How this investor built a single-family rental empire virtually

Growing up, Katy Klesitz was surrounded by real estate as her father, Scott Agnew, established some of the first Keller Williams’ offices in Utah and Arizona. As the years went on, Klesitz said she developed an “affinity” for real estate and eventually earned her real estate license at 25.

“I finally got my real estate license when I was in Arizona, and I just kind of naturally gravitated towards working with investors as a real estate agent,” she told Inman. “I would work with out-of-state investors to buy rental properties or fix-and-flips in Arizona.”

“Then I met my husband, moved to California, had babies, and let my real estate license go in Arizona,” she said with a small chuckle. “After having kids, I was like, ‘Dude, I need to go back to work’ [because] my brain was going to mush.”

Klesitz decided to build upon her previous experience as a real estate agent and establish Katy & Frank Home Buyers with her husband, Frank in July 2019. Although the couple lived in California, they decided to build their single-family rental portfolio in Omaha, Nebraska — a burgeoning secondary market with affordable prices and plenty of opportunities to scale — and conduct business virtually.

“We had been purchasing one to two rental properties a year in Omaha since we’ve been together,” she explained. “We were buying all those properties traditionally off the MLS using a real estate agent, having to put 20 to 30 percent down because they were investment properties, [getting] commercial loans on them and all that stuff.”

Klesitz began researching the best way to scale their portfolio and bought a mailing list of homeowners who were in pre-foreclosure, behind on property taxes, amid a divorce or bankruptcy, inherited a home or had recently pulled their home off the market.

“These are homeowners who I knew would be receptive to a fast cash offer to sell now,” she said in a recent press release explaining Katy & Frank Home Buyers’ history. “I focus on helping the Omaha homeowner whose home might be dated or needing repairs, so they know they won’t be able to get full price on the traditional market.”

“I’m very transparent – if they can get more money elsewhere, I tell them,” she added.

Once the homeowner expresses interest in a deal, Klesitz sends one of her team members to tour the home, take pictures and video of the property and neighborhood, and make notes about any needed upgrades and repairs. From there, Klesitz begins crunching numbers, including her offer, renovation costs, refinancing costs and what they could reasonably rent the home for.

“I buy them off-market for probably about 60 to 70 percent below what someone could sell it for on the MLS because most of them need work and repairs,” she said.

From there, the closing process could happen within a week; however, some homeowners ask for a longer timeline, especially as the COVID pandemic began taking off.

“It really depends on the homeowner,” she explained. “[With COVID], at first people were freaked out.”

“They just still didn’t want anyone in their house, but we offered a solution to a lot of people that needed to sell their house but didn’t want tons of people in and out of their house,” she added. “[We’re] one buyer, you get a cash offer, and we solve the problem of them having to spend any money with contractors to get the house ready to sell on the MLS.”

Klesitz said having a virtual-based business has helped her team thrive through the pandemic, since her property manager, transaction manager, construction coordinator and other team members do most of their work online with little-to-no physical contact with the homeowners.

“We made it quick and convenient, so they didn’t need to have ten people moving through their house,” she continued. “Around June or July, people started to be a little more open to at least letting us their home, and we’ve actually bought homes from three or four people that have had COVID.”

“They were happy to be done with the sale of their home and not have to deal with lots of inspections and appraisals,” she added.

The Klesitzes have bought 24 homes over the past year, with each deal taking an average of a month to complete from close to rehab and finding a tenant. However, Klesitz said refinancing has been the most difficult part of the process as banks have tightened standards due to COVID.

“The big challenge for us is the refinance time,” she said. “We ideally would like that to take four weeks, but sometimes it takes four or five months, depending on the banks and their appraisal processes.”

To cover purchase and repair costs, Klesitz gets a line of credit from a private lender. From there, she’ll work with a local bank to get a cash-out refinance based on the home’s appraisal with repairs. Since she purchased the home for 60 to 70 percent below market, Klesitz’s out-of-pocket costs will be $4,000 to $5,000. Sometimes, based on the appraisal or the bank’s lending policies, she’ll even get a few thousand dollars back.

“Right now, most things require at a minimum of a 1.25 debt service coverage ratio (DSCR),” she said of what banks are looking for. “So you want to make sure your portfolio always averages over that number, and ideally, you want it at a 1.5.”

“The DSCR is your net operating income divided by your expenses,” she added. “My net operating income is my rent, and then my expenses are my principal interest, taxes, insurance. Then you got to calculate vacancy and property management, which should both be at an annual minimum of 5 percent.”

She continued, “You have to constantly be looking for other banks and always have multiple banking relationships when it comes to refinancing because a bank’s portfolio and what they can handle can change on a dime.”

Klesitz said she makes a profit of a “few hundred dollars a month” on each of her properties, which she rents for an average of $900 per month. Her lowest-priced property goes for $500 per month, while her highest-priced property goes for $1,595. She determines the rent based on “the one percent rule,” which states an investor should be able to rent a property for at least 1 percent of the sales price (e.g., $100,000 home yields $1,000 per month rent).

Although she could rent the homes for more, Klesitz said the affordable pricing works in her favor as her vacancy rate is nil, as renters are unlikely to find comparable single-family rentals at the same price in Omaha.

“All of our rents, we typically price them about $100 below market,” she said. “So we get tenants that stay forever, and we hardly ever have any vacancies, and we’re also really good landlords. If something breaks, we fix it. We don’t nickel and dime.”

This article was written by Marian McPherson from Inman News and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.