Note: This is the latest post in my series the ABCs of Buying, Selling and Investing in Real Estate. Each post, I select a letter (Q for this one) and then write up a fictional advice column around the letter. The story is fake, but the advice is real(ty).
This story continues the post found in Three Quality Sites Buyers Can Use to Figure Out Real Estate Costs.
Quincy, a retired medical examiner, had come to me asking about some quality resources he could use to figure out real estate costs. Quincy had decided that he wanted to do real estate in his retirement, even using some of his retirement funds to invest in real estate. While I am drinking coffee one morning at my favorite place, Quincy sees me from across the room. He strides over to me and takes a seat (which I always welcome) and starts into an update on his latest real estate endeavors. He had found a young kid, around 35 or so, who is showing him the ropes about real estate investors. Quincy sighs. After three weeks with the guy, he feels he has not really learned anything from the guy. He says he wasn’t even sure what questions he needs to be asking him. He asks me what I would ask his young mentor if I was in his shoes.
This is what I told Quincy….
I told Quincy that I admired his actions for trying to learn more about real estate investors before getting into it himself. There are so many new investors that just jump into the deep end of the REI pool that they drown quickly and I never hear from them again. No one should enter into REI without some idea of what to expect and how to prepare. It is a cut throat business that puts many other businesses to shame. Quincy said he already understood this side of the business. He had seen his mentor encounter some shady characters in his time with him. I nodded my head and told him that is why Integrity 1st Real Estate really enjoys helping investors because we can filter out all the shady types versus the legit ones. For example, I told him about our flipper program where real estate investors can work with us in finding deals on the MLS and we even help with off market deals when we think the deals are safe. One question Quincy needed to ask himself is where does he go for legal advice. If he didn’t already have attorney on his contact list, he needed to be sure to find one. I told Quincy. “Real estate investing is a legal game and having a trusted attorney can help cut down on the anxiety level.” I also asked him directly if he was sure he had the required funds to get into the game. “Get rich schemes abound in the industry and it does take funds to do REI despite what some pundits might be telling him,” I warned. Quincy said he did have an attorney and felt comfortable with his level of funding. He still wanted to hear what other questions he needed to ask his mentor. I gave him three to consider.
Do I have enough patience and fortitude to do this? – Now that Quincy had been working with his mentor for several weeks, I felt it important for his mentor to evaluate Quincy. Did Quincy have what it takes to be in the club of real estate investors. Did he have the will and understanding to move forward in the business? For example, did Quincy have the guts to make an a low offer on a house? Investors will often send in offers much below the asking price of a property because the property is either overpriced for its condition, or the seller is just attempting to take advantage of the market. Investors have to be willing to have sellers ignore them, or even get angry, with their offers. We always tell investors that offers should make sense from a numbers perspective, otherwise, there is no point being in the business. Also, it takes patience to be a real estate investor. The market might be wrong for you at the moment from the perspective of achieving your long term goals. You might have to wait for the right deal to come along or be patient enough to wait for the market to turn(which is always does eventually).
Do I really understand the costs involved? – I next told Quincy that he needed to ask his mentor to sit down with him and go over in detail the costs involved in REI. Most serious real estate investors will have their unique tools, like spreadsheets, or online calculators, that help them to evaluate a property, whether it is with a flip property, or rental. There are many hidden costs involved with both types of transactions that many new investors don’t anticipate and only learn about the hard way. For example, most landlords will put aside some of their monthly cash flow for capital expenditures(foundation, roof, plumbing, etc). This expense needs to be part of any tool used by an investor when evaluating rental properties. Without it, you can get some nasty surprises when the roof suddenly needs to be repaired or fixed. With flips, you should always have a contingency line item in your budget for hidden defects in a property that doesn’t become apparent until repairs/rehab have started. Ten percent of the overall repair/rehab budget is always a good number to use for these contingency line items.
Do I really understand the market I am in? – The last question Quincy should ask his mentor is if he is knowledgeable enough about the market to start making purchases. Hopefully, the mentor has been filling Quincy with statistics and facts about the neighborhoods they have visited. As with any profession or business, you have to know your merchandise very well to make a profit. For example, if you don’t know ARV for a property based on the comparable properties in the area, then you might incorrectly calculate the offer price. You have to know what a rental’s monthly lease if you want to make sure you are achieving your desired cash-on-cash or cash flow. Investor-smart real estate agents can help with these items and Integrity 1st Real Estate makes sure to do this with each of its investor clients. After all, the agents are running a business as well and want to make sure investors succeed so we can also.
Quincy took a long swing of his coffee after I finished. He said he didn’t think his mentor had done anything to answer any of these questions. He would start off by asking his mentor to give him a frank evaluation of how he thought Quincy would do as a real estate investor. He had seen his mentor use some spreadsheets, but he knew now to try to ask more questions while they were running the numbers. Finally, he said he would be calling me when he was done with his mentor so we could start working together on understanding his target market better.