605: Q&A with Jennifer de Jesus
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Welcome to Episode Five of Season Six of the Growing Empires Show. Today we are back with our famous Question and Answer segment. So stay tuned.
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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.
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I hope you're enjoying all that season six has to offer I'm gonna jump right in with some great questions from our listeners. First question, how do you protect yourself from buying the wrong property? That's a great question. So first of all, I think it's important to keep in mind that you have to know why you're investing and the property that you're purchasing has to make sense for those goals. So for example, let's just say that you are looking for investment properties for a long term hold strategy. That means that you have time to improve the property. That means that you have time to get rents up to market rates. And that means that you have time to wait for the cashflow to stabilize if your end goal is to hold the property for a few years. Now, if you're looking at a quick turnaround, meaning that you would like to buy a property, improve it, get rents up to market and do whatever you need to do and then sell it in a year or two, the microscope that you're going to be looking under to identify a property is going to look very different than the one that you would look under if you were going to be holding a property for three, four or five years or more. So it's important that you make sure that you have identified clearly what your goals are and that the property can achieve those goals in the set amount of time that you have allotted. If you're looking to buy a flip property, can you successfully purchase a property, renovate it in a few months and then turn it around and sell it? And when you do turn around and sell it, are you going to be in a market that is going to be conducive to you selling the property at that time? So those are just a couple of tips on how to protect yourself from buying the wrong property. But you're also going to want to look at the cash flow. You should never want an investment property in general, so bad that you make bad decisions. You shouldn't be in a rush to buy financial properties or investment properties. You should take your time. Carefully analyze the details. Strategically plan your improvements and your moves, your strategic moves on the property. And if you do that, you're going to find that you will be far more successful than if you're rushing into a deal or if you want to deal too badly.
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Next question, due diligence time, what am I looking for? What should I do to protect myself in that area? Well, again, due diligence time is your time to really identify the property as far as condition is concerned. But it is also time to dot every I and cross every T regarding financials. It is not uncommon for sellers to be very tight lipped and less than stellar communicators when it comes to providing financial information on the buildings. But with any contract, leases are due within five days of contract. So the first thing that you want to do is when you get those lease agreements, you want to compare it to the multi-list or compare it to the financials that you were given at the time of contract. And you want to verify that everything that you believe is accurate, is verifiable by those leases. And if you don't have a lease, you have an estoppel letter. If for any reason the initial data that you were given that helps you prepare an offer on the property is not the same as the items that you're refining. As far as factual in the estoppel letters or leases, you definitely are going to want to go back and renegotiate. Keep in mind that you want to buy a property based on its current financial status. You do not want to buy a property based on what it could be in the future. That's the difference between buying at Proforma or buying an Actuals. As a savvy real estate investor, you want to always buy the building based on actuals. You want to have a perception or a perceived idea of what the performance is going to be the projection. However, your actual purchase price should always be based on the current status today. Because all of that upside is your cash flow, it's your profit. So you never want to give that away in a deal. The current seller should never win based on a price that you're paying that's fake. And if you're buying based on what the property could be and the seller was not successful getting the property to that status, they shouldn't be able to reap the rewards of a fully improved or stabilized property. So again, just keep that in mind when it comes time to verify the leases in your due diligence period. The other thing you're going to want to do is, you're going to want to verify expenses in particular. Now, I know due diligence time people think condition of the property. But if we're buying true value add propositions, you should expect to do some level of maintenance and repairs to the property. So due diligence time, in my mind, is a lot more about the financials and a lot less about the actual condition. Because we should be going into this with eyes wide open. And you should be thinking that, you're going to need to put some improvements into the property to really get it to turn around and stabilize and get the rents up to market rates. And during that due diligence time, you're going to want to plan your capital improvements, or plan any improvements to the property, so that you can have a very good strategic plan for once you actually go to settlement on that property. But, in due diligence time, besides the leases, you're going to want to also verify the expenses. Specifically the landlord paid expenses. And those landlord paid expenses are the things that can be verified by either calling the utility companies to get a 12 month history of the average usage. You can certainly verify it by bills, utility bills, from the seller. You can also verify it by schedule E's have a tax return and a Schedule E is an itemized list of the income and expenses on a property that the seller would claim on their taxes. So any of those would be good ways to verify the expenses, the landlord paid expenses. You're going to want to make sure that you're talking to insurance companies and make sure that your insurance number is not going to be out of line for what your expectation is. Keep in mind that what the current owner is paying for insurance is not a guarantee that that policy is going to be turned over to you and that you're willing to pay the same amount of money. There is a difference on reissue rate with insurance. So a lot of times, if somebody has a multi line policy, or they have multiple things, they get discounts for those multi line items on their policies. If you are trying to put a policy together for just one investment property, you likely aren't going to be able to take advantage of that multi line discount. So that could be one reason why your insurance policy number could be larger or actually smaller than what the seller is currently paying for insurance. But another reason is insurance is based on your credit history and worthiness. It is based on the property. It's based on any historical changes to the building, meaning if the property has just been identified to be in a flood zone that could drastically change your policy premium. So you're going to want to, in your due diligence period, make sure that you get all of your insurance policy items in place and that you know what the premium is going to be for the year so that you can account for that in your cash flow statements. And then last but not least, you're going to want to make sure that anything that was disclosed to you, as far as the condition of the building, at the time of contract is true to this date. So if you do have a home inspector or roofer or a mechanical contractor or somebody like that going to inspect the building, you're going to want to make sure that there are no items that were potentially hidden from you during the time of contract or that the seller is not fully telling the truth regarding any kind of maintenance or upkeep on the building. And if you do suspect that something does not quite smell right, you should absolutely go back and either continue to get expert advice and recommendations on how to make those improvements or go back and question the seller as to the validity of their statements.
