Hands-on investing: Learn how real estate investor John N. strategically grows his portfolio

by Team Stessa, posted in Investor Stories

The Stessa Investor Stories are monthly spotlights about real estate investors who are building and scaling their businesses. In this month’s interview, real estate investor John N. talks about why tenants are key, and how he’s using a two-prong hands-on investment strategy to grow his family’s portfolio.

Real estate investor John N. and his family currently own 5 single family and 2 duplex rental properties in Southern California. John is strategically scaling up his family’s real estate portfolio by buying larger 5+ unit multi-family properties using a two-part diversification strategy, focusing on tenant satisfaction, and keeping property management in-house.

Given John’s experience, we asked him a few questions in this month’s investor profile. Here is what John had to say about his real estate investing experience in California.

1. Tell us about your real estate background – why you started investing in real estate, how long you’ve been doing it, and how it fits your lifestyle.

Answer: From a young age, I’ve always been fascinated with investing in different asset classes. I purchased my first stock at a young age when my grandfather took me to downtown San Diego to meet with his stockbroker and I invested $250 (a lot of money back in those days!) During college I interned at Merrill Lynch to learn about the stock market.

My interest in investing later expanded into real estate as I learned about the benefits of short-term cash flow, long-term price appreciation and investment property tax benefits. I became actively involved in real estate investing in my early 30’s when I went into family partnership with my grandparents and my parents and bought my first property.

Currently, I consider myself a “part-time real estate investor” because I have a full-time career in management consulting. I support my family’s investment properties in my spare time and will continue to manage my family investment properties on a part-time basis until a point when I can safely retire and live off the rental income.

2. What does your real estate portfolio consist of today?

Answer: We own 7 properties in Southern California, a mixture of single family rental homes and duplexes. We recently completed a 1031 Exchange with one of our duplexes, and are in escrow with a 5+ multi-family property in Inglewood, CA where the new Los Angeles Rams/Chargers stadium is currently being built.  Our geographic target market goes from Los Angeles south to San Diego. Over the past 5 years we’ve been proactively divesting of poorly performing properties in stagnant neighborhoods and purchasing replacement properties in desirable, vibrant, growing areas. Our current purchase in Inglewood, CA is an example of how we’re moving into gentrifying areas of southern California with long-term price appreciation and rising rental income potential.

Real estate investor stories

Redondo Beach, CA

Real estate investor stories

Redondo Beach, CA

3. How do you plan on expanding your portfolio from here?

Answer: Having good tenants is the key to our success. My brother and I handle the day-to-day management because we find that managing the properties ourselves creates a better, more personal tenant experience than using a third-party property management company.

Currently, we’re scaling up our real estate portfolio by purchasing multi-family properties with 5-units or more to increase occupancy density and boost cashflow. This property size lets us be hands-on while growing our portfolio at the same time. With these bigger deals of 5+ units, we’ve begun working with commercial lenders. They’re usually able to offer more creative loan terms for bigger investments.

4. What investment strategy are you using to scale up your real estate portfolio?

Answer: We invest in locations near our homes in Los Angeles, San Diego, and the surrounding submarkets. These are the areas we’re familiar with, and we have a solid understanding of the demographics and socioeconomic conditions of each area. We know the employers, local services, and schools, and this helps us determine appropriate market rents.

As I assess investment properties for purchase, I’m typically looking for immediate value, long-term appreciation and location, location, location. We diversify our real estate portfolio by investing in two types of property: workhorses or cash cows for short-term cash flow, and “rising stars” for long-term price appreciation.

Workhorses generate dependable monthly income with little or no debt service and are in decent locations with moderate appreciation. Rising stars give us growing monthly income – possibly with moderate or high debt service – but are in great locations with high long-term appreciation potential.

By diversifying our portfolio with these two property investment types, we’re generating positive short-term cash flow with our workhorses and long-term value with our rising stars.

5. Why did you start using Stessa, and how do you use Stessa to track and manage your properties now?

Answer: I got tired of trying to track my rental property information manually using multiple Excel spreadsheets. One night I did a Google search for “rental property management software” and was lucky enough to find Stessa.

With Stessa there’s almost no learning curve at all. I began by entering the key property data and tenant information into Stessa from all of my Excel files. After that I was able to immediately begin using the Stessa dashboard to analyze and drive my decision-making based on that information.

Stessa is a great one-stop shop. From day 1 I was able to use Stessa for all of my real estate investing and property financial reporting needs.

6. If you had to name one real estate deal or success as your best one, what would it be and why?

Answer: The Southern California real estate market is highly competitive. By thinking outside of the box, we found a seaside duplex in a highly desirable location with incredible ocean views. Other investors passed on the deal because the property had one vacant unit and a poorly structured lease on the other unit – but we recognized the opportunity the property offered.

By renegotiating the lease we increased the rent 25%. With the vacant unit we’re capitalizing on the sharing economy by renting out the individual bedrooms, similar to what WeWork is doing with coworking office space.

In the future we plan on improving the property by adding additional square footage and possibly an ocean view deck to the existing property to improve rental income. Another alternative is to build two new townhouses on the property that should yield a 100% ROI when everything is said and done. Again, location, location, location was key to this deal given the smashing ocean views!

7. Everybody makes mistakes. What’s the biggest mistake you’ve made in real estate investing and what did you learn from it?

Answer: Tenants can make you or break you. A lot of beginning real estate investors – including myself when I first started in the business – make the mistake of being more concerned with minimizing the amount of vacancy between tenants than they are with finding and keeping great tenants.

It’s critical to take the time and vet potential tenants who will take care of your property and pay their rent on time. Renting to the wrong tenant can end up costing you literally thousands of dollars in unpaid rent, legal fees, and eviction costs.

8. Looking back, what’s the one thing you wish you’d known when you first started investing in real estate?

Answer: I would have purchased more investment properties earlier in my real estate career. Real estate appreciates year-over-year, so the sooner you buy and hold and start growing your real estate portfolio the better off you’ll be. The bottom line is that real estate is probably the #1 investment vehicle for both long-term appreciation and financial security.

9. What’s your favorite book on real estate investing?

Answer: I prefer real-life, boots-on-the-ground research on real estate investing rather than reading about it.

I keep my finger on the pulse of real estate market trends in my target market by constantly looking at online websites like Zillow and Redfin. I’m on everyone’s email list so when a new potential investment hits the market I’m notified immediately.

10. What’s your favorite thing about Stessa?

Answer: It’s difficult to choose one favorite aspect of Stessa because it makes my life and real estate investment business so much easier!

First, it’s extremely easy to get set up with Stessa, start entering information, and using the Portfolio Overview to display your properties. Next, because cash is king in real estate, I love the way the Net Cash Flow by Month Chart illustrates my income and expenses month-over-month.

Stessa cash flow chart

The Transactions Section for tracking various income and expense entries and assigning them to the correct property is the perfect tool for reconciliation.

Finally, the Property Donut gives me a comprehensive view across all of my investment properties by showing rental income, total square footage, and market value. Stessa is a valuable online investment property tool that lets me use data-driven decision-making to manage my family’s real estate portfolio.

Strategically growing a real estate investment portfolio

With hands-on investing, scouring markets he’s familiar with for opportunity, and automating his property financial management system with Stessa, John N. and his family are successfully growing and diversifying their real estate investment portfolio in Southern California.

  • Start with smaller rental properties and scale up in markets you know
  • Build your real estate portfolio with a mix of properties that deliver immediate positive cashflow (workhorses) and properties with long-term price appreciation (rising stars)
  • Tenants can make you or break you, so find great tenants and keep them
  • Automating right from the beginning avoids missed opportunities