People invest in real estate for a myriad of different reasons. Some people have a very clear plan for what they want to accomplish, while others jump in on a whim. It can be very seductive to see the amount of wealth that can be created in real estate. With so many different avenues available to a new investor, which one is right for you?

Do you start by being a bird dog or wholesaler? Many people choose this road because they do not have the access to capital that is required to follow other paths. Do you try your hand at being a landlord? This can be a fantastic way to amass wealth over the long-term but it can be a source of frustration as well. Perhaps you are looking to flip-and-grow-rich. There are a plethora of great deals to be had. The obvious challenge is being able to flip them to a willing buyer at a decent profit.

My Chosen Route

My path was to follow the rehab road. I was led in that direction by circumstance, not by an overwhelming desire to find my fortune in real estate. I was at a point in my life when I was looking to purchase a home for myself. I bought a “fixer” because I was able to buy a house in a better neighborhood by using my own sweat equity. I soon discovered three things about rehabbing houses:

Do What you Enjoy

With so many different aspects of real estate investing, there is sure to be something that you are good at and enjoy. Many people who invest in rental properties find that they are not cut out for it. Dealing with tenants can be very difficult and stressful. You can avoid a lot of that by using a property manager, but that has its own set of problems. Then you have to deal with repairs and vacancies. However, many others have no problem with those issues.

Nothing in life is perfect, but you need to choose what is best for you. Spend time investigating different aspects of investing until you find something that you think you would enjoy. Proceed slowly until you find out if you are suited to that particular investment style. When you discover your niche, run with it.

Finding Your “Why”

In order to achieve any significant goal in life it has to have meaning. New Year’s resolutions are a great example. Most people who make resolutions at the start of the year will break them quickly. They stop smoking for a short time, stick to a diet until they get a whiff of a fresh sticky bun, or they work to get out of debt until they see something on sale that they absolutely have to have.

If you are able to get in touch with your “why” you have a much greater chance of reaching your goal. You may think of investing as a great way to make money, but what will that money do for you? Perhaps it means more time with your family or time to pursue activities that you enjoy. Maybe you have a desire to get out of the rat race that is your typical 9-5 corporate job. Whatever it is, if you keep sight of why you are doing something, you have a much greater chance of following through with it.

What you get by achieving your goals is not as important as what you become by achieving your goals. - Zig Ziglar

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Tags: goal-setting, real estate, real estate investing, rehab, Rehabbing, Richard Warren

Whenever I attend my local real estate investment club meeting someone using the same pick-up line inevitably approaches me: “I’m going into wholesaling, can I call you when I have a deal?” Most of these people are never seen or heard from again. It seems that most of them attended some guru’s curse on how to make big bucks in real estate even if you have no money. They fall prey to the notion that it’s really easy, just find a deal and flip it to an investor. How hard could it be?

The gurus have these people thinking that there is nothing to it. The reality is that finding deals to wholesale is no easy task. Most of these novices are unprepared to do the work involved. If they do find a deal they have only done half of the work. The other half is having an investor to sell the contract to.

Is It A Deal?

Many of these wanna-be wholesalers have no clue as to what a good deal is. I can’t even begin to count the number of times I’ve been called with a “hot” deal only to find that it is a sure loser. A house selling for 80% of market value is not a deal. The truth is that anyone can find deals like that. If you are going to be a wholesaler you need to find properties that are real deals or you will never be able to make any money.

As a rehabber I use the following formula:

(After Repair Value x 70%) – cost of repairs = Maximum Purchase Price

In the market we have today I look for, and find, better deals than that on my own. For me to pay an assignment fee to a wholesaler he had better be bringing me a smoking-hot deal. In 15 years as a real estate investor I have never bought a contract from a wholesaler. I have nothing against doing so, it’s just that I have never been presented with a deal that was better than I could get on my own.

