5 Items That Impact Local Real Estate Markets

With all the constant news and information regarding the real estate market it is easy to get confused sometimes. One day you hear that interest rates are going up and housing market is in trouble for 2017.  The next day you hear that there will be an increase in loan programs which will open the door for new buyers.  The reality is that most real estate is done at the local level.  Something happening in Ohio doesn’t have much impact on the market in New Mexico.  It is important that you understand the markets where you invest and more importantly what influences changes in these markets.  Knowing this can put you in front of a growing market or give you the heads up that it may be time to leave a declining one.  Here are five key items that impact local real estate markets.

  • Demographics. As we mentioned every real estate market has its own unique set of qualities. These qualities often determine just how strong, or weak, it is. Many of these qualities can be defined as demographics. Local demographics can be anything from the mill rate to the strength of schools. It can be unemployment figures, crime rates or average household income. To best gauge the strength of a market you need to look at as many of these figures as possible. Relying on just one of these can give you a misleading portrayal of the area. Finding demographics can be as easy as looking at information provided on the local town website. You can easily find the tax rates, crime figures, unemployment numbers, schools in the area, new housing permits and almost anything else you think is relevant. Real estate is done by real people in real towns. Demographics often hold the key for where the market will go next.
  • Inventory. Real estate is also based on supply and demand. This certainly isn’t an earth shattering observation but is important to remember. If there is increased supply buyers are in a stronger position. They can pick and choose the ideal property for them. Since the buyer pool is reduced sellers are more open to negotiation. Buyers in markets with increased inventory can make the offer they feel comfortable with and if it is not accepted move on to something else. The trickledown effect to this is that home prices tend to be lower. Areas flooded with foreclosures and bank owned properties may seem like a goldmine but can actually be fool’s gold. You may be able to get the property at a discount but you will also have trouble getting it sold. On the flip side in markets with limited inventory sellers have the upper hand and can increase the list price of their properties. Buyers know that there are only so many houses to choose from if they want to stay in that market. Before making any offer always ask your real estate agent about the current inventory and changes over the last twelve months.
  • Foreclosures/Short Sales. The overall number of foreclosures and short sales has been greatly reduced over the last five years. That being said there are still many markets that are not completely out of the woods. All it takes is one foreclosed property to have an impact in the market. When a foreclosed property sells it lowers the comparable sales for every other property. This has an impact on properties trying to sell or even refinance their homes. If there are multiple foreclosures it makes it difficult to pull values up. You can find current foreclosure numbers in town hall. Always look to see foreclosure volume as well as changes over the last six months. It is also a good idea to ask your real estate agent to provide you with a foreclosure sales chart. If the sales prices are greatly reduced it can have an impact in the town even if the foreclosures are nowhere near your subject property.
  • Days On Market. Trends are nothing more than a snapshot of what has happened in the past and not a predictor of the future. Flat sales volume over the last year has nothing to do with the next twelve months. What you want to look for is the average number of days on the market. This tells you just how long, or quickly, homes have sat on the market before getting sold. Some of this is influenced by the current state of lending but most on buyer demand. If the average days on market have been shrinking it is a sign that buyers are coming out in full force. If the days on market are getting longer inventory could be poor or buyers are looking elsewhere. Either way it is a poor indicator of things to come.
  • Price. Price is typically the bottom line for any market. As simple as it sounds if prices are rising the market is more desirable. If prices are falling sellers are looking to get out and buyers are looking elsewhere. When investigating price adjustments you need to look at as much data as possible. It is not uncommon for one or two high end sales to completely change the average sales price. This is why a median or a mean price number is more reliable. With these methods they throw out the lowest and highest sales and provide you a more realistic snapshot of the market.

Before diving into any market you need to know where it stands and where it may be headed. Use these five items to help determine the strength of your market.

 

Business Development: Why Every Good Investor Needs A Plan

If you are considering getting involved in real estate you need to have a plan. Your plan doesn’t need to be elaborate or even overly formal but you should have some sense of where you want your business to go.  Where most investors get in trouble is thinking they know the business simply by watching a few shows or reading as few books.  As they quickly discover the business has a way of taking them to places they would have never expected.  Without a solid business plan it is easy to bounce around from lead to lead without any real direction.  Prior to looking at your first property or researching your first deal you need to start with a plan.  Here are five aspects of writing a good business plan.

