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There are two types of people out there:

Surface-Scratchers and Deep-Divers.

I’ll cut straight to the chase.

Don’t be a surface-scratcher.

Surface-Scratchers

The world is full of surface-scratchers.

Those that barely penetrate the surface layer of understanding, then move on to the next topic or industry that peaks their interest.

These people are great at carrying out conversation.

They can chime in on pretty much anything.

But their words don’t carry much weight.

It’s the deep-divers who are worth listening to.

Deep-Divers

Unlike the surface-scratcher, the deep-diver doesn’t have the widest breadth of general knowledge.

They don’t have a scattered selection of one-liners that they can lend out to any and every subject.

But they’re extremely well versed in their realm of genius.

If they’re focused on tech startups - they can give you a detailed bio of the existing incumbents and dissect the business model of every newcomer.

If they’re in the real estate space - they can break down an entire city block by block and tell you exactly where to buy versus where you should avoid.

If they’re all in on emerging markets - they can tell you which countries are growing the fastest and what types of investment opportunities should be on your radar.

Whatever it is that they’re into, they’ve dedicated their all to it.

Planting their feet firm in the center of their circle of competency.

Made My Choice and Never Looked Back

Over my years of investing in real estate, there’s been plenty of shiny objects that have caught my attention and nearly caused me to swerve from the beaten path that I know best.

Crypto

Stock Options

Buying Businesses

There’s plenty of money to be made in all three spaces.

And each one is interesting enough to drag you down a never-ending rabbit hole.

But the dichotomy of the surface-scratcher vs the deep-diver is what has always kept my eyes on the road.

The journey to cementing yourself as a thought leader and trusted source of insight is a life-long commitment.

And I decided early that real estate is what I’m going to give my all to.

To put a bow on this. . .

Some may say that deep-divers are stubborn and don’t know enough.

I say that surface-scratchers are shallow and try to learn too much.

It pays to be sharp, not well-rounded.

Pick the one hill that you’re going to live and die on.

We all have to go someday, at least you’ll leave on top of your game.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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You should never build your budget based upon the list price alone.

Whether you’re buying your first suburban abode that you and your family will call home, or you’re investing in a duplex halfway across the country, you have to factor in all of the additional fees and expenses that come along with acquiring real estate.

Zillow, Redfin, and Realtor.com do a great job of showcasing the up-front sticker price, but below the surface, there are a laundry list of hidden expenses that can sneak up on you at the closing table.

So to help you avoid any surprises, we’re going to walk through the 5 different ‘cost buckets’ that I cover whenever advising a client through their first purchase or investment.

I’ve categorized them as follows:

• Bucket 1: Soft Costs

• Bucket 2: Underwriting Costs

• Bucket 3: Closing Costs

• Bucket 4: Renovation and Repair Costs

• Bucket 5: Leasing Costs

Over the next 2 minutes I’m going to give you a brief masterclass on each of these 5 cost buckets.

We’re going to cover the different expenses that fall into each category, how much money you should set aside, and any pro-tips that I can lend in order to help prevent you from overspending in any of these areas.

Let’s start by unpacking Bucket 1 - all of the typical ‘soft costs’ that you’ll have to cover in addition to your downpayment.

Bucket 1 - Soft Costs

‘Soft costs’ can a bit ambiguous. To narrow down the list, you can think of these as all of the miscellaneous expenses that are incurred before entering into contract. For instance:

Traveling to the property.

Taking off time away from work.

Lodging and other accommodations.

As you can imagine, these expenses will vary largely based upon where you’re thinking about buying. If you’re considering purchasing a home or rental property that’s located in another state, you’d have to account for plane tickets, hotel stays, rental cars and dining, plus any pay that you’re going to miss out on from leaving work.

It’s tough nail down an exact dollar amount for these line items, but the average round-trip flight will likely run you about $600, a decent hotel will cost roughly $300 per night, rental cars have gotten pretty pricy recently, I typically budget about $75 a day, and you can fill in the blank for any sunken costs incurred from missing work.

In total, you’re easily looking at $1,500+ before you even place an offer.

To keep these tabs to a minimum, I make an effort to do as much homework as possible before spending a single dollar. This includes researching the neighborhood, asking the broker targeted questions about the property, and gathering any inspections and reports that may be available.

Bucket 2 - Underwriting Costs

Underwriting is a fancy term for due diligence, and due diligence is just another fancy way of saying investigate and inspect.

Running the numbers through an Excel spreadsheet is free, but a homeowner’s inspection, roof inspection, pest inspection, sewer scope, and architect’s assessment can cost a pretty penny.

Gathering all of these various reports isn’t always necessary, but for the vast majority of real estate purchases, it’s wise to get a professional’s 2nd opinion.

Here’s what you can expect to pay for each inspection if you’re carrying out due diligence on a single family home:

Homeowner’s Inspection: $400 - $600

A homeowner’s inspection will cover all of the interior of a property. The inspector will point out any issues, defects, or damage that may go unnoticed to an untrained eye. What’s most important is that the inspector assesses the functionality and remaining lifespan of the property’s mechanicals and high-ticket items - plumbing, electrical, HVAC system, and appliances.

Roof Inspection - Free or A Small Additional Fee ($50 - $150)

The roof inspection is sometimes included with your homeowner’s inspection. If not, the additional cost shouldn’t be too steep. The inspector will either walk the roof themselves - taking photos and making notes of any problem areas - or they will utilize a drone to assess how many more years the roof will hold up.

Pest Inspection - $100 - $250

Some inspectors will carry out the pest inspection, others will outsource this task to an exterminator. The focus of a pest inspection is to spot any rodent droppings or termite activity.

Sewer Scoper - $100 - $250

During a sewer scope, the inspector will run a camera through the sewer stack of the property to ensure that there aren’t any clogs, blockage, or breaks throughout the pipe. If there’s any damage in this department, you have grounds to request that the necessary repairs be made or a sizable concession be provided.

Architect’s Assessment - Varies But Expect A Base Cost of $200+

Calling an architect out to the property is only appropriate when you suspect that there are structural issues or potential problems with the foundation. Both of which can be a deal breaker depending upon the severity.

In summary, you can expect to pay around $500 for a basic suite of inspection reports; all the way up to $1K or more if you choose to carry out extensive inspections.

To avoid over-spending on inspections, here’s one savvy tip that I’m going to give you:

Assess the seller’s inspection reports whenever their available. Sometimes the seller will carry out their own inspections prior to placing the property on the market. When they do, ask to view their findings. Regardless of how detailed of a report they provide, it’s still a good idea to take a deeper look for yourself just in case they missed anything. But leveraging an existing inspection report can save you hundreds.

Bucket 3 - Closing Costs

Next to inspections, closing costs tend to be the biggest ‘surprise expense’ that catches first-time buyers and early-stage investors off guard.

Calculating your downpayment is fairly straightforward - purchase price x downpayment percentage. But points, attorney fees, and title and escrow costs can be a bit more difficult to calculate.

As a ballpark figure, I tend to use 1.5% - 3.5% (of the purchase price) for an estimated total closing cost amount. Depending upon the purchase price of the property, this percentage can end up a bit higher or a little lower, but here are some of the standard fees that you can expect to pay:

Attorney or Title and Escrow Fee - $1,000+ (or 0.25 - .75% of Purchase Price)

Prorated Property Taxes - Vary (Roughly 0.75 - 1.25% of Purchase Price)

Lender Underwriting Fee - $1,500+ (or 0.5 - 1.0% of Loan Amount)

Appraisal Fee - $500 - $800

Notary Fee - $150+

Not included on this list are ‘points’ and other miscellaneous fees that may be imposed by the lender. Points are essentially pre-paid interest payments. The lender will allow you to pay one large lump sum at closing, in exchange for a lower interest rate over the life of the loan. Luckily, the majority of these non-standard line items can be negotiated or waived.

In instances in which I’m not competing against multiple other offers, I try to negotiate with the seller and get them to cover - or at least split - some of the closing costs.

Another thing that you can do to reduce your closing costs is ask your lender which line items you can shop for. Aside from the appraisal and underwriting, lenders will typically allow you to source outside service providers that may be able to provide more competitive rates or lower prices.

