By guest blogger Ryan Mullin; President of FS Houses
The only problem is the amount of work that may be involved. When you think of real estate investing, you think of leaky toilets, tenants calling in the middle of the night, dealing with realtors and driving all over town to find the perfect deal. It seems like a ton of work…because it is. Historically, real estate hasn’t always been a true “passive” investment. It can be very time-consuming if you are doing it on your own. As we all know, if you have to put a lot of work into something, it’s more like “having a job”. Being a true investor means letting your money work so you don’t have to. This article is intended to benefit investors who don’t have the time and effort to build their own system for investing in real estate.
Q: So, is there a way to invest in real estate and collect purely passive income?
A: Yes, you need a turnkey system that WORKS.
The brilliant thing about real estate is that the returns are high enough that you can literally pay to have everything taken care of and still beat the returns from mutual funds and stocks. Often times, you can achieve double digit returns in buy and hold properties even after paying for property management, leasing, and construction. The key to finding these allusive 10%+ returns is to locate the right operation in the right market. This means you can take advantage of monthly cash flow, appreciation, and purchase with instant equity. Having the right operation equates to a full staff working hard (and smart) to maximize your returns.
When you buy a turnkey property, you are not just buying a house. You are buying an entire system.
To find true passive investments in real estate, your goal should be to do enough due diligence to find the ideal turnkey system. From there you can build trust within a relationship that will ultimately provide many investments to come. Once you get the ball rolling, you only have confirm the numbers, make a purchase, and grow your portfolio. No taking phone calls from tenants, no endless searching for properties, and no fighting with contractors, just passive income.
When researching passive real estate investing, you want to check “The 4 Pillars of Buying into a Turnkey System”
There are many different things to take into consideration when deciding which properties to purchase. The top 2 reasons are instant equity and high positive cash flow. Some properties have both and some have one or the other. A balanced portfolio should include a good mix of both equity and cash flow. Thus you can diversify your holdings and maximize liquidity. Acquiring properties for a turnkey operation requires comprehensive market knowledge. Such an operation will provide multiple types of properties with different specs. Focusing on a specific type of deal will make it very difficult to keep any inventory. For example, if you’re a turnkey operation looking to buy 6 – 8 properties per month in a metro area, this is very manageable. However, if you’re looking for 6 – 8 properties (per month) all within a half mile radius, and they have to be 3 bed 2 bath houses with a garage… Now you will have to start paying more for a limited product. The returns offered will decrease. This is a mistake that most major hedge funds (in residential real estate) have made over the last 2 years. A great acquisitions department will be comfortable buying in “A+” neighborhoods as well as “C-” neighborhoods, 2 bedrooms as well as 4 bedrooms, single family and multi family. It takes truly localized market knowledge to spot multiple types of great deals in a particular metropolitan area.
Make sure the contractors involved in your turnkey system are doing “value added” rehabs. In other words, make sure your construction is priced well below retail value. This will ensure there is equity created by the rehab, and therefore adds value to the project. Anyone can find a contractor from the Yellow Pages to do a full-priced rehab. The trick for a turnkey operator is to find inexpensive contractors who do quality work, fast. If price, speed or quality becomes an issue, than the ROI offered will decrease. Keeping contractors busy is extremely crucial for any operation. If the work flow isn’t there, the contractors start laying workers off and looking elsewhere for new jobs. If a contractor is always busy, he can work for cheaper wages and a sense of loyalty will ensue.
Be sure that the leasing system is somewhat separated from the property management. It is a bad idea for the person approving the applications to be paid a bonus upon lease signings. Leasing agents should get a bonus to move people in apart from a separate property manager who decides which prospective tenants are approved and which are denied. This eliminates one of the most common conflicts of interest within rental properties. The goal is to find stable, long-term tenants, not just the first tenants who apply. For a turnkey system to work, the leasing standards have to be set high. With any rental portfolio, vacancy is definitely the enemy. To ensure a low vacancy rate, you need multiple leasing agents competing to rent each property to earn a commission. It’s also vital to have an open line of communication between the leasing agents and the investor. If a property sits longer than a month, there needs to be feedback from the leasing agents to the investor and the property management team.
Don’t hire a property manager; instead hire a team. Your management team needs to understand your cash flow. The big picture with management is to keep maintenance costs low and rent collections high. This may sound simple, but there are many psychological aspects to property management that most investors don’t think about. For example, picking up the phone and providing good service to tenants goes a long way; and in the end, it will save the investor money. Just listening to the tenants’ issues and trying to come up with solutions usually puts them at ease and diffuses the situation. Unresponsive property managers often get stuck with tenants who don’t feel that it’s important to pay the rent.
Bottom line: the systems and operation you put in place (or don’t) can certainly make or break your investments, so choose your team wisely!
About Ryan Mullin – Ryan Mullin is a serial entrepreneur from Indianapolis, IN. In 2005 he started his first real estate company and over the years Ryan’s businesses have purchased, renovated, leased or sold thousands of Indianapolis houses. In May of 2014 Ryan and his wife Ashley started FS Houses, an innovative real estate brokerage focusing on investments in the downtown Indy area. FS Houses buys, renovates, sells, and manages properties in specific target neighborhoods that have high projected appreciation.
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