Real Estate Investing: Episode 4

Jason Bramblett Real Estate Show Podcast 

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Jason:  Good morning, Triad.  Hope everyone is doing wonderful today.  We are going to be jumping into all things real estate as we have been doing for the past several weeks, but also digging into how about a little golf today.  How about that golf tournament we have got going on?  Got a headliner, Mr. Jordan Speith, in the house.  So welcome to the Triad, sir. Hope everything is going lovely at Sedgefield. Outside of firecrackers and thunderstorms and I do not know, what, 14 inches of rain since the guys have been here.  All in all, a pretty fun tournament. Hope you guys go out and check it out.  I understand they have got lots of tickets and lots of opportunity to go out there and support the Triad, but also support the golf and the tournament.  It brings lots of great opportunity and business to the area, so hope you guys can do that. But we are going to continue our series of real estate investing and jumping into that.  So what you want to do is grab a pen, grab a piece of paper.  We are going to dig in. Where we left off last week was talking about turning your home into, the home you are in now, your first home, into your first rental property. We are going to talk a little bit more about that, walk you through step by step.  In addition, a little bit of discipline, too, because it takes discipline in order to achieve some of those goals.

Mikell:  Absolutely.

Jason:  So discipline over time is a very good thing. Most people do not like the word discipline, Mikell.  They think discipline and punishment sometimes –

Mikell:  See, that is where my mind went when you said that, so okay.  Punishment, okay.

Jason:  I think you are the same camp with a lot of people there.

Mikell:  Absolutely.

Jason: But it is not necessarily true, and it does not have to be punishment.  Good discipline over time can end up being a great thing.  Some of you guys have disciplined very well, sitting on the couch, eating potato chips.  And the results, well, look down.  It is right in front of you.

Mikell:  There you go.

Jason:  There you go.  Right?  And there are other disciplines that you can get into that will reverse that goal.  Or reverse that pouch in front of you.

Mikell:  That does not sound fun.

Jason:  Yeah, I know. The great thing about the discipline though is once you do it for a while, it becomes like breathing.  You do not think about it.

Mikell: There you go.

Jason:  It is just getting into that day-to-day habit and making it happen.  It is a challenge.  Not everybody is cut out for that.

Mikell:  Absolutely.

Jason:  It is something that is a practice. It is actually an intentional practice that you have to do in order to develop that discipline. All right.  You have got your pen.  You have got your paper. Let’s do this thing.  We have got the benefit of turning that first rental, or I’m sorry, your first home into a rental.  One of the biggest things is how you bought it.  The financing.  You have had, with an owner-occupied property, you have had multiple options in which to buy. You could have bought it with cash.  You could have done a 100% loan, meaning you put no money down.  You could put as little as 3 ½% down, 5 or it is unlimited after that.  Most people fall in the 3 ½-5% camp.  That is typically what they put down on their first home.  You cannot do that with investment properties. The banks, for the most part, want somewhere between 20-30% down on investment properties, and most people say well, why? A lot of folks think it is to reserve the game field for the rich in that the rich are the only ones that could come up with the 20-30% anyway.  Therefore, the rules are written for them.  Well, kind of.  Really the rules are written for the bank. The bank realizes this – if you have two homes, one of which you live and one in which you do not, the likelihood of you not paying on the one you live in is a lower probability.  Right?

Mikell:  Absolutely.

Jason:  Therefore, they, by assumption, believe that hey, they probably will pay for the one does not, they do not live in and does not hurt them first. Right?

Mikell: Absolutely.

Jason:  Well, psychologically, I guess, if you will, they also figured out if they get 20-30% of your money, it will make it much harder for you to walk away from that property losing that money that you put in.  So if it was a $100,000 house, that is thirty grand. 

Mikell:  And that is quite a bit.

Jason:  That is quite a bit.  $200,000 house, now we are talking $60,000.

Mikell:  Sheesh.

Jason: Most people, not willingly, will not walk away from $60,000.

