As you may know I like to make the beta reading of my book open sourced so the community that will be using them can actually gain the information and request changes or additional information to be added as the book is being written.
This post is One Chapter of my coming book, “GET THE DEAL”. Which the idea has it’s origins from the live training with the same name that I have taught to thousands of real estate investors all across the country and have had time to refine the information to answer the questions most asked at those trainings. Without further ado I want to encourage you to read this chapter and leave your suggestions in the comments below!
Location & Class
“It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate.”
– Donald Trump
Political views aside I couldn’t agree more with Donald’s opinion of real estate. I just love it and I always have. I can remember being a little kid building sand castles with roads and moats. Then as I grew up stacking shoe boxes and cardboard boxes to build forts. I think each one of us sees the beauty in real estate as a child whether you are playing house with your dolls or defending your fort there is something important about the place you call your own or the land you defend.
Growing up I lived in a 4 family tenement building that my grandfather owned. My earliest memories of my grandfather were when I was as 5 years old and he would take me for walks around our block. He was patient with me and my little brother who would each hold onto one of his fingers, asking him the questions that kids think of. “Vavo” I would say, “who owns this house?”, “why is it painted that color?”, “why do they have a different designed wall than us?”, “when are we going home”. I can remember thinking that last one after we would go up the big hill, my legs were tired and I was looking down at all of the tenement houses as far as the eye could see. Home felt very far away, but he knew where it was and I trusted him to get me back there.
Growing up in Fall River I didn’t know anything else and I’ve always felt safe around multi-family real estate and mill cities in general. I looked up to my grandfather who migrated to America from the Azores which are a group of islands off the coast of Portugal. He came here to build a better life for his family which included my father and uncle. He worked hard in the factories, saved his money and eventually bought first and only mult-family.
Some of my fondest childhood memories where when my grandparents would saved up the money to buy materials for some house project. The materials would just show up one day and then we would all be working together for a weekend whether it was building a patio, roofing the garage, replacing brick beams in the basement or painting any of the hundreds of things that need to be painted when you own real estate. There always seemed to be something to paint, but I loved the work and the feeling of accomplishment after a job well done.
I have many fond memories of my grandfather, but my last memory of him alive was in the hospital. He asked me to write down all of the addresses of the properties I owned. I started writing the addresses on a small piece of paper. As I wrote down the 6th and 7th and 8th address I noticed he was smiling and nodding with approval. For some reason I started to feel self-conscious as I realized I owned more real estate than my family combined. I wish I had paid more attention to the look in his eyes, but I will never forget his words. As I finished writing the 10th address down and went to toss the paper in the trash he stopped me and said, “I want to keep this”. I asked him why and he told me, “because this is what my grandson owns, I always drive by your properties and I keep an eye on them”. I had never known that anyone in my family actually paid attention to me when I bought a new house, let alone kept an eye on it.
Now thinking back I remember him asking me for the address whenever I would add a new house to the portfolio. What I didn’t mention is that a year earlier my grandmother had passed away. I hadn’t made nearly a big enough effort to stop by and make sure he had company, but he was still keeping an eye on me and as my portfolio expands I know he has the perfect vantage point.
My grandfather used to tell me that his only hobby was a beer in one hand and his hammer in the other hand. He taught me the importance of loving where you live and investing in what you love.
I have based my strategy of investing on buying “on the line” of where multi-families and single families meet. Those tend to be the multi-families in decent areas that can still be bought at a great price. One full block away there are single families and in the other direction all multi-families. There are pockets of areas like this all over the city and they are my favorite properties to own, just like where I grew up in my grandfathers house, perfectly located on the line where single and multi-families meet. Location is the most important decision to make in your investing career and your strategy will greatly depend on your location.
The Importance of Location
The three most important things in real estate are location, location and you guessed it location. The reason location is so important is because it absolutely dictates what you’re going to pay, what strategies are available and the future value will be. Based on the location you will find that across the board inventory on multi-families, single-families, and condos will change from towns, cities and different states.
