Disciplined Real Estate Investing

Disciplined real estate investing is something that must be accomplished with your brain, rather than letting pure emotion rule your decision-making process. Not only locating property, but committing yourself to a logical, informed approach with respect to purchasing real estate, will lead to a successful flipping opportunity. Just because something may seem decent at the outset, doesn’t necessarily mean it will end up resembling anything like a ‘no brainer’.

This concept might be a little hard to digest when first starting out, but is in fact easier than you may think. For the first timers, or even casual flippers, the mistake of ignoring a few warning signs could prove to be disastrous.

Fixer Upper

Be on the lookout for houses that you can, as they say, ‘buy right’ (read: disciplined real estate investing). If the numbers for rehabbing or financing are not going to work out for you – even a little bit – you should avoid those properties altogether, and keep looking.

Don’t ignore information that may seem to be damaging to your project’s worthiness – no matter how small – just to make the overall numbers ‘work’ in your favor.

Disciplined Real Estate Investing: Defining Your Comfort Zone

It’s not just about flipping houses. It has more to do with your level of comfort because there is more to it than just feeling good about the numbers. When I say try to ‘buy right’ and get the deal you want, I’m not necessarily talking simply about the art of negotiating a satisfactory purchasing price. That, I think, is rather obvious, and is certainly important.

Rather, it has more to do with your ability to comfortably manage the actual purchase, rehab, and selling of residential real estate. More specifically, your comfort level and how it relates to the concept of disciplined real estate investing.

You’re going to be intimately involved with this thing for several weeks, if not months, so it’s best to know up front what you can, and cannot handle (tolerate) in relation to the flipping process as a whole. Emotionally, you can look at the house and think to yourself, “I can make a lot of money here!’, and get very excited. You start thinking of the money you’ll get from the sale, but with little forethought as to how you’re going to go about making it.

Your task is to analyze a piece of property (through disciplined real estate investing procedures) and to make sure you can effectively handle financially without fear of draining your income dry, and also one you can handle physically and emotionally without letting yourself feeling tired and burned out. Simply negotiating a great deal on a house does you no good if it is way beyond your means either financially or experientially (think renovation), or both.

Let me give you two case studies involving properties that I have done over the years to illustrate my point. Seeing exactly what happened and how I felt about each case will give you a better feel for disciplined real estate investing.

Disciplined Real Estate Investing: Case Study #1

Several years ago a real estate agent friend of mine approached me with a distressed piece of property that was in very bad shape and definitely needed a lot of work. A woman took possession of the house upon the death of the owner who had no children or any living relatives. She didn’t want the house, and after briefly flirting with the idea of rehabbing it, decided it needed too much work, and subsequently sold it to me for $35K (her asking price).

Since I had experience in remodeling, I determined that it would probably take approximately $23 – $25K for a complete update to bring the house at the upper-end of the comparable homes being sold in the area, which was in the upper $80K range.

I knew I wanted to make at least $20K on the flip from the outset, and decided I wouldn’t do it unless I could. After some research of the area, it was revealed that a few homes had sold in recent months in the $85 – $88K price range. So far so good. I knew that if I did a nice job remodeling (of course I would!), I would a find a motivated buyer at the higher end. Since I would do much of the actual work myself, I felt good about the renovation, and how it would proceed.

I liked the financing situation, too. I was involved with a low-income, state-supported housing fund set aside for the express purpose of rehabilitating distressed properties for resale to qualified home buyers only. No rehabs for rental purposes. I felt reasonably sure that I could handle any of the renovating situations (everything from all the mechanicals to roofing) just fine.

So, to gauge where I was mentally with the project, I examined the following criteria for disciplined real estate investing:

  • Purchase Price

Asking price was good. Plenty of room for a solid rehab. Also include your carrying costs (fixed/ongoing costs such as interest payments on note, insurance, utilities) as part of your monetary outgo.

  • Financing

My ability to finance the flip was firmly in place (interest only payment of 5%/month) with nothing down.

  • Remodeling

Much work to be done (which is a good thing) – but certainly manageable. I did a lot (not all) of the actual work, and paid myself $20/hour.

  • Selling

The sale of the house was handled by my real estate friend as part of the deal for her finding the property for me. This can be advantageous as I did not incur any selling costs nor invest any personal time post rehab – which is exactly what I would have to do if the realtor was not involved and I sold the property myself.

On the other hand, I paid a 5% fee for her service, which came to $4250. I was fine with that arrangement as I don’t particularly like the sales aspect of it anyway. Others will certainly see it differently, to be sure. Simply a disciplined real estate investing preference.

To sum it up, I liked it a lot. The deal made sense all the way around, and that’s why I proceeded to flip that particular piece of property. In the end, I did indeed sell it for exactly $85K. The rehab to 4 months to complete, and 3 months to sell.

I encountered a few unseen issues (happens a lot in rehabs – especially older homes) in relation to the roofing and plumbing that took an extra $1200 off my bottom line. I spent close to $26,000, including all carrying costs. A little off on my projections, but hey – I was close enough to what I was aiming for. Disciplined real estate investing indeed.

