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    Real Estate Due Diligence: The Investor's Guide to Avoiding Costly Mistakes
    Real Estate Due Diligence: The Investor's Guide to Avoiding Costly Mistakes
    Real Estate Due Diligence: The Investor's Guide to Avoiding Costly Mistakes
    Ebook222 pages2 hours

    Real Estate Due Diligence: The Investor's Guide to Avoiding Costly Mistakes

    By Joe Torre

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    About this ebook

    What is preventing you from owning a million-dollar real estate portfolio?

    If you are like most people, you have probably faced uncertainty about whether an investment opportunity is as good as it sounds. We have all heard the pitches from the real estate gurus-and they make everything sound good. But how can you tell which investments are worthwhile and which ones are hype?
    In Real Estate Due Diligence, you will learn how to:

    ~Identify which markets are good for investing and which ones to avoid.
    ~Read and sanity-check a property's pro forma financial statement.
    ~Screen and vet property management companies.
    ~Evaluate special asset classes like condos or duplexes.
    ~Account for climate change if investing in coastal communities.

    Real Estate Due Diligence guides you through the process of evaluating residential real estate investment opportunities so you can invest with confidence.

    "I've been investing in real estate since 2004, owning 13 houses at one point. I wish I had this book when I was starting out, as it would have saved me a lot money from deals I should have passed on. It's not hard to make a $20,000 mistake in real estate. If this book helps you avoid making even one such mistake, it's worth it."
    - Scott Timmons, San Jose, CA

    "I see so many aspiring investors stuck in 'analysis paralysis', going to seminars for years and never making an investment! What they're missing is the ability to independently evaluate whether an investment is sound enough that they can take action. This book helps fills that void."
    - Ginger Marphis, President, Reno Real Estate Investors Meetup www.RenoHouseFinders.com

    LanguageEnglish
    PublisherJoe Torre
    Release dateMay 27, 2021
    ISBN9781949642650
    Real Estate Due Diligence: The Investor's Guide to Avoiding Costly Mistakes
    Author

    Joe Torre

    Joe Torre is an investment counselor for a national real estate investing firm. He has almost 20 years' experience as a real estate investor and educator. Joe holds an MBA in Finance from Columbia University Business School and formerly served as an officer in the US Marine Corps. He is not related to the former manager of the New York Yankees.

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      Book preview

      Real Estate Due Diligence - Joe Torre

      Real Estate Due Diligence

      The Investor’s Guide to

      Avoiding Costly Mistakes

      Joe Torre

      Copyright © 2021 by JOE TORRE

      All rights reserved.

      No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, without the prior written permission of the author.

      Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional when appropriate. Neither the publisher nor the author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, personal, or other damages.

      REAL ESTATE DUE DILIGENCE:

      The Investor’s Guide to Avoiding Costly Mistakes

      by Joe Torre

      1. BUS054010 2. BUS050020 3. BUS054000

      ISBN: 978-1-949642-64-3

      EBOOK: 978-1-949642-65-0

      Cover design by LEWIS AGRELL

      Printed in the United States of America

      Authority Publishing

      11230 Gold Express Dr. #310-413

      Gold River, CA 95670

      800-877-1097

      www.AuthorityPublishing.com

      Smashwords Edition

      Dedication

      Geraldine Barry

      (1964 – 2019)

      To Geraldine Barry,

      real estate mentor and friend, who left us too early.

      Acknowledgements

      Writing a book is a lot more work than I expected and would not have been possible without the support of some seasoned investors and industry veterans who provided great feedback and suggestions that added clarity and completeness to the final version. They include:

      Natasha Keck

      Kay Gunderson

      Elizabeth Macken

      Graham Parham

      Michelle Pepper

      I must also thank my proofreader George Mason ([email protected]) and the team at Authority Publishing for guiding me through the process and protecting me from things I didn’t know I didn’t know.

      Of course, any remaining mistakes or omissions remain mine, alone.

      Contents

      Introduction

      Part I

      Fundamentals of Due Diligence

      Chapter 1: Choosing Your Investment Strategy

      Chapter 2: Turnkey Providers

      Chapter 3: Markets

      Chapter 4: Property Management

      Chapter 5: Tenants

      Chapter 6: Neighborhood

      Chapter 7: Pro Formas

      Chapter 8: Property

      Chapter 9: Financing

      Chapter 10: Buying

      Chapter 11: Selling

      Part II

      Special Situations

      Chapter 12: New Construction Homes

      Chapter 13: Condos

      Chapter 14: Small Multifamilies (2-4 Units)

      Conclusion

      Appendix A – Glossary

      Appendix B – List of Resources

      Introduction

      If you follow the guidelines in this book to the letter, you will never buy an investment property in your lifetime. That’s because no single investment property will check all the boxes and provide the ideal investment that we all want: One that both cash flows and appreciates, one that was purchased below market, has no risk, has tenants who never leave, and makes you money until the end of time.

