February 7, 2018 9:44 pm
Real estate investing is a preferred investment strategy for many. With proper information and planning, these investments can provide an additional stream of income or a mainstream of cash flow. If you are a seasoned investor or someone who’s interested in entering the residential real estate investment zone for the first time, we have an interesting interview for you.
Today we are talking with a prominent residential realtor who owns rental properties and helps his clients find properties to increase their own investment portfolios. In this interview, Minneapolis real estate consultant, Tim Kindem with Keller Williams Integrity Lakes, gives us some of his views on this type of investing, with a special emphasis on buying duplexes. Let’s invest a little time.
Question: Tim, thank you for sharing your time with me today. As you know, I’m interested in real estate transactions and investing, and I’d like to know more about investment property potential, especially with regard to duplexes.
Answer: I always enjoy talking about real estate, and I’m a strong advocate for real estate investing. For people who like working with real estate, it’s a great opportunity to create additional income streams and offer exceptional rental situations to great tenants in the process.
Q: I hear many people sing your praises as a respected realtor in the Minneapolis/St. Paul metro market. Would you tell us briefly how you got your start in real estate and how long you’ve been a real estate agent?
A: Sure. I’ve been a full-time agent since 2006, and I was first inspired by the experience and excitement of buying my own home which seemed like I was setting myself up for such a bright future. I wanted to help others and impact their world in an uplifting way. It’s great to have a career that can make a positive difference in people’s lives. At this point, 95% of my business comes from referrals, so I must be doing something right ^_^.
Q: How have you learned and grown in the real estate business over the years?
A: I went to seminars all over the country, listened to webinars and podcasts, took classes (probably triple the classes needed for continuing education credits), read a library of books, and picked the brains of gurus and experts. I learned to focus, take things to the next level and approach the industry as a business from a number of fabulous mentors along the way. I found that people like to share their knowledge when they know you are eager to learn. I also learned a lot by trial and error. And error can effectively teach lessons that you remember!
Q: As a residential realtor and continuous learner, you are obviously immersed in the industry. It seems natural that you would also help people buy and sell investment properties if that’s what they’re looking for, but how involved are you in that process on a personal level?
A: I own or co-own 14 properties. It’s become an area of expertise for me. Friends and clients come to me for advice, and I enjoy helping them achieve their goals for investing wisely.
Q: What type of investment properties do your clients purchase?
A: Since I’m on the residential side of the market, my clients are most interested in buying duplexes, single-family homes and townhomes. Many will “flip” their properties: buy, fix it up, then sell and make money. Some of these owners will buy the property, live in it while making improvements and increasing the equity, then buy another and repeat the process. This works especially well for duplexes. Others will “buy and hold” which is the strategy for most of my investor-clients. Investment properties are not the highest percentage of my business, but they are a significant amount.
Q: I’m curious. How does it differ to work with someone who is buying a property as an investment rather than someone buying a house as their main residence?
A: When people are buying for their own purposes, most often they are willing to pay a little more because it will be their personal residence. There might also be more of an emotional attachment and a longer list of “must-have” features. They generally don’t feel the pressure of having to make the numbers work as much. Cash flow is not top of mind as it is with an investment property.
Q: What questions do you ask your clients when they are considering an investment property?
A: For first-time investors, I ask if they want to a) buy and hold (becoming landlords with tenants) or b) flip the house. These are two different strategies. If the first strategy is preferred, I ask if they also want to live there. If it’s intended as a flip, I ask how long they intend to keep it before selling and whether they will live there. For both scenarios, we also discuss:
- what types of properties appeal to them.
- the pros and cons of each type of investment: single-family home, townhome, condo, duplex, tri, quad, multi-family, twin home.
- what type of cash flow are they expecting.
- what type of financing they need or expect.
- the importance of cash flow and effects of high or low cash flow.
- geographic areas of interest and realistic expectations in that area.
- who will manage the property and tenants: owner or property manager.
- who will do the maintenance: owner, property manager, hired contractors, etc.
In general, buyers need to understand the financing and options. The numbers are important and cash flow becomes extremely meaningful. The cash flow can make all the difference between a good experience and a poor investment that drains you physically, emotionally and financially.
Q: Once goals are set, how do you conduct the search?
A: Once we narrow it down, I set them up on the MLS, so they are getting alerts that meet their criteria. I also subscribe to wholesaler mailing lists which include sellers who don’t want to be shown on the MLS, but clearly, the MLS yields the most results. Communication with other agents is also a great source of leads, and occasionally an FSBO (For Sale by Owner) deal may have possibilities, but these are generally higher in price than an investor is willing to pay.
Q: What do you consider some of the most important factors to consider when buying an investment property, specifically a duplex?
A: There are many factors to consider. Here are a few at the top of the list:
- If an investor-owner is not living there, 100% cash flow is the biggest factor.
- Negative cash flow is extremely risky and can eat you alive. We all want to count on building equity but need to guard against a setback. If things would get upside down, that’s a problem you don’t want.
- Owners should factor in property management—even if they intend to manage it themselves. That way, if circumstances in their lives change, they can have someone else manage it and be assured it will still make money. Factoring in maintenance is also hugely important.