Bucket 4 - Renovation and Repair Costs

Once you wrap up with closing and your celebratory champagne toasts, you may have to get your hands dirty.

If you purchased a new-construction home or newly renovated investment property, you can skip this section. But for those that signed up for a little sweat equity, this cost bucket is bound to overflow.

I’ve purchased my fair share of real estate, and no matter how well I crunch the numbers, expenses are bound to run a bit above budget.

Everyone’s list of repairs will differ depending upon the condition of the property their purchasing; so I’m not going to make an attempt to price out each and every aspect of a typical renovation project.

However, I will tell you this:

Regardless of how much money you’ve budgeted for renovations and repairs, add an additional 25 - 50% on top. Even the most thorough inspector is bound to miss something that will cost you later down the line. And it’s far better to be financially prepared, rather than caught off guard by an expensive fix that you never planned for.

Other than setting aside a contingency cushion for your renovation and repair budget, the only additional pro tip that I have to offer is ‘trust but verify’.

There are a ton of great contractors and vendors out there, but there’s also a fair share of bad actors as well. When working with handymen / woman and independent contracts I highly recommend that you place a few guard rails in place to protect yourself from being taken advantage of. Two golden rules to follow are:

1. Never pay in full up front.

2. And always inspect their work in person before closing out your tab.

By sticking to these simple rules, it will make it tough for a shady contractor to run off with your money before completing the job to your liking.

Bucket 5 - Leasing Costs

For the fifth and final cost bucket, let’s discuss leasing fees and expenses.

Similar to the Renovations and Repairs bucket, this category isn’t going to apply to everyone. For the first-time buyers that are purchasing a primary residence (i.e. a home that they’re going to live in), feel free to skip to the end. But for any early-stage investors that intend to rent out their property, what I’m going to share should be helpful.

First and foremost, it’s important to understand that your property may not rent as quickly as you’d like. Sometimes the stars align and you’ll receive a flood of applications as soon as you go live; but more often than not, it takes a while to land the ideal qualified tenant.

With this in mind, I recommend that you budget for 30 - 90 days of vacancy.

There’s only been one instance in which I’ve had a property sit for more than three months without much activity; but it’s good to prepare for the worst case scenario. Carrying debt service can get costly.

Secondly, unless you lease up the property yourself, you’re going to have to pay a broker or property manager to source and vet the tenant. It’s customary to pay one month’s rent in the form of commission for them filling the vacancy.

So when it’s all said and done, you may have to float the mortgage and utilities for a month or two, plus pay an additional one month’s rent to the broker or property manager that assisted with leasing.

Early on, this can set your rental income back a bit. But by years two and three, you should have the lease up process down to a science which will help reduce your vacancy costs.

There’s only so much that you can do to reduce vacancy and cut out leasing expenses.

Experienced brokers and trustworthy property managers are worth their weight in gold. So I wouldn’t recommend beating them up too much on commissions if they help you secure a tenant within half the amount of time that it would have taken you to do it yourself or hire a less qualified third party.

Instead, I’d focus on making the property as desirable as your budget will allow. If the numbers make sense, go above and beyond throughout the design and renovation process. Couple this with a competitive rent rate and you’ll position your property to garner a ton of interest from highly qualified applicants; drastically reducing the amount of time that your property will sit vacant on the market.

So there you have it.

These are the 5 different ‘Cost Buckets’ that you should be aware of as you prepare to purchase your next home or investment property.

When your crunching your numbers, do your best not to skip over the smaller line items that come before and after the big down payment. These little expenses add up.

For those that are in the hunt for their next buy - or have already made it into contract - and would like some feedback on the financials of the deal, feel free to send me a private message.

More than happy to give my two cents.

Until next time,

Michael

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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Last month we sold one the apartment buildings within our fund for a double digit profit.

We invested nearly six-figures in renovations and updates, and took the building from 70% vacant to 100% occupied.

In the end, we walked away with an 18% return on our capital.

Objectively speaking, it was a win.

But knowing what we should have made on the deal, it kinda felt like a loss.

(Not only that, but I’m convinced I picked a few extra gray hairs along the way.)

As I look back at the game footage like a head coach after a matchup against our biggest rival, there’s four distinct moments - or plays if we’re running with the sports analogy - that changed the trajectory of our exit.

Three of which were completely out of our control, and one of which is a mistake that I’ve since vowed to never make again.

Here’s what happened . . .

We Got Hit With an EF-3 Tornado

On May 16th one of the deadliest tornados in St. Louis history ripped through the city and parts of the greater county. It took 5 lives, caused countless injuries, and left behind over $1B in property damage.

Luckily our building weathered the storm unscathed with the exception to a few minor exterior fixes. However, that wasn’t the case for much of the surrounding area.

The tornado left parts of the neighborhood looking post-apocalyptic. Hundred year-old trees were ripped from their roots and left blocking roadways. Homes and commercial shopping centers were leveled to the ground.

As you can imagine, trying to sell in this environment was an uphill battle. Local buyers were focused on rebuilding whatever they had left, and out-of-town investors were intimidated by how long it may take for the city to return to a sense of normalcy.

After months of low-ball offers and seller-financing proposals we finally received a decent LOI (Letter of Intent [To Purchase]). Albeit not as high as we’d hoped, it was strong enough to make the numbers work.

Insurance Options Disappeared

In the aftermath of the tornado, property insurance premiums went through the roof, and some carriers skipped town altogether.

Fortunately this didn’t affect our operations much, but it definitely hindered the sale. It was yet another underwriting component that gave many investors and prospective buyers pause.

If they could find a provider that would cover the building, the premium was often higher than anticipated.

Ultimately, we had to assist the group that bought our building with sourcing insurance coverage. But the difference between the cost of our in-place policy, compared to the premium that the new owners were quoted, was so large that it had to be factored into the sale price.

Being that the property was a small commercial apartment building, its value is derived from a Cap Rate. So the dent that the increased insurance cost made in the NOI (Net Operating Income), rolled over to our bottom line and negatively impacted our exit figures.

It wasn’t a massive hit, but every dollar counts.

Interest Rates Remained On A Roller Coaster

By now, most investors would have expected interest rates to have taken at least a slight dip. But they’re still sitting in 20-Year High territory.

To make matters worse, Jerome Powell continues to hint at a rate cut, but has yet to pull the trigger. This gives investors hope that lower debt service and higher yield is just around the corner. Leading most to sit on the sideline and try to wait out the current lending environment.

The dearth of active buyers meant no bidding wars or multiple offers to sift through. Instead, we had to actively market the asset to every reputable investor group and brokerage that could potentially bring us a decent purchase proposal.

After more than three months of sitting on the market, we finally settled on a price and terms that made sense for all sides.

Short-Term Debt Applied Pressure to Sale

Every other factor that affected this transaction was out of our control. But this was our own doing.

Ideally we’d leverage nothing but long-term debt with 10 - 30 year balloons (i.e. payback periods). But this deal was far from “ideal”.

As previously shared, it was only 30% occupied and needed over $100K in capex (capital expenditures). No banks or even hard-money lenders wanted to touch it. But we couldn’t make sense of passing on a deal that we knew would yield strong cash-flow, and potentially provide a large liquidity event once we refinanced or sold.

So we did what any savvy investor would do. We turned the seller into the bank and negotiated our own financing terms without the help of a 3rd party lender.

After a few rounds of negotiations, we locked in a solid purchase price and came to an agreement on a fair interest rate. But the one piece of the puzzle that didn’t fit was the balloon period.

The sellers wanted to be paid off in 12 months or less, and we were pushing for a payoff date of 36 months or more. We settled in the middle; conceding to a 18-month balloon with debt service being amortized over 30 years.

Our monthly payments were low. This allowed us to allocate substantial capital towards improvements and it set the stage for robust cash-flow.

But it also forced us to reposition the asset quickly. And while this was the objective—in the end—it limited our exit options.

Even after we completed all renovations and stabilized the building, because of its size and the relatively short hold period, it was tough to refinance into a long-term loan. The few term sheets we received were heavy on fees and not-so-pretty on the interest rate. This is what led us to selling the property. (And you’ve already been caught up to speed with the roadblocks we ran into throughout the sale cycle.)