      In the real world, there are tradeoffs. For instance, you may want a brand-new property in a good school district, but that property will likely be too expensive to cash flow. Or you may want a property that offers great cash flow but is in a less-desirable neighborhood with more crime and lower-quality tenants.

      You can’t have it all, and part of this book is about understanding the tradeoffs and deciding where and how you want to place your bets.

      Why I Wrote This Book

      I work full-time as an Investment Counselor for a real estate investment firm, and I’ve seen a lot of investors make a lot of mistakes over the years, including me. It’s easy to make an expensive mistake by missing one small detail, and no investor can be aware of every potential pitfall. Conversely, I’ve seen investors who suffer from analysis paralysis: They’re paranoid about what key factor they might be missing and so they read books and attend seminars for years but never pull the trigger.

      Each chapter in this book covers a large enough topic to warrant a book of its own. While I can’t include everything there is to know about each topic, I believe provide enough to enable you to make your own investment decisions and ask the right questions of the people you work with.

      My goal is to tell it like it is—the way I’d want someone to tell me if I were starting out. This book provides the analytical tools for single-family home investors like you, so you can get past analysis paralysis, do proper due diligence, and confidently build a portfolio of investment properties that helps you meet your financial goals.

      Focus

      There are a lot of investing strategies out there: flipping houses vs. buy-and-hold, new construction vs. existing, and others. For the most part, this book is for buy-and-hold investors, whether buying on your own, through a turnkey provider, or through a new home builder.

      How to Read This Book

      Throughout the book, you’ll see little icons or sidebars that add color to the discussion, e.g.:

      Exception

      The principles outlined in this book are sound but should not be applied robotically. As an investor, you should incorporate general principles but be aware that there may be exceptions to the rule, which if recognized, will enable you to take advantage of opportunities other investors pass up. I will give examples of exceptions to the rule, so you can feel more comfortable bending the rules in real life.

      War Story

      I will occasionally offer a real-world War Story to illustrate potential pitfalls, based on my experience.

      Tip

      Periodically I’ll insert a Tip that will help you invest smarter or with less risk.

      Extra for Experts

      Sometimes I will delve into a topic in more detail than is needed by most readers; I will identify these tangents with an Extra for Experts heading. The reader can choose whether to skip over these sections or not.

      Dogma Alert!

      In general, I attempt to stick to the facts and leave my personal opinions and biases out of the discussion, but sometimes I feel the need to add my two cents. When I deviate from strictly factual presentations, I will warn you with this symbol: Dogma Alert! You’ll then know that what follows is my personal opinion only, and not to be taken as gospel truth. Caveat emptor!

      Glossary

      There are many terms used throughout the book (like turnkey). Their definitions can be found in Appendix A – Glossary. I recommend you scan that section before reading the book.

      A Word about Pronouns

      The English language has no gender-neutral pronoun for a single person, as some other languages do. English requires authors to write he or she or s/he when referring to either or both genders. I find this awkward and unwieldy.

      Throughout this book I’ll use the pronoun that, in my experience, is the most common for the context. For example, most electrical and plumbing contractors I’ve met are men. Actually, all of them were. Most property managers and leasing agents I’ve met are women. So when discussing these various players in the real estate world, I will be using he or she according to my experience.

      Legal Disclaimer

      Finally, to appease the attorneys, I must state that the views expressed in this book are those of the author alone, and do not in any way constitute investing advice. I don’t know you or your situation, so I can’t presume to offer you advice. Everyone has unique circumstances, goals, and risk tolerances, so you should consult your CPA or financial planner to get advice tailored to your unique situation. All investing involves risk and reading a 200-page guide on the subject does not remove your risk.

      Joe Torre

      February 2021

      Part I

      Fundamentals of Due Diligence

      Chapter 1

      Choosing Your Investment Strategy

      The first thing you have to do as an investor is decide on your investing strategy and your investing goals.

