Housing prices have increased in many areas of the county over the last few years. In my market prices have increased 30 percent in the last two years. It has been much tougher for me to buy rental properties, but I have found good deals even in an appreciating market. There are many ways to buy rentals with rising housing prices. I have bought houses from MLS. I have bought houses with direct marketing. I have talked to wholesalers about buying houses. I have even considered buying rental properties in different markets.
For more information on my investing strategies and rental properties check out my complete guide to purchasing long-term rental properties.
How have I bought rentals from MLS?
I bought rental property number eleven from the MLS in July of 2013. I bought the house for just over $109,000 and it is rented for $1,400 a month. I just got rental property number twelve under contract. I will be paying over $130,000 for it and it will rent from $1,400 to $1,500. I am paying over $20,000 more for a house that will rent for about the same amount as a house I bought last year. I am not happy about paying so much more, but I don’t have many other choices. I have not seen any deals like rental property eleven since I bought it.
I have to face reality that if I want to keep buying rental properties in my market I will have to pay more money for them or find different ways to buy them. With rental property number twelve I will make over $400 a month in cash flow, which is less than the $500 a month I look for. $400 a month in cash flow is still pretty good and much better than investing in the stock market or not investing at all. Instead of making a 20 percent cash on cash return, I will make 16 percent or so. I still like those returns, especially when you consider I am buying the home well below market value and it will be worth at least $180,000 once it is repaired. Even though I am not making as much money as I was a few years ago, I am making money and enough money to justify paying more for houses.
When buying from the MLS I have a huge advantage as a real estate agent. I can act very fast, write contracts very fast and get offers in before investors who are not agents can. I check the MLS at least five times a day and most of the time I do not see any good deals. I have to be patient and keep looking everyday and sometimes I will go months without seeing a really good deal. If I was in an area where I could not find cash flowing rental properties, because prices are so high I would not buy just to buy. I think it is a bad idea to buy hoping for appreciation when you are losing money every month.
Buying out-of-state rental properties
If you have read my articles over the last month, you know I have considered buying an out-of-state turn-key rental property. I had a great phone call with a turn-key rental property company and I saw some examples of properties I could buy for cash in the $30,000 range. Those properties are projected to make 10 to 15 percent cash on cash returns after all expenses. Those are great returns, but I can still make the top end of that range or higher in my market. I can also buy below market value in my area, which is tough to do on a turn-key rental property.
Getting rental property number twelve under contract encouraged me that I can still get great deals in my area and I probably won’t buy a turn-key rental property right away. There are many markets that are harder to cash flow in than my market and many people are not in the business like I am. If you can’t dedicate the time I can to find great deals, or prices are even higher compared to rents in your area, maybe turn-key rentals are a good option. You could also look into buying rental properties in a slightly larger geographical area. I have looked in areas within a 45 mile radius, but my town seems to have the best rent to value ratios. You may also want to check out the Invest Four More forums as a reader posted about cash flowing properties in California and where to find them.
How to use direct marketing to buy rental properties
Besides paying more for rental properties, I am also looking for more ways to buy rentals besides using the MLS. I have done direct marketing for over a year with mixed results. Direct marketing is when you send letters, put out bandit signs, rent billboards or in some other way advertise to buy houses. The advantage of direct marketing is there is no real estate commissions paid, the sellers can be very motivated and many times houses can be bought below market value.
I bought a fix and flip last year through direct marketing. I had sent letters out to out-of-state owners and probate owners and a gentleman wanted to sell his mothers old house without listing it on the MLS. It was a mess and needed a lot of work. We worked out a deal that worked well for both of us and the home is being repaired by my contractors. I bought the house for $100,000, it needs about $25,000 in work and it will be worth around $170,000 when it is done. Here is a great article on all the costs involved in a fix and flip.
I have a potential rental property purchase from direct marketing as well, but I am not sure if that one will go through. There is an older gentleman looking to move to Texas and he wants to sell his home as-is without using MLS either. He liked the price I offered him, but said he has some other buyers who are friends of his who want to buy his house as well (at a lower price than my offer).
I am a real estate agent and many people worry about being an agent and buying off-market properties. When I buy off-market homes I always disclose that I am a licensed agent and that I am buying the home below market value. In some cases I think being an agent helps me, because it gives me credibility. People can look me up and see I have been in the business a long time. Besides buying properties from direct marketing I have also listed and sold two houses as an agent and I am listing another tomorrow. I always give the seller the option of listing the home or selling it directly to me. Most of the time the seller will make more money listing the home, but in some cases they still want to sell it to me, because they don’t want to list it in MLS or they want a quick sale.
I have not been focusing on my direct marketing either. I have sent a couple hundred letters every month and I have not been good at following up with sellers. I recently put a couple of agents on my team in charge of calling back leads. They get a bonus if I buy a house from a seller they talk to and if they can get a listing out of it they can list the house. As the team leader I get 50 percent of their commissions. I hope to have many more leads coming in from direct marketing in 2015.
How to use wholesalers to buy rental properties in a tight market
I have never bought a house from a wholesaler, but I have come close. There are a couple of wholesalers in my area who have brought me some deals in the last year. The deals were not quite good enough for me, but they were close. A wholesaler finds great deals on houses, gets them under contract or buys them and then sells the contract or house to another investor. Many wholesalers use direct marketing to find great deals and some use the MLS. I don’t care if a great deal comes from the MLS or direct marketing, but I try to get to the MLS deals before anyone else does!When you buy from a wholesaler you usually need to have cash and be able to close very quickly.
