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353: Affordable Real Estate Investing

October 15, 2019bmanasseroUncategorized2 comments

SHOW NOTES FOR EPISODE 353: AFFORDABLE REAL ESTATE INVESTING

Lisa Phillips had everything going for her. Great new engineering job. Her first home. Everything was going great, that is, until the recession hit. Then, almost over night, she lost her job and her new home. Fast forward 10 years. Using her engineering skills and a first-hand knowledge of low income neighborhoods, she has mastered the art of real estate investing in homes averaging $35-50,000 per house. In this podcast, Lisa shares how, using the 2% rule, she is able to generate a great income from a very modest investment.

What You Will Learn

Practical measures a person can take to weather tough economic times
How banks usually can’t assist you in difficult times unless you have demonstrated a failure to meet your financial obligations
Why certain areas of the country are easier to find low cost homes
Where you can find good rental properties for under $50,000
How to find good properties in high crime zip code areas
A special government loan that will give you a great rate and terms and will cover renovation expenses
How you can reduce the risk of out-of-state rental property investments
What are common free online tools you can use to find good low priced rental properties
How to invest in rental properties with little cash and as a 1099 tax status

About Our Guest

Lisa Phillips

Lisa Phillips is the founder of Affordable Real Estate Investments, a platform that specializes in helping Black professionals become rental property owners and to achieve financial freedom. In the recession of 2009, Lisa lost her (engineering) job and home to foreclosure. She was left with a $35k condo and only enough money to renovate the place, doing the work herself, to stretch her unemployment check. She clearly had reached the bottom; an electrical engineer with no job.

Coping with her new reality, she came upon a strategy of owning inexpensive rental properties for cash flow, even when traditional mortgage funding wasn’t obtainable. As her strategy started to show consistent results she started teaching others how to do the same thing on her platform Affordable Real Estate Investments.

More About Lisa

While in college, she saw housing prices just rocket from 2001 to 2006 – from $60,000 to $300,000
Got out of college
Got an engineering job
Knew she had to buy a house before they got much more expensive
There was a national fervor to buy real estate
So she bought her first home in Las Vegas, NV in 2006 for $380,000
Great mortgage terms – “0% down, interest only!”
At first, she thought she would save up $40-50,000 first but was impatient

Then the Recession Hit!

She lost her job!
She found out she needed to get roommates to cover the mortgage
She also learned about buying real estate in an over-inflated market – Here home was now only worth $180,000
Just because she had an engineering degree, did not guarantee that she could get another job
A lot of learning happened within a 4 year period
Was very humbled, yet open-minded as to what she should do next
She looked for work and the only place she could find a job was in Ohio
She rented out her Las Vegas home in 2008 and moved to Ohio
Bought a $35,000 condo in Ohio
Because the price of the house was so over-inflated, she had to rent out the house at $900 less than the mortgage
She was just trying to avoid foreclosure
In 2009, she got laid off of her job a second time

Foreclosure!

Could no longer afford to keep paying the $900 monthly difference for her Las Vegas home mortgage
She knew foreclosure was eminent!
She didn’t want to see foreclosure happen but it was happening everywhere – she was not alone!
In 2009, she called the bank to explain the problem but, since she hadn’t missed any payments, they said they couldn’t help her
She stopped paying the mortgage
She was still living in her $35,000 Ohio condo, in a nice, safe neighborhood and her mortgage was only $350 a month and her unemployment check covered it
She thought, “I’m never getting into another expensive mortgage again!”
She liked that there was lots of affordable housing in Ohio at that time
Owning real estate gave her a complete sense of security
Lisa got a roommate to further reduce her living expenses
Since she wasn’t working, she spent time trying to fix up her Ohio condo
But, since she didn’t have much money, she learned how to do most of the work by herself – Do it Yourself (DIY)!

New City, New Job, New Home

Six months later, she found another engineering job, but not in Ohio. It was in Washington, DC
So, she rented out her condo and moved to DC
Started looking for a place to live
Didn’t know the areas
She’d go to online forums to find out what the good and bad areas around DC were
She came up with a system to evaluate areas, looking at “warning signs.” She looked at things like:
- Crime rates
- Maps
- Other data
- Condition of the house
- Used her engineering background to create a matrix to evaluate areas
It helped that she, as a child, lived in a low income area, modest means, working class
She wasn’t afraid to “dig deeper” in some areas where other people might avoid from the start
She’s comfortable in those areas, knows how to talk with people
It’s more a case of taking the time to “look under the surface”of certain areas
She became an expert at evaluating low income areas

Evaluating and Buying in Low Income Areas

If, for example, you go on Trulia, and look at a property’s “area stats,” you may see an entire zip code colored to reflect “high crime”
- In reality, the entire area is not ALL high crime – it’s just certain parts (streets or neighborhoods) of that zip code – not the ENTIRE zip!
- Lisa has found that it’s really just a handful of blocks (20%) that are bad, as opposed to ALL areas in a “Bad crime area” zip code
Today, she teaches this navigation/evaluation system to her students
You can find good houses in these areas that range in prices from $30-50,000
She works with some people from California, New York and other areas where there are NO HOUSES in this price range in there areas
They can pay cash for these homes, without having to qualify for a mortgage
She teaches people how to invest out-of-state smart and strategically
When you are learning how to become an investor, it’s not easy for many people to invest, even 20% down, in an “A Class” neighborhood
She prefers to buy homes $50,000 and below
She recommends people buy in an area they can at least drive to but, if, for example, you are from California, you will have to fly, at least to the Midwest, to finds the good prices
- For California clients, she only recommends that they buy duplexes for stability
  - Double the cash flow
  - Only 50% loss of rent when you have a vacancy
- She always asks questions like:
  - What is your nearest airport?
  - What are the shortest direct flights to an area you want to buy in?
- It also depends on how much time and effort you can afford to invest in the property as well
  - Are you rehabbing yourself?
  - If you’re not rehabbing, you may have to increase your purchase price
- Not everyone is the same and she helps her clients “customize” their investment strategy to meet their specific interests and approach
  - She doesn’t like the “one size fits all” types of real estate investing coaching or educational programs
  - For example, some people may only want to buy in areas where hey have family members they trust and who can help with their out-of-state properties
    - Others may not care or even want family members to help (or slow them down)