The same categories of multi-famly will have different floorplans in different cities. For example there are only a few different 18th century floorplans that were used for 3 family homes in Fall River, MA, but 15 minutes away in New Bedford they had different architects who designed their 3 families with slight differences and tended to put the kitchens and bathrooms in different areas.
Another change you will see are that building materials can be different between northern and southern states as well as coastal and inland properties. So you have to understand what your long-term goals are to decide what kind of location you actually want to invest in. Many people like to invest locally, many people, like to invest out of state and some people invest out of the country.
Some people just invest in cities that are nearby but not within the city they invest in themselves. Some people like to invest next to colleges, some people like invest next to large companies, there are people who invest out on the woods. Everybody has a different niche. For investing you have to understand your location and you have to choose it based on what’s going to profit and based on what’s going to give you the quality of life that you’re looking to have in a long term.
When we discuss location one of the things I really preach strongly is investing in your local city, either move to the city you want to invest in or invest in the city you already live. You’ll have some distinct advantages by investing in your location. First off, it doesn’t take you very long to get anywhere. If somebody calls you for an appointment, you can be there within five to ten minutes.
The other reason is you know the area. It’s so easy for you to drive by a house and get a feel for the area while doing some driving for dollars. You can learn more about changes in city policies and keeping up to date with how the school systems are. These are really key elements, that are harder to keep track of if you start investing thirty minutes an hour away now you need more leveraged systems in order to manage it. The other key element to investing locally is you can build a team much faster.
The more involved you are with the community the more deals people will bring to you because they like you and what your company represents. I suggest volunteering on some of your community boards as a way to build relationships with some of your city officials and the people who know how to get things done in the city. Volunteering and paying it forward to the city that is giving you so much opportunity is a good idea and the right thing to do. I am personally on the conservation commission in Fall River and am always looking for other opportunities to serve on another commission or board here in my community.
You have more people who are going to be advocates for you, more people are going to bring you deals. Then when you’re specifically saying you only invest in a specific city, like I have done for my whole career I always invested in Fall River, Massachusetts. Even agents or investors from out of state or hours away will send me deals, because I am the “Fall River Guy”. That is the reputation you want to build for yourself and it can only be done by committing to your location.
I receive deals from Connecticut, Rhode Island, from Boston, the North Shore, South Shore, Western and Central Massachusetts, because they all know that I am the “Fall River Guy”. You want to invest very, very local, small niche if you want to maximize the return on investment. If there is already a “Fall River Guy” in your local market, you can become the, “Condo Queen” or “The South End Guy”. These are examples of niches that no one has the guts to box themselves into.
You can invest anywhere but if you want to get the most out of your time and not have to work as hard, investing locally and as close in a small range/niche as possible it is going to speed up your investment growth and fast-track your retirement.
Investing out of state.
If you can’t find property that fits your strategy locally, then you may be tempted to invest in an area where that ideal strategy works perfectly. For example if you live in the middle of Iowa and they only have single-family homes there, to invest in multi-family you may have to go to a different state. Or if you’re investing in single-family homes you will have a higher barrier to entry if you try to do it in the New England market, typically the buying price is way too high and you will end up finding a lower pricing barrier to entry out in the Midwest.
There are many different reasons people invest out of state, but it’s mostly because the location they live in just doesn’t fit their strategy. Now when you invest out of state you’re going to have to build a team, it’s imperative. Now a local team is far easier to build, a team in another state will require better systems and understanding of the business, and can be a little more difficult for someone new to real estate investing. You’re going to have to rely on people you may have never met in person, you’re going to incur travelling costs.
There’s a little bit more involved with investing outside of your local area. Having the right strategy and the wrong location is only one of the reasons you might consider investing out of state. Another reason you would invest out of town is because you’re looking to move to a different climate, different area, different tax laws.
