The Pathway To Success
The Best Practices of Real Estate Property Investing by Kurt Carlton“Be fearful when others are greedy and greedy only when others are fearful.”
-Warren Buffett
Foreclosure Property investment has become a taboo topic in some corners of the investment horizon. This does not mean that investing in real estate is a bad option; it may merely mean that at the moment the media swing is not in favor of this investment arena.
The most important step for any individual that may be looking to get started in this niche market is proper preparation. This avenue of investing is not like buying a CD or a bond and putting it in your bottom drawer. If you buy a home and check on it a year later it will not provide you with a small return and no headaches. On the other hand if you tend to it and can play an active role in nurturing the home it does stand to provide far greater returns on your money and opens a lot of doors to access tax benefits. Real estate foreclosure investing is not for everybody, but before you decide to turn your back on it just remember that statistics show that 80% of the millionaires in the US made their money in real estate, and the best time to get in is when everyone else is heading for the exit.
Each stage of real estate investing needs to be carefully scrutinized and the first step to building a successful, sustainable business is deciding what your goals are. The reason for deciding to invest in property can vary enormously from person to person. The objective of most investors is usually one of the two following.
1. Cash Flow – Renting out property is a proven method of generating a passive income. Rental properties can provide positive cash flow, which can be defined as a return above the PITI (principal, interest, taxes and insurance) payment. The goals of this style of property investment are to create a revenue stream monthly, to receive tax breaks as is applicable to each individual (having a good real estate accountant is important), to pay down the mortgage through the life of the loan, and to capture the appreciation of the property over the length of the note until the property is eventually owned free and clear. The benefits of this are realized over a long term and while this approach is more passive than the second style of real estate investing, it is still going to require attention. The cash flow approach can normally be associated with a part-time investor as there are no strict time frames relating to it. It will not involve the same time commitment and resources as a resell goal will.
For this approach, a good property manager is something that can be a great tool to have in your work belt. Locating an experienced company that has a proven method of qualifying long term and credit worthy tenants can dissipate the common headaches associated with being a landlord such as maintenance issues and evictions.
Here’s a good example of an investment goal for building a rental portfolio to provide net worth and income for future retirement.
10 year Goal
Acquire, rehab, and rent 40 distressed properties
Action Plan
• Acquire 1 property every 3 months, total 4 per year for 10 years
• Finance with hard money loan. Repair, rent, and re-finance properties at or below an 80% LTV (Loan to Value)
• Refinance at 7% interest, 15 year fixed term
• Reinvest as much cashflow as possible in the form of extra payments to accelerate loan pay-offs.
After only ten years the investor would have captured $2,368,983.20 in equity while maintaining approximately $13,000 in positive cashflow per month. On the 11th year the first 4 houses the investor purchased would be owned free and clear and cash flow would begin to increase substantially. After twenty years the entire portfolio would be paid off and would increase the investor’s net worth in real estate to $5,445,840.51 with monthly cashflow of over $54,000! Not to mention enormous tax advantages!
Formula based on 2% annual appreciation, properties worth $100k purchased with 20% equity, monthly rents equal to 1% of value, and a cashflow reinvestment of $150 per month per house.
2. Resale – this is a more labor intensive method of investing in
Real estate and the returns are immediate. The investor in this example will buy a property that is discounted at a price point which will allow the buyer to purchase, repair and resell the property in the shortest amount of time possible for a profit. The decision to take this approach is usually based around a lifestyle change and this will become a full time occupation for the individual due to the heavy time investment that is required to make this approach successful. The success of this technique hinges on several factors and the first process involved is always going to be locating the right property at the right price. If the property does not have enough equity at the time of purchase the success of the transaction will likely be limited to providing a return of only education and experience. The next major obstacle is funding. Most lenders will not deal with these types of transactions. Conventional lenders will frown on these deals and the loan will rarely pass underwriting. Houses that need repair are not considered good investments by banks and with recent conditions that have occurred in the marketplace they do not accept loans on homes in disrepair. Finding a good funding source is essential in closing on the deal and without a reliable funding partner deals are lost and relationships are destroyed. Once the property has been purchased it is imperative to conduct the repairs properly and keep to the budget. It is all too common to see the budget increase as build-outs are underestimated due to inexperience or oversight. Once the property repair is finished selling the home is the final task. Marketing for a buyer yourself or using a realtor to sell the finished article is a personal decision but it is one that needs to be carefully thought out and researched to assure the best return.
