In todays blog, I will outlining the seven steps we take every week to source, analyze, purchase and renovate homes throughout the Tampa Bay area in Florida. Last week alone, I analyzed 50 different homes, 19 of which were personally visited by my colleagues. We followed up those visits with nine cash offers and had two of them accepted.
The aim of this article is to really drill down into the nuts and bolts of buying and owning real estate. While the day to day reality is far less glamorous than the depictions of the popular tv shows, purchasing your own rental properties has the potential to transform your life in more ways than any other investment I know of.
I have tried to write a valuable step-by-step guide for anybody interested in learning more about the real estate business. It hopefully gives some useful insights into what the Torcana team actually does every day, including all the number crunching, the hundreds of miles we clock up every week and the financial risks we take in the weeks and months before we present a turnkey property to you.
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Step 1: Finding and analyzing potential houses
When you first start looking at properties for sale, it is very easy to get overwhelmed by the sheer volume of options out there (see local map above listing homes currently available in our target areas). That´s why it´s important to focus on very specific property types, price ranges and locations.
Last week (1-5 February) I carefully studied 50 potential single family homes listed for sale in the Tampa Bay area. That included the MLS (official website used by real estate agents), Zillow, Craigslist and several online auction sites such as hubzu.com and auction.com. We also get calls every week from local property owners who receive letters from us asking them to call if they are interested in selling their property for cash.
By “carefully studying” I don´t mean reading the listing information and looking at the photos a couple of times. In the Torcana office it means inputting details into an in-house designed spreadsheet, which contains more than 70 rows of data on each property. As you´d expect, this includes the basics such as beds, baths, sq ft, year built, asking price and market rent. It also includes fields for outstanding permits, liens, rehab estimates, holding costs, tax records, closing costs, running costs, map links and much else besides.
Step 2: Visiting the properties
After the initial numbers were crunched, the initial list of 50 properties was whittled down to a shortlist of 19 that were to be personally inspected. After visiting hundreds of them you get pretty efficient at this and we can usually get in and out in less than 45 minutes per property. We use Google maps to plan our trips as efficiently as possible. It is also helpful to see where prospective properties are located in relation to others we have already purchased.
Draft renovation budgets are quickly calculated during these initial inspections, which usually includes a new kitchen, floors, roof, paint and bathroom vanities. Feedback is provided to me using a note sharing app which also includes observations on the local area. These observations can either be positive (neighbors with nice gardens and clean cars) or negative (neighbors with pit bull terriers and gardens full of junk). My spreadsheets are updated accordingly and 9 of the 19 properties inspected last week were given green lights to make offers.
Step 3: Making an offer
I am not a big fan of verbal offers – I prefer to send a signed document with a proof of funds to the seller or their representative. It shows that we are serious and ready to move quickly. We don´t wait around to make offers either – I will usually send a contract to the seller the same day we visit the properties. The best opportunities are rarely available for more than a couple of days.
Many of the sellers we deal with are banks, which have their own online systems for submitting offers. As you´d expect from a bank, most are pointlessly inefficient and almost seem to be designed to discourage people from making offers in the first place.
Step 4: Offers accepted
Of the 9 offers made last week, 2 of them were accepted, which is actually higher than average (about 1 in 10 would be the norm). Once the sellers returned the signed purchase agreements, I immediately ordered property inspections from a licensed professional. We have been working with the same property inspector for a couple of years and he knows we need them quickly. If I order one on a Monday morning, he usually visits the property that same afternoon and emails me the official report the following morning.
These reports (which cost $90 each) contain the following information:
- Dwelling (observations, comments and concerns on the exterior structure)
- HVAC (heating, ventilation and air conditioning details)
- Plumbing system (age of pipes, water heater, valves and condition of appliances)
- Electrical (condition of electrical panels, types of wiring present)
- Roof (type – shingle, tile etc, roof age, estimated remaining life, signs of damage)
The important thing to note about property inspections is that they focus on the non-cosmetic stuff that can actually cost you a lot of money. Anybody can see that a kitchen needs upgraded and you will know the cost in advance. On the other hand, a roof, water heater or air conditioning unit on their last legs could cost you many thousands of dollars. Serious issues with the structure, the foundations or a buried septic tank could cost you tens of thousands to repair.
Of the two inspection reports ordered last week, one of them came back with a clean bill of health. The report on the second property (see image opposite) mentioned that there was aluminium wiring in the house, which could mean spending an extra $1,500 on special alumi conn fuses to bring them up to code (we learned that the hard way on a previous house). There were also some damaged water valves spotted.
A layman (even one who buys properties for a living) would probably not have noticed either of these items. As you can appreciate, these are issues that need to be identified quickly – ideally before your purchase deposit becomes non-refundable!