You may start investing out of state prior to your actual move to the new location. In fact for some people if you invest in Massachusetts you may eventually start buying in Florida because your intention is to move to the warmer climate, cheaper living costs and better tax laws for business owners.
There’s a lot of different reasons that somebody might invest out of state and you just have to know your long-term goals. Knowing where you’re looking to go and why you’re doing what you’re doing is key in order to decide whether you should invest in state or out of state. There might also be a difference in income due to slippage.
Slippage is a term used to refer to a failure to meet a standard or deadline or the extension of this deadline. Slippage in real estate occurs when your contractors take longer to complete a project or a property is left vacant longer than it should be which causes lost revenue. Slippage can also occur if you are not on the ground keeping an eye on your properties or projects.
When you are not local you’re not able to pay attention to the properties as much, you are not able to pay attention to the team as much. So there’s a little bit of control that is lost and typically that relates to a lower return on investment due to slippage. Locally if you’re paying attention to things, you can really control the amount slippage to some degree.
If you are planning to eventually move to your ideal investment location, but still need to tie up some loose ends it may make sense to start building teams and buying real estate in your ideal location. There are strategies for building teams and attracting the right people to your company in the, “People” section of this book.
Whether you decide to invest locally, out of state or find a mix of both, you are going to want to understand how the different classes of real estate effect your investment strategy.
Real Estate Property Classes
Time and time again have people all across the country come up with the following question: “What Are Real Estate Property Classes?” Let me tell you that if you are looking forward to investing in real estate, property class is one of the most important terms you should know about.
With the help of the property “class” classification system investors smarter than me created, you’ll be able to determine whether a property is worth investing in or whether it will be profitable or not. This system classifies an investment property based on demographic, geographic as well as physical characteristics. Each property class represents a varied level of risk and return.
The different letter grades are assigned to different properties after taking into consideration various factors like property’s age, location, growth aspects, tenant income levels, amenities, appreciation, and rental income.
Prior to investing in a real-estate property, it’s really important for the investors to have a better understanding of each of the property classes. That’s exactly what I will help you with here. In this section, not only will we take a look at the different property classes, but we will also take a look at the benefits of each one of them.
Different Real-Estate Property Classes
Listed below are the different property classes:
Class A Property
Class B Property
Class C Property
Let’s take a look at each one of them.
Class A Property
Class A Properties are the ones that have been built within the past 15 years. These properties are usually in great condition and are subject to lesser maintenance issues. And that’s exactly why they are considered to be a great choice for “Buy & Hold Investments.”
These properties usually have modern amenities as well as high-end finishes like stainless steel appliances, hardwood floors, and granite countertops. As they are usually high-quality properties, they are priced comparatively higher. This leads to lower cash flow.
If you are a real estate investor with particularly limited funding, you would find investing in Class A Properties to be pretty hard.
Such kinds of properties are located outside the cities. The areas in which these properties are located have a high percentage of owner-occupied properties. As a result, owner-occupants manage to take great care of their neighborhoods and homes.
Such neighborhoods will have good infrastructure, shopping centers, low crime rates, high income, outstanding medical facilities and so much more. And that’s what leads to the rates of class A properties being sky-high. Hence, you’ll find the vacancy rate to be pretty low, whereas the rental rates are usually high.
One of the best things about investing in such properties is that you won’t face a hard time selling these properties. They are considered to be “Low-Risk Assets.” As an investor, you will be secured and won’t have to worry much about issues popping up and higher maintenance costs.
Low Crime Rate in the neighborhood area.
Investors won’t have to worry about the higher-maintenance costs and issues popping up.
High Rental Rates
Class B Property
For starters, these properties are not much different from the Class A ones. The only difference is that these properties are a bit older. These properties might be 10-30 years old. They are in good condition, have various features similar to the class A properties, and are located in pretty great neighborhoods. However, you will have to invest some money for maintenance purposes. Hence, the acquisition costs are comparatively lesser.
