Long Term Rental Properties

Update on Parkwest: The First Class-A Small Multifamily Project in Greater Houston

October 31, 2018 By Erion Shehaj Leave a Comment

This morning, I just wanted to provide an update on Parkwest – the first Class -A small multi family new construction project from Value Builders in the Greater Houston market we opened up for pre-construction sales in September.

PRICE REDUCTION

As you’ve probably heard, mortgage interest rates have been rising steadily since over the last couple of months. When the units were released for pre-construction sales, preferred lenders could secure interest rates of 5.00-5.125% on investment properties purchased by well qualified investors. At this time, going rates are in the 5.375 and 5.5% range.

Since the developer is committed to providing a solid return on investment for investors in this project, they’ve decided to reduce prices so that the properties provide the same return they did at the lower interest rates.

Below is the updated pricing:

Plan 2573 – 1 Story 3 BR 2 Bath $432,300

Plan 2662 – 1 Story 3 BR 2 Bath $441,000

Plan 2930 – 2 Story 3 BR 2.5 Bath $444,000

Plan 3004 – 2 Story 3 BR 2.5 Bath $444,000

RENT STUDY

Also, we completed a detailed rent study of apartment complexes in the vicinity of the project that would constitute our competition for tenants.
Some of the important takeaways from the study:

The two most comparable apartment complexes by age and finishes are The Fountains of Conroe and The Retreat at Conroe.
Rents at apartment complexes change every week and depend on the season. One of the complexes quoted $1850 just a week ago but $1600 when we did the study. They mentioned that during the high season (spring and summer) their vacancies are very low and their pricing is at the highest.
Availability was non-existent to very low. Most complexes had no 3-bedroom units available for lease and they all had a waiting list.
Rents for three bedroom units are $1600 plus a $100-$150 add-on for a one car garage. Average size of the units 1325sf.
Units in comparable apartment complexes come with refrigerators and full-sized washers and dryers included at no extra charge.

Conroe Apartments Rent Study PDF Download

FINAL THOUGHTS

As of the time of this post, the project is 25% sold out with 7 duplexes under contract and several investors in the consideration stage. Below is the updated site map with sold units marked. Based on prior experience, unit sales will start accelerating now 1/4 of the project has sold.

Parkwest Site Map with Solds Download

If you’re considering purchasing an investment property in this new project, please contact us or if you’re seeing this in your email just Hit Reply

New Construction Opportunity in Houston Market: 14.4% IRR

September 21, 2018 By Erion Shehaj Leave a Comment

Today I’m very excited to share with you a limited opportunity to invest in new construction, Class A small multi-family in the Greater Houston market.

For years, there has been a shortage of well-located, high-quality, new construction properties in our market. If you wanted multi-family, your choices were either 1) newer buildings in bad locations or 2) old buildings in good locations. Until today…

After speaking with the Builder this afternoon, they’ve just released 27 lots on a Class A small multifamily project (2 unit) for pre-construction sales.

This project is located in the heart of Conroe – just 7 miles from the Woodlands and less than a mile to I-45 with easy access to great shopping and dining. Also, residents will be able to get to Lake Conroe in 15-20 minutes. The area is zoned to good schools in Conroe ISD (same school district as The Woodlands). The location is close to strong centers of employment like the Exxon Campus, Southwestern, Texas Childrens and MD Anderson hospitals and more. The area is poised to benefit from the incredible growth that the Houston area is expected to experience over the next coming years.

The Builder is offering four floorplans – Two are one-story and two are two-story.

One-Story units are 3 bedroom 2 bath 2 car garage, brick and stone exterior, 2573sf and 2662sf
Two-Story units are 3 bedroom 2.5 baths, 2 car garage 2930sf and 3004sf

Both will have large fenced-in backyards, premium wood-look tile flooring throughout the first floor and the bathrooms, granite counters in kitchen, stainless appliances.

Purchase prices of $446,500 and $455,300 for one story plans and $465,100 and $472,200 (two story) and they lease for $1725 and $1850 per unit.

Properties will be managed professionally by Signature Real Estate (that’s us!) at a favorable rate of 5% and the cash flow numbers include professional property management fees. We will be starting the leasing process in January with a goal of pre-leasing as many units as possible even before closing.

Also, the Builder has agreed to cover the leasing fee for your first Tenants which should boost returns for the first 2-3 years (the average duration of a lease on Value Builders past projects)

Construction has begun with the best estimate of completion at this point is April-July 2019 (depending on weather and order of construction) for a very favorable spring/summer leasing season.

Based on current level of interest, I expect this project to be 100% sold out by Oct 30 (5-6 weeks). I will be holding 1-on-1 conference calls with clients over the next 7-10 days to discuss potential purchase so if that’s you, please contact us or reply to this email if you’re receiving this post by email.