  • Know What You Are Getting Into. You should never start investing without some idea of what you are getting into. Without the aid of experience you should start your plan by doing your homework. Most investors in today’s market are infatuated with rehabs and quick flip deals. While these can certainly make sense in the right market they may not work for you and your goals. You don’t need to be an expert in every aspect of the business but you should have some idea of what you want to do and how you plan on doing it. There is a big difference in what is needed for a rehab as opposed to a buy and hold rental. When you do get involved in your first deal it shouldn’t catch you off guard. You will never know everything prior to getting started but you should always do as much research as needed to make you comfortable.
  • What, Why, When, Where. Your business plan should serve as a roadmap for where you want to go and how you plan on getting there. Start by accessing what kind of investing you want to pursue. Do you want to get in to the world of rehabbing or are you looking for long term rental properties? How you answer will partially determine which markets will be your focus. Some markets work better for rehabs while others make more sense for long term acquisitions. You also need to determine the timeframe for your first purchase. Are you looking to buy tomorrow if something presents itself or do you want to wait a few months? Under each answer you should play out the best and worst case scenarios. Most new investors think everything will fall in line just the way they plan. When they are presented with the slightest issue it throws everything off. The more you consider all of the negatives that can happen the better you are at dealing with them.
  • Time Commitment. One of the great aspects of real estate investing is that you can do it on your own terms. If you want to buy one property a year there is nothing keeping you from doing so. Part of your business plan should be recognizing how much time you can commit to the real estate business. There is a lot that goes into being part of a successful transaction. Even though there are websites and apps that make the process easier there are no shortcuts to success. You need to do your due diligence on every deal if you want to truly know what you are getting into. It is important to ask yourself how much time you have available during the work day to focus on real estate. This can be a challenge if you want to hang onto your full time employment. If finding time during the day is tricky you need to be able to work at nights or on weekends. There are ways to invest even with just a few hours a week but you need to map out exactly how you plan on doing it.
  • Strengths & Weaknesses. What parts of the business do you feel you have a pretty good grasp on right now? While you really never know until you get started often times you know which areas you are comfortable with and those you need to work on. You should play to your strengths and look for ways to compensate for your weaknesses. Whatever field you come from should be your focus. If you come from finance, real estate or the mortgage business you should be able to understand the numbers and jargon on a new deal. If you have a tech background you can use that strength to help generate leads and promote your business. Getting into any new business requires some self-assessment. As you write you plan you should take the time to consider your strengths and weaknesses.
  • Lead Generation. Regardless of your background the strength of your initial lead generation often determines the strength of your business. A major part of your business plan has to be how you plan on getting leads. Fortunately it is easier than ever to promote a business and reach people. The internet, particularly social media, make it easy to reach hundreds of people every day. However reaching people is not enough. You also need to think about how you will generate leads. You don’t need to spend thousands of dollars on lead generation but you should have some strategy in mind. Finding the right strategy will take some trial and error but you need to have a plan prior to getting started.

Your business plan can be as short as a paragraph or as long as you want. Having a plan of attack is the best way to approach a new endeavor.

 

4 Advantages Of Multi Family Investing

There is more than one way to invest in real estate. One of the most intimidating hurdles in the real estate world is taking the leap to multifamily investing.  The common thought is that with increased units comes increased risk.  The reality is that the opposite is often the case.  Sure, multifamily properties can be more difficult to obtain but are often far less risky than single family properties.  In fact the rewards often outweigh the risk. There is nothing wrong with single family investing but multifamily properties should not be blindly ignored.  If you are on the fence as to whether or not multi’s are for you here are four advantages of multifamily investing.

