Real Estate Investment Strategies in Today’s Market

Flipping Properties in Austin or Dallas, Are You Insane?

I am a moderator on a popular national real estate investment forum called REIclub.com. Flipping properties is a hot topic. Television shows make it seem like an easy feat to buy a property, fix it up, and sell it for profit.

Since the market has tanked in other states, we been getting a lot of questions on REIclub.com about flipping properties in Texas. Generally, it’s a bad idea to invest outside of the neighborhood you live or work in unless you have experience. If you want to flip properties, follow this advice:

1. Read Rick Villani’s Flip Book before they even think about buying a potential property.
2. Research, ask questions, and network on sites like Creonline.com, Reiclub.com, and TheCreativeInvestor. Have a thick skin because these are true investors who will be brutally honest. Remember, it’s all in the spirit of helping!
3. Use more reliable sources like your local real estate investment club and Rehablist.com. Keep in mind that even deals through these channels should be thoroughly evaluated.

Rehabbing Houses in Today’s Market

I am working with an investor who is not a beginner, but he’s putting about $50,000 into each project. My job is to make sure he makes the right choices and saves much money as possible. Keep these tips in mind BEFORE you buy:

1. Always know your final sales price. Base your final sales price on homes that have SOLD, then work with a market expert to calculate where that price will be once your project in done. They should give you a high, middle, and low range.
2. Don’t over-improve. This can sound simple, but investors think wood floors and granite counter-tops will always get them a great return. Wrong. Why buy a higher-grade finishes, appliances and fixtures when the step below will suffice?
3. Don’t cheap out. This sounds contradictory to tip #2, but it’s not. Some investors cut corners on finishes because they’ve gone over budget. Buyers won’t immediately notice the stellar job on the foundation or plumbing, but they will notice a vinyl floor in a neighborhood where ceramic tile or wood is standard. Fix major issues first, but choose wisely when you downgrade finishes.
4. Know your buyer. The type of finishes, floorplan, landscaping, etc. will all depend on your potential buyers. Understand who is buying, renting and selling in your area. More importantly, know when you’ve priced out a particular type of buyer and which drawbacks (like a busy street) will completely scare them away.

Top Mistakes Made by Real Investors

Many of you are aware that I am an investor, but also a licensed broker-associate who specializes in working with relocation clients and investment properties. When I started investing years ago, as many new investors have experienced, I made costly mistakes. These are mistakes that homeowners can make, too:

1. They didn’t start investing soon enough. It’s actually not difficult to buy rental properties or grow your wealth by investing in real estate. With a hot market like the one we have in Texas, every local person should be buying something. Once you learn how to invest, you will wish you started sooner, guaranteed.
2. Too "motivated" or eager to get started, so you overlook the basics. Investing is a process, so you will often just the first deal that comes along, rather than being patient enough to make sure it’s the right move. There’s a such thing as being too analytical, but it costs less money to be analytical than it does to lose your shirt on a bad deal.
3. Not understanding how to analyze a rental property or account for the costs. I made this mistake and so did another person. You have to verify the management and maintenance fees as well as rents. Sometimes, landlords can have hidden concessions that are not in lease, so you’ll lose money on a property that looks great on the surface.
4. Working with contracts without someone on your side. This is a tough one. A general contractor is probably the #1 way to lose money, especially if they know that you are inexperienced. Whether you’re a landlord or a rehabber, you’ll need to use a service provider or general contractor and some point. Before you hire, talk to an experienced investor.
5. Not calculating enough cost when fixing up a property. This one is always made. At some point, 100% of investors will underestimate their repair costs. The question is by how much.

Advanced Investing: Minimizing Risk in "Spec Builds"

"Spec" builds are when you build a house with the intent to sell it as an investment. The builder, you and/or your agent will locate a piece of land, determine what to build and sell it before or shortly after the home is complete. Spec building is very risky, but can be a lucrative strategy.

In the following example an investor is financing both the land and project using a construction loan. This is normally not an issue, but in this case, the builder is also asking to split profits after the sale.

TYPICAL OPTIONS FOR A SPEC BUILD

Option 1. The builder finances at least part of the project, which increases their risk, but also the return because profits are split once the home is sold. Of course, they are still paid as the builder.

Option 2. The investor obtains all financing and the builder gets paid as a contractor for managing the project and completing the build.

Think about it. The goal of investing is to achieve maximum profits in relation to risk. The best way for a builder to maximize profits is to take on some risk so they can have a portion of funds from the home sale. If the builder prefers to get paid right away, they can just build as they normally would and get paid in draws. The investor/buyer would then receive all of the profits since they’ve taken the greatest financial risk.

In either scenario, all parties maximize their profits based on how much risk they commit to.

Worst case scenario with a builder. .. read about projects in Killeen and Maravilla.

Good Real Estate Day Jobs for New Real Estate Investors

Real estate investing is one of the fastest-growing fields for real estate careers.  The most common dilemma is for those with full-time jobs who must make the transition before quitting their day jobs.

If you want to be an investor, but you need to make money before you jump in, here are some job ideas:

1. Property Sales, Management or Locating
2. Homebuilder Sales Rep
3. Title Searches or work for a Title Company
4. Courthouse Clerk/Appraisal District
5. Appraiser/Inspector
6. Legal Assistant
7. Construction
8. Staff at Local REI Club

Remember that these are just some of the positions many investors held before they went into real estate full-time. You may decide to hold these jobs while continuing your investment career since they will keep you "in the game". One of your top tools as an investor is growing your network.