In hindsight, I stand by our decision to acquire the asset. Despite the ups and downs, we still made it out on top. But if I could rewind the hands of time, I’d be unwaveringly firm on a 36 - 60 month payback period, or I’d raise additional funds so that we could buy the building outright without any debt in the capital stack. Either of which would have made it far easier to hit our desired return hurdle.

In summary, we won the war, but we took a few bruises in battle.

It goes without saying, I would have liked to squeeze a bit more juice out of this fruit.

But I’m not mad at the profit we returned to all of our investors that had a hand in the deal.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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Stop fixating on price.

It matters far less than you think.

How much you pay for a property is not the sole and only determiner of profitably.

It’s actually far down on the totem pole.

There are 4 core facets of every investment.

Get these right, and you will never go wrong. . .

#1 is Location

The importance of location cannot be overstated.

It’s one of the only un-controllables within real estate.

Once you’ve closed on a property, you can’t change the side of town that it’s on, the block in which it’s located, or how the surrounding area looks.

I avoid buildings that sit at a dead-end, as well as those that are situated adjacent to freeways and major intersections.

Alley access is sometimes an advantage, but the trash and unwanted traffic can also be a headache.

I’m careful when it comes to buying next to parks and schools. Some parks attract the wrong crowd - gangs, homeless, you name it. And while being located in a school zone can increase safety, the constant flow of wandering teenagers can be a turnoff to prospective tenants and buyers.

Most importantly, unless I have trusted boots on the ground, I’ll never buy too far away from home. The added cost of flights and hotels can back you into a corner, and you’ll quickly find yourself between the infamous rock and hard spot—leading you to bite the budget-blowing-bullet, or forcing you to depend on contractors that don’t have the same vested interest that you do.

Before we move on to #2, I cannot miss the opportunity to once again reiterate how critical it is that you are careful when choosing where you buy. Location is number #1 on the list for a reason. You only get one chance to plant your flag. Remain selective, and never settle.

#2 is Financing

How you fund a deal is less irreversible than buying in a bad location. However, taking on risky debt can undoubtedly cause challenges later down the line.

There are three types of debt that you should use sparingly: short-term, floating-rate, and hard-money.

Loans with maturity dates under 5 years would fall into the short-term bucket. These loans are built for single-family fix-and-flips and smaller renovation projects. Using this form of financing for a buy-and-hold rental wouldn’t make much sense. And leveraging these loans as bridge debt when taking down larger development deals can add a ton of pressure to your turn-around timeline.

Floating-rate, sometimes referred to as variable-rate debt, places you at the mercy of the market. If interest rates remain steady or decrease prior to your maturity date, you’ll have nothing to worry about. But if they rise, you can find yourself in trouble. An unexpected spike will not only cut into your cash-flow - making it tough to service the debt - but more importably, it can block your ability to refinance and limit your exit options.

Both short-term and floating-rate debt are common types of hard-money. But hard-money can also come in the form of long-term loans. I’d define hard-money as any loan that has little or no personal underwriting requirements. These loans are typically high in fees and carry a heavy interest rate; making it difficult to clear a profit if you’re relying on ordinary rental income.

Keep in mind, I wouldn’t say that these capital sources are completely off limits. Sometimes they’re your only option. But I would I highly recommend that you exercise caution when taking on any form of short-term or high-leverage debt that can change quarter by quarter depending on how the Fed is feeling.

Regardless of how tempting it may be to take on bad debt, try your best to remain conservative when building your capital stack.

#3 is Strategy

If your entire business plan is hinged upon a single investment strategy, you’re exposing yourself to a tremendous amount of risk. The more ways that you can turn a profit from a single property, the better.

If you acquire an asset that’s intended to be a fix-and-flip, you want to ensure that it will also at least pay for itself as a rental as well.

If you underwrote a property as a vacation rental, you should also run the numbers to see how it’d perform as a mid-term rental.

Whatever you had in mind for Plan A, make sure that there’s a viable Plan B.

Albeit relatively predictable, real estate can still be volatile. Not like stocks, but more like the weather.

Everything can be sunshine and rainbows, and then boom, you get hit with a rainy day—your contractor bails on you, squatters break in and occupy the property, new legislation passes. When the unexpected happens, you have to make sure that you’re prepared to make it through the storm. The inability to pivot can choke the life out of your profit and leave your deal for dead.

#4 is Operations

Operations are the lifeblood of a real estate portfolio. Efficient systems and processes can compensate for nearly any error you make - overpaying, costly debt service, even location to a certain extent.

Tenant screening, vendor selection, budgeting, management, they all fall within the operations umbrella. Each being its own small cog that makes the machine work as it should. When in unison, everything runs smoothly, but when a monkey wrench is added to the mix, the train can quickly go off the tracks.

It’s your job to be the conductor. Creating the necessary guardrails, sticking to your SOPs (standard operating procedures) and executing at the highest level.

Unlike every other aspect of real estate which requires you to remain nimble and be flexible, this is the one area that you should be rigid. Stick to your guns and don’t allow the rules to be broken, or even bent—even if times get rough. You’ll regret it when things go awry.

If you’re worried that you got the short end of the stick at the negotiation table, don’t fret. It’s not the end of the world.

How much you paid, does not dictate how much you’ll make.

Location, financing, strategy, and last but definitely not least, operations will trump the price tag.

So don’t beat yourself up over the small losses along the way, just focus on securing the big win in the end.

Hope this helps you along your journey.

Michael C.

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In less than 5 years I’ve scaled my portfolio to 25 doors.

But if I was starting from scratch again, I’d do things differently.

Rather than racking my brain with a bunch of different elaborate work-flows and operational frameworks, I’d dumb it down to these three simple steps:

Step 1

I’d start with just 1 property.

You don’t need a ton of rentals in order to pocket a solid profit at the end of the month.

In fact, more properties—without the proper systems in place—often equate to lower returns and higher management costs.

So rather than fixating on quantity, I’d focus on quality - specifically location and value-add potential.

Step 2

I’d turn that property into a place that people never want to leave.

Vacancy can deal a death blow to your bottom line.

It’s like a carbon monoxide leak to your financial statement.

An invisible expense that will slowly kill every bit of your projected profit.

To keep my property from sitting empty, I’d start backwards.

Instead of trying to figure out how to get people to move in, I’d prioritize creating a space that tenants would never want to leave.

Step 3

Lastly, I’d direct all of my efforts toward optimization.

I’d position the property to operate at its highest and best use.

This sounds obvious, but most investors aren’t maximizing their assets.

As a result, they’re leaving a ton of money on the table each month.

If street parking is scarce, I’d implement paid dedicated parking on the premises.

If the apartments are small with limited closet space, I’d rent out storage units where tenants can place their personal belongings.

If the units aren’t sub-metered, I’d enforce RUBS (Ratio Utility Billing System) to recapture a portion of the operating expenses.

These are just a handful of the low hanging fruit that can easily add hundreds - if not thousands - to your bottom line.

Real estate is simple.

It’s us investors that overcomplicate it.

If I were starting over, I wouldn’t chase door count or massive scale.

I’d focus on the fundamentals.

With a strong foundation, you have everything you need to build a highly profitable portfolio.

So instead of trying to go from Step 1 to 100 all at once, start small. But always think long-term. And squeeze every ounce of value from what you already own—before racing off to buy more.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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We hear about the financial benefits of real estate investing like a broken record.

But nobody talks about the non-monetary gains.

Our timelines, feeds, and podcasts loop the same song:

Real estate gives you financial freedom . . .

Real estate creates generational wealth. . .

Real estate unlocks the dream lifestyle. . .

All of these things are true.

But there are 3 specific intangibles that come along with owning properties that truly make it worth the investment.

They’re the perks that can’t be penciled on paper, but provide outsized return.

1. Mental Clarity

Next to food, shelter is the foundation of our human basic needs.

You can’t even concentrate when you don’t know where your next meal will come from.

You can’t think straight when you don’t know where you’re going to lay your head at night.

Nothing else matters when either of these two things aren’t solidly squared away.

Ownership solves the biggest piece of life’s puzzle.

Whether you own just one property for you and your family to live in, or you have 10 rentals to choose from, you never have to worry about: being priced out of your place because the landlord decides to raise rents, or having to relocate because your home is being sold.

