Ask Marco – Making the Leap, Due Diligence, The First Step | PREI 019
In this episode of “Ask Marco” we answer some listener questions. Here is the actual email text:
I’m looking to purchase my first investment property sooner rather than later. I’ve been reading tons of books, blogs, and and listening to podcasts incessantly for the past couple of months, including the Passive Real Estate Investing Podcast (which is a great podcast. Thank you!)
I live in NYC which has way too high an entrance cost into the market. Having lived in Portland Or for 9 years, I know the areas and market. It has a much lower entrance cost than NYC. But, I feel it’s kind of at the top end of a boom and I would still need to save for about a year for down payment money.
Being a fan of your podcast I decided to look into Norada and was kind of blown away at how accessible rental properties are in other markets. I got excited at the prospect of being able to acquire multiple properties within a year. So, I guess my first question is addressing my lack of knowledge about these cities. I know NYC and Portland. I’m not too familiar with, say, Kansas City or Dallas and I’m uncertain of exactly what I’d be buying. This is my biggest source of uncertainty.
Second, I love that Norada has a lot of the due diligence right there for each property. But, in the spirit of “trust but verify,” what research would you recommend I put forward beyond the wonderful data provided?
And lastly, say I saw a property you have on Norada and decided it was what I wanted to purchase. What would the first steps be?
Thank you for your time and help,
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Ask Marco – Making the Leap, Due Diligence, The First Step
In today’s episode, I want to do an Ask Marco episode because we get questions from investors throughout the week, every week, via email and voice mail and through our online voice mail recorder on our websites. Sometimes, we get some really great questions that I know other investors are thinking about, other investors are probably asking but maybe not coming right out and asking us about it.
On this episode, I wanted to go over a recent email that I got from an investor yesterday. His name is Robert. He has three questions in his email that I think are excellent to cover in a dedicated podcast episode. Robert from New York, his subject is: Question about making the leap into real estate investing.
His message is, “Hello Marco, I’m looking to purchase my first investment property sooner rather than later. I’ve been reading tons of books, blogs, and I’ve listened to podcasts incessantly for the past couple of months including the Passive Real Estate Investing podcast, which is a great podcast. I live in New York City, which has way too high in entrance cost into the market. Having lived in Portland, Oregon for nine years, I know the areas and market. It has a much lower entrance cost than New York City, but I feel it’s at the top end of a boom and would need to still save for about a year for down payment money. Being a fan of your podcast, I decided to look into Norada and was blown away at how accessible rental properties are in other markets. I got excited at the prospect of being able to acquire multiple properties within a year. My first question is addressing my lack of knowledge about these cities. I know New York City and Portland. I’m not too familiar with say, Kansas City or Dallas and I’m uncertain exactly of what I’d be buying. This is my biggest source of uncertainty.”
First and foremost, if you’re working with a good, competent, reputable real estate agent or broker in that market, they should be able to provide you with all of the information that you would need to feel comfortable about a particular market and to educate yourself about that market. If you’re working with a competent, experienced real estate investor in that market and they’ve been working in that market for many years, odds are that they’ll probably know a lot about what’s going on in that market and be able to tell you a tremendous amount of information about that market that you’re looking into. Last but not least, if you’re working with a good, competent, reputable turnkey property provider in that market, they of course will know the neighborhoods and the market and what’s going on economically in terms of shifts and demographics. They’ll know about population growth, where to invest, where not to invest, maybe new employers that are coming in to the area. For example, if you listened to our previous episode on Kansas City, we spent about five or ten minutes talking about large, major employers or expansions that have occurred in the city bringing in tens of thousands of jobs. The information’s out there. If you have contacts or connections to people that are in the market and in the know, they can certainly help you with that.
In addition to all that, you can use a tool like a search engine. It’s just amazing what you can pull up if you just type in the right keyword phrases in a search engine like Google. For example, you can put in the term Kansas City followed by the phrase of the information you’re looking for. A couple of places you may want to start are Kansas City Chamber of Commerce, Kansas City economic development. You should pull up, in major cities, departments or organizations that are helping the city expand economically. They have usually a ton of information on their website about what is going on in the city in terms of growth and employment and economics and whatnot. You can type in a phrase like Kansas City population growth, Kansas City population migration, Kansas City unemployment, Kansas City job expansion.
Anything that you want to find out about a city, just put the city name in first followed by one, two, or three words of what describes what you’re looking for. You’ll be surprised at how much information you can actually find. If you find one good source of information, you may want to just keep searching to find a second or third just to cross reference and have multiple sources of the same information just to verify that what you’re getting is not just a one-off article or a one-off prediction.
The other thing I can mention about this first question here is that when you are working with certain people that do understand what’s going on in the market, they can provide you additional information about the market in terms of jobs and job growth. Those are key drivers – population growth, demographic shifts, any new employers coming in to the area, expansion by existing employers. There’s just a lot of information out there. Don’t be afraid to ask whoever you’re working with in every single case.