Mikell:  I am not sure if I know anyone who would.

Jason:  I do not either.  Let’s face it.  If I dropped a briefcase of $60,000 out on I-40, somebody would probably stop and pick it up.

Mikell:  I would wreck my car.

Jason:  Absolutely.  There would be a lot of car wrecks.  By the way, it is not out there, so do not go looking. The other thing is that is the psychological piece.  The second piece of that is if you put, let’s just say you put $30,000 down on $100,000 house, and the home is worth $100,000. If things really started to go south, and whatever job change, loss, whatever it is, if you needed to sell that home, you are also in a position to be able to do that.  I think most people would agree you could pretty easily sell $100,000 home for $90,000, if you had to. Right?

Mikell: Absolutely.

Jason:  It is a bargain.  It is savings, and so you could get out of the situation and the bank still is okay and you actually will be okay.  Yes, you would take a $10,000 loss, but you would not take a $30,000 loss.  So you could actually get out of that property.  If they allowed you to do 100% loans and something happened with your primary income and you needed to unload that house and you had no savings.  Let’s say you needed to do the same situation.  You needed to do the $100,000 house at 90.  It is still a bargain, but if you owe $100,000, who is coming up with the $10,000.  Probably nobody.

Mikell: That is true.

Jason:  Because you did not have any money to put down to begin with.

Mikell:  Absolutely.

Jason:  That is the logic behind why the bank does what they do. So you think about those things, and there are always methods and reasons to the madness, and that is just a little insight of the psychological piece and also the math piece. So they are going to reduce their risks.  They are going to get that down payment from you, but the benefit in converting primary to rental is that you are able to buy it under owner-occupied terms. Check with your mortgage company. There are certain loans that require you to stay in the property for a certain amount of time before you can convert to a rental property.  You cannot use a primary home loan for a rental property.  That would be fraud.  Okay? I have seen it happen, and it is not smart to do that.

Mikell:  I have witnessed people trying to do that as well.

Jason: There are no secrets, guys. The banks today are very savvy. When I started in this business, you made your loan application. If you could do what you said you were going to do then, nobody ever checked behind you. Now, all the way up to, sometimes the final hours before you close on a home, someone is checking behind to see if everything is exactly the way in which it was when you applied for the loan.  One big thing they check, just by the way, is that you are still employed with the company in which you said you worked with when you applied for the loan.

Mikell:  Absolutely.

Jason:  I know that seems like a no brainer.  I know that seems like well, Jason, you have got to be kidding me. What idiot in the world would try to buy a house without a job?  You would be surprised.

Mikell:  Well, things change every day.

Jason:  Every day.

Mikell:  Unfortunately, and especially with employment.  So you never know.

Jason:  And some of those are not by their choice.

Mikell:  Absolutely.

Jason:  The bank is going to check.  They are going to check your credit, and then they, in the past ten years, they have snuck this other little thing in at the closing table, and it is basically your application again, in which you are signing off saying everything that was true when I applied for the loan is still true today or better.  Then they are having you sign it one more time.

Mikell:  What would change?

Jason:  Well, in this case, it could be that maybe you did not switch companies, but you changed jobs within the company.

Mikell:  Okay.  Okay.

Jason:  Perhaps you were full-time and now you have been RIFed down to a part-time position.

Mikell: Okay.

Jason:  So those type of things.  Or just flat out do not have a job. That is another one. Or you did something really smart and you went and leased that Rolls Royce. Yeah, that is going to show up on your credit, by the way.  Do not do that. Also, just while we are talking about things that can sabotage your sale or your purchase, okay, so if you go to the big box stores that sell furniture, and you buy furniture and you, so you are going to move in on the 30th, so on the 15th you go buy the furniture, but it is not going to be delivered until the first, and you think you are okay. If you are financing that, they probably pulled your credit, and if you have purchased with a later delivery day, that could mess up your debt-to-income ratio. Right?

Mikell:  Okay.