  • Cash Flow. On a single family property you have one rent coming in. With multifamily properties there is almost no limit as to the number of units you can have. When most people think of multifamily investing they usually think of a two or three unit house. Multifamily investing also includes commercial, mixed use and apartment rentals. On a large apartment complex you can have 100 units or more. This increase in units directly increases your cash flow. This doesn’t necessarily improve your net income but your cash flow amount is much greater. Increased cash flow reduces risk. With a single family property if your tenant stops paying you have no cash coming in. On a ten unit property if one tenant doesn’t pay that is only 10% of your total units. While this scenario isn’t ideal it is much easier than dealing with an eviction and trying to offset the entire monthly payment. This alone makes it much more of an attractive investment in relation to a single family property. A single family property may be easier to sell but a multiunit property is less risky partially due to the increased cash flow.
  • Competition. If you have avoided multifamily properties for years you are not alone. In fact you are much more the norm than the exception. Once the extra unit or units are added to the mix many investors run for the hills. This greatly decreases the competition for these properties. Like anything else in the real estate world the less competition the easier the property is to acquire. Instead of competing with a dozen other investors for a property there may only be one or two interested people. On large apartment and commercial complexes there is often little to no competition at all. There are other hurdles to acquire these properties which are largely financial but reduced competition allows you to streamline the process. Instead of wasting time on single family properties that you may not end up getting your due diligence can be rewarded. Anytime competition is reduced it greatly increases the chances you can get a property you really want.
  • Management. One of the most common reasons that investors shy away from extra units is the perception of increased work. As crazy as it may seem you may actually end up working more on a single family property than you would on a ten unit. There are many single family owners whose cash flow is paper thin. Instead of spending money on property management they are forced to do everything themselves. Every time the phone rings or something needs to be fixed they are the ones handling it. Over time this becomes too much to bear and they look to simply get out of the property. With multifamily properties the increased units give you increased cash flow. This gives you the option of hiring a property management company to take care of the property. You will still get the occasional phone call but you don’t need to hop in your car every time the toilet clogs. Your property will pretty much run on autopilot while you focus on other areas of your business.
  • Appreciation Potential. One of the golden rules of real estate investing is never count on appreciation. This is true regardless of the number of units. While your focus with multifamily properties isn’t necessarily on appreciation there is greater upward potential. With a single family property you are at the mercy of the local market. You may have made great improvements and have strong cash flow but it doesn’t necessarily translate to increased value. With most multifamily properties comparable listings and sales are far less important. Buyers look at certain rental formulas and calculations to determine value. If the property is running at maximum cash flow and the local area is on the rise your property will appreciate. In most cases the appreciation levels are much greater with the more units you have. Some of the wealthiest in the world have accumulated their wealth with multifamily properties. Increased appreciation is never a guarantee but the potential is much higher with increased units.

While there are some differences in single and multifamily investing the process is essentially the same. You are still looking to generate rental income which relates to value.  Like anything else you do in real estate you need to be comfortable with how you invest.  If a multifamily opportunity presents itself don’t dismiss it solely based on the additional units.  Once you close your first multifamily deal you will discover that it was often much easier than you anticipated.

– See more at: http://www.cthomesllc.com/2016/03/4-advantages-of-multi-family-investing/#sthash.Mz0gZlqP.dpuf

How To Prepare Your Real Estate Clients For Mortgage Mayhem

How can real estate pros prepare their clients to survive the mortgage process?

While some sources suggest that getting a home mortgage loan is getting easier, it will continue to be a quirky and trying process until major innovations are implemented. Mortgage struggles are one of the most common reasons that real estate deals fall apart. With fallout ratios that can top 30% of all contracts signed; mastering this part of the industry can help optimize business, maximize revenues, and build a superior reputation. Acing this not only decreases the chances clients will drop out, but can make all the difference when real estate agents, investors, and others are buying and selling houses themselves. So what’s so difficult about getting a mortgage today? How can these challenges be navigated to a successful closing?

The Issue

For most, getting a mortgage loan is not an easy or fun process. The process is notorious for constant new demands by underwriters and changing terms. The final terms will almost invariably be worse than the original quote. Interest rates and monthly payments will be higher and buyers will have to bring more money to closing than they expected. Original ‘loan approvals’ are mostly worthless. Once a formal mortgage application is made, the real conditions start flowing. Few may appear to make common sense to borrowers. There may be extra insurances, explanation letters to be written, trips to out of area locations to acquire old paperwork, and lots of resending the same documents again. It’s enough to make even a zen monk get crazy. For the average first time home buyer, this is can be an extremely volatile emotional roller coaster. When underwriters ask for tough conditions and a parent has to explain to their spouse and kids they may not get their dream home, it can get ugly. No one wants the stress. The headaches, extra money, and wasted time may all be palatable, but when it comes to causing emotional stress to their family members, many will draw a firm line in the sand. So how can real estate agents, investors, and sellers, help minimize these issues and keep more deals together?

