Discussion: How to invest in Real Estate

What's up, you guys? It's Graham here. So today we're going to be doing something a little bit different. A friend of mine is interested in investing in real estate and had a whole bunch of questions. So I told him just to go ahead and email me a list of his questions and he did.

Now, when I got his questions, I realized that these are such good questions and I felt it would be a shame if I couldn't upload these questions to YouTube. So I asked him if it's cool if we got on a call and I recorded it and that way I can share all of my advice with him as well as with you guys watching on YouTube. So this is primarily about investing in real estate, what I look for in an investment, and he said it's cool to record it. So let's do it!

"Hey, how's it going, everyone? I see from your email that you wanted to be potentially buying something preferably a multi-unit. I'm guessing that you want to move into one of the units and then rent out the other few?"

"That's right, yeah, that's correct. Um, so look to purchase something within the next two years. I kind of want to do a multi-unit, um, within like a 50-mile radius of LA, uh, within the next two years. So, um, yeah, that's kind of the gist of what I'm trying to do."

"So I see from your email here you want to stick with 1 to 4 units. That's great so that all falls under a residential loan. So if you get between one and four units, it's all residential. As soon as you go above four units it turns into a commercial loan. There's a lot more requirements with that. You have to usually put a lot more money down; it could be like 30, 35% down, higher interest rates. So I totally recommend the one to four unit."

"I think down payment around 90 grand, I mean that's suitable. What I'm finding usually for investment properties is that generally banks like to see 20 to 25% down for investment properties and that's anything other than a single-family residence. And most of the time I encourage people to put 20% down anyway. I think it's a good idea not to stretch yourself too far and put like 5% down or 3% down; I just don't really recommend that."

"So I think you're pretty good with the 20% down. Sometimes they may want to see 25% down and that's what I'm experiencing with banks such as like Chase or Wells Fargo. Sometimes Bank of America too, they want to see 25% down. But regardless, I think the 90,000 should be pretty decent, especially if you want to get within 50 miles of Los Angeles. Kind of, what are your thoughts? Like do you uh prefer multi-unit or would you kind of go for a single-family residence home instead?"

"You know honestly, I like them both. I think from an investment standpoint I think it makes sense to go multi-unit because you have instead of all your eggs in one basket doing a single-family and having one tenant pay 100% of your rent, you know having a multifamily, you can have two to four different tenants paying your rent. Now the only downside I see to be completely honest with you with multifamily is that in Los Angeles anything built prior to 1978, more than one unit falls under rent control."

"So even though right now it may be really appealing and you may get some great returns, now if these tenants stay 15, 20, 25 years from now and rents have gone up considerably, it's definitely going to affect your bottom line. That's the only risk I see with investing in multifamily is that generally anything 1978 and prior is rent controlled versus a single-family which is not rent controlled."

"I mean honestly, between the two, generally you can get a slightly higher return with multifamily and you kind of share the costs in terms of it's like one roof, one backyard, one front yard, and you're able to reduce your costs because you have volume because you have, you know, more than one unit that, you know, a lot of times they kind of share these things."

"So I like multifamily. I also like multifamily if it's something you want to live in for yourself because you get to live in one of the units and then rent out the other unit to three units. And most of the time if you buy this thing correctly, you can live for free and that's what I want to be doing actually."

"I think, you know, as we were talking about, that's what I really want to be doing this summer or later this year. Buy something like that, um, because I truly see the value and literally you can buy a place and live for free. Not only that, if you get a two-bedroom that you move into, you can have a roommate on that and can like make money, own this place, live for free and still make a profit."

"So I definitely prefer multifamily, especially if you're going to be living in it, but just be mindful of future rent control that that might impact you."

"Okay, yeah, that's something that I didn't actually know. Um, I was just kind of assuming it's just, uh, rent control is based on the city and kind of the ZIP code. Um, but that's a new one for me. So everything prior to 1978, yeah, okay."

