In the Kenny Rogers song, “Gambler,” he says, “Know when to hold them, know when to fold them.” Even though he’s singing about gambling, these words run deep for real estate investors whose main investment strategy is to find, repair, and sell houses for a profit.
As in a high-stakes game of poker, there is a huge price to pay if you lose at the game of investing in real estate. The choice to “hold” or “fold” is a choice that a poker player, or investor, must make after careful and calculated analysis of the hand that has been dealt to him or the house he is considering. like a jerk.
Professional poker players know that it takes a certain skill to win at poker. They learn how to spot trends and calculate the odds that another player has a particular card or which cards have been dealt. Based on that information, they will either “hold” them and stay in the game, or they will have the discipline to “withdraw” them and wait for the cards to be shuffled again.
Any real estate investor moving houses for a living as a means of generating wealth should do no less. Flipping houses is not a game, but a business. However, relying on luck to win at inverted houses is just as risky as professional poker relying on sheer luck rather than proven formulas for success.
Let me give you five fundamental rules to follow if your investment strategy is to find, fix, and sell houses. These five rules have evolved since I rehabilitated more than 225 houses in four years.
1. Find the right offer
To find the right investment property, you need to decide the criteria that make it a good investment property for YOU. You must consider the price range of the houses that you will eventually sell to your buyers. For example, my niche is providing quality, affordable housing to low to moderate income families. Having defined my target market, I now select the neighborhoods where low to moderate income families live. In these neighborhoods, most of the houses are between 30 and 50 years old. The homes we are targeting for rehab are ideal candidates with good earning potential after we fix them.
2. Risk analysis vs. Reward
Most of the leads for my property I get from wholesalers because they know my investment profile. So once a legitimate lead is presented to me, I have to decide what to offer on the property.
In this step, it is very important not to let your emotions tell you that the house just needs “a little more” rehab money to get it right. You just can’t trust your emotions. Consequently, an automated formula or process will really help you decide whether to “fold” them and when to move on to the next house.
Consequently, I rely on the following proven formula to determine my maximum bid:
Value after repair
– Rehabilitation (repair) costs
– Maintenance costs *
– Minimum profit
= Maximum bid
* (closing costs, property insurance, taxes, utilities, interest, sales commissions, etc.)
Some investors are reluctant to use this formula because the calculations may take some time, but it is more important to be right than to be quick.
3. Financing the correct line of business
There are two quick ways to obtain financing for your potential investment property.
to. You can get a loan that will be repaid with interest when the house is sold.
B. You can partner with another investor who will contribute the money and divide the profits, usually 50%.
If you decide to get a loan, private lenders are an ideal source of funds for most transactions. Private lenders generally lend money to investors based on the home’s resale value or after-repair value (ARV). Most private lenders will make loans at a 65% to 75% loan-to-value (LTV) ratio.
If you don’t have access to a private lender and don’t want to lose the deal, then seriously consider partnering with another investor. After all, half the profit is better than no profit. Your local REIA is an excellent place to find other investors with the financial resources to partner with you.
4. Value-added rehabilitation strategy
Although each of the five rules is crucial to the success of your investment, the rehabilitation phase is where most new investors make some serious miscalculations. Rehabilitating the home within your repair budget and in a timely manner is essential to making a profit.
If you’re just starting out as a flipper, forge a relationship with a contractor who will help you create a plan for the work that needs to be done in order for the home to meet retail standards. Next, determine the materials needed to complete the rehabilitation. Finally, evaluate the cost of labor and materials, and the time (in days or weeks) it will take to complete the rehabilitation project.
5. Profit from the sale
Once the home rehab is complete, it’s time to sell the home and take your money to the bank. You basically have two ways to sell the house.
to. Sell the house yourself
B. Hire a real estate agent
Selling the home yourself can take a long time and you must have the resources to do it. You will be responsible for posting yard signs, directional signs, and distributing flyers on the property throughout the neighborhood. Additionally, you will be responsible for all incoming phone calls from prospective buyers and for showing houses, taking applications, and forwarding applications to the lenders you have a relationship with in your city.
On the positive side, you can keep the commissions (usually 6%) that you would normally pay a real estate agent to sell the house. If you sell houses with an average price of $ 80,000 each, and you sell 15 houses in a year, you will save $ 72,000 in real estate commissions.
In contrast, hiring a real estate agent saves you a lot of time and effort because the agent will manage the entire home sale process. The agent will list the property in the Multiple Listing Service (MLS), market and display the home, ensure the necessary paperwork is done correctly, and ultimately sell the home within a mutually agreed time frame.
Depending on the location of the property, I have used both methods to sell houses and they both work. In high traffic areas, I sell the house for sale by owner. Otherwise, I trust an agent to do the job.
Professional poker players insist on playing with a full deck. Anything below that and the deck will stack against them. Ignore any of these five rules and your chances of successfully finding, fixing, and selling a home will be against you. Apply these five rules to your real estate investment business and your fears will no longer stop you because you will know when to “hold” them and when to “withdraw” them.