Welcome to the next episode of our monthly feature, Investor Insights!
Each month, top 1% producer Eric Workman provides information that real estate brokers need to know about working with investors. In this episode Eric goes through the EXACT calculations he personally uses (and has used for thousands of investments) to determine whether a flip or buy-and-hold opportunity meets his ROI (return on investment) requirements. You can use the same methodology with your investor clients or for your own investment opportunities!
Download the calculation worksheet referenced in the podcast by clicking here!
Please let us know which investment topics you would like covered in future episodes!
Eric Workman can be reached at 630-408-5582 and eric@renovofinancial.com.
Transcript
D.J. Paris 0:14
Hello and welcome to another episode of Keeping it real the only podcast made by Chicago real estate agents and brokers for Chicago real estate agents and brokers. My name is DJ Paris. I am your host, and today is our monthly series, our monthly episode called investor insights. This is a specific special episode we do every month where we talk about investor information. So brokers that are either investors themselves or brokers that are working with investors, and we have our resident investor expert, Eric workman of Lenovo financial on the episode. So thanks, Eric, for for continuing to do this
Eric Workman 0:53
series. My pleasure, happy to be back.
D.J. Paris 0:56
Tell it and just in case somebody’s brand new and isn’t familiar with Eric, Eric, tell the audience about yourself?
Eric Workman 1:02
Sure, well, I guess I can kind of go back in the archives and listen to not only our investor insights, but also the episode that we did, just kind of kind of about my story. But I have been focused specifically on investment, real estate, and really the single family and small multifamily asset class of investment real estate since 2008 2009. Before that, I was in new construction, and not unlike everyone else who was in new construction at that time needed to find another way to make a living. And over the last, you know, nine to 10 years now we’ve we’ve done somewhere in the neighborhood or so about 2000 transactions of properties that we bought, renovated, resold kept, et cetera. And it’s been it’s been my career focus.
D.J. Paris 1:55
Well, we appreciate your your expertise and your willingness to share your your expertise with the audience. So let’s talk about what we’ve discussed in previous episodes. And as Eric mentioned, real quickly before I turn it over to Eric, we do have a couple I think two or three previous investor insight episodes, so you can find those. By the way, if you’re not if you’re listening, and you’re not currently a subscriber of the podcast, you can find us on iTunes just search for keeping it real pod or podcast rather keeping it real podcast on Google Play Stitcher, really anywhere podcasts are served. Also, if you really want to go back and hear Eric’s entire story, which is absolutely fascinating. It’s one of our most listened to episodes, go back through the archives and find the the episode where I interviewed Eric directly. But anyway, so let’s let’s talk about what ground Eric you’ve covered in the past and then talk a short we want to get to so
Eric Workman 2:51
what we what we looked at first. And this you know our our series here has kind of come out of a number of college courses that we do for realtors, on why to work with investors and how working kind of in the investment space can dramatically increase an agent’s productivity and income. And we talked about the overall size of the of the market being billions and billions and billions of dollars of transactions that occur each year in Chicagoland have single family and small multifamily buildings that transact purely for investment purposes. It’s a it’s a huge component of the market. And such a small number of investors take advantage of it, that there’s a there’s just a tremendous opportunity for any agent or broker out there who’s wanting to increase their business to substantially improve what their production and income levels are by working with investors. So we hit on that. We also hit on the different types of investors that are out there, those who buy properties, renovate them, and sell them all the way up to people who who buy properties, and kind of keep them as rental income providers. We went through the different ways to purchase properties, cash, hard money, friends and family, community banks. And then we also went through as an from an agent’s perspective, what’s the best way to kind of run an initial smell test on an investor and see whether or not they are someone who is worth your time? You know, is it going to be worth your time to spend, you know, looking at properties and running numbers and presenting potential deals to an investor or not. And that was that was kind of going through the makings of an investor’s business plan. And really, if they have one or not and what the components of that should be. So we’ve we’ve really touched on a lot of stuff as to why you should work with investors. What the different buckets are and then how you determine if a particular investor is worth your time.
D.J. Paris 5:04
Great. And you know, I again, I do want to encourage everyone to go back and listen to those, those episodes to get that that foundation so that this will be hopefully helpful. And in fact, for today’s episode, this is the first time we’ve done this. And we may be doing this in subsequent investor insight episodes, we have an accompany sort of worksheet or to illustrate some of the numbers that we’re going to be going through. So you can find that in the Episode Notes of the podcast, or if you’re on our website, you’re listening, there should be a link in the on that page as well. So you know, feel free to follow along, obviously, for driving, you won’t be able to but you can download that later. So anyway, I’m going to turn it back over to Eric.
