We’ve owned property in twelve different states and have explored opportunities in Texas, Arizona and Nevada. It became clear to us that Georgia is the best area of the country to set up a real estate enterprise as the U.S. real estate market adjusts to the “new now.”
We buy in Atlanta for the following reasons:
- Atlanta is one of the fastest growing, stable metropolitan centers in America with 5.4 million people
- Increase in growth since the 1970s, as well as added 1.1 million people between 2000-2008
- Second largest metropolitan area in the Southeastern U.S. and 9th largest in the country
- Top business city and primary transportation hub of the Southeastern U.S.
- Fourth largest concentration of Fortune 500 companies
- World Headquarters for Coca-Cola, The Home Depot, AT&T, Delta Airlines, Turner Broadcasting System, Newell Rubber Maid, SunTrust Bank and many others
- 75% of Fortune 1000 companies have business operations in the metropolitan Atlanta area
- Hartfield-Jackson Atlanta International Airport has been the world’s busiest airport since 1998
- Atlanta is home to a growing Biotechnology center
- As of December 2010, recent news is to make Atlanta the IT Health Capital adding hundreds of thousands of jobs
- Rates first in the United States as the least costly large city for business
- Second as America’s best cities to relocate
- Third in job growth
- Forbes Magazine ranks Atlanta as fourth most affordable U.S. market
- Forbes also ranks Atlanta as the #1 rental market
- Low property taxes
- Low Home Owners Insurance
- Newer inventory avoiding lead-base paint issues and unseen major repairs
- Pro Business State
- Growth is inevitable
Atlanta is a large metropolitan area and like all major cities, there are good and bad areas and sometimes within the same zip code. We do not buy houses in the ghetto and we avoid rental neighborhoods in general.
Our focus has been in the outlying areas of Atlanta due to the demand for houses within these areas. There are a lot of newer houses with high rent to value, and the ease of property management.
The problem directly around and near Atlanta-proper is two-fold:
- Inner city ghetto – too risky
- To the north there are older, more expensive homes where the cash flow and upside potential is not nearly as attractive as to where we acquire houses.
The “new now” in real estate encompasses a “buy and hold” strategy. This is not a flip market although that can be done on occasion. This is the time to buy undervalued new properties in emerging markets and hold them for the production of income and future growth.
This strategy is best initiated in areas that will experience future growth because as demand absorbs the supply, prices will go up. When the tide comes in, all boats in the harbor rise. That is; when builders start to build again, our houses will go up in value.
Counties, cities and towns are cash starved. They will increase impact fees and the cost of building materials will continue to rise. Thus, buying newer houses in subdivisions at rock bottom prices is a safe harbor for investment dollars that will produce a dividend every month in the form of rent.
The first question we ask ourselves when buying a house is, “Who will pay more for this house, and why?” School systems, neighborhoods, and jobs are all the “local” drivers that push value.
There are a lot of displaced homeowners as a result of foreclosure and they still need a place to live. They are forced into the rental market, which by all reports is getting stronger. Atlanta has been recognized by Forbes as the number one rental market in the United States. Additionally, people are moving to Georgia from the Northeast and Midwest.
With baby boomers retiring at 10,000 per day for the next 19 years, there will continue to be an influx of people to the South to enhance their quality of life. Let’s fact it: a warmer climate is much more attractive to live in as we age.
One of the biggest mistakes people make when buying real estate is to identify their exit plan before they acquire property in a certain area. Here are a few examples to make my point:
I recently met with a European who bought properties in five U.S. cities located in New York and Florida. He bought older houses that are rented by Section 8 and in bad neighborhoods in Buffalo and Rochester, New York. How do I know? I owned houses on two of the same streets a lifetime ago and things have only gotten worse in these areas, not better.
These tenants will never buy these houses and his only potential future buying is another investor. He’s already discovered his maintenance costs are through the roof and eventually he will find out how much fun it is to deal with Section 8 inspections as well as having to register his property as a rental.
