Building A Cash Flow Foundation
There are many good reasons why rundown houses are the perfect properties to begin a real estate investor career. However, leading the list is CASH FLOW. Rundown houses offer the best opportunity for small-time investors to acquire real estate with small down payments and still achieve cash flow quickly. No other type of real estate I know of can do that!
With rundown properties, it’s not the least but uncommon to pay just 10% down and still be able to create a positive cash flow property within a relatively short period of time after the purchase. Obviously, the time it takes will depend on a number of factors, such as - how long will the fix-up job take, how much tenant movement will there be, and of course, the big variable - the skills and aggressiveness of the person doing the job. I have learned from experience - cash flow is much easier to achieve when buying small multiple properties, such as 3 or 4 houses on a single lot, or several duplexes with a house or two. I call these various combinations “leper properties”. I own many properties with 5 to 8 living units each. They become excellent cash flow producers after a year or so. My goal to accomplish a “tum-around” (total fix-up job) is 18 to 24 months.
LESS COMPETITION
Fewer potential buyers interested in the property you want increases your odds for striking a bargain with the seller. Conversely, when there are many buyers willing to write offers - Your chances of buying at a discounted price just flew out the window! Sellers have no reason to offer discounts when there are flocks of buyers lined up on their doorstep.
Given the normal competition, there are basically just two ways to acquire income properties at prices that allow for investor profits.
- BUYING BEFORE THE PUBLIC KNOWS - One on one with the seller (without competition). To do this you must somehow find out about a property that’s available, before the public knows about it. I do this with my cold call letters. I write letters to the owners of properties I’d like to own, suggesting a possible sale to me. Real estate agents often accomplish this by listing a bargain property (no one else knows about), then telling a friend who buys it. Smart agents buy the property themselves. The key here is to purchase the property before the competition even hears about the deal.
- ADDING VALUE, THE VISION TO SPOT POTENTIAL - Basically, this method is buying properties that most of my competition views as worthless - or certainly worth much less than what the seller’s asking. Roughly 95 of my competition view rundown ugly properties with tenants who look about the same - as pure junk and certainly not worth the asking price. When my competition does make an occasional offer, it’s always a “low ball” offer, which generally insults the seller - further reducing serious competition for me. This is the me- thod I always recommend for beginners because it’s the easiest - also the most profitable.
MOTIVATED SELLERS
Motivated sellers get that way for many reasons! Here’s a list of the most common ones - all except one, which we’ll tackle later:
A. Property owner loses his regular 8 to 5 job.
B. Family problems - mostly divorce or death.
C. Poor health - can’t work on property any longer.
D. Change of investment goals. Found a better mousetrap.
E. Moving from area. Job transfers are most common.
F. Retirement time - Ready to hang it up and go fishing!
PERFECTION IS NOT REQUIRED
Rundown houses that need work are ideal candidates because they’re inexpensive to acquire and because perfection is not nearly so important. Almost any fix-up work you do will likely improve the property even if it lacks professional quality. Remember, we all get better with experience and we can only get experience by doing. If somehow you’ve missed my point so far, let me be a bit more direct. I have long held the notion that no one should be allowed the status of fullfledged real estate investor without first having completed an understudy assignment doing “fix-up”. My reason is simple - Fixing rundown
houses and apartments gives an investor many real world experiences that he or she is not likely to get from any other kind of real estate. Most fix-up projects require a multitude of tasks beginning with the purchase of a property at a price that will allow the investor to profit. Fixup investors will be involved with employees and contractors. They must develop an economical “fix-up plan” that fits within a pre-determinedbudget. Finally, they must learn to handle tenants and negotiate with future buyers.
By the time you’ve completed a fix-up project or two, I can promise you one thing. You’ll have enough experience to deal with nearly any type of real estate venture! You’ll also have a ton of confidence in yourself and your abilities. Let me explain a little more why fix-up properties are the perfect place to start, especially for do-it-yourselfers who don’t have a great deal of money to begin with.
PROBLEM-SOLVERS EARN THE HIGHEST PROFITS
To start with, fixer-upper properties are cheaper - or at least they will be once you learn to buy them right. You should expect to pay about 20 to 40% below normal market prices for fixer houses. The biggest discounts will come when you buy the dirtiest - and poorly managed properties. Ugly rundown houses, combined with people-problems, such as divorcing owners and abusive tenants who kick in the walls just for fun, generally provide the biggest discounts. What I share with you next is very important. You should underline it twice and read it often because if you can learn to apply what I’m telling you, amazing results can be yours for the taking!
THE BIGGER THE PROBLEMS YOU LEARN TO SOLVE, THE LARGER THE PROFITS YOU’LL EARN FOR YOURSELF.
As I just told you, problems can be both the physical condition of the property or people-problems at the property. Houses with both kinds of problems, going on at the same time, can create super paydays for “savvy” investors who know how to fix them.
CHANCE OF LOSING MONEY IS MINIMAL
No investment opportunity is worth its salt if the risk is too high. Fixing up residential income properties comes about as close to zero risk as you’ll ever get. Furthermore, it don’t take four years at Harvard to make you a successful house fixer. Based on my own experiences and my observation of many other house fixers, your chances of losing any serious money is almost nil. There are two primary reasons for this! First, it takes lots less upfront cash to get started. Sometimes when trades are acceptable or options are used, it takes no cash at all to acquire a property. Secondly, when fix-up properties are purchased at least 20% below market value - and the investor’s personal labor will save about two-thirds of the total fix-up cost, it’s nearly impossible to lose any serious money. About the most you’ll ever lose is your own labor - even if you’re a total flop. Risking labor is always much better than risking dollars! That’s why I consider fixing up rundown houses one of the most risk-free opportunities today.