Below is an extensive guide to the four basic steps of real estate investing and the top ten most costly mistakes real estate investors tend to make.
The Fundamental Four Fs of Real Estate
Find
Once a real estate investor has a desire and the financial capabilities to invest in real estate the first step is obviously finding a high-quality investment project. There will always be situations where a seller is motivated to sell a property at a great discount. Sometimes a property in serious disrepair is inherited by an individual who doesn’t have the money, experience or desire to rehabilitate the home, and they would be ecstatic to find a real estate investor that would help them with their problem so they can get on with their life. Other times people lose their homes to foreclosure and the bank wants to liquidate the property as soon as possible and recover as much of the loan amount as they can. There will always be hundreds of different situations that will create opportunities to find deals. We will go into detail about the best practices to evaluate and choose the best investment projects later but first we will cover the four basic avenues of finding properties. The one you decide is best for you will be based directly on the amount of time you have available and the level of experience you have with real estate investing.
Avenues of Acquisition
Realtors
Everyone knows a Realtor. Some Realtors are better than others. There can be a huge gap in the level of professionalism, work ethic, and expertise from one Realtor to the next. Be aware that a lot of Realtors are accustomed to working with owner occupant buyers and have little experience or appetite for properties sold AS-IS and in distressed condition. Be very mindful of a specific Realtor’s clientele before considering working with them, if they spend their day driving around with families in their car looking at beautiful retail homes then they will not be of much use to you in finding investment quality homes. However, do not discount these ‘retail’ Realtors entirely. You should get to know several of them, as they are exactly the person you need to sell or rent your finished product down the road.
The kind of Realtor you want to find to locate investment properties is one that deals only with investors. These real estate agents will understand the principals of investing and have the stomach for walking through ten or twenty houses that are close to falling down from disrepair. For brand new investors, finding a Realtor like this is usually a good idea as long as you have an abundance of time available to look at lots of properties and make tons of offers. Real estate agents will generally only have access to properties listed on the MLS, as they make their living collecting seller’s commissions, and this means most of the properties you will see will be newly listed bank foreclosures, but you could also come across some time-consuming and unreliable short-sales, and some incredibly complicated estate and probate sales, if you have little acquisition experience you would be well advised to stick primarily to the bank foreclosures in the beginning. The process you will follow to purchase homes listed on the MLS will be first setting up a showing and viewing the homes the Realtor has selected to show you. Usually you will walk through about 10 homes and select three you will make offers on. The other seven will be ones you’re not interested in due to situations like major structural issues, black mold, or maybe the DART rail goes right through the backyard, etc. Be prepared to spend 8 hours per day engaged in this type of activity for at least a month before you have an accepted contract that actually works out. Also be prepared for sellers today to have almost no interest at all in accepting your contract if you are using conventional financing and/or require a 30-45 day close unless your offer is very close to the retail value of the property. You will generally only obtain the discount you need if your offer is all cash or you can close in a week or less. Most new investors do not realize the level of competition in the market for high-quality investment homes, the speed at which the truly good ones sell, and the difficulty and time involved in actually contracting one. Although working with a good investment-based Realtor is a great way to get your feet wet and learn the basics, like evaluating property values and the cost of repairs, if you have the time to invest.
Professional Acquisition Companies
Every large real estate market will have generally one or two major acquisition companies, which specialize in the acquisition of government or bank owned assets which they break up and sell off individually. These companies only deal with real estate investors so the properties they offer have already been filtered down to only include investment-quality homes that can be purchased at good discounts. The properties they offer generally sell much faster than properties listed on the MLS even though they are not available to the general public, mainly because they are priced correctly upon release. Properties are usually available for no more than 12-24 hours in most instances.
The main disadvantage of purchasing a property through an acquisition company is that they will have more rigid policies. Do not expect an option period for inspections, any contingencies whatsoever regarding financing, or any real flexibility on the required closing date, although you can expect them to guarantee clear and marketable title to the property. They will request a down payment at the time of contracting usually in the realm of $3,000-10,000 which is refundable only in the event of title issues.
