by Tod Snodgrass
For most new REIers (Real Estate Investors), undertaking the leap into the investment world can be a very scary undertaking. After all, there is no small amount of things that may not go well when you set out to fix, then flip, a house. Common mistakes made by first-time rehab REIers include:
1. Purchasing one of the nicer properties in a neighborhood vs. a house that is at the lower end or middle of the market in the same general area. It is usually an expensive mistake to buy the “crème de la crème” (i.e. the very best) SFR (Single Family Residence) home available. Buying a lower end/middle of the market property is usually the wiser investment to make since you then have the opportunity to substantially raise the value of it, via rehab, thereby potentially increasing your eventual profit.
2. Underestimating rehab costs. For fixer newbies it is not unusual to actually lose money on their first rehab attempt by failing to properly do their homework on the real costs involved. Losses often are caused by one or both of the following two (negative) factors. They: a. Overpay for the property;
b. Incorrectly underestimate the true renovation costs and/or time involved.
3. Buying the neighborhood “white elephant” which, even after you rehab it, may be difficult to sell. For example, maybe the property is burdened by some form of “Functional Obsolescence” (FO). This can be some structural issue that cannot really be changed very easily. For example, having to walk through the master bedroom to get to the guest bathroom. FOs can squelch the REIers plans to earn a decent profit on a flawed property.
4. Counting on appreciation alone to carry the profit day. Think of market appreciation as a potential extra added profit kicker, if you are lucky with your timing. However, should the market go south, then you will potentially be facing heavy profit-related headwinds. Judge accordingly.
5. Financing, using all cash. Let’s face it, leverage is one of the best benefits of REIing. It increases your (cash-on-cash) investment returns; that potentially allows you to buy more properties.
6. Failing to ask for help when you need it. As the old saying goes “No man is an island”. We all need advice and assistance from time to time. Never be afraid to ask for help from those who are smarter or more experienced in the REI business than you are.
7. Lack of a solid REI team. A good realtor you are comfortable working with is important. Same goes for escrow, title, inspectors, suppliers, insurance agent, CPA, etc. These industry pros can spell the difference between success and failure in this biz. Check everyone’s references very carefully.
8. Insufficient cash. For example, HMLers (Hard Money Lenders) usually require that you bring “skin to the game”, i.e. 15%-15% down payment money. If you don’t have it, then you will need to secure it from someone else, perhaps via a private investor, thereby reducing your overall profit.
9. Employing the wrong type of mortgage product. Using a regular residential loan to buy an investment property can prove to be problematic. It is usually better to eventually latch onto a line of credit. That way you can draw out, and then pay back, the different amounts of capital as needed. Once you have enough equity stored up in all your properties, then use that as collateral to obtain a commercial loan.
10. Assuming you can do it all. Don’t assume you can do all the work necessary for a rehab job. You will need a skilled crew for most jobs, including licensed professionals such as plumbers, electricians, etc. Make sure you build in the funds needed to pay these needed and necessary professionals.
11. New “shiny coin” syndrome. This is where a newbie REIer can’t make up his/her mind about what to invest in. They lack focus and bounce back and forth between new/different REI opportunities. It is far better to pick one thing you like, then stick to it no matter what.
12. Limiting yourself to just your local market. Keep an open mind to investing in other markets, if the numbers hold up.
What We Do: Quickly provide short-term, first position, private capital funding, in smaller amounts, to: wholesale contract flippers, fixer/flippers or to investors who own a property free/clear but cannot or will not use hard money lenders or conventional funding sources. See more info below.
Contact info: Tod Snodgrass, firstname.lastname@example.org, 310-408-7015