Real Estate Investment Strategy
Kurt Westfield started WC Equity Group, a real estate services firm in Tampa, Florida in 2008, and has developed it into a full-service brokerage, property management, syndicated fund, and real estate investment platform. He recently sold 20 units in the Tampa market and plans to buy a 100-plus unit apartment project in Jacksonville, Florida. He also owns and operates additional apartment holdings in the Tampa market and his management division manages both single-family and multifamily assets state-wide. We talked with him recently by phone about how to move from a single investment to multiple ones. Following are his edited comments.
Question: When does someone know they’re ready for a second residential property investment if they’ve done well with the first one?
Answer: This typically comes down to available capital. It’s important to be cautious about over-leveraging. But, if the capital is available and the risk is moderate, the second, third and fourth investment properties tend to come quite quickly once the first functions and offers good cash-flow. A lot of this depends on the team(s) in place for absentee investors. In our case, we’ve inherited several nightmare experiences that owners have had and which required repair.
Question: Is it best that the next investment is similar to the first, perhaps, a two- or three-flat or just a single-family home?
Answer: Finding a niche to invest in has always had its benefit, and we find many investors that stick to that profile (whether single-family homes or multifamily under five units, or condos, etc).
Question: How much do you find you need to put down in making this kind of investment? Have you had better luck with getting a mortgage from certain kinds of lenders?
Answer: The golden standard is still 25 to 30 percent down for most lenders; especially the institutional/conventional variety. Cash still remains king, and we find many clients aren’t mortgaging properties but paying cash and avoiding debt altogether. I second this format, as well.
Question: What about a bigger multifamily dwelling—what are signs you’re ready for this investment?
Answer: Taking on a larger multifamily property almost always requires a suitable team to help you perform: property manager, subcontractor(s), lender, project manager, etc. Those investors who are entirely in-touch with the real estate sphere and live local to their investment may be able to handle the day-to-day management individually to cut out some management costs for a higher net income. However, at a certain point, critical mass is realized and it becomes detrimental to operate an apartment building in this manner.
Question: Do you find that the investment properties should all be near one another and near your home or office to save you time?
Answer: If you’re self-managing and requiring (or preferring) that your investments are near your home or office, you are pigeonholing your investment location. If you live in a Class A region and, thus, are required to invest solely in Class A assets, your price per unit will certainly be higher; cap rate lower; and hassle lower. I would recommend investing in opportunity and growth, regardless of area. We assist clients with investing outside their local market.
Question: What about the condition—in need of repair so more of an upside and profit—or in better shape and less time but less headache, too?
Answer: This is a specific question that regularly comes up in our discovery meetings with new clients. In the end, it comes down to appetite for risk. First time investors are likely to want turnkey properties—those that carry lower risk, are renovated, are occupied, and are managed professionally. In turn, the general rate of return is lower as the value has already been absorbed by the party that operated and invested in the repairs. Conversely, a more seasoned investor is open to taking on various levels of foreclosure, distressed, inhabitable, and vacant properties and adding value through renovations, leasing, and marketability.
Question: How do you know when it’s time to hire a property manager or an off-site super or even one who lives on site?
Answer: If you don’t live local to the subject property, a property manager is required. If you live local to the subject property but have other obligations (full-time job/career, family, etc), you need a full-time property manager. Only if real estate (brokerage, management, investing) is your career path and you live local to the subject property should you consider managing your own investments.
Question: How much will this cut into your profit margin? But also how much time will you save?
Answer: Property management fees range from 7 percent to 11 percent depending on size of portfolio, relationship with client, location of property, size of property, tenant demographic, etc. A standard management rate is 10 percent so you can assume that by having a professional management team handle your investment you will have to spend 10 percent for service. However, property managers also add value: leasing at higher rates or rates commensurate with a market, providing liability protection, preserving the investment, etc. Peace of mind is a small price to pay for an adequately managed property. Poor management can turn even a strong investment into a poor one—and do so almost overnight.
Question: How do you judge when it’s time to sell a holding?
Answer: Market timing is such an important factor in determining when to sell. Ideally, holding rental properties is the key to wealth building but many will opt for a shorter hold period and sell in order to get into larger investments or hedge against a market softening. A general rule of thumb is if the sales point allows you to profit, get into equivalent or larger investments, or cash out and move the capital to debt relief (in favor of better net personal cash flow). If all hold true, then a sale is a suitable exit.
Question: Any final advice or tip?
Answer: Be diligent in working with a reputable investment services firm or, if going at it solo, conducting your thorough diligence every step of the way. Investing outside of your local market isn’t as frightening as it sounds and often can yield greater returns as those in California, New York, Colorado and elsewhere are well aware.