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The 10 Commandments of Real Estate Investing

by Michael LaCava on May 12, 2013 · 28 comments

  
Commandments

Although Easter was a few weeks ago, I’m still in a Ten Commandments kind of frame of mind.

Although I’m far from a religious kind of guy, there’s something amazing about the scene in the Ten Commandments when Moses comes down from Mount Sinai after getting the 10 Commandments from God.

As you may recall, Moses ambles down Mount Sinai with tablets in hand, only to find his people worshipping that very strange-looking golden calf, adorned with flowers and some half-naked babe at its feet.

I’ve always thought it was kind of an odd thing for Moses’ people to do.

I mean, why couldn’t they have just waited a little bit longer? I mean, they just escaped slavery from Egypt and narrowly escaped death by the parting of the Red Sea – all thanks to Moses – and they just lose faith so quickly after 30-something days of him being up there with God?

Don’t you think that’s kind of impatient? 

When Moses comes down and sees what’s going on, he gets pretty pissed off. In his fury, he hurls the 10 commandment tablets (which explode in classic Ernest B. DeMille Hollywood fashion) – and sentences his people to wander the desert for 40 years – to drink bitter waters as punishment for their misdeeds.

Not a very good outcome for the people of Israel.

Although you may not have to drink bitter waters and wander the desert for 40 years if you break these 10 Commandments of house flipping below…you certainly won’t make nearly as much money as you could if you had followed each of them instead of going off the farm like the Israelites did in the Ten Commandments.

Commandment #1: Thou Shalt Conquer Thy Irrational Fears

We are all plagued by our fears. You, me everyone. Anyone who tells you they don’t have fear is lying to you. It’s always there.

But does your fear paralyze you?

If it is, then control it. Face your fear and you control it. With knees shaking, make that first offer. Go to that first networking even. Get out there. Do it over and over again until the fear starts to diminish. You’ll never get rid of it, but you can control it.

Think of the worst case scenario. If you can handle the pain and aggravation of it, do it. Rarely, if ever is making a mistake in real estate investing a cataclysmically horrible event. The chances are on your side that if you do something you fear and it fails, you’re not ruined. Just learn from it and move on.

Commandment #2: Thou Shalt Do Thine 10,000 Hours

Set aside your thoughts that all those “get rich quick in real estate” gurus actually know what they’re talking about.

Real estate investing success just doesn’t happen like that. Instead, it happens by putting in your 10,000 hours.

What’s your 10,000 hours? As Malcolm Gladwell says in his now-famous book, Outliers, it’s the perfecting of your craft over a period of time to achieve mastery of that craft.

Although many think that the Beatles achieved their “overnight success” by just suddenly arriving in America in 1963, even those shaggy lads from Liverpool put in their 10,000 hours before they even set their first their first pointy Beatle boot on American soil.

It was only by gutting it out in the sweaty, dank and dirty rock club caverns of Hamburg, Germany nearly all day and all night for nearly two straight years.

Not like they didn’t have a fun doing it, because I’m sure they did. But they were dirt poor and not “the Beatles” that we know of today. By the time they landed in America, they had played over 1,200 concerts together – having perfected their musical skills forging the four band members into the seamless musical unit that then achieved astronomical musical success

If it took the Beatles two years of constant playing and gigging to perfect their craft, don’t you think it might take you more than just reading a couple of articles on the blog or watching a few reality TV shows to master the art of fixing and flipping houses?

Start by reading as much as you can here on Bigger Pockets. Pick the experts brains in the forum. You don’t have to have your 10,000 hours already done to start…you just need to start to get your 10,000 hours.

Commandment #3: Thou Shalt Give First, Then Thy Shall Receive

When you’re learning to fix and flip houses, you think about what you can GET. This isn’t malicious; it’s just the way we all think. As humans, we are largely selfish. We are hard-wired to think of ourselves first – and that self-preservation has led to us as a race to be fairly successful on our relatively short time on earth thus far.

But to be a huge success in real estate investing and in flipping houses, you always have to think about what you can give first, THEN what you get after.

It’s like a fireplace – in order to GET heat, you need to GIVE it newspaper, kindling, wood, a match, maybe a little bit of that billowy thing that helps the fire get more air…see where I’m going here?

This isn’t to say you should just give away the farm willy-nilly. Absolutely not. That’s just bad business. What it does mean is that you do always have to keep the other person in mind and what it is that they want – so you can ultimately get what you want.

So don’t expect people to just do stuff for you. You have to take the bull by the horns and give first – but don’t say “now that I did this, you owe me one”. Just keep giving and eventually it will all come back to you.

Commandment #4: Thou Shalt Build Thine House Flipping Team

You cannot do this alone. If you’re flipping or investing for the long haul, you need a team to help you achieve your objectives.

