The Basics

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Getting Back to the Basics

by Mike Jacka

I get asked many different questions from new investors all the time. The questions range from, does this real estate investing thing really work (to which my answer usually is, “Well Ya, Da” just kidding, but that is the way I feel sometimes) to what technique is the best and everything in-between.

That last question (what technique is the best?) is one that I can not answer for you, that one you will have to figure out on your own because there are so many different niches and ways to go about real estate investing. There are even many different avenues related to real estate investing that don’t require you to actually participate in the real estate itself.

Take me for example; my main business is buying Foreclosure properties “Subject-To” (click here for more info about “Subject-To”) the existing financing, liens and judgments. I then take these properties and either sell them to other investors to be rehabbed or sell them on Lease-Options. My best friend buys his houses the same way, but he keeps almost everything and turns them into rentals.

Others buy houses directly from banks, rehab them and then sell them to owner occupants who go out and get their own financing. Some buy 2nd/3rd mortgages, judgments and liens. Some do strictly “Subject-To” deals where the sellers are current and not facing foreclosures. Others look for FSBO’s (For Sale By Owners) and get owner financing. There are many other techniques that I haven’t even touched upon here. The point is, there are a lot of different ways to buy real estate and you will have to figure out which method is best for you.

There is one thing that is important to every real estate investor, whether they are new to the business or a seasoned pro, and that is the basics of real estate. If you are new to the business, it is imperative that you learn the basics before you do anything else. And if you are a seasoned pro, then maybe you need to take some time out and get back to the basics again. I am guilty of this myself from time to time. I get focused on one thing and sometimes I miss the basics.

What are the basics?

That’s simple to answer. Wholesaling…. Yes, that’s right, Wholesaling properties. The reason wholesaling is the basics of real estate investing may be a little more complicated to answer. But when you truly know and understand wholesaling, everything else will make sense. Let me try and explain.

What is Wholesaling?

Wholesaling is when you find a property that needs work (they don’t always need work to be a candidate for wholesaling, but they normally do), get it under contract for one price and resell it at a higher price to another investor that intends to rehab the property. I am not going to explain how to wholesale a property here; there are many good courses that can do a much better job at that than I can. I just want you to understand the concept here.

Why is Wholesaling the Basics?

Because wholesaling forces you to learn the numbers, and more importantly understand them. If a property is worth $100,000 after it is all fixed up, what is it worth today? Is the property really worth $100,000? What is the rehab cost? What are the other costs involved with rehabbing a property? You need to understand all the above in order to determine what price you are willing to pay to acquire the property.

Let’s assume these numbers for the basis of the following example:

$100,000 ARV - (ARV = After Repaired Value)

$20,000 Repair Costs

$10,000 Holding Cost for 6 months and miscellaneous expenses

Based on these numbers, how much do you think someone who was going to rehab this property with the intent of reselling to an owner occupant and is getting their own financing is willing to pay?

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$70,000

There is one more factor that you have to consider before you make your decision and this is a factor that many seasoned investors tend to lose sight of over time. Yet it is the most important factor in real estate. It is the reason we all want to get started in real estate as an investor. It is called “PROFIT”. All too often I see new investors, as well as experienced investors, paying to much for the properties with the hopes of finding someone else to pay them to much. That is called “Working on the greater foul theory”. It works sometimes, but not most of the time. Rehab investors know how much the properties are worth and you need to as well.

So what do you think is a reasonable “Profit” to expect an investor to make considering that they are putting up the money to buy the property, rehab it and try to resell it? My answer is generally a 20% profit margin. So now, based on the numbers above, what do you think an investor is willing to pay you for the property?

Answer: $50,000. Does that make sense to you? The property is worth $100,000 After Repaired Value.

$100,000 ARV

$20,000 Repair Costs

$10,000 Holding Costs and Miscellaneous Expenses

$20,000 Profit Margin

$50,000 Purchase Price

In order to determine that number, you need to know how to figure out the ARV, how to determine the repair costs and how to figure out what the holding costs and miscellaneous expenses will be.

I can help you out with the holding costs and miscellaneous expenses. From my experience, as well as the experience of others, you can figure an average of 10% of the ARV. Example: if the ARV is $75,000 then 10% would be $7,500. If the ARV is $125,000 then 10% would be $12,500)

Here is the most important question for you. Knowing that a rehabber is willing to pay you $50,000 for the property based on the above example, how much are you going to make?

The answer to that is up to you. They key is, that you have to get the property for a price less than what the rehabber is willing to pay you. If you want to make $5,000 to wholesale this property, then you need to get it for $45,000. Basically, any price you can get the property for less than the $50,000 will be your profit.

This is a process you need to understand, because it forces you to understand the numbers and how to determine them correctly. Once you understand this, you will be able to move on to other ways of investing in real estate.

The above example is for wholesaling and rehabbing properties to sell to an owner occupant that will be getting their own financing. These numbers get thrown out the window when you get into other aspects of creative real estate investing, but you need to know this process to help you determine your exit strategies for other types of investments.

Example: You are looking at a property in foreclosure and you can buy the property “Subject-To”. The property needs no work and you intend to resell the property on a lease with the option to buy. The down payment from your buyer will cover your cost to stop the foreclosure and re-instate the mortgage and the property will cash flow, even though the mortgage you are taking over is 90% of the ARV.

This would be a good deal because your exit strategy is different from the rehabber who needs to get all his cash back out of the property to do the next deal, and the property needs no work.

However, lets look at this same example, but this time the property needs at least $10,000 to fix it up and bring it back to market conditions. If you did this property the same as above, you would be out of pocket the $10,000 to fix/clean it up. And you would also be into the property at 100% of the ARV. Knowing the basics would force you to either get a little more creative or to have the sellers fix the property with their own money, before you would be willing to buy the property.

Here is another example similar to above: It needs $10,000 to fix/clean it up, but the underlying mortgage is at 70% of the ARV. You could now try to sell the property to an owner occupant who got their own financing. Because of the holding time, you may not make the full 20% profit, but you only had 10%-15% invested in the property, rather than

75%-80%. Your return on investment would be 100% or more, verses 30%-40% for the rehabber that put up all the cash.

Now that you understand why the basics are so important, I wanted to recommend two different courses to learn the basics.

Fast Cash Generator - by Ron LeGrand. $69.95

This is one of the best courses available for the price.

Wholesaling Houses – by Scott Rister $349

This course is a very good, well rounded course and goes into great detail on the subject of wholesaling.

Happy Investing,

Mike Jacka

www.realestatepromo.com

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