How to add value

14 Replies

I did a little R.E. investing about 15 years ago. I owned a couple of 4 family apartment buildings, but got out because I was traveling out of town on business a lot, and the time/hassle was not worth the potential returns (one building consistently made me money, the other did not, but I could have probably turned it around)

Anyways, now I'm older and exploring getting back into things. The good thing is I have a fair amount of investable cash - I'm in a position to pay cash and hold things that way, if need be. Potentially I can be involved in R.E. full or part time, as my non-R.E. activities give me flexibility.

There was an excellent post somewhere else on this forum (can't remember where I saw it), saying that to make money, you have to add value. Some areas listed (approximately) were:

1) Bird-dogging/wholesaling - buy low, sell high (quickly), but deals take a lot of effort to find/negotiate.
2) Buy and hold - you're putting your money in up front, and your time into long-term management of the property (of course, you can have a mortgage and/or a property manager, but these reduce profits, and you're still likely to need SOME money and SOME time involvement).
3) Service provider - a real estate agent, loan officer, contractor, inspector, etc. All the folks who provide services in this business for a fee/commission.
4) Rehabber - buy low (and in need of repairs), invest your time and money into rehabbing, then either hold as a rental or flip.

I'm probably most interested in #4 - I've enjoyed the hands on minor carpentry/painting/landscaping/etc I've occasionally done in the past, and my primary job has given me some experience in project management (locating and managing contractors).

But I worry a bit that all the transaction costs (time and money) in finding and buying the house on the front end, and and selling the house on the backend, with accompanying paperwork/legal/etc, would eat up so much margin as to make it difficult to make real money on the rehab itself (i.e. improving a run down property back up to 'market' value).

For those doing 1 & 4 (straight flipping or rehabbing and flipping), how do you find properties priced low enough, and sell them high enough, holding down your costs all the while, to make a decent profit? Do people make real money at this on a consistent basis, after factoring in *all* dollar costs and time spent? Is it realistic to specialize in just rehabbing and flipping properties and not owning/renting some on the backend? (FWIW, I live in a relatively big midwestern city...)

Thanks for any input...

In any transaction the key is to accurately factor in ALL of your costs so you know you will make money on the transaction. This isn't rocket science. With a little intelligence and even without outside insight and wisdom (as from this forum) it would only take a couple rehabs to figure what to do and what not to do.

People do make real money at doing #1 and #4 (I'm one of them :D ), but you caught on to the key very quickly. You have to buy properties at a strong enough discount to be able to pay for all your expenses and still be able to profit. The number one mistake new investors make is buying properties for too much. Buying properties for a low enough discount would be one of the main things you would learn after doing a rehab or two on your own.

In a normal market, a good formula for a rehab is taking 70% of After Repaired Value (ARV) and then subtracting repairs from that number.

For example if the property will sell for $100,000 all fixed up, and it needs $15,000 in repairs, then you would take 70% of $100,000, which is $70,000, and then subtract the $15,000 from that. Leaving a maximum purchase price of $55,000.

Now a couple things to look out for when using this formula is overestimating ARV, and underestimating repairs. These are two common mistakes that can really skew the formula. Be conservative on your ARV and your repairs.

If accurately factored, the 70% formula factors in all your expenses (except repairs) and your profit. For more info on the 70% formula, check out some of the Crunching Numbers posts at:

http://forums.biggerpockets.com/viewtopic.php?p=18568&highlight=#18568

Now someone looking to build this into a long term business, I would recommend a holistic investment strategy, which would include investing into longer term strategies such as rentals or carrying notes. Wholesaling and rehabs can generate capital for you, but long term wealth comes from residual income.