This team will help you to find, fix and sell the property – and the collective wisdom and expertise will surely help you reach your house flip goals that much faster. No matter your level of experience, you simply will not be able to do everything on your own, so enlisting your own mastermind group will not only help you be more productive, but will help you work through the inevitable problems and challenges that you’ll face.

Your team at the very least should be composed of real estate brokers, contractors, architects, insurance specialists, accountants, wholesalers, short sale specialists and money lenders. All these specialized real estate resources can help you shorten your learning curve and get you making money flipping houses faster than you would have been able to do on your own.

Commandment #5: Thou Shalt Find Good Houses to Flip

Finding a suitable property to flip is certainly a challenge. With the drying up of the foreclosure market recently, finding good deals that hit all the house flipping rules is not an easy task to say the least.

Ideally, you should be able to buy the house for a low price, eyeball it to be able to rehab it quickly and relatively cheaply, so you can sell it at a higher price…and obviously make a profit. Knowing all these aspects in order to make the profit, you’ll need to rely on your house flipping team for their expertise.

But a good real estate agent is worth their weight in gold for a house flipper or any real estate investor. You may want to focus on properties that may not need expensive repairs or you can focus on properties that need more extensive repairs, but the repairs will substantially increase the equity.

Commandment #6: Thou Shalt Follow The House Flipping Math Rules

In real estate investing, there are rules. Rules you need to follow to keep you out of trouble.

The ARV Rule, the MAO Rule and the 70% Rule all are house flip rules you need to stick to. When you are first starting, determine the potential selling price of the house when it’s all fixed up. This is what’s called After Repair Value or ARV for short. You get this from your real estate agent or comps in the area.

This number is the most important number of all. The rule is that thou shalt not bend this number to your needs. If your broker and all your data says you can sell the house for that ARV, don’t add on an extra $10K just to make your numbers work.

Use the 70% Rule to calculate your MAO Rule (maximum allowed offer). The 70% Rule is the rule that I’ve always stuck with because it applies to nearly every house flip and it’s an excellent benchmark to use to keep you honest and ensure a good profit on the property.

So let’s say your ARV is $200,000. To determine the rest of your math, use the 70% Rule – by multiplying the $200,000 by 70%, which gives you $140,000.

Then take that $140,000 and subtract your cost of repairs, which according to your general contractor is $50,000.

The maximum price you want to pay for this house is $90,000.

Don’t pay $110,000. Pay no more than $90,000. If you can get it for less, do it.

Commandment #7: Thou Shalt Manage Thine Rehab Tightly With Good Contractors…Whom Thou Shalt Not Kill

This is a kind of a long commandment for sure…but I just had to get that “kill” word in there somehow!

Once you do purchase a house, don’t just solely rely on your contractor to handle and supervise all the repairs. Make sure you manage this process tightly if you are doing the management on your own. Just don’t assume they are taking care of your profits.

Until you really know and work with your contractor, they still look out for themselves first…and you second. So hire a professional contractor to oversee all the rehabilitation, especially if the rehab is extensive. Make sure you personally oversee but not manage the repairs to ensure that they are being carried out properly and on budget.

In the end, your profit largely depends on what you pay for the house, but making sure that the repair costs stay within your budget is equally if not even more important.

Likewise, overextending yourself by doing more than your budget allows on the rehab or taking your eye off the ball and allowing your contractor to run free are two of the quickest ways to ensure that your make profits will go up in smoke.

Manage your contractors who manage your project and you’ll not only adhere to this commandment, but you’ll make more money as well.

Commandment #8: Thou Shalt Work Fast to Maximize Thine Profit

Time is of the essence in house flipping. It’s a race against the clock because the longer the rehab takes or the longer the house sits on the market once it’s done, the less profit you make.

Soft costs such as financing payments, insurance payments, town taxes, utilities and any and all other carrying costs, all which have to be paid at regular intervals, add up to diminish your profits, the longer you own the house.

It’s simple: the shorter the time you hold onto your investors’ money, the better your profits will be. So make your improvements fast. Do the job well, but do it fast.

Make sure your contractors do the job on budget and on time and hire good real estate agents who help you price the final product so it sells quickly. In all of our house flips, we estimate six months from purchase to sale, but factor in a few additional months of expenses to be absolutely certain you end up I the black.

Commandment #9: Thou Shalt Network

Real estate investment meetings like those offered by your local REIA are a must for any serious investor. I have so met many people at REIA meetings throughout the years that have directly led to profitable house flip deals for me.

The next person you meet at one of these meetings could turn into a house flip partner, a source of lucrative house flip deals or even a life-long friend.  Wondering how to find investors to flip houses with?  Check out the REIA website to find a meeting near you.