These properties are usually investor-owned & rented out. Such properties are occupied by lower-income tenants. That’s the reason rental income is a bit lower than the Class A properties, but the thing is these properties are considered to be perfect for the investors due to higher growth potential.
All you need to do is perform some renovations and improvements and you will have turned your Class B property to a class A one. Alongside this, the cash flow associated with these properties is steady. So, you won’t have to worry much about that.
When compared to Class A properties, the rates of Class B properties are comparatively lower.
Better Growth Potential
Steady Cash Flow
Pretty Good Neighborhood
Ability to turn your Class B property into a Class A one.
Class C Properties
These properties are older than 30 years. Most of these properties will have outdated systems and might show visible deterioration. They might be in serious need of repairs as well as hands-on maintenance.
Such properties are situated in lower-income, less desirable neighborhoods with a comparatively higher crime rate. Alongside this, the rental rates are comparatively lower. People in the neighborhood usually work on low-wage jobs. These properties are in most cases, investor-owned.
One of the biggest plus points of investing in Class C is the lower acquisition costs. Plus, they have the potential for great cash flow. All you need to do is to come up with an outstanding strategy and you will be able to turn these properties into profitable investments.
However, some risks associated with these properties are that they need tons of improvements as well as ongoing management. Most of the time, the roof as well as other major systems are at the end of their lives. Hence, you should invest in such properties only if you are an experienced investor or property manager.
Lower Acquisition Costs
With the right strategy, you will be able to turn a Class C property into a really profitable investment
Potential for higher cash flow
After reviewing all of these classes you may already have an idea of which class is for you. Let me share that it is okay to start in one class and diversify into another class eventually, but I strongly encourage you to stay in your lane and work with the class that you have the most experience in.
For myself I started out in C class properties and have built a substantial business by driving our portfolio toward a B class trajectory. This is an aggressive strategy that has allowed us great benefits in the way of appreciation, but can be labor intensive during the stabilization period of each building. It also requires that we do a larger capital raise when accounting for renovations and the time it takes to reposition our tenant pool.
You Can’t Kiss All The Girls
Recently on an episode of the 100 Millionaires Podcast, Mike Schein and I were discussing some stocks that he invested in. Now I also like these stocks, but I didn’t want to reduce my positions in my REIT portfolio. He mentioned that his father used to tell him , “You can’t kiss all the girls” and what it means is at some point you have to make a decision about what kind of investor you are.
I am a Multi-Family investor and I only invest in the cities I understand and see the potential for growth in the tenant pool that I prefer to work with as well as the property class. Take a moment to put this book down and decide which city/state and property class you are going to commit to investing in. Then decide which of the basic investment strategies will work for you.
Understand that you can always come back and try something new or partner up with someone who is doing the sort of deals that are outside of your lane, but this exercise is designed to give you some clarity which you can use to help you as you go through the remainder of this book, gaining the skills, strategies and tactics to succeed. Keeping the current strategy and location in mind at all times.
This simple exercise will help you get the most out of this book and should be taken very seriously. Re-do this exercise again each time you read this book.
Think about and write down the TOP 3 locations you want to work in.
Right down the TOP 3 strategies you want to work with.
Which location is best suited to put your ideal strategies in place? Cross out the other 2.
Which strategy are you currently best suited to maximize based on your current network/skills/money. Cross out the other 2.
Stick to this strategy and location until you have earned a full $1,000,000 in either income or net-worth. Do not deviate from this path until successful or you are ready to automate that business and start your next one. This is important, because every strategy and location has it’s obstacles. I don’t want to let you think it is okay to switch strategies or location just because you hit an obstacle.
Successful people make their decisions fast once they have the best information, then they change their decision slow if ever. Do not leave this business until you have automated it so it can run without you. No matter how much you hate doing the work. Trust me, this will pay off in the long run.