The biggest upside to buying from an acquisition company is time savings. You can expect the properties to be of good investment-quality and to sell on a first come, first serve basis, so they are available immediately. Unlike finding properties from the MLS that are available to every Realtor in town, you don’t have to waste large amounts of time submitting countless offers and waiting days for a response just to find out a handyman owner-occupant outbid you by paying full retail. Even if you are a new investor and are working with a Realtor you should also look into aligning yourself with an acquisition company. Because the properties are already prequalified to meet investment standards, you will spend very little extra time to greatly quantify your investment options.
Also since these companies tend to operate on a volume level they usually rely heavily upon repeat business and investor relationships similar to the way a Realtor would. Due to their size and exposure in the industry, acquisition companies can usually offer a wide array of resources and contacts to help investors achieve success after the sale. They will almost always have references for proven property managers, reliable contractors, hard money lenders, and since they are generally licensed real estate brokers too, they will usually list your rehabbed property free of charge and save you half of the sales commission on the back-end when you sell or rent your house.
Acquisition companies can provide a great source of properties for both new and seasoned investors alike, however due to the speed at which these companies operate this avenue is only recommended for serious investors which are certain they want to be involved in real estate and can make quick and decisive decisions.
Flippers
There generally exist a large handful of flippers in every market. These individuals are also referred to in the industry as property wholesalers. They generate leads through various marketing efforts such as letter campaigns, internet websites, mass emails, etc. Flippers specialize in locating motivated sellers that are in pre-foreclosure or other desperate situations. Their goal is to contract the home and assign the contract to a real estate investor for a marginal fee. The real estate investor will be the end buyer for the property and the flipper will collect an assignment fee at closing. Most flippers are usually small professionals who offer just a handful of real estate opportunities per year and generally work from a home office. Like Realtors their levels of professionalism and integrity range largely from one to the next. Unlike Realtors they usually do not carry a real estate license so they are not subject to the same legal obligations. For the most part flippers are honest and professional individuals. Although just to be on the safe side, before you decide to contract a home from a flipper, it’s a good practice to make sure you have a real estate professional not related to the flipper to review the basics of the transaction such as the true after repair value of the deal and the contracts. Always get a title insurance policy.
The Courthouse Steps
On the first Tuesday of every month foreclosure auctions are held at the county courthouses in Texas. This day is commonly referred to as Texas Tuesday and it can be an extremely confusing experience for those not familiar with the auction process. Limited information regarding the auction properties is posted 21 days before the foreclosure date. Very sophisticated investors filter through massive amounts of these foreclosure postings (Dallas County alone auctions many thousands of homes each month). These courthouse buyers narrow down the list of homes to select a smaller group which they then run title history inquiries on to determine an even smaller list of properties that do not have various judgments or liens, or otherwise majorly clouded title issues that will survive the auction sale. Then a massive amount of research is required to estimate the value of the many remaining properties to determine the maximum bid amount they will offer at auction. This can be very risky and complicated due to the fact that the investor does not actually receive physical access to the properties because the home owner facing the foreclosure still technically owns legal title to the property.
On the day of the auction, the investor needs to be extremely familiar with the properties he or she wishes to bid on. The trustee that auctions off the properties operates very quickly and identifies properties only by legal description and not the street address. Not only is the investor competing against other buyers but he is also bidding against the bank that initiated the foreclosure and which is usually intimately familiar with the property. The bank is often even in possession of a full appraisal. After each sale, which usually lasts 30-60 seconds, the winning bidder has literally minutes to hand over the full purchase price in cash, usually in the form of multiple denominations of cashier’s checks, and additionally, because of the nature of the transaction he will not be able to obtain a title insurance policy.
There are also various other forms of courthouse auctions such as tax sales, etc, which come with their own set of equally complicated dynamics. Buying directly from the auction requires not only extensive real estate knowledge, but also a massive amount of detailed preparation. Even the most experienced investors are subject to enormous amounts of risk. The courthouse steps are not for the conservative investor; they can bring profits much higher than traditional real estate investing but can also lead to losses large enough to end a real estate investing career in a single day.
What’s a Good Deal?
