Building a portfolio of rental properties using the BRRRR method is hard work. Each stage comes with its own set of difficulties.
First, you have to buy a property at a deep discount. Finding a motivated seller, especially in today’s market, is incredibly difficult.
Then, you have to manage a thorough renovation. Dealing with contractors is never easy.
Finding decent tenants to rent to is a science. You’ll rationalize their shortcomings to start collecting some money!
The refinance process can be more invasive than a colonoscopy. Be prepared to show them every crack and crevice of your personal finances.
When you’re finally done, you’re mentally exhausted. Repeating the process is met with resistance. You want to do it for financial gain, but you’re also kind of like…meh.
?The Hardest Stage
I believe the first stage, finding a property worth buying, is the hardest.
It’s no surprise I spent the first few years of my real estate investing career waiting to join in on other people’s deals. I couldn’t find my own!
We currently own 11 units across 3 properties, but I did nothing to find these deals. They were handed to me on a silver platter by my partners at Rise Properties.
Enough. It’s time to scratch my own itch. I need to take some action and try to source my own deals.
For the next 7 months, I’ll be marketing directly to distressed homeowners to buy their property or help them sell it.
Here’s how I plan on doing it.
With Propstream, you can quickly research and evaluate a property. You can find cash buyers and compare accurate comparable sales.
Most importantly, Propstream allows me to identify properties owned by people who have a specific motivation to sell.
Here are a few examples of those motivations:
My goal is to identify 1,000 homeowners that I can reach out to every month.
Here’s what I’m targeting in order of priority:
1. Expired MLS Listings:
Expired MLS Listings are low-hanging fruit. These are owners that tried to sell their home on the market but were unsuccessful.
Maybe they didn’t get the offer they wanted. Maybe something is wrong with their home. There could be a dozen different reasons their home didn’t sell.
The fact remains: these owners raised their hands to sell their property, but the open market said, “No, thank you”.
This is where my team and I hopefully enter the picture.
The most common objection a seller will have to a “low-ball” off-market offer is, “I’ll just list my property on the MLS and get closer to retail value”.
The rebuttal here is obvious: “How’d that work out for you last time?”
2. Inherited Property:
As a parent, I look forward to leaving property to my child(ren). As a child, I do not look forward to inheriting my parents’ property.
Yes, I realize what a first-world problem that is and I’m a schmuck for complaining about it. But the fact remains, inheriting property is often a headache.
While you could be grieving the loss of a loved one, you’re stuck cleaning out a house.
Every single item is another decision.
- Should I keep it?
- Should I throw it away?
- Should I put it in storage?
- Should I try to sell it?
- Should I give it to another family member?
Once you’re done sifting through every little item, you have another big decision to make:
- Do we keep the house?
- Should we rent it out?
- Should we sell it?
- Should we renovate it?
- Should we move in?
- Would that be weird?
The list of micro and macro problems with inheriting property is endless.
My team and I offer the inheriting party a simpler solution: remove 10,000 decisions by making 1 decision.
Sell the home in “as-is condition” to an investor that has the experience necessary to solve all associated problems in one smooth transaction.
If someone is filing for bankruptcy, they are probably going to be forced to sell their home anyway.
Creditors are like vultures when it comes to bankruptcy. And they want their money fast!
Cleaning up your property and listing it for top dollar isn’t really going to be an option. A cash buyer that can close quickly is going to be their best bet.
4. Vacant Property with Out of State Owner:
Vacant property leads to major issues:
- Pipes burst
- Tiny leaks turn into moldy walls
- Infestations, Asbestos, etc.
A vacant property combined with an out-of-state owner seems like a knockout combination.
Logistically speaking, it’s too difficult for an out-of-state owner to coordinate anything other than an off-market sale to an investor.
5. Seniors with High Equity:
In some states, senior citizens can apply for a property tax exemption.
This means different things in different places. Sometimes it means a discount, other times it means the property tax won’t increase at the same rate as everyone else’s.
Either way, if someone is applying for a property tax exemption, it probably means they are on a fixed income. If they are on a fixed income, they may not be able to handle the rising costs of maintaining an aging home.
Property tax is just one of the many expenses associated with homeownership.