Homeownership affords you the comfort of knowing you’ll always have a place to stay.

It gives you the peace of mind that we all need.

2. Newfound Confidence

Before shooting for the stars, most of us need to know that we have a nice cushiony cloud to fall back on. Real estate is that cloud.

It’s the safety blanket that gives you the confidence to take risk and pursue your off-the-beaten-path aspirations. Whether it’s pulling the trigger on that side hustle you’ve been tinkering with, or launching the next unicorn, you’re covered—both literally and figuratively.

Even if none of your entrepreneurial endeavors pan out, with just one property under your belt, you’ll never be without a home. With multiple doors in your portfolio, you have an evergreen flow of rental income that will fund your retirement and send your kids to college some day.

Real estate unlocks the cages of our mind that keep us from chasing our dreams.

3. Self-Worth

The social impact that comes with being a housing provider is invaluable.

Last year over 750,000 men, women, and children went without shelter. Even if it’s just one family, putting a roof over someone’s head is life changing.

Aside from the difference it makes in other’s lives, it’s equally self-serving.

Every upright citizen has the innate urge to be of value. I can’t think of a better way to check off this box.

Providing quality housing is undoubtedly one of the greatest ways that we can be a small part of the solution, and contribute to the improvement of our communities.

Nothing I’ve listed above, shows up at the bottom of an operating statement.

Peace of mind, financial security, social impact—none of them are a line in an Excel spreadsheet.

These are the profits that can’t be measured in dollars.

But ironically, they provide the absolute best return on investment.

Don’t let the non-monetary benefits that come along with owning real estate be overshadowed by the financial gains.

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Passing on a bad deal will make you more money than investing in a good deal.

I’ll never forget the duplex that almost lost me $100K.

I Remember It Like It Was Yesterday

It was the first Midwest deal I put under contract.

I had just closed out two successful flips here in California and bought a 3-story townhome in Philly.

On paper, it was a no-brainer.

The price was right, tenants were already in place, and financing was lined up ready to go.

I was so confident in the numbers, that I was going to buy the building site unseen.

But a few days into the due diligence period, my gut told me to fly out and make sure everything was what it seemed.

I’m Glad I Did

The second I pulled up, I knew that the property wasn’t worth the price that the sellers wanted.

The block was riddled with dilapidated homes and abandoned cars.

The tenants were hostile; they hardly let us in to carry out the walkthrough.

The HVAC units, roof, and electrical panels all needed attention.

The building was a ticking time bomb, and If I would have went through with the purchase, it would have exploded in my face.

I Had To Abort the Mission (ASAP)

I laid out the laundry list of issues that needed to be addressed and gave the sellers two options: fix the problems or adjust the price accordingly.

They wouldn’t budge, so I told them to beat it.

I called the deal off and purchased two properties on the opposite side of town instead.

I still own both of the buildings today.

How It Ended

Because I cancelled the purchase contract on that first deal before my due diligence period ended, I got to walk away with my earnest money deposit.

But more importantly, I learned 3 extremely valuable lessons:

Lesson 1: Look out for the “low-priced-property” trap

The price tag on a property can be like bait to us investors. If it’s low enough, we’ll bite the hook.

Knowing this, you have to separate price from value. Just because you come across a $50K duplex, doesn’t mean that’s what it’s worth.

Lesson 2: Numbers don’t lie, but they hardly tell the full story

You have to take the spreadsheet math with a grain of salt.

You should always assume: the rental income is lower than you’ve been told, expenses are high than what’s been disclosed, and the property’s in worst condition than pictures show.

Lesson 3: Never buy blind

You’ve heard it before: trust but verify.

No matter how attractive a deal looks on paper, make sure it looks equally good in person.

Whether you personally set eyes on the property, or you send someone you trust, never enter a deal in the dark.

The moral of this 5-minute long story is:

It’s easier to make money in real estate, than it is to prevent losing it.

Real estate is not rocket science. You don’t need a PHD to do well in this game.

Harnessing the patience and discipline is the tough part.

You have to be patient enough to sift through the plethora of sink-pit deals that will cost you more money than they’ll ever make you. And you need to be disciplined enough to do what most investors won’t.

Whether that’s running the numbers 10 different ways through 10 different scenarios, or jumping on a last-minute flight and flying halfway across the country to meet with an inspector.

Ultimately, the deals that you pass on will shape your track record just as much as the ones you knock out of the park. The wisdom lies in knowing when to swing—versus when to step back from the plate.

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In my football glory days I’d study game film like religion.

Pausing, rewinding, and fixating on every second of the tape in search of the exact moment where things went wrong.

This is what we’re taught to do.

In sports.

In work.

In life.

We’re bread to find our past mistakes so that we can avoid making the same error in the future.

But hardly ever do we step back to assess what we’ve done right, so that we can focus on being even better moving forward.

By the time I hung up my helmet and jersey for the last time, it finally clicked. . .

Those that want to be good, obsess over correcting their weaknesses. But those that strive to be great, go all in on their gift.

I realized that consuming myself with a list of shortcomings was counterproductive.

Placing every ounce of energy that I have toward honing my handful of natural talents, is far more beneficial.

When I traded in my cleats for Allen Edmonds I brought this realization with me over to the real estate game.

I quickly recognized that I wasn’t the best salesman.

It didn’t come natural to me like other Realtors that transitioned from selling cars and solar panels, to now houses.

So I had to find my path.

I’ve never been one to throw in the towel, so taking a left turn wasn’t up for debate.

And wasting time and effort to become a mediocre salesperson made no sense.

I made the right decision without hesitation.

Sales isn’t my thing, but I’m a hell of an educator and I have a knack for simplifying complex concepts.

So rather than trying to sell ice to eskimos, I figured that I’d focus my efforts on teaching about the dangers of frostbite and how my jackets and gloves could be of value.

After only a few months of sharing useful insights and practical tips that property owners could immediately benefit from, my first sale fell in my lap.

I rolled that commission into two flips and an out-of-state rental.

From there I picked up five small apartment buildings and another single-family rental here in California.

I’m now at 23 doors across 3 different states and I still suck at sales.

The idea that we can brute force our weaknesses into strengths is a fallacy.

If you loathe running, you’ll never be an olympic sprinter.

If you hate cooking, you’ll never be a master chef.

But if you’re a natural-born chess savant that eats, sleeps, and breathes rooks and bishops, you have a much higher chance than most at becoming a World Champion.

Chess may not be your game—football wasn’t my ticket to the Hall of Fame—but we all have a unique super power.

Find it and be the hero of your story.

Thanks for reading.

Please share if I’ve earned it.

Michael C.

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Nearly once a week I’m asked: What’s a better investment, stocks or real estate?

Comparing the two is like lining up an apple vs an orange. The two asset classes are so fundamentally different that I don’t even make an attempt at putting together a case for one over the other.

A much easier question to answer: Trade stocks or buy-and-hold real estate?

This is like asking a kid if they’d like asparagus or ice cream.

The smart answer is obvious.

Here’s why. . .

Unlike trading stocks, long-term real estate investing is a marathon, but most beginners perceive to be a sprint.

They make the same mistake as the Wall Streeters - try to get in and out as quickly and profitably as possible. This is a tough game that’s hard to win. The brightest Einsteins spend their entire careers trying to get this right, and they still end up wrong 9.99 times out of 10.

Real estate investing is a little different. Those that are successful, follow a simpler approach that has much higher odds of success. It goes something like this: buy right, sit tight, enjoy the ride and make great money along the way.

I settled on this thesis the hard way. I lost more money than I made in the stock market. And after taking my fair share of bumps and bruises, I backed away from the trading desk for good; doubling down on long-term buy-and-hold real estate.

Luckily, my bank account lived to see another day. Now here I am to help you avoid some of the pitfalls that I fell into while still early in my investing journey.

I created this diagram to help drive the point home: Hold-Time Trumps Market-Timing

The left side of the diagram depicts the plight of the short-term stock trader. Buy low, sell high (+ pay taxes), or lose on the dip.

The right side is a glimpse of the route that long-term real estate investors take. Pay a fair price, hold for a long time (+ cash-flow well), and refinance opportunistically.