The wholesaler makes money by selling the contract or the house to the investor buyer for more than he pays the original seller. I had ten fix and flips much of last year and I decided this year I would try to wholesale more homes instead of flip so many. In fact, I wholesaled my first house last week! It was not a traditional wholesale deal as I held the house for months since I intended to flip it. The home was 45 minutes away from me and on the bottom of my flipping priorities. I had a for sale by owner sign up in the yard and I had a buyer come along right when I finally had a contractor free up to work on the home. I bought the house for $92,000 and ended up selling it for $108,000 without completing any work on the home. I had some financing costs, but I also made a commission on the houses when I bought it, so it was not too bad of a deal.
Finding wholesalers can be tricky, but try attending local REI meetups and networking with as many investors in your area as possible. You can also try searching for local wholesalers in your area on Google as most should have a website. The tough part about finding wholesalers is there are a lot of people who want to b wholesalers who never actually complete deal. The most promising wholesaler I know actually found me because I have bought many houses with cash. If you are looking for a wholesaler in a major metro area let me know. I may know of one as I have met many people in the industry.
Drive for dollars to find a good deal when prices are rising
Driving for dollars is when you drive around looking for distressed or vacant properties. Many times people who do not take care of their home are motivated to sell quickly. If the home needs a lot of work it may not qualify for a traditional loan and they may be willing to sell for below market value. If a home is vacant there also may be opportunity to buy below market value. Many times vacant homes are going through foreclosure or the owner may have left for a number of reasons.
In a rising market the owner may be able to sell the home and they do not even realize it. The biggest sign a home is vacant is there are notices on the doors or windows, the yard is not being maintained or newspapers have piled up. When you find a vacant house the tricky part is finding the owners of the home. If the home has already gone through foreclosure, then the bank is the current owner. The chances of buying a home from a bank, before they list it as a REO is extremely small. Most banks have policies that prohibit them from selling houses before they are listed. You will probably spend hours on the phone trying to find the right person to talk to, only to discover that you have to wait until the home is listed with an agent.
If the home has not gone through foreclosure you can try to buy it from the current owner if you can find them. If the current owner has enough equity in the home they can sell it very easily if they want to. If the owner does not have enough equity you may be able to try a short sale with the owner. However, it can be very risky buying a short sale on a home that is not listed. Short sale fraud is one of the most investigated crimes by the FBI. Most banks require a short sale to be listed by an agent in the MLS so they can get the highest offer possible. I see some agents list a short sale in MLS as under contract and never give anyone else a chance to make an offer. This may be fraud!
- The bank is taking less money than they are owed in a short sale and they have the final decision on whether to accept the short sale. If a short sale is sold well below market value and no other agents are given a chance to make an offer, the bank is not getting the highest and best offer they could. If the seller and buyer are related or know each other it looks even more like fraud, because the seller might give preferential treatment to the buyer to give them a good deal.
- I have bought many short sales that were great deals and below market value. But, they were listed by another real estate agent on the MLS and I had absolutely no connection to the seller.
- Be careful when you as an investor initiate a short sale, the real estate agent for the seller and the buyer are the same, the home is sold well below market value and no other agents had a chance to make an offer. I am not a lawyer and do not know all the ins and outs of a short sale fraud, but you have to be very careful if you are deceiving the bank in any way, which results in them taking less money than they could have gotten if the home was marketed on MLS.
How to use auctions to buy homes in an increasing market
Many REO sellers are using auctions to sell their inventory. I list many REOs and many of my listings are now going to auction and in some cases are not being listed in MLS. Two of the best deals in my area are auction properties that I have listed. They are in MLS, but are much different from a typical MLS sale. The houses are on Homesearch.com and you do not get any inspection or financing contingencies. I cannot buy houses that I list, because it is a conflict of interest and in some cases I cannot buy any houses from a company I list REOs for, even if I am not the listing agent.
There are also many other companies that use auctions to sell houses and in some cases they do not list them in MLS. Auction.com is another auction site that has REO properties. Be careful with Auction.com, because they list local foreclosure auctions on their site as well. Those are not homes they are auctioning off, but that the local county auctions off.
I used to buy many houses from our local county foreclosure auction, but prices have increased so much at those auctions I do not even go to them anymore. There are many investors in attendance and many of them pay close to MLS prices for those houses. When you buy from those auctions you have to pay cash, get no inspection, no guarantee of clear title and in some cases can’t see the home. If I am buying houses under those circumstances I want an awesome deal, not a slightly better deal than MLS.
I am still checking the MLS everyday for good deals and I think that will continue to be my source for most of my purchases. I have realized that I still make a great return on my investment with rentals, even if I have to pay a little more than I am used to. I am also changing my direct marketing techniques, which will hopefully result in more listings and purchases. I don’t spend a lot of time driving for dollars specifically, but I drive a lot and I always have my eyes open for distressed looking properties. I will also watch the auctions to see if the prices being paid decrease any, but I am not getting my hopes up on that front. Finally if I can’t find anymore rentals in my area, I may consider buying a turn-key rental again.