takes a lot of the emotion out of the deal very early on.

After you identify your target renter, look at the market and where you want to find a property. That will be driven by what commute you are willing to make and what commute you think your tenants will be willing to make.  During this step, I would also reach out to folks at the base that you are joining.  Ask them where the (insert your desired rank here) are living.

Once you identify your target area, start running the rental comps.  Figure out what the average rent price is per bedroom, or square foot, to understand what service members in the area are paying for housing.  Keep in mind that there will be variables which will affect this number, i.e.: garage, yard, pool, etc…  You can also reach out to a property manager for this step.  I would avoid asking your real estate agent as they can be conflicted.  Reach out to a property manager that you get recommended by a fellow investor and ask them how much you can assume to get in rent.

Now that you have identified the best area to purchase, and rent comps in that particular area, you can work your numbers backward to figure out what you can spend in order to get into that area and still maintain your goals on the backside.   There are things that you will want to consider when buying even though they won’t be a factor until you leave.  For example, you need to factor in a monthly property management fee.  Even if you can’t possibly imagine needing a PM, plan for it.  It will cost you 8-10% of that monthly rent.  Capital expenses are a big one that people usually forget.  Plan for 10%.  Does this area require an owner to pay any utilities?  If so, factor that in.

Now that you have identified your target renter, target area, figured out what the rental comps will be, and worked your numbers backward to figure out what you can pay, you can start shopping for properties in that price range.  What you need to remember, and I know this from experience, is that this should not be emotional.  Many folks move to an area and want the perfect home in the perfect neighborhood etc…  If this is truly an investment strategy for you, than there is no emotion.  The numbers are the numbers.  It has to work.  You make money when you buy the property not when you rent it out, or when you sell it!

Now get out there and find that property.  Not the property you are going to live in for the next three years, but the property that you are going to own for the next thirty years (or 20 or 10)…..

About 13 years ago, I was on a Navy ship sailing home on deployment from Iraq and a squadron mate of mine starting talking about the several houses that he owned.  He was a bit senior to me, but it still amazed me that he was able to afford several houses at the same time.  I had no idea about the power of leverage or the idea of having other people pay your mortgage.  He suggested I read a book called “Rich Dad Poor Dad.”  Being on deployment and, more importantly, on the way home, I had nothing but time.  So I found a copy of the book on the ship.  The ship has books and games all over the place.  So I started reading and I couldn’t believe what I was reading.  As a result I started rethinking the way I was looking at money.  I won’t go into all the details, because that is not the point of this post.  However, another squadron mate of mine who was also on the deployment also read the book and we began to brainstorm.  We got on the internet and looked at rental property markets all across the country.  We looked at population growth, unemployment, home values, rental rates, etc.  We narrowed our target market down to Phoenix and Las Vegas.

Copperleaf Drive

Now, what 25 year old man do you know that doesn’t want an excuse to go to Las Vegas.  Las Vegas it was.  I started looking at the Las Vegas market to find a rental property that would work for what I needed.  At the time, I thought that I needed to find a place that I could rent for the price of the mortgage and taxes.  I did not think about things like repairs, vacancy, etc… but that was only because I was ignorant!!  As a result, it was really easy to find a house that met my criteria.  I settled on a three bedroom, two and a half bathroom single family home with an attached two-car garage in north Vegas.  The house was originally listed for $150,000 and it had been on the market for about three months.  This was definitely a buyers market, but again due to my ignorance, I didn’t know anything about that.  After talking with my real estate agent, who my buddy and I picked off the Coldwell Banker website because that is who his parents used (again, ignorance is bliss), I made an offer of $137,000 and the seller accepted.  Home Run!!