Click below to download a complete marketing package with financials, floorplans, and more.

Parkwest Marketing Package Final Download

Should I sell my house or turn it into a rental property?

June 15, 2018 By Erion Shehaj Leave a Comment

You’ve made the decision to move. Maybe it’s because you were bursting at the seams and your family needed more space. Or you wanted to get the kids into that excellent school district. Or perhaps it’s time to enjoy the good things in life and you really wanted a backyard paradise with a great swimming pool. Whatever your reasons for moving, now you face a critical decision that could have important repercussions for your financial future.

Should you sell your current house, unlock your equity and take any capital gains that might have accumulated off the table tax-free? Or, should you turn your existing home into a rental property and use it as a building block for your real estate portfolio?

It’s a very good (and common) question that like most good questions doesn’t have a one-size-fits-all answer. But, I’d like to offer you a mental framework to help you think through this important decision.

Eliminate bad options

A decision is only difficult if it’s a choice between two very good options. If one of your options at your disposal isn’t particularly attractive, the decision makes itself, doesn’t it? So the first thing you should consider carefully is the validity of your options.

Is selling your house even an attractive outcome? For instance, if you were upside down on your mortgage as many homeowners were coming out of the Great Recession of 2008, selling your property isn’t a great option on its own, regardless of the alternatives. So that option will eliminate itself and make your decision more obvious.

Alternatively, would your property make a good investment property? There could be physical aspects of the property that would make it unsuitable for investment. For instance, the property could be very old and it would require significant capital expenditures or it could be too large. Or, the numbers on the property don’t work to generate a fair return on investment for the risk you’re taking in turning it into a rental property.

This is the point where you get out your pencil and run some simple numbers: Rent minus Operating Expenses minus Mortgage Payment equal Cash Flow. Are you looking at a positive return or will you need to “feed” the property from your pocket each month? While considering the validity of turning your house into a rental property, you may eliminate this option from contention and make your decision easier.

Side-by-Side Comparison

I assume that if you’re asking this question, you’re most likely facing a decision between two equally attractive options. If that’s the case, let’s move to the next level of the mental framework: the side-by-side comparison.

First, let’s look at the selling option. Let’s say you’ve built up nice equity over the years courtesy of your initial down payment, value appreciation and paying down the mortgage.

The first thing you want to do is determine the exact value of the equity you could unlock by selling. This isn’t a simple problem where you take your estimate of value and subtract the mortgage balance because that’s not what you’d get if you sold. You have to account for closing costs, selling costs, prorations and make ready. Closing costs are fees you pay at closing for things like title insurance, title company fees, recording fees, HOA statements etc. Selling costs are fees you pay to real estate brokers for facilitating the sale and any incentives you might offer the Buyer (i.e. closing costs contributions) to entice them to buy the house. Prorations are your share of property taxes, insurance costs and HOA dues for the portion of the year you owned the property. And finally, make ready costs are what you’d spend to get the house ready for sale (i.e paint, carpet, landscaping). Once you’ve accounted for all these costs, you can determine your net proceeds at closing otherwise known as the amount on your check after closing.

Next, you want to consider what you would do with this money if you sold. Would some (or all) of it make up the down payment of your new house? If you have that covered with other funds, where would you invest that money and what is your expected rate of return? You could purchase a different investment property or invest the proceeds in the stock market.

Now, let’s consider the option of turning your house into a rental property. Earlier we ran numbers to determine your annual cash flow. Divide the annual cash flow into the net proceeds you’d receive if you sold. That’s your return on equity – the return you’re earning on your equity by turning the property into a rental. How does that figure compare to the return you could earn by selling the property and investing the proceeds into an alternative investment? Beyond the side-by-side return comparison, it’s critical to make a judgment call on how your house is likely to perform over the long term. Do you feel that the property will see more value appreciation, solid tenant, and buyer demand or is the area in decline and things are about to get worse? If the long-term fundamentals don’t look promising, it’s time to sell and deploy that capital into an area that is poised for solid growth.

Another way to ask the question is this: If you were to sell your house, would you buy it again as an investment if given the chance or would you purchase a different investment? This focusing question removes the confirmation bias fog that tends to skew our judgment to confirm decisions we’ve already made. If you wouldn’t buy the property again if given the chance, then the only reason you’re considering keeping it is that you already own it.

In Conclusion

The decision between selling your house and turning into a rental property can be complicated. Sometimes, the right decision is obvious because one of the two options at your disposal is not feasible or favorable. But when presented with a choice between two good options, you should use a mental framework that walks you through the benefits and drawbacks of each option and compares them side-by-side in a long-term outlook context. This way you will see the empirical differences and make the smarter decision for your financial future.

