1. Learn How To Generate A Deal
The real secret to being a real estate investor is in finding the deal. If you can master a method for finding off market deals then it will be your golden goose. Forget about trying to find deals on the MLS or online auctions. There is too much competition there.
Understand this. Nobody is going to give you a really good deal. If it is a good deal, they are going to do it themselves. If you want to be in this game for the long haul you need to create your own deals. Get on BiggerPockets.com and learn about the various methods you can use to get a deal and start implementing them. If one works for you in your market, keep doing it. Grow your marketing expense over time with your profits and grow your business.
2. Know your numbers
I think the number one reason most new real estate investors fail is that they do not know their numbers. It is extremely important that you make a fair offer for the house and complete the renovations within your budget. Below is a simple plan to help you make better offers.
How we determine our offer price
Determine the After Repair Value (ARV)
Once you have found a house, you need to determine what you will sell it for once it is fixed up. I recommend averaging the prices on Trulia and Zillow. Use this average as your After Repair Value. This should be a fair price and if you do the renovations correctly, you should be able to sell the home for at least this price.
Determine the Cost of Repairs
Next you need to estimate the cost of the repairs to the house. This can be a challenge for new investors. You need to take the time to learn what it takes to renovate a house. I recommend getting on BiggerPockets.com and learning all you can. I highly recommend Jay Scott’s “The Book on Estimating Rehab Costs : The Investor’s Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs”.
If you do not know your numbers you can get yourself in trouble. When planning your renovations, only do the updates that are necessary to sell the house.
On average, a whole property renovation could cost around $60,000. I put together a list of the average renovation costs in my hometown below.
Do the Math
As a new investor, I would recommend using a 30% margin. This will allow you some wiggle room in case you have unexpected expenses when renovating or the market value starts to go down when you are renovating the house. I will use an example of a typical house with a modest renovation budget as an example.
After repair value $ 300,000
Less 30% margin $ 90,000
Cost of Repairs $ 40,000
Offer amount $ 170,000
3. Don’t give all your money to gurus
One mistake I see new investors make is they spend all their money on the learning process. They spend thousands of dollars on guru courses and have none left over to actually purchase a house. Join your local real estate investor club and start learning what you need to know. Be careful with the guest speakers though. They are there to sell you a weekend learning package. Usually this is reasonably priced and you can get some good information from them. Just be careful you don’t get too enthusiastic that you drop $6,000 on their boot camp and don’t have any money left to buy a house. I have already mentioned BiggerPockets.com and I think you can get access to all you will need to know at a very reasonable price.
4. Don’t try to make your flip an HGTV show
I think a lot of real estate investors have spent too much time watching shows on HGTV and fall in love with the renovation process. Once you become a seasoned investor you realize they all become the same. I use the same tile, colors, cabinets, accessories, materials on each house. It makes my life easier and the contractors know exactly what to do. I avoid making significant changes to a house. I may rip out a wall to open up a kitchen, but major changes usually just increase the cost and might not bring in that much more profit. Try to keep your renovation budget to a minimum and remember you are trying to bring the house to retail quality at a reasonable price.
5. Protect your reputation at all costs
Real estate investors are not the most respected players in the real estate industry. Some see them as quick talking shysters trying to steal houses from unsuspecting sellers. Some buyers fear an investor flip thinking that the repairs were done at minimal cost.
This does allow the good investors to shine. In order to make sure you are shining,
always treat people the way you would want to be treated. Make sure every deal is a win win deal for all parties. If they can’t give you a 5 star google review and tell all their friends when you are done, then you have failed to protect your reputation. You may have to give up some profit to make sure you earn these feelings, but it will prove to be valuable. The shysters never last in the industry. The people who treat people right and respect their clients will win out in the end. If you protect your reputation like this you will find more deal coming to you in surprising ways.
Written by: James Fitzgibbon of Ledge Real Estate Solutions, LLC