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2016 Results & 2017 Focus

Starting this year I thought reaching $1,000/month in cash flow was out of reach, thought I was shooting high, but early mornings, late nights, and a great team made our goal a reality before I knew it.

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real estate investing pensacola fl

Put me in Coach! We started 2016 with only one unit and set out with a goal to increase our cash flow to $1,000/month.  We didn’t have a specific number of units in mind, just $1,000/month in positive cash flow.  If we’re following our rule of $200/unit after all expenses, then we needed 4 more units. By May, we closed on our 4th unit of the year allowing us to do just that. I initially thought $1,000/month in cash flow was out of reach, thought I was shooting high. I’m consumed by my day job and couldn’t imagine how we could get there, but early mornings, late nights, and a great team made our goal a reality before I knew it. What now? 

The next several months we spent getting those properties in shape and our last acquisition of the 2016 year was a Tax Deed purchase in August. This tax deed property and inherited tenant situation started out strong, but sad to say we eventually had to evict him and currently going through stabilizing that property. Nonetheless, from one to now six units in our portfolio…wow!

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More. 

The Pensacola Market is hot and has been hot for a while. Many local and regional experts that I’ve talked to are expecting a down turn in the next 12-36 months.

There is also some solid supporting evidence that a local down turn is imminent:

  • volume of sales in Pensacola – at & above 2005 levels (see graph below)
  • Price of properties
  • # of new RE Agents
  • Amount of new construction for both SFR & MFR in Escambia & Santa Rosa counties
  • Veteran REIs (regionally & nationally) starting to offload assets
  • Two small MFRs hit the Pensacola MLS last month, both were under contract in 2 days of being listed
real estate investing pensacola fl
Above graph provided by Emerald Coast Realty

It could just be the paranoid side of me, but I have a hard time seeing how this will last much longer in Pensacola. However, as I mentioned in How We Use Our Tripod of Adopted Investing Criteria, we are focused on Cash Flow and not so much on appreciation / price. That said, with the predicting market turn we’re going to be more patient and focus on learning more about midsize multi-family properties (15-20 unit apartment buildings).

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2017 Focus:

  • Building Relationships / Expanding Circle of Influence
  • Stockpile Cash / Reduce Expenses
  • Increase Credit Lines
  • Build Knowledge Base of 15-40 Unit Apartment Buildings
  • Patience for great deals

When we first started thinking about seriously investing in real estate (2011) I found BiggerPockets.com [great site, join it, connect with me]. One of the first articles I read, published by BiggerPocket’s VP of Business Development Brandon Turner was How to Make a Million Dollars from Real Estate. This article laid out a 7-year plan to make a millions dollars in REI. That story stuck with me then as much as it does now. Starting 2017 we are effectively starting year two, in which the article suggest to not do any acquistions. Lining up with Pensacola’s expect downturn I’m fine with sitting on the sidelines…as long as I can be patient.

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How To Find REI Opportunities: Just Ask

“If you can move the house by the end of the month, you can just have the whole thing!”

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real estate investing pensacola fl
As the year is coming to an end, the sights, sounds, and smells of Christmas often remind me of those precious childhood memories. Forcing me to reflect and think about love ones who have passed and I hope those great memories stay with me forever. On that note, when thinking about real estate investing, I sometimes think about my Maw-Maw & Paw-Paw. For as long as I can remember my grandparents owned & operated what they referred to as a tenant building – low income, mid-size multi-family rental property that provided them a way of life. I hope to blog about more of those memories one day, but they lived in the house next door to their tenant building and the story on that house acquisition is amazing.
As the story goes, my Paw-Paw was in need of some spare lumber, this was late 1970s, ’78 or ’79 I think. Driving by this house, he noticed the owner was outside and in the process of removing the front porch from this 2 story, 3 bedroom / 1.5 bath, 1900 sq. ft. home. When Paw-Paw asked if he could have some of the lumber being discarded from the front porch removal, the owner simply said, “If you can move the house by the end of the month, you can just have the whole thing!”
And that’s exactly what they did. They acquired a lot a few blocks away near downtown, hired a moving company, and a few weeks later my grandparents were setup in their new home. I cannot tell this story without mentioning the power company. The path of the move required the power company to drop lines on 2 sides of the street – the largest cost of this project which had to be done on a Sunday; when most businesses downtown were closed (late 70s). I believe their all-in cost was around $25k. Simply put, an amazing opportunity.
real estate investing pensacola fl
Paw-Paw (green hat, 2nd from the right)

We created many holiday memories in this home and my parents still own it today. Opportunities are everywhere and through this event, my Paw-Paw has certainly encouraged me to Just Ask.

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 #REI  #RealEstateInvesting #HelmsREI

How We Use Our Tripod of Adopted Investing Criteria

We consider appreciation extra icing and don’t acquire based on assumed appreciation, but we also don’t want to be put in a position to exit a property and be required to bring money to closing.