Eric Workman 5:47
Sure. Well, now that just kind of following along in the progression of the series here. Now, now we want to start presenting properties. Right. So we’ve we’ve decided we’re going to work with investors, we’ve met with some we’ve determined they have business plans, we know what kind of properties that they’re looking for, and what their what their returns are like. So now we need to go out and find these good investment opportunities for these investors so that we can transact them. And so what I want to do first is kind of walk through how you calculate profit, and calculate return on investment. Also, commonly heard is ROI return on investment, how you calculate that on a flip. So foreign investor who’s going to buy the property, renovate it, and then resell it. Now, the the calculations that we’re going to use today, and kind of the methodology that we’re going to use is if the investor is paying cash, there’s, there’s a number of other calculations that go into if the investor finances the finances a transaction, but we’ll have to save those for some later episodes. But if an investor is paying cash, and you’re looking at a potential property or potential project, and trying to calculate the profit on it, there’s a handful of things that you really need to set up first. And these are kind of the first four questions you have to ask yourself, and to be used in down the road for running the running the math. And the first is, how long from the day they close and buy the property to the day it’s sold to that to that homeowner, how long is this project going to take? So you can roughly calculate that, you know, a project that’s going to be flipped. From the moment that you put that on the market, I always instruct people to assume that there’s going to be at least 60 days between the moment that it’s put on the market for sale, and that the new person closes on it, and you hand over those keys. So when you look at the project, and you have your your purchase time, your renovation time, your listing time, your closing time, that’s the first question that you need to ask yourself is how long is this project going to take me? The second question? Go ahead. You’re correct. The second question is determining what you think the listing price will be. Now, look, this is why this is why investors work with us, right? Because we’re the market experts. So no matter whether it’s a neighborhood in the city, or a particular subset of suburbs that you focus on, but you’ll know by taking a look at the MLS and your own experience, what what a nicely renovated property could sell for in this particular sub market that you’re looking at. But it’s not actually not actually the first thing that you need to look for. It’s really the second thing you need to look for. The third is determining the rehab budget. And we’re going to have further classes on on kind of helping you with some with some numbers on what rehabs costs. But the third thing is determining the rehab budget. And fourth and final and again, this goes back to your own market knowledge and intelligence is is staging going to be necessary. So before we run any math, how long is the project going to be? What’s the list price? What’s the rehab budget and do you need to stage it? Got
it. And from there now it’s time to start crunching numbers. So when you calculate profit, and again this is on the handout here and it’s very easy to follow on the handout we we kind of use this as the cheat sheet for for brokers whenever they’re going through and running numbers on a particular project but you have the list price that you’ve determined. I always instruct agents to to use the top line of the of the money that you’ll receive on that listing is 97% of the list price. You know the the rough numbers that I gave as if you If you list a property for, if you list a property for 200,000, and it’s in a good market, and you get a strong buyer early who offers you 195, the likelihood is, is that investor is going to take it. So it’s, it’s unlikely that you’re going to get at or above listing, that’s just not the market that we’re in, especially not right now. So I always tell people to figure around 97% of what they think their list price will be. From there, you subtract the selling costs. Now, the selling costs are, are the realtor Commission’s realtor commissions, and then things like title fees, etc. Number a number of times Sure, there’s going to be also potentially some things that come in there with like, you know, fixes that the particular buyer wants with inspections, etc. But for now, we’re going to assume that all that stuff is in good is in good shape. So 97% of the list price less, anywhere between five and 6%, that’s going to be up to you what you charge as a as a listing agent, some closing costs, title fees, surveys, etc. And then we have to get into our carrying costs. And this is where I think a lot of a lot of people will actually get tripped up and forget to include these. But but this is why we go back and we figure out how long we think this project is going to take us. Because you’re going to that investor is going to be paying property taxes and insurance on that property while this renovation is going on wild properties being listed. And then while it’s in escrow. Right, so remove your property, your property taxes and your insurance. And then we’re gonna have to take out our actual investment into the property. So the purchase price, so what the investor paid for it, and then what their total renovation costs will likely be. There’s a lot of things to subtract there, but 97% of list price, minus your selling costs, your commissions and your closing costs, minus your carrying expenses, your property taxes and your insurance, minus the investment, your rehab and your purchase price. And that will give you what the profit is on that particular property. And we need that number in order to calculate what the return on the investment will be for that particular investor. So how do you calculate ROI or return on investment? Well, you take that profit number, and then you divide it by the combination of the investment and the carry costs. So the purchase price, the rehab, and then the cost of owning the property, the property taxes and the insurance through the duration of the project. And that will give you what the investors ROI or return on investment is for that particular project. And now why are those two numbers important? Well, as you go back and listen to some previous episodes of ours, a lot of times whenever you’ve sat down and you’ve worked with an investor, and you’ve gone through what their business plan is, their business plan should be relatively clear on area, style of property, and then minimum yield, as in minimum return on investment that they will accept in order to take the risk to do a project. So when you find as a as their agent, when you find a property that fits the property type, and the location they’re looking for, you now need to be able to run these numbers to say yes, this meets investor A’s, you know, return hurdle, I now need to present this to him because I think this is going to be a great opportunity.
