367: Affordable Multifamily Investing – Part 2

SHOW NOTES FOR EPISODE 365: AFFORDABLE MULTIFAMILY INVESTING – PART 2

Did you know you can buy multiple unit properties for less than the price of a single family home and never have  to go through a bank?  In today’s podcast, 50 year real estate investing vet Jay DeCima continues on the second of a two-part series sharing a unique real estate investing niche that few investors know.

What You Will Learn

• How to find the right properties and the owners of those properties
• What a multiple unit property is
• Why single family homes are not as good as multiple unit properties
• How you can work a full-time time and grow a cash flowing real estate portfolio at the same time
• What expense percentages you need to maintain profitability
• The secret to rental property success

About Our Guest

Jay DeCima

Jay P. DeCima, otherwise known as “Fixer Jay,”  is a seasoned real estate investor with over 50 years’ experience specializing in fixin’ and rehabbing rundown houses and small multi-unit properties.   Jay is also a successful career-changer having worked more than 20 years for the telephone company before switching to become a full-time investor.  Beginning in the mid-1980’s, Jay began teaching others his high profit fix-up strategies and unique landlording techniques.  Conducting fixer camps and seminars around the country, often sponsored by investment clubs, Jay is widely regarded as the “king of fix-up” on the national teaching circuit.  In 1998, Jay began writing about his successful fix-up techniques.  He published his first book; “FIXIN’ UGLY HOUSES FOR MONEY”, a “self-help” guide for do-it-yourself investors chronicling his own properties and experiences.  The self-published book sold very well, which led to a second book.  “INVESTING IN FIXER-UPPERS” was voted the No. 1 real estate book for 2003 by syndicated columnists at the San Francisco Chronicle and Los Angeles Times.   To date, Jay has published six “self-help” books with sales exceeding 250,000.  Somewhat different from others, Jay’s self-help books are written specifically for investors like himself – part-timers and career-changers, willing to substitute their personal skills for a shortage of start-out money.  Today, Jay spends much of his time overseeing his rental properties  and mortgage investments.  He also continues writing and encouraging other investors via his popular telephone mentoring service.   A civil war buff, Jay’s hobbies include reading about and visiting the Civil War battlefields, spending time (relaxing) in the Sierra Mountains (Lake Tahoe area) and mixing with other successful investors as a guest speaker on cruise ships, which he claims are working vacations.

…Continued From Part-One

Finding the Right Properties

• You need to be willing to spend time driving up and down streets and doing the research
• You also need to look in areas you would like to invest in
• Take half a day driving up and down the streets in the area that you like
• When you spot a property that looks like the right kind of property…
  • Stop across the street
  • Write down the address on your yellow notepad
  • Make notes
    • Looks like it has 8 units
    • The dimensions of the lot
    • Draw the layout
• If it looks good and well managed, there’s not a good chance that it is for sale
• You have a better chance it it is run down and not well maintained
• However, if he sees a property that is run down and not being taken care of and too many hanging around like druggies, he wants to investigate further
  • He researches at the local County Tax Office (you can do this in person or with a computer)
  • Get a copy of the tax bill for that property
  • Once you get the AP, you can see where the tax bill is being sent and that’s usually the owner
  • If he sees that the owner lives a long way away from the property, he gets more excited because that owner may not have a clue of what is going on at his property
  • He next writes a letter to the owner
    • Dear Mr. Jones, I own rentals near your property and can’t help but notice how your properties are are declining more and more as I drive by.  Maybe you hired a manager like I used to one time before he made be lose $100,000 because of mismanagement.  I’m in the fix-up business and if there’s anything I can do or a service I can offer, give me a call.
    • And he adds a P.S.  By the way, if you’re ever in the market to sell, give me a call.
    • If the property looks real bad and it has a couple of pit bulls and shady looking characters, he’ll snap a few photos that he includes in the letter as well.
• He does all this by himself, without assistance from anyone
• When you start owning a lot of properties, brokers/agents will start contacting you and bringing you deals
• This is what he calls a “Johnny Lunch Bucket Investor”
  • A person that starts off with a full-time job
  • Doesn’t have much money
  • Does their own labor
  • And eventually switches over to full-time investing
• He’ll find out who manages the property
  • Drives to the property around 10am
  • Get’s a clipboard
  • Walks up to the property
  • Looks up at the power wires to look like he’s from a utility company
  • He may see a tenant standing around
  • When he walks up to the person he says “I’m from PG&E.  We’re adding another line.”
  • Then he asks, “Oh, by the way, are these rental properties?”
  • If she says yes, he asks, “Are there any vacancies?”  And the tenant will often say, “Contact our management company” and shares the name