Real Estate Investing Rules of Thumb are Dumb

April 23, 2018 By Erion Shehaj 1 Comment

You can’t escape it. Everywhere you look – in online forums, blog posts even books – you will run into real estate investing rules of thumb that promise you an escape from doing boring, old-fashioned analysis.

There’s the “world famous” 2% rule: The monthly rent on a good investment property should be at least 2% of the purchase price. As long as the rent is 2% of the purchase price, your analysis is done. You set out on your quest to find these unicorn properties that abide by this golden rule. Single-family properties that sell for $150,000 and rent for $3,000 a month? Got it. Small multifamily properties that sell for $380,000 and bring in $7,600 per month in rent? Sure. I have some good news and some bad news about the 2% rule. The good news is that should you find such a deal you should jump on it because it is an absolute steal! The bad news is that such deals are at best, fossilized remnants of decades past and at worst, pure fantasy.

Then we have the reformed 1% rule: The monthly rent on a property should be at least 1% of the purchase price. Not as radical to be sure but you keep looking for properties that fit into that box and you find yourself being pushed to lower and lower quality neighborhoods. Properties in these neighborhoods attract more problematic tenants that lead to evictions and turnover and expenses. In the end, you have a terrible investment experience and your actual returns aren’t that good when it’s time to face your accountant and year-end.

Last but not least, the 50% rule: You can safely assume that operating expenses on your property will be 50% of your gross rent. No need to figure out actual expenses or put boots on the ground. The magical 50% has you covered. Then you realize that it’s much more complicated than that. Are you managing the property yourself or do you have a property management company? Is it an older property that requires lots of capital expenditures or a newer property that needs very little? Is the owner responsible for any utilities or are they all covered by the Tenants?

Look, I get it. There’s an allure to the simplicity of these shortcut rules. They offer an escape from the boring analysis, the mind-numbing figures, and the time-consuming due diligence. Furthermore, they can provide a template lens through which to view potential investment opportunities.

But in the end, real estate investing rules of thumb are the realm of amateurs and they’re a poor replacement for solid analysis. There’s no shortcut to actually looking at operating expenses and estimating vacancy and repairs. There’s no getting around learning the market and figuring out what price to rent ratios it offers for each type of property at this point in time.

Even worse yet, rules of thumb can provide an arbitrary filter that can keep you out of the investing game when the opposite is the preferred course of action. Rules of thumb can establish rigid anchors in your thinking and ultimately prevent you from achieving your goals.

If you don’t know how to do due diligence on a prospective property that should be the first thing on your agenda to learn. Skip the analysis and due diligence at the peril of your investing results.

The Freedom Formula: How to turn $244,000 into $1.4M in 14 years

September 10, 2016 By Erion Shehaj 10 Comments

Today’s post is exciting for me to write primarily because of what it can do for investors that actually heed the advice.

Since the beginning of Investing Architect, I’ve argued that quality real estate purchased in the context of and according to a sound overarching long term strategy can alter an investor’s life in fundamental ways. Surely, it can have an impact in that investors financial life – namely her passive income and net worth. But that’s only part of the magic. Most importantly, through their financial impact they can offer what I believe most of us are truly after: The freedom and independence to craft a life well lived.

I have a Freedom Formula that I’d like to share with you:

(Quality real estate + Strategy+ Discipline + Execution)^ Time = Freedom

The case study I’ll go over with you today is the “proof” of the validity of this formula. Let’s dive in the numbers.

Case Study

Suppose you were presented with an opportunity to invest in brand new small multifamily (4 units) properties in a new development in an established Texas market with impressive population growth and solid tenant demand with strong median household incomes to support your rents.

Annual Income: $55,200 (4 units leased at $1,150 per month)

Total Operating Expenses: $22,563 (property taxes, insurance, management and repair reserves, vacancy provision)

Net Operating Income: $32,638 per year

Debt Service and Leasing Fees: $23,485 per year

Positive Cashflow: $9,152.64

Purchase price: $460,000

Cash to close: $122,000 (25% down payment plus closing costs)

Why Strategy matters

This is usually the point where first time readers get a puzzled look on their faces. “Wait a minute – how do we go from a potential investment property that throws off $9,200 a year in positive cashflow to turning $244,000 into 1.4 Million?”.

In one word: Strategy.

There’s a reason why strategy is the second ingredient of the formula. Quality real estate comes first because in it’s absence none of the remaining factors matter. You could have the most sophisticated strategy in the world, the discipline of a buddhist monk, and Jason Bourne’s execution skills and none of it matters. But once you’ve purchased quality real estate your strategy makes the difference between magic and meh. Every month I meet with investors that through sheer gut feel have acquired a couple of quality properties. But only minutes into our conversation it becomes abundantly clear that their investing efforts lack a general direction, an overarching strategy. Therefore, they do okay with their investment but they leave massive potential on the table.