- You need to decide how to handle maintenance projects and costs, and you need to be realistic about whether you are a do-it-yourself type or need to hire the work done.
- Location can determine what you can charge for rent and the likelihood that you’ll have longer- or shorter-term tenants.
- Look at the current rent and know if that’s a good rental price. If under-rented, there’s an opportunity for a better deal. If you make improvements, you can likely charge more rent.
- A home inspection or evaluation by a professional is essential to point out potential high budget items, such as a new roof, furnace, etc.
- A good offer is worth careful consideration. For investment purposes, a low offer is always preferred, but you can also lose the deal if going much too low. In that case, someone else will buy it, and they will be making money on it while you are not. If the numbers make sense and you have room to play with it, the advice usually is “Go for it” because you can’t make money if you don’t buy.
- Also, if an investor offers cash, it might be accepted because an owner-occupant might not be able to compete.
Q: Let’s get specific. Why might a duplex be a good investment?
A: If the buyer plans on an owner/occupy situation, that’s the best scenario. They have their own unit and when the other unit is rented, things are great. If the other half is not rented, at least it doesn’t hurt as much as in a single-family home when you would be missing 100% of the rent. The key to rentals is you need to keep them occupied.
Q: Is there a downside to choosing a duplex?
A: There can be a downside (or several). It might be that the chances of getting a longer-term tenant are lower. You want long-term renters, and induplexes the tenant stay tends to be shorter, perhaps because it’s less private. Maintenance expenses tend to be higher because the tenants might not have as much ownership or connection to the place since they know they won’t stay that long.
Also, there are costs associated with losing a tenant and preparing the space for a new renter: cleaning, making repairs and improvements, etc. A question some people forget to ask is, “Who pays the utilities?” If the bill is split between the units so each tenant can pay their own, that makes it easy. If not, the owner generally pays the bills and splits it in some fashion between the tenants. This can happen in older buildings, especially for gas and electric. You need to also check on how the water bill is calculated.
Q: What is some good advice for first-time investors who are considering a duplex purchase?
A: The first thing I recommend is a list of resources: books and podcasts. A more educated client will better understand the process, financial implications, and how to attain more favorable results. Here are some books high on my list for investors:
- Millionaire Real Estate Investor by Gary Keller (baseline book, great for everyone)
- What every Real Estate Investor Needs to Know About Cash Flow and 36 Other Key Financial Measures by Frank Gallinelli (should be in your library immediately; has all the financial metrics you need know)
- Investing in Duplexes, Triplexes, and Quads by Larry Loftis
- Flip: How to Find, Fix, and Sell Houses for Profit by Rick Villani and Clay Davis
- Rich Dad Poor Dad by Robert Kiyosaki
Podcasts are also a valuable source of information. Bigger Pockets is not just a podcast but offers a wealth of knowledge and an online community for real estate investors. You can sign up for free membership.
Q: Are there signs that tell you if the client is ready for real estate investing?
A: It’s important to figure out financing first. They should be pre-approved by a lender (specifically a creative lender with numerous loan options and experience in lending on investment properties) and be willing to get that done. They also need to be willing to formulate a workable plan. Sometimes you can tell that they aren’t yet ready if they can’t make a decision even when a good deal is presented.
Q: How can you tell that a property or duplex might not be right for them at that time?
A: If the deal doesn’t match up with their comfort level, it’s not right. If the property needs more work than they are willing or able to do, that’s a red flag. If they can convince themselves that things can be improved easily, or they can afford to do it, but they really can’t, that needs serious discussion. The best time is when it makes financial sense and the plan is feasible.
Q: How do you help your nervous clients reduce the stress?
A: Usually, as they see houses, something will excite them. Then, it’s a matter of going with the momentum or having a reality check. If it gets uncomfortable, we can get them out it.
Q: What other professionals do you work with for a smooth transaction?
A: Here are a few examples to show the variety of assistance and opinions that can be needed:
- Lender, to offer a variety of ways to get from A to B and make sure all options are understood
- Home inspector, to break everything down to the minute details and provide a thorough report
- Electrician, to check the critical, unseen elements
- Roofer, to give an honest evaluation
- Handyman, for help with repairs and improvements
- Plumber, to check the other critical, unseen elements
- HVAC, to evaluate mechanical systems
- Property Manager, to offer professional management assistance
Q: Do you have any other advice for the first-time investor?
A: Assuming “buy and hold,” think about it as a long-term strategy. Be patient. There aren’t always abundant deals in today’s market, but they can be found. The more you’re willing to do as an owner, the better the opportunities. If you are a DIYer, you can save a lot, but you also need to find the time to do it. Financing impacts your results. If you have the money, great. If not, be sure to explore the lending options.
Thanks, Tim! We’ve learned more about this fascinating journey into the real estate investment market. There’s a lot to learn and now we have even more resources to help us find success in property ownership. We know that we need to pay attention to finances, investment goals and property management. We can also evaluate our desire for hands-on involvement and carefully chose our mentors.
If you have gained motivation to dig deeper by reading some of the recommended books, talking with other investors, or looking for rental properties, please share this article with a friend who might also benefit. Happy investing!