Welcome back to the Fearless Innovator Podcast, my name is Mechiel Kopaska, and I am your host.
4 reasons newbie real estate investors like yourself can be successful. Why didn’t I label this the 4 reasons newbie investors fail? Well, it’s because I’m going to share with you the mistakes, I made so that you won’t make them!
This last weekend, I went and looked at a house built in 1970, it’s 1200 sq ft. a 3/1 bath on .35 acres overlooking this beautiful bass fishing lake in a prime location here in Florida. It had a dilapidated front porch, the kitchen had been updated, the house was spacious, nice sized yard, and the dock getting to the gazebo on the water was a little treacherous. Septic and well included. The house itself was made of wood, the back room had been added on and the subflooring was not level with the main house. Roof and siding needs replaced. The asking price is $399,000. We won’t discuss the smell because all rehab houses whether you know this or not smell the same! I haven’t quite figured out how that happens, so just trust me on this one!
The first question I always ask myself, what am I going to do with this house? I already know the type of investor that I am. I like rehab projects but I’m not a flipper. I love buy-n-holds but I’m not a long-term landlord. I love Short Term Rentals. As I’m walking through this house, I imagine this house as a vacation rental. I can see how my guests would love this little cottage on the lake where they could scoot around the lake on a kayak. Now that I’ve defined how I intend to use this house, the hard part begins!
1– Define and evaluate the risks – Just with my brief description of the property, I’m confident that you defined several risks yourself. To name a few, the price first off is way off basis – I realize this is in a prime location with an awesome view – but let’s get real. The only person who would buy this property would be someone that would want to live and fix it up as they went, or an investor like me. Also keep in mind, what you pay for a property makes or breaks the deal. If you don’t purchase at the right price this could become the Flip that Flopped like in Episode 7. The structure of this house was unstable and made of wood – that could mean termites! Adding a new front porch, new roof and new dock are no big deal. There were definite issues with the subflooring and who knows the status on the well and septic. What’s the best way to mitigate risks? Bring your contractor to walk thru the property to help you define the risks and then you pay for an inspection. That inspection albeit may not be perfect, but you may discover issues you didn’t know you had – like electric, water or AC.
2 – Underestimate repairs – This is a common mistake that even well-seasoned investors make. I have created a Property Inspection Summary Sheet that defines all areas that you’ll need to look at. As far as determining the costs for repairs your contractor should be able to give you cost breakdowns, however, keep in mind that pricing on everything these days has skyrocketed, and costs are forever changing. Be sure to lock in pricing for repairs.
3 – Time Management – Here’s another helpful hint and another mistake a lot of people make, time IS money – you’ve heard that before. Don’t do the work yourself – get out of your own way and make sure you hit your timeline. Hire the professionals to get it done within your timeline. Typically, on a rehab it shouldn’t take more than 3 months to complete your project! If you’re worried about the costs – then negotiate! Getting this property online where it’s making you money is worth more than patting yourself on the back for self-satisfaction! Ask yourself do you want a J.O.B. or do you want your money working for you?
4 – Where do I get the money? Now, unless you are independently wealthy, which most people are not. You’ll need to get creative on where the money comes from. Most people who start to invest have a 9 to 5 J.O.B., so that means you have money coming in each month and you quite possibly have a nice little nest egg with let’s say $100K or less that’s either in savings, an IRA, or a 401k. You have several options, and I can’t hit on every scenario here so we will just discuss a couple of options.
Let’s say this deal was negotiated as a purchase price of $150,000 but you need another $100,000 in repairs. You’ll need $250,000. If you have the $250,000, put it under contract and let the work begin.
If you don’t have all the money, perhaps take ½ of your $100K and use it for the down payment and then borrow the rest with a traditional mortgage. Take the remaining $50K and use it on another property for the deposit. Now you control 2 properties instead of using all your cash on one house. Now, you just need to qualify for a mortgage.
Remember this is not your primary residence, this is now a rental property where you’ll be earning passive income. Mortgage company’s or lenders treat this type of mortgage differently. I’m not saying it can’t happen, they just have other stipulations for qualifying for this type of mortgage. Another stipulation is after you have 3 – 4 traditional mortgages under your belt the banks will cut you off and you will no longer be able to qualify for a loan. Validate what the exact number of loans are with your lender when you start your real estate investing adventure. What if your goal is to have 10 rental properties – now what do you do, when you know, the banks are going to cut you off at 3-4? 1 – you can negotiate directly with the seller. If the seller owns the property out right, they can become our bank!
2 – Look for OPM. What’s OPM? Other People’s Money. That’s right, other people you know with money sitting around can become your bank. It works just like getting a loan from a bank – it’s all done legally through a real estate attorney, it’s less paperwork, less hassle and you’ve just created a win-win solution for yourself and your investor. You get the house, and the investor earns interest or whatever deal you negotiated with them.
One day when you become a full-time investor, using OPM is one of the best ways to become financially independent or if you’re in the other camp where this real estate investing seems like too much work, I just might know a girl that’s done her homework and is always looking for OPM. There’s a lot more to learn here and if you have any questions, or would like a copy of my Property Inspection Summary Sheet you can reach out to me at my email address: Mechiel@fearlessinnovator.com – it’s in the show notes!
As far as this 3/1 opportunity on the lake, I’m evaluating the rehab costs, vs. just tearing it down and placing a tiny home on the property. You’ll have to wait for a future episode to see how it turns out!
I’m looking for guests for my show. If you or someone you know has a compelling story about how they quit their J.O.B to become a real estate investor, I’d be interested in interviewing them for my show.
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Thank you for listening, I hope you were inspired, entertained or you learned something new!
Catch me later…