The only constant in the world is change. All you have to do is pick up a newspaper or turn on the TV and another crisis has arisen somewhere in the world. I’ve never made money by watching or reading the news or by getting involved in political agendas so I pretty much don’t do that. It’s a result of my 35 years of “hands on” training in the real estate business and also by what one of my greatest teachers, Jimmy Napier from Chipley, Florida told me 30 years ago. He said, “Throw out the paper and turn off the TV, and simply do business.” He also said, “You’re not a tree, you can move” and it only took me 22 years to figure that out and finally hold properties in growth areas.
Too many people look for excuses not to take control of their financial future and it’s a travesty that people don’t take the time to think and more importantly, to take action and move forward.
I’m RJ Palano, a “turnkey” operator in Atlanta, GA. We’ve been through business and real estate cycles over my 35 years in this business and I have come to realize the following: Most people, especially under 30 years of age have no concept about the cycles of boom and bust because they haven’t had the experience of doing business during those time periods. Even myself, when I entered the real estate market in 1977, I had no idea what to expect in the early 1980s when interest rates were hovering around 20%. Then again, when the Resolution Trust Company took over many of the banks in the late 1980s, opportunity was ripe if you had the “know how” and the money. At that time I knew what to do, but was limited with personal funds and credit.
When the market went crazy in the early 2000’s, I was poised in Tampa and buying houses throughout Florida, flipping “as-is” to investors by assigning my contracts with zero risk as well as retailing to the public. We also held a lot of inventory for long term rentals in Florida and that is where the shit hit the fan for me. When house values plummeted, I was under water on mortgages that exceeded house values.
Since that time, we’ve re-engineered our model to become one of the most active “turnkey” operators in Atlanta primarily seeking international investors as well as domestic retirement account holders. These are the people our model has been designed for.
Atlanta July 2015
A lot has changed since we entered the Metropolitan Atlanta area in 2009. At that time there was a plethora of houses being foreclosed on and we had a proprietary concept that trumped the local investors. You see, we modified our approach to sell to foreigners for sales that didn’t require financing and appraisals. Our sales were cash and the buyers were acquiring properties based on cash on cash returns. At that time, we were selling at 10-12% cash on cash returns. Meanwhile, the “locals” that were already entrenched in the market and they never made the paradigm shift that we did and were still trying to sell retail where the properties were difficult to appraise. Everyone should remember when lenders started using distressed sales for comparable sales on appraisals and basically, the appraisers held back the market. We had a field day during those times because really, we had very little competition from the local investors.
Then the funds came and it changed the landscape of the Atlanta market completely around 2012.
At this point, it’s important that I share a few poignant thoughts with you:
- The real estate market is constantly changing.
- It’s local in nature.
- When someone loses, someone else wins.
- Look for the opportunities in the current market space and take what the market gives you.
- The tide comes in every day bringing with it new opportunities.
- The best opportunity comes around every 24 hours.
We immediately started selling houses to the funds and sold well over 100 houses to Colony, a few dozen to Blackstone and we built 73 houses for other funds on lots we acquired from my least favorite lender, Bank of America.
As fast as the funds came, they left!
Currently, there are only a few small funds that are still active in the Atlanta market as the big ones, Colony and Blackstone have left. They left because the opportunities had dwindled to a level that doesn’t support their model of buying 200+ houses per month. As foreclosures have dried up nationwide it becomes more difficult to accumulate enough properties to support the infrastructure those funds have created. I’ve personally observed these funds operations and to write that they had management issues would be an understatement. They had an army of people buying houses and it was impossible to assimilate so many properties under rehab and management at one time.
We have once again changed our approach to the market. We still have all the International buyers, in fact, we have more. Later this month we will have our 12th house buying bus tour with Europeans and early August for Canadians. These buyers perceive the U.S. as the safest place to invest and if you’ve visited their countries and understood their currencies, then you would understand their predicament and our opportunity.
But, the market really has changed again!
We no longer have a competitive edge over the local investors as retail sales to end users (homeowners) are way up and appraisals are mostly back up.
Our approach to sales has changed as we are now looking for specific houses to retail to homeowners in addition to our sales to investors. Thus our price points can be much higher. With retail and investor sales, we seek properties that are in the “first time home buyer’s” price point. In my area, that is from $80,000 to $200,000 and sometimes we will go higher for really sought after areas like Dunwoody.
We’ve also changed our approach for marketing to buy houses as well. With so many small investors competing for the same properties, we’ve had to go off grid where we have very little competition. We’ve tweaked our lead generation system to obtain high quality leads from motivated sellers.
