The 10 Commandments of Real Estate Investing
With real estate markets sporting profits more solid than ever, you should really consider investing in real estate. However, there’s far more to a fix-and-flip than most new investors realize. Fortunately, The Investor's Edge is here to help you start off on the right foot. We’ve been in business for over a decade and learned all the tricks of the REI trade. There are plenty of mistakes to avoid and other items to focus on as you pursue financial freedom.
In short, here are the Ten Commandments of Real Estate Investing. Follow these tips and you are guaranteed tremendous success from your first flip to your 50th flip, every time.
1. Do Your Homework BEFOREHAND
Before you put down ANY offers, make sure you know exactly what your deal entails. You can never underestimate the power of cold, hard facts. Be sure you know if the property is in a good area, neighborhood comps, how much repair work the property needs, etc. You can find out all these facts, plus get an estimated net profit on your deal by using the Advanced Deal Analyzer. You can also use your results from the ADA to not only weed out the good deals from the bad, but ensure you pay the best price for the property.
2. Don’t Buy “Unique”
No matter how sorely you may be tempted by the unconventional, STAY AWAY from weird houses! More often than not, they need more rehab work than your deal can afford. Also, investing in an odd property significantly decreases your pool of potential buyers. You want to create a home which appeals to a wide variety of home buyers. If you invest in a “unique” home, it will most likely end up sitting on the market long after your loan term ends.
3. The Smaller House Can Yield Bigger Profits
When performing your first fix-and-flip, you never want to purchase the largest house on the block. First off, it would be difficult to obtain proper neighborhood comps for that property and correctly determine its value. Second, no potential home buyer ever wants to purchase the most expensive home in the neighborhood. When you search for a profitable property, you want to think smaller. Set your sights on a small-to-average sized home. They’ll yield the largest profits. Remember, don’t think too small. Most hard money lenders won’t lend on a home less than 900 square feet.
4. Don’t Discard an Ugly Home
Remember, the whole point of a fix-and-flip isn’t to take an already gorgeous house and turn it into… a gorgeous house. So don’t feel deterred if a property lacks some curb appeal. That’s where you come in. Some of the ugliest homes on the market earned our borrowers the highest return on their investments. That being said, make sure you don’t invest in a lemon which will expand your rehab budget into a black hole of mounting repairs. Properly evaluate the home. If the fix-ups fall within your budget and the property is in a great area, go for it!
5. Check out the Neighborhood
In addition to performing an evaluation on the surrounding area, it’s always a good idea to check out the neighbors of your potential property. Great neighbors can be an excellent selling point when you put your house on the market. Likewise, horrible neighbors can chase off potential buyers faster than anything. Even if you perform an amazing rehab on a home in a good location with great amenities, if the neighbors are terrible, you’ll have a hard time selling your home quickly.
6. Don’t Pay Full Price
While sellers of distressed properties may be motivated, odds are they’re looking at making a nice profit off of their property, too. More often than not, they overprice their properties. The one thing you MUST NOT do is show eagerness. You may feel it if you searched for months for a fix-and-flip property, but never show desperation. The sellers can smell it and could take advantage of that situation. Instead, have evaluations performed on the property and neighborhood comps collected. Then, you can determine what the home is really worth and offer a fair price based on your findings. One of our borrowers in Atlanta, GA nearly purchased a home for a purchase price that was way too high. Our account advisors advised him against purchasing too soon and performed some property evaluations. They came back with a bid for the borrower to give to the seller. Thanks to the information from the evaluation and the account advisor’s warning, our borrower in Atlanta ended up saving $40K on the property purchase price!
7. Avoid Busy Streets
This commandment is more common knowledge. Many people don’t want to purchase a house on a busy street. Therefore, it makes more sense to not waste your money investing in a home located on a busy street. The same rule applies for properties located near commercial buildings or close to railroad tracks. Remember, if this property is located in an area where you yourself couldn’t stand living, odds are your potential buyers won’t want to either.
8. Communicate Effectively
There are a lot of steps in the fix-and-flip process and many of them can get very complicated. Therefore, you need to over-communicate with the members of your team. Make sure you clarify what you expect from your contractors and real estate agents and outline everything in writing. Likewise, be in touch with your hard money lenders and project managers and ask what they expect from you. Always follow up to ensure every step of the process is being completed in a timely manner. Remember, the loan is short-term and you only have a few months to successfully fix up and resell your property. You don’t want any delays which could have been avoided with good communication.
9. Don’t Walk, RUN Away from a Bad Deal
You NEVER want to waste your time on a bad deal. Finding a good deal is a hard and time-consuming process and we completely understand how frustrating it can be. However, it’s far better to move on from a bad deal than to invest in one. Always trust the experts who perform the evaluations and discern the risk factors. They can help educate you in terms of what to look for in a good deal. If a deal has too many risk factors, drop it and find a better one. And speaking of risk factors…
10. Pay Attention to Risk Factors
There are quite a few fix-and-flip opportunities out there. So, how do you weed out the good deals from the bad ones? The answer can be summed up in two words: risk factors. The risk factors of a property can increase or decrease the after-repair value and can even increase or decrease the interest and points determined on your hard money loan. You never want to ignore risk factors. Otherwise, you’ll invest your hard-earned money in a terrible deal which will never give you a return on your investment. Risk factors include the state of the property, the property’s location and other geographical factors and potential hazards.
Now that you know the 10 Commandments of Real Estate Investing, you can hit the ground running with your next profitable REI deal. The Investor's Edge is more than happy to help you get started on your journey to financial freedom.
See how you can make money flipping properties with us by attending our next webinar.