Maintenance and capital expenditure is probably the biggest expense line item a senior citizen with a lot of equity would probably face. Replacing mechanicals, roofs, windows, etc can be very expensive.
We can solve that problem by cashing them out, which in turn would likely increase their fixed income. Then they can live somewhere else without having to worry about the nuisance of homeownership.
6. Absentee Owner:
Absentee ownership basically means the owner’s address is different than the property address.
I would say this is the LEAST motivated list I’m targeting. However, I did tighten the criteria a bit. I only included properties owned by individuals with more than 50% equity. As opposed to corporations (LLCs) with less than 50% equity.
I’m trying to avoid going toe-to-toe with other investors. Instead, I’m trying to find a “tired landlord” operating with a mom-and-pop mentality.
These are the people who drive to their rental properties to collect rent because it’s the only way they’ll get paid.
Once I identify 1,000 properties to market to, I send that list to my mail house, Ballpoint Marketing (Afflink).
They use a mechanical arm holding a pen to write postcards to the owners of these homes. It’s pretty neat.
It’s important to note: we are sending letters to the homeowner’s address, not necessarily the address of the property we are targeting.
Many of the homeowners I’m targeting do NOT actually live at the property I’m trying to acquire.
Ballpoint Marketing offers a series of 7 different postcards with a comic-book theme.
The copy on each postcard speaks to a different pain point.
- Cash offer in 24 hours
- No commissions
- No cleanup
- No renovations
- Choose your preferred closing date
- Local cash buyer
- Final Effort: We want to buy your house!
This 7 card sequence is a brilliant strategy. Salesforce.com says it takes 6-8 marketing touches to generate a viable sales lead.
Here’s a sample of the images:
These really stand out against all the other mail a homeowner receives.
Once the mail reaches the property owner, we expect one of three things to happen:
- 98% will throw the postcard into the garbage
- 1% will call or text us
- 1% will visit our website
We are aiming for a 2% RESPONSE rate. This is less than half of the typical 5% response rate many of the people I’m learning from claim to have.
Of the 10 people that call or text us, we expect 5 of them to tell us to piss off.
We will happily remove properties from our list if the homeowner requests us to do so. Every time we remove a property, we will add a new one to ensure we are mailing 1,000 pieces per month.
Of the 10 people that visit our website, we expect 5 of them to bounce and 5 to fill out a form.
Here’s what I expect the funnel to look like:
- 1,000 pieces of mail sent.
- 980 are discarded
- 20 generate a response
- 10 people take no further action (bounce) or request a negative action (tell us to piss off)
- 10 people want to hear a cash offer
- 1 person accepts an offer
We are aiming for a .1% offer acceptance rate (1 / 1,000).
I want to be candid about one thing. I am terrified of fielding calls from the people I’m sending mail to.
I’ve wanted to start a direct mail marketing campaign for years, but the thought of my phone ringing with an angry person on the other end is debilitating.
So I did the only thing I knew how to do: outsource lead management to an expert in the space.
Enter my partners: Rise Properties. Their contact information is on the postcards I’m sending out.
Their website is at the top of the card. Their phone number in the body of the text. Their name is in the signature line.
I’m just identifying the properties, paying for the mail, and advising from a safe distance.
?Solving Problems With Empathy
The most important attribute to success in this field is empathy.
We are targeting homeowners in trouble. Somewhere along the line, this property turned into a problem for them. They probably didn’t expect to be in this situation, and they’re probably not proud of it.
The last thing we want to do is take advantage of someone, exploit them, or be seen as opportunistic.
We aren’t trying to persuade or trick people into selling their homes to us.
Instead, we want to take a stance as professional problem-solvers:
- Are you behind on your mortgage payments? We can help you.
- Is it becoming too expensive to live in your home? We can help you.
- Are you too far away from your property to turn it around? We can help you.
- You couldn’t sell your property on the MLS? We can help you.
- You inherited a property and don’t know where to start? We can help you.
As I mentioned above, we are hoping to make an average of 10 offers per month (1%). We’re hoping to get 70 offers out in the next 7 months. Hopefully, 7 of those offers are accepted.
