When most people start to invest in real estate they usually have a limited amount of funds. Many beginner investors try wholesaling in order to make enough money to move into fix and flipping or buy and holds. When people have a limited amount of funds to invest, cash in a huge concern and they do everything they can to save money. They make repairs themselves, they don’t hire professionals and they set unrealistic prices. In the long run, many of these choices meant to save money will actually cost you much more money in the end.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
About five years ago I decided to do the repairs on a fix and flip myself. I was not an REO listing broker at the time, I sold 10 to 20 houses a year and my primary source of income was from fix and flips I did with my father. To earn extra money I would sometimes paint, install lights fixtures or do other minor repairs in our flips.
I decided that I wanted to make more money on the next deal. I decided to complete all the repairs on a flip we were buying. I figured I would profit more on the flip by not hiring a contractor and I would earn an hourly wage my dad paid me when I did work on the flips. This particular home was about 100 years old and needed a lot of work. The home needed new windows, a new kitchen, new flooring, new doors, new paint, new fixtures as many other minor repairs. I could handle it……..
Did I mention I wanted to take a wall out to give the home an open kitchen/dining room? I was smart and decided to have a contractor take out the wall and install a header, but I installed all the drywall and textured the walls. I began making repairs on the rest of the home with no real plan in mind. I installed windows, which took forever because all the walls were crooked. I tore out the old cabinets and installed new cabinets and counters. I installed new appliances and new light fixtures. I put in laminate wood flooring, but I did let the pros put in the carpet. I installed doors, new cover plates, some new trim and a few other items.
It only took me six months!
By the time I had repaired everything and the home was finally ready to sell, the market had declined and I had eaten up all the profit with carrying costs. I loved the articles on BiggerPockets that show how much carrying costs can be each day on a flip. I wish I had seen those articles five years ago! It took me 6 months because I didn’t really know what I was doing. I had to learn how to make all the repairs and continually fix my mistakes. Not only did I not make any money on this deal, but the rest if my business suffered because I spent all my time at this stupid house. Boy did I hate that house when I was finally done.
I learned a very valuable lesson that year: hire professionals to do the work. If I would have hired a contractor, it would have taken at least 80% less time, been competed with better quality and I could have been making money doing other things. Now I hire out everything I possibly can, because my time is valuable and once it’s gone I can’t get it back. If you want to save money by doing the work yourself on a flip or any property, think about if you are actually saving any money .
I have mentioned this before, but I used to have my uncle do my taxes. He did a decent job and was cheap, but he never really gave me advice. I would ask him how to pay less taxes and he said it was a good thing I paid a lot of taxes, because that meant I was saving money and not spending it. I didn’t think paying a lot of taxes if I didn’t have too was a good thing, so I got a new accountant. My uncle was very cheap, he didn’t charge me anything. But he kind of gave the impression I should pay him something for his work. That was awkward because he wouldn’t tell me how much he charged, I had to guess.
My new accountant was expensive. I asked around and decided to go with who I thought was the best firm in my town. I was surprised when I saw the bill for my taxes, but I paid less taxes that year than I did the year before and I made more money the year I used the new accountant. The money that accountant saved me was much more than the increased fees I had for the tax preparation and advice.
I recently bought out my parents and took over the entire real estate team (8 people) and our flipping business. This was a very complicated transaction with multiple year payouts and property transactions. We had an idea how to structure it, but my accountant said I had it all wrong and he knew how to structure the deal so I paid almost nothing in taxes and saved thousands every year. Trying to figure that deal out myself would have taken months and caused me to go insane. If I had used a less expensive accountant I would constantly be questioning if I had done the right thing. I knew I had the best and I was getting the best advice. Peace of mind can be expensive, but it is well worth the price.
If you need professional services; accounting, Real Estate, law advice, use someone good. Don’t try to figure out how to do it yourself. You will waste hours, days, weeks of time and still not do as good a job as the professional. The professionals have been mastering these techniques for years. It will save time, money and frustration to hire someone to do it right.
Pricing a Home Too High
Many investors try to get the absolute maximum they can when they sell a home. I did too when I finished this flip, I priced it at the very top of the market to try to make some of my labor back. It didn’t work, you can’t force a price on the market. I ended up lowering the price twice before it sold. When I lower a price, I don’t lower is $100, I lower it 5-10% so that hurt. Asking for a higher price also cost me more money, because of carrying costs and the stigma of an aged listing. Whenever a home sits on the market, people assume there is something wrong with it, even if it is perfect. Trying to make some extra money by pricing a home too high almost never works out, except in very specific markets which I talk about in this article.
Time is Money
Once we lose a minute, hour or day, we never get it back. I want to get as much out of my life as possible and hiring people to handle things I don’t know how or don’t want to do allows me to do that. My coach has a great saying: “never do work below your income level.” That means if your time is worth $100 dollars an hour and you can hire someone to do a task for $50 an hour. Pay the $50 an hour and you keep doing work that makes $100 an hour or more. Better yet, go play golf or spend time with your children.
Opportunity cost is the loss of opportunities, because you don’t have the time, money or resources to go after those opportunities. When I was working on that flip we didn’t buy any other flips, because I was working on that stupid house. Who knows how many thousands of dollars (or more) we lost in income from other deals. I didn’t sell many houses that year, because I was working on that stupid house. I probably lost at least 20k by doing that work myself. I won’t kick myself for making a mistake, because I learned a ton from the experience. I learned how to drywall, lay flooring, install a kitchen, install windows and I learned I never want to do any of it again!
Concentrate on doing what you do best and leave the rest to the professionals. How’s that saying go? Master of nothing, mediocre at everything. Doing repairs yourself, not using a Realtor, pricing too high and not paying for advice may seem like a way to save money, but in the long run it will cost you much more than it will ever save you.
Photo: 401(K) 2012