      Investing Models

      There are numerous ways to invest in real estate and all have their pros and cons. Here I’ll discuss three of the most popular investing strategies for building your personal portfolio:

      Flipping

      Buy-and-hold through the BRRRR model

      Buy-and-hold either through a turnkey provider or new construction

      Flipping

      Flipping has been made popular in recent years by some popular TV shows. It basically involves buying a house in need of repair (fixer-upper), either personally renovating it or hiring work crews to renovate it, and then selling it for a gain.

      Typical numbers would look like this: You buy a distressed property for $200,000, put $50,000 in renovations into it, and sell it for $300,000 for a gain of $50,000. The gain is usually less than projected because you’ll have to pay holding costs like insurance and property taxes, or the rehab might cost more or take longer than you planned, or you may have vandalism. But even if you clear only $30,000 per deal, and do one deal per quarter, that’s still $120,000 per year.

      Keys to Success

      Buy the worst house in the best neighborhood.

      If you can buy a C property in an A or B neighborhood, then renovate the property to the standard of the neighborhood, you can achieve outsize returns. The key to this strategy is to have good sources of inventory: bank foreclosure departments, wholesalers, or bird dogs (people who look for and identify properties with investment potential).

      You need access to private lenders or hard-money lenders, as banks will not lend on distressed properties and you’re not going to be holding it for 30 years anyway.

      Solid, reliable work crews that don’t rip you off.

      Operating in a market where prices are rising is a big help. If your rehab budget has a cost overrun, rising home prices can help cover your overages.

      Pros

      Potential for healthy gains.

      Good for investors who are handy.

      Cons

      High risk: What you lose on one bad deal can erase what you gained on several good deals.

      Inventory is hard to come by and you’re competing with many other flippers in most markets.

      No more free time: You’ve basically taken on a full-time job.

      The BRRRR Model

      Another strategy that’s become popular in the last few years is called the BRRRR model, which stands for Buy, Renovate, Rent, Refi, Repeat. The following example is how it would work ideally.

      Let’s say you start out with $80,000 in your bank account. You buy a fixer-upper for all-cash for $60,000 and put $20,000 of renovations into it for a total all-in cost of $80,000. You then rent it out to a tenant and, after six months, you refinance the house with a conventional lender.

      Here’s the kicker: You didn’t just pick any property; you strategically picked a property suitable for upgrading. Maybe you bought a three-bedroom, one-bath house and converted it into a three-bedroom, two-bath house, or a four-bedroom, two-bath house.

      The fact that you added a bedroom and/or an extra bath is key, because after the renovation, your house is no longer valued at $80,000; it’s worth $100,000 because you strategically upgraded it and increased its value.

      Your lender only expects you to have 20% skin in the game (like a 20% down payment), so when you refinance, you get your original $80,000 back! You started with $80,000, and you ended with $80,000, plus an upgraded house! It feels like you got the house for free, but in fact you simply added value to it.

      Then you take your $80,000 and do it again with another property. If you can do this once a year, you can churn your original $80,000 into a portfolio of multiple properties over time.

      If it works as planned, BRRRR can be a powerful tool for building your wealth. But of course, things don’t always go as planned. Maybe the After-Repair-Value (ARV) is only $90,000 so you can only get $72,000 (80% x $90,000) back from your refinance. Even then, you’ve got forced equity in your property and can add in some additional funds if needed to do your next deal.

      Tip

      It helps if you’re operating in a market that’s appreciating, because a rising market will help force the appreciation you’re counting on to get your original capital back.

      Buy-and-Hold

      The buy-and-hold investing strategy is when you buy a property, either off Multiple Listing Services (MLS), from a new-home builder, or through a turnkey provider (more on that in the next chapter) with the intention of renting it out for a number of years or perhaps indefinitely.

      This approach doesn’t take as much time as the others and is great for people who have busy day jobs already and prefer a less aggressive and work-intensive approach.

      Exhibit 1.1: Summary of Most Popular Business Models

      Table Description automatically generated

      Investing Goals

      Broadly speaking, there are three types of real estate markets you can invest in. Your first task as an investor is to decide what your primary goal is and, by extension, which of the three market types best meets your needs. The three types are cash flow markets, appreciation markets, and hybrid markets.

      Appreciation markets are those that have high price appreciation but generally have either negative cash flow or low cash flow. Most of California falls into this category, as does Seattle, Boston, Manhattan, and other high-priced markets. These are good for investors with high-paying jobs and a longer time horizon who want to grow their net worth over time.

      At the other end of the spectrum, cash flow markets give you

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