I’m looking to start a real estate investment management company. I’ll buy up houses, rent them out, and then sell derivative bond-like instruments and roll the cash over into further properties. Eventually, in 5-7 years I’ll pay off the debt and own a dumperload of houses. Any thoughts?
This is assuming I can only get so much out of banks, or other lower interest rate means.
anybody know how to build a real estate investment model? involving comparables, vacancy rates, etc to create realistic cashflow forcasts?
http://seekingalpha.com/article/659191-the-new-and-improved-real-estate-investment-model
Houses are tough for a few reasons:
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Banks will let you finance maybe 3-5 before you have to put down around 30% per property.
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The economies of scale are a huge factor. If you’re small and own a few houses you can manage yourself, its great for tax benefits and building some wealth. But in order to get some economies on maintenance and management costs, you have to own quite a few - maybe 100+. Anything in between is too small to have internal property management, and too big to manage yourself. When I was looking the rates on management for single family was around 10% of gross potential rent, compared to maybe 3-5% on multifamily - internal or third party.
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If you own 10 houses, and one goes vacant, your portfolio occupancy has just dropped 10%. Those other houses better cash flow to cover the note, and if you’re escrowing taxes and a reserve fund, that can be tough depending on rental rates.
I’ve seen a handful of people get into it with mixed results. One guy I met at a CFA review owns around 80 properties in Las Vegas with an average entry of around 75k. He said his return on cash is around 10%, but that is largely because the labor in LAs Vegas is so cheap that his management and upkeep costs are low. He also bitched about the tennants. I looked at doing this in California, and couldn’t really make it pencil out. Las Vegas got hit so hard that houses actually sell for less than 100k.
I’ve seen a a few fund pitches trying to buy around 300 homes in SoCal but haven’t really looked too deep. From what I recall they were buying both loans and foreclosures and projecting 20%+ IRR.
Some people are buying houses from the current owners by either buying it for the debt or assisting the short sale process. The benefit is you have a tenant in place, but mutually beneficial or not, I consider this a little sketchy.
Either way, they say home ownership is a pain in the ass. Owning 100 is no walk in the park.