"I was kind of thinking too, um, I've heard, you know, there's different ways to finance, um, a loan, um, and get this house that you're looking for. Um, and I think you may have answered this in the beginning of the video, um, with the 20% down. Um, would you stray away from doing the FHA and putting a happy down payment instead?"

"Yeah, I would be doing, I would definitely be doing the conventional loan. Um, FHA is usually for first-time home buyers who maybe don't have the income and who don't have the credit. If someone's buying something from FHA, generally, they don't have the income or the credit to qualify for a conventional loan usually, and usually, they're a first-time buyer."

"Especially in a competitive market such as like Los Angeles or anywhere in Southern California, not a lot of sellers will take an FHA loan seriously if it's a really hot property and they have multiple offers. A conventional loan is usually the way to go. Um, FHA loans usually also carry a premium in terms of mortgage insurance whereas conventional loans don't and usually FHA loans are at a slightly higher interest rate because they lend a little bit higher than conventional loans in terms of debt to income and usually because the borrower credit isn't like 740 plus as would be with, you know, a top-quality conventional loan."

"So I recommend 100% you go conventional. I would not FHA."

"The only reason I brought that up, Graham, was um, just kind of like thinking of leveraging money um, and if you don't want to, you know, drop down, let's say 90k, um, just drop down 3.5% of the property and use that cash for, you know, maybe the stock market or something else. But, um, you know, it may not even make sense once she crunches the numbers and see the cash flow or lack of cash flow."

"It entirely depends on the type of loan that you get and what you're going to be paying up front because if your interest rate is going to be pretty low and if you can only put down, you know, three and a half, 5%, I mean even though you don't really have much equity in the place to begin with if the numbers work, it's always possible."

"But I generally just, it's again, personal opinion here, I I'd rather have a little bit more equity in the property just in case hits the fan that you have at least something, at least some sort of cushion to fall back on versus, you know, being three and a half% in 5% in and having these rent payments coming in that's like you're kind of counting on that, right? You're kind of just scraping through."

"I hear you, exactly."

"Okay, yeah, kind of you personally, how do you search for potential investments? And mainly do you, because you're a, I mean, you're a realtor yourself, you're a real estate agent, do you personally go through the MLS and kind of just go through all your options or would you hire a, um, buyer agent since they're they would be free for you, um, and have them assist you in their localized market?"

"Yeah, I always do it myself. I mean, there's no sense doing a buyer's agent when I can do it myself and usually when I represent myself on a deal, I cut my buyer commission entirely. So for me, it's about 2 and a half% cheaper than if another agent involved. I mean, the money has to go somewhere; someone gets paid. So whether it's I get paid and I make the 2 and a half% or I cut it out entirely and save the seller some money. So I definitely, I always do everything on my own. I do not, I would not have someone else represent me, um, especially on my own deal; it just doesn't really make that much sense."

"But I always, I always look on the MLS. I mean pretty much everything, everything I bought, three of the four properties that I bought were all bought from the MLS. And I look daily. I mean, I actually, I take that back; I would look three to four times a day when I was in the market to buy something. I saw every single property come up and I also had this program set up on the MLS; it's called Auto notify. And what that means is that as soon as something comes on the market or as soon as there's a price reduction or as soon as something is adjusted with the listing, it emails to me."

"So I would get all these emails; I might get like 10 to 25, 30 emails a day anytime something is adjusted with the property that was in my search criteria. I would get it and being an agent myself, I just wrote the offers immediately. As soon as I saw something come on the market, I would just write an offer; a lot of these were sight unseen because at the time there're short sales. So I would just, no matter what, I just write an offer and a number that makes sense to me."

"Now everything I'm looking at is still on the MLS and I do two things. I first look at places as soon as they come on the market and then I also look at the places that have been on the market the longest and I find there's a good middle ground between the two because as soon as something comes on the market, it's usually a hot property; everyone is looking at it; there's the most competition. But that's your chance to find something that could be absolutely perfect that otherwise would have sold in a matter of days or weeks."