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real estate investing pensacola fl

If you’ve been following us you know we have adopted a tripod of investing criteria we use to analyze ever potential acquisition. There are many criteria and tools used in real estate investing, but our current REI focus in the Pensacola area is buy & hold with an emphasis on cash flow. Since cash flow is the #1 goal, we start our analyzing there but each criteria I mention below must be met before we make an acquisition.

Prerequisite: Asset Must Rent @ 1-2% of Acquisition Costs
Also known as the 1 or 2% rule. I was introduced to this rule by the guys over @ BiggerPockets.com and is the first hurdle any potential asset must leap for us to pursue any further. I try to analyze at least 3 Pensacola properties a day with this prerequisite. Takes approx. 15 minutes or less with this prereq and if it passes, we move onto Criteria #1: Cash Flow.

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More.

The 1 or 2% rule is fairly straightforward – the asset must have a monthly rent of 1-2% of its potential acquisition costs. For example, using the 2% rule, if a potential asset has a total acquisition costs (purchase price, closing costs, capital expenses/repairs to make it livable) of $50,000, it must rent for $1,000/month. Knowing the rent values in our investment areas, makes this a quick prerequisite to jump through.

Criteria #1: Cash Flow is >=$100/Month Per Unit
I go into how we calculate cash flow on the Real Estate Investing Terms: Cash Flow post, but essentially you add up all your monthly expenses, subtract those expenses from gross rent. What you have left over is Cash Flow and our target here is $100/unit or in other words $100/door.

Criteria #2: Projected CoCR is >= 15%
Cash-on-Cash Return (CoCR) is a way we analyze Pensacola properties to see how they compare to one another, but also how well they compare against other non-real estate investment avenues (i.e. IRA/401k, stock market, etc.) In the post How We Used Our IRA to Invest in Real Estate, I talk about how previous IRA and current 401K provides a return of 8% on their money. While our criteria is 15%, anything over 12% we look at in more detail. I’m posting in detail how we calculate CoCR and I’ll link back here.

Criteria #3: Asset Acquired @ 20% Below Market Value

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This essentially means we make a lot of offers, low offers. My realtor team calls me Mr. Low Ball and I’m ok with that :). The primary reason we do this and especially right now, is preparing for a dip to happen. The Pensacola market has been on the upswing for a while now and many of the local experts are predicting a dip or slight correction in the next 3-5 years. As the market tends to shift, we will slide the % on this criteria. The biggest takeaway from this criteria is look for a deal!
We consider appreciation extra icing and don’t acquire based on assumed appreciation, but we also don’t want to be put in a position to exit a property and be required to bring money to closing.

Acquisitions are one thing, exits are another. We currently hold 2 criteria as our exit strategy and more to come on those later.

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My First Tax Deed Auction Purchase [Letter]

Do I just walk up, knock on the door and tell them you’re in my house? Start paying rent or leave? How well do you think that will go over?

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real estate investing pensacola fl

 

Like many states, Florida is a tax deed state, meaning, if you own the tax deed (or win it at the county tax deed auction), under FL Statue you have the right to take immediate possession. Most folks tend to purchase tax deeds where the property is unoccupied. I now understand why this can be an issue, but in my first experience, so far/fingers crossed, my first tax deed auction purchase was occupied and it has gone extremely well.

Quick Details:

  • Yes, this was my first tax deed purchase – Pensacola property in Escambia County
  • I did very little due diligence pre-auction (not good and certainly not advisable, I was lucky)
  • Mobile Home Trailer in a class C neighborhood
  • From several pre-auction drive byes, I could not tell if the property was occupied or not; a call to the utility company let me know power was being paid (of course they wouldn’t give me any details by whom)
  • Post Auction (After I paid for the property!) I discovered the occupying party was not on the title, he had lived there for 15+ years (discovered this from a Professionally paid title search – Always use a professional )
Being as it was my first tax deed auction purchase, the Pensacola property being occupied by an unknown entity, and my natural behavior to avoid conflict (especially one where I may be shot by Shotgun Sally), I didn’t know what to do. Do I just walk up, knock on the door and tell them you’re in my house? Start paying rent or leave? How well do you think that will go over?
A while back I posted about the importance of having a lawyer on your team and here is a great example of why. My first thought was just to evict the occupant. Per my lawyer’s advice, I cannot evict the current occupant as there is no lease agreement to evict on. This left me with 2 real options:
  • I can attempt to perform an ejectment notice – lengthier than an eviction and WAY more costly (estimated around $3,000).
  • Have the occupant sign a lease and become my tenant.

I like option B MUCH better. After all, supposedly this occupant had been there for 15+ years and clearly he was settled in by the looks of the place. It was going to cost me thousands of dollars to clean it up and even more to find a new tenant. But with the fear of being shot, how do I make contact to see if he’s open to it? Via a Certified US Letter, that’s how. And that’s exactly what I did.

Contact me via the form on this website or email [ jay@helmsREI.com ] and I’ll send you a copy of the letter I sent. 