Every investor is going to develop their own opinion of what is or is not a good deal. Generally what most investors consider an excellent deal, whether they are buying houses to rent or sell, is a property in a marketable area that they can acquire for between 65-75% of the ARV (After Repair Value) minus the cost of the repairs the property will need. This simple formula insures that after all closing costs, repairs, and dept servicing, there will remain approximately 20% equity in the property. If an investor can capture this equity several times per year then it’s a great business to be involved in. If a landlord can start out with an 80% LTV (Loan to Value) then it’s a fantastic head start to positive cash flow and paying down the mortgage and owning the property free and clear.
DOM
DOM (Days on Market) is a great indicator to judge how long you may have the property on the market after you complete the repairs. Every real estate agent has access to the MLS and this information. It’s a good practice to look at all of the comparable properties in the area that have sold or rented in the last six months to see how long they were on the market. This way you can easily factor the estimated financing costs incurred by the property being vacant while you market it for sale or rent. Expect to pay more for areas with a lower DOM. It’s better to turn 4 deals per year and make $20,000 per transaction than wait all year for the homerun that could make you $50,000! The same policy goes for landlords; a lot of the time it’s wise to pay more for a property in a desirable area that you never have to worry about finding a tenant for.
Fund
Once you have identified a good investment property that is
in line with your investment goals and you’re lucky enough
to win the purchase contract, now you will need money to
close. There are only three reliable methods to purchase
distressed investment properties; cash, hard money / private
financing, or a line of credit. Due to the physical
condition of the asset, title seasoning requirements, time
requirements, and one hundred other reasons, bank financing
is your worst option for real estate investing. A line of
credit from a bank is typically your best option, they come
in (SLOC) form, which are secured by other assets, usually a
bank CD, and non-secured (LOC). Typically you will not
qualify for a LOC with a bank until you have a long
established relationship with them and can show extensive
experience with real estate investing. Most investors use
either cash or hard money until they reach this point.
Cash vs. Hard Money
Depending on your school of thought and the resources you
have available either cash or hard money financing can be a
good option. If you have a minimum of $100,000 or more in
cash you can purchase an investment property outright,
remodel the property, and either sell it or rent it out
without incurring the costs associated with carrying a loan,
and that means more profit in your pocket. Although the
other school of investors do not want to risk all or most of
their capital on one transaction and understand that real
estate is an illiquid investment. If you are planning on
renting the property out and would like to perform a
cash-out refinance to recoup your cash invested to buy a
second rental property, this can prove difficult in today’s
market and can lead to a dead end investment strategy.
Investors that believe in the effectiveness of leverage tend
to favor using hard money loans. This type of lending is
quick, doesn’t carry any of the limiting factors that
prevent bank or conventional loans from being successful,
and comes with construction funds needed to transform a
distressed asset into a performing one. When an investor is
ready to refinance out of a hard money loan it’s considered
similar to a rate-in-term refinance and not a cash-out,
which is infinitely more available. With a hard money loan,
the investor only needs to risk the illiquidity of a
fraction of the cash thast would be required for an all-cash
transaction, $15,000-25,000, and can usually receive close
to a 100% return on that cash when the property sells or in
the way of additional equity if it is held as a rental
property. Some investors don’t see the wisdom in buying a
single property with all of their cash to make $25,000 when
they can utilize leverage to buy 3 properties that will
provide $20,000 each while greatly diversifying their
investments and improving their chances of success.
It’s always a good idea to have a source of financing lined
up prior to beginning your search for real estate. A simple
pre-approval process can take as little as 24 hours and is a
great way to establish what your buying capacity truly is.
Fix
Most new investors think their job as a real estate investor
is completed once they close on a property. The reality is
that it has just begun. The remodeling phase of the
investment process is where new investors are going to pick
up the majority of the experience they will use in their
future investments. The positive attitude that it’s okay to
make some mistakes is really what is going to set the scene
for a real learning experience. There are a lot of
‘tentative’ real estate investors out there that spend
thousands of dollars on real estate seminars and never come
close to the experience there is to gain from just one
experience with the reality of rehabbing. And if you only
make half what you expected to make in profit or cash flow
then you’re still ahead of them all! The experience you will
pick up will help you not only with future remodeling but
also with knowing what properties to select for future deals
and what kind to avoid at all costs.
