From Ian Morell, VP of Sales at Rain City Capital and Owner, Caliber Real Estate
Investing in real estate has proven decade after decade to be a tried-and-true means to build wealth, but it’s not as easy as it’s made it look on TV. I’ve renovated over 200 homes since my first project in 2009 and have seen pretty much everything. I’ve seen a lot of people enter this business, and not everyone succeeds. Here’s my guidance for setting yourself up to succeed as a real estate investor:
1) Can You Stomach the Ride?
Not everyone can handle the challenges that come with flipping homes. The first thing to ask yourself is whether you have the emotional fortitude to flip homes. You’re starting something of your own, becoming a self-employed entrepreneur. You need to be prepared for setbacks and know how to handle them in a level-headed and professional manner.
I’ve built up an immunity to panicking when crisis strikes—yet I still have moments questioning why I’m in this business. I‘ve had three different basements flood in one weekend, resulting in over $30K in repair costs. I’ve experienced multiple septic failures, dozens of burglaries, and a couple threats to my personal safety—it comes with the territory and you need to be able to handle the unexpected.
2) You Make Money When You Buy Real Estate, Not When You Sell
If you flip ten homes, you’ll likely hit one out of the park, have seven or eight provide a decent 10-20% return, and end up with one stinker… and that’s only IF you avoid paying too much for a property. Overpaying almost guarantees you’ll lose money. Budgets will swell, there will be surprises along the way (both good and bad), and rarely does a project finish on time. In a stable housing market, you can mess up nine of the ten parts of flipping a home and still come out ahead if you bought it at a good price.
I often see beginners overpay for their first property because they’re either anxious to get started on their first project or don’t know how to evaluate opportunities properly. No amount of fix-up will allow you to turn a profit if you’re starting with too much invested. Your buyer won’t care how much money, time, and energy you’ve put into the project—the housing market (and a really good listing agent) will determine what your project sells for. Buying the property at the right price puts you in a position to overcome the unexpected.
3) Start Small
The sexiest pictures and greatest stories come from projects that are large in scope—but they often require the longest hold times, biggest budgets, and most expertise. Avoid getting in over your head and choose a project that you can handle for your first flip. Know your strengths and your limitations.
I make it a practice to understand my first-time client’s experience level and knowledge base before setting them up with their first project to minimize their risk. You can get great returns from projects that only require some minor work or updating because they can be turned quickly, sell fast, and save on borrowing costs.
4) Be an Eager Learner
There’s a lot that goes into a successful flip, so be prepared to sacrifice some of your profits on your first projects as you learn. Everyone who’s successful in this business has paid their “flipping tuition” in some form or another (and I don’t mean the cost of some over-hyped seminar or “Get Rich with Real Estate” system.) The practical experience you’ll gain and the relationships you’ll make are priceless.
A recent first-time client of mine purchased a property at a good price only to discover some undetected mold—increasing her$50K fix-up budget to over $80K! Unlike many I work with, she thanked us and said she was looking forward to working with us again. She saw the value in what she learned along the way and who we introduced her to. She gets it and has the right attitude to make it in this business.
5) Have a Precise Budget – and a Buffer
I don’t remember the last time one of my flips came in under budget. We all tend to be overly optimistic when budgeting for projects; even experienced investors seem to have short-term memory loss when we’re in acquisition mode. But realizing your budget was too small after you’re in the project makes it much more difficult.
Be cautious and generous with your cost estimates for your flip, and then add in a buffer (I recommend 10-15%.) This will prepare you for the true cost of the project and give you a realistic expectation for your ROI. Plan for the worst and hope for the best. And give yourself a reasonable time frame to complete your flip.
6) Buy and Sell in the Same Market
The “same market” doesn’t mean location, but rather the same market conditions (like demand for homes, the economy, mortgage rates, etc.) Ideally, you want to buy, flip, and sell in less than five months. This minimizes your exposure to larger fluctuations in the housing market. None of us have a crystal ball, but it’s easier to see a few months into the future than a year or more.
7) Emotions Sell
First timers are often tempted to start cutting corners in the final stages of a project to save a few dollars—mostly because they’ve gone over budget or taken longer to finish than expected. It’s important to control your expenses, but the cost of having the property poorly presented is much greater than the cost to finish right. I often see landscaping, staging, lighting, etc. get cut at the end of the project only to have the home sit on the market longer than expected or not attract enough attention from buyers.
Emotion sells properties for top dollar, so you MUST appeal to your buyer’s senses—sight, touch, sound, and smell. While a new roof may have been the biggest item in your budget, it’s the smell of fresh paint and new carpet that confirms all the work you’ve done and great staging that allows buyers to envision themselves living in the home.
8) Don’t Go It Alone
There’s no such thing as a successful soloist in the real estate investment business—everyone depends on someone else. Contractors, vendors, real estate agents, lenders… you’re going to have to leverage others to be successful, and your success will be highly dependent upon who you know and work with.
It’s best to start assembling your team before you buy your first property—and also have them vetted by a successful investor. Your buddy in construction is probably a solid craftsman and a great guy to have a beer with, but is he going to be able to manage your project on time and on budget?
9) Protect Your Profits from the “Average Joe” Real Estate Agent.
While you can almost guarantee profits by buying a property at the right price, you can also cut those profits by listing the property at a discount or with an inexperienced real estate agent. Creating the most demand for the home (resulting in multiple offers) and negotiating those offers to the highest price increase your profits.
I work with a realtor that is well worth what I pay him to sell my investment properties. His marketing systems create maximum exposure among buyers, and his industry experience and negotiation skills have put more money in my pocket on many projects. Negotiating is an art and can turn a marginal deal into a great deal.
Investing in real estate is never a ‘sure thing,’ but minimizing risk by constant learning insures the highest probability of creating good outcomes every time. While there is no crystal ball for certain success, I’m confident that following the guidance above will shave off years of painful lessons and pave a much quicker path to becoming a successful real estate investor. In the future, we plan to devote an in-depth article to each of the topics discussed. Thanks for reading—and happy house-hunting!