Through the letter I explained and provided copies of the tax deed auction purchase, I was interested in keeping him as a tenant, but if he didn’t contact me within 10 days of receipt, I’d be forced to take legal action to remove him from the premises. In approx. 10 days he called me up, we worked out a deal and he signed a lease. This could not have went any better.

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Will I continue to invest in tax deed sales? Yes, but the next go round will institute more pre-auction due diligence. I really was lucky here. As a matter of fact, I placed bids for additional tax deeds in Pensacola the month immediately following this one, but did not win those auctions.

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How We Used Our IRA to Invest in Real Estate [6 Month Follow-Up]

Not really even month 1, weeks 1 & 2 we received our first service calls. Broken A/C in unit B and leaky sink in Unit A. I initially thought...Fun Times Ahead! but quickly reminded myself we bought these units knowing repairs and deferred maintenance were on the forefront. 
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real estate investing pensacola fl

In April of this year, I wrote the article How We Used Our IRA to Invest in Real Estate. Now that we’re 6 months into owning this asset, time for a little follow-up.

Quick Recap: the Pensacola property we purchased with our SDIRA, had 2 trailers on it, both occupied, both with one year lease agreements with a record of paying on-time tenants. At such a low purchase price and high cash flow, I went in expecting $5-10k of deferred maintenance. Six months into it, I was dead on. Thanks to my awesome wife for taking this photo at closing and our little man for making sure we signed in all the right places.

Month 1 (April): Not really even month 1, weeks 1 & 2 we received our first service calls. Broken A/C in unit B and leaky sink in Unit A. I initially thought...Fun Times Ahead! but quickly reminded myself we bought these units knowing repairs and deferred maintenance were on the forefront.

Month 2 (May): no issues!

Month 3 (June): Unit B’s AC goes out again. Upon further inspection a leaky coil resulted in replacing the entire unit. A home inspection by my Pensacola property management company revealed a faulty breaker box also on Unit B. Total costs for repairs = $4,100. That should be it for Unit B, as Unit A needs the real work.

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More.

Month 4 (July): Stove repair in Unit B: $104. Crickets on Unit A.

Month 5: (August): Oh boy, where to begin. A failed eviction on Unit A, charlie foxtrot of a situation. Nonetheless, I turned this thing around which resulted in me taking on managing the property myself, signing the existing tenant to a new lease – a lease that was mutually beneficial for the both of us. A great time to reiterate how important it is to have the right team members, especially a quality property manager.

Month 6 (Sept): Unit B, no issues. Finished up deferred repairs on Unit A (roof, bathroom floor, plumbing, windows, A/C…yea, a lot not done by the PM group): $2,293.

Before we get started on the #s, a few reminders:

  • Last year (2015) my traditional IRA returned a whopping -10% (that’s a negative, as in going the wrong way, ten percent) and my 401K returned 1.4%.
  • Cash-on-cash return for this asset was projected to be >20%
  • Even though these units were occupied, major repairs (>$500) were expected to bring these units up to code and thus added to the acquisition costs below.

Six months into our first SDIRA Pensacola Real Estate investment, here’s how the #s breakdown:

  • Total Acquisition Costs: (purchase price, closing costs, major repairs): $38,293
    • Purchase Price + Closing Costs: $31,900
    • Major Repairs: $6,393
  • 6 Months of Operating Expenses: $2,001
    • Minor Maintenance & Repairs (6 months): $1,115
    • Property Management Fees (6 months): $231
    • Eviction Costs (6 months): $400
    • Insurance (6 months): $255
  • Rent Revenue (6 months): $4,989
Cash-on-Cash Return (the return I’m comparing to my other investments) is calculated by dividing the annual before-tax cash flow by the acquisition costs. Since we don’t have a year of expenses and revenues yet, I’m doubling what has transpired over the last 6 months for minor repairs, fees, insurance, and revenue to obtain the estimated annual cash flow.
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  • Expected Annualized Operating Expenses: $4,002
  • Expected Annualized Revenue: $9,978
  • Expected Annualized Cash Flow: $5,976
  • Cash-on-Cash Return = $5,976 / $38,293 = 15.6% 

So, not the expected >20% that we estimated, but a helluva lot better than a negative 10%! We’ll see how all the #’s shake out in another 6 months when we can put estimates behind us and put a year of real world #s in our calculations.

 

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Successful REI Takes A Team: Our Roster


Hopefully this relationship will continue to build, but playing a key role on the team, I plan to start interviewing additional companies now, identifying that backup option just in case.

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real estate investing pensacola fl

Our Pensacola Real Estate investing is focused on buying & holding (B&H) properties for short-term cash flow and long-term wealth building. While the team members discussed here pertain to our focus and are the team members we’ve discovered to successfully invest in B&H, different investment objectives may introduce different and/or more team members. I discuss the various types of investors in the Advantages of Selling Your Home to a Real Estate Investor blog post, but here I’ll discuss what our current roster looks like to make our buy & hold investing a success.