Buying for Cash Flow

Lisa likes to buy properties based on “The 2% Rule” – Rent should be at least 2% of the purchase price!
- She tries to get her clients to buy properties that will give between $400-700 in monthly cash flow
- She says it’s doable to find $45,000 houses that can rent for $900 in the right area of the country
- It just depends on the location
  - The South tends to have less cash flow than the Midwest
  - The Northeast is lower than both the South and the Midwest
  - Local “Cost of Living” has a big impact on cash flow
    - Baltimore has a higher cost of living, for example, than cities in Arkansas
She recommends that investors hire property managers
- “I’m a property owner, not a landlord.”
- She is building a business to generate “passive” income, and for wealth and equity creation
- She doesn’t want “another job”
- But MAKE SURE that you hire property managers that are used to serving low income neighborhoods
Some people prefer to do more of the work themselves for…
- Quality control
- Money savings from outside repairs, things they can do themselves, etc.

It’s Just Not About Buying a Cheap House

Everyone loves to buy a house of $35,000
However, you need to be discerning!
The numbers and deal analysis has to work
- Rents have to cover all your costs (maintenance, repairs, taxes, insurance, vacancy allowances, etc.) first and still meet your cash flow goals
- One of here “rules of thumb” is that whenever you budget for repairs, etc. it will always be DOUBLE what you budgeted
  - The reality is you are not going to get “Craig’s List” or “Cousin” prices!
When trying to pick an investment market, there are consistent metrics at every level
- You need to find markets that meet your criteria and skill sets
- Gather data points and do your research
- Invest in the right market FOR YOU!
Should you only invest in only one city?
- According to Lisa, “It depends.”
- When you are dealing with the lower price point homes, you may have to go to other markets to find the right metrics for each property

What if You Don’t Have the Cash or Don’t Qualify for a Mortgage?

Two aspects:
- If you don’t have money
  - It’s best, if you can, to pool resources from people like your mom, dad, brother, sister, daughter, etc.
  - Doubling up or tripling up may be necessary
- 1099 tax filer or fixed income investor
  - Getting a mortgage is not easy for this group
  - Lisa’s family is all in Las Vegas
    - When she needs mortgages, etc., she can also pool her family’s credit scores, qualifications, to get the loans she needs
    - That’s what it was like in the olden days – people used to just join forces with friends and family (if you can) to get things done
Lisa’s real like example:
- She just bought a big beautiful house this year – July 21, 2019
  - Her first home, coincidentally, went into foreclosure almost exactly 10 years ago
  - She is deferring all her expenses until next year
  - She is also going to create an AirBNB space in the house (FYI: when she buys property, even if it’s for herself, she must produce income from that property, making it a TRUE ASSET!)
  - She is also doubling up with her parents to get the mortgage to do it now! If she saved, it could take a few years
  - Four months before, she was really paying down her debt so she would be able to take on the new higher debt load that would come with a more expensive home mortgage
FREE TIP!
- Fannie Mae has a Fannie Mae Homestyle Loan
  - Loans that investors can do that include both the home cost AND the renovation costs
  - Anyone who qualified to do the, now expired, HARP loan can do a Homestyle Loan

Biggest Mistakes

Don’t hire your contractors off of Craig’s List
She hired a very inexpensive contractor off of Craig’s List that took her money but didn’t deliver
Also, don’t pay in advance for work
- Pay them in stages but not upfront
- She tells contractors, “After you do this, you will get paid this. When it’s done and you’ll get the second portion of the draw.”
It manages your risk and it gets them to work more diligently

Biggest Success

Listening to her own “gut” first, even if everyone else says something else
Her systematic nature as a result being an engineer
Tapping into her “working class background” in evaluating neighborhoods
That’s a big reason why her teaching is workable and profitable for her clients

Advice for Old Dawgs Interested in Real Estate Investing

She has known people in their late 50s who may only have $80-120,000 in their 401Ks or IRAs
If they buy a $50,000 on a mortgage, all they have to put down (at 20%) is $10,000
Then, they can target $400 in net cash flow
If they like the results, they can do it again

Her Business Goals

She wants to see multiple businesses
Wants to continue to buy rental property investments that make sense
Trying to impact and reach as many people as possible
She knows that what she does may not be for everyone but if it can help a person, she wants to get that work out
Responsible Investing
- If a person invests in something that is affordable for them and meets their cash flow goals, and gentrification comes along, you don’t have to increase your rents
- She has a video called, “I Don’t Raise my Rents.” that explains why she doesn’t raise rents, even if her rents are under market

New Book

Investing in Rental Properties for Beginners
On three “Best Seller” lists on Amazon
- Women in Business
- Buying and Selling Homes
- Real estate Investment
To buy the book, click here

Rap-It-Up

Favorite real estate books: Rich Dad Poor Dad by Robert Kiyosaki and Tax-Free Wealth by Tom Wheelwright
Favorite business book: Story Selling by Harry Maziar
Most valuable web site for success (other than your own): BiggerPockets.com
Favorite app: Twitter
Favorite quote: “Fear is the enemy of action.”
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? Find a really good mentor she would know and trust who started from nothing and offer to pay him or her the $1,000 to tell her how they did it.

How to Reach Lisa

Website: AfforableRealEsateInvestments.com

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