In this fourth part to this series I am going to focus on one of the most profitable real estate investing strategies available. And when I mean profitable I am speaking of profits that can routinely exceed $30,000.00. Now that is a huge payday… and for many real estate investors that amount may represent a significant portion of their current W-2 earnings.
I will warn you however, that this strategy may not be for the faint of heart or those who shy away from taking charge and actively managing projects.
When I speak to new or current investors regarding this strategy one of the first questions I get asked is… is it really possible to make more than $30,000.00 in profit from a single deal? And of course you can guess that my answer is… “not only is it possible, it should be the minimum expected outcome for your efforts and risk.”
Your Only Job as a Rehabber…
I like to explain it this way, your only job as a rehabber is this…
“To be able to convert the existing equity in your deal to cash through the development and execution of a plan that you have developed and are capable through your direct efforts of managing to completion”
In short… it’s one thing to buy a property, it is quite another to earn your profits.
Lets explore this further.
The primary skills a rehabber must possess are not complex, nor are they rocket science… but again, just like wholesaling, there are a lot of moving parts and you need to know them all.
Finding Deals… Have you noticed a theme in this series? If you don’t have a property to work on… nothing else matters! Mastering the art of finding the deal is crucial to the success of every rehabber. Yet the good news is, that unlike a wholesaler who has to find a deal or they don’t have a business, a rehabber has the luxury of either finding their deals themselves, using the various methods discussed in Part 1 or just getting friendly with one or more wholesalers.
In fact, that is the exact strategy several of my clients have chosen to pursue. They hate the process of inspecting endless properties, making never ending offers, and being outbid. Instead they have sought out wholesalers, defined what they were looking for and were able to focus on extracting that cash from the equity while others did the “dirty” work.
Note to all wholesalers…rehabbers can be some of your best customers. Find them, know what they want and then supply them with a steady stream of quality deals… and you will never go hungry.
Getting the Deal Closed… Seems that I discussed this important element in Part 3 of this series. Well, it is just as important for a rehabber as it is for a wholesaler to know how to get a deal through escrow.
The most critical part of this process is obtaining the financing to both purchase and renovate your deal. Without the money… it doesn’t matter how much equity you have stored up in a potential deal… you are not going to achieve your paydays. In today’s market obtaining financing from traditional banks is becoming more and more of a challenge. During the run-up almost every bank on every street corner would welcome a rehabber with open arms. Not so much in today’s world. While there are still banks that will lend purchase and construction capital it is getting more difficult everyday to find willing banking partners.
On the other hand, the world of private and hard money lenders is a much more welcoming environment. It is not my intent to discuss all of the ins and outs of finding and creating relationships with any of these lenders… know that you must succeed at this one task or nothing else matters!
Getting it Renovated… If you were to ask one of the above mentioned lenders where they felt the most risk existed in any rehab deal they would tell you… “its in the renovation.” And here is why. The wild card in every renovation is not a shift in the market (though if you pay too much for a property you create additional risk when if the market shifts). It is not in the unknowns or surprises in the structure (again… if you buy it right you will recover from these surprises.) No… the greatest risk to any renovation project is managing contractors in a manner that ensures strict adherence to both the budget and on time completions.
This is where the “through the development and execution of a plan that you have developed and are capable through your direct efforts of managing to completion” comes into play… and this is where lenders express their greatest concern. Can you manage that renovation without going broke? Again… while this isn’t rocket science this is one more area of expertise that requires your mastery.
Getting it Sold… Now that you have toiled, worried, and probably popped at least one gasket… you have completed your project and now is the time to cash in and complete the process of converting that equity into cash.
Going through the process of getting a property sold is one area where I never wanted to become an expert. And why should I! There are dozens of realtor’s who are more then eager to help you get your property sold.
I realize that there are two distinct schools of thought regarding engaging the services of a real estate agent, and my extremely strong opinion is this… when stripped of all of the clutter my job as a rehabber is to purchase properties, improve them and get them sold. The most I should be doing through out this entire process is developing that plan, making sure it gets effectively executed and then write checks to suppor the entire process… period!
Why would I want to spend my time listing, advertising, showing, negotiating a sales contract, holding the buyers hand to ensure they get financed… and any other tasks that others are in the market to handle for me. It doesn’t make sense… and will only steal your profits right out from under you!
Hire an agent… and then go find and rehab another deal!
OK… as a wholesaler you can literally can spend just a few hours putting a deal under contract and then get it assigned. Little risk… lower payday.
As a rehabber, your risk posture is higher… again those moving parts. Yet, when you get it right, and you will more times then not… the paydays are just fantastic. I will never forget my first $70K+ payday. It was the first time I had ever held a check for that amount. What a rush!
While this article reflects some cold hard facts confronting every rehabber, they are not intended to scare you or drive you from this very profitable portion of this business, but instead to make sure you have your eyes open before you jump in.
And with that, lets take a look at some of the pros and cons associated with being a successful rehabber.
1. Potential for very substantial paydays.
2. Improving communities one property at a time.
3. Extremely formulaic. Just plug in the numbers and execute.
4. Private lenders can more easily understand this strategy and are more willing to participate.
1. Almost always requires cash to get into a deal.
2. Rehabbers assume the risks associated with getting the renovation completed on time and within budget.
3. Market forces could shift during renovation stealing most or all of your profits.
4. Finding lenders could affect your ability to take down deals.
5. Finding competent contractors can be a challenge.
6. Managing those competent contractors requires constant effort on your part.
7. Choosing the wrong real estate agent can be painful.
So, there you have it. If you are seeking an extremely rewarding, financially and otherwise, business to step into becoming a rehabber fits the bill.
Keep in mind however, that just as with a wholesaler, a rehabbers job is never done. There is no wealth building… just income based on your ability to find, rehab and get sold great deals. When you stop… so does the income.
In the next and last series I will focus on the true “investing” aspect of real estate investing… owning income producing properties.