At the very least, just get out there and start networking. You just never know what can happen and who you could meet, until you go.

Commandment #10: Thou Shalt Commit to a Relationship with a Wholesaler

As has been discussed many times here, real estate wholesalers can be a very good source of profitable house flip deals.  Although some have a tendency to get a bad reputation, most are very good. And they are a great source of house flip deals for you.

Simply put, a wholesaler controls the contract for a piece of real estate and then flips the contract over to a house flipper or another kind of real estate investor.  Not every deal that a wholesaler has is a good deal, so you must still run your own numbers on the property regardless of their pitch.

Nevertheless, the relationships I’ve established with wholesalers over the years have led to some of my best house flips and have made me a lot of money. I value wholesalers so much; I now have two of them on my house flipping team sourcing deals for me and for them right now at House Flipping School.

Although this commandment plays into the finding good deals commandment, having a wholesaler who you can rely on is a must. There are two ways to deal with wholesalers so make sure you approach them in different ways.

If you’ve made it this far, leave a comment below! What real estate or house flipping commandments did I leave off the list? What do you think? Leave a comment below and ask me any question you want!

Photo: glen edelson

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{ 28 comments… read them below or add one }

Dennis May 12, 2013 at 7:55 am

Commandment 2: Back in the days of slaving under my mentor, his directive to me was go out and look at and analyze 100 houses in your target area, bring me the info you collect. Whatever you do, don’t buy anything yet!

So who listens? The first property I looked at I bought for $23k a duplex in what looked like a great neighborhood (I was right but the area was in decline). A year later I begged my mentor to get me out of this mess. A subject to deal, I got my $3000 down money back. He kept the place until the 30 year note was paid off, cash flowing at $400 a month (didn’t even refinance to the lower interest rates) until he dumped the place 5 years ago for $70k.

The $3000 was a gift I would have given the place to him for free, he knew that too.

The law is a gift, not a burden.

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mike May 12, 2013 at 11:14 am

True Dennis maybe you should of took his advice but you took action and although that first deal didn’t turn out the way you may have hoped for at least you learned from the experienceoof it. How are you doing now?
Thanks for sharing

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Ben Leybovich May 12, 2013 at 7:57 am

Come on man – the over-night success thing has to be true; it has to be…

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mike May 12, 2013 at 11:23 am

I know you know better Ben! I guess everyones definition of over night may be different which brings up an interesting question. What is your definition of over night?
Mine has changed a few times do to the plan evolving.
Thanks for your comments

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Ben Leybovich May 12, 2013 at 11:50 am

LOL My night lasts about 7 years :)

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Mark May 12, 2013 at 3:36 pm

How about, 11. Thou shall not think that rehabs are the only kind of investing.? I am so tired of would-be investors who walk past much bigger profits earned more easily because the only think they can think of to do is rehab. I have rehabbed hundreds of units and all the real money I ever made I made where the construction was incidental to other things I did to add value.

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Michael May 12, 2013 at 7:56 pm

I agree Mark, flipping is just one way to make money in real estate out of many. It is also a way to lose money if not done correctly just like many other ways of investing in real estate.
I am accumulating properties for passive longer term wealth as well. Reinvesting what I make on flips is part of the strategy. Thanks for the 11th commandment. Were your rehabs apartments?

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Sharon Vornholt May 12, 2013 at 3:56 pm

Another homerun Mike. Great post and great rules to run your business by.

Sharon

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Michael May 12, 2013 at 8:02 pm

Thanks Sharon. I didn’t forget about your post on the Brian Tracey book Eat that frog. I promised I was going to read it but I have to buy it first. A friend was going to send me their copy of the ebook but I didn’t get it. I still like the hard copy so off to the bookstore. I will report back after I read it.
I enjoy your posts and take something away every time. TY

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Sharon Vornholt May 13, 2013 at 8:00 am

Thanks Mike. I’m going to hold you to that Mike (book report due). LOL

Sharon

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Michael May 13, 2013 at 6:01 pm

Pressure is on Sharon. LOL.

Glenn Schworm May 12, 2013 at 4:05 pm

Mike, okay besides feeling like I was back at church, I enjoyed your article! :-) I did not know about the Beatles and really like the analogy. Also I love your part about giving to get and the fireplace analogy. Great points, thanks for writing.

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Michael May 12, 2013 at 8:06 pm

Thanks Glenn. I try to give back as much as I can without expecting anything in return but it is amazing how it is coming back the more I give. Magical! I thank God every day. BTW listened to your podcast. I really enjoyed it. Good job. Keep it up!

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Karen Rittenhouse May 12, 2013 at 7:03 pm

Can we add one about focus?

Thou Shalt put No Other Shiny Objects before Real Estate.

Thanks for a great post, Michael.