Do Your Homework

Take the time to learn what a truly good deal is in your market. That means doing a lot of legwork and looking at a lot of properties. Talk to investors and take the time to learn what they are looking for. Seek out that diamond in the rough. If you are looking for deals through real estate agents or by using the MLS, you are wasting your time. You need to find the deals that nobody else knows about.

You also need to build your investor list. That list needs to be pretty large since investors may not always be in buying mode. Some investors may purchase several houses a month, while others may buy one or two in a year. While it is important to stay in touch with your investors, it is also important that you don’t waste their time. If you call someone three or four times to present poor deals it is more likely than not that the investor will stop taking your calls.

Stick With It

Every profession has a learning curve. To learn any business you have to get out there and do it. The reason that so many rookie wholesalers disappear after a short time is that it is much harder than they thought. For many people it is much easier to quit and move on to something else than it is to gain needed experience by doing the work. It can be very discouraging to work day after day without finding a true deal, but imagine how good it will feel once you finally do.

Tags: real estate investing, Rehabbing, wholesaling

We certainly have not been focusing on our investor interviews lately and we’re making a concerted effort to change that. We’ll start with an interview with one of our active BiggerPockets contributors, Tom Cmunt.

Tom has given much of his time to help fellow BP’ers through our forums and has become a staple in the community. He focuses on extremely affordable properties in Ohio that he rehabs and rents out (typically costing much less than 1/10 the price someone could buy for even the cheapest home in Southern California, for example). We’re excited to have the opportunity to learn more about this relatively new, but successful, investor.

Meet Real Estate Investor Tom Cmunt

How long have you been investing in real estate?
I have been investing for a little over one year.

What attracted you to becoming a real estate investor?
I believe the main attraction was that I had found something that would allow me to use the construction skills that I obtained as a teenager and young adult, to make money, while still having the ability to work for myself.

Are you a full time or part time investor?
I am still working as a part time investor, although at times it feel like a full time job. There are many days that I will spend several hours concentrating on my property investment company verses working at my full time job as a Software Programmer.

How did you get started investing?
I believe my awakening came when I was trying to figure out how to get out of the every day corporate environment. After facing years of layoff’s and watching my coworkers being walked out the door, I knew that I had to figure out a way to support myself, instead of relying on someone else for a paycheck.

Tell Us About Your First Real Estate Deal . . .
My first deal was a HUD home that was listed for $24.9K. My wife and I conducted the first walk through and decided to make an offer. I knew that the home only needed around $5k to $6K to make it rentable. We offered $23K and HUD accepted the offer. We conducted a second walk through before closing and that’s when I noticed a termite problem, which is pretty much unheard of in North East Ohio.

After we started rehab we ran into several problems. When it was time to turn the gas on, they found several leaks in the basement. The plumber took care of that and we called the gas company back out. She did one final inspection only to find a gas leak in the front yard. This cost us an additional $900.00. Everything else went pretty smooth. Our renter was Section 8 which required us to do a little more rehab that I was expecting.

So, after the termite extermination and the gas leak out in the front yard, we completed the rehab for just under $8K and were only one month over our deadline. An appraisal 3 months later brought the house in at $64K. I would have no problem at flipping it quickly for $47K.

Have you ever had a real estate mentor? If so, what did they do for you?
Other then advice on BiggerPockets, none. I find most of the investors in my area are only interested in sucking equity out of a property and not looking toward building future wealth.

What is your focus (area of expertise)?
Currently due to market conditions, I am only buying and holding for rentals. I am looking at doing a flip within the next few months; I have identified several properties for under $20K, that I could flip for $35 to $40K with a minimum investment.

What do you look for in an investment?
The home has to be solid with good mechanics, in a safe neighborhood and under $20K.

How many deals have you done in your career?
I have done 3 deals now. The only thing slowing me down right now is getting funding. I have been working on an pulling cash out of my last property to purchase another for well over 1 month now; the banks have made it very difficult to obtain funding.