Many cities and towns charge fees for the mandatory home inspections and licensing landlords in the Northeast and Midwest. They need money and this is one way to get it at the expense of a real estate investor’s returns. These cities and towns are not landlord friendly and in actuality create a disincentive to invest in these areas. They have it backwards from a business standpoint. They should reward landlords to invest and rebuild their ancient inner-city properties which in turn would create jobs and keep houses on their tax rolls. In this case, his returns will be compromised, his upside is non-existent and he will ultimately have to sell to another landlord – at a loss.
He also bought in Cape Coral, Florida. These are pretty houses that once sold for $300,000 and now sell for $100,000 but you know what; it’s in the middle of nowhere and there is no employment base to drive up home values. The real estate taxes are high, insurance is high so cash flow is compromised by a lack of tenants and fixed expenses. He could sell to an end user or an investor but he is out of the path of progress. In case you haven’t heard, more people are leaving Florida than are coming as the trend has finally reversed. Never lose sight of the fact that the demand for housing drives values and retirees to Florida are looking elsewhere.
This investor also bought two expensive condominiums in the Miami area and after his fixed expenses and HOA dues, he realized his cash on cash rate of return is about 1%. When you buy a condominium, other people vote on what you can and cannot do and charge you for it. They are problematic with foreclosures and than they cut services and raise fees to make up for the differences.
I give this investor a lot of credit for taking action. He identified a currency arbitrage converting his euros to dollars and attempted to spread his risk in various areas. But he still missed the boat for cash flow and upside potential. Where you buy is more important than what you buy.
One last point, we acquired approximately thirty houses in and around Detroit three years ago. We are dumping them all due to high fixed expenses, no upside – ever, and liberal courts. It takes a long time to evict a non payer in Michigan.
The point is: begin with the end in mind! Have an exit plan in mind before you buy anything.
Here’s Our Exit Plan:
It’s known as a lease with an option to buy. Not a contract for deed, because these make it hard to evict for non-payment. It is not just a rental, we want someone that will stay long term. It’s a lease with an option to purchase the property for a set price within three years.
The American Dream of owning a home has turned into a nightmare for many people. These displaced, evicted former homeowners still want the security of keeping their kids in the same schools while having roots within a community. For first time homebuyers the challenge of mortgage financing has become burdensome as lending guidelines continually change and are getting stricter.
Our program is designed for people who want to stay in a house with the “hope” to own it within the next three years. The option price is typically 50-100% more than what we sell these properties to investors for. The option consideration is $1,000 to as much as we can get. Once negotiated, the property manager goes back to the tenant and negotiates a higher rent then what was agreed to by “matching funds” toward the down payment and closing costs. For example, if rent was agreed upon at $1,000, he would try to move them up to $1,100 with $200 going toward their eventual closing. Heck, it’s like a savings account for the tenant except it is nonrefundable if they don’t buy the house.
The property manager attracts many candidates for each house using our gorilla marketing. He selects tenants based on ability to pay, credit report, current income and that income to debt ratios fit FHA guidelines, background check, job location and their current home inspection. If our credit repair assistant agrees that the credit is fixable – they’re in. Of course option consideration and monthly rent is a factor as well.
The option price is predicted on the availability of mortgage funds and the house appraisal as well as the tenants qualifying for a mortgage.
The reality, based on historical tracking, is that 20-30% of tenants will actually go through with the purchase for one reason or another. Who cares when you are buying for cash flow and long term growth. At the end of three years, it’s a new negotiation that will be influenced by our perception of the housing market at that time, the current tenant and any investor, if one is involved.
Choices are simple:
- Keep renting – possible renegotiation
- Sell to someone else
Think About This:
- If it becomes too tough for tenants to get a mortgage in the future
- If lenders aren’t lending in 3-5 years
- If the economy continues to spiral downward
Guess what? Rents will go up and returns will be higher. Seller financing could always be accomplished at significantly higher prices because of the lack of institutional funding. This is not a bad alternative and here are some figures:
- Buy a house for $75,000 in January 2011
- Rent it for 5 years net rent $750 per month x 60 = $45,000 that has been collected
- In 5 years you sell it for $150,000 at 10% for 20 years = $1,316 monthly income
Heck, you can keep the income and have made a significant amount of money over time. You can also sell the mortgage, or sell a part of the mortgage.
