Going from 0 to 9 properties in 17 months (Part Three)

This article is a continuation of a previous article I wrote. To read part 1 and 2 click here:

Part 1: https://www.dhirubhai.net/pulse/going-from-0-9-properties-17-months-part-two-austin-yeh/

Part 2: https://www.dhirubhai.net/pulse/going-from-0-9-properties-17-months-part-one-austin-yeh/

In the final part of this three part series of how to go from 0 to 9 properties in 17 months, we will be going over the Rent, Refinance, and Repeat portion of the BRRRR strategy (Buy-Renovate-Rent-Refinance-Repeat). Actually, since the last article was published, I have ended up purchasing an additional 4 properties: a 3-unit property which I will be BRRRRing and 3 town homes in a row in a desirable student rental area with my capital investors. So really this article should be named how to go from 0 to 13 properties in 17 months, while maintaining a full-time job.

As per usual, here's a quick high-level refresher of the BRRRR strategy:

BUY: You will purchase a property that is a fixer upper or a property where you can force value by completing a strategic renovation (e.g. Adding extra bedroom, adding extra bathroom etc.). Ideally, your property will not require big ticket renovations- like fixing the foundation or dealing with exterior waterproofing.

RENOVATE: You will complete high-value add renovations such as flooring, paint, trim etc. These renovations will drive value to your property.

RENT: Now comes the part that every investment property was bought to do- you rent the property out to high quality tenants at premium rents due to the beautiful renovations.

REFINANCE AND REPEAT: Finally, comes the most powerful part of BRRRR. Due to the value-add renovations, the bank will appraise your property higher than your purchase price. The bank will loan you 80% of the newly appraised value and you can use the new mortgage to pay off the old loan/mortgage. If you executed this process correctly, you will have most or all your money out of the deal, which you can use to repeat the process

RENT

Renting your property for top dollars is important, but what’s even more important is to ensure that you have a strong tenant occupying your rental unit. If your tenant refuses to pay rent or becomes troublesome, it can become quite difficult to evict the tenant, especially in Ontario.

Some things to consider before placing a tenant include:

• Credit Score
• Employment history/employer
• Income
• Why are they moving?
• Character/Personality
• Number of tenants that will be living in the property
• Budget
• Social Media search the tenant
• Google search the tenant
• Criminal Background Check
• References
• Co-signor

Relying on a property manager may be necessary for those who choose to invest long distance. As per wikipedia, "A property manager or estate manager is a person or firm charged with operating a real estate property for a fee, when the owner is unable to personally attend to such details, or is not interested in doing so."

It's important to realize that your time might not be worth managing your properties. In reality, property management is a $20 dollar an hour job. You should be focused on closing the next deal which is a $1,000+ per hour job. Hiring a good property manager is absolutely essential. As with the construction industry, many property managers are difficult to work with and most of them won't care for your property. The reality is that property manager's incentives are not aligned with yours- they could care less if your property gets damaged or if you do not receive rent payment. Not all property managers are terrible, but you definitely need to screen your property manager as he/she will be an essential member in your real estate journey.

Here are some tips to consider when hiring the right property manager:

Have a Powerful Intro

•   Introduce yourself
• "My name is XYZ, I am a real estate investor from town ABC and am looking to grow a strong presence in your city. You were referred to be by person ABC and I am looking to build a large portfolio in your city within the next couple of years. Do you have time for a chat?"

Questions

• Most of your questions should be open ended question as some property managers will go on and on and give you information that you would have never asked for

1)     Tell me a bit about your property management company

2)     What made you get started in property management? How long have you been in the business for?

3)     How many properties do you currently manage? How do you go about prioritization or managing all the properties?

4)     Do you invest yourself?

5)     What services does your property management company offer?

6)     How long does it typically take to tenant a property?

7)     Do you ever say no to clients? For example, are you willing to property manage in worst parts of town?

a.      Usually, I want property managers who have the ability to say no to clients, especially if a property is in a bad part of town or in poor condition.

8)     Do you have experience with evictions? On average, how many evictions do you go through a month?

9)     What is your screening criteria for tenants? What are the steps you take to place tenants? How do you ensure you’re placing the right tenants in the property?

10)  What platforms are you advertising in?

11)  Walk me through what happens if a tenant calls in and says that there is a leak in plumbing. What steps do you take?

12)  What are the prices? Any other fees for emergency calls, markups for repairs etc.

REFINANCE

Refinancing a mortgage is the process of obtaining a new mortgage on your property to access the equity built in cash or by a home equity line of credit (HELOC). The equity built could be because of owning the property for years and paying down the mortgage, by natural appreciation in the property, or by forced appreciation.

Assuming a residential property, refinancing requires an appraisal of the property by an independent 3rd party. Closing costs to be aware of include lawyer fees and breakage penalties if you plan to break your existing mortgage, which typically occurs when you change mortgages from one bank to another.

To ensure that you receive the highest appraisal possible, make sure to be on the apprasiers good side. Be kind, nice, and do not give attitude. Explain the updates you completed to the property, and provide the appraiser with an appraisal template. This appraisal template includes comparable properties that you cherry-picked to justify the valuation you are asking for.

For a free appraisal template, visit my website:

https://www.austinyeh.com/free-resources/

Once you refinance the property, you will be able to pull out your initial investment. Note that your monthly mortgage will increase as a result. Ensure that your property still cash flows despite the increase in mortgage payment.

Now you can use this capital to purchase another property and complete the same process again.

REAL LIFE B-R-R-R-R EXAMPLE:

Situation:

• Duplex off market/private dealer within 2 days of hearing of opportunity
• 1 bedroom upper, 2 bedroom lower
• Provided Cash to the lower tenant so they can leave the property
• Offered quick 30 day closing

Purchase price $180,000

Renovations: ~ $35,000 of strategic renovations

?All new flooring lower unit, paint, kitchen update, gut washroom and resize, fix drywall, fix outstanding ESA electrical work order, minor plumbing issues, upper unit paint and basic renovations, redo the entire fire escape staircase on the exterior, repair basement staircase

? Estimated project length ~ 3 months

Potential Outcome:

• Ran the numbers conservatively $250,000 after repair value

Actual Outcome:

• Downpayment: $40,500
• Lawyer Fees + Closing cost: $3,750
• Renovation: $35,000
• Holding Cost: $3,000
• ALL IN COST: $82,250

After Repair Value

• Appraised at $270,000 by the bank

Cash out

• Old mortgage (80% of $180,000) = $144,000
• New mortgage (80% of $270,000) = $216,000
• New mortgage - old mortgage = $216,000 - $144,000 = $72,000

Cash Flow = $750-$800 after refinance