What I look for in a buy and hold property.

The term “buy and hold” as it relates to real estate investing is pretty much self explanatory. An investor purchases and holds onto a property with the goal of creating strong positive cash flow through rental income. Although this seems like an easy enough strategy, not all properties are created equal as it relates to it’s buy and hold potential. There are 5 things I look for when purchasing a buy and hold investment property to ensure it will be a successful investment.

  1. What are the rental rates in the market? This is a pretty obvious item to be aware of as the revenue you generate from rents needs to be substantial enough to cover all fixed expenses and produce positive cash flow. It’s extremely important that the rental rate you expect to get out of a property is realistic and is compared to properties of similar caliber. Just comparing a 2 bed, 2 bath with others in a market is not enough. Here are some questions you need to ask yourself to make sure your comps are accurate.
    1. Am I comparing apples to apples? Comparing a 2 bed 2 bath condo with a 2 bed 2 bath house on 1/4 acre of land is not apples to apples.
    2. What is the condition of the property? If my property is outdated and I expect to get the same rental rate as other 2 bed/2 bath properties that are updated, I making a big mistake.
    3. Proximity to desirable locations. In a beach community such as Carolina Beach, proximity to the beach is a huge factor in determining rental potential for similar properties. Every market has there desirable areas and people pay a premium to live there.
    4. What’s the worst case? Although I want to secure top of market rents, what happens if the market tanks and rental rates drop by 20%? Am I still in a good situation relative to the properties expenses?
  2. Can I add value to the property to get top of market rents? If a property needs work, I wouldn’t shy away from it. When home buyers or investors purchase a turnkey home or investment property, they are typically paying a premium for it. A property that needs some work gives an investor more negotiating power with a seller and it provides opportunity to “force appreciate” the property once it is acquired. The goal here is to acquire a property for the least amount of money possible, update the property and then secure top of market rents due to the updates. Depending on the extent of the rehab and the increase in rental income, an investor could choose to refinance the property to take some of their cash out and put towards other projects, sell the property to other investors looking for turn key, or just hold it. Either way, you have options.
  3. Are there any major investments needed to the property immediately or in near future? HVAC replacement, Roof replacement and crawl space mold remediation are examples of costly items that can drastically impact your ability to create positive cash flow. These items should be budgeted for through positive cash flow as the HVAC and roof will need to be replaced at sometime. However, if the property needs it right away, it should be used as a negotiating tool for a lower sale price.
  4. What is the cash on cash return? Lets say your purchase price of a rental property is $300,000 and you put $75,000 (25%) down with closing costs to secure the loan and put another $10,000 towards repairs. Your total cash invested is $85,000. Cash on Cash return is the amount of Net Operating Income (Gross rents – operating expenditures)/total cash invested. Assume the property has a a NOI of $12,000 annually, the cash on cash return (12,000/85,000 x 100) would be 14%. The higher that number the quicker you are getting back your cash investment and the sooner you can take on another property.
  5. What is the trajectory of the market? When purchasing any property it is always good to understand where the market is, where it has been and where it appears to be going. While no one can predict the future, there are clues that will tell you if the rental market will continue to grow. Things I look for are:
    1. Jobs: Are there good paying jobs in the market and are the major companies that provide those jobs expanding? Wherever Amazon selects as their new headquarters is where I want to own rental property.
    2. Vacation Rental Potential: I love Carolina Beach as a rental market because it gives me two options. I can choose to rent annually because Wilmington and it’s jobs are so close and also rent weekly to vacationers. Not every market provides this flexibility.
    3. Migration Patterns: Wilmington has had a net inward migration of 6.8% in the last 5 years and ranks #19 in cities with the highest in-migration according to the US Census Bureau. People are discovering Wilmington and all its beauty and although they may not be buying homes they still need a place to live.

 

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Why your first home should be an investment property.