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The episode will continue in just a moment.
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The best investments with the highest potential for a solid return always start with the right real estate purchase. But it's not just about a flips potential margin or how fast you can ready a property for leasing. It's about creating a future of financial stability for yourself and for your family. One that supports the lifestyle that you want. If you're an active investor and purchase, renovate and lease your own properties and you love the process, the chase and the returns. You're in the right place listening to this show. Especially this season because we're talking about a deep dive into how to purchase the best property for you. However, if you're more of a passive investor and one who wants to diversify your stock portfolio with real estate, but you don't want to get involved in the active management of those properties, you're also in the right place as we serve both types of investors. To gauge what your real estate investment tolerance sits and what would be the best fit to grow your income with real estate, I invite you on a call with me. To book your call, visit growingempires.com and click book a consult. That's g-r-o-w-i-n-g-e-m-p-i-r-e-s.com and I'll help you choose the best real estate model to help you achieve your real estate investment goals.
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Next question, if I'm buying my first property, where do I start? And this is a great question. It's actually one that I get asked often so I think it would be great to kind of dive into this for a quick moment. When you're buying your first property. The most important thing for you to do first is to have your finances in order. You've got to make a determination whether or not you're going to buy the property with cash or buy the property with financing. And if you're going to buy the property with financing, you're going to want to make sure that you have the financing lined up. Now, not every lender, especially if it's a commercial lender, provides pre approvals or pre qualification letters. But you're going to want to know that before you actually submit an offer, so that you can disclose that up front to the potential seller. You want to have all your I’s dotted and your T's crossed as far as your lending is concerned. So before you go looking for a property, it's important that you have your pre qualification or that you have a relationship with a bank so that you're not doing that post contract time. Keep in mind that during contract time, you have seven days to secure a financing application. And if you do not do it in that time period, you are actually in default to the terms of the contract. So you're going to want to make sure that you have your financing in place long before you start looking at properties. If you're going to be purchasing with cash, it is important that that cash is liquid. No seller is going to wait for you to refinance a property or pull money out of an IRA. If it's going to take some time, you're expected that if you're putting in cash offers that cash is liquid and available today, if you were to go to settlement. So make sure that you do all of that before you actually look for and try to contract for properties. The other thing that you're going to want to do besides, having your financing in place, is make a decision on whether or not you're going to be purchasing in the name of an LLC or purchasing in your personal name. And you may need some legal advice. You also may need some accounting advice. So make sure that you've talked to your professionals, your tax advisor, as well as your attorney to verify what the direction is that they're going to give you as far as recommendations. Because that also is going to be necessary when it comes time for contracts. You're going to need to know if you're going to be assigning the contract to your LLC. You also need to know if you're going to be purchasing in your personal name. And last but not least, you need to make sure that you have a budget for your property. We're not just talking about down payment and closing costs. We're talking about how much cash do you have to invest into this investment property. Obviously at closing you're going to take your down payment plus your closing costs. But beyond that, you need to expect to be paying money into this property to initially get it stabilized. So you want to make sure that you know exactly what your boundaries are. If you've got $50,000 to spend, and your down payment and your closing costs are going to be $50,000. You have overextended yourself and you cannot afford the property that you're trying to buy. So please make sure that you set your budget up so that when you're talking to your real estate adviser about the types of properties that you're looking for, you can give them very clear direction on how much cash you have available, liquid cash to spend to put into your next investment property. And those tips will allow you to get started on the right path, making the best decisions that you can make to buy your first property.
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Last question is, how do I find the right deal in a competitive market? And this is certainly super challenging to do in the current state of the economy as well as the current marketplace. But the best advice that I can give you regarding this is Be patient, you can never want to deal so bad that you make bad decisions. And it's not always best to look in the same direction that the rest of the world is looking at. I'm not discouraging you from placing an offer on a property that has multiple bids. But what I am saying to you is that there are other properties out there that, while there's multiple bids on many other properties, are just sitting and they're just sitting for a variety of reasons. It could be terrible marketing. It could be the current condition of the property. It could be the tenants are not cooperating with showings on the properties. You might want to consider looking at properties that nobody else wants. Because that's where I find that you can get the best deals and you can negotiate the hardest. Because, the sellers are already frustrated that their property didn't sell in a marketplace that is already hot. So they're likely discouraged. And sometimes a good offer is better than no offer. So you might want to consider just looking under a different rock. But if you are going to be purchasing a property that has multiple bids, and it's a super competitive arena for what you're trying to acquire, just make sure again, that you never want the property so bad that you overpay. Make sure that your financials are set in stone before you make the offer on the property. And it's no different than bidding on eBay. You need to know exactly what your ceiling is and what you can afford for the property as well as what makes good financial sense for you and for your goals. And no matter how bad you want the property, if the bids go over that property, you should just walk away and find another property. And one of the easiest ways to accomplish that is to just really nail down all of your finances. Try to get as much information as you can up front and perhaps put yourself in a place where you can walk away from the deal if for some reason, the deal no longer makes sense once you go through your due diligence period. And that is my best advice on how to find the right deal in a competitive market. I hope you enjoyed our question and answer segment for season six. And until next time, take care.
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More information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio. Visit growingempires.com