The Fundamental Four Fs of Real Estate - Part 2
|Real Estate Investing for beginners can easily be covered in four fundamental tenets: The Find, Funding, The Fix and The Big Finish. The First Fundamental - The Find, was broken down to components in part of this getting started in real estate series, |
The Fundamental Four Fs of Real Estate
===>>Second F: Fund
Once you have identified a good investment property that is in line with your investment goals and you're lucky enough to win the purchase contract, now you will need money to close. There are only three reliable methods to purchase distressed investment properties; cash, hard money/private financing, or a line of credit.
Due to the physical condition of the asset, title seasoning requirements, time requirements, and one hundred other reasons, bank financing is your worst option for real estate investing. A line of credit from a bank is typically your best option, they come in (SLOC) form, which are secured by other assets, usually a bank CD, and non-secured (LOC). Typically you will not qualify for a LOC with a bank until you have a long established relationship with them and can show extensive experience with real estate investing. Most investors use either cash or hard money until they reach this point.
Cash vs. Hard Money - Depending on your school of thought and the resources you have available either cash or hard money financing can be a good option. If you have a minimum of $100,000 or more in cash you can purchase an investment property outright, remodel the property, and either sell it or rent it out without incurring the costs associated with carrying a loan, and that means more profit in your pocket. Although there are some investors who do not want to risk all or most of their capital on one transaction and understand that real estate is an illiquid investment.
If you are planning on renting the property out and would like to perform a cash-out refinance to recoup your cash invested to buy a second rental property, this can prove difficult in today's market and can lead to a dead end investment strategy. Investors that believe in the effectiveness of leverage tend to favor using hard money loans. This type of lending is quick, doesn't carry any of the limiting factors that prevent bank or conventional loans from being successful, and comes with construction funds needed to transform a distressed asset into a performing one.
When an investor is ready to refinance out of a hard money loan it's considered similar to a rate-in-term refinance and not a cash-out, which is infinitely more available. With a hard money loan, the investor only needs to risk the illiquidity of a fraction of the cash that would be required for an all-cash transaction, $15,000-25,000, and can usually receive close to a 100% return on that cash when the property sells or in the way of additional equity if it is held as a rental property.
Leverage - Some investors don't see the wisdom in buying a single property with all of their cash to make $25,000 when they can utilize leverage to buy 3 properties that will provide $20,000 each while greatly diversifying their investments and improving their chances of success.
Get Pre-Approved - It's always a good idea to have a source of financing lined up prior to beginning your search for real estate. A simple pre-approval process can take as little as 24 hours and is a great way to establish what your buying capacity truly is.
===>>Third F: Fix
Most new investors think their job as a real estate investor is completed once they close on a property. The reality is that it has just begun. The remodeling phase of the investment process is where new investors are going to pick up the majority of the experience they will use in their future investments. The positive attitude that it's okay to make some mistakes is really what is going to set the scene for a real learning experience.
Jump You Wont Fall - There are a lot of "tentative" real estate investors out there that spend thousands of dollars on real estate seminars and never come close to the experience there is to gain from just one experience with the reality of rehabbing. And if you only make half what you expected to make in profit or cash flow then you're still ahead of them all! The experience you will pick up will help you not only with future remodeling but also with knowing what properties to select for future deals and what kind to avoid at all costs.
Unless you are a competent remodeler by trade, you're likely going to make more money with a cell phone in your hand than a hammer, so the first step to rehabilitating a property is to find the right contractors. Most real estate agents, other investors, flippers, or acquisition companies can provide great references for quality tradesmen that they have worked with in the past so don't be afraid to ask.
Rehabbing - The construction and remodeling business can be a real racket and unfortunately not all contractors are investor friendly. Some contractors just want to make the largest fee possible and can have little foresight for repeat business or regard for their reputation. Timing is often a factor when dealing with contractors too, the best and most reasonably priced contractors can get fairly busy and when you need them for a job, they may not need you, and this may cause their bids to be temporarily high.