D.J. Paris 13:45
And how would you recommend that brokers get more proficient in estimating some of those expenses? Obviously, there’s some that are pretty simple and the math is quick. Others are, you know, obviously based on experience, and then a lot of variables. Do you have suggestions recommendations of where people can start to get a better sense of what those costs might be to determine though that ROI?
Eric Workman 14:15
Sure, well, like this, this particular set of calculations here, you can actually use this formula to help you determine what the purchase price is that you should be offering on the property. You know, your public data is going to let you know what the property taxes will be sure. You know, their insurance on a rehab project like this is going to run you roughly $900 a year. And then, you know you can take a look at a number of closing statements and those kinds of things are call up. You know, you can call up my guy Mike Murphy at Chicago title and ask him like what what are the closing costs from the seller side going to be etc. So those are all things that just being professional You should be able to get as far as the rehab is concerned, I think we should make that our next episode, where we walk through, you know, how much does it cost to replace a roof? How much does it cost to replace windows? What is a, you know, what is the kind of standard flipped kitchen with gray cabinets and the white countertops? What does that really cost? Right. But we can do that in the next episode to where we kind of walk through what these rough numbers would be to help a broker put those costs together. Perfect. Cool. So now that’s on a flip. Right? So again, you’ve you’ve gone through you found the property, you know that it’s going to fit a particular investors location and property type parameters. And now you know how to calculate the profit on what a flip what what kind of profit that that flip will will generate, and whether or not that’s going to be a high enough yield for an investor to take the risk on. And as we’ve talked about a handful of times, there’s more money in the market these days than opportunities. So when you when you come across a good opportunity, if if an investor in your network isn’t interested in it, there are there are investors out there in the market salivating for good opportunities. So if the numbers work out, you’re not going to have a hard time finding a finding good investor to do this with.
D.J. Paris 16:20
Sure. And what types of ROI Are you seeing these days and the properties that that you analyze?
Eric Workman 16:27
Well, the margins have gotten quite a bit smaller, to be honest, you know, what, what used to be, you know, 20 to 30% ROI is now into the 10 to 17%. opportunities, especially home runs are few and far between, you find a lot of investors in the market these days who to kind of keep the baseball analogy are hitting singles, and they’re happy with singles, it’s a strong enough market that no one’s feeling a tremendous amount of risk in being able to sell, there’s just a lot of compression on the buy side, there’s not a lot of deals out on the buy side right now that are going to create these huge spreads on the sell side. So, you know, properties that you could maybe have bought for 200 In the past, put 50,000 in and sold for 325 You’re now having to pay 235 or 240. For those still put 50,000 in sell it for 325 or 330. And, and the margins are just getting compressed.
D.J. Paris 17:33
Do you do you believe? Do you see any trends that would suggest that will continue? Are the margins will continue to compress? Or do you suspect it’ll remain steady or loosen? In the future? No year or so?
Eric Workman 17:50
Well, you know, if I if I’m right, on whatever my prognostication is, then it would then I should be I should be doing things like picking lottery numbers and the stock market you know, from from a personal from just a personal standpoint, I hope that they widened, right I I’m I’m a value add investor myself, and I own a number of properties and the more opportunity that comes in the market, the more properties that I can buy. That’s kind of the one hand on the other hand, you know, gosh, I I do love living in a strong and stable real estate market where things are more predictable and where there’s just good activity on both the buy and sell side. So all indications economically and in the world right now, I believe point towards a pretty steady time for the next year and a half to two years you know and if we make it that far with things staying steady, then we’re going to be into another presidential election cycle etc. So assuming that nothing goes really crazy in the world, there’s no new wars, there’s no you know, no major disruptions, I think things can stay relatively steady for quite some time. And and in that in that steady you know economy and in that study real estate marketplace there you just you just have to work harder, and you just have to network more and and put yourself out in more places to find more deals.