"I also check the ones that are really old on the market; the listings that have been been on for like four, five, six months and haven't moved. Maybe they priced it too high in the beginning and they've been slowly chasing down the market, maybe they're just like they listed it way too high, maybe the pictures are really shitty, maybe there's something about it that for whatever reason turn some buyers off. And then after a month or two, it just becomes a stale listing."

"And even if it's priced well, if it's been on the market for like five or six months, it just kills the value of the property. So I like to look at those as well as a potential opportunity for you to go in and kind of lowball it and potentially get a good good good deal. Uh, usually from my experience, there's a reason they've been on the market that long and usually there is a reason but sometimes the reason is as bad as really bad photos or the agent just like does not want to show it or doesn't pick up their phone. There are a multitude of reasons that are maybe outside the control of the property owner. So it's good to explore both options."

"But I like, I mean honestly, I just use the MLS. I think, anytime someone is serious about selling, usually they'll put it in the MLS. Some other ways to go about it, you can send letters if you want to be in like a very certain neighborhood or if there are very, you know, select few houses that you're interested in, you can always send a letter to the homeowner and then hope that they're going to sell. I haven't had luck with that; I've tried it before; I never had luck with it. Um, I'm sure some people have; there's always a possibility someone gets a great deal from sending out some letters wanting to buy a house; uh, but from my experience, you know the MLS is great. Otherwise, sometimes it's good to have these connections because you get properties before they come on the market. But again, it's rare; most smart sellers would want to list their property and get a lot of activity and kind of bid it up to the highest price."

"Gotcha. Cool, Mak makes total sense. Um, one question that I didn't, um, write in my email but that kind of just came up when you were talking, um, you mentioned a short sale. Um, what, what type of, um, I guess homes would you kind of look for like a short sale or foreclosure or just kind of regular home? Yeah, what are your thoughts on that?"

"So right now I don't see any short sales in this market. If there is a short sale, there are so many people who are so hyped up over the term short sale that they just automatically get drawn to it like, like a moth to a flame they get drawn to the short sale. And usually, it ends up getting bid back up to retail levels or higher than retail levels because there's all this demand for people like saying they want a short sale."

"So I, I honestly, I don't, I don't deal with short sales anymore. I, it's, it's to me there's, it's not that type of market where I see a lot of opportunity in. I look for properties that need cosmetic upgrades only and I focus it on properties that the bones and the structure are great, the foundation is good, the floor plan is good and it's just the cosmetic things that might turn a lot of other buyers off."

"The few things are floors, which are really easy to do; paint, which is really easy to do; landscape, countertops, bathrooms, kitchens, things like this where you don't really have to do anything structural and you don't have to add square footage to it. It's so easy to go in and do cosmetic upgrades and just do a light remodel on the home. A lot of that you can get done in less of a month and it's not too expensive."

"Um, on one of my places I spent I think like five grand total on two new bathrooms and a lot of this stuff was like Home Depot sales sections, um, using, you know, just good contractors that I've used on other jobs that just bid you a good fair price. So I like to focus on homes that just need a lot of cosmetic upgrades only. I think it's simple and I think a lot of buyers just get turned off with wanting to do the floors themselves, wanting to do landscape themselves, or, you know, a kitchen isn't that updated; bring it up."

"And I would say most home buyers don't want to deal with that. They just want to buy something that's turnkey and move in and not have to worry about it. So for someone who's not afraid of doing the work, I think it's just a really good opportunity to get in there and get a property at otherwise a price that other people wouldn't necessarily pay."

"Now how do you determine the location? Like what kind of metrics or like what kind of guide you to pick a certain location over another?"

"So what I like to look for personally are areas that are close to other really expensive areas or other areas that are being really successful in terms of development. So, IIR in Los Angeles for instance, we all know that Santa Monica is crazy in price, Venice is crazy in price, Mar Vista is getting crazy in price because Santa Monica and Venice are crazy in price. So I like to bet on areas that are surrounding those areas."

