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Last Updated: May 14th, 2012 - 22:24:01 |
The world of real estate investing is vast and intricate and there are many ways for the small investor to participate. For example, you could buy rental properties and become a long-term landlord. You could specialize in foreclosures or tax lien properties, or build an income through several lease option techniques. Other opportunities could include such ventures as buying and selling discounted mortgages, mortgage lending or brokerage, or even new-home building. The possibilities are numerous and often confusing, particularly for the beginning investor.
What is the best opportunity for you? There really is no right or wrong answer to this question. This is something you must carefully consider and decide for yourself, based primarily on what aspect of the industry you are most interested in. in all of the areas I’ve mentioned, the opportunities are there to succeed as an investor either on a part-time or full-time basis. Clearly, I have a preference for handyman properties. Let me tell you why I think handyman properties handyman properties are an excellent opportunity for the beginning investor.
Handyman Specials – The Rehab-and-Sell Strategy
The essence of this investment strategy is speed – buy a fixer-upper property at a bargain price, quickly rehab, and then quickly sell the property. Get in, get it fixed up, and get out: a simple yet very profitable and safe strategy, regardless of external circumstances. Using this technique, profits are made when you buy at a bargain price, increased as a result of the renovation process, and converted to cash when the property is sold.
The key advantage of this strategy is that you, the investor, are in control of every aspect of the transaction from start to finish. You are not dependent on price inflation or any other external factors to make profits. You will know going into a deal what it will cost you to fix up the property and how much the property will sell for at the end. And best of all, you will know exactly what your profit will be, because you will have included it in your buying decision. Uncertainties, and therefore, risks, are controlled and thereby reduced substantially.
Risk management and reduction are two of the most compelling benefits of this investment technique. And in many respects, it is a recession-proof business. Regardless of the external economy, people need and want quality housing and will pay top dollar for a relatively inexpensive house in excellent condition.
Are there negatives associated with this strategy? Sure. Just like any other worthwhile endeavor, sustained success comes to those who have created an advantage for themselves. And typically that advantage is hard work and knowledge coupled with a system of doing business – a system that, once developed, can be repeated over and over again with predictable results.
What would such a system consist of? It’s really several systems or subsystems: ways to consistently find and buy properties at prices will below market value; methods to get the work done by professionals, without impacting your profits; techniques for financing the purchase and rehab work, using little or none of your own money, if possible; and finally, selling the property quickly and for top dollar and more. The formula for success in any business is:
Knowledge + Hard work + System for doing business = Profits
Do not be misled. Real estate rehab is not a get-rich-quick scheme. The necessary knowledge and a system for doing business is the subject of this technique. And never forget the hard work ingredient. It is required and is indispensable to make the investment strategy work.
Why is this technique particularly well suited for the beginning investor? There are three reasons:
- It provides for immediate positive cash flow.
- The acquisition and rehab work can often be financed without any out-of-pocket money from the investor.
- The business system utilizes skilled professionals (real estate agents, appraisers, contractors, home inspectors, etc.) for the critical elements of the business, thereby significantly minimizing potential mistakes and reducing risk. The investor assumes the role of the project manager, leaving the day-to-day implementation in the hands of the various experts who are brought into the project for specialized tasks.
Just the Opposite – The Buy-and-Hold Strategy
In contrast to my preferred rehab-and-sell technique, is the traditional buy-and-hold strategy. Let’s take a closer look at this investment method and examine the pros and cons to see how it compares.
There are many variations of the buy-and-hold strategy, but usually it entails buying a house or small apartment building with a small down payment (20 percent or less) and renting out the units. The holding period is at the discretion of the owner – it could be one year, one decade, or forever. In the meantime, the owner is making payments on the underlying mortgage or mortgages and managing the property. During the holding period, profits are derived from positive cash flow (if any) and possibly tax advantages.
But the real profits of the buy-and-hold strategy are dependent on price inflation, that is, the extent to which the value of the property increases over time. And of course, the more highly leveraged the property is, the higher the return on investment. For example, let’s say you own a $100,000 house with a $95,000 mortgage, which you bought with a $5,000 down payment – a typical deal. Over the next five years, the house appreciates 20 percent or about 4 percent a year. The house is now worth $120,000 and the return on your $5,000 investment is $20,000 or a whopping 400 percent (not counting any positive cash flow or mortgage reduction). This is the power of leverage at its finest.
But what happens if the market stays flat or worse yet, if the market goes down? Unheard of? If you’re lucky and the market stays flat, you come out even and your $5,000 investment is worth $5,000, five years later. Not exactly a super-duper investment but what if the market went down 20 percent and the house is worth only $80,000? You are now in a situation known as being “upside-down”. You owe $15,000 more than you can sell the house for, so you have negative equity. Not a pretty picture.
The point is this: Local real estate prices generally move up and down over time, in cycles. Although the long-term trend may generally be increasing, the short-term trend may be devastating down. Where in the cycle did you buy and where in the cycle did you sell? To a large extent, this will determine your profit outlook in using the buy-and-hold strategy. And it is these external circumstances that you as an investor have absolutely no control over. Shake the dice and take your chances.
A Blueprint for the Novice Investor
Buy It
- develop a workable business plan for the overall investment process.
- Find and work with real estate agents.
- Evaluate neighborhoods and recognize candidate properties.
- Find bargain properties that have profit potential.
- Research foreclosures and bank REO (real estate owned; properties that have been foreclosed by a bank or other lending institution) properties.
- Determine the maximum purchase price for any property.
- Use appraisals for estimating as-is and after-repaired values.
- Attract partners, investors, or private mortgage lenders for financing.
- Inspect houses and estimate repairs.
- Negotiate with sellers to get offers accepted.
Fix It
- Choose the best renovations to maximize profits and marketability.
- Create fantastic curb appeal.
- Install killer kitchens and bathrooms to die for –cheaply.
- Get bids and negotiate acceptable contracts.
- Successfully mange your rehab project.
Sell It
Find a top-gun selling agent.
Develop a powerful and successful marketing strategy.
Include incentives and protections in our listing agreement.
Attract buyers with seller financing options.
Sell the house quickly and for top dollar.
Profit
- Consider the profit potential of a full-time rehab business.
- Incorporate advanced bargain-finding techniques.
- Operate your rehab business for maximum profit.
- Invest your profits in mortgages to skyrocket your returns.
Buying, fixing, and selling handyman properties can be a very exciting and profitable investment technique. It is intellectually rewarding because it requires you to develop and use your social skills, analytical skills, and creative abilities to successfully complete a project. It is a niche in the real estate field that offers great potential for those who really want to dig in and lean the business.
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