Unless you are a competent remodeler by trade you’re likely
going to make more money with a cell phone in your hand than
a hammer, so the first step to rehabilitating a property is
to find the right contractors. Most real estate agents,
other investors, flippers, or acquisition companies can
provide great references for quality tradesmen that they
have worked with in the past so don’t be afraid to ask. The
construction and remodeling business can be a real racket
and unfortunately not all contractors are investor friendly.
Some contractors just want to make the largest fee possible
and can have little foresight for repeat business or regard
for their reputation. Timing is often a factor when dealing
with contractors too, the best and most reasonably priced
contractors can get fairly busy and when you need them for a
job, they may not need you, and this may cause their bids to
be temporarily high. It’s a good idea to have several
different people to call per trade and to get at least three
separate bids for each part of the rehab. The bids should
always separate labor cost from material cost and everything
should be in complete and explicit written form by way of a
signed legally-binding contract. Otherwise a contractor can
quote you $150 to replace the toilet in the master bathroom,
but you may find out after you hire him that he wants
another $200 to install it. Disputes like this are very
common and end up costing everyone involved time, money, and
relationships, so it’s worth the extra time in the beginning
to make sure everything expected is clearly defined in
writing, room by room. And never, ever finish paying a
contractor before the job is 100% complete.
Finish
After the home has been completely remodeled and professionally cleaned, it’s time to launch into the final marketing stage. Unless you are a licensed real estate agent or have a knack for grass roots marketing it’s a good idea to find someone who is licensed to list the property on the MLS for sale or rent. Typically you will pay a 6% commission to an agent for the sale of a property or a commission equal to the first month’s rent for a lease. There are many brokers available too that offer discount listing services for either a flat fee or 1%, but this will generally only include an MLS listing and no other services like help with negotiating contracts or showing the property. If you purchased your property from a professional acquisition company chances are they will list the property for you free of charge or for a nominal fee. Generally if you are an investor, getting your property listed on the MLS is all you will need, especially if you have experience with contracts and local real estate customs. You will generally still be expected to pay a 3% commission to the agent that sees your listing on the MLS and brings the buyer though.
There are several other marketing techniques in addition to simple MLS exposure. If the property is being sold it can often be necessary to have the house professionally staged with furniture and decoration to give it some life and purpose beyond just empty rooms. Unlike real estate investors, retail buyers are not just buying for the bottom line. It’s likely going to be an emotional decision for these buyers so every little bit of effort counts. Everything from air freshening devices to a small stereo to play soothing music during normal showing hours can set you aside from the other houses for sale in your area. A professional stager can help set the tone for the wholesome environment every home buyer is looking for, and their services are usually very reasonably priced and well worth it.
Another way to go above and beyond the competition is to have the entire subdivision or immediate area distributed with flyers announcing the property is coming on the market. There are companies that specialize in getting the flyers out. They are the same companies that hang restaurant menus on your door knob when you’re at work. They typically charge 15-20 cents per door, so for the cost of a few hundred sheets of paper, printing, and $100-200 for distribution you can reach over 500 homes in your immediate area. It’s good to design a high quality flyer that doesn’t have all of the physical property info but just advertises a specific weekend or two when you will be having an open house and states that the house was completely remodeled. With all of the ‘Flip That House’ going on in the media and television these days it is sure to get people’s attention. Make sure you mention that you will feature some stunning before and after pictures during the open house to entice even families that are not in the market for a house to come by and have a look. Offer free sodas or lemonade and grill some free hotdogs in the back yard for visitors too. Everyone has a sibling, parent, friend or acquaintance that is in the market for a home and they want them to live close by. This is by far the most cost effective way to sell your house off the market, and it saves you from paying that 3% realtor commission that would typically go to a buyer’s agent.
The bottom line is getting creative, don’t just hire a realtor and expect the house to move. There are hundreds of additional techniques to marketing a property for sale. The best real estate investors are constantly trying new techniques along with the old time honored ones to make their business of buying and selling or renting houses more successful.
