Does anyone else think like me?

Question

Hey everyone!  So I've been reading alot on the topic of 'starting out' for investors who are limited on cash and have credit issues (wich is my situation) and alot of the advise I've come accross has been to start off as a wholesaler, wich is great advise by the way. Personally, I would like to get directly into purchase and holding properties for rentals and long term wealth building.....So I guess my question is, is there anyone out there that was in my same situation who has skipped the whole step of wholesales and jumped right into rentals, and if so, what was your process?.... I know theres a way for everything...

Jeff Fairchild · Answer

I didn't read everyone's replies but here is what I'd say.  Just try to get as much leverage out of every deal that you do.  Then if you get one that doesn't require much cash down you would be able to keep that one as a rental.  In the meantime your wholesale profits should be saved up for use in the rental deals that you keep.

Christian Malesic · Answer

Ditto!

This was certainly one of the lessons we learned through the school of hard knocks.  We did have enough $ to set in an account for 'emergencies'.  One of those came by way of city government writing-up some repairs they wanted done.  Often it was non-rent increasing things, such as outdoor pealing paint, downspouts, screens on windows, storm windows, or sidewalk repair.

Since we had calcualted INSIDE repair costs to be able to rent out a nice place, we had not thought of some of these other 'outdoor' expenses that the government made us fix.

It piled up quickly and all at once.  We got through the storm with some credit card assistance and smartened up our buying approach to include outdoor items as well.

Mike C · Answer

Jon, 
            
            Yes, I was referring to the reserves you mention you should have at the beginning. They may need some cash for things that can happen. You are right, the property will carry itself and will build some reserves over time. I wasnâ€™t suggesting speculating and hoping for appreciation and carrying a negative cash flow property.

Under capitalization is the downfall of many businesses in the beginning. RE investors are more likely to start out under capitalized and get themselves in trouble if things are not trouble free in the beginning.

Mike C · Answer

Marcial,

The reason many recommend to start with wholesaling first is to build up your cash reserves. Rentals cost money to operate. Depending on how good you are or how many mistakes you make, they can cost you a lot. If you have cash reserves OR access to cash, then you donâ€™t necessarily need to start with wholesaling. And as this thread suggests, many do start without wholesaling.

Just getting started is the most important thing you can do. And donâ€™t listen to all those who say you canâ€™t do it, whether they be family or friends. What they mean is THEY canâ€™t do it. Even when you start having success, some people will still never â€œget it.â€

Good luck

Mike

Jon Holdman · Answer

Well, maybe if you're buying speculative properties where you're hoping for appreciation.  Good rentals must pay for themselves, though.  Why would you own something that sucks money out of your pocket?

You still need reserves to handle that large bill that comes in a some point.  And you need that from the start. But that reserve should be "paid back" over time from the income from your property.

Will Barnard · Answer

All that is great advice if you personally choose to be a hands on and "do it yourselfer". I use another approach where I hire it out. Yes, it may cost more, but I do have lots of experience hiring, interviewing, negotiating, and oversight of the various tasks I hire outside services for and not doing it myself allows for a time savings for me. This, in my business, equates to money savings as time = $ for me.

Nothing wrong with either approach, hands on, or hands off.

Marcial J.Paredes · Answer

Again,great advise!....I am currently searching for a mentor and hopefully will find the right person. As far as rehabbing , I am capable of doing alot of work myself and what I'm not able to do, I'm lucky to have a very " handy" father who is willing to do work for me as well as teach me to do things I don't know or need help with.  I am very thankful for this site and all you guys for giving me different ideas for achieving my goals. Just what I've been looking for.

Augie Byllott · Answer

Christian makes a good point.

Asking questions in a forum like this is absolutely going to help you in making your decisions.  I would advise, that in addition to this, you should seek out a mentor.  If you don't know your way around a hammer and nail, maybe you can volunteer to help someone with a project for free.  You get education, they get free labor.  I was lucky enough to have my father teach things like replacing a leaky faucet or retile the backsplash in a kitchen.  When you learn how to do something yourself, then you know the minimum it will cost to fix.  Then, in the future, when you get an estimate from a contractor, you can decide whether it's worth it to pay them or better just to spend some time and do it yourself.

If you never learn to do it yourself, your only option is to negotiate the lowest price with a contractor and hope they do a good job.  If you learn to do it, you know:
a) what's involved
b) how long it could take (for you, non-pro)
c) how good of a job you can do personally (to compare to contractor)
d) Whether it's worth it for you to do it to save the money.

An example might be to fix a leak in a pipe under the sink.  To have a plumber come out might cost a few hundred dollars.  If you did it, it might cost you $15 in parts from Home Depot and a couple hours of your time.  At least you can now decide what to do.

A good mentor can also help you to evaluate deals.  If you have a true trust relationship, you shouldn't have to worry about this person taking your deals.  If you don't trust the person (because you just met them), then you decide whether you want to disclose the address location of the target property.

Christian Malesic · Answer

The other thing that is highlighted in this thread is the importance of being able to do rehab work yourself - or at least to manage it.

This means, you need to know your way around construction.  What needs done and what doesn't?  What is a good price for construction projects?  What can you do vs. contract out?  Which project is the chicken and which is the egg (order of rehab tasks)?  At what point can you show a unit even though you are not quite done?

These all areas in which you need to be an expert in the REI biz.

Augie Byllott · Answer

I'm not in the same situation as you, but I've coached quite a few people who are.  I'll tell you what I tell them.

There are several options.  Any of them are possible with little money or credit.

1) If you have your own home already and you can't quality for new credit for a second, then you have an option to sell your home and then buy a duplex or triplex.  You can live in one unit and then rent the other to a tenant.  This will help you get started.

2) Find a family member who is willing to give you money for your first purchase.  If you work out the numbers and it makes sense, then maybe they will help.

3) Go to your local Real Estate Investor's Association or Club, and get a list of investors that want to buy whole-sale properties.  Then start calling every For Sale By Owner (FSBO) in the local paper to see if you can get a deal.  In order to make a whole sale work, you have to get a very deep discount; maybe only 65 cents on the dollar if it's an all-cash deal.  The reason is you want to make a profit, but there has to be enough spread left over for the wholesale investor to make a profit.

4) Try to obtain owner financing with 0 down.  If you can get this type of financing, it's just as if the bank gave it to you, but there are no points, etc.  These are great deals.  If you know a fellow investor with access to RealQuest Pro, you can get a dump of all properties without mortgages in a particular area.  This makes your job a lot easier.

5) Buy the house subject-to, which means, you will take over the owner's payments and then pay them over time for their equity as well.  Just make sure to look into a vehicle like a land-trust to avoid the due-on-sale trigger.  In most cases, the banks don't care unless you miss payments, which you won't do.