Jason:  Because it is credit. It is money that you are borrowing.  Even though the furniture is not going to show up until after you own the home, it very well could be that those ratios now put you in jeopardy of not even buying the house.  It is not a good thing to have your washer, dryer, refrigerator or all your new living room and bedroom stuff show up to a house that you do not own.  You do not want to do that, folks.

Mikell:  I am sorry. That is funny.

Jason:  Think about those things. Then, of course, that begs the question is do those people really need to buy a home at all. You have to make that determination for yourself. Mortgages have a seasoning period.  At the end of the day, make sure you check with your bank too, that you can turn your property into an actual rental based upon what we are talking about today. But most of the time, you certainly can. Every mortgage is different.  Of course, if they have special terms in fine print, you want to read all those things, too.  There are other options that you have that maybe if you do not have the down payment money, but you like the fact of other people paying for your stuff.  We talked about this before, but roommates.  Roommates can be very good.  I know that there are folks that have maybe had mom or dad help them purchase a home. It is really mom and dad’s rental property, but the intention is, basically what they do is mom and dad conned you into this.  Hey, we are going to buy this house for you while maybe you are in college, and then you can get people, roommates, and they will pay for it –

Mikell: Absolutely.

Jason:  But really the truth of the matter is this.  You are the cheap landlord for mom and dad who own the house.  Right?

Mikell:  Absolutely.

Jason: At the end of the day. It may be, just may be, if you take care of their asset and do not turn it into a frat house or whatever those things, you know what I am talking about.

Mikell:  Absolutely.

Jason:  Maybe they actually do give it to you one day. Potentially.

Mikell:  If you earn your keep.

Jason:  If you earn your keep. That is right.  That is right. So maybe it is a good test.  Roommates can be really good. I know situations where folks that own, actually they own the house, and they have roommates, and the roommates actually pay 100% of the payment for them.  That is not for everybody, and if you are married and have kids, probably not a roommate situation is going to work out real well.  Do not go to your wife today and say hey, I heard this guy on the radio. He had a great plan. You know that extra bedroom we have?  We are going to rent that out.  You did not hear that from me. Okay?  Do not throw me under the bus with your creative ideas here.

Mikell:  Oh, darn it.  I was going to try it, Jason.

Jason:  I know. I know.  Trust me, if you want to stay happily married –

Mikell:  Key word.

Jason: -- do not go with that option.  But if you are single, it is something you are looking to diversify a little bit, you can do that.  Another one is a duplex or a quadplex or something along those lines.  One building that has multiple units in it. It is kind of the same situation as roommates.  You are all under the one roof, but you have each have your own little part, your little condo part, if you will.  Something like that.  It can still work in that way, and the really cool thing about anything multi-family in the duplex, quadplex, anything like that is you actually can still get an FHA loan.

Mikell:  Okay.

Jason:  This is an interesting thing. So this is an exception to the rule in that you can actually buy a four-unit building, and as long as you occupy one of the spaces as your primary residence, you can purchase that with a minimal down payment. You do not have to have that 20, 30% to put down. You can actually put down 3 ½%. So you could actually buy a four-unit building, have three of them be rental, and you live in one, and you can actually reduce your down payment.  Now the downside in the Triad is we do not have a lot of those to offer. There are some out there.  One thing I would say is be careful of the zoning. There are some of these that are for sale. They were really big houses, a lot of times, in downtown areas. So maybe in Winston, Greensboro, High Point, and they have converted them to a duplex, quadplex, triplex, but they are not legally zoned for that type of housing.  So they are really a single-family home in which somebody has illegally –

Mikell:  Okay. Okay.

Jason:  -- converted to multifamily.  Okay. So just because it is what it looks like, it does not mean it is a duck. Okay?  It may look like a duck, but it is not a duck. It is a chicken.  So make sure that you check the zoning because you could buy a mess.

Mikell:  Gotcha.