This is the abbreviated version of the full story. It leaves out the not-so-fun parts of owning and operating real estate - management, maintenance, etc.. Nevertheless, it captures the big picture.

The purpose of today’s piece is not to downplay stock traders or house flippers. I have a tremendous amount of admiration for those that have a knack for finding the sweet spot in the market.

But the truth is, attempting to perfectly time the market is a risk laden way to invest. Even those with a crystal ball tend to misread the forecast the majority of the time. Compounding small victories over an extended hold period is often a more predictable approach to achieving the big win.

To the early-stage investor that’s found their way to the end of this post, I leave you with this:

Home runs aren’t the only way to win games; base hits get the job done just as well (with far less missed swings at bat).

That’s all for today.

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Long-term buy and hold investors often forget that the #1 killer of cashflow - aside from taxes - is vacancy.

The common approach that most use to grow their top line is to wait for a tenant to vacate, and re-fill the unit at a higher rate. But an even better approach, is to push rents without ever letting the unit go empty.

Most think that this is impossible to pull off, but it’s not.

Here’s how I do it across my portfolio:

Step 1: I Open Up the Lines of Communication

Nobody likes the hassle of having to move.

I’ve found that before a tenant reaches their breaking point, they’ll tell us what’s making them consider relocating. But the key is to give them a way to communicate their concerns. So I provide plenty of different ways that our tenants can get in touch with us - email, phone call, and even text.

I self-manage a handful of units but leverage 3rd-party management for the bulk of my portfolio. For those units that I personally oversee, residents can send an email or text any time of day, and they’ll receive a response from either myself or my virtual assistant within 24 - 72 hours. My property managers can be reached via phone call and text in addition to email. They make an effort to provide same day response.

Step 2: Take a Top-Down Approach to Tackling Issues

Once I’ve gathered all of the pain points from our residents, I focus on the most important ones first; especially those that are an easy fix.

Don’t overwhelm yourself or your management team by trying to resolve every problem at once. Start at the top of the list and gradually work your way down. Remember, tenants aren’t expecting ‘perfection’; they just want to see ‘improvement’.

It’s extremely rare that a tenant will make a grievance pertaining to their ‘rent being too high’.

The vast majority of complaints are pertaining to a broken appliance, stolen package, or noisy neighbor. All of which are relatively simple and inexpensive problems to solve. I hone in on these low hanging fruits first, and work my way around to the more complex and costly issues.

Step 3: Identify the Outliers

Within every portfolio - especially if you’ve inherited tenants from a previous owner - there are a handful of ‘outliers’.

These are the tenants whose rents are severely suppressed compared to the present day market rates.

Rather than attempting to raise rents across my entire portfolio - risking a spike in vacancy - I target those outliers and work on bringing their rents to fair market value first.

Then once I’ve made it through that cohort, I turn my attention to the remainder of the residents who are ripe for a rent increase.

Step 4: Put Up Guardrails

Rent rate imbalance (the disparity between the in-place rent and market-rate rent) is often the result of a lapse in financial oversight.

As my portfolio grew, I recognized that it would be more difficult to remain acutely in-tuned to the financial well-being of each and every property that I owned. With this in mind, I removed as many manual cogs from the machine as I possibly could. I automated everything that didn’t require critical decision making, and systematized the rest.

With SOPs (Standard Operating Procedures) in place, I drastically reduced the risk of any leases falling between the cracks and going years without an eval (evaluation) or reassessment.

It’s important to take a measured approach to raising rents.

If you attempt to squeeze out more money from your tenants without re-investing in the real estate, you’ll be left with an empty building.

Additionally, it’s wise to raise rents in an orderly fashion. Bring up the bottom of the bunch before proceeding to the newer residents that have only been with you for a year or two.

If you borrow from these tips, and add your own twist, you’ll be able to do what most investors can’t - add to your top line while protecting your bottom line from vacancy risk.

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Real estate investing doesn’t have to be complicated.

It’s designed to be the simple, slow, and steady route to building wealth.

Of the million different ways that you can get started, here’s the most straightforward approach:

It’s called the Live-In Flip, and I’ve broken it down into 3 easy to follow steps.

Step 1: Buy In Your Backyard

After I flipped a few homes here in California where I live, I bought my first buy-and-hold rental property on the complete opposite side of the country - Philadelphia.

I still own the building to this day, and I don’t foresee selling any time soon; but I wouldn’t recommend that the average first-time investor take this same approach.

There’s perks that come along with investing out-of-state, but it’s also riddled with risk and can be extremely capital intensive.

For these reasons, I advise all of those that are just getting started, to buy in their own backyard.

It allows you to leverage a low downpayment loan, and if you’re up to the task, you can take care of renovations and repairs yourself.

Whether you’re the one getting your hands dirty, or you hire someone else to do all of the heavy lifting, by investing within the same vicinity that you live in, you can keep a close eye on your property without having to hop on a flight.

Step 2: Add Value In Every Way You Can

No property is perfect.

There’s always something that can be done to update and add value to the asset.

The low hanging fruit are the aesthetics.

Modernizing the kitchen and bathrooms, or repainting the interior and exterior facade, will give you tremendous bang for your buck.

If you’d like to take it a step further, you can carry out structural improvements as well.

Adding a bedroom, converting the garage into a JADU (Junior Additional Dwelling Unit), or building out an entirely separate rental in the rear of the property, will increase your cash flow, plus force appreciation and add equity to your property value.

Step 3: Sell To Trade, or Refinance, Roll and Repeat

After you’ve added value, it’s time to trade up, or refinance and roll the proceeds into your next purchase.

If you don’t have to, I wouldn’t recommend selling.

Regardless of what the property’s worth today, it’ll be worth more tomorrow.

If you’re able to pull off your next purchase without letting go of your first, I highly recommend doing so. But if holding will hinder you from taking your portfolio to the next level, feel free to trade up to bigger and better.

For those that are able to refinance prior to taking down their next purchase, it’s important to pull only what you need.

If you have adequate equity, a lender will gladly drown you in mortgage debt.

Albeit a windfall of cash can be tempting, I encourage you to limit the payout to whatever your downpayment will be; plus the funds that may be needed for your next renovation.

Additionally, you should ensure that the post-refi debt service on your first purchase, does not exceed the projected rental income.

That’s all there is to it.

It’s not the exciting, rocket-ship style of real estate investing that the YouTube gurus tout.

But it doesn’t require you to harass your family and friends, or go out and raise gobs of money from random strangers.

It’s the somewhat boring, but simple route that I recommend all early-stage investors take.

By executing this same 3-step formula year after year, you’ll build a highly profitable, easy-to-manage portfolio that will spin off cash flow and stack up equity over time.

If you’re someone like me, who lives in an expensive market that’s highly competitive, send me a message; I’m more than happy to share a few pointers on how you can still invest locally without planting your money out of state.

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If I could rewind time, here’s how I would get started as a first-time real estate investor:

Step 1: Choose My Model

The very first thing that I’d do is nail down my model.

One of the biggest - most common - mistakes that early-stage investors make, is that they fail to commit to a specific strategy.

They try to learn everything there is to know about AirBNB operations, while also binging YouTube content on mid-term rentals and rooming houses.

This is a recipe for disaster.

The truth is: There’s countless ways to make money through real estate.

But the key is: To choose the simplest strategy that will achieve your desired outcome.

Real estate is a long game.

You’ll have plenty of time to learn all of the different tricks of the trade.

But when you’re just starting out, you should avoid spreading your knowledge, resources, and capital too thin.

It’s far better to settle on just one strategy and go deep.

Step 2: Pick My Market

Once I’ve landed on my investing model of choice, I’d focus all of my efforts toward market selection.

Along side the laundry list of different investment strategies, is an even longer list of locales to choose from in which you can place your capital.

Where you ultimately plant your flag will often come down to a blend between budget and opportunities.

If you reside in an expensive market that has limited deal flow, you may not be able to park your money in your own backyard.

Your search could lead you to the Midwest or Southeast Sunbelt where your dollar goes a bit farther and inventory is more robust.

Regardless of which market you end up committing to for your first deal, try your best to identify the best and worst parts of town as quickly as possible.

Bad neighborhoods can tank even the best deals.

