202: Investing in the Lehigh Valley—Buying for Cash Flow and Appreciation
Episode Transcript
Welcome to episode two of season two of the Growing Empires show. Today's topic is buying for cash flow and appreciation and we're going to share some secrets with you about how to do that in the Lehigh Valley, so stay tuned.
00:16
Welcome to Growing Empires hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
00:35
So the Lehigh Valley is made up of very diverse options for investing. You can invest in commercial real estate, strip centers, retail office buildings, medical complexes, apartments, mixed use, and literally just about anything you can think of the diversity is what attracts many investors to the Lehigh Valley. The value of your money here spreads much further than in any surrounding Metropolitan area. And when you're looking to buy for cash flow and appreciation, I believe that the Lehigh Valley has a lot of the metrics that allow you to achieve steady streams of cash flow and consistent appreciation. So there's really two types of appreciation. And we talked a little bit about this in season one; there's natural appreciation, which happens as the market adjust and as the values of homes rise. And then there's what I call forced appreciation, and forced appreciation is essentially what you're putting into the property. So if I make improvements to the property, let's say that the property's got a lot of deferred maintenance and I make improvements to the property. And simultaneously I'm increasing the income by raising rents and/or making quality improvements that allow me to attract a much higher quality renter. I'm essentially forcing appreciation on the building. I'm increasing the value of the building based on condition and I'm also creating value and appreciation by increasing the cash flow of the building. And when investors go to look for investment properties, the number one thing that you're looking for is cash flow. And you're looking for the building to have the ability to appreciate both naturally and forced, and also you should be looking for consistency.
2:22
So the Lehigh Valley has several different areas to invest in. You can invest in what we call the inner city, which would be Allentown, Bethlehem and Easton. And each of those is slightly unique in what they offer to an investor. And then you have the suburban areas which attract different type of tenancy pool. And if you're looking for cash flow and appreciation right now, the hotspot or the sweet spot for the Lehigh Valley is rental apartments. I'm certainly not saying that commercial real estate, retail, medical facilities and office complexes are not the way to create an abundance of cash flow, but I really feel like the residential rental market really is the sweet spot of the Lehigh Valley. And when we're analyzing deals there's a certain range of things that we look for. And it's even something that I look for when I'm investing. I want to be able to buy the property for anywhere between 50 and $70,000 per door. Okay? So for example, if I'm buying a three unit property, I don't want to pay any more than $150,000. And really, that metric came up from analyzing quality deals for the last 11 years that I've been doing this. Some people look at cap rate, and they use that as a metric to determine the viability of a property. However, cap rate doesn't really tell the full story. Cap rate is essentially your income minus your expenses divided by the sale price or the purchase price of the property. But you can have a high cap rate and a negative cash flow. So cap rate, in my opinion, is not the ultimate driving factor. There's other things that people look at as well. Debt service coverage ratio, that's essentially the amount of money that, you know, a bank is going to look at to determine if the deal that they're lending on is going to be viable. So debt service coverage ratio, most banks right now are looking for 1.2% or greater. And that's the available cash flow to pay the current debt obligations. So the banks are using this as a metric because they want to make sure that ultimately you're going to be able to pay down that debt and that the building is going to cash flow well enough for that debt to be actually paid off. And to calculate the debt service coverage ratio, you're going to simply divide the net operating income by the annual debt. And that tells you what the cash flow is that the property is generating. So some people are using a cap rate method. Some are using a debt service coverage ratio, commonly used by banks. And then there's quite a few other ways that people look at. Sometimes people are looking strictly based on their personal needs. You know, I have had investors come to me and say I need to make $500 net income per month on the building that I'm buying. And then we go out and we search for properties that achieve that. A lot of times the income that is necessary is a foundation of what somebody is using to figure out how much they need to make per month to replace their current income from their jobs. But whatever your metric is, every area has an area where the best deals can be had. And in the Lehigh Valley, I feel very strongly that you can buy great deals that will be full of appreciation, and have great stable cash flow, if you're buying in that 50 to $70,000 per door ratio. And whether you're buying two units, five units, 10 units, 20 units, you should be able to use that same metric. When you're going to analyze the deals, if there's any other component to the property that's going to make my metric a little bit off. So for example, if there's retail on the first floor and then apartments above the 50 to $70,000 door no longer works because now you're talking about mixed use properties. If a large portion of the of the asset is garages or warehouse space, that's also going to throw off my metric, right? So I'm specifically talking about what I'm looking for investment properties that are going to cash flow and have natural and give me the ability to have forced appreciation, I'm looking for that 50 to $70,000 per door.
6:29
So what I can expect in that range, I can expect deferred maintenance. I can expect properties that may or may not have tenants. I can expect properties that definitely need some capital improvements. But in my mind if you have the right partner in place, meaning if you have a great property management company, to be by your side, buying these deals in this sweet spot should be easy for you. And what that allows you to accomplish is consistency and cash flow. Growing appreciation and the ability to have a steady stream of income for whatever your life's goals are. But the secret to building wealth, in my opinion, is creating a portfolio and consistently adding doors to that portfolio that return a great cash flow and will appreciate for you. So let me give you some examples. We've done quite a few of these over the last couple of years. And, you know, now we're kind of in that cycle where because it's a seller's market, some of the investors that we've worked with have now been able to sell some of their assets or trade up in and do like a 1031 exchange or use other tax strategies to help them again retain more of their cash flow. So we are analyzing properties on many different levels. But when you're buying properties in that area that I suggested to be our sweet spot in the Lehigh Valley, what I can can assure you is that next year the property is worth more, no matter what the market does. I can promise you that you will grow your cash flow because you're going to increase the rents, decrease the expenses, make some capital improvements, fix some deferred maintenance, and the result of that will be great appreciation on the building.