Making a quick cash offer comes down to doing some back of the napkin math.
There are three different equations we can apply.
1. The 70% Rule.
After speaking with the seller and looking at the public records we’ll have a good idea of the property’s specifications:
- Lot Size
- Square Footage
- Bedroom Count
- Bathroom Count
Based on these metrics, we can get pretty close to what’s known as a comparable-based ARV (After Repair Value). This is what the property would sell for on the open market if it was updated.
Then we calculate the rehab budget. We encourage the seller to tell us about the condition of the property. How old are the mechanicals? When was the roof last maintained? What type of flooring is in the home?
We assign conservative numbers to all repairs.
- Flooring – $5/foot installed
- Paint – $5/foot
- Roof: $15,000
- Full Appliance / Mechanical Package: $5,000
So let’s say we believe the ARV (market price) of a property is $500,000. And through discussions with the seller, we believe it’ll take $100,000 in repairs to achieve market price.
Our Max Allowable Offer would be: $500,000 x 70% – $100,000 = $250,000.
You might be wondering, “Why 70%?”
The answer is simple. If you need to sell the property, 30% comes off the top of the ARV for 3 major things:
- 10%: Cost of Sale (Commissions, Fees, Concessions)
- 10%: Carrying Costs (Interest, Property Tax, Utilities, etc.)
- 10%: Profit Margin
There are other methods of making offers. I like these less, but they work. One is too conservative, the other isn’t conservative enough.
2. The 2.5x Rule: Take the ARV and divide it by 2.5.
$500,000 / 2.5 = $200,000
My mentor uses this rule to make HUGE profits. He makes multiple 6 figures per flip. He doesn’t do many deals, but what most people make in 4 projects, he makes in one.
3. The 80% + Wholesale Fee Rule: Instead of 70%, you take 80% of the ARV and also deduct a fixed profit of say, $10,000. So in the example above, you could offer:
$500,000 x 80% – 100,000 – $10,000 = $290,000
In this final scenario, you’re offering $90,000 more to the property owner. The downside is you probably won’t be able to keep the property OR flip it. You’ll simply have to unload it to another buyer that has less strict criteria than you.
I don’t want to get into the weeds of wholesaling, but it basically works like this: you get the property Under Contract for $290,000 and then find someone willing to pay you $300,000. You assign the contract to the end buyer and take a $10,000 fee for connecting the buyer and seller.
Escalating offers decrease the likelihood of keeping the property.
As you can see, we take a Goldilocks approach to making offers.
- The 2.5x rule is the smallest offer.
- The 80% + Wholesale fee is the largest offer.
- The 70% Rule is juuuuuust right!
If we can get a property at the 70% rule or lower, we’re likely keeping it. Anything higher, we’re probably sending it off to another cash buyer or not pursuing it at all.
?Investing in Direct Mail Marketing For The Long Haul
Direct mail marketing is exciting because it’s scalable. Once you identify a handful of niche lists that work, you just keep pumping more marketing dollars into it.
It can also be discouraging. I’m expecting the first few months to be an absolute drag. I imagine people calling us screaming, “Take me off our list!!!”
Just like anything else, the trick is to stick with it long enough to see the results.
Not every piece of mail turns into a response. Not every response turns into an accepted offer. But the few that do, will return the portfolio.
I’m expecting to invest $7,350 over the next 7 months in this experiment.
- 7,000 postcards at 95 cents each = $6,650
- Propstream membership at $100 / mo = $700
This doesn’t include my time. I already see myself spending hours on YouTube trying to figure out how to tweak my niche lists to target even more motivated sellers.
However, I truly believe if we can get 1 deal over the next 7 months, it’ll be a net positive. It’ll at least be enough to continue investing and tweaking the system.
I’m looking forward to writing the update in 7 months.
- I’m using Propstream to pull niche lists
- I’m using Ballpoint Marketing to print mail
- I’m partnering with Rise Properties to manage leads
- I’m using a Goldilocks approach to making offers
- I’m keeping the best and wholesaling the rest
SUBSCRIBE NOW TOSUNSHAKSUNDAY
Join my newsletter if you want to learn more about real estate investing, personal finance, health & fitness, and so much more.