Do you have your real estate license?
No

What advice would you give to a beginning investor?
I see many people getting into real estate without having any idea what type of expenses they will incurred. I truly believe that all investors should have a construction or carpentry background. Everything else can be learned on the job, but if you can’t walk into a rehab and know what its going to cost you within a few thousand dollars, you really should not be in the business. I work under extreme budget measures and when I go over my estimated budget, even by a few hundred dollars I beat myself up over it. Sometimes things cannot be avoided such as a gas leak in the front yard, but a termite problem which cost me another $900.00 could have been. It was a stupid mistake, that will not happen in the future.

Now granted, I am working on $20K homes which require a lot of elbow grease and not a lot of major expenses. If you put me in a $150K home and tell me to rehab it, so it will sell for 300K, I would have to take a lot more time to figure out my budget.

What was your toughest deal?
None yet. Once I get funding, I am ready to go.

What would your dream deal be?
The perfect home that only needs a septic upgrade. I would invest $20K in a new septic and flip it for $70K more then I paid for it. It would be a simple fix that would not require much time on my part, and I would make $45K on it.

Finally, Do you have any thoughts about the current state of the real estate marketplace or economy?
Yes. As I mentioned previously, it is extremely difficult for investors to obtain funding right now. I have many deals that fit within my business plan that I simply cannot move on due to a poor FICO rating and a tight credit market.

Not From BiggerPockets: If you want to talk to Tom, you can connect with him on our social network. Additionally, if you’re interested in being interviewed for our Meet The Investor feature, please contact us.

Note: Interview Conducted March 18, 2008

Tags: flip house, flipper, HUD, landlord, meet the investor, real estate, real estate investing, rehabber, Rehabbing

You’ve been hunting for that perfect rehab deal like a Neanderthal stalking a mighty Mastodon. You’re sure you’ve found it. The after repair value and renovation costs will allow for a hefty profit. You should even be able to set a price that will result in a quick sale when the rehab is complete. There is only one teensy-weenie thing left to do – find the money to make the purchase of the property.

Back in the ancient, olden times (early 2007) it was fairly easy. You would seek out a hard-money rehab lender. Sure, the terms were steep, but the financing cost was built into the equation. As long as the numbers penciled out you could get funded. It was even pretty common to include the cost of purchase and repairs and have the interest financed right into the deal. If you did it right you didn’t need much, if any, of your own money.

Things Ain’t What They Used To Be

Here we are a short time later and the easy money is gone. Rehab loans can still be had, but things sure are different. A novice rehabber has little hope of obtaining financing at all. The experienced rehabber is facing a lending environment that has changed dramatically. No money down? Forget it. All costs rolled in? Fat chance. All repair costs included? In your dreams. These days the lenders want you to have significant skin in the game.

It’s hard to blame the lenders. They have been burned so often in the recent past that they had to change the rules. While it is easy to say that they had no one to blame but themselves, you can’t fault them for adjusting to the realities of a changing market. The rehabber has to adjust as well, unless he is going to pack up his tent and go home until things change.

What’s a Rehabber To Do?

It’s more important than ever to seek creative ways to fund a deal. If you have equity in your own home, try using a Home Equity Line of Credit, or HELOC. Lately many banks have been reducing the credit limits on existing HELOCs, so be careful there. The advantage of HELOCs are that you are a cash buyer, you can use the money as needed for the deal and repairs, and when you pay it back it is there to use again.

Can’t use a HELOC? Look for owners who are willing to hold a short-term note while you complete the rehab. A friend of mine made an offer on a house with no money down, the owner holding a note for two years and payments deferred for six months while he completed the rehab. The seller accepted the terms without a fight. It can be done.

Learn about “subject to” deals where the existing financing remains in place. This allows you to buy a property without have to obtain financing. If the seller still has equity in the property, ask him to defer taking his share until you complete the rehab and sell the property. When people are in desperate need of selling a property, they will agree to all sorts of crazy terms. Try it, you’ll like it.