Step 3: Pull the Trigger

After I’ve gained clarity on my How (strategy) and Where (market), I’d concentrate on executing.

This is where a lot of early-stage investors get stuck.

They know what to do and where to do it, but for whatever reason, they fail to pull the trigger.

I believe this is largely due to first-time jitters.

Once you step from behind your computer screen and actually begin walking properties in person, the numbers on your spread sheet become more than just napkin math.

And the thought of betting your hard earned money on a real estate play can be scary.

It’s normal to have reservations when making such a large investment.

But I implore you to foster confidence from the knowns, rather than allowing the handful of unknowns to intimidate you.

No matter the curve ball that comes your way, there is a solution for each and every issue that may arise.

That’s it.

These are the 3 simple steps that I’d take in order to secure my first investment property.

It goes without saying, there’s a ton of additional steps that come before, after, and in between the 3 that I’ve listed here.

But that’s ok.

As an early-stage investor, you shouldn’t cloud your brain with the burden of thinking through thousands of scenarios that have yet to arise.

You should remain clearheaded and tackle each obstacle as it comes.

If you’re normal like the rest of us, and a bad case of cold feet has gotten in the way of you taking down your first deal, feel free to send me a message or leave a comment.

Always happy to answer any questions, or give a quick pep talk to help restore your confidence.

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Whether you’re relatively new to real estate investing or you’re a vet in the space, I’m sure you’ve heard it before:

“Did you know that you can buy real estate without using a bank or lender—100% seller financed?”

This is true, you definitely can. And it comes with it’s fair share of perks. You skip the hassle of submitting a mountain of documents. You have more flexibility in regard to deal structuring. You eliminate most (if not all) financing fees.

But there’s also a short list of risks that can’t be ignored.

Without a firm grasp of these 3 critical aspects of seller financing, you’re bound to run into trouble.

1. Seller Financing ≠ No Debt Service

Just because you close a deal without a bank or mortgage broker, does not mean that there’s no debt involved. The seller is simply stepping into the lender role.

More often than not, you’re still going to put up a downpayment. The difference between your downpayment and the purchase price is what the seller will be lending aka “carrying”.

The terms that you and the seller agree to (interest rate, amortization, and payback period) will determine the debt service.

If you’re not careful, you can end up paying more to the seller, than you would to the bank or a traditional lender.

2. Limited “Tradability”

There are plenty exceptions, but usually sellers are only willing to finance deals that no one else is willing to buy. If they could put it on the market today, and have it sold by tomorrow, they would.

Whether it’s the condition of the property, asking price, or market timing, there’s typically something that’s keeping buyers away from putting forth a strong offer.

And while this may not be a deterrent if you’re a long-term buy-and-hold investor, it’s something that can hinder your ability to exit if you ever end up deciding to sell.

3. Less Liquidity

Lastly, are the liquidity obstacles. If a property is tough to sell, it’s probably equally tough to finance. If buyers don’t want it, lenders and banks will often stay away as well.

Now you may be saying to yourself: “This is why I’m using seller financing!”

I hear you loud and clear, but you can’t stay in bed with the seller forever. At some point they’re going to want the rest of their money, and not many sellers are going to carry a loan for 30 years.

So when your payback period comes to an end, you’ll either need to dig deep into your pockets to come up with the rest of the purchase price, or search far and wide for a bank or lender that’s willing to take the seller’s place.

Both routes can be equally daunting.

I don’t share these aspects of seller-financed deals to scare you away from opportunities that may be out there.

The hairiest deals often have the most upside. However, it’s equally important to recognize the potential downsides as well.

Not enough brokers, investors, and advisors are sharing the risks that come along with creative financing. I had to be the one to do it.

If you’re considering taking down a deal using seller financing, and you’d like feedback on the terms and structure that you should go with, send me a message or leave a comment.

I may be able to help you avoid stepping into a sticky situation.

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I understand why most investors want to automate-away every operational aspect of owning rental properties.

But this is the wrong way to go about building a legacy portfolio.

With the exception to a handful of mundane tasks that can be set on cruise control, like . . .

lawn care

unclogging toilets

tenant correspondences

I think it’s wise to live in the weeds when you’re building a portfolio that you’d like to stand the test of time.

Here’s a short list of the things that I try my best not to outsource; regardless of how large I scale:

Site-Walks and Underwriting

I can’t ‘feel’ a property through photos or Facetime.

Once we’re in contract, I like to physically walk not only the property, but stroll the neighborhood as well. Immersing myself in the area and envisioning what a tenant or short-term rental guest will experience.

Additionally, I think that it’s important to run your own numbers.

The numbers never lie, but they seldom tell the whole story. It’s imperative that you underwrite deals with your operational plan and exit strategy in mind. No matter how much money’s on the line, placing the fate of a deal in someone else’s analysis can be risky.

Tenant Screening and Interviews

It amazes me that investors are comfortable with completely deferring tenant selection to those that won’t bear the burden of picking a bad apple.

Property damage, legal fees, eviction costs, they all fall on the owner’s shoulders. Yet I consistently come across investors that let 3rd party property managers choose who lives in their buildings.

Once a prospective tenant’s application has made it through preliminary review, I personally carry out interviews before giving final approval.

Project Management and Draw Schedules

Every unit turn, build-out, and renovation project will run over budget if your let it.

Thoroughly vetting contractors, hand-picking finishes and overseeing their work to a certain extent is the only way that I’ve managed to get through projects on schedule and remotely within budget.

I don’t expect this style of investing to resonate with everyone.

It’s contrary to the typical advice that you’ll get from your favorite guru.

But that’s ok.

Those that ‘get it’, are able look past the trees and see the forest for what it is. In other words, they get the bigger picture.

Building and operating a real estate portfolio that you’ll one day pass on to your children is a journey that I can liken only to running a family-owned restaurant.

The location, the recipes, the service; each play a part in the overall customer experience, and ultimately, the longevity of your establishment.

And the same concepts apply to us housing providers and real estate operators.

Although it may feel a bit burdensome now, sweating the details pays off in the long run.

The compounding of these tiny - yet critical - decisions is what makes all of the difference.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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Yesterday I got the news that one of my contractors died of a heart attack.

He was only 39 years old and leaves behind 5 daughters.

The Very First Thing I Did

Before the day was over I sent flowers and a card to his family.

Inside the card was a check.

I made sure they received every penny their loved one was owed for the work he did for me.

I’ve had guys get hurt on the job.

I’ve had guys disappear without ever finishing.

But this was the first time I’ve had to navigate a death.

What Happened Next

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You hear it all the time - Real estate is all about location, location, location!

Everybody says it, but very few truly understand why location is so critical when choosing which properties to pursue.

As someone who’s owned and sold buildings in every asset class from A to D, I can attest to the importance of market selection and the obstacles that come along with disregarding the golden rule.

To all of my fellow value-add investors out there, I’m not saying that you should never buy in sub-Class C markets, but I am saying that you should keep these 5 risk factors in mind when doing so.

(these are in no particular order, they’re all equally important)

#1. Insurance Risk

Let’s start with one of the least obvious - insurance risk.

If you’re financing the acquisition you’re going to need insurance.

A myriad of factors are taken into consideration when calculating your annual premium. But the greatest determining factor - aside from the property’s condition - is location.

It’s not just flood and fire zones that drive up your insurance cost. Being located in a high crime area will lead to steeper premiums as well.

#2. Construction & Rehab Risk

Compared to upper-middle class and higher-end neighborhoods, carrying out construction and renovations in Class C and D markets is 10X tougher.

Squatters will make themselves at home like they own the place. Vandals will break in and carry out senseless damage such as spray painting all over the walls or shattering windows. And thieves will steal anything they can scrap for a few bucks: copper, generators, appliances, you name it.

Heightened security is a must and this comes at a cost.

#3. Tenant Risk

It can be hard to find ‘good tenants’ that are willing to move into ‘bad neighborhoods’.

Regardless of how nicely you’ve renovated the units, or how many upgrades you’ve made throughout the interior and exterior, if the area is dicey you’ll always face an uphill battle when it comes to tenant sourcing.

You should expect for your lease-up to take a bit longer, and be prepared to withstand the additional carrying costs that come along with extended vacancy.