"So for me, the one house I got Culver City. So I think Culver City is a phenomenal area because the people that can't afford Venice, Santa Monica, Marina del Rey, they go to Culver City and even now in Culver City, Culver City is becoming very expensive. So now people are moving to let's say Baldwin Hills, Ladera Heights, West Adams, Jefferson Park, downtown. So I like to focus in on areas that haven't yet hit, uh, per se in terms of their development and in terms of their prices."

"And I like to focus in on areas that are on the outskirts of another really developing city. Um, same thing with, um, let's say Van Nuys, we're seeing Sherman Oaks and Studio City just skyrocket in value and that is amazing for Van Nuys, for Chatsworth, uh, Tarzana, like all these areas that are kind of surrounding that area. It tends to raise the prices as people are outpriced already in Sherman Oaks and Studio City so they tend to move a little bit further outward. So that's personally what I look for."

"Okay, okay, yeah that probably definitely helps. Um, if you're, you're already a realtor and really aware of the market. Um, so for someone like me, I'd probably have to, um, really just do my research and and get to know the areas. I would definitely get to know the area and another really great way to know the area is to drive around and spend like a whole weekend driving around every single area in LA. Um, and I think that's one of the best things you can do because you're going to get so familiar with absolutely everything."

"You're going to see all the areas; you're going to see what's good, what's bad; you're going to see all the new constructions, the businesses, where the people are going to; you're going to be able to see so much firsthand and that's really going to help you pick what you want to buy and invest in."

"Gotcha, totally makes sense. Okay, um, now to the question that I really struggle with the most and I don't know if everyone out there kind of struggles with this one but um, it's how do you evaluate? And this is kind of a long one. How do you evaluate a potential investment to ensure the numbers make sense? Um, and if you use a spreadsheet or whatever, you know, that kind of helps you, um, what type of metrics do you use to kind of classify a good investment?"

"I mean there's a ton of stuff online like cap rates, cash on cash return, you know, all kind of calculations that you could use but like what do you use personally to, I mean it really depends what you're going for. If it's something to move into, I treat that differently as something that you're doing just to make money or is something for cash flow. So let's start with cash flow."

"When I want cash flow I kind of determine a little bit between the appreciation of a property and what it's going to spit out in terms of monthly income. Now if you if you're just going for monthly income you don't care about appreciation at all, I recommend areas in California such as like San Bernardino, Inland Empire, a little bit further out. I'm finding you can get about a 6 to 10% return on your money by going to those areas."

"However, generally those areas don't appreciate as much as properties do in Los Angeles so there's a tossup that even though you earn all this money in rent, you're not earning the potential appreciation of the property long-term. So it's a bit of a tossup. Ideally, you would get a bit of appreciation and a bit of rent as well."

"Now in terms of cash flow, it's really hard in Los Angeles to get a property that cash flows. I mean really difficult. You're not going to find it in Santa Monica, Venice, Beverly Hills, Brentwood, I mean it just doesn't happen in the really good areas. You don't find properties at cash flow because people pay a premium for that area. However, in those areas you generally get a stronger appreciation and it's generally a little bit more resilient to any sort of market fluctuations."

"Like if interest rates go up to five, six percent, chances are Beverly Hills Flats is not going to be affected at all; it's going to stay really strong. But if you're buying a property to cash flow in the Beverly Hills Flats, you're out of luck. I mean this property might make you like two and a half, 3% a year; it's terrible."

"So ideally you want to find a tossup between the two. So for cash flow, I recommend going further out; you get less appreciation but you do get cash. Now I usually for cash flow properties like to see above 6 to 8% and it's hard to find now but it's doable in Southern California to find properties, you know, 6 to 8%, especially if you go further out to like if you want to be in Lancaster for instance like you could easily find an 8% property in Lancaster."

"But again, it's just the tossup between getting rent and getting appreciation. Now in terms of buying something to live in, I treat that a little bit differently because you do pay a premium for what I call lifestyle cost in the sense that like you're going to be in a better location; your happiness being close to things; I mean that's worth something."