The Ten Most Costly Mistakes Made by Real Estate Investors
1. Lack of Capital
2. Waiting for the Perfect Deal
3. Lack of Preparation
4. Banking on Speculation
5. Spending Money in the Wrong Places
6. Buying Clean Houses
7. Not Taking the Call
8. Greed
9. Always Being the Winner
10. Lack of Trust
Big Mistake Number One
Lack of CapitalIt’s almost inconceivable the amount of people who want to get into real estate investing with insufficient capital. This is thanks partly to the no-money down gurus that teach long shot, hypothetical and unlikely investment techniques for the sole purpose of filling hotel ballrooms. Coincidentally, when there are no qualifying factors to investing, everyone is a customer for your seminar!
No matter how good some brand new special technique sounds, in reality there are techniques that work once out of a thousand times, some that work one out of a hundred, and some that always work and are reliable, getting great discounts by using cash is one of them. And by cash I also mean cash alternatives such as hard money and lines of credit. Cash has been King for a very long time and should continue to be into the future. The only properties you can get for close to nothing down are the ones you don’t want to own.
If you want a fair shot at success in real estate investing you will need to wait until you are in a position to invest responsibly. An investor will need capital for a substantial down payment of 10-20%, a reserve equal to about half of the repair budget, and six months of carrying costs at a minimum. Investors get into though situations when they run out of capital. There’s nothing worse than not being able to realize $30,000 in profit because you don’t have $2000 to make two payments until your property sells, or having to fire-sale away all your equity to avoid damaging your credit or going into foreclosure. The more capital you have the more options you will have available. When you have capital you can afford to lose money on one house and make money on three over the course of a year.
$20,000-$30,000 should be the absolute minimum to have on hand before venturing into buying distressed houses. If you don’t have it, you can make some sacrifices and develop a good savings plan, or you can find a partner that has some money and trusts you with it.
Big Mistake Number Two
Waiting for the Perfect DealSome investors never take action due to a strong fear of failure. Fear of failure is a perfectly normal feeling to have when venturing into a new business and it just takes some courage to overcome. Some investors mask this fear with a determination to find the one perfect deal out there that has no chance of going wrong. There’s a balance between being selective about the houses you buy and never actually taking action. The only guaranteed way to become unsuccessful is by doing nothing. To overcome this state of immobility the best thing to do is revisit your investment goals, set some specific and realistic underwriting standards for future deals, and buy the very next property that meets those standards, regardless of the twisted knot in your stomach.
Even if you happen to get lucky once per year and find that perfect deal and make an easy $40,000 profit, while you waited you would have missed out on the 4 average deals that would have brought in $15,000-20,000 each, and you would have gained a heck of a lot more experience and contacts through the process, meaning you would be better equipped to find more of those ‘perfect’ deals in the future.
Big Mistake Number Three
Lack of PreparationAlthough having a burning desire to invest in real estate is helpful to become successful investor, it’s not the only thing you will need. When a new real estate investor charges ahead at full force before knowing basic information about what he is even capable of buying he is bound to waste loads of valuable time. Proper preparation is the key for any real estate investor looking to start out and the first step is obtaining a simple pre-approval from a lender. This allows an investor to get a good snapshot of his/her credit score, financial situation and overall buying capacity. The results of this process could vary from building a solid foundation of confidence in your buying abilities to the realization that you may need to work on some things before you dive into the world of real estate investing; for example creating a savings plan to build up more cash reserves or pay off some negative items showing up on your credit report that could keep you from refinancing out of a high interest hard money loan. Having proper financing in place before you begin your property search is the most important step an investor can take. Contracting a great deal without financing in place is never a good idea, especially if you have earnest money, potential profit, and your professional reputation on the line. Make sure you do not miss this simple step.
Other examples of good preparation are aligning yourself with the contacts you will need to accomplish your goal. A good consultation with tax professional could change the entire direction of your strategy and save you years of time and money down the road. Finding good and reliable tradesmen ahead of time is important too. If you find a great deal then there’s bound to be lots of competition and often times you’ll need to act quickly. If the foundation is a bit scary and you want a foundation professional to estimate the damage before you jump in then the yellow pages is not the right place to start your search for a fast and reliable response. Proper preparation is generally the first thing to be overlooked as new investors excitedly race forward to find properties, and it is still true as it has always been, an once of preparation is worth a pound of cure.