Many homeowners in America feel that their house is a great investment. The fact of the matter it’s not and here’s why. An investment is the action or process of purchasing goods in hopes for a profit or material gain. Most people believe home ownership fits this definition for the following reasons:

  1. Buying a home takes significant capital to purchase.
  2. Real Estate has historically increased in value over time even with bubbles and crashes along the way. This enables a home owner to sell at a profit later on given this fact.

So why isn’t owning a home an investment for most homeowners? Because the true cost of home ownership is not what you paid for the property. Insurance, taxes, maintenance and interest all eat away at any potential profit you may make once you sell. For example lets assume you purchased a home in 2017 for $150,000. You take out a 30 year mortgage on 120,000 (20% down) with an interest rate of 4%, property taxes are $1700 a year, and insurance is $800.00 a year. You then sell that home 10 years later for $235,000. Lets look at the return on that investment once the property is sold.

Purchase Price  150,000
Down Payment (20%)  $   30,000.00
Closing Costs  $     6,500.00
Mortgage Principal Paid  $   26,165.00
Mortgage Interest Paid  $   44,304.00
Property Tax over 10 years  $   17,000.00
Insurance over 10 years  $     8,000.00
Maintenance over 10 years ($500 per year)  $     6,000.00
Approximate capital spent on property  $ 137,969.00
Sale Price  $       235,000.00
Sales commission on sale (6%)  $         14,100.00
Remaining Balance on mortgage once sold  $         94,204.00
Approximate net to seller at closing  $       126,696.00
Approximate capital spent on property over 10 years  $       137,969.00
Total ROI after 10 years  $       (11,273.00)

So by looking at this example, even with a 56% increase in property value over the 10 years you would have lost $11,273.00 on your “investment”.

On the other hand, lets say the property you purchase has an extra bedroom and you find a roommate to rent out one of those rooms. Rental income is $300.00 per month and you decide to put that money towards the principal of the loan. Here is how it would breakdown:

Purchase Price  $       150,000.00
Down Payment  $   30,000.00
Closing Costs  $     6,500.00
Mortgage Principal Paid  $   62,165.00
Mortgage Interest Paid  $   44,304.00
Property Tax over 10 years  $   17,000.00
Insurance over 10 years  $     8,000.00
Maintenance over 10 years  $     6,000.00
Approximate capital spent on property  $ 173,969.00
Less Rental Income  $   36,000.00
Total spent by owner  $ 137,969.00
Sale Price  $       235,000.00
Sales commission on sale (6%)  $         14,100.00
Remaining Balance Once Sold  $         50,365.81
Approximate net to seller at closing  $       170,534.19
Capital spent by owner over 10 years  $       137,969.00
Total ROI after 10 years  $         32,565.19

So in this scenario, just by renting the one bedroom and putting that income towards the principal, you have a $43,838 swing in the positive direction. For 1 more scenario, lets assume you didn’t put the rental income toward your mortgage principal. Rather, you used the rental income to help pay your mortgage payment with no additional funds being put toward the principal. You would have profited $24,097

Another fact that I didn’t project in this example is that rents typically increase at least with inflation over time. My projections assumed a renter was paying $300 a month for all 10 years with no increase in rent. Also, a person executing this strategy probably will not stay in the property for 10 years. Instead they may choose to rent the whole property out while they go on to their next. At that point you have a tenant who will be paying the full mortgage (plus potential positive cash flow) on your investment as it appreciates over time thus increasing your ROI.

Anyone can do this and it’s not exclusive to first time home buyers. But in my opinion unmarried, young professionals are ideal for this strategy. By purchasing a home and renting out a room or purchasing a duplex and renting out one unit, you have set yourself up with shelter and a passive income stream. With more and more adults under the age of 35 renting in lieu of purchasing and an increasing amount of renters choosing to have roommates to offset costs; it only makes sense to be the other side of the renting equation. See Forbes article regarding roommates and rentals here.