It's a good idea to have several different people to call per trade and to get at least three separate bids for each part of the rehab. The bids should always separate labor cost from material cost and everything should be in complete and explicit written form by way of a signed legally-binding contract. Otherwise a contractor can quote you $150 to replace the toilet in the master bathroom, but you may find out after you hire him that he wants another $200 to install it. Disputes like this are very common and end up costing everyone involved time, money, and relationships, so it's worth the extra time in the beginning to make sure everything expected is clearly defined in writing, room by room. And never, ever finish paying a contractor before the job is 100% complete.
===>>Fourth F: Finish
After the home has been completely remodeled and professionally cleaned, it's time to launch into the final marketing stage. Unless you are a licensed real estate agent or have a knack for grass roots marketing it's a good idea to find someone who is licensed to list the property on the MLS for sale or rent.
Get An Real Estate Agent - Typically you will pay a 6% commission to an agent for the sale of a property or a commission equal to the first month's rent for a lease. There are many brokers available too that offer discount listing services for either a flat fee or 1%, but this will generally only include an MLS listing and no other services - like for example - help with negotiating contracts or showing the property.
If you purchased your property from a professional acquisition company chances are they will list the property for you free of charge or for a nominal fee. Generally if you are an investor, getting your property listed on the MLS is all you will need, especially if you have experience with contracts and local real estate customs. You will generally still be expected to pay a 3% commission to the agent that sees your listing on the MLS and brings the buyer though.
Marketing - There are several other marketing techniques in addition to simple MLS exposure. If the property is being sold it can often be necessary to have the house professionally staged with furniture and decoration to give it some life and purpose beyond just empty rooms. Unlike real estate investors, retail buyers are not just buying for the bottom line. It's likely going to be an emotional decision for these buyers so every little bit of effort counts.
Everything from air freshening devices to a small stereo to play soothing music during normal showing hours can set you aside from the other houses for sale in your area. A professional stager can help set the tone for the wholesome environment every home buyer is looking for, and their services are usually very reasonably priced and well worth it.
Another way to go above and beyond the competition is to have the entire subdivision or immediate area distributed with flyers announcing the property is coming on the market. There are companies that specialize in getting the flyers out. They are the same companies that hang restaurant menus on your door knob when you're at work. They typically charge 15-20 cents per door, so for the cost of a few hundred sheets of paper, printing, and $100-200 for distribution you can reach over 500 homes in your immediate area.
It's good to design a high quality flyer that doesn't have all of the physical property info but just advertises a specific weekend or two when you will be having an open house and states that the house was completely remodeled. Make sure you mention that you will feature some stunning before and after pictures during the open house to entice even families that are not in the market for a house to come by and have a look.
Offer free sodas or lemonade and grill some free hotdogs in the back yard for visitors too. Everyone has a sibling, parent, friend or acquaintance that is in the market for a home and they want them to live close by. This is by far the most cost effective way to sell your house off the market, and it saves you from paying that 3% realtor commission that would typically go to a buyer's agent.
The bottom line is getting creative, don't just hire a realtor and expect the house to move. There are hundreds of additional techniques to marketing a property for sale. The best real estate investors are constantly trying new techniques along with the old time honored ones to make their business of buying and selling or renting houses more successful.
Real Estate Investing for beginners can easily be covered in four fundamental tenets: The Find, Funding, The Fix and The Big Finish - Getting it Sold! I'm always happy to help you shorten your real estate investing learning curve...Good Luck!
|Kurt Carlton is one of the original founders of a real estate acquisitions firm, and is CEO for a hard money fund designed to lend capital to investors looking to acquire and repair distressed single family properties throughout Texas. |
Kurt Carlton has been directly involved in more than $100 Million in real estate transactions; mostly distressed single family investments.
Kurt Carlton also donates a large part of his time to various charities and currently sits on the board of directors for Alley's House in Dallas, Texas.
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