D.J. Paris 19:24
And also to learn to be agreeable to the singles and doubles right into understand and also to set the right expectations for investors. I guess we this was covered really in previous episodes, making sure that you understand a business or rather an investor’s business plan, as Eric mentioned, understand what their expectations are. So you can actually find them the ROI that they’re looking for are decided to pass on them if they’re, if their expectations are not in alignment with with what you’re you know what you’re finding in the market.
Eric Workman 19:54
There you go. Yep, for sure.
D.J. Paris 19:56
Should we and we can save this for a future episode too. But What would you like to talk about? So now that we have a working, you know, mathematical model for determining, you know what the ROI is? Should we talk about how brokers actually go out? And find maybe different ways that they can go out and find these opportunities? Or do you think we should save that for another episode?
Eric Workman 20:21
Well, I think that’s another kind of part of the whole course also is, you know, where do you find these properties? And how do you come across them? I think we save that for the next episode, where we’re gonna start in the next episode, but for one of the upcoming episodes, and then in another upcoming episode, we’ll also cat wall. So go through how do you calculate cap rate? Because beyond just flip opportunities, you have a tremendous amount of investors who are coming into the market, who are looking to calculate started looking to acquire rental properties.
D.J. Paris 20:50
So sure. So in the next episode, we’ll we’ll hit rental properties. And then we’ll once once we’ve thoroughly educated everyone on flips, rental property calculations, then we’ll get into all right now, what do you do? How do you find these, these opportunities? So I think this is a good place to pause unless you feel there’s anything else we should add before signing off.
Eric Workman 21:15
No, again, just go to the show notes, and go to the website to be able to download kind of our cheat sheet here to be able to help walk you through running these app running these calculations.
D.J. Paris 21:24
And we also should definitely remind everyone that Eric is from Lenovo financial, they are a lender, and they work specifically with investors. And if you’re a broker or an investor yourself, or both, or just one of the two, that then renewable could be a good solution for some of your investment needs. Eric, what’s the best way that anyone can reach out to you and your team?
Eric Workman 21:48
Sure, it’s Eric er, I see at renouveau financial.com. And then I know my cell numbers, always the best way to get ahold of me 630-408-5582
D.J. Paris 21:59
And also visit Lenovo at Lenovo financial.com and learn more about their lending practices and services are extremely well respected in the in the local community here for investors. I Eric has spoken at our firm, he speaks actually quite a bit. And in fact, I do have any upcoming speaking arrangements we can we can promote. I know from time to time you’re out there. Yeah. So
Eric Workman 22:24
we do a lot of work with the with the local Chicago Ria, the Real Estate Investors Association. You know, and I’ve mentioned on here a few different times, I think they’re probably the best source in Chicagoland. And they have a 14 or 15 different meetings a week where they they really teach investors, brokers, anyone who wants to go the the ins and outs of real estate investing, but I am speaking at the meeting coming up on April 9, and then I am teaching their mastery course this upcoming weekend, as well.
D.J. Paris 22:58
And Chicago RIA is absolutely one of the best, if not the best resource. That’s Andrew Holmes is a group. They are the largest in Chicago. And Andrew has been on the show as well, obviously, Eric, and Brie Schmidt, who also occasionally speaks there. It has been featured on our show. So if you’re interested in learning more about a Chicago Ria and seeing Eric speak, you can visit Chicago Ria, which is our eia.org. And they, they have so many events that you can definitely find one that fits you in your calendar and everyone I’ve ever met that is attended those reports back that they’re absolutely worth the time. And you get to meet Eric in person. So even even better. So visit Lenovo financial reach out to Eric, if there’s any questions you have about lending. He his company is very skilled in that respect. And we’ll see you guys in a month. If by the way, as you’re listening, if you have additional questions, and you want us to address those, we were taking those questions now and Eric will answer those on subsequent episodes. So you easiest way to get us those questions you can write us which you can write our producer. So Jen, je n at keeping it real pod.com Is her email address. You can also find us on Facebook, keeping it real pod and our website keeping it real pod.com We have a contact form there. So definitely send us your questions so that Eric can answer those for you. And again, Eric, thank you so much for your time and we’ll see you next month.
Eric Workman 24:36
Awesome. Looking forward to it.
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