After paying off the remaining amount on the mortgage and the fee to the realtor at the closing, I went away happy. I didn’t quite make the $20K net projection, but I was close enough to feel that it was worthwhile flip, all things considered.

Disciplined Real Estate Investing: Case Study #2

Recently (March ’08), through my sourcing network, I got a tip on a house to check out before the owner put it up for sale via real estate agent.

The house was located in a nice, stable working-class neighborhood within walking distance of a church, nearby grocery, and a small park for kids to play in. The surrounding houses were well kept, and in generally good shape. The streets were clean and well lit, with little through traffic (if at all) to speak of. The house itself needed a lot of work.

This opportunity screamed Yes! at every turn. As my (financier) partner and I went through the house, we noticed that there were several issues that needed upgrading. But nothing jumped out at us that we didn’t think we couldn’t handle.

There was, however, a couple of things we didn’t like. The house was appraised at approximately $75K in a neighborhood full of $100 – $115K houses. The owner wanted $60K. It seemed to us that since she thought she was under the ‘market value”, she should get her price, but was ‘open to negotiation’. All that in itself was fine, but what we did not like, was the fact that in order to bring the house up to marketable standards (read upper-end) of the neighborhood prices, we were going to have to spend about $50K to do so, which we thought would put us at our rehab budget limit, and no room for error. Definitely a test to see if our joint concept of disciplined real estate investing was intact.

But as we really analyzed the total property (exterior and yard needed a lot of help too), we also uncovered a rather large crack in the foundation that upon first glimpse, would seem to be minor. To err on the side of caution, however, we decided to enlist the help of a structural engineer friend of ours (very handy) to take a look at it and give us his assessment.

What he had to say wasn’t good, to say the least.

He indicated it would take several thousand dollars to repair the crack correctly. Wow! This once ‘great’ deal was quickly turning sour. The amount of money to rehab the house was adding up to a bigger number than what we originally anticipated.

Note

… Now we could have simply filled the cracks in the foundation with some type of caulk/cement and been done with it. But, as I’ve stated elsewhere (and at the risk of sounding preachy), a lack of ethical house flipping practices in the form of extremely spotty remodeling work only gives the industry a big black PR eye.

Just as shoddy building ‘techniques’ (cutting corners) in new house construction will never go away, nor will the unethical flippers, sad to say.

What I advocate in your approach to rehabilitation of property, is to treat it like you and your family were going to live in the house yourself.

Besides, a good house inspector (hired by the prospective homeowner) will see this type of repair as a quick-fix band aid, and proceed to inform their client to either get the job done correctly (paid by you), or keep looking for a better house. If the inspector is worth his salt, he will advise the prospective homeowner not to buy unless the foundation is fixed in accordance with normal building/repair standards. And, as I’ve said, that could be another $2 – $4K off you’re bottom line.

Figure ($$) on doing it right the first time, because … well, it’s the right thing to do! Not only the problems with the foundation, but also the large amount of water that accumulated in the crawlspace (due, in part, to the aforementioned crack in foundation wall) was causing major mold issues that wasn’t noticeable inside the house, but rather under the house and in the floor joists. You could only see this by going into the crawl space and examining it for yourself. (Guess who got that wonderful job?). Now we had a rather large amount of mold under the house to with as well.

It was becoming quite clear to us that a lot of money was needed to do the correct amount of remodeling work required, an amount that realistically, was just too much to do. In essence, we were looking at a money pit, something that disciplined real estate investing will, at times,reveal to you.

So, we submitted a very low bid to the owner (knowing she would probably refuse), and never heard from her again.

In summation, it was probably best that we didn’t get the house, even at our low bid ($30K). In retrospect, we felt that there was just too much in the way of renovation, and a lot of headaches as well. I personally put some time into it, but came away that much wiser overall. So, even without doing any flipping, I still came out ahead in terms of defining what disciplined property investing means to me.

Disciplined Real Estate Investing – Bottom Line

Bottom line is this: Know what you can realistically handle in terms of the overall flipping process. As in my case study #1, everything fit rather nicely in terms of what I wanted to do with that particular property. I was a one-man show at the time, yet still felt that I could certainly attain my goal $20K in about 7 months from beginning to end.

I felt differently, however, in case study #2. Even though I had more financial resources and remodeling knowledge than I did earlier (#1), I still had to acknowledge that it was not a good deal. It certainly seemed that everything was in place to be a really nice flip. Even the neighbor next door was thrilled that something was finally being done to the property. Everybody was happy. But, in the end, there was simply too much to do to bring it up where it needed to be to make any money ($20K).

There would have been a tremendous amount of time involved in the rehab process too, more than it was worth. If you don’t account for all the time needed in something like this, you will pay for it in one way or another. Simply know you’re limits of what you feel comfortable doing financially, experientially, and emotionally, which should be the foundation of your approach to disciplined real estate investing.