Real Estate investing can be daunting when starting out. The natural tendency is to look online for information. Some sources, such as Bigger Pockets, are credible. But it’s important to not drown yourself out in information. I will touch upon some important basics.
The first thing is due diligence. This is what makes or breaks the deal you are conducting your due diligence on. For larger properties that involve institutional investors, we look at Annual Cash Flows- Property Level, Institutional Cash Flows Base, Investor Cash Flow Refinance, Year 1-5 Pro Forma, Closing Cost Analysis, Monthly/Yearly Cash Flows, Unlevered Returns, Lever Returns Property Level, Returns Net To Investors, etc. It gets complicated. We use our own proprietary underwriting model which has more than 30 sheets in excel with hundreds of formulas. It’s something we discuss in great detail in our strategy session. For ex. if the rehab involves 300 units, you need to know how the returns will be affected as those units are rented out post rehab. It gets messy. But for smaller properties this level of analysis is rarely necessary.
Another critical factor that will determine returns is property management. Most investors of dream of being absentee owners, but the reality is that you will have to be more involved than you think. Many owners choose to manage their own properties, which is fine. But it’s all about your goals and the income you seek. However if your goal is to eventually form a real estate syndicate, you will have to work with property management firms. My partners however own the property management side as well. The benefit of that is they control quality of the operations rather than depend on a 3rd party firm. Property management is generally not a very lucrative business.
For rehab projects you need to be aware of how to work with a general contractor. Often times they will under budget and underestimate the time needed to complete a job. This is bad because it hurts your bottom line. If the property is not habitable, that means you spend more time without collecting rent. My partners who control almost 1,400 units also control the construction side. The benefit of that is we again get to control the quality and also make money on the construction side.
Lastly, as a landlord, you need to know how to find good tenants. These is a screening process that we use when offering our properties to tenants. One of the basic principles is rent to tenants who have something to lose. For ex. any tenant who has a good job, decent or better credit, etc. will not leave your property in a bad condition, abandon it or avoid paying rent. If you rent to deadbeats, you can expect a lot of problems. Quite frankly it’s surprising to hear stories of landlords suffering. Sure, once in a while a bad tenant will slip through the cracks. But often times it’s a pleasant experience. We rarely have had to evict a tenant. But again, it also depends on the type of property you own. If you own a Class D apartment building, you are generally catering to the more blue collar tenant and as a result you can face slightly more problems than renting out to a young professional at Bank of America.