By the way, we solve seller’s problems and while these transactions are win-win, they’re really not! We’re finding opportunities way below market. Just take a look at the following two houses I acquired last week and their price points:
must start. I had to decide how much income I wanted per month, then figure out how many houses I needed to support that income. And then – go out and acquire them. Goals are powerful if you have them but they must be written down and in the forefront of your mind so you stay on track.
Plan your work and work your plan and most importantly – don’t deviate from what you know. At age 60, I don’t risk what I’ve worked so hard to attain for two reasons:
- I am financially comfortable now, and I have a fairly simple lifestyle.
- I don’t want the risk or the stress. It’s no fun chasing bad money with good money and I continue to simplify my life.
And believe me, we all screw up in business in some point and if it was easy, everyone would do it. That’s why most people want and need the security of a job.
We are quickly approaching a somewhat normalized real estate market with prices approaching a real 3% appreciation per year. Of course you make money when you buy at discount but real investors understand the simple benefits of owning rental houses:
- Cash flow.
- Tax write-offs.
- Pride of ownership – Hey, that’s what they used to tell us 30 years ago but I say forgetaboutit. It’s a silly term as the primary reason to be involved in this business or any business is to make money with the goal of attaining financial freedom.
You see, if you can replace your income from that job you have with rental houses – then you’ll never have to work again.
Look I don’t love money but I love what it can do for us. Money gives us choices and one of those choices is lifestyle.
Six years ago it was very easy to get double digit returns on rental houses. Those days are pretty much gone if you’re buying well-located real estate in areas of appreciation.
In a normal real estate market the typical free and clear house will return 5-7% cash flow per year. If you made a great purchase below market value, you can do better. However, most people don’t have the time or skills to locate, negotiate, rehab and manage a portfolio of houses. And I would be the first to say “Do what you love to do to make money and then invest it.” This business isn’t for everyone but everyone must invest their money if they desire financial independence. There are plenty of “turnkey” operators like us that have risen up all over the country to serve the needs of the small investor. Simply use your common sense when working with people and always understand upfront: “What’s in it for them and what’s in it for you?”
I know many people are out there buying “low income housing” and in some cases getting federally subsidized rents via Section 8. Or, just getting high cash flows renting to low income people with jobs. Those returns always look good on paper for a while. Right up until you have lived through a couple of rehabs on those properties. Low income housing equates to intensive property management and long term maintenance headaches. I’ve lived that life a long time ago and I’m suggesting you leave it to the pros that operate in this niche as it requires a special mindset to deal with the issues that never stop coming up with these types of properties.
And what about investors that are discovering Kansas City, Memphis, parts of Ohio and other Midwest cities and areas in the Northeast.
Ask yourself a few questions:
- Who’s moving there?
- Are jobs being created or lost?
- Who are the main employers and is the employment base diversified?
- What percentage of property value are the real estate taxes?
- How expensive is insurance?
- What is the potential for natural disasters?
- Why would someone pay more for this property than you after a period of time?
- Who do you sell to?
- What is your exit plan?
- Does this house fit your goals?
As we look to the future in the U.S. in general, we know our country is changing. As investors, we have to make all decisions based on anticipated changes using our intellect.
One of my mentors is Pete Forunato from St. Petersburg, FL. He’s a national speaker, a big libertarian and he’s never sold a house he’s acquired. I’ve attended his seminars since the early 1980s and Peter is a terrific resource that I still bounce ideas off of today. That finally sunk into me after being around him for 30+ years. It’s impacted me because now – when I buy a house I plan to keep it forever and live off the rents. When you look at buying a house to hold for investment, take a really good look at how that house might look in 30 years, and especially the neighborhood, town and county that house is in. What kind of people will be living there?
The best way you can protect yourself against another downturn in the market is to be cautious borrowing money on a house. Many investors use “hard money” which might not hurt if you pay it back fast. But, when you borrow at high rates and high upfront cost – just know you are transferring your profit to the lender. This is exactly how so many investors bellied up in the last recession. The wise use of leverage can really spike your results favorably and the unwise use of leverage could shorten your life expectancy as an investor.
Lastly, don’t believe everything you hear or read from me or anyone else. Use your head and find advisors you can trust to provoke your thought process. Do what you know! None of us can be experts at everything so do what you do best and let others do the rest. Got a question? Sent it to me and I will give you the best advice I can and/or send you in the right direction.