Big Mistake Number Four
Banking on SpeculationIn investment real estate a good rule of thumb to remember is ‘make your money when you buy, not when you sell.’ A wise investor will value a property based on today’s value, not tomorrows. If you have a look around today you will find the markets that were considered the fastest growing communities in the nation five years ago are now the hardest hit in most cases. Time will tell us the one thing we can’t always predict is the future. The only information we have is that which we know to be true today. Life can be complicated and you don’t always know how things are going to transform, whether its business related or personal. If you buy right from day one then you can ensure you will have a good exit strategy if you need to sell in five years or tomorrow. A good investor may buy with hopes of appreciation in mind, but at the same time will always protect the downside if things don’t go as planned.
Big Mistake Number Five
Spending Money in the Wrong PlacesIt’s all too common to find a real estate investor who has gone over budget on a real estate project. Equally as common is to find an investor who hasn’t spent enough, but the most common of all is to find a real estate investor who spent money in all the wrong places.
Before putting a rehab together it is vitally important to have an intimate understanding of the recent comparable sales and active listings in your immediate area. This information is what you will use to generate your strategy and should be referred to in determining your every repair and upgrade. If houses are selling in the area in less than sixty days with vinyl flooring and popcorn ceilings for premium prices then you can save yourself the cost of travertine tile. If half the houses in the neighborhood have garage conversions, and they haven’t affected sale values, the knowledge alone will save you the thousands of dollars you would spend converting a desirable bedroom back into a garage. The most sensible thing you can do when planning a rehab is to ignore your personal taste and focus on the taste of the neighborhood. Find out what’s selling, and what’s not. This essential information is literally worth thousands of dollars!
Additionally, as a rule of thumb you will generally receive your highest returns on money invested into kitchens and bathrooms (the master bathroom especially). Some items that provide lowest returns are fences, high quality windows and doors, landscaping, and decks. Keep in mind this is the rule but not the exception. The area information will provide the particular exceptions. And no matter what area you’re in, it’s always a good idea to invest money in keeping the property impeccably clean following the remodel. As strange as it sounds it is a proven fact that people will buy a property in disrepair before they will buy one that is unclean.
Big Mistake Number Six
Buying Clean HousesOne of the big mistakes investors make is buying an investment property based on how nice and clean it looks. Often times the best investment properties exist because the average person lacks the vision to realize the properties potential. However challenging it can be to see the dollhouse within the doghouse this is where the profit exists for real estate investors, and the best ones develop the ability to see what everyone else can not visualize. Investors make money from ‘use-change,’ which means acquiring a distressed uninhabitable asset and changing its use to that of a livable and performing asset. Some of the best investors understand that the more a property deters potential buyers, the better the price will become. A great understanding of what deterrents are easily fixable and what ones to truly avoid is something that can only come with experience.
Generally if you have two properties; one has carpet stained with foul smelling substances, filthy mud streaked walls, and kitchen counter-tops covered in burn marks and rotten food. Over all, this is a scene discussing enough to prevent most buyers from stepping foot inside. And another property with just two stains on the carpet, minor wear and tear throughout the interior walls, and some minor nicks on the counter-tops. The cleaner of the two properties will sell for much more, maybe even to an owner occupant that will pay a lot more than an investor. And when we start to work up the remodeling costs of both properties we find they will roughly cost the same. You will remove and replace both carpets and kitchen counter-tops, and fully paint both interiors. In the end you have the same dollhouse; you just receive a lot more profit from one of them.
Every investment strategy ends at an ROI (return on investment). If you can make more spending the big money to fix foundation damage that scares everyone else than you spend the extra money to return the greater ROI. Don’t be afraid or turned off by the ugly, smelly, and dirty houses that are offered at the best prices. This is often where abundant opportunity will lie. Most times you will make more money from the properties that people generally do not want than the ones that everyone wants.
Big Mistake Number Seven
Not Taking the CallOne of the eventual goals of an active real estate investor is to develop a large enough reputation so that one day instead of spending massive amounts of time searching for great deals, they will come to him. Whether an investor’s reputation is big or small, taking the calls when they come in is crucial. On the other end of the call could be a motivated seller that heard of the investor through word of mouth. If the call is missed, the next call could be to another potential buyer, or it could be a bank agent or an acquisition company you’ve dealt with in the past that wants to offer you an exclusive shot at a property that just fell out of contract. Either way, there are tons of calls where time is truly of the essence. Some opportunities are available in very short windows and if you can’t react with speed and decisiveness than you run the risk of passing along profit to your competition.
