How To Find More Profit In Every Real Estate Deal
One of the keys to really taking off as a real estate investor or turning your passion for real estate investing into a full time company is figuring out when and how to start acting, well…, like a business. Many of my closest friends will laugh as they read this article because the buzz word is going to be details. Details are often the difference between so-so investment deals and home-run deals. Details are absolutely the difference between an investors success and failure at turning an enjoyable hobby into a thriving business. My friends will laugh because I am not a surface details kind of guy. When it comes to the 30,000 foot view on many things, I would rather stay right there instead of getting into the granular detail.
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But my father taught me one very simple lesson as I was growing up in business. He taught me that a handful of the right details was all I needed to know about the health of my business. He taught me that he really only focused on a very few key details in each of his businesses and made sure to surround himself with great people to care for the rest. It has turned out to be the biggest difference between our company and our success and many other companies and their lack thereof. It is not that they are not successful, they just simply are focused on the wrong things and while we are building a thriving set of profitable companies, we are approached almost weekly for advice from other struggling business owners wondering where they are going wrong.
When Do You Make Profit In Real Estate?
The old adage that has been tossed around for years at every REIA meeting and by every real estate coach, guru, mentor and 2-bit huckster is that you make money in real estate when you Buy The Property. I’m not sure I agree with that. After being in this business for almost 10 years full time, I would say that you make your money in real estate long before you buy the property. I have conversations nearly every day with investors who are not making money on a property that they purchased and they bought properties dirt cheap! Unfortunately, I run into a lot of deals where an investor started a project and either never finished or were not able to sell the property and I end up picking up the property on the back end at a great discount. So no, I do not believe you make money when you buy real estate. I am firm believer that the profit you are going to make when you buy real estate comes in the details that go into your decision to buy the property.
We began buying real estate on a heavy volume basis in the early 2000’s. It was not until 2007 that we really formally began to take the business seriously and my father made his decision that this was going to be more than just something he did for fun. Doing it for fun meant a hundred deals a year. Doing it as a business meant there was no limit. In order to really maximize the profit on every deal we had to utilize technology and start tracking every detail. Since every deal starts with the offer that is made, that is where we started tracking the details. Today, we have a chart that shows offers we have made since starting the business. Every offer is broken down to the simplest common denominator and that is price per square foot. The chart shows not only price per square foot on what was offered, but also which deals were accepted, how much renovation was budgeted on each deal, how much renovation was spent on each deal, the expected first rent as well as the actual first rent and the sales price of each property.
This type of detail is so valuable. We are able to drill down to see price changes over time not only in zip codes, but at the neighborhood and street level. This saves time both in man hours spent researching as well as making offers. Instead of spending hours on every property we want to make an offer on, we are able to use the past data to quickly determine what price per square foot we need to be in a particular part of town and get that offer out quickly. We are able to offer on multiple properties very quickly. There are many listing agents today that ask that we look at any property of theirs in person before making an offer, while others are more accommodating and accept blind offers. We have earned that ability by closing everything that gets accepted and because we have a tremendous database full of the detail that allows us to make very educated guesses. By only having to lay eyes on a percentage of offers we are making, we have a much more efficient buying department and we make surprisingly few mistakes. The averages of time really do work.
Finding Profit After You Purchase Your Property
This is an area that some investors are very meticulous with and it shows in the level of detail that they keep on every property. Then again I have met many investors who go 180 degrees in the other direction and every rehab is a completely unique experience for them. In my world, the more detailed we are able to be in our approach to every rehab the more stable our profitability will be. And when I say detailed…I mean it. This is where your extra profit can be found.
We use the same material on every deal. The same toilet. The same counter tops. The same carpet, hardwood, linoleum, tile, grout, light fixtures, ceiling fans, garage door, interior door, door locks, furnace, AC unit, shingles, water heater, etcâ¦all the way down the list. Every item we use, if it purchased at Lowes Hardware, comes with a corresponding UPC code. It is impossible for one of our contractors to mistakenly buy the wrong product. Let me take that back. It is impossible today for a contractor to buy the wrong product. It only takes making a contractor remove perfectly good tile and grout once for everyone to understand what you mean when you say âhere is your exact materials list".
This saves an enormous amount of time in both decision making (for you and for your contractor) and saves on material costs. Every piece of material that is purchased is used. It is used either today on this property or tomorrow on the next, but there is no burn rate on materials. And how about the true cost of everything from nails to ply wood and copper to oil? Tracking and charting material costs is not only a great way to properly budget, but it is also a great way to negotiate. I can tell you today that a 10lb. bag of grout at Lowes is $13.87. That price is .59 cents higher than in the early summer and .10 cheaper than the same time last year. Water heaters, kitchen sinks, toilets, vanities and ceiling fans have all gone up steadily over the last six months while locks, pvc pipe, copper, galvanized steel, water heaters and counter tops have all held their price. Over the past two years copper has gone up 10% while lumber has gone up almost 55%.