The obvious hurdles in executing this strategy is saving enough for the down payment and finding a property that has a separate living quarters (duplex, mother in law suite). Good news that you don’t need 20% down to secure a mortgage and I can help you find the right property. Lets get started today!

Why the blog?

My name is Michael Urti and I am an entrepreneur, real estate broker and investor in the Wilmington, NC market. After working the typical 9-5 job for 10 years, I grew tired of working countless hours on a fixed wage for someone else’s benefit. I wasn’t sure how or when I would be able to make any kind of major moves to change my situation. I had owned a home in New Jersey with a $2300 a month mortgage and the income from my job was pertinent in us being able to pay it. So, like many people out there, I found myself unable to take a leap of faith due to the financial responsibilities I had.

At 30 years old, I decided to start putting the wheels in motion toward living life on my terms. I owned a home, had good credit and had an opportunity to purchase a health club business that was profitable. Although I didn’t have the money to purchase the health club, we were able to find a way to make it happen. My business partner shared the risk with me, the business was profitable, our resumes were reflective of the business we were purchasing, and we had collateral to secure a loan. It was a recipe that enable us to secure the business even though we weren’t the most financially able at the time. Two important lessons I learned from this experience was:

  1. Fortune favors the bold. At the time, going to a bank and asking for a 1-million-dollar loan seemed outrageous. I only owned my house for 2 years, had a modest salary and had limited cash but I knew I wanted to start owning something. What I learned is how commercial lenders work; what they look for in both personal assets (background, business experience) and financial (real estate equity and cash). Had I talked myself out of it, I wouldn’t own the business today, received the education having gone through that process and the opportunities that followed wouldn’t have been possible either.
  2. Learn to be comfortably uncomfortable: Putting your house on the line for a business takes a lot of conviction. It was totally out of my comfort zone, but by doing so, I have developed a tolerance to taking risk that has set the stage for future ventures. I may be a little more conservative in the future, but that’s a determination I am now able to make .

A year later, I started to look at my living situation. I owned a 4-bedroom, 3 bath house and it was just me and my wife. Our property taxes kept going up and up and I disliked my job. Although I owned the business, we weren’t taking much money out of it as we reinvested in new equipment and renovations. So, I was still in the same situation I was prior to having the business. I still needed to work to cover my mortgage and I had the stress of a business loan. That’s when we decided to take another leap of faith and move out of NJ. My wife and I found a 3-unit condo in Carolina Beach, NC and the light bulbs went off. We live upstairs and rent the other two units below us. We could generate $2400 a month in rent while also living in the top unit. Our principal, interest, taxes and insurance went from paying $2300 a month in NJ to earning $200 a month in NC…and we are 2 blocks from the beach!

I don’t say any of this to brag by any means. We are blessed to have been able to recognize and act on opportunities when they have presented themselves. In addition, I am personally grateful to have a wife who shares a similar outlook on risk, business and life. We are now real estate brokers in Wilmington, NC with a passion to encourage first time home buyers to get out of their comfort zone and finally stop renting. I stress first time home buyers because I know so many people, sitting on some cash still paying someone else’s mortgage. The moral of the story is that our decision to act and be bold opened a sequence of opportunities that would have never been possible. Purchasing our first house enable us to purchase the health club business. Appreciation in our first house enabled us to sell it for a profit and invest in in a 3-unit condo. Having our mortgage paid through rental income in our triplex enables us to save money every month etc… Had we still been renting, none of that would have been possible.  We also work with investors seeking properties to buy and hold (both vacation and residential properties) and fix and flip. Our goal is to provide our clients with a thorough analysis of a property’s investment potential to ensure they are making a sound financial decision.

This blog serves as an avenue for us to educate and inspire others to jump into the world of home ownership and/or real estate investing. With more and more millennials delaying or forgoing home ownership, we feel it is our duty, as millennials to educate others to stop standing on the sidelines and dive in.