Creativity Is Key

The point is to look for alternative ways of making deals happen. Instead of thinking, “it can’t be done”, ask yourself, “how can I do it?” In a nutshell, think outside the box. These are challenging times. Those who rise to the challenge will succeed.

Tags: creative finacing, financing, hard money, heloc, home, lender, property, real estate, real estate investing, rehab, Rehabbing

In previous weeks we discussed rehabbing a home for personal use (Getting Started In Rehab) and rehabbing for use as a rental (Rehabbing a Rental Property). This week we will look at rehabbing with the intention of flipping. This is, by far, the riskiest of the three. However, it can also be the most lucrative if you do it right. The key word here is “if.”

Swimming in a Pool of Sharks

When rehabbing to flip it seems that every problem is magnified. Never mind Murphy’s Law, in rehab it seems as if Murphy has moved in with you. The most pressing problem is usually your holding cost. This is especially true if you are using hard money financing. You also have the risk of the market changing during the course of your rehab. It may not be as easy to sell as you thought or had hoped. You may experience weather-related delays or problems finding the necessary contractors.

Sometimes you can experience something that seems to come from out of the blue. Shortly after Hurricane Katrina hit New Orleans I was rehabbing a house in Nevada. I was nearing completion and I needed about 10 sheets of drywall. I went to the only lumberyard in the area and was told that they don’t have any sheetrock at all. When I asked when they expected to get some in, I was told that a delivery was coming in on Tuesday. I figured that wasn’t too bad since it was Saturday. Then I was informed that the load that was coming in had already been sold. I could reserve some from the next delivery two weeks later! It seems that all available building materials were being diverted to Louisiana to help in their efforts to recover from the storm. I had to drive 250 miles one-way to find the material to complete the project. All told, I lost about three days. That may not be much time when you are working on your own home, but when working on a flip it can be a huge problem.

Time Is Money

Managing a rehab project can drive you crazy enough to think that you are hearing voices in your head. What you should be hearing is a ticking clock, like the one on 60 Minutes. Every tick you hear just cost you money. Contractor doesn’t show up…tick, tick. Failed an inspection…tick, tick, tick. Unexpected problem arises…tick, tick, tick, tick. Project is behind schedule and another mortgage payment is due… tick, tick, tick, tick, tick…BOOM!

Effective management of the rehab is the key to a successful deal. If you do this part poorly you will feel it in your wallet. Some important points are as follows:

Tags: flip real estate, flipping, real estate investing, rehabber, Rehabbing

Last week we discussed rehabbing a home for personal use (Getting Started in Rehab ), this week we will explore rehabbing for the purpose of renting. Of the three main types of rehab, personal use, renting and flip, the rental falls in the middle in terms of risk. If the rental market is strong where the house is located, you do not have to worry about your exit strategy.

A simple fact of real estate investing is that renters will not take care of a property the way an owner would, in most cases. Another fact is that renters do not have the same expectations as buyers when it comes to quality. A person looking to buy a property might expect ceramic tile floors and granite countertops where a renter is quite satisfied with vinyl flooring and a laminate counter. This means that you can spend a lot less money on the rehab if your ultimate goal is to use it as a rental property.

Basic Systems

Tenants and buyers will both have certain expectations. They are looking for a home that has the basic systems in good working order. This means that the plumbing and electric must be adequate, the heating system works properly, the roof keeps the house dry and, in warmer climates, the air conditioning functions, as it should. With a rental, if these systems are not in order you can expect to have higher than normal maintenance costs.

Regardless of the ultimate goal, any rehab should include bringing the basic systems up to an acceptable level of performance. This is not an area where you should cut corners. Upgrading the electric or the plumbing doesn’t have the pizazz of a new kitchen or bath and won’t add much value on resale or yield a higher rent. However, a house with the basic systems in poor condition can subtract value and make it difficult to sell or rent a property.