So what's the best way to find properties at such large discounts? I know, roughly, of

1) Regular MLS
2) Pre-Foreclosure
3) REO
4) Real estate agents feeding you deals

Which of these (or others), is likely to be most productive?

you have to network.

i know that sounds like a cliche, but it's the truth. doors open up ALOT when you start talking with other investors. even though rei is extremely competitive, there is plenty to go around...or so it would seem.

but i'm curious. "adding value" and "finding deals" are two seperate things...somewhat.

obviously, to find "deals" you need to find a property that is most likely, in need of repairs, either by you or by an assignee (wholesaling).

but strictly "adding value" is a seperate category in and of itself. commercial buyers really rely heavily on the potential to add value. with commercial real estate, the swings of just fixing leaky faucets and doing redoing the landscape can really increase value A LOT. or so i've heard - (i've never owned any commercial real estate myself). but if you do the math, it really can add up.

anyways, as i was saying, "adding value" depends on many different variables, for one - CASH or available CREDIT to do what you think will add value. for instance, making a 2 br into a 4 br would certainly add value to a SFH, but do you have what it takes to swing this? this then becomes an important piece when evaluating and pricing the property before you purchase.

hope this makes sense. of course, you can look at "buying low" as "adding value"...but that's not really (to me) what adding value is. that's just simply cutting costs from your pocket...the Value of the property does not increase by simply "buying low".

The financial stuff is not an issue for me. Again, the issue is:

Purchase Price
+
Purchase costs (commissions etc)
+
Repair costs (including my time)
+
Selling costs
+
Profit

must be >= Sale Price.

Without relying too much on home runs in either the purchase or sale price (finding a screaming bargain or getting a stunning sale price), is it realistic to find a deal flow of houses with purchase prices low enough to make the whole thing profitable, assuming you're looking to sell at the end rather than hold for rentals...

from the way real estate has taken off into the stratosphere - i would say the answer is definitely YES.

but it takes time and effort. most people don't invest enough time into anything other than working for the man, and watching tv,

Pst, do all of them. ALL OF THEM plus anything else you can think of. Check out the Finding Deals posts at:

http://forums.biggerpockets.com/viewtopic.php?p=18568&highlight=#18568

You seem to keep asking the same question. Let me put it to rest. Yes, you can make money at this. Yes, you can make the whole thing profitable. Yes, it is feasible and reasonable and potentially lucrative. I am not speaking because I read some book or took some guru's course and maybe one day I will buy a house or two. I am saying it because I am a full time real estate investor, and I make a very respectable income doing it.

I understand you have your doubts, and you seem to have a very analytical mind that is questioning the actual probability of being able to find enough deals at the type of discount that is needed. Let me tell you the truth from my own personal experience. Yes, you can find deals. Yes, you can find enough at a strong enough discount to make this whole thing worthwhile, but the whole key IS finding the deals. The key is to get good at finding deals. This whole idea is based on being able to find deals, and that is exactly what you should focus 80% of your time on. If you get good at only one thing in real estate, I would recommend getting good at finding deals.

You said you live in a 2 million+ city. I would say that finding a 100 houses per year that are profitable deals is absolutely feasible in your metro area. I actually think that finding 200 deals EVERY year is absolutely possible in your town. I know, I know, you think I'm loopy, but remember I'm not selling anything. I don't have some seminar to sell you or some book to convince you to buy. I'm just telling you what I honestly believe in my professional opinion. In my little old town of 200,000, I've done 80 deals this year so far. 80. Now don't get me wrong, I am highly focused and extremely motivated (most of the time :D), but I am still in a town of only 200,000 people. And I'm not even the only show in town. There are several other investors here that do at least 30 or 40 a year also.

It is possible, and it is feasible, but it will be completely dependent on your motivation, belief, and drive in what you are doing. You won't do a 100 deals a year while you are questioning if you can even find 1 or 2. Well, you say of course, if I was finding 10 deals a month I would believe I could do it. But I say until you BELIEVE you can find 10 deals a month you will NEVER do it. Belief is a pre-requirement.

It is possible and feasible. Now the only question is, is it possible and feasible for you to do it?

Ryan, thanks for the info.

Unfortunately, it sorta confirms what I suspected - that the bulk of the profit is in the deal itself (particularly favorable purchase or sale price), rather than in the improvements made to the property.

I'd be more interested in this biz if I thought that focusing on smart rehabbing (i.e. good choices of what to improve, and a good job of doing it), drove things a bit more.

I'll keep kicking the tires a bit, but I sorta doubt I'll make the plunge...

Originally posted by "pst":
Ryan, thanks for the info.
I'll keep kicking the tires a bit, but I sorta doubt I'll make the plunge...
What's stopping you from taking the plunge? If you go into it with knowledge and your eyes open you have nothing to lose.