Today we will have to get a professional estimate to address the aluminium wiring and the damaged valves. If the seller is unwilling to renegotiate the price accordingly, we will cancel our contract, request a refund of our deposit and move on.
Will will visit the inspected houses again early this week with a general contractor and will spend about an hour with them in each home designing a detailed renovation scope of works, which is inputted online in real time. Again, I will adjust our calculations accordingly.
Step 5: Purchasing the house
Now that our due diligence on the house has been completed and we have a detailed renovation scope of works, it is up to our title company to make sure that clean title is transferred on the day of closing.
If any unpaid utility bills or taxes are found during their searches, they will have to be paid by the seller before the closing date. This sometimes causes needless delays – a property I was supposed to buy on 18th January is closing today (8th February) because of an unpaid $150 water bill. As usual, the owner (a bank) and the utility company did their level best to make this as complicated as possible. In the end we just lost patience and visited the water company ourselves, wrote them a check, got a receipt, sent it to the seller and told them to get on with it.
Sometimes liens are placed on the property – which is more serious. I recently had a purchase delayed by 6 weeks because the seller had an unpaid $1,800 credit card bill. Mastercard were able to hold up the sale until it was satisfied. You´ll also see liens placed by local tax authorities, local municipal authorities, home ownership associations, mortgage companies and even child support authorities.
As you can probably guess, this is an important part of theprocess and not the time to take your eye off the ball. The most dangerous way to purchase a property is at a public auction as you will not have any time for any formal title checks or title insurance. You might think you got a bargain for $60,000 only to find that you are on the hook for a $70,000 second mortgage that came with the property. It happens every week. Professionals can spot the second mortgage in the public records before they bid. Newbies often don´t know where to look.
Starting your property investment career by purchasing at a public auction is a little bit like heading straight for the advanced black rated slopes on your first day skiing - probably not a good idea. You´d be better off starting with the REO auctions that come with the liens already cleared.
Step 6: Getting the property rent ready and tenanted
Before I go any further, thanks for reading this far! I´m not going to go into much detail about getting a property rent ready as I have discussed renovations in other blogs (and will do so again in the future).
I will simply summarize by saying that we do whatever is necessary to present the property to our buyers and their future tenants to a higher than average standard. When we list our properties for rent, the quality of the kitchens (usually with new cabinets and granite counter tops), bathrooms, flooring, paint and landscaping are all higher than average for the local area.
To be clear, that doesn´t mean they are nicer than your $400,000 house, just better than the other $90,000 properties in this particular area. Over renovating can be a very easy way to lose money.
The upshot of our renovation policy is that we get lots of inquiries and the properties are quickly rented. I remember we finished two big renovations in late December and our property manager was able to place tenants in both homes by the 7th of January. Pretty quick right? Demand in these areas is naturally high and when we advertise a renovated home with great photos you´ll always generate a lot of interest.
Step 7: Selling turnkey to our clients
The whole point of this entire process (the sourcing, the number crunching, the property visits, the negotiations with sellers, spending money on houses in disrepair, dealing with contractors and title agents) is to enable us to provide great turnkey rental homes to our clients.
All of our offers and renovation budgets are calculated with the end goal in mind – presenting a rent ready property at a fair price that will generate an estimated 8-9% in net cash flow per year.
In other words, if you buy a property from us for $100,000, we want you to receive $8,000 - $9,000 net every year. That is net of your expected property management, property tax and home insurance costs. It also includes setting aside another 10% for vacancy and maintenance reserves. The properties you see advertised with 15% returns usually forget to include this stuff (and will probably need a new roof within 2 years).
We don´t just sell and then leave you alone either. We make sure you have a great property manager (who uses software that lets you login and view status of your income & expenses 24/7) an insurance carrier who understands what coverage landlords need, and we are always available to answer your questions before, during and after the purchase.
We do all the work (and believe me, doing this properly requires a lot of work) so you don´t have to. It is difficult to source, renovate and purchase rental properties as a hobby or part time. Most people don´t have 60 hours a week like I do to stare at spreadsheets and make offers all day long.
The vast majority of our clients have full time jobs doing something completely different to real estate investing. What they have in common is that they recognize the importance of putting some of their hard earned cash to work for them. After all, having a passive income stream is crucial to anybody who wants financial freedom and it requires long term planning.
Buying rental properties is the best way I know to protect and grow your wealth without subjecting yourself to the volatility of the stock markets and the unacceptably low returns from bank deposits and government bonds.
Right now, we have four properties under renovation and another three under contract. The properties being renovated will be reserved in the coming days and the others within a few weeks. If you are interested, please don´t sit back and wait for the information to come to you, as most are sold to people who reach out to us in advance.
I´d love to hear from you today!
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