Real Estate Strategies
It is really important to know the many ways to work Real Estate. When you understand the creativity within the chaos you will be able to give yourself multiple exit strategies in case things do not go as planned. So lets dig in!
A flipper is a little ambiguous. It can mean someone that buys a property and immediately sells without putting any money in. It can also mean a rehabber that buys and immediately repairs and upgrades the property for a higher ROI (return on investment). For purposes of this documentation we will refer to a Flipper as someone who buys and immediately sells, and a Rehabber as someone that buys and repairs for profit.
How Flipping Works
The investor that immediately sells without putting more money into the deal is relying on the property being in demand. The only way this works is by having enough equity after the purchase. Equity equals the difference in Total Investment and Market Value or ARV. ARV (After Repair Value) you get from your comps. ARV equals the difference in Total Repair Cost and Comps.
So the goal for the flipper is to buy low and sell a little bit higher. The reason I say a little higher is because the rehabber or investor will usually not accept less than $20,000 for their profit and most like at least $30,000. Now I do not suggest relying on this assumption unless you have proof that it is one heck of a deal and is notoriously desirable.
The rehabber most generally is doing the work independently or has his own crew. Some outsource the work. The DIY guy usually doesn't make anymore than if he was an employee. If you have your own crew you can filter some of the money through the business. Any which way you work it there has to be enough equity left over to profit at sale. In the instance our rehabber is looking to buy from a flipper it might go like this:
- Flipper buys property at under Market Value
- Market Value = $100,000
- Flipper Purchased @ $50,000
- Flipper lists property to sell @ $80,000
- Rehabber sees the ARV according to comps look to be $150,000
- Rehabber has $20,000 in equity @ Market Value
- Rehabber can put $20k to $30k in and still profit
- Life looks good to the rehabber
The example above looks promising to the rehabber. See remodeling a home can get pricey very quickly. It is easy to spend $10k on a weeks worth of work. So $10,000 is nothing to a rehabber and leaves no margin for error.
Buy and Hold
The Buy and Hold guy is looking to profit from rent. There are a few different ways to do this but lets tackle what most people think of first.
If you purchase a single home in hopes to rent you will be liable for the maintenance. If a light switch quits working, sink clogs, HVAC stops, you are liable for the upkeep by law. You have to plan for this expenditure in your Operating Expenses. Also include home insurance while your at it.
The goal is to collect enough rent to pay the mortgage and still retain a profit.
Single Home Lease to Own
You can have the renter pay $2k to $3k up front under the agreement that their payments go towards the purchase of the house. If they do not keep their part of the bargain the house comes back to you and you can go through the process again.
The beauty in this is every time renters turn over you get another large down payment and by all means if the renter fulfills their end of the deal their rent payments went towards something obtainable. It is also good for the landlord because you don't have to worry about the hassles of maintaining the property.
Duplexes to Quadplexes
Theses are still considered residential and provide multiple rents. They can be purchased with FHA loan as long as you live in one of the units for a year. They are easier to pay down the mortgage because you have more Cash Flow.
Throws you into the commercial bracket and poses a whole different set of rules. The rent per unit definitely brings increased Cash Flow but it also has more complex Operating Expenses. You really need to dig for exact numbers here.
A Bird Dog is a term used to represent a person who is a deal analizer. In general terms a Bird Dog knows the criteria their list of investors are looking for and hunt down good investment opportunities. This is a good way to get your foot in the door, but your numbers must be bulletproof. Meaning you must have a good system that filters through prospective properties and then conduct thorough due diligence that accurately presents profit margins or as investors call it--the spread. These investors are sharp and savvy. The reason they like Bird Dogs is because it cuts down their work. They have people bringing them deals. So they just verify numbers and decide to approve or disapprove.
Intelligent investors test you on how well you know the business by asking you about your numbers, use real estate jargon, and even ask how long you have been doing this. My advice is to be upfront and truthful. Only approach an investor if you know your numbers inside and out. I'm not talking proforma numbers either. I mean really dig. Find out as many exact numbers as you can.
I hope this overview of Real Estate Strategies has demystified some of the terms you have heard. I will go more in depth into each strategy later on.
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