Setting the Right Expectations

All too often, real estate professionals try to make the process of buying a home sound easy. They promise a perfect, glitch free, enjoyable adventure in buying their dream homes. If that ever occurs, it is a miracle, and the exception. This can make it worse when challenges and new demands start popping up. It may well be worth over preparing clients and buyers for the worst. Tell them the process isn’t easy, that the end terms will probably be more expensive, it will take longer to close than expected, and they should expect bizarre sounding conditions from underwriting. If that doesn’t occur, then they will love you and rave about you to others. When it does happen, they won’t panic and will understand that this is what you meant about it getting challenging.  That way, things won’t seem so bad and your clients will be confident that you will help them through the process.  This also helps them to be prepared to ace any hurdles. If buyers get extra documentation ready before they even start, they’ll be ahead of the game. That sure beats being asked for a tax return the day before closing and finding out the IRS is backed up for 90 days.

Help buyers understand and know where they will and won’t draw the line in advance. If they are applying for a loan with 3% down at 4% interest, will they still stay in the deal if rates hit 5% and they have to put 5% down and bring an extra two thousand dollars to closing? At what point will they have to call it a day?

Stress Management

Never underestimate a client’s stress level. For those buying homes they plan to live in, they will often spend many sleepless nights thinking about the deal. Their whole family’s hopes and dreams – and cash – is riding on this. You might not be able to do much, but you can offer a sympathetic ear and encouragement. Simply dismissing their calls and emails is not going to help get things to closing. They don’t do this every day. So take the time to make them feel better.

Other Solutions

Not every deal is a nightmare. Some will close more easily than expected, but it is smart to be over prepared. These issues can also be minimized by working with better lending partners, choosing better qualified clients, and considering alternative sales processes. Can you seller finance, or at least partially seller finance, your properties to avoid these issues altogether?

 

5 Rules To Buying Great Properties

To be a great real estate investor you need to follow rules. The rules you create will help guide you in everything you do.  Without rules it is easy to jump at every new property that hits the market.  Without a set of defined rules you can end up with properties that aren’t really profitable.  Instead of working on quality properties you will waste time, and money, trying to scratch out a small profit.  Before you make any offer you need to see that the property fits your criteria.  It may be more difficult in finding properties and deals that are a match but the ones you do will be much more profitable.  Here are five golden rules to buying great properties.

  • Buy Properties That Create Value. To make money in real estate you need to be able to buy low and sell high. This isn’t exactly breaking news but it often gets lost on new investors. Buying a property and making some upgrades is no guarantee that you will make a profit. The single most important factor in any real estate purchase is the ability to create value. This can be done with buying in the right market or making the right improvements. Buying in the right market certainly helps create value but is far from the only factor. You need to be able to solve a problem. The seller may have a problem finding willing buyers and is ready to sell for a discount. A seller may not have the capital to complete all of the improvements and is ready to move on from the property. Before you make any offer you need to ask where and how you will create value.
  • No Emotions. It is important that you take all emotions out of your investing decisions. There will be times when you follow a property for weeks and feel you have the inside track to purchase it. When you find that there is competition the natural reaction is to do everything possible to make sure it is yours. This often leads to irrational behavior and poor decisions. Regardless of how long you have pursued a property once the price gets too hit you just need to let it go and move on. Like the old saying goes there are other fish in the sea. The longer you stay attached and consumed with a property the longer it will take you to find your next deal. Letting go and moving on can be difficult at times but it is the best thing you can do to ensure you only pursue quality deals.
  • Numbers. A major part of letting go is trusting the numbers. The market and the numbers should be the ultimate guide for choosing which properties to pursue. Not only do you need to look at the numbers but you need to make sure they are realistic. If you really want a property you can adjust the figures and data to make a property look as appealing as you like. By doing this all you are only hurting yourself. The goal of any real estate investor is not to acquire any property but to purchase the right one. It is critical that you let the numbers guide you with everything you do. It is not enough to take the seller or selling real estate agents word for it. Spend a little time and do your own due diligence on everything associated with the property. You never want to be caught off guard by something you should have found before you closed. If the numbers don’t work or if too much has to happen for the property to be successful you need to walk away and wait for the next one.
  • Expect The Unexpected. Regardless if you focus on rehabs or buy and hold rentals unexpected items always happen. The best investors acknowledge and brace for these events to happen. It doesn’t mean they are consumed by negativity but they have systems in place to handle unforeseen events. There is nothing that can wipe a business out quicker than not having ample reserves in place. Without them you are walking a tightrope without much of a net. Your great tenants today could stop paying their rent tomorrow. The kitchen floor you want to replace may need to be dug up and started from scratch. There are many examples of unexpected items happening in every area of the business. Whether you have reserves in place or simply have the mindset to prepare for them you always need to expect the unexpected.
  • Have A Good Team In Place. Most investors feel they can do everything themselves. When they realize this isn’t the case they often struggle. Before you move forward with any purchase you need to surround yourself with people you can trust. It is not enough to work with the first able person that presents themselves. You need to be fully comfortable with everyone on your team. Whether you know it or not but you will lean on your team more than you know. Not only will your team help get the job done but they will also make your life that much easier. Instead of handling tenant disputes your property manager will deal with them. If there is a problem with a rehab property your contractor will be first in line. Over time you will learn to trust your team more and your business will benefit from it.