The current players are:

  • Realtor: someone who is used to working with investors or a young go-geter who has just gained his/her license and ready to tackle the REI world for you. Nothing wrong with interviewing realtors to let them know how you plan to invest and the direction you want to take your REI. Don’t be shocked if they all say Yes to everything you ask of them – after all, they are sales people. If you’re just starting out, work with 2-3 or ever how many it takes to find that one that truly understands your investing goals.

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More.

  • Property Management: a must for Buy & Hold investors. I started our investing wanting to play this role and I still do for a few properties in our portfolio, but the tenants are AWESOME. As I started searching for PMs, I called and left messages with the top 3 Pensacola Google magic results and 1 that I met in person. In the voicemails I left, I let the prospective Pensacola Property Manager know that I had 4 properties I wanted to transition to them. I went with the only one that called me back and so far it has been a relationship where we’re learning a lot about each other. Hopefully this relationship will continue to build, but playing a key role on the team, I plan to start interviewing additional companies now. Because this is such a key role, having the backup option identified will prove to be key.

 

  • Tradesmen (electrician, roofer, plumber, HVAC, handyman): if you have a PM in place do you still need these? Yes. While your PM should have a rolodex of tradesmen to provide quotes on needed repairs & upgrades, having your own list isn’t a bad idea. I started building my list when I first thought wanted to be my own PM and just like any other team member, it took going through 2-3 of each to find the right one. The right ones for us are ones who provide quality work for a fair, consistent price.
  • Lawyer: just a no brainer. At some point in time you’ll need a lawyer for a very important event (title searches, evictions, closings, asset protection, lawsuits, etc.). Interview early, let them know your REI goals, but start this relationship before an event happens. I have a great one in Pensacola if you need a referral.

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  • Accountant: also a no brainer…at some point. Starting out or having <7 properties this is probably not a need but as your portfolio builds, it is a must have. Ensuring taxes and tax advantages are properly gained, a licensed CPA will do a way better, legal, job of this than you will, unless of course you are a CPA :).
  • Wife / Family: support groups are key, and my wife provides the positive reinforcement needed when facing challenging times and level-headed thinking when I want to invest outside of our criteria. The MVP of our team!
real estate investing pensacola fl

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My First Eviction Turned Into Greater Cash Flow

I received the email no landlord wants to receive. “It’s the 11th of the month, Unit A hasn’t paid rent yet. Do you want us to start the eviction process?”

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real estate investing pensacola fl

 

Being my first eviction and at times a hard ass, my initial reaction was, rent is due on the 5th, it’s the 11th, why are just now bringing this to my attention? Why didn’t you already file the eviction on the 6th and just let me know that you’ve done it? But, as I get older I’m learning that sometimes cooler heads do prevail and in more ways than one, this is certainly one of those examples.

A week later I followed up with Pensacola property manager to find out the status of the eviction. “She’s fighting it”, was their reply. “She paid rent through the court and now’s she fighting it.” I thought, that certainly sounds strange to me. If Tiffany Tenant (Tiffany is not tenant’s real name BTW) had the money to pay rent, why didn’t she? I’m now out $400 court costs. Again, being my first Pensacola eviction and trying to be wiser, I let it roll.

Before I go any further, I must admit I assumed Tiffany was a “professional renter.” I inherited these tenants with the purchase of the property and at the time of the eviction they had 2 months left on their lease that was signed with the previous owner. I assumed the worst.

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More.

Toward the end of the month I receive a call from Tiffany. How she obtained my # I still don’t know, but I appreciate her determination. We had a lengthy conversation about the eviction and her story was not matching up to the Pensacola property manager’s. Tiffany brought up several maintenance items, that I was led to believe had been addressed – as in there were line items on my monthly maintenance statement from the property management company as being addressed. I figured the truth was somewhere in the middle but I needed to see for myself.

Sure enough, personally doing an inspection of the property, the maintenance items had not been addressed. The tenant even showed me the cancelled money order (date printed/receipt) where she attempted to pay rent through the property management company.

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Why this transpired and I’m out $400 court costs, I still don’t know, but I’ve now decided to manage this property myself. I was able to sign Tiffany to a new lease, one she is happy about and one that cash flows an extra $75/month for me. As for my Pensacola property management company, I see that relationship coming to an end soon, but for now I’ll let it roll.

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Real Estate Investing Terms: Cash Flow [example]

Because we focus on buy & hold rental properties in Pensacola, Cash Flow is the most important metric we look at when considering an acquisition.
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real estate investing pensacola fl

Caution: This post goes technical real quick and my geeky side does come out 🙂

Most people, even some experienced Realtors, think cash flow is the gross revenue generated from a rental property. Unfortunately, that is not true.  Cash Flow is similar to Net Operating Income, but also includes some calculations for future expenses. Let me explain…

Cash Flow, as I calculate it, is the Monthly Revenue minus ERMVITC.

Monthly Revenue – ERMVITC = Cash Flow

What is ERMVITC?  Glad you asked.
Expenses (General): these include utilities, garbage, mortgage, property management fees, etc. You should be able to obtain exact #s for these variables.