Durability Counts

Renters tend cause a greater amount of wear and tear than owners do. That being the case, you should usually choose items of greater durability wherever possible. When choosing carpet, paying a little more for a product with better durability may actually be less expensive in the long run. If you can avoid using carpet in certain areas, even better. You could consider using a laminate flooring product in high traffic areas.

When the time comes to sell a property, you can go back and complete the rehab. The time to do the fancy things and add the amenities that buyers love is when you are ready to sell. There is no point in doing a lot of high-end, high-cost rehab on a rental. More likely than not, you will just need to do it all over again when you are ready to sell.

Buy It Right

One of the most difficult aspects of real estate investing is finding property that will provide a positive rental cash flow. As hard as it is, it is significantly easier if you buy rehab property. Since a fixer-upper should be available for well below market value, it is likely to command a much higher rent as a percentage of purchase price. House “A” and house “B” may command the same rent if they are in comparable condition. However, house “A” may sell for $100,000 at full retail, but house “B” is selling for $50,000 with $20,000 in repairs needed. The total costs for house “B” was $70,000 but will rent for the same amount as house “A” even though that house costs $30,000 more. That could well be the difference between a house that helps put food on the table as opposed to a house that eats you alive.

A fool and his money are soon elected. - Will Rogers

rehabbing, renting, rehab, flip, Tenants, fixer-upper

Tags: real estate investing, Rehabbing, rental-property

You want to rehab houses, but where do you start? We see the fix-and-flip “reality” shows that, somehow, manage to have no basis in reality. How hard can it be to buy a house, rehab it, sell it, and retire to a life of luxury on the French Riviera? On TV, it all happens in thirty or sixty minutes. Easy, right?

Before you start it is imperative to have your own financial house in order (See last week’s article. ). Jumping into rehab without a solid foundation will make it very difficult, if not impossible, to succeed.

Choose Your Weapon

Rehabs fall into three basic categories: personal use, rental, or flip. Each type carries a different level of risk. My recommendation for most people is to start by rehabbing a house for their own personal use. It carries the least amount of risk since you will not have the added carrying cost of a second property. If you live in the house while you are renovating it, you just have your regular living expenses.

There are other advantages to living is a house while rehabbing it. You do not have the same time pressure. When you are rehabbing a property with the intention of flipping it, you are losing a little piece of your profit everyday. Holding costs are a ticking clock, time is money. When you experience a delay, you lose money. If the market makes a quick sale difficult, you lose money. The risks associated with flipping are enormous. The current real estate market conditions just make it worse.

Make It Your Own

When you are renovating a house with the intention of flipping, you need to keep the end user in mind. This usually means making conservative choices that will appeal to the widest number of potential buyers. If the house is going to be your residence you have the ability to incorporate your own personal taste. If you want purple walls with a pink ceiling, then go for it. Rehabbing a house for your own use allows you to create a home that fits the way you live.

You still need to keep resale in mind if you have any intention of selling in the near future. Determine what you resale timeframe might be and work with that in mind. If it is going to be a long-term hold you should do whatever makes you happy and fits your lifestyle.

Learn As You Go

No matter how much you study and prepare, first time rehabbers will make a lot of mistakes. It’s much easier to learn from those mistakes if you are not under the constant pressure of having to complete a flip. My first rehab was a major learning experience. I had the luxury of time. I was able to take the lessons learned and carry that knowledge forward into future projects. If that first rehab was intended to be a flip I would have lost a lot of money and it probably would have been my last project.

Instead of trying to earn a bazzillion dollars on your first deal, look for one that can propel you to future success. Start small and keep the project within your ability. With each success you can move into bigger and tougher projects. As your ability grows, your profits will increase and your profits will soar.

Happy rehabbing!

I honestly think it is better to be a failure at something you love than to be a success at something you hate. - George Burns

rehab, houses, flip, rehabbing, renovating, home

Tags: flipping, investment real estate, Rehabbing