#4. Slower Growth & Appreciation

As a long-term buy-and-hold investor, I’ve never been one to fixate on appreciation.

I primarily invest for cash-flow and future rental income potential.

But for those whose business models are dependent upon a swift exit, I caution you to underwrite conservatively when projecting the future value of assets that are located in tertiary markets.

Unless you strike gentrification gold and outside capital begins flooding the area, properties located in Class C and D markets appreciate much slower than their Class A and B counterparts.

#5. Liquidity Risk

Lastly is liquidity risk.

Similar to insurance risk, this is another inconspicuous obstacle that early-stage investors often overlook.

Lenders like to have their funds backed by quality assets in great neighborhoods. If your building is in rough shape, or it’s situated in a less desirable area, this will give lenders pause. Ultimately, making it more difficult to refinance or sell to non-cash buyers down the line.

I’m not trying to scare you away from value-add opportunities.

Repositioning Class C assets into Class B work-force housing is an investment model that’s tried and true.

But you can’t let the spreadsheet fool you.

If you’re not careful, these deals that often look like a dream come true, can quickly turn into a living nightmare.

The potential for strong returns can be spoiled by theft, vacancy, insurance risks and financial hurdles that you never saw coming.

If you’re going to invest in transitioning neighborhoods and tertiary markets, do it with your eyes wide open.

Run your numbers twice, pad your reserves, and factor in the real-world challenges that don’t show up on an Excel pro forma.

If you take into consideration, not just the good, but the bad and the ugly as well, you’ll never be caught off guard by a surprise pot-hole or roadblock along your real estate journey.

You’ll have the foresight necessary to mitigate risk and successfully navigate these more nuanced investment opportunities.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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Everybody’s familiar with income tax, short-term and long-term capital gains tax.

But only us real estate investors know about “out-of-town tax”.

It’s the hidden premium we pay for not being local.

And it comes in a few different shapes and sizes. . .

Such As

I’ve had brokers and wholesalers try to inflate the price on deals simply because they know that I’m from California, and they presume that all of us West Coasters are flooded with cash (absolutely not the case).

I’ve had contractors up-charge me because they know that it’s cheaper to pay them than it is for me to fly across the country and do it myself.

And the most common way that we get hit with the out-of-town tax happens like this:

We hire the cheapest, quickest, contractor we can find because we desperately need the issue resolved.

Their rate is half the cost of the name-brand contractor, but the work ends up being shabby.

And ultimately we have to hire another crew; costing us double the money and taking 2X as long.

However the out-of-town tax makes it to your bottom line, it all hurts the same.

But contrary to that powerless feeling you get when you have to cough up an extra $2,000 to rectify a $500 fix, you don’t have to take these costly bumps and bruises on the chin.

You Can Fight Back

I’ve been investing in real estate for years and the vast majority of my properties are spread across the Midwest and East Coast.

I learned about the out-of-town tax the hard way—it was an expensive tuition.

But over time, I learned how to evade Uncle Sam (the out-of-town tax).

I boiled it down to these 5 simple frameworks.

They’re not impenetrable; you’re bound to pay a bit extra out of pocket every once in a while; it comes with the territory.

But they’ve undoubtedly kept my capex (capital expenditures) in check.

And they will do this same for you.

Framework #1

Know Your Numbers Before You Start Counting Cash

Without a basic grasp of construction and repair costs, you’re going to get ripped off on a regular basis.

Contractors will take your lunch money like clock work.

Whether it’s through books, blogs, Chat GPT, or good old-fashioned Google searches, do your homework ahead of time.

Gaining a loose understanding of what the job entails and how much it typically costs, will help you establish guardrails before gathering bids.

Framework #2

Handyman or Licensed Pro? Pick One

All jobs aren’t created equally.

Unclogging a toilet doesn’t require the skilled training - nor $300 an hour price tag - of a licensed plumber.

On the flip side, I wouldn’t hire a handyman to repair my sewer lateral.

Developing a knack for which jobs are cut out for licensed tradesman, versus which ones can be outsourced to the average Thumbtack handyman will save you thousands of dollars and millions of headaches.

Framework #3

Never Hesitate To Use Your Lifeline or Phone A Friend

Some investors are scared to ask for help— i’m not one of them.

After I’ve done my own independent research, I’ll look to other investors for referrals.

Our community is smaller than you think.

If there’s a carpenter that does great work in your market, chances are, their name will come up.

And the same goes for the bad actors.

When con-tractors slither through town snaking people out of their money, word travels just as fast.

Fellow property owners will be the first to tell you who they’d recommend working with versus who you should watch out for.

Framework #4

There’s No Such Thing As One and Done

Gathering bids is a chore that no investor enjoys.

But in the same vein, all of us love the feeling of getting a good deal.

It runs in our blood.

So although you dislike sifting through Google Business Profiles and sitting on the phone with contractors’ admins, you have to do it.

It’s the only way to ensure you’re getting a fair shake on the work that you need done.

Compiling multiple estimates will reveal one of two things: (A) The first quote you got was way over priced, or (B) It was too cheap to be true.

Both insights are equally valuable and will lead you to the true cost of the project.

Framework #5

If Financing Wasn’t An Option, Would I Pay This Price In Cash?

Putting $10K on a credit card or stretching it into tiny payments across 5 years, doesn’t hurt as much as digging into your pocket and handing it over in cold hard cash.

But you have to treat them the same.

That $10K project will turn into a $15K line item when you tack on interest and fees.

So whether financing is an option or not, you must be an equally fierce negotiator.

If you don’t, you’ll become numb to the pain of breaking the bank.

Part of being a remote investor is recognizing that the same rules don’t apply to us.

The local contractors, brokers, movers and shakers do things their own way.

And if you let them, they’ll walk all over you; making you pay the out-of-town tax every time you pass go.

It’s up to us to know the game inside and out.

It won’t happen over night, but these frameworks will surely speed up your learning curve.

Even if you don’t immediately put them to use—which I wouldn’t recommend—hang on to these guiding principles.

When you finally become fed up with getting over charged and ripped off, they’ll come in handy.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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Keeping your properties occupied year-round isn’t easy, but it’s straightforward.

Every vacancy traces back to one of these four culprits:

Affordability, Safety, Functionality and Beauty.

If you want to keep churn and tenant turnover to a minimum, here’s how you do it ↓

Affordability

Make sure your rents land in the “sweet spot” - high enough for you to make a profit, but low enough to fit within a tenant’s budget.

You don’t have much control over what you can charge for rent.

You can’t just pull a price out of thin air and slap it on a Zillow or Apartments.com listing.

Supply, demand - and in some markets, rent control - dictate rates.

However, when it comes to tenant screening, you’re the one sitting in the driver seat.

You get to choose who occupies your property.

And when making this decision, you want to ensure that the rent you’re charging, fits comfortably within the tenant’s budget.

Whether it’s a family of four with two working spouses, or a single renter with no kids, the tenants’ household income should be at least 2X - 3X the marketed rent rate.

If housing costs exceed 50% of their gross monthly income, the risk of non-payment is substantially higher.

Any unexpected expenses will get in the way of timely rent payments.

This leads to late fees, and ultimately, it opens the door to eviction proceedings.

Neither you or your prospective tenants want to end up in court over un-paid rents.

So do both of yourselves a favor by making sure your property wont turn into a financial burden halfway through their lease.

Safety

Even if the neighborhood isn’t lined with white picket fences, your property has to be a safe haven for its residents.

Regardless of how rough a neighborhood may be, your property must be the exception.

If your residents don’t feel at home when they park their car and kick off their shoes, they won’t stay for long; it’s as simple as that.

No matter how “affordable” the rent may be, no tenant worth having can tolerate a hostile environment for an extended period of time.

For those that own real estate in relatively high-crime areas, there’s plenty you can do to help insulate your residents from the madness.

For starters, you can install cameras all around the perimeter of the building and near the front door(s).

This will help keep an eye on who’s coming and going.

Next I’d place motion censored flood lights throughout all entries.

This will not only brighten up the property, but it’d also help deter any “thieves in the night”.

Lastly I’d add a security gate; for both the parking entrance and walk-up.

This will help keep out unwanted company.

