Holy cow, where do I begin?

Question

Where do I begin? This forum is massive and a bit confusing. I have no idea where to begin in RE investing, can somebody point me in a direction where I can start reading?

I have owned multiple businesses so that area I have covered but I have spend most of my life avoiding RE investing because it kinda scared me. Because of this I'm clueless except for the home I built for my family.

Everybody in my family tree is in the trades including home builders. I have been around the "building" part forever but that's it.

What should I read first? The only thing I know I might be interested in is building new because I can reduce my cost quite a bit. I also like the idea of renting out individual houses but I'm not sure it makes sense.

Where is a guy like me best suited? I'm lost...please help. :D

Mike

Jon Holdman · Answer

I'll step back from your house plans for a moment.

I see real estate investing as covering two major segments:
1) True real estate investing, and
2) Real estate businesses.

You can invest  your time any money in either of these, but they are quite different.

Investing in general means you put your capital into some asset with an expectation of gain.  Gain is usually in either income produced by the asset or in increases in value in the asset.  Sometimes there can be other benefits like being able to deduct depreciation against other income.  With real estate, you can buy and hold properties.  Some produce income, some require to continue to feed the monster.  Some gain in value, some lose.  Ideally, you would buy properties that produce some income each month and that gain in value.

Real estate business can be broadly divided into two categories - making deals happen and creating improvements.

Making deals happens is what brokers and agents do.  Its also what "wholesalers" and "bird dogs" do.  There's a lot of variations on exactly how this is done, but at the end of the day you business is to find sellers, find buyers, put the two together and collect a fee.  This is a form of commissioned sales. As long as you do deals, you get paid.  Stop doing deals, and you stop getting paid.

Creating improvements means taking raw materials - land, boards, plans, permits, labor - and creating a piece of real estate with more value than it had before.  This is pretty broad in that it could span from developing a 1000 acre tract of land all the way down to doing a minor fixup on an existing house.  I lump developing, buliding, and fix and flipping all into this category.  As for brokering, you have to keep turning the crank to produce income.  I consider this sort of real estate business as being like manufacturing.  You're taking raw materials and producing a product.

A third sort of real estate business (I did say just two, didn't I) is property management.  Legally, this is usually lumped under the broker category, since most state require you to have a real estate agent license if you want to manage properties you don't own.  Here you're dealing with the tenants on behalf of the owner and getting paid to do it.

Many investors span across these different areas.  If you buy a house