Repairs & Maintenance: I typically estimate these between 5-10%. The range is based on the amount of repair work done prior to placing a tenant. The work performed up front, the lower the percentage and vice versa.

Vacancy: Also estimated between 5-10% based on the property, current tenant situation, and neighborhood.

Insurance: Insurance carriers always vary, so I encourage you to shop around. While underwriting a potential acquisition I stay conservative an estimate $100-125/unit.

Taxes: usually a known quantity by visiting your county’s Property Appraisers site.

Capital Expenses: I typically estimate these between 5-10% also. The range is based on the amount of repair work done prior to placing a tenant in the property and covers such things as a new roof, bath room remodel, appliances, etc. And just like RM,  the more work performed up front, the lower the percentage I use in my underwriting and vice versa. 

 

Here is a real life example of how I evaluated a Pensacola property for acquisition. This property is fairly old and needs some repairs so I’ll be using 10% for Repairs & Maintenance as well as 10% for Capital Expenses. This property should stay rented fairly easy so I’ll use 7% for vacancy. I’ll also be using 10% for Property Management Fees, the tenant is responsible for all utilities, there is no HOA and I’m purchasing this Pensacola property with cash, so no mortgage payment. Let’s do some math!

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Monthly Rent: $750

Expenses: 10% of $750 = $75 (for Property Management)
Repairs & Maintenance: 10% of $750 = $75
Vacancy: 7% of $750 = $52.50
Insurance: $125/month
Taxes: $840/yr or $70/month
Capital:  10% of $750 = $75

Add up all of our estimated expenses:
$75 (E) + $75 (RM) + $52.50 (V) + $125 (I) + $70 (T) + $75 (C) = $472.50

$750 (Monthly Rent) – $472.50 (ERMVITC) = $277.50 (Cash Flow)
 
 

Based on these calculations, this meets one of our investing strategy criteria. Now to further evaluate this property with our other criteria before making an offer.

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How Do You Know How To Invest in Real Estate?

As I continue to talk with more & more people about our buy & hold real estate investing in Pensacola, I find myself running into a similar question: How do you know how to do this? How do you know how to successfully invest in buy & hold real estate?

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Fair question. I have spent most of my career in the IT world, I did not study REI in a MBA course, and we just started actively investing in 2014. Self-education is the actual answer; self-education and being strict on the tripod of acquisition criteria that we have adopted.

Years before we purchased our first Pensacola property we started learning. Learning about the Pensacola market, different ways to invest, and trying not to repeat what I consider a false start to my real estate investing career in 2006. It seems like Real Estate has always interested us and it really wasn’t until after our first full year of investing did our focus become clear – thanks largely in part to the REI social network @ BiggerPockets.com.

We’re not trying to reinvent the wheel, just follow the pros!  The best source of learning is from people who have and are successfully investing. At the time of this original post (I’ll add more books as I continue to educate myself), I’ve listened to over 250 hours of audiobooks & podcasts that are focused on real estate investing/wealth building and held countless conversations with local realtors, lenders and real estate attorneys.

Below I’ve listed the books/links that I credit the most in helping shape my mind around our real estate investing. As I run across additional, paradigm shifting material, I’ll be sure to update this post. Enjoy!

 

real estate investing pensacola fl

The Total Money Makeover – Dave Ramsey

Biggest Takeaway: Create a budget that will assist you in meeting your financial goals and stick to it.

 
 




real estate investing pensacola fl

The 10X Rule – Grant Cardone

Biggest Takeway:  Write down your goals often and dream big! Being financially successful is my duty & obligation. #DBALB

Biggest Takeaway: Overall different way of looking at money and putting validation around making your money work for you. This book is a perfect gift for anyone, especially new fathers. 

Biggest Takeaway: All about stats.  Create a budget and not a flashy lifestyle; live within your means. Focus on being an exemplary builder of personal net worth. Exemplary Net Worth Equation: 

Exemplary Net Worth > Your Age / 10 X Current Salary

real estate investing pensacola fl


BiggerPockets Podcast & Social Network 

Biggest Takeaway: Too many to count here. Always great to have a network of like minded people seeking similar goals to bounce ideas and directly learn from. Free to join – send me a colleague request. They have published a few Amazon Best Selling Books on REI

 

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Selling Your Home. Can and Should You Owner Finance?

If you have a house in the Pensacola, FL or Cantonment, FL area you want to sell, there are plenty of things to consider. One of those is whether you want to owner finance. In some cases you simply won’t be allowed to do that, but there are circumstances where it may work for you.
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real estate investing pensacola fl

So let’s start with the Can You Owner Finance question. For people who have mortgages, owner financing is generally out. Even though you have the title to your house in your name, the bank still “owns” the house in the sense that they have a lien (the mortgage) on it. You can’t sell something with a lien on it without paying off that lien. This means you can’t transfer the house’s title to the new buyer without paying off your existing mortgage.