Big Mistake Number Eight
GreedThe strong desire to build wealth can be an excellent quality for a real estate investor to possess but when that quality turns to greed it can work against that goal as effectively as can inexperience. The temptation to push the boundaries of the market is a good thing as it originates from attributes like curiosity and wonderment that make up great business people. But when that boundary is pushed because you lose sight of what real value is then it can be a recipe for failure. Listing property at an unrealistic premium is the number one factor that will delay and shrink a profit. The first thirty days of an MLS listing is by far the most crucial time in the marketing process and the actions taken during this period can mean the accumulation, or lack thereof, of major profit. Property values are inevitably determined by what a buyer will pay and not by sellers or list prices. Trust in the fact that things will sell for close to what they are truly worth to people. Most investors find it is a far better idea to list below market value in an effort to elicit more attention and along with it multiple offers, real urgency, and at best, a bidding war.
Even when presented with multiple offers to choose from it’s not always the best policy to go with the highest bidder, but instead with the most qualified. If a buyer submits a contract a few thousand short of the highest bidder but has solid financing in place, or is putting down a very large down payment, then they may prove to be the best choice as they will have the best chance of actually closing. Even though that extra few thousand may seem like a loss to an investor who has given in to greed. A rational investor knows to take less and keep moving the same way a seasoned trader knows when to sell a stock. The same principle is true for landlords. A landlord may not want to increase the rent on a seasoned tenant that has always paid on time, and will find it a good policy to offer below market discounts to tenants with good credit history.
Big Mistake Number Nine
Always Being the WinnerWinning can exhilarate you, feel great, and provide a lot of motivation for whatever’s next. But there are definitely times in any business when it’s better to lose the battle if it means improving your chances of winning the war. The best real estate investors are long-term forward thinkers that know when to submit. There will be times that you will have a burning desire to obtain a particular property and your competition will be bidding against you, you will have to know the point in which to back down and let them have it, or you could end up the real loser when you pay too much for it. There are other times that sellers, buyers, or contractors will blatantly default on legally binding agreements and however infuriating, the best route may be just to move on. Knowing when to put your foot down is one thing, but it’s generally a good idea to avoid lawsuits at all costs, whether from you or against you. There’s a good saying to live and do business by ‘your worst settlement is worth more than your best lawsuit.’ Avoiding snags that will inevitably slow down your progress and bring negative emotions into your business is imperative to your success, even if it means losing a little bit of money and having to forgo ‘teaching someone a lesson.’
Big Mistake Number Ten
Lack of TrustLack of trust within business relationships can lead to a major reduction in speed and efficiency. When trust is low costs skyrocket and production shrivels. When you have to wait for non-disclosure contracts to be signed and notarized and you can’t divulge information immediately, you miss opportunities. Building a close network of contacts that you trust and can rely on is imperative if you want to expand your business beyond your personal abilities. Trusting people can be a very challenging endeavor for many individuals involved in business and takes real courage. No one can expect everyone to be trust worthy but as long as you present yourself as someone of constant and future value then you can generally expect people to reciprocate trust. And if someone proves otherwise, you have an excuse to remove them entirely from your future dealings. The best people to do business with are the ones who understand that business is not about the deal you’re working on now, but about all the deals you can do in the future years to come. High levels of trust lead to more money, less work, and much more enjoyment in what you do.
Kurt Carlton – Over the course of his career Kurt has been directly involved in over $100MM worth of real estate transitions and his holding company currently purchases on average $1.5MM of residential and small multi-family investment properties per month within the Dallas Fort Worth area.
For Education Purposes Only Disclosure - The above guide has been published for educational purposes only and is not meant to provide professional or non-professional, paid or unpaid consultation or advertise a product or service of any kind. Nor does the publisher or the author make any claims to be a consultant. Real estate investing is a volatile and ever-changing form of business and the educational information within this guide is subject to loss of its validity at anytime and does not guarantee real estate investing success in any way, shape or form.
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