Let’s get back to the numbers to illustrate the opportunity cost of a solid strategy. If you were to purchase this same exact property but lacked a long term strategy, what would happen? Well, you would be earning 7-8% on your money (conservatively) and would take advantage of leverage as the property appreciated over time. That’s not a bad investment but it doesn’t exactly change your life.

Here’s a better option. For the investor with available capital resources, I’d recommend the purchase of two fourplexes (8 rental units in total). The completion of these two transactions requires $244k in capital (+- 1%). Upon the completion of acquisition, I would have this investor utilize the positive cashflow from both properties to aggressively pay off the mortgage on the first property while making regular payments on the second. To add more “wood to the fire”, I would recommend that the investor contribute an additional $500 from her income to accelerate debt retirement even faster. Think of this as a 401(K) contribution that actually works.

What’s the effect of this strategy? The mortgage on the first property is completely paid off in 112 months (just over 9 years). After the first property is free and clear, the positive cashflow from that property is no longer $9200 but rather the entire Net Operating Income of $32.6k since there no more debt to service. Now I’d recommend that the investor continue the same process with the second property. The only difference is now we’re attacking that mortgage with a LOT more money every month. Therefore the mortgage on the second property is paid off in 57 months (just under 5 years.

Final Results

Let’s look at the only thing that ultimately matters: Results. If you heed my advice, you invest $244,000 of your hard earned capital and after applying a Domino Strategy you end up with two free and clear properties in 14 years that assuming an appreciation rate of 3% (inflation) would be worth $1.395M at that time. Also at that time, these two properties would produce $65,000/year in investment income. That’s the difference between just buying a couple of good properties and buying a couple of good properties according to a solid strategy mixed with discipline and laser focused execution raised to the power of time.

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Important Note: A project with 11 new construction 4plex and 4 new construction 6plex multi family properties in a growing Texas market is about to break ground in 2-3 weeks. We have partnered with the Developer to offer first shot on these properties to our clients during the construction phase. Over the next few weeks, we will be holding one-on-one conference calls with our clients to discuss the opportunity. Typically we sell out projects of this magnitude in 2-4 weeks.

If you are interested and would like to receive an information packet containing detailed cashflow analyses, location map, site map, demographic and psychographic data about the location, contact us or if you’re reading this from your email, just hit reply.

The most amazing real estate deal of all time

August 25, 2016 By Erion Shehaj Leave a Comment

Imagine for a moment that you just orchestrated the most amazing real estate deal of all time. This deal is so impressive Scorsese will make a movie about it with Di Caprio playing your part. People who aspire to become successful real estate investors will hold week-long case studies of this deal for years to come.

All the elements are present. Through world-class negotiating skills during purchase, you locked in so much equity it should be illegal. Price to rent ratio is in the low single digits so your property throws off cash like an ATM machine. And finally, the return on investment might make people think you’ve entered the loan shark business. A thing of beauty, a work of art.

And yet, I’ve got news for you. The most amazing real estate deal of all time, will NOT change your life.

Let’s run through the numbers of one such hypothetical scenario.

Suppose you were able to purchase a $250,000 property for $150,000 and secured six figures of built-in equity. No repairs are needed. The first week on the market you find a great Tenant willing to pay $2200 per month for a two-year lease on the property. Total operating expenses plus mortgage payments add up to $1400 per month leaving you with positive cash flow of $800 per month. Assuming a 35,000 capital investment that’s a 27% cash on cash return with an internal rate of return in the triple digits.

If you zero in on the numbers of such an amazing real estate deal, it’s pretty impressive. But when you open up your focus and look at the big picture, things come into perspective a little clearer.

Let’s look at the end result. With all the amazing equity, cash flow and returns, at the end of the day, even the most amazing real estate deal produces just $800 per month in passive income. That’s a fantastic return on the capital invested but from the perspective of your complete financial picture, that cash flow will not change your life. It will not allow you to retire early or do the work you want to do instead of the one you have to do.

The main point I want you to take away is this: Real estate investing isn’t some form of Olympic sport where investors compete for the highest return or the largest amount of built-in equity record. Instead, it is a vehicle you use to create the passive income and net worth required so you can design and live the life you want.

Even when you pull off the most amazing real estate deal of all time, if the aggregate of your investing efforts fails to create the life-changing circumstances that set you financially free, it’s all for naught. Or put a different way – if all you do in a lifetime of investing efforts is pull off a couple of “most amazing deals” but fail to fundamentally alter your financial life then what good did it do?