Novice Mistake???

Rehabbing, Fix and Flip, Rental Properties
1

I’m using a buy, hold, rent strategy and very actively looking for my first property. However I’m falling into what I believe to be a newbie mistake- “Champagne taste on a beer budget” I’m finding properties that are in horrible shape which is not the problem because I have a good vision for the interior, but these houses lack curb appeal (meaning the over all architecture of the house is not appealing). Am I being a snob or is this something that you more experienced guys (and gals) look at? Any advice is appreciated!

~Heather

2

You are NOT making as mistake!!

You are GOING WITH YOUR GUT!!!

NEVER, NEVER, NEVER go against your gut.

I know EXACTLY what types of homes you are talking about. They are old, odd balls, that have had hack additions added to them or crappy repairs over the years. RUN…don’t walk away from these dumps. They are MONEY PITS!!!

I’ve been in this business for 20+ years. I LOVE Ranch houses and Capes and Cottages built between 1950 and now. Everything is standardized. Windows, doors, ceiling heights, interior wall materials, plumbing, electrical. I call these homes LOW HANGING FRUIT. The others (the odd balls) are a pain in the @ss.

You can’t polish a turd. Remember that. The same “things” your noticing will be picked up on by EVERY potential buyer that looks at the home.

Having said that…for a seasoned rehab investor these odd balls can still make you money. But…in my experience you’ll spend twice the time and twice the money getting these homes finished. NO THANKS!!
I’ll take a 3 bed 1 bath ranch house any day.

If your plan is to RENT these homes it’s a different story. People aren’t as picky about Architecture on a rental as they are on a home they want to buy. If your new at this I would STRONGLY suggest buying and selling a couple of properties to build your cash (unless you have $40K) in the bank now. Rentals cost MONEY to own. Even GOOD rentals EAT money. I’ve seen lot’s of new investors eaten alive by expenses they DID NOT have funds to cover. Get that cash cushion, THEN start building your rental inventory.

GO WITH YOUR GUT. ALWAYS!!!

3

Thanks for the advice. Right now, I only have a little more than $21,000 in my bank account (not including retirement funds which I will not touch) and I only owe the mortgage on my house. I also have a $100k unsecured LOC with a $0 balance. I had originally planned on using this to purchase the properties, then obtain financing through a convention means.

I will admit that I am a bit apprehensive about flipping in today’s market. I feel like the holding costs will eat me alive until the sale transaction took place and short term capital gains. The only houses I’ve bought and sold have been my own. I’m a licensed (but not praticing) realtor so that helps.

What do you feel is a comfortable cash position to begin a buy hold strategy.

4

Sounds like you need to get more information on how to buy and what to look for… keep on reading on this forum. You’ll know when you know how to buy… buy.

5

If I had your capital I would be looking for houses that I could purchase for under $50,000. I have no idea where you are but any home you found for $50K would have to be rehabbed for no more than $10,000 and then sold for $100K or more.

If you are doing it right the complete “TURN” should only take you about 90 to 120 days.

In order to do this you HAVE to buy homes at 50% of their value. Get in, do a light rehab. New kitchen, refinish hardwoods, re-glaze (paint) bathroom tile and fixtures, buy a stainless steel frig and range for the kitchen and UNDER price the home by 10%.

The 50% puchase price is the MAXIMUM allowable at this stage of your investing. If you do this and do it right, you’ll have over $120K in CASH within one year. Then it gets MUCH MUCH easier. You can buy homes and make a smaller profit because your using YOUR money to do it and your holding costs go through the floor.

YOU GAVE TO GET OUT THERE AND DIG FOR THESE HOMES.

6

Heather,

Don’t confuse YOUR tastes with that of renters. I wouldn’t live in most of my rentals (and my wife wouldn’t live in ANY of them), but they are excellent rentals. The rental business is about MONEY, not pride of ownership.