Jason: Or you could buy something that nobody knows really what is going on, but with the change of ownership very well could make a difference, and then maybe somebody that does not like what is going on there notices and then all of a sudden you really just bought yourself a house when you thought you were buying a triplex.

Mikell:  Okay.

Jason: Double check that.  Do your due diligence. That is the key.  Check everything out. Make sure it is legal. Make sure the zoning is correct, and then just be truthful about everything because could you buy one that is not legally zoned. It happens every day, but some people get caught when the bank goes out and they do not like the fact that you have not represented truly what they have collateralized.

Mikell: Absolutely.

Jason:  Okay?  Makes a big difference.  All right. We are going to take a quick time out. When we come back, we are going to dig into more multifamily. Apartments.  Man, apartments are an amazing source of income. So do not go anywhere.  We will be right back.  You are listening to the Jason Bramblett Real Estate Show.

And welcome back to the Jason Bramblett Real Estate Show. So we are digging into all things investing. Of course, we are also talking about real estate investing as well. So a couple things we have talked about is keeping that first home that you purchased, turn it into a rental.  We have talked about duplexes, triplexes, and quads and all these other things.  And now apartments.  Apartments are, in my opinion, one of the most superior investments that you can make.  The downside with apartments is it does take considerably more money to get into this particular step in the real estate investment world. But the cool thing about that is now you have basically, let’s just say you have one roof or maybe you have multiple roofs in multiple apartments, but you have a lot of people, paying for your investment. So you are well-diversified within each building that you own. So you may have 10, 20, maybe even 100 people that are contributing to paying down this debt for you. Not only are they paying down the debt, more than likely, if you purchased it properly, you are also earning some income along the way. Now with apartments comes greater investment, greater risk, but at the end of the day, the risk assessment on it is much, much better than owning single-family homes.  The downside with single-family homes is they are scattered.  It is very rare that you just buy everyone right down the neighborhood.  So you have got one here, one there, and one everywhere. If I own twelve single-family homes, I have 12 roofs to take care of, 12 properties with lawn maintenance, all those things in 12 different locations.  If I buy one apartment building that has 12 units, I have got one roof, one location –

Mikell:  That is true.

Jason:  -- limited number of lawn maintenance. It is not 12 times.  That is for sure.  So from just a time standpoint, a risk assessment standpoint, it is far superior to have all your ducks as close as you can. Now if you own 100 single-family homes, different story because you are probably not the one out there doing it.

Mikell:  No.

Jason:  You employ people this time to do that.

Mikell: Absolutely.

Jason: But when you are getting started and you have one here and one there and one there, if you are like me when I started, all my properties, none of them could be in the same place, in the same city, for that matter. So they are scattered all over the place. You have got to run from this town to this town to this place. Apartments alleviate a lot of that.  So it is great to have them there. It gives you really tremendous cashflow in the apartment business.  If you look at some of the wealthiest people in America, they own apartments.

Mikell:  Absolutely.

Jason:  They own hotels.  They own commercial buildings.  They may own single-family homes, but they do not own hundreds of them most of the time.  They have converted to something that consolidates their map essentially.  I am sure there are people out there that owns thousands of homes, everybody has got their own desire to do whatever. I am just saying from a time standpoint having everything in one location is superior. The downside, capital.  You have got to have some bucks, man.  Apartments are not cheap.

Mikell:  Not at all.

Jason:  An apartment building in our area is about $8 million.

Mikell:  Okay.

Jason:  So you do the math on that, you need some jack. That is it.  You need some money.  Let’s just say, we will make it easy math.  If it is $5 million dollars, you are going to need about $1 million cash to be able to put down to borrow because one thing that banks do not do in the apartment business is 100% loans.

Mikell:  Okay.

Jason:  The other thing they do not do is they do not finance them for 30 years typically.  There are some lenders out there that will finance them for 30 years.  I typically find them on the west coast, and I think maybe that is because well, an apartment building on the west coast maybe $100 million. Simply because of the cost of living.

