In order to know where we are going, it is important to first know where we stand.
Below is a quick self assessment to gauge what your threshold is for real estate investing. Keep track of what number you answer most frequently.
Which of the following sounds like your ideal property?
1. Recently remodeled, shows really nicely. A property you won't have to put much capital into for years to come.
2. Something that has the right things wrong with it. Properties with room to make cosmetic upgrades.
3. A property that you need vision to see what the potential is. Willing and able to make improvements to the majority of the property, even though it costs time and money.
Please Note:
-For 2-4 unit purchases, the minimum down payment for a conventional loan is 25%. That means you currently need $200,000++ to purchase an investment property in San Diego.
-For FHA owner occupying, you will need a down payment + reserves, so the minimum you will want devoted to this purchase is $70,000.
-For VA owner occupying, you will need enough for closing costs and reserves, so the minimum you will want in the bank devoted to this purchase is $40,000.
Which category do you fall in financially?
1. Money devoted to a down payment, but not much capital for extra improvements to the property.
2. Money for a down payment as well as some capital for minor cosmetic improvements.
3. Money for a down payment as well as substantial money for capital improvements. (Roughly, to completely turn over a unit, you will need $40,000+ per unit in renovation costs.)
Which sounds most ideal to you, in terms of tenants:
1. Tenants that are paying competitive rent prices and/or vacant units that are ready to receive leading market rents. Allow the property to continue to run smoothly, as-is.
2. Understanding that some of the units are receiving a discounted monthly rent, you feel comfortable negotiating with them to pay higher rent, give them termination of tenancy or non-renewal of lease.
3. Understanding that the majority of the property is receiving discounted monthly rent and/or the property is in disrepair and could yield a much higher income if it was fixed up to the standard of the neighborhood. Willing to give termination of tenancy for a substantial remodel to all units, even if it takes time and money, understanding that any money spent will be pennies on the dollar for what you will create once the property is performing at peak performance.
This self assessment is a guide to understand what your current investing fitness level is. Please refer to the category in which you answered most frequently: 1. Power Walker / Turnkey Investor: The best fit for you may be a turnkey and straightforward investment. One which you can put your name on title, receive the tax benefits and equity pay-down from tenants paying off the loan, satisfied with the property breaking even and looking forward to increasing the positive cash flow slowly year by year. You prefer a slow and steady investing route, where you can build wealth organically through appreciation on rents and values. You are okay with growing your wealth and cash flow slowly and organically over time so you can have more peace of mind throughout the process. Ideal Property: The property that is likely best for you is something that someone else has already done the work. You are willing to pay more for the work already being done, and are okay with simply a positive cash on cash return while you wait patiently for equity pay-down, appreciation and future cash flow.
2. Jogger / Light "Value-Add" Investor - The best fit for you is a mix of value-add components to the properties you purchase, but also simple, straightforward investments where there is a clear path to get from A to B. You are willing to do some work but want a simplified way to get there, understanding that the time and effort you put in will accelerate your cash flow and wealth growth. The property you will likely purchase will be under-performing, the rents will give negative cash flow but you see the value in the upside the property has. You are okay with the worst case scenario of the property costing you monthly, but know ultimately you will be able to negotiate / terminate tenancy or raise the rent to market once the tenant moves out, which will accelerate the cash flow faster than if you purchased a turnkey, stabilized property to begin with.
Ideal Property: A property that has upside in the rents, where current rents are discounted from what the neighborhood can bear, but strong enough where you feel comfortable carrying the burden until you can finally make simple improvements to increase the rents to market and get the lift you were waiting for. Perhaps there is a vacant unit or tenants have been there less than a year and it will be easy to give non-renewal of lease to underperforming units.
3. Sprinter / "Value-Add" Investor: The best fit for you is to buy an underperforming property where you can significantly increase the income and therefore the value of the building. You are willing to do what it takes, whether that means getting lawyers involved to terminate tenancy on the basis of a substantial renovation or negotiate with the tenants giving cash-for-keys to terminate tenancy. You have the time and capital and wherewithal to organize the remodel of the building. You are able to see past what the property currently is and look at what the potential is. You are committed and capable of fast-tracking your investing career. You can see that the perceived risk is far inferior to the substantial reward once the project is completed.
The Ideal Property: A property that is in disrepair and/or has substantially under-market rents. The property may not show nicely and will turn off a good portion of investors, but you can see past the paint and clutter to see the potential of the building. A property that has upside in the rents that has the potential for increased value on the income is increased. A property that gives you a significant lift.
Like in normal fitness, sometimes we are only capable of starting out with a power walk instead of hopping on the treadmill or into a race with an all-out sprint. Like with fitness, we can build endurance by starting where we are and continuing on the path. Just because you start out as a power walker or jogger doesn't mean you won't be sprinting through the finish line!
It is important to self-assess what your investing threshold is and let me know where you fall within the above categories, so we can narrow down your search accordingly. It is also important to understand the reality of the market and know what you can expect in each category, as described above. For example, we cannot expect significant cash flow year one, if we are not willing to do the work ourselves.
As always please reach out to discuss any of the topics further, and let me know what category you fall into so we can narrow down our search accordingly!