For most homeowners with mortgages, just paying off the mortgage in one lump sum isn’t practically feasible. But if you’ve lived in your home 15-30 yrs, never refinanced and don’t owe on your home then owner financing might be an option for you. If you need to get your house sold quickly, owner financing may be the way to go. When you owner finance, you’re basically the bank. You hold the mortgage on the home, and the new buyers pay you every month. There’s a written contract, just as there would be if they obtained a mortgage from a traditional lender, and you have the right to foreclose on the property if they don’t make their payments to you. While you won’t get a lump sum at the closing, you’ll get a down payment and the monthly mortgage payments. But is that really a good idea?

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Let’s know look at the Should You Owner Finance question. There are pros and cons to the owner financing option. It can certainly work for some people, and it will allow you to go ahead and get your house sold. That can be a big deal if you need to move quickly or there are other circumstances where a quick sale is very important to you. However, owner financing also has some big disadvantages that you’ll want to consider. First and probably the most important aspect for everyone, you’re not getting your money right away. Other than the down payment amount, you’ll have to wait for the rest of your cash 10, 15, 20, possibly 30 yrs – whatever the terms you and the buyer agreed upon. If you’re planning for the proceeds of your home selling to go toward another large purchase, such as buying another house somewhere else, you’ll basically be out of luck.

Another concern when you owner finance your home in Cantonment, FL or Pensacola FL areas is the chance that your buyer will stop paying at some point (non-payment actually happens everywhere, I thought this was a good spot to remind you we serve the Pensacola area). Banks have teams of people who can come in and foreclose on properties. They know what legal steps to take, and how to handle things. Unless you’re a seasoned real estate/finance veteran, chances are you don’t have the knowledge at your disposal, and foreclosing can be difficult if you’re unsure of the process. It’s even more frustrating if you’ve moved out of the area and now have to try to do everything long-distance or you must travel back and forth.

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A few other quick hits regarding owner financing…You’ll also need to make sure the property taxes get paid, and that there is proper insurance coverage on the property at all times, to protect your interests. Owner financing can be worth doing, but only if you’re knowledgeable about the process and prepared for any issues it may bring.

So, Can or Should you owner finance the sale of your home? Well my friend, that is totally up to you.
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How I Started Investing in Real Estate

I began my real estate investing career in 2006 with what I like to consider a false start. Flags on the field, back it up 15 yards…or realistically, 5 yrs :).  At what we now know was the height of the local market in Birmingham, AL, I purchased a 1950s ranch style SFR with the plan to live in and flip.
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real estate investing pensacola fl

Being my first attempt at a flip and working a a full-time job I knew it would not be the quick 30 day schedule that’s portrayed on TV. Single at the time, I knew I could live through the construction zone. Ironically and amazingly, the bulk of the construction happened after my girlfriend, now wife, moved in. I am VERY thankful as she became key in the design and helped with me with the manual labor on items we could do ourselves. Another blog idea…Know Your Limits. I may link back to this later, but knowing your limits in repair/maintenance is key to producing a good product and my limits would not be so low if I would have taken some of the best advice I ever received (from my dad).

Entering my sophomore year of high school, my father wanted me to spend each summer working with a different tradesman. He helped build houses on the side, so we had the connections of guys who could teach me right and make it fun. His plan was for me to spend one year with an electrician, next year with a plumber, 3rd year with a carpenter. The only thing is, I had a devastating fear of being electrocuted (still outsource most all electrical issues), cutting my fingers off and I didn’t want to deal with other people’s…poop (thank goodness for professional plumbers!). Needless to say I  regretfully didn’t take my father’s advice – I was a teenage kid, definitely thought I knew more.

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More.

Back to my false start…as we were paying more for labor we should have been able to perform on our own (thanks teenage me), the Birmingham market started tanking hard and in a couple of years we were like many people, upside down. We didn’t see much a choice but to bunker down and finish remodeling. By 2010, my day job provided an opportunity for us to move to Pensacola, FL, and always wanting to live on the coast, we took it.

Before moving to Pensacola, we had to make a choice (1) sell our house and take a major financial hit (2) turn our house into a rental and hope the market recovered sooner than later.  Not having the means nor wanting to take a major financial hit, we converted our Birmingham house to a rental and with it, I was re-introduced to the idea of passive income.  Unfortunately this time it was negative passive income. Following our move to Pensacola, each spring was the time I touch based with my realtor. “Not yet,” he would tell me. “If you can hold onto it for a few more years, you’ll be in a lot better position.”  And he was right. We held onto the rental property until 2014 when the market allowed us to exit nicely with equity to reinvest in Pensacola, FL.

real estate investing pensacola fl

It would be an understatement to say my real estate investing debut was a learning experience. However, my rookie season experience has pushed me to learn more, study harder, and really focus on the numbers – after all it is investing. At the time this post was written, we have made 15 offers in the last 3 months yielding no deals. I did receive an astounding “F&$% you and your calculator” response from a for sale by owner, so I know I’m doing something right. Believing in the process and highly relying on the numbers will help me not fall back to the way this all began and ultimately protect mine and my partners’ money.

