I get this question often. Understand I have been investing full time in real estate for more than a decade. I've seen up markets and down markets. And, the question is consistent, "
Can you make money in this market?"
The answer is always, yes. In today's market there is loads of inventory. There are however a limited number of loan programs, and the ones that are available have stricter guidelines and qualifications. BUT people are still buying.
How Do You Profit?
There are plenty of strategies (or recipes as I call them) to win. One that you can use is "buying, fixing, and re-selling". Remember this is but one-way to win. The first thing to realize about real estate is there is always a current value. Unless we are speculating, the current value is the value. NOT what the home was worth last year, or what it might be worth next year.
If you are buying at a discount on the current value then you have potential to win, period. It's like gas prices; we remember what it once cost. But the reality is we buy gas at today's price. You must treat real estate investment the same way. What is this house worth today?
Using a local agent to establish value - and even an appraiser - will help you understand the values in your investment market, the average time on market, and the median house price.
- AVERAGE TIME ON MARKET will tell you how long it takes to sell a house in your market, and even better, for the neighborhood of the house you are buying.
- MEDIAN HOUSE PRICE tells you what the average price is for a house in your area. You want to know this number because if you buy a house lower than or near this median you will have a higher number of potential buyers.
In other words, take the statistics of wealth in general; there are many more people with ordinary jobs than there are rich and carefree. You want to follow this statistic. Don't worry we aren't going to get crazy about analytics here, just know we want average houses, not mansions.
Okay so where are we? You are buying average houses, under the current market value. What's next? Here is your punch list:
- MONEY - How will you pay for this house?
- FIX IT - Who will be doing the rehab work?
- SELLING - Who will sell it?
- DISCOUNT - How much under value?
Notice I didn't number this list. That was intentional. All the factors here tell you what you can pay for a house...
DISCOUNT - How Much Under Value?
On average we are paying no more than 75 cents for a house. What that means is if the house will sell for $100,000 we will pay no more than $75,000 AND that number must include any repairs. If the house requires $15,000 in work then we can pay no more than $60,000 for the purchase.
Understand, we have been doing this for many years. As a rookie you can quickly eat away a 25% profit. Let's look at an example transaction:
You pay 60 cents for a house, where you budget $15k to fix it. You will have an additional 6% or ($6,000) in agents fees, another 2% in closing costs, and this does not include any holding costs; utilities, cost of money, etc.
Here it is more clearly (same end value of $100,000):
- 60% buy
- 15% in repairs
- 6% in commissions
- 2% holding costs
- 83% total
- 17% potential profit
MONEY - How Will You Pay for This House?
There are many ways to pay. You can get a bank loan on the property, but, in many cases rehabs need more work and the lending guidelines will not allow for rundown houses. You can get a loan on your current house, if you have equity. You can borrow private/hard money. And, you can likely do a combination of several. Lastly, you can use your own cash or partner with someone with cash.
Regardless, there is a cost of money. That cost is the interest rate and any loan fees, plus time. For example, a private lender will charge points - one point, equals 1%. On a loan for $75,000 one point is $750 or for a two point loan - $1500. In most cases this will be added to your loan. Meaning you will pay it when you sell the house.
The common lingo for investors and private money is "
two and twelve" which means that the loan costs
2 points and 12% interest. Note: you may pay more, even six and eighteen. Shop around. Assuming you paid 2 and 12 your points are $1500 and you monthly interest is $765 monthly.
If you hold a house for a number of months time is ticking dollars:
- month 1 - $765
- month 2 - $1,530
- month 3 - $2,295
- month 4 - $3,060
- month 5 - $3,825
Which means that over five months you will pay $3,825 plus $1500 (the points) for a total cost of money of $5,325. IF you held your house for 8 months you'd spend $6,120 plus $1500 ($7,620).
Remember you had 17% potential profit ($17,000). The other variable here is unforeseen costs of repair. I just bought a house that had an overage of $2000 for roof repairs - hidden under snow. Which brings us back around to your repair work.
FIX IT - Who Will Be Doing the Rehab Work?
People come and go. Over the years I've had several dream teams. Your contractor is a part of your team, as is your agent, and any other person you find yourself working with again and again. Once you have all the players your job will get easier. Our focus now is on your contractor.
All you have to do is turn on the TV for a primer on how to flip houses. And you see all the clichés; yelling at contractors, contractors who don't do good work, and contractor who charge too much, etc. There are however, a select few who get it.
You want someone fixing your houses that wants to grow with you - I assume you plan on buying more than one investment. You want a team player that not only understands how to fix houses, has a team attitude, and enough of a foundation he can eat some of his mistakes. Why? Because no matter how hard you BOTH try there will be houses like mine with a $2000 roof overage. I made the contractor share the cost. It was an item he over looked.
Your contractor is also there to look at houses before you buy, give you a cost for repair, then to DO the repairs quickly and have the home shining for you tell sell it - in the shortest time possible, tick-tock.
SELLING - Who Will Sell It?
Choosing an agent to work with is much like finding a contractor. There are people that specialize. You want an agent that works with investors when you are buying. But, you also want an agent capable of selling your house when it's ready to go back on the market!
RECAP
- MONEY, how will you pay for this house? - You can use private/hard money lenders, bank loans, or cash. Yours or a partners.
- FIX IT, who will be doing the rehab work? - Find your team. Shop around. Ask for referrals, there ARE good contractors with great prices.
- SELLING, who will sell it? - The agent that helps you buy can also help you sell. Again, shop for an agent who works with investors.
- DISCOUNT, how much under value? - Your discount may change based on your cost of money. I would never pay more than 75 cents with repairs.
In closing, this article was not meant to give you every answer about buying real estate for profit, but rather a glimpse at how you can win today. Again this is but one recipe for buying and selling houses. You must find the one that works for you. "
Can you make money in this market?" You bet!
