Summary

About once a month we have a virtual meetup of real estate investors at work. Less experienced investors ask questions and more experienced investors answer them. It works really well.

Some questions pop up more than others. I’ll summarize them here, for your reading pleasure and quick information. I do this because real estate questions are hard to search for on the internet. There is a lot of noise in the answers, and I want to cut through it.

The answers are pithy on purpose. I wanted them to be a quick way to satisfy your curiosity, without needing to sift through the noise on the Internet. As always, the devil is in the details.

These are my answers, or (where attributed) answers I liked from others. This is what I’d tell you if you would ask me. Someone else may well tell you something else.

I like the passive aspect of real estate, what do you think about it?

Investing in real estate is “passive” in the same sense as driving a car is passive transport.

When you drive a car your legs aren’t doing the transporting, so you are being “passively” taken from point A to B. But if you try to be hands off, you will end up by the side of the road.

Can you compare investing in real estate to investing in other asset classes?

A colleague noted that you can earn outsized returns in real estate (vs market averages) if you are willing to put in the work. This usually means that you must like that sort of work.

If you don’t expect to spend time on it, or don’t like the work, and instead just want to park some capital, then real estate is just one more asset class, neither better nor worse than others.

How do I negotiate the purchase price down?

You must have a lever to pull. If you don’t have one, you typically can not negotiate down.

For example if the water heater is at end of life and would cost $1500 to repair, you can ask for $1500 of a discount.

A colleague noted that to do this, it’s useful to do an inspection as soon as you can, and use the results in your negotiation.

My CPA said that…

On average, CPAs do not know about real estate investing.

Don’t take investing advice from CPAs. Tax law is large and complex, and unless the CPA is specifically dealing with taxation of real estate investments, they likely don’t know enough to give you advice.

My lender said that…

On average, even lenders don’t know about real estate investing.

Don’t take investing advice from lenders. They have no incentive to solve issues creatively for you. They are incentivized to close you a loan, get their commission and move on to the next loan.

I was told by my lender that if I transfer property to the LLC, I won’t be able to refinance, what to do?

See question above for general advice.

While your lender is correct that you typically can not take out a residential loan in the name of an LLC (I am inferring this as your situation from the question, since this is where it usually comes up), the conclusion does not follow.

You can transfer your property back into your own name if you want to refinance, and refinance only once the transfer back completes. It does cost time and money, but presumably it will be worth it for you.

I heard people invest with little or no money down, is this a good idea?

I think this is not a good idea, but I speak from a somewhat conservative investor mindset. To me, it is a good idea to keep a healthy equity stake in your property. For investment properties this is typically 25% to 35% down.

While it is possible to take out loans at higher loan-to-value, such loans are more expensive than adequately sized ones. This makes it easier to default on them due to external pressures.

In real estate Internet lore, there is quite a bit of survivorship bias in reporting success stories about this sort of financing. I would assume that for each 1 success story that gets reported, 10 failure stories never get reported. Because people like reading about success more than about failure.

But if I invest 25% to 35% in properties, I will run out of money. How do I grow then?

If you are growing your portfolio, no matter how much money you start with, at some point you will run out of money to invest.

At that point you must learn to raise capital.

In theory it is possible for your portfolio to snowball and grow organically, but that could take a long time.

So how do I raise capital?

In a few ways:

• You can partner up. Find a person whom you can work with. You split responsibilities, gains and losses down the middle, and you can attack 2 times larger deals.

• You can raise debt. Get money from people in exchange for a fixed interest. You get the money, you take all the equity, but you also take on all the risk.

• You can raise equity. Get money from people in exchange for the equity interest in the project.

Whatever you do, you must do that lawfully. See the next question.

I want to learn about syndications. How do I do that?

If you want to self-study, luckily there are books that get you on your way. You won’t become an expert after having read them, but you will know what questions to ask and what direction to turn.

• From the syndicators perspective: “Best ever apartment syndication book”, by Joe Fairless.

• From the investor’s (“LP”) perspective: “The hands-off investor”, by Brian Burke.

Where do you see the real estate market in 3 months, 6 months, a year from now?

I don’t know. Nobody does.

I don’t predict markets. I look for properties that match my fixed benchmarks. One deal may be better than another, but they all fulfill my investing criteria. This way I know that I’m getting at least the minimum that I set out to achieve.

If you aren’t sure what criteria to apply, here’s a set that you can start from, and adjust as needed.

• Residential real estate up to 4 units.

• Minimum 20% down for financing

• Maximum 40% down for financing

• Cash-on-cash return 10% or more

• Capitalization rate (“cap rate”) 8% or more

If you find something that fits, buy it. If you don’t find it, keep searching until you do.

If your net ends up empty, consider tweaking your criteria.

Should I self-manage?

Unless you can afford to spend a long time on the phone in a single go, I would say no.

Property management activity is bursty. You can have weeks of nothing, and then a few days of absolute chaos. If you can’t afford to drop everything else and dedicate yourself to sorting the chaos out, you probably want to have a property manager.

How do I find a good property manager?

Surprisingly hard to say. All property managers talk big game, but few deliver.

And even good ones, as the word gets around and they expand their client base, get spread thinner to the point where they start dropping the ball.

My advice would be to iterate: start from a property manager that someone recommends to you. Fire them at the point where they don’t work well. Find another. Rinse and repeat until success.

Reconsider your property manager choice every 2 to 3 years.

Should I get a home warranty on my rental?

In my opinion, no.

Home warranties are not compatible with rentals. If something breaks in your rental, you want it fixed as soon as possible, preferably today. Home warranties typically take weeks to resolve. No renter will wait that long if it is important.

In general, you should not insure against events that you would be able to pay to get fixed.