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Oh and if you want to see photos from the original remodel, a few are located on our site: http://www.palmettosunproperties.com/remodels.html
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How To Subdivide a Lot in Santa Rosa County

We learned a lot through this process: zoning, required set backs, required road frontage, required acreage, # of dwellings, etc. 
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real estate investing pensacola fl

 

In a recent acquisition, we purchased a duplex that was on a half acre lot in Gulf Breeze (discussed in the post titled: Purchasing Our First Duplex ). The west side of the lot was overgrown and not in use except by the trees and weeds. Before we offered on the property, we thought about subdividing to either sell the lot, posting a BYOT (Bring Your Own Trailer) sign, or put a trailer on it ourself… untapped revenue potential and additional monthly cash flow awaits!  Before we dive into the steps we took, we learned a lot through this process: zoning, required set backs, required road frontage, required acreage, # of dwellings, etc. In our particular area in Gulf Breeze, lot size is restricted to a minimum 1/4 acre with 70′ of road frontage and only one dwelling per lot (regardless of size). Having never done this before, here are the two steps we used to subdivide a lot in Gulf Breeze.

Step 1: Hire a Land Surveyor

Fortunately we didn’t have to do this. Come to find out, the owner we purchased this property from in Gulf Breeze had the same idea. Luckily for us, he had already performed the land survey and was willing to share his plans.  If you don’t have a land surveyor, Google Magic is the way to go and I encourage you to shop around – prices do vary. The land surveyor should know the restrictions for lot size, road frontage, setback, etc. needed to meet county or zoning requirements.

Cost: $200-$600
Turn Around Time: 1-3 Weeks

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Step 2: Submit Plans to Santa Rosa County Planning and Zoning

This requires a physical trip to one of their offices.  I went to the one in Gulf Breeze and was in & out within approx. 15 minutes (maybe I hit it at the right time on the right day, but Michelle made it quick and easy). We had to submit the plans drawn up by our Pensacola surveyor and fill out a Parcel Combination/Separation Request form. Make sure the Property Appraiser rep gives you a copy of the Parcel Combination/Separation Request form. With this copy you’ll be able to start applying for building permits (otherwise you have to wait until your request is approved).
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Real Estate Investing Terms: Capitalization Rate

Cap Rate…it’s not science rockets!? Wait, did I say that wrong?
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real estate investing pensacola fl

Capitalization Rate (Cap Rate for short) is the measurement used to reveal how well a real estate investment will perform or is performing. I look at 3-5 investments in Pensacola a day and Cap Rate is one of the factors I consider when investing or deciding to hold onto or let a property go. There are many ways to calculate Cap Rate but I do it by dividing the annual net operating income by the original capital costs (or its current market value). I explain why the potential to use different denominators below.

The example we’ll use for this post is a SFR with a purchase price of $50,000 and after all monthly expenses are paid, I expect $350/month in positive net cash flow (or $4,200/yr.), So, the net operating income for this property is $4,200/yr. Cap Rate is calculated as follows:

  • $4,200 / $50,000 = 8.4% Cap Rate
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A couple of resources we use, put Pensacola property appreciation between 1.2-1.8% annually, on average, for the last 30 years. For this calculation we’ll land in the middle using 1.5% appreciation. 

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Using our same example, let’s fast forward 10 years down the road. Now that I’ve owned the property for ten years, I want to see how this piece of property is performing against other properties in my portfolio. To recap, I purchased the property, made some improvements and some natural appreciation has occurred. Forcing appreciation by improving the property has allowed me to increase rents over the last 10 years. By doing so, this property’s annual net operating income is now $6,000 and with 1.5% appreciation for the last 10 years, the property is now worth approx. $58,000. After owning the property for 10 years, my Cap Rate calculates as follows:

  • $6,000 / $58,000 = 10.34% Cap Rate
At the 10 year mark, if I use my original purchase costs to calculate Cap Rate, my cap rate would look like this:
  • $6,000 / $50,000 = 12% Cap Rate (higher, but not an accurate insight on how this asset is performing today)

Cap Rates are used to compare one investment to another. If I’ve owned the Pensacola property for years, I use the present market value as my denominator. If I’m underwriting a property for potential purchase, then my denominator is my expected initial costs.

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More.