Changing from Single Family Rentals to Multifamily

• First thing he noticed is that you don’t have to go so fast
  • Buying single family you are always running around, trying to get more properties
  • Then there’s the issues with the bank
    • What happens when you reach your maximum number of loans?
• With these types of properties
  • You buy a lot of units/doors at the same time so there’s no rush
  • You don’t deal with banks because you do seller-financing
• Unit Price
  • A cheap single family is $90,000
  • The same cheap house on a lot with 6 other is $40,000
• Rent-to-Value Ratio and 1% Rule
  • With the 1% Rule your monthly rent should be 1% of the purchase price
  • He has places that are 2% and higher
• It usually takes him 18 to 24 months to do all the repairs to get the properties up to where they need to be
  • Most of the efforts are spent on the exteriors (paint, landscaping, etc.)
• He sold off his 23 houses
  • Sold some in bulk (10 houses)
  • Did a 1031 Exchange
  • It took a while
• When he got into the multiples, he hit a home run
• In California, he said towns like Stockton, Merced, Sacramento, Williams, Willows, Chico (they rent to college students at much higher rates) are excellent for these types of properties

How These Properties Came About

• Years ago, a person would buy an acre of land
• The family had their home at the front of the property and maybe a “victory garden”
• Then they think, “Why not build a duplex in the back of our land for retirement?”
• The duplex works so well that they want to build another and so on

Cash Flow

• You can buy these properties keeping the unit price down
• Keeping the Rent-to-Value Ratio above 1.5% monthly  or 18% annually because you buy these properties at a lower base price per unit
• It’s like buying fruit in bunches – it’s cheaper per unit when you buy in bunches

Biggest Mistake

• He was investing in single family houses for 10 years
• He suffered without making any money
• He had equity but he wanted cash flow
• Get away from the rules put on my banks, cities & counties with building departments and permits because it’s very costly
• In the city, you can’t get away with the things he can do in the country
  • For example, if he was going to put in a new window, the city would be all over you.  In the country he never gets questioned
  • Jay would rather ask forgiveness than permission
  • When you have rental properties, a lot of the city/county people aren’t as concerned

If You Want Cash Flow

• Single family homes that have a 85-90% mortgage will not generate enough cash flow to support an individual
• Multifamily is the best way to go
• If you can smell saltwater, it won’t work

Biggest Success

• Going from single family homes on their own lot to multiple single family homes on one lot

Advice for Old Dawgs Interested in Real Estate Investing

• Buy small multiple unit properties
• They wouldn’t have to be fixer-upper types like Jay bought
• If you have a self-directed IRA or Roth IRA, that’s a good way to go
• Because of your age, you can’t just start with one
• You need the right property that will immediately start generating significant cash flow
• You don’t have the time to test things out
• You need to do the numbers to make sure it works
  • Your expenses for the property should be no more than 45% of income
    • Credit loss
    • Vacancy loss
    • Insurance – 6%
    • Management – 10%
    • Maintenance – 10%
      • Cut grass
      • Paint, etc.
    • Repairs – 5%
      • Something breaks
      • Toilet clogs
    • If you can self-manage and do repairs yourself, that will reduce costs significantly
• He’s got a great retirement plan
  • He’s sold most of his properties and now holds the notes
  • The notes are secured by properties he knows and has run for years – he knows them well
  • When you carry notes – you’re the bank!
  • You get great cash flow but without all the work and headaches
  • He lives off of that income today

Rap-it-Up

• Favorite real estate book:  How to Get Rich in Real Estate by Robert Kent and How I Turned $1,000 into Five Million in Real Estate in My Spare Time by Willam Nickerson
• Favorite business book: Grinding it Out by Ray Krok and Back in the Saddle Again by Gene Autry
• Favorite quotes: “A man needs to stay busy.  He will rust off long before he wears out.” – Colonel Saunders and “I didn’t invent the “fix-up” strategy.  I simply added on a turbo charger to the old lawn mower”  – Jay DeCima
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? I would find a seller motivated enough to take what I had to offer (the $1,000) for a multiple unit property.

How to Reach Jay

• Phone: 1-800-722-2550 (If you mention that you heard Jay on the Old Dawg’s REI Network, you’ll get books that are on amazon for $300, for only $15)
• Website: Fixer Jay

THIS CONCLUDES PART-TWO OF OUR PODCAST SERIES ENTITLED “AFFORDABLE MULTIFAMILY HOUSING.”

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Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com