Taking these measures doesn’t guarantee there won’t be any mishaps, but it definitely reduces the odds.

As owners and investors, it’s not always necessary turn your property into a mini Fort Knox.

But providing your residents with peace of mind is a must.

Functionality

You don’t need a long list of amenities, you just have to make sure everything works the way it’s supposed to.

Before you shift your focus to beautifying the property, you have to take care of the basics.

Most residents aren’t looking for a ton of bells and whistles, but they expect everything in their home or apartment to function properly.

A fancy gym or vending machines in the common area won’t keep your tenants around.

If the sink drains slow, the shower water pressure is low, and the AC is constantly cutting off, it won’t be long before you receive a notice of non-renewal.

Ensuring that the property is pest-free, providing updated appliances, and making sure all mechanicals - such as the plumbing, HVAC, and electricity - are working properly, will go much farther than any exterior or cosmetic updates.

Beauty

Everyone wants to feel good about the place they call home.

Only after you’ve nailed the fundamentals - affordability, safety, and functionality - should you direct your attention toward the fun part: beautifying your property.

This is when you get to play the creative role.

Me personally, I never splurge on trendy finishes or flashy fixtures, but I will spend generously to execute a timeless design.

Installing tile floors instead of linoleum, and quartz countertops rather than formica.

These minor touches make a huge difference.

High quality materials are more expensive upfront, but they look better and last longer.

Not only does this help attract a larger pool of prospective tenants, but it also reduces your replacement costs down the line.

And most importantly, investing in the overall appearance of your property achieves the #1 goal - minimizing tenant turnover.

The better a building looks, the longer residents will typically stick around.

If you’re looking for the formula to low churn and high tenant retention, this is it.

It’s not rocket science.

You don’t need marble floors and gold plated door handles.

All people want is a safe, clean, and comfortable place that they can be proud to call home.

Anything above and beyond is just a cherry on top.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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Choosing the right type of project for your first investment is one of - if not the most - important decisions you’ll make along your real estate journey.

Overpaying for a property or biting off more than you can chew will leave an everlasting sour taste in your mouth. And this can easily turn your first project into your last project; causing you to turn your back on real estate altogether.

With that in mind, to help you avoid some of the major mistakes that I made, I’m going to break down the 3 different types of opportunities that early-stage investors should focus on.

Let’s get into it. . .

Outlines

Just like the outline of an essay, these types of deals come with nothing but the bare bones.

For a fraction of the cost of a finished build (i.e. Final Edit) you’ll start with a shell. This typically entails: the foundation, framing, a roof, new or existing plumbing, and electrical.

You get to skip architectural plans and some of the most arduous phases of the permitting process.

But when it comes to aesthetics, finishes, and all of the design decisions that go into a full build-out, you’re essentially starting from scratch.

Most early-stage investors shy away from these projects under the guise that they’re too challenging and expensive to take on. But this is far from the truth.

Your acquisition cost is low, which also means your debt service isn’t astronomically high.

You reduce the risk of surprise repairs that are often hidden behind the walls and veiled by the poorly executed improvements of previous owners.

And most importantly, you walk into equity before a single hammer is swung.

If you’re willing to line up the necessary contractors - once the build-out is complete - these projects can be highly profitable; even for a beginner that’s still getting their feet wet.

Rough Drafts

Rough Drafts are for the DIYers out there.

The weekend warriors that aren’t afraid to get their hands dirty.

These opportunities are priced lower than newly built construction and recently renovated homes, but higher than an Outline type of property.

They’re affordable enough to make you feel like you’re getting a deal, but they’re not cheap enough to be considered a steal.

As a result, the margins are slimmer and there’s less room in the budget to hire out certain aspects of the renovation.

In order for the numbers to work, you have to be willing to roll your sleeves up and carry out some of the cosmetic improvements yourself.

Now although the thought of painting an entire house or installing new floors may sound daunting, it’s not as scary as it seems. In all honesty, it’s more time consuming than complicated.

So for those that are willing to spend a few weekends in a hard hat and steel toe boots, these properties are a great way to get your foot in the door as an early-stage investor.

The renovations are more mild compared to the improvements that are needed to bring an Outline back to life.

They require less upfront capital than properties that’d fall into the Final Edit category.

And last but definitely not least, you’re still able enjoy some immediate sweat-equity.

Final Edits

Now let’s run through Final Edits.

These properties require the least amount of pain and brain-drain.

They’re perfect for remote and out-of-town buyers that are looking for more of a passive investment.

Unlike Outlines and Rough Drafts, Final Edits are often ready for a tenant immediately after closing.

They don’t require any major repairs or substantial improvements.

At most, they may need a deep clean and some touch up paint.

But here’s the catch, they come with a higher price tag and lower cash-flow.

This means you’ll typically have to put forth a larger downpayment, and you’ll likely take home less rental income at the end of each month.

However, if neither of these caveats are non-negotiables for you, Final Edits could be the route to take while you’re early in your investing journey and still figuring out how far you’d like to venture down the real estate path.

So there you have it.

We’ve turned a literature refresher into a real estate lesson.

In summary:

If you’re looking for the best bang for your buck and you’re not intimidated by a house with no walls, Outlines fit the bill.

If you’re looking to house-hack or do a live-in flip for your first project, go after a Rough Draft.

If you’re looking for a set-it and forget-it type of investment, stick to the Final Edits.

Through painstaking (and costly) trial an error, I’ve learned that 99% of “good deals” fit into one of these three buckets.

Anything in between or outside of these lines puts you in a bit of a grey area—which I equate to the danger zone.

But if you stick to this rubric when scouting for investment opportunities, you’ll save yourself both money and migraines.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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The first thing most investors do when they run into a roadblock is drop rents.

This is death by suicide.

A rent reductions is the absolute last lever you should pull.

It’s the big red button on the switch board that should only be pressed in dire straits.

The next time you’re considering dropping your rent rates to fill a vacancy, think back to this advice I gave to a couple of apartment investors who own buildings throughout the midwest.

I’m pretty sure this one simple layout change will drastically increase occupancy, plus save them from abandoning their original business model.

The Players

This past week I crossed paths with two fellow Midwest investors.

Coincidentally, we both own small apartment buildings in nearby pockets of South City St. Louis.

After exchanging tenant war stories and a few contractor referrals, they began telling me about how things are going with one of the properties they’re operating as an Air BNB.

It’s a six-family situated in Holly Hills, and for the most part, it’s been cranking out cash-flow.

The Problem

They’ve been getting both short-term weekend bookings, as well as longer mid-term bookings that sometimes extend three to four months. But the one leak in their bottom line has been the vacancy across their two-bed units. They said their one-bed listings go like hotcakes, but the two-beds often go stale with little activity.

After monitoring the trend for a while, they deduced that most of their guests are solo travelers or couples that don’t see the need for an extra bedroom that’ll sit empty.

So here they were with a firm grasp on the issue, but still in search of the best solution.

They were torn between dropping their nightly rate, or scrapping the short-term rental strategy altogether and turning a portion of the units into long-term traditional rentals.

The Fix

That’s when I proposed an alternative route that would potentially solve the vacancy issue, while also keeping them from abandoning the short-term rental strategy.

Here’s what I advised:

Rather than reducing the rate, simply reposition the listing.

Swap the bed that’s occupying the second bedroom with a Peloton, a few yoga mats, and a sleek work station. With this simple furniture change you’d essentially ‘amenitize’ the unit.

Instead of an un-needed extra bedroom, guests would get a home-gym plus an office.

This would eliminate the hassle of scouring the city for a place to take Zoom calls or get a decent workout. Not to mention, you can still squeeze in a futon or pull-out bed to accommodate those guests that need a place that sleeps four.

This layout would attract a larger breadth of guests - especially those that are looking for convenience without the steep cost - and ultimately lead to an increase in bookings.

Problem solved.

While this advice was tailored to the short-term rental approach, the takeaway applies equally to long-term rentals.

Whether you’re renting a unit for the weekend or for the next twelve months, always aim to maximize the perceived value of every square foot.

Sometimes the solution isn’t as simple as moving furniture around or rewriting the listing description, but 9 times out of 10 there’s always a smarter way to optimize a space.

Hopefully you found this helpful.

Until next time.

What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?

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