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AH BANKS! Pardon My French – Part 1

If this is the new norm, then our buy & hold strategy is going to be a gold mine. Even with continued lower rates, banks and lending institutions are continuing to make it it more difficult to do business with them.
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real estate investing pensacola fl

In the past 3 years we’ve used two different lending institutions – one to fund the purchase of our primary residence in Pensacola and one for a conventional loan on an long-term rental investment property in Gulf Breeze. Now that we are well past the closing on each property, the emotional piece has subsided from my not so pleasant experience and I’ve realized that the lending institution process is just a nightmare. It amazes me how little a loan officer actually knows about underwriting and how little they can speak to the process & knowledge of their underwriting counterparts. It’s not their fault, it just the process sucks and their caught up in the mix dealing with guys like me who want answers. Whether purchasing a primary residence or rental investment in Pensacola, this post is to help you understand what we’ve experienced so your expectations can be set. If your experience is better, then I’d love to hear who you used in the comment section below. Let’s dive into the details:

Our Primary Residence Purchase:
— Down Payment of 20% (check)
— Credit Score of high 700s, low 800s (check)
— National Bank with a large local presence and really good interest rates (check)

Why the 20% down? First off, there are lending programs out there that don’t require 20% down. We wanted to avoid what’s called Private Mortgage Insurance or PMI and banks will waive or discontinue PMI once there is an 80% loan-to-value ratio, hence the 20% down. There are numerous sites found via Google Magic that discuss PMI and I encourage you to do some research – it can save you thousands of dollars in the long run. Also, if you don’t have the 20% down payment, there are creative ways to come up with it – and no, I’m not encouraging you to do anything illegal…there are legal creative ways. 🙂

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Is an 800 credit score required? No, but your credit score does help determine your overall loan rate. The higher your credit score the better. If your credit score isn’t ideal right now, just know it will take several years of a consistent watch to improve it. I’m not an expert, but here’s how we did it: How We Increased Our Credit Rating

Where the “fun” begins... we were pre-approved by our chosen lender, found our ideal Pensacola property, went under contract, and moved onto the financing “fun”. Now every lender (credit union, large national bank, small local bank, mortgage broker – I’ve dealt with them all) has their own set of due diligence. I get it. They’re about to loan a significant amount of money to a person they’ve had no record with and they want to grab a better understanding of who they’re doing business with – makes perfect sense. For this purchase, the initial 11 page document detailed out everything we needed to provide them. Not a big deal. It took a few hours for me to grab and submit all the documentation. “That’s it. We should be good, I’ll send this off to underwriting.” News to my ears, but certainly became a little frustrating after the 3rd & 4th time I heard it. By the fifth round of them coming back asking for more info I had had it. I exclaimed, “ABSOLUTELY NOT! Either you have what you need to process this loan or we are moving on!” Well, at the risk of really pissing my wife off and losing the home we were now emotionally committed to, that tactic work. I didn’t provide another single piece of documentation and we closed in the next couple of weeks.

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I hate dealing with middle men or gate keepers, and in this case, the Loan Originator or Loan Officer. They provide no value to me and appear to do nothing but protect the underwriters. You can’t have underwriters talking to clients!? What was an emotional event at the time, I now see as a broken process. It was a broken process during this purchase in 2013 and is still a broken process on our most recent Gulf Breeze rental property purchase in 2016. That horror story is coming in Part 2 which I’ll link back here later.
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Winning: The Real Life Game of Monopoly

Primarily because no one wanted these low-end properties and all I saw was an inexpensive way for a chance to build my portfolio. 
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real estate investing pensacola fl

 

Growing up, one of the board games I played as a child was Monopoly. As we navigate deeper into our Pensacola real estate investing, I’m reminded of those days around the dining room table and think how similar the Monopoly game is to real life investing.

Due to its luxurious nature, I always wanted Boardwalk & Park Place. I knew having a hotel on either of these properties would surely increase my bank roll from any visitor. Here in Pensacola, I correlate that to the high-rise condo on the beach or historic home in East Hill.

real estate investing pensacola fl
Only a lucky roll would push you through my corner rent free!

 

I also couldn’t stay away from Mediterranean & Baltic Avenues. Primarily because no one wanted these low-end properties, but also because I thought this was an inexpensive way for a chance to build my bank from frequent visitors (plenty of places in west Pensacola fit this model).

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Needless to say, I hardly won the game unless others just wanted to quit due to boredom 🙂  In the game of real life investing, I hardly see where this is the case. My strategy for the childhood game was a slow and steady approach that required a lot of luck. This strategy didn’t produce a lot of winning and comparing to investing today, I realize I learned several valuable lessons playing the game. Maybe its time to break it out again! As I thought about this correlation more, I turned once again to good ol’ Google magic. I stumbled upon a site that really geeks out over the strategy of winning @ the monopoly game. Using our current strategy for buy & hold as a comparative to the game of monopoly, I can see where we are winning @ the game of real estate investing. It is not about the luxurious condo on Pensacola Beach, nor is it about the slums in West Pensacola (done correctly, both of these have their upsides). But the best ROI, winning formula lies in the middle (reference heat map below) of three houses on St. James, Tennessee, and New York and three houses on Kentucky, Indiana, & Illinois. For most of our current positions we’re in that sweet spot. Our others, we’re not too far from it. We buy & hold strictly sticking to several criteria using conservative #s. Using these criteria and with planned exit strategy’s already in place, we’re winning.

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Thanks to the creators of http://www.amnesta.net/monopoly/ for putting their site together and bringing back some fond childhood memories. The below screenshot is from their site, showing a heat map of the best investment and ROI for the monopoly game.

real estate investing pensacola fl

 

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