By following a firm set of rules you are less inclined to veer off track every now and then. Recovering from a bad deal can take months, if not years.  Before you get too far in your business make a set of rules you can follow on every potential deal.

 

Mortgage Brokers VS Banks: Which Is A Better Option For You?

If you are looking for financing on your next deal you shouldn’t discount your local bank or mortgage broker. Even though traditional financing has received a bad rap in recent years it is still a viable option for the right borrower. The two main lending options are a local bank and a mortgage broker. While they both perform the same basic functions how they go about it is often much different. A local bank is confined to in house guidelines and programs while a broker has access to several lenders. There are pros and cons with using each that are based on your specific credit profile, available down payment and debt to income ratio. Deciding on who to work with can be tricky. Here are a few pros and cons of each to help with your decision.

Local Banks:

The most common starting point if you are seeking a loan is your local bank. It makes sense to reach out to the institution where your accounts are held. However you should also know what benefit they provide. Before you seek any type of financing you should have an idea of how strong your application is. You can get a pretty good idea by obtaining a copy of your credit report. In addition to your score you can see what liabilities are listed. By taking the minimum monthly payments for these liabilities and dividing them by your gross monthly income you have your debt to income ratio. This is one of the most important factors for loan approval. Where local banks have an advantage is by catering to borrowers that have a strong credit score, significant down payment and low debt to income. This is magnified if you are an existing account holder in that institution. It is not out of the question to find interest rates a half point lower than you would find with a mortgage broker with an excellent credit profile.

Where local banks falter is with any sort of application that is out of the box. Most local lenders have a strict set of guidelines and underwriting rules that must be followed. There is little margin for error or ability to make exceptions. If you are less than perfect in any one of a number of areas your application will be rejected. Another potential with this is the length of the transaction. A good number of local banks do not do their underwriting in house. If they do this is a major advantage and will expedite the process. However, most loans are shipped off where you are at the mercy of strict underwriting guidelines. Because of the red tape involved it is not uncommon to stretch the process out a few extra weeks, or more. A local bank is best served for “A” borrowers who know where they stand and are willing to wait a little longer to close.

Mortgage Brokers.

Many fingers were pointed at mortgage brokers when the market collapsed. Like any other profession there were a handful of good brokers coupled with a few bad apples. Fast forward almost ten years later and the industry has undergone sweeping changes. The biggest change deals with the requirements to hold a license. Not only are there local and national exams in order to get licensed but annual continuing education requirements. When you work with a mortgage broker today you should feel confident that they know what they are doing. The next major change deals with how fees are charged and disclosed. There is a cap on how much they can earn and a fee sheet required before you get too far in the process. If these fees change by more than just a few percentage points the loan is re-disclosed and subject to a mandatory three day wait to close. All of these changes were done with protection of the borrower in mind and have revitalized the industry.

The biggest benefit that mortgage brokers offer is their ability to work with several different lenders at once. It is not uncommon for a broker to have a few dozen different banks they can work with at any time. Each of these lenders offers something a little different that can make the transaction appealing. Some take a higher percentage of rental income while others allow for self-employment less than two years. They work with lenders that can stretch guidelines where local banks can’t. This allows borrowers with slight credit dings a better chance at getting approved. Another benefit is that brokers work with lenders on the wholesale level. This affords them access to lower interest rates than what you may find locally. They also have the ability to offer interest rate credits that can reduce your bottom line needed at closing.