Clients that work with us, what we do, in addition to provide them much of this information, is we also put them in touch with our team on the ground. We have what you might call boots on the ground. Our team members that are in our network or other service providers, such as our new home builders, our rehabbers, our property managers, these people are accessible to you. We can get you on the phone with them at any time and make that introduction. You can speak to them about the things that you want to learn about whether it be about the city itself, growth, changes, forecasts, neighborhoods, whatever that might be. We’ll put you in touch with them so you can learn from them as well because they’re a valuable resource.
Robert goes on in his email to say, “Second, I love that Norada has a lot of due diligence right there for each property. But in the spirit of trust but verify, what research would you recommend I put forward beyond the wonderful data provided?”
You do want to trust but verify. Again, just to repeat what I had just said, we as a company can provide you with a lot of that information. In fact, sometimes it’s a little bit too much. We get that information overload syndrome where our investor’s eyes glaze over with the amount of information we’re giving them. That’s okay. That’s a good thing. If you need more detailed information, such as what has been happening over the last 2, 10, 20 years on the appreciation within a neighborhood, we’ve got that information. We can provide it to you. You just have to ask. There’s just a ton of information out there.
My fear with investors is that they get too deep into it and they get so analytical that they paralyze themselves. It’s that concept of analysis paralysis. You can keep doing all the research in the world for days and weeks on end and never pull the trigger and actually purchase your first or your next investment property. I don’t want to see investors get stuck in that rut.
At the end of the day, you need to do enough research and analysis where you have built a comfort level that you feel good about the investment that you’re making. You do want to do your research and due diligence. You want to verify the information. When you get to the point where you feel confident enough that it’s a good decision, move forward to the next step. If you need information, ask for it. If you want more information, ask for it or find it. It’s out there. It’s not hard to get to. When you’re ready, just move forward to the next step, which is a perfect segue to the last sentence here in Robert’s email.
He says, “Lastly, say I saw a property you have in Norada and decided it was what I wanted to purchase. What would the first steps be?”
We have a detailed checklist that is essentially a roadmap that breaks this down into a step-by-step process. The next step after you’ve done all the due diligence you need to do on a particular property, this is what I call initial due diligence, because there are other due diligence steps that come in after you put a property under contract. Once you’re at that point, the next step would be to put the property under contract. You take it off the market and you can proceed with your due diligence; that would be having a home inspection done, continuing with your financing.
When it comes to the actual first step, the first step you really should do is get pre-approved with a lender. If you are working with a good lender, whether it be your local bank or whomever, that’s great as long as they understand investment loans and know how to work with you from an investment perspective. However, not all lenders are actually that great. Even though you should get pre-approved before you go down the road of investing in real estate, you should work with a good, competent mortgage broker or lender that knows what they’re doing in terms of investment loans.
The problem I see is that some lenders and large institutional banks have these overlays, these extra rules on their financing for investment property. Unfortunately, it creeps up at the eleventh hour and then what happens is the loan gets denied late in the game. That’s just a terrible situation to be in for everybody because you may have wasted three weeks of your time on a particular property only to find out that you don’t have financing anymore.
There are three main things when it comes to the numbers on a property. You have property taxes, insurance and property management. The property management piece is easy to verify. The numbers are what they are. When you talk to one of our property management companies that we’ve had in each local market or you work with a particular property management company that you’re already working with in a particular market, you already know what those numbers are. You already know what the monthly property management fee is. You’ll already know what the cost of a renewal is. Those numbers are easy to verify.
Property insurance varies a little bit. Insurance is such a commodity, you could shop it around amongst many different insurance agents and get different quotes. It’s really whatever is the best deal that you can possibly get. Often, I budget $55 to $60 a month for the Midwest properties that we have within our network.
When it comes to property taxes, virtually every county across the United States has an online tax assessor’s website for the county that the property is in. Almost in every case, you can look up that property’s property taxes by simply putting in the address of that property on the website of the county. We can give you that information of course. It’s very easy to verify what the current property taxes are on a particular property. Whatever you need to verify can be verified rather easily. The information is there; you just have to ask for it or look it up.
Robert, hopefully, this has been helpful. I’m sure that a lot of other investors have had similar or the same questions and just haven’t come right out and asked them. Hopefully this is going to be helpful for other people too.
If anybody else listening out there has any questions, go ahead and submit those via email or through the voicemail system. I’d be happy to cover those questions in future episodes. There are a lot of great questions out there that people are asking but not vocalizing. I’m sure that other people listening to this podcast or out there thinking about real estate investing are asking themselves but maybe not finding the answers too. If you let me know what your questions are, I’d be happy to cover them in an Ask Marco episode.
That wraps it up for this quick episode today. Remember to download our free report. It’s a 40-something paged mini eBook called The Ultimate Guide To Passive Real Estate Investing. It is chock full of great information. If you haven’t done so already, go to our website PassiveRealEstateInvesting.com, you’ll find a link for that guide on the website.
If you’re a first time listener or you haven’t subscribed yet, go ahead and do so. We put out content every week and we really like doing the show so we want to keep helping you guys build your real estate portfolio and learn more about real estate investing in general.
I want to thank you for listening. It’s been fun. We look forward to your questions. We’ll see you on the next episode.
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