Clearly Define Your Wealth Plan
At my seminars I often ask my students — Why have you decided to invest in real estate? The most common answer is; to make more money and to build personal wealth! Then I’ll ask students — How do you propose to do it? What is your investment plan or specialty? Are you using your plan now – and how long will it take? Many folks have great difficulty trying to explain their investment strategy to someone else. This is one of the major reasons why investors get themselves in a financial pickle. The basic problem is — Not enough planning is done before the deal is finalized or closed. That’s a big mistake, which often leads to overpaying. Overpaying often means no cash flow or worse yet, negative cash flow! Real estate will often forgive overpaying if you wait long enough. The problem, of course, you must have the extra resources to hang on while you’re waiting! Overpaying and negative cash flow adds far too much risk to any investment plan. You must learn to avoid both if you expect to make any serious money in this business.
If you decide that fixer houses might work for you, the first thing you should do is develop your marketing plan. For fix and sell investing you must determine how much you can sell the fixed -up property for (fair market value). If your plan is to mostly rent houses, like I do, you must determine how much rent you will get when the property is fixed up. Do not buy the property first and wonder how much you can get later. Know how much you can get first. Then you will know exactly how much money you can spend doing fix-up.
For example — I always plan to earn a minimum of 15% annual return on my fixed up rental houses. Don’t count appreciation or tax savings in this computation. My return is based on the total “fix-up” cost of the property. If I buy a house for $44,000 and spend $6,000 for fix-up, that means I must get $625 per month rent ($44,000 + $6,000 = $50,000 x 15% = $7,500 annually). If your plan is to sell and you want to earn a minimum 15% profit, you should work the numbers backwards from market price.
Let’s assume that the $44,000 house I purchase is 20% below its current market value! That means the fixed up value will be $55,000. I plan to do the work myself; however, material costs will be about $2,000 or roughly one-third of my $6,000 total fix-up estimate. In this example $44,000 cost plus $2,000 fix-up = $46,000 completed. If I sell at market value ($55,000), my gross profit will be $9,000, which exceeds my minimum profit expectations.
WHERE TO INVEST IS WHERE YOU ARE
Nearly every city and town across the country where people buy or rent housing is a good location for fix-up investing. The reasons that location is less important than you might think is because you must plan your investment strategy to meet the needs of a specific customer. You have already determined that you can profitably rent or sell. You must always do this before you purchase any property. If the numbers work out positive, it doesn’t matter too much where you invest. There may be one exception for newer or less experienced investors. Cities by the ocean are generally very expensive locations. Competition is tough and start-up costs are often beyond the means of average folks — Particularly start-out investors without any cash reserves. During a seller’s market, which is almost always the case in large seaside cities, cash buyers are standing on every corner it seems. My advice is to drop back inland 50 miles or so where you can no longer smell fish and feel the ocean breezes in your face.
IT’S IMPORTANT TO STAY IN CONTROL OF YOUR INVESTMENTS
If you study my investment strategy, you’ll learn rather quickly that I insist on having total control over my investments. As I’ve already told you, it applies to financing when I purchase properties. Most older “fix-up” type houses should not require new bank financing. Always try to get sellers to finance the sale. Owner financing is FLEXIBLE and lots CHEAPER. If you buy economical priced properties (medium to medium-low range), most people can afford to rent or buy from you. Conversely, if you buy high-ticket properties, you will limit the number of people who can do business with you.
If you buy right, meaning don’t over-pay and if you avoid buying properties in single employer towns, like “sawmill towns”, you will always be able to maintain a steady cash flow from renting. Also, when you are in a position to customize your terms for resale’s — like offering low down payments, options to purchase and wrap-around seller financing — You will always have a steady flow of customers at your doorstep. Even a roller coaster economy won’t affect you very much because your moderately priced rental properties will service the greater percentage of the population where you invest.
Besides using my PROPERTY ANALYSIS FORM to determine how much I can pay for a property, I always sketch out a rough cash flow estimate using my yellow pad to determine how much money I’ll spend (outgo) and how much money I’ll take in from rents (income). I always do this upfront, before buying) to determine if the property will earn me a decent return. Obviously, this is not a scientific study and my numbers (projections) are not set in concrete. But, as most contractors like to say: It’s close enough for government work. At least I can explain my plan and my numbers. My yellow pad study shows exactly how I intend to make a profit on the deal. Try this; you’ll be pleasantly surprised how close you’ll come with your own cash flow projections, once you get the hang of doing it! Never buy a property unless you first determine how you plan to profit from the purchase.
Do not underestimate the importance of knowing your market. It’s the key factor to buying right. It makes little sense to have a $100,000 house for sale in’ a town filled with $75,000 buyers. Same goes for renting. It makes for a very poor rental operation if you purchase $100,000 houses in a town where 90% of your potential tenants work at KMart and Burger King. In closing, allow me to make one observation about investing in general. The seeds of destruction are most always sown during good times. I’m telling you how to survive in the worst of times.
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