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Michael May 12, 2013 at 8:11 pm

Absolutely Karen. Focus. Yes of course. It is so easy to get distracted today. Something I always continue to try and improve on. I am going to read the book Sharon Vornholt wrote about in one of her blogs. Eat that frog by Brian Tracey. Thanks as always for your comments

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Fred Stevens May 12, 2013 at 8:18 pm

After I figured out that 10000 = 1000 10 hour days I decided that, unlike Moses and his angry all powerful mentor, you may have been speaking figuratively. Being loyal to a wholesaler really resonated with me. Also having an agent in my corner has been extremely helpful.

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Michael May 13, 2013 at 5:11 am

So true Fred. There is no I in team and the people you chose will help you be successful.
It is great having a team to help you through all aspects of this business.
Thanks for your comments!

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Roy Schauer May 13, 2013 at 11:43 am

Though shalt put systems into place to leverage thine time effectively. So many people doing REI constantly say, I’m so friggin busy I can’t stop. Nobody ever said on their death bed, “wish I’d spent more time working and less time enjoying life.”

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Michael May 13, 2013 at 6:00 pm

You are so right Roy. A day doesn’t’ go by where I don’t think about improving my business to free up time. It is all about systems. The e myth revisited is a great book and all about systems.
I use to do it all but not anymore. It is all about balance. Health, family, business, God…….You need time on all of them.
Thanks for your comments.

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Michael May 15, 2013 at 8:51 am

Great reference to the 10,000 hour rule! Puts the ’90 days to success’ pitch in perspective.

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Michael May 18, 2013 at 3:38 pm

Thanks Michael.

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Shaun May 18, 2013 at 10:29 pm

Great list of “Commandments” for us to follow.
Simple to the point and easy to understand.
If all rehabbers followed these day in and day out there would be a lot of very rich investors out there.

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mike May 19, 2013 at 4:39 am

So true Shaun. How you doing on your flips?
Working on anything.

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Shaun May 19, 2013 at 3:52 pm

Have one on the market right now that has gotten lots of interest and a few offers.
Keep having inspection issues that kill the deals but I’m not too worried.
Have one roughly half way done the rehab that I think will be very nice.

Otherwise having the same issues everyone seems to be with finding projects at reasonable prices.

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Michael May 19, 2013 at 5:19 pm

Thats great Shaun. Keep it going. I just had one of my deals 3 days before closing get kicked out because underwriting from USDA said that a gift from the buyer girlfriend’s mother would be mean they would have to count his girlfriends income thus over qualifying them on the income. They pulled the loan. Unreal!!!
What amazes me is that the mortgage broker should of known what all the guidelines are so this sort of thing doesn’t happen. They going FHA now and I had to negotiate to make the deal work of which $4600 will come from me. Option B would be to re list and start all over again. Some Things we just can’t control. I may start having to suggest we want pre approvals from mortgage lenders we know.

Shaun May 19, 2013 at 9:20 pm

Oh my that is pretty bad.
That kind of stupid stuff drives me nuts! The one USDA that I have done actually went fairly smooth except for a few short extensions for administrative BS and a few required repairs that I thought were stupid but weren’t that expensive.
FHA has been a bigger pain for me. Some of the repairs are just ridiculous. Recently had to spend a couple grand regrading a yard because the appraiser thought it might drain towards the back addition, that was on a slab and over 20′ from the basement.

My best one for an incompetent mortgage person was after the 3rd EXTENSION I said I wasn’t going to sign another one without just an explanation of what the delay was and that afternoon I got the declination letter saying they were denied financing because of their debt ratio. So it seemed like they waited 8 weeks to pull their credit!

Best crappy loan story though was an FHA townhouse. As you may or may not know to get an FHA loan on a condo or townhouse the complex has to be approved. Well this place was a HUD home so by definition it was an FHA loan foreclosure. So I didn’t think much of it. From the time I bought it until I went to sell it the association let the approval lapse. I got an FHA buyer with a very strong offer and their mortgage people saying they could get the place approved again without any issues.
It took over 6 months for the approval to come though!!!!!!

The potential profit was huge on it and my carrying costs were low so it worked out.
Also silver lining was that it took so long to sell (Between that, a few other things with this CRAZY buyer, and the 1st contract I had falling through after 6 weeks) I had it over a year so I paid Cap Gains on the profit. :)

Michael May 20, 2013 at 4:34 am

Thanks for sharing your horror stories. I didn’t think I was alone on these but it does get you crazy how this stuff happens. I don’t think you could make this up if you tried.

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Brian May 30, 2013 at 8:37 pm

Great article! Love the style you used too :)

I agree with the 10,000 “rule” as I’ve heard before that people who spend that much time at something are far more likely to be successfull! Excellent advice and one of the best investment posts of 2013!!

Brian.

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