Mikell:  With renters though how soon is it easy to pay it off?

Jason: Well, some of that depends on how much you put down. Of course, location, occupancy, rent, how much you are getting and all those types of things.  But apartment buildings cashflow very, very quickly. Most of them that I have looked at have anywhere between an 8-12 year payback period –

Mikell:  Okay.

Jason:  -- depending on the location. So you think about that. If you today had like just make it ten years, if you had $5 million, if you were able to borrow $5 million to buy an apartment building, in ten years’ time you have $5 million equity, meaning you owe nothing.  If you sold the place, well hopefully you would sell it for $8 million. Right?

Mikell:  Absolutely.

Jason: If you would ever want to, and that is a decision you have to make. Some of these things, the money coming in is so nice, why get rid of it.

Mikell: And that is what I was thinking about when you said most of the wealthiest people own apartments because people do not want to buy their apartment. They want to buy houses.

Jason:  That is right.

Mikell:  You fall in love with the houses even if you are renting it and you want to stay there. 

Jason: You do, but there is always a need for apartments.

Mikell: Absolutely.  Absolutely.

Jason:  It is always a stepping stone. We have built 9000 apartment units in Greensboro in the last 7 years.

Mikell:  You said built?

Jason: Yeah.

Mikell:  Wow.

Jason: These are new.

Mikell:  That is incredible.

Jason:  That is a lot.  I do not know what Winston-Salem’s numbers are, but I would speculate that they are probably somewhere close and probably at least 5000. So if you say 10,000 in Greensboro, five, that is 15,000 apartment doors with 15,000 people that are renting.  Now, some of those have traded up.  They went from a class B property to a class A property, a nicer property.  More amenities and those types of things.  That is usually what people are looking for.  It is interesting. Sometimes we have folks that are building and we sell their home before they are done, and they decide I am going to take the summer, for whatever the reason it just happens to be the summer a lot of times, and we are going to rent this apartment, and when our house is done, we will move in.  We will do a three-month lease and whatever. And almost 100% of the time, when they have owned a home for 10 or 15 years and maybe they are building a new one, they call me and they say hey, do not hurry on the house.  We are kind of enjoying the apartment life in the fact that we have got a pool we do not have to maintain. We have a lawn we do not have to cut.  Actually all we have to do is just come home, cook dinner, relax.

Mikell: That is it.

Jason:  Do not have to worry about pulling weeds.

Mikell:  Maintenance is taken care of.

Jason:  Maintenance is taken care of.  Almost every single person, we had one lady that moved into a hotel for a week and stayed for three months.  She was like this is awesome. I wake up. Breakfast is ready for me in the morning. I got Wi-Fi, coffee 24/7. 

Mikell:  This is the life.

Jason:  This is the life.  There are always new people.  I love talking to people. This is great.  There are new families.  I have breakfast with different people every single day. She was like this is great. I do not care if I ever buy a house again.

Mikell: Wow. But living in a hotel is expensive.

Jason:  It is expensive. It is not for everybody.  But in her situation, it was not only her housing, it was her entertainment, a good portion of her meals.  Right?

Mikell: Absolutely.

Jason:  Her fitness. They had an exercise room.

Mikell:  They do.

Jason:  They have got a pool. They have got a hot tub. So it is her spa. So you start putting all the amenities together and you go this is not too bad.  Now, you cannot have any stuff. That is one downside with a hotel. It is still a hotel room.

Mikell:  That is very true.

Jason: You are not having plants and all those types of things, but anyway, so it is not for everybody. But it is interesting. Folks that transition, they kind of like the fact of no responsibility for a while.

Mikell: We all do.

Jason:  Absolutely.  Absolutely.  Go to Jason Bramblett dot com.  You can get more information.  We have investments out there.  If you are looking for apartments, we can help you. If you are looking for a rental property, we can help you.  And we will be back next week.  We are going to dig in more investing in real estate.  You are listening to the Jason Bramblett Real Estate Show.