The biggest knock on mortgage brokers is that they think they can close every deal that comes there way. By working on a deal that ends up falling out you run the risk of losing your deposit and missing out on the property. No two loan scenarios are exactly alike. What works for one borrower may not work for another. With an overzealous mortgage broker they may think they can do everything. This can end up costing you in the end if it doesn’t work out.

A common misconception is that your credit score drops every time it is pulled. The reality is that you are allowed, and expected, to shop around when searching for a mortgage without lowering your score. By knowing everything you can before you get started, and asking a ton of questions, you can pick the best type of financing for you.

The Basic Steps Of A Real Estate Transaction

Every new investor wants to dive into the business as quickly as possible. They watch their favorite investing show on TV and think things will be just as easy. Without knowing what steps to take you will run yourself into circles and not get very far. Regardless of what type of investing you want to pursue the steps to purchase are basically the same. It is important that you follow these steps and avoid taking shortcuts on a given deal. All it takes is one oversight or incorrect figure to turn everything upside down. Whether you are looking for your first deal or simply need a refresher here are the basic steps for any real estate investing transaction.

Property Information. Numbers and data should dictate your buying decisions. You may personally fall in love with a property but if the numbers don’t make sense you need to pass. The first step of any deal evaluation is the actual property. You need to assess the current condition as well as what improvements are needed to maximize your return. Some of the improvements can be cosmetic while others will be more large scale. You need to put a price tag on whatever updates you plan on making. If you are not versed in estimating these numbers you need to reach out to a contractor that can provide real figures. If you notice we did not mention the current list price. That is because this is often just a starting point and not a final number. A homeowner can list for whatever they like but ultimately the market will determine how much it sells for. Only when you are finished evaluating every aspect of the property can you move on to step two.

Seller Motivation. There is often a big difference in what you think the property is worth and the estimation of homeowner’s value. Ultimately the homeowner is the only opinion that really matters. You can support your argument with facts and data but if they don’t want to hear it they don’t have to sell. Generally speaking the best real estate deals are done with motivated sellers. These are sellers who have a desire to sell based on a pending short sale, foreclosure, divorce, death in the family or change in employment. As you evaluate the property you need to gauge the motivation of the seller. If they are not ready to sell now there is nothing you can say or do that will change their mind. You can follow up with them from time to time but you shouldn’t devote all of your efforts in trying to get them to change their mind. They will respond when they are ready and you can’t get too caught up or angry with their inability to act. Without motivation you should move on to the next deal.

Financing. How you plan on financing the deal often has a huge impact on your offer. There is something to be said for the ease of transaction. If you have access to capital or hard money funds you can offer a little less with the ability to close quickly without having to wait for lender approval. On the flip side if you are using a lender you need to have all of the items for the loan ready to go upon submission of the offer. In most cases you only have 30 to 45 days to get your offer approved and cleared to close. Without financing in place you cannot make an offer and even if you can the seller will not accept it.

Offer Amount. Your offer amount should be based on three factors: seller motivation, market demand and comparable listings and sales. You should always know who your competition is and what the demand is like. On properties with little demand you never want to bid against yourself and offer too high. You can always come up but it is difficult to go down. Properties with high demand your offer needs to be as close to asking price as possible. Always run your own numbers and come up with a price that works for you. Keep in mind that you need to have enough room to make a profit. Make your offer and if it is not accepted move on to the next property.

Closing Process. Getting your offer accepted is only the first part of the process. Many would argue that your work starts after your offer is accepted. Regardless if you are using hard money or lender financing you need to get an inspection done immediately. Never skip this process just to secure the deal. Even the trained eye of a contractor can miss something with the foundation or structure. If you skip the inspection you are opening yourself up to risk. If you are using a lender you need to submit all loan items as soon as possible. The quicker you supply your lender with tax returns, full bank statements, business licenses and anything else they need the quicker they can start the process. It is important that you find an attorney who practices real estate and knows how to work with other attorneys and lenders. You never want to lose a deal because your attorney dropped the ball.

You should see the deal all the way through closing and be as involved as you need to be. There are always unexpected curveballs in real estate but these are the five basic steps towards closing.

