A little while ago I laid out a recent property deal I'm working on in a Midwestern ghetto area that was listed at $260,000, I put in an offer at $190,000 (but ended up getting it accepted at $195,000) that's worth $9,479/month in bottom-line cash flow.
And how I had 4 investor partners fighting over this deal because of the low cost of entry, their complete lack of involvement in the property itself (including management), and the incredibly high monthly cash flow such a property provides.
The problem is the class of the property. They are Class D properties, to be exact. No, this isn't even an "official" classification yet it seems that many listing agents have been using the term "Class D" so often in the past decade that it's now becoming more "official" of a class than not.
The other problem is figuring out how to taken an under-performing property in these areas (such as those as low as 1/3 occupied) and finding renters. It's not as easy as posting on Craigslist and thinking people will be beating a path to your door to live in a drug infested drive-by shooting riddled community, even if the rental rate is way below market.
Another building I'm putting an offer on was listed at $399,000 but since I'm going in with 100% cash with a private investor, I will able to get the seller down to $199,000 for a quick 2-week close (which you can easily do with an all-cash offer). And this property isn't even under-performing since it's 100% occupied.
And what kind of building is this one?
Again, I'm not going to tell you exactly where it is but I will state that it's in the Midwest, it's 22 units and is located in a C- area.
So, what type of cash flow is a POS property like that even worth? We're looking at a $4,167 monthly positive cash flow walking into the deal. And this is for a Class C- POS property in a less-than-savory neighborhood.
First of all, where do you find investors that are interested in these types of deals? Deals in ghetto neighborhoods that are actually worth nothing when you think about it aside from the cash flow that they could make.
You start creating your own network of investors through postings on the Loopnet Big Board, for example. But the easiest and, perhaps, the most effective way to create your own network of investors is by meeting them in person. I'll get to that in a minute.
The second obstacle is figuring out how to manage such a challenging property. This task isn't for everyone. But there is one secret to doing this that'll be something you've probably never thought of.
Most of these properties are lacking in tenants. Forget finding "quality" tenants because that just won't happen. Instead, you need to care about having tenants that will pay their rent most of the time while not harassing other tenants. That's the best you can hope for. Otherwise, if they're growing weed in the kitchen, so be it. Having a makeshift "massage parlor" in their living room, whatever. Not much you'll be able to do about this type of stuff in these types of areas. Reality is, you're not getting tenants with 800+ personal credit FICO scores with executive jobs at Microsoft who are 100% upstanding law-abiding citizens unless you're living in a mental fantasy land of some sort.
How do you "cure" tenancy problems in these areas?
There are management companies who specialize in these types of properties. Some of them do a kick-ass job managing a property that you wouldn't even want to fly over in an airplane let alone driving by at 90 miles per hour because of where it's located.
I put $0 out of pocket for each deal and they will be "financed" at a 100% LTV with all cash and no mortgage through private investors.
This is my newly discovered "niche" for getting private money and cashing out the deals with 100% cash. They are easy to "sell" to private investors even though they are in "shady" parts of town because guess what? They never have to deal with the property. I do. You do! Everyone elsebut them!
How was the $4,167 per month deal set up?
Here's what I arranged:
1) 50% goes to the investor partner; 50% goes to me.
2) These are 10-year deals which are highly unusual for investor partnerships (which are typically 3 to 5 years in length); the stipulation is that I will cash them out on just their investment plus a 10% straight-line interest on the original cash they put into the property.
3) The investor partner will make approximately $250,000 in cash flow over 10 years PLUS will get the $190,000 back with 10% interest. And this is assuming we won't be increasing rents but we will. It'll probably be closer to $350,000 that they'll receive over the next decade.
Why wouldn't they want to "cash out" by selling the property and taking out the gained equity?
Because of these reasons:
1) The property is in a crappy part of town and...truthfully (if the building is still standing), it won't ever sell to another investor. If it does, it'll be for a fraction more for what we paid for it...if we're lucky. Why do this when I can keep raking in the cash flow?
2) This allows the investor partner to be completely off the hook without having to wait for years (in most cases) if ever to sell that type of property. They'll get their cash flow, their money out of it, and walk away without breaking a sweat.
3) I get the property. It becomes mine 100% with or without a loan attached (depending on how well I managed my cash flow on this and other properties) and, conveniently, rents will nearly double in another 5 years after the property becomes mine. Providing I don't have a loan on the property, I'm looking at a monthly cash flow of at least $15,000 on this same POS property that's "worthless" on the real estate market as a property sale but is a freaking cash cow that would make a drug dealer drool. (Actually, at that time, I could probably sell the property to a drug dealer who probably lives in the same building!)
And this is how you get rich in real estate.
1) You'll get OPM on a POS property that no other investor wants by paying 100% cash for it.
2) You'll cure any vacancy problems, start bringing in a kick-ass cash flow, and keep your investor happy while he never touches, manages, or deals with the property.
3) You cash out and separate ways after 10 years. Everybody is happy and you get the property 100%. Even though it's a POS...who cares? By the time 10 years rolls around, I'll be making about $8,500 per month on this property. And this is just one of many!
And here's the clincher...
You do this times a minimum of 5 deals.
You can see what 5 x $8,500 a month can bring you. That's $42,500 a month in case you don't have a calculator.
What is that a year? That's $510,000 per year. From a pile of POS don't-want properties in the "shady/questionable" part of town that you can get for cheap that you ain't even paying for!
One way you can tap into these funds is by attending my upcoming event and meeting with a few investors who will be attending, looking for high cash flowing deals just like these. And no, they don't care where the property is located. They are simply looking for a deal that will make them money.
You can see my "Monica's-Gone-Crazy!" deal on my upcoming seminar event that ends on Monday. CLICK HERE for the deal!
If you have any questions, just call Lea. You know the drill. It's preferred that you CLICK HERE to check out what's going on first before eating up Lea's phone time.
See you at the top!