At the end of the day, after acquiring houses in emerging markets you’ve done a few things for yourself:
- Reallocated assets
- Created predictable monthly dividends
- Hedge against inflation
- Tax benefits, depending on transaction structure
- Huge upside no matter how you look at it when you buy right
- Safeguarded and preserved your wealth
We are not alone marketing to prospective tenants and we endeavor to be different. We promote home-ownership, the importance of family and surround ourselves with like-minded people. We are capitalists with a capital C but we sincerely want to help people. That is why we have created the symbiotic relationships with credit restoration people that are tied in with the lenders. Anything worth doing is worth doing with excellence and that is why we strive to be the best at what we do.
Knowing what to buy is important.
Knowing where to buy is really important.
Knowing how to manage properties and people is critical.
Having the experience of dealing with thousands of tenants is priceless.
A word about the property manager’s compensation:
We are firm believers that everyone should be paid on performance and we abhor entitlements and the entitlement mentality. By the way, that’s why property management is so tough in certain cities in the Northeast and Midwest, people have an entitlement mentality. One of our firm’s convictions is, “There is no such thing as a free lunch.”
National ERA Servicing, LLC (NES) is owned and operated by Anthony Salmeri. In short, here are some bullet points:
- He is responsible for his staff and all his expenses
- By contract, he can never mark up a fee or service and/or receive discounts by vendors. If he pays a contractor to do something, that is the only bill paid by an investor with zero markup. If he has to evict someone, he only gets reimbursed for actual fees and adds nothing to it.
- They are responsible for lock boxes, signs – of which they put out about 500 per month, video cameras on vacant houses, utilities turned on and off, real estate taxes and insurance paid on every house.
- If he sells a house and another realty company has the buyer, he pays out of his portion, typically about 4%.
- NES gets paid 10% of every dime collected on a house including option consideration, rent and sales price. 10% of the sales price may seem high, but when you consider the going rate, it’s cheap in comparison. Why? Because, most property management companies mark up every service they provide and have deals with vendors for back door discounts. Not here! Everything is transparent. They are responsible for credit repair and have a huge incentive to select the right tenant and also must compensate a contributing broker or realtor out of their 10%.
Additional team players involved with the Buy Cash Flow Property team are:
First: Todd Breen.
Todd Breen acts as a consultant to the company and has been instrumental in relaying information on marketing, property management software and more. He has been a property manager since the mid-80s and is a national speaker consulting with other property managers worldwide.
Second: Jim Case.
Jim has overseen the property management of over 300 houses, organized the crews and set the systems in place. His experience dealing with rehabs, tenants and creating internal systems is extensive. He has done this in New York, North Carolina, Florida and now Georgia.
Third: RJ Palano.
RJ is the bean counter. Constantly organizing and focusing on the end result: safety, efficiency, and higher yields. Over 30 years of investing and thousands of transactions has given him more experience in housing than most people would ever want.
Fourth: Kim Weed.
As the bookkeeper, she tracks every dime as it goes through the main office located in Tampa, Florida. The entire operation is completed, transparent and is tracked entirely online using Appfolio property management software.
Fifth: Joel Williams, attorney.
Joel has zero to do with management but everything to do with acquisitions. All investor funds for acquisitions flow through his office and are only released upon an accurate marketable title with title insurance.
Risks to Investor
Everything in life has some kind of risk associated with it, especially inaction. People over project, over analyze and in some cases get paralysis of analysis and sit on the sidelines and miss opportunities.
This is the best buying opportunity for houses in our lifetime when we can buy (at my prices) for 1/3-1/2 of what is costs to build. However let’s identify the risk:
- Paid too much – the question is, “according to what?” You can’t really go by comparable sales anymore because 80-90% of the sales are REO properties. You have to measure acquisition price by cash flow using a cap rate and price per square foot. The name of the game is safety first, cash flow second.
- Property Manager not performing – Our investors can choose any property manager they want. NES can be fired at any time for “just cause” but we believe the systems they have in place for tenant selection and accounting to investors are as good as it gets.
- Can’t sell in 3 years – keep renting or use seller financing and sell the mortgage
- House prices drop more – How much more? 10%? 20%? This is doubtful considering the prices that we are buying at today. However, if prices dropped 10% in a year, that loss would be more than made up with cash flow.