Real Estate as an Investment

There are many ways to utilize Real Estate as an investment opportunity.  Some investors view it as a way to make some serious money fairly quickly, others look at it as a method to supplement existing income, while still others assess it simply as a reliable hedge against inflation.  Which method you choose has much to do with your individual personality, personal preferences, lifestyle as well as your overall tolerance for risk.  Today, we will give you suggestions regarding the ‘Buy and Flip’ method! 

By far, this is the most romantic method of Real Estate investment, in large part due to several television shows which give the illusion of a sure-fire get-rich-quick scheme! In reality this path is wrought with risk! Nonetheless, there are many things you can do to minimize your financial exposure, here we’ll take a look at 7 of the most important principles:

  1. Buy right! Look for properties heavily discounted.  Bank-owned or Estate-owned properties, as well as Trustee sales and tax sales are common targets, however any property in which the Owner is highly motivated to sell can also be an excellent candidate.  Additionally, making ‘low-ball’ offers on homes priced at or near fair market value can also be productive, however this is generally effective only where Real Estate activity is slow or inactive.  In your offer to purchase, always include a unilateral right to cancel (in Washington state, it’s most common to see a 10 day period following mutual acceptance of the offer), in order to give you the time to thoroughly inspect the property and work the numbers.

  2. Buy on up-cycles of the Real Estate market! If the market is heading in an upward trend, all news following your acquisition becomes good news.  You expected to be able to sell the home for “$X” but in reality you end up selling for “$XX”—your entire team look like heroes, you’re ecstatic and very pumped up for your next endeavor!  The sun is shining, the birds are chirping and the grass seems just a little bit greener… okay, sorry about that…

  3. Create an unbeatable Team!  Your team should include a superb Real Estate Broker, Loan Representative (or private money source), Real Estate Attorney, CPA, as well as a skilled, reliable, affordable Contractor pool.  Beware of cutting too many corners when it comes to your team.  Experience has shown that a ‘Flipper’ who shops for the cheapest professionals is doomed for failure.  When you hire excellent team-members, you only cry once, while the ultra-frugal cry every day.

  4. Look for good bones! When scouring the market for your next rehab project, focus on those properties having a good location, roof, foundation, electrical system, well, septic system, plumbing system, as well as overall structure.  The reason is that, although defects in these items can always be remedied if you throw enough money at it, the eventual Buyer of the property most likely will not pay what it cost you to make the repairs.  If you make a habit of spending $100k to make $50k, you’re sure to become a millionaire- only if you started out a billionaire!  Renovations that involve expert painting, beautiful floor covering, exquisite kitchens, luxurious bathrooms and clean landscaping are the big money-makers!

  5. Use your skill-sets! If you have carpentry skills or other areas of expertise that can save you money, use them when at all practicable.  I have Clients who save tens of thousands on every project, by making use of their skills.  This is not a hard set rule though, for I have other Clients who have the necessary skills to perform certain tasks but still contract out to others, simply because their time is more profitably spent elsewhere.

  6. Do the math! It’s advisable to work the numbers backward before you’re committed to purchase (i.e. prior to the end of your unilateral right to cancel an agreement).  For example; once the rehab project is complete, what will the home sell for?  Your Real Estate broker can give you a reliable range, which will ultimately be influenced by the quality of the work performed, the location, characteristics and amenities of the property as well as foreseeable market conditions at the point of sale.  Utilize the low number if you’re conservative and the mid-number if you’re able to assume more risk (i.e. have deeper pockets) and then begin your subtractions.  Subtractions from the sales price are closing costs when you sell (your Real Estate broker can itemize these for you); Cost of the rehab project (your Contractor team can provide this for you- however build in extra for those unforeseen issues that may arise, especially where tearing out walls will be part of the process); Holding costs during the project which include loan interest, utilities, property taxes and insurance (your Contractor team can give you a close estimation of the time they’ll need to complete the project while your Real Estate Broker can give you an estimation of the time it will take from the first day on market to the date of closing with the new Buyer); Closing costs at the point of purchase (your Loan Rep will provide this to you); and finally, your desired profit (you can provide this to yourself, although you will want to plan taxation strategy with your CPA).  Once you know all these numbers, you know the ‘Buy it Right’ price!  Do beware of the ‘paralysis by analysis’ syndrome however, whereby many people never do buy anything ever, simply because they brain-drain every purchase.

  7. Adhere to the ‘Time-is-money” principle! Time lag can bleed your profit margins dry by the increase of your holding costs.  You can reduce the risks associated with this by the following: A). Map out on a calendar the entire project, from start to finish.

    B). Have your Contractor team ready to start work the very day after you close Escrow on the property.  C). Have your Contractor team committed to work that single project until the rehab portion is entirely completed.  D). If you have to wait days or weeks for the local Building Inspector to inspect a portion of the project, have your Contractor prepared enough to move to a different part of the project while en waiting.  E). Have your Real Estate Broker ready to hit the ground running by preparing marketing materials prior to the initial listing date.  This way, when you’re ready to launch the listing onto the market, it will be a simple matter of populating the marketing materials with photos, videos, aerials, panos, etc.  F). Don’t skimp on final market preparations- clean landscaping and other items to increase ‘curb appeal’ can attract more prospective Buyers and Staging the interior can help bring a faster sale. G). Require a loan pre-approval letter from any Buyer prior to accepting their offer.  If you fail to do this, you can waste days, weeks or even months of prime marketing time—all the while, you’re paying those dreaded Holding Costs.