If you don't think this matters you are wrong. If you know the details on pricing from walking the aisles of Lowes and reading the Nasdaq raw materials index, then you have the data you need to negotiate. Whether you are negotiating the ability to purchase as a bulk buyer or you are negotiating with a contractor for services, knowing the costs of the materials you will need puts you in a position of strength. By strength I do not mean simply the ability to drive-down costs or beat up a vendor for better pricing. I mean the ability to talk like you actually know what you are doing! The ability to keep a vendor from taking advantage of you or the ability to negotiate better pricing because you have factual details on your side. Today, we do not take bids on our projects. We hand contractors their materials list with a price sheet that we will pay and we never get turned down for a job. Why? Because we have earned that reputation for being so on top of the details that we make it easy for contractors to work with usâ¦and we pay every Friday (that always helps)!
Squeezing Out More Profitable Rents With Details
I’ve talked about this here in the BiggerPockets.com Blog before, but I am always shocked by the finished product both in Memphis and in Dallas that we run across. I’m going to address two areas where details matter as it relates to rents. One has to do with your property and one has to do with the other properties in your area.
How often do you drive and pay attention to what surrounds your rental property? I mean, really pay attention. How often do you call on other rental properties to gather “intel”? Do you listen to what they are telling you? Do you pay attention to how the person on the other line makes you feel? Do you ever get out of the car and visit the inside of another property for rent near yours?
These are all questions that we ask our licensed rental agents all the time. We have trained them to pay attention to the details that are around them all the time and then to report those details back to us at our weekly rental meetings. We want to know how many rings does it take before some answers the line. As is almost always the case, the phones are not answered so we want to know what the message sounds like. What are they saying and how are they representing the property to a prospective tenant. Then we want to know how long does it take for them to return a message. When looking at the details of a property, how is it presented? What is the rental rate for that presentation.
Many other property managers have laughed at our attention to detail only to wonder aloud how in the world we get two year leases and higher rents than their properties directly across the street. It is because we pay attention to details and those details are where rental investors make their profits. Small details make a big difference. If you are aware of what is being offered around your property – not just in terms of price, but also in terms of service – then you have a tremendous advantage when speaking to a prospective tenant. One thing we have learned is that tenants are no where near as sensitive to price as they are to service. A rude experience on the phone means you have no shot at renting a property even if your price is lower. If you fail to call back a prospective tenant, your property will sit vacant. If you present a lousy looking, smelling and generally unattractive property to a prospective tenant, then you can expect it to sit a while.
These are all little things and you obviously want to do the opposite of these mistakes if you want to find hidden profits. As silly as it seems, in the earlier article I wrote about leaving the tags on new ceiling fans and leaving the tags on new blinds in every window. These are such small inconsequential details right up to the point where a prospective tenant is told to compare the new look of these minor features to the lower priced unit across the street with broken blinds or dirty looking old fan. How about leaving the inspectors sticker on new mechanical units in a property? Do you think that will have a psychological effect on a tenant looking at renting your property. You bet it will. When you or your leasing agent are able to tell that tenant that the mechanicals in this property are new and they compare that to dirty units in the lower priced property that were simply serviced, you have now raised your property above the competition.
So often investors think competition starts with price and the reality is that so many people today are looking for VALUE!!! Learn to give your buyers or your renters what they want and you will have found the secret to growing your profitability.
Why Being Profitable can be Profitable
That was not a misprint. I wrote that header so that you would pay attention to what being a profitable investor or investment company really means. There is a gentleman on the site name J. Scott out of Atlanta and he has a brand called LISH Properties. J. and I were talking last year in Denver at the BiggerPockets Summit and he shared an interesting fact that I thought was awesome and it really spoke volumes about the way he had to run his business. I didn’t need to hear anything else. J. told me that he often had realtors calling him with buyers wanting to know if he had any of his renovation properties ready to go for buyers. They were not wasting time with simply searching the MLS or driving their clients all over town. They had a buyer looking in the area that J. operated and they were going straight to the best source for quality renovated properties. I may exaggerate part of that story – it’s been almost a year and maybe J. Scott will come on here and share any other details. But that is my point. He is so good with the details that realtors in his area call him first. He does not have to sell his properties. He has a brand and a reputation and they sell themselves. That does not happen by accident. That takes work and paying attention to the hand ful of details that make him successful. And, I have a pretty good hunch that he runs a profitable company as well.
Recently when I was in Los Angeles I had an investor ask me in front of the crowd how much money my company makes on every transaction. I answered his question and he just looked at me and smiled and said that is a man I want to do business with. I will never forget his next sentence “…why in the world would I want to do business with someone who didn’t know how to build a profitable company?”. That investor has since done a lot of business with us and he and I have had many great conversations talking about everything under the moon, but mostly about his time as an executive at one of America’s iconic brands. He placed a premium on my knowing how to be profitable, realizing that my success would help him find his profits.