"So you shouldn't necessarily look at that in terms of how much money you're going to make from that or not just because it's your happiness that's at stake, right? Now I like to look at everything as a whole for something I'm living in in a sense of I calculate how much rent I'm going to be getting as a whole, I subtract my mortgage, I subtract the interest, I subtract the property taxes, the insurance, I add on some repairs and I add on some vacancy to that."

"And I'm able to come up with a number that is usually a low number when you have a property and you add in all the rents and then you subtract everything it's usually a low number but then because I'm living in it and because it's an income property I then add back on some of the things that I'm able to deduct."

"Like for instance, the mortgage interest is a tax write off; your property taxes are a tax write off. Let's just assume you pay $10,000 a year in mortgage interest; for me, that might only equate to, you know, $77,000 after my tax write-offs or $6,500 after all my tax write-offs. So right off the bat I'm able to add back in $3,500 because it's a tax write-off. Same thing with property taxes; if I pay $10,000, $12,000 a year in property taxes, that's really worth to me like $8,000."

"So I'm able to pocket the difference. So I tend to add all of that back in and come up with a true number. It's, I also add up paying down your mortgage. So if your mortgage payment, let's just say is four grand a month but out of that, you know, $1,100 a month pays your principal down, I count that as well as a return because not only do you have a cash return but you have a total return in terms of all the write-offs you get and what you get paying down the equity."

"It's almost like a forced savings so I don't really count that as an expenditure; I count that as going towards my total return. I don't count appreciation and return just because it's usually not something that's as predictable as a tax write-off would be but that's what I take into consideration."

"I'll send you a full breakdown by the way of this and what I kind of look for, um, and how I do it but yeah, every deal I will definitely analyze it and I try to get it down to, you know, a few hundred give or take of how much profit I'm going to be making per month maybe I could usually be within about 100, 150 bucks."

"Gotcha, right on and, and yeah, this is, um, kind of the critical question that I had. Um, since it's a big it's all new to me and it's a kind of a big investment. So, um, aside from numbers and I think you may have answered this with the, um, the cosmetic comment you made, but aside from numbers, what else do you uh take into consideration when you're evaluating your property?"

"Really the area in general. I I want to make sure if I buy a house or I buy a multi-unit that I'm not on the same street as an apartment building. I want to make sure that I'm not on the same block as a commercial building and I want to make sure it's not a through street. So for me, for instance, I'm looking in West Adams, I want to make sure that I don't have an apartment building on my street because that usually lowers the property values and it means the streets are really crowded when you have like 20 people living on that little apartment building in the street, people come over, people park on the street and street parking is usually difficult."

"Same thing with being on a through street. I dislike it if the street has speed bumps on it; it's usually for a reason because cars go by at a higher volume than other streets. So to me that disqualifies it as well. I also, again, commercial buildings; I don't want to be in the same block as a commercial building; any sort of retail or anything like that, usually it's too busy and I'd rather be on a quieter residential street. So I would pay a premium not to have those things around um, where I end up buying."

"Awesome, cool taking notes here as we're going. Um, number, I think I skipped one, um, number seven was um, how do you know what you can charge for rent when you're considering a potential investment that you are evaluating?"

"You know what the best way to do that honestly is Craigslist. I know I'm always talking like highly about Craigslist and I feel like Craigslist should be paying me for all the promotion I'm giving him but seriously Craigslist. And I like, so let's say let's take my example West Adams. So I want to find out what a one-bedroom is going for in West Adams. I just go on Craigslist, I type in West Adams and I in one-bedroom exactly and I see what's coming up and I just check them out and I see what the going rents are for and sometimes they're priced a little bit too high so I might discount it by like 5% or so but generally, you're able to get a good understanding of what the rents are going to be just based off Craigslist alone."

"That's awesome, yeah I didn't think about that but that's real cool. Um, I've heard a lot of buzz on this and I kind of wanted to hear what your thoughts were. Um, what's your opinion on out-of-state investments?"