5 House Flipping Mistakes Newbies Must Avoid

Not every rehab and flip deal you get involved in will be successful. With poor planning and unrealistic numbers you can and sometimes will lose money. As much as investors don’t want to hear this they need to recognize the possibility. All it takes is a few small mistakes to turn a profitable looking property on paper to one you struggle breaking even on. In a perfect world the mistakes you make will be small enough in nature that you can use them as a learning experience. However the bigger the mistake the more costly it will be. Instead of making mistakes on your own it is best to learn from the mistakes of others. Here are five house flipping mistakes you need to avoid.

Planning As You Go. Once you make your plan you need to be committed to it. It is ok to make minor tweaks as you go but you have to avoid wholesale changes. The middle of the project is not the time to decide that you want to switch up the layout of the property. Not only does this add days to the process but money to your budget. Adding amenities does not always improve your bottom line. It can be easy getting influenced by what your contractor or someone else says you should do with the property. These are simply suggestions and should not be taken to heart. If something does not work out you are the one that will feel the repercussions. Adapting to an unexpected item is different than scrapping your original plan and starting from scratch. If you spent time planning for the property you need to trust your gut and stick with your plan.

Unrealistic Budget. Your budget can be anything you want it to be. It is not uncommon for novice rehabbers to fudge the budget to make the deal appear more attractive. By doing this all they are doing is creating a bigger problem down the road. There is nothing wrong with passing on a deal if the numbers don’t make sense. Getting into a deal is not the goal. The goal of any rehabber is to make a profit on the end sale. If you are over budget your bottom line won’t be as high as you anticipated and you will regret getting into the property. Your time could have been better spent on another property with much higher upside potential. On your budget you should always go with the worst case scenario. If things work in your favor you will be pleasantly surprised but at least you protect yourself from the downside. The budget and numbers should guide every decision you make with the rehab. Only use numbers you are confident in.

Overinflated ARV. Your budget and after repair value (ARV) typically go hand in hand. Getting a good deal and staying under budget only helps if you can sell the property the price you anticipate. A common mistake rehabbers make is thinking that the work they do will have a greater impact on the value than the market suggests. When estimating value you need to look at the property from potential buyers prospective. Giving the property a complete makeover will give your value a boost but maybe not as much as you think. Doing work just for work sake does not make sense in every market. If there are no substantial comparable sales or listings you could be throwing money away. Buyers do not care about the condition you bought the property in or all the great work you may have done. All they look at is the finished property and how it stacks up to other homes in the area. Having an overinflated value will cause the home to stay on the market longer than it needs to ultimately sell for much lower than you thought.

Holding Costs. There is more to your bottom line than simply the purchase and end sales price. On every rehab deal there is the time from acquisition to the end sale. The hidden fees during this time can greatly impact the profitability of the property. In addition to the interest repayment of the loan there are also payments for the insurance, property taxes, licenses and utilities. You are on the hook for these every day you own the property. Some of these will be more costly than others but over a few months these can easily equal thousands of dollars. It is important that you fully know and understand all of the potential expenses prior to making an offer.

Lost Work Days. As we mentioned time really is money in the rehab world. It is critical that you keep things moving throughout the process. Before you take ownership you and your contractor should sit down and make a work list and schedule. Reach out to everyone you plan to work on the project and confirm the dates you are requesting. Reiterate the importance of sticking to these dates and ask if they anticipate any conflicts. It is up to you and your contractor to keep things going so you hit the dates on your end. Waiting a week for materials may not seem like much but pushes everything back accordingly. One lost week can turn to two and before you know it you are 30 days past your projecting finish date.
Flipping a house means staying on top of the little and not so little things. Whatever you do avoid these five common mistakes at all cost.

Flipping Real Estate with No Money Down [Myth or Reality?]

There’s all types of courses about building a real estate investing business today or developing an empire or rental properties but what if you don’t have much to get started with and you’d just like to get started flipping real estate in your spare time?

Can you do it part time, can you really pocket $10,000, $40,000 or more from each deal and is flipping real estate with no money down really possible or is it all a myth?

If all you are looking for is an extra $10k a month, flipping real estate can easily be done in just a few hours a week with the spare time you have in evenings or weekends. With the right systems and tools you can even make quite a lot more than that without ever making it a full time job. Though how much do you really need to get started?