Originally posted by "Rich":
Originally posted by "pst":
Ryan, thanks for the info.
I'll keep kicking the tires a bit, but I sorta doubt I'll make the plunge...
What's stopping you from taking the plunge? If you go into it with knowledge and your eyes open you have nothing to lose.

I have time and money to lose.

The point of going in with eyes open is to have some idea of whether or not it will be a fruitful venture for me - one that I will both make money at, and enjoy doing. Part 1 may perhaps be true, but for me it's not worthwhile without part 2 as well (i.e. would I enjoy it?).

Whether or not you will enjoy it is something you need to decide. It will be very profitable if you go into it educated and make smart decisions. The biggest thing to look at is the price you're buying at versus the after repaired value. If you are buying at a low enough price you still shouldn't lose any money if you make a few mistakes along the way. The mistakes will just eat into your profits not into your pocket. Also, part of being educated is knowing what you don't know. I'm sure you are unable to properly quote a rehab job, you're not a contractor. If you have good contractor estimating your rehab costs you'll have a better picture of what the costs will be, add a little for buffer and buy low enough and you should still make money even with extra expenses or holding costs. The point is you shouldn't lose money if you pay close attention to what you're doing. You will be dedicating a lot of time to this, no doubt there, but only you can decide if that time should be spent.

I would say that smart rehabbing is very important to the process, but you are right, buying the property at the right price is the most important aspect.

Why does it bother you that profits are mostly deal driven?

Originally posted by "Ryan Webber":
Why does it bother you that profits are mostly deal driven?

Two reasons:

1) The deal side of things is just less interesting to me than the rehab side (I like the idea of creating something that is tangibly, physically better than what was there before).

2) Pursuing the deal side too aggressively starts drifting into areas like the last post in this thread. That type of thing may be ok for some, but not for me. I'm not interested in making a fortune via someone else's misfortune (or mistake).

(And by the way, I don't mean to assert that the only way to get a good deal is by actions such as that poster's, nor that all, most, or perhaps even many folks on these forums do things like that. But I *do* see some folks in the R.E. field, either on these forums or elsewhere, advocating stuff that may not be that blatant, but still strikes me as a less than fair transaction...)

I agree the poster's orientation is a little off. A mentality of trying to convince people of one thing before they figure out something different is never a good idea for long term business.

I always aim to be upfront and offer my services openly and freely. I also believe the services I offer are worth the discount. I will buy their house in a matter of days with no worries of me backing out or being screwy with the transaction. I will take care of everything and normally all they have to do is show up to close. I also will be open and upfront with their options. I routinely tell my customers that the absolute best way to get the most out of their house is to fix it up themselves and sell it with a realtor. I will even refer them to a good realtor. Now I am clear and upfront with what selling with a realtor entails, and it normally requires two things that the seller does not have. Money and time. I offer them a solution that will overcome both of these problems.

Now I will say that I don't necessarily offer my competitions name and number. Well, I actually have a couple times, but it was when I knew the house couldn't hit my numbers, and it might hit my competition's.

This IS a business, and my business is to offer a no hassle, no haggle solution to a real estate problem. I am not pushy or dishonest, but I definitely would prefer anyone to sell me their house versus someone else. I offer my services freely and openly, and my goal is to help people solve their real estate problem in an efficient and timely manner. I also have absolutely no issues with profitting from offering those services.

It seems like you aren't comfortable with a "sales" type of environment, and I can completely understand that. This business isn't for everybody, and I would say that you could still make a reasonable profit without diving into it with that type of focus.

also what community or area you live
i live in Hawaii... rehabing cost are expensive. if you know how to repair your own house you can make some money.
usually, labor will determine your profit.
in my experience...the more work and so called "clearner" the unit
the faster you will move the property.
However, it takes too much time !!!
i rather make less profit and move to quicker transaction
wholesale is what you should look at.
consider this.....
if you can pocket 20 grand and it took you a year
that is about $1666 a month.
i can find some wholesale for 5 grand a month. much faster and you can all work at home!!!
your skill for wholeslae is if you can effiecently market that property!!!
thanks

sunsmicro