Low and lower-middle income tenants don’t generally care about architecture. These tenants are more interested in the basics: RENT, cleanliness, safety, etc. I wouldn’t slap floor paint on the floors at my home, but I do it all the time in my rentals. I wouldn’t put used appliances in my home, but I do it all the time in my rentals. I wouldn’t paint my home like a white tornado, but I do it all the time with my rentals. Don’t confuse a property that you would live in with a property tenants would live in. THEY ARE NOT THE SAME!

What I look for in a property is CASH FLOW, not architecture. It’s all about the numbers. In addition, with $21,000 in the bank and a $100,000 LOC, I think you have plenty of money to start a rental property business - JUST BUY RIGHT!

Good Luck,

Mike

7

Heather, one more thing…

Buy Mike Rossi’s book on rental property. It’s worth 100 times what you’ll pay for it.

That book is THE BEST I have ever read on the rental business. Just like Mike…it’s no BS, just the facts.

Get it!

8

Yep, Heather, buy the book.

You are getting million dollar advice from the above two seasoned investors, one who flips, and one who holds lower-income rentals.

My path is to buy low to moderate priced cottages, houses, units. They have got to have some charm when they are finished. I do what propertymanager does–paint floors, buy used appliances, etc. I also fully furnish my houses right down to the toothpicks. I spend time and money on quaint door-knockers, vintage framed pictures, big-screen TV’s. I look for good basic architecture like fdjake, but I don’t much like those dark ranch houses. I get triple the rents of those who rent unfurnished in this town. I expect at least $300/month profit per unit or I am doing something wrong. On some units I get much more. I do a ton of work and have cleaning and maintenance staff. I love my work.

The point is to find your own path that you personally can excel in in where you live. You have enough money to start. Do lots and lots of searching, that’s on the street scouting not just on the computer or MLS. You should be able to just look at a house and know its value. You should buy what you are comfortable with. For me, I would not buy it if I wouldn’t live in it.

FurnishedOwner

9

Thanks…actually I already bought the book (via Amazon) and it should arrive today. I have a long business journey beginning tomorrow and it will be the perfect opportunity to dedicate myself to reading, taking notes, etc.

I figured I was being a bit high maintainence. I was looking for something I would live in, not something others would live in. I’m in Jacksonville, Florida and focusing on middle class properties in historic districts. I have an inactive real estate license that I working on activating and finding a broker that will hold it free of charge. I have one in mind but he is not apart of MLS. How many of you use MLS? I am wondering if I should look for a broker that is service.

Not this Tuesday (due to my business trip) but next Tuesday I’ll be attending my first local REI club meeting.

Thanks again for the help and I forward to continually learning from you all.

10

Mike keeps saying there is no real secret of real estate. But there is, and I am going to reveal it (I should be charging you $20,000 for this):

There is always something to buy. (That’s the $20,000 secret that will help ypu be a sucess)

Don’t be afraid to walk away from a house that isn’t just what you want. There is always something to buy, and another one will come along pretty quick.

In this market, you should be able to get a good price on a cosmetic fixer. New paint, new carpet and back on the market, really quick.

Structural changes can be really expensive, especially on older houses where you don’t really know what you will find as you start tearing down walls.

Bad floor plans are a hard sell and very expensive, or even impossible to fix. There are enough houses on the market that you can find one with a decent floor plan. Pass on the ones with bad floor plans. It costs too much to move walls, re-wire, and move the plumbing.

You can do a lot to fix curb appeal with some clever landscaping and new paint, but if you need to add porches, or new driveways, or roof over-hangs, that can get into a lot of money that you won’t necessarily get back.

Leave the house that need structural changes to the experts. After you’ve done a couple of easier ones and seen how fast the costs can add up, and seen what you can do with just paint, then you are better qualified to assess whether it is worth the time and expense to be making serious changes in a house.

OK: one more secret: price isn’t everything. Just because a house is really really cheap does not guarantee that it is worth buying. You might be better off to spend more money and get a house in a better neighborhood that takkes less fixing up. Spend less fixing and a lot less on holding costs, and it will be a lot easier and quicker to sell.