One thing you certainly shouldn’t try to skimp on is your real estate education but once you know what you are doing and have the right plan you’ll find flipping real estate could be a lot easier than you thought. In fact you’ll probably be kicking yourself for not getting started a lot sooner.

When it comes to money you’ll soon find out that not only can you really buy and flip real estate without using your own money that’s how the pros do it again and again even once they have millions in the bank. And if you aren’t putting your own nest egg on the line there really isn’t anything for you to lose.

How can you get started flipping real estate without draining your savings? There are actually a number of ways to finance properties without using your own cash from tapping into private mortgage lenders to hard money loans to transactional financing.

Don’t Forget These 5 Hidden Rental Property Expenses

A buy and hold rental portfolio is one of the building blocks of long term real estate investing success. Regardless if you have one single family property or a pool of apartment buildings it is critical that you understand the numbers.  Omitting or miscalculating a few expenses can quickly cause a profitable looking property to turn negative.  A rental property with negative cash flow will weigh on your portfolio and make you second guess buying rental property in the future.  In most cases all of the expenses are black and white however there are a few that are often overlooked.  It is these overlooked expenses that make all the difference with your cash flow.  Here are five overlooked rental property expenses you need to be aware of.

  • Maintenance. Every rental property will need maintenance at some point. In fact if you are not getting maintenance calls your tenants may be hiding an issue with the property. Maintenance doesn’t necessary mean replacing the furnace or hot water heater. It can something as basic as getting the locks changed on ever lease or repairing a clogged toilet from time to time. Individually these items will not break the bank. However added up they can be much more than you may realize. You also need to factor in seasonal items such as cutting the grass and snow removal. There are also costs for seasonal maintenance on the furnace, HVAC and house cleaning after every lease. It is not a stretch to say that these costs can quickly exceed a thousand dollars or more annually without having to deal with a major problem.
  • Vacancy. No landlord ever expects a vacancy. However the longer you own rental property the more realistic it becomes. With every property you own you need to ask yourself what you would do if your tenant suddenly stops paying. Most landlords think they are protected by eviction laws but they don’t work overnight. Even with the courts help you are still looking at multiple months without income coming in. Without capital to help bridge the gap until you can find a new tenant you will be looking at trouble. At least some portion of the rent received should be placed in a reserve vacancy fund. You should plan on not touching this money for as long as it takes to have a vacancy. Ideally you won’t need this money for several months, if not years. However when the inevitable vacancy pops up you will be glad you have these funds available. Unexpected vacancies can happen with any tenant and to any landlord.
  • Fees. There are several fees that are unrelated to the property. Everyone is aware of property tax and insurance fees that come with owning a property. However many towns have begun charging their own set of fees. If your property is located near a number of colleges and universities the town may impose a student housing permit fee. This is required as long as you are currently renting or may want to rent to student tenants in the future. Like most other town fees this won’t break the bank but must be accounted for. You are looking at a few hundred dollars annually on top of inspection fees every few years or so. You also need to make sure you have good tenants in your property. If your student housing tenants are rowdy and cause excessive damage you may be stuck with a bill or a fine from the town. It is a good idea to reach out to the town planning and zoning every few weeks or ask to be put on an email list to be notified of any changes.
  • Eviction. An eviction is truly one of the worst things that can happen as a landlord. Not only do you lose your only source of income but you also need to pay to have the problem rectified. Dealing with an eviction means first reaching out to an attorney. Even if you have some idea how the process works having an attorney helps speed things up with the court and make things as smooth as possible. Your best case scenario is having the court set an eviction date a few months down the road. When that day finally comes you can bet that your property will not be in the condition you desire. You will also need to have money to fix any repairs to get the property ready for your next tenants. If at all possible you should try to reach some kind of an agreement with your tenant before you get that far. If not you will be looking at a stack of expenses that will fall on your lap.
  • Equipment. There are many rental property owners who decide to self-manage their property. The thought process is that they can save money on management fees by taking care of the property themselves. While this is true to some extent you need to factor in the cost of management. If you are going to cut the grass you need to have a good lawnmower at the property. It is also a good idea to have a reliable snow blower as well as anything else you need to take care of the exterior of the property. You should also invest in a good set of tools and other basic items needed to manage a property. When all is said and done you could be looking at an investment of at least a few thousand dollars.

A well run rental property can be the gift that keeps on giving. Understanding all of the numbers associated is big part in rental property success.