The Numbers

You will have to forgive me because I don’t remember all the numbers, and didn’t keep any records (not smart).  However, the numbers looked something like this:

Purchase Price: $137,000

Down Payment: 5% ($6850)

Closing Costs: $1500

Interest Rate: 6%

Insurance: :$720/annual

These numbers combined put my monthly payment of principal, interest, tax, and insurance at roughly $950 per month.  All I had to do was find a family to rent my new rental property for $950 a month or more.  That should be easy.  Again, I had not even considered any repairs, vacancy, capital expenses, utilities, etc……

We found a tenant to move in within two weeks and they were willing to pay $1000 per month.  Home run right.  As it turns out, it worked pretty well.  They paid for a year up front so we didn’t have to do much.  We rented the property to them for the year and then they renewed their lease.  They decided to pay the next year each month, rather than in advance and everything was smooth until they stopped paying!  In April of 2005, the tenants missed their payment for an initial time and we had to evict them.  Evict them we did and then I got the call from my property manager.  The house was not in good shape.  The family had done quite a number on the property.  As a result, off to Vegas I went.  I met a friend of mine in Vegas and brought a friend with me.  We spent a long weekend fixing up the property, painted, re-tiled the kitchen, new carpet, etc….

I wasn’t really thrilled with the prospect of another tenant so I decided to put the house on the market.  When I called a real estate agent, I was floored.  They recommended a sales price of $250,000.  In 17 months I was in line to make a $113,000 profit.  After about a month on the market, I sold the property for $247,700.  After closing costs ( I negotiated with the agent to sell for a 1% commission, making my total real estate agents feed 4%), I netted a profit of $84,000.  This includes the closing costs and commissions on the buy, as well as the minor rehab I needed to put into the place after the tenants moved out.  Not too bad for screwing up about every possible thing I could.

List of things I screwed up

1. Real Estate Agent:  I just cold called a Caldwell Banker and pick an agent.  No vetting, no recommendations

2. Property Manager:  I just utilized one the real estate agent recommended.  I didn’t interview her or anyone else.  She was just starting and was ill prepared for the job.  I can write an entire blog on her shortfalls and maybe will at a later time, but one of the main give aways was when she told me the house had a lot of damage.  When I got to Vegas to fix it up my neighbors said it had been in rough shape since the tenants moved in.  I am not sure she ever even went to check on the house during the entire 17 months.

3. Numbers:  I didn’t take into account any vacancy estimates, repair estimates, capital expenses (I had to repair the slab at one point), property management fees, HOA fees, etc..  I was only concerned with getting as much rent as I needed to cover my mortgage.

Things I did well

1. I bought in a greatly appreciating market.  I have since learned to NEVER buy for appreciation, however it worked this one time.

2. I got really lucky!

This one worked out really well, and was truly the catalyst for what has turned into a successful real estate investment portfolio.  However, I learned a ton and made a bunch of mistakes.  In the following blogs, I will outline how differently I look at rental properties now during the evaluation stage in order to buy at the right price and protect my investments from all the things that come up that you never expect!

 

 

 

 

 

A couple of changes over the last couple of months, but nothing earth shattering.

Howe Ave

I increased the rent in two of the three occupied apartments and got the fourth apartment rented.  The two bedroom on the bottom floor front was rented at $800.  The tenants have been there for eight years and always pay on time.  I was torn between increasing the rent to $1000 and possibly losing them or keeping the rent at $800 and keeping them.  In the end I compromised and talked to the tenants.  I told them that the unit was substantially under market value and I needed to increase the rent.  They told me they are on a fixed income.  I am not unsympathetic but this is a business.  I asked them to look over their budget and tell me what they would be willing to pay.  In the end, we compromised at $900 per month, and I explained that the rent will go up 3% annually the rent is comparable.  The second apartment I raised the rent on is occupied three bedroom upstairs.  This tenant is on housing assistance and they didn’t even have to pay the increase, the housing authority pays it.  No impact to the tenants, just paperwork for me and an inspection on the unit.  The last unit, the three-bedroom that was unoccupied, was rented out to a family for $1200.  That brings the monthly rent up to $4100 and improves my cash flow substantially.

3 Fieldstone Ct

This property was purchased with an FHA loan five years ago which included PMI.  The PMI was around $225 an month.  I have finally hit the five year mark and the PMI went away.  That is another $225 in monthly cash flow!

 

No changes to St. Marks, Whispering Willow, or Wintercreeper at the time.  In this business I find that to be a good thing though, as that means no major maintenance, costs or unexpected findings.  Steady is good.

 

My goal is to pick up one more multi-family property (four-unit hopefully) by February or March.  If anyone knows of a good deal on or off market, let me know!!

Just starting the site.  It is time to show everyone how you can make this happen.  More to follow as I fine tune it!!