"I wouldn't do it. I mean I'm sure a lot of people do it; there's nothing wrong with an out-of-state investment; it's just for me personally I wouldn't want to manage something out of state and if something were to go wrong and God forbid I need to be there for something, I just don't want to have to go deal with going out of state. Now you could get a property manager and that would alleviate all of your concerns if you get a property manager but at the same time, I feel like you really need to be familiar with an area to want to buy in there and see what's going around the neighborhood and what's coming up and what's coming down and different neighborhoods that are developing. I think it's harder to do out of state if you're familiar with something out of state; I don't think there's anything wrong with it if you can get a property manager but it's just for me, I personally wouldn't do it."

"Right on, okay that's kind of what my thoughts were as well. Do you currently use a property management company for your rental properties or do you kind of just handle that on your own?"

"You know I do a mixture of both. I manage all my properties myself but I do have people that are there that in case I need them. So I had this one guy, I pay him $35 an hour and he's phenomenal and he lives in the area; he is a contractor; he's also retired so if anything were to go wrong, I could just call him up; he's in the area and can swing by and handle any issues that come up."

"Same thing with like plumbers, electricians, landscapers; if a tenant calls me up and says my electricity won't turn on, I just know to call the electrician; same thing if the water doesn't work; I know just to call the plumber. And I worked with these people long enough, and I found them by the way all off Yelp; I just looked up you know highly rated people on Yelp and I've worked with them long enough now that I trust them where I just tell the tenants to call them directly. So if there's a leak, I tell them, you know here's the plumber, there's an electrical problem, here's the electrician."

"And then I have my one dude who I pay 35 an hour keep an eye on things and just make sure every six months he'll take a walk through the properties. Um, if there's a vacancy he'll help fill that vacancy so it's the best of both worlds going forward. You know if he were out of the picture I would probably end up getting a property manager just because I I don't want the hassle or the work right now but I think you can do it on your own and I would recommend people do it on their own in the beginning because I think it's a good opportunity to learn how to manage your tenants and I think it's just a skill that everyone should have at some point."

"Awesome, thanks dude. Is there anything else that you would consider that we haven't kind of talked about when going through the evaluation or the whole process that you kind of want to mention?"

"So yes, to answer that question there is one thing I would recommend and that is to work on your credit and I think working on your credit is so important and I made the mistake when I first started buying properties of not having a credit card. I was just a dumbass and when it came time to want to get a loan I literally couldn't get a loan because I didn't have the credit. I think right now the one thing you should do especially because you're about two years away from buying something is to work on your credit."

"That means getting a credit card, paying off whatever debt you have, getting your finances in order and always make sure that you're making payments on time; try not to pay too much interest. I recommend just paying in full every month and really work to to improve your credit. Ideally you want to be above a 740 to get the best rates on loans but I'm finding that you want to have a bit of a buffer so I recommend trying to get it above 760, 770, 780. That way if something were to go, you know, awry or someone is pulling an Experian and it's a little bit lower than a TransUnion that you at least have a bit of a buffer so you always stay above that like 740 range where you really want to be."

"So I think working on your credit is absolutely vital and just make sure you have a wide variety of credit too. You know credit cards, auto loans, obviously a mortgage helps, um, just having a wide variety of loans at your disposal and same thing with having like like a high credit limit mixed with a low usage shows that your utilization rate of your credit is really low and you're less likely as a borrower to default on that loan. So I would certainly recommend working on your credit as much as you can."

"Awesome, cool, cool, cool. Thanks dude. Uh, I think that was all the questions that I had sent out to you. Um, I really appreciate you taking the time and and kind of answering these really thoroughly. Um, I'm sure all the viewers are going to, you know, kind of get a lot out of this as well. So yeah, appreciate it dude."

"Yeah, know I'm really glad like when you sent me this email by the way, that's why I wanted to see if we can film this because even though I'm going to be making videos about this I still think it's helpful for everybody else and that way like I can help you at the same time as like all of the people watching could also like be on a, like a, you know call at the same time."

"Awesome. So anyway man, I really appreciate it and um, yeah let's keep in touch and just let me know if you have any other questions."

"Awesome, Graham, I appreciate it. We'll talk soon."

"Cool, alright see you."