08:22
The episode will continue in just a moment.
As a real estate investor, understanding the nuances of the market is critical to sourcing the right property for your portfolio. Knowing what the market will support in terms of lease ability and potential rental income is a vital part of that equation. You want your property to be in good condition and in a location that's attractive to high quality tenants. If you wish to acquire a property that becomes the gem of your portfolio, you're going to need help to do it right. The good news is you have a great resource who can help you slice through the challenges of finding your ideal property and that's me. So whether you're just getting started and are unsure of which market to start with, or whether you know the market but can't wait find the right property, I can help. Visit GrowingEmpires.com and schedule a call with me today. One simple conversation can help you avoid wasted hours, days and weeks and also help you avoid costly mistakes that will weaken your portfolio. Schedule that call with me today at GrowingEmpires.com, that's GrowingEmpires.com and I'll make sure that I help you find that home run property to add to your portfolio.
09:29
So let's talk about a couple examples. So a few years ago, roughly 2017 I helped a client buy a 12 unit apartment complex, definitely deferred maintenance, definitely had tenants that were not paying rent, many were on month a month leases some needed to be evicted. And the building overall needed a lot of love it cosmetically was just not appealing. And when I helped the client purchase this property, our goal was to increase the cash flow and build wealth for this client and eventually give them an opportunity to trade up into something larger. So over the next couple of years, we decided to strategically, one unit after another, go in make improvements and we weren't necessarily going for, you know, top of the line. We weren't putting in granite countertops or stainless steel appliances. We were putting in a vinyl grade, very durable type of flooring that looked like wood. We were putting tile in some of the bathrooms and kitchens. We were upgrading the cabinets. We were giving the building a paint job. We were modernizing the building. We put up security cameras in the back to make sure that people's cars and the building was safe and secure. And we just did a lot of things to make the overall atmosphere better for the tenants.
And we didn't break the bank on it because we weren't doing anything that was above and beyond what the market would bear for these types of rentals. And as we had new tenants move in, we were able to really increase the quality of the tenants in the building, we were able to essentially remove all the pets from the building, we were able to provide safe, habitable, nice, clean apartments. And for that people were willing to pay a premium for these one and two bedroom apartments. So going back a little bit to what I said the building was purchased in 2017 for $700,000. Today, that property is worth roughly $1.4 million. So double the income and it took three years and that's one of many examples of what appreciation can do. It's not always a 50% you know, double your money type of deal. But if you're buying the right deal, and you're patient, and you make good decisions, the Lehigh Valley has an incredible amount of inventory and opportunity for you as the investor. Let's talk about another example. We bought a two unit property $75,000. Completely empty, was an estate, the person that had lived there had passed on. Definitely an older property; needed a lot of work was super, super dated and again, completely vacant. We bought the property, quickly made some improvements, leased up the property. That was in 2016. The original tenants that were put in that building after the renovations were done in 2016 are still in that building today in 2020. The property was in Easton. That building today is worth about $175,000 on the open market.
12:49
So again, an incredible example of how just being patient and making the right moves, really is going to do such a world of good for you. The examples go on and on and later in this season, we're going to talk more in detail about other case studies that we've had. And I'll share how we accomplished some of those goals. But I want to come back to what I said earlier, and that's, you have to be patient, you have to find the right deal, right? And you have to be willing to do what is going to give you the ability to have the most amount of return on your capital, or your cash. And right now, in the Lehigh Valley, buying the apartments that are in the B & C class neighborhoods is going to yield you the highest return. You can buy those apartments and Bethlehem, Allentown, Easton, you can buy them in any of the suburban areas surrounding the Lehigh Valley. And if you make modest improvements, and give the tenant population a safe, clean, habitable property to live in, you'll find an abundance of tenants that are willing to be respectful of your building, pay rent, stay long term and take good care of their unit that they were given. And you don't need to put in granite countertops, stainless steel appliances or anything of that nature to achieve these goals, because what we're doing is we're providing housing for our workforce population. We're providing housing that is affordable or providing housing that fits the needs of the majority of people looking for rental properties.
Now, maybe your investment strategy, you want to have turnkey operations. And I find that people that are looking for turnkey, are willing to pay a premium for that asset. And maybe that's that is the right thing for you. However, I've also noticed that sometimes people ask for the turnkey properties because they don't have the time or the energy to kind of manage the property. But when you can find that partnership and find a good property manager in the area, who can be on the same page as far as what your goals are financially, and they understand what the market will bear in terms of rentability and what the needs are as far as improvements to properties, they will help guide you to finding and capitalizing on the types of investments that are cash flow heavy and appreciate drastically. It is not unheard of for in the Lehigh Valley for your assets to double overnight. It is not unheard of for you to be able to put little money down and create great cash flow. Whether you're new to investing or whether you're looking to add to your portfolio, the Lehigh Valley can be a great option for you. If you need help finding the right investments, you can certainly reach out and give me a call. But ultimately, it comes back to those three things that I mentioned on an earlier episode. The Lehigh Valley is balanced, diversified and growing; there are plenty of opportunities to provide housing for our tenant population. And if you buy smart, you too can have amazing cash flow and generate greater appreciation on your investment properties. So if you want to find out a little bit more about winning in the Lehigh Valley with your real estate investments, please don't hesitate to reach out to me or my team. And in the meantime, remember the Lehigh Valley is balanced, diversified and growing. It's a great place to invest, and a great place to create consistent cash flow and appreciation. All the things that are necessary for building wealth. Until next time, take care.
16:23
For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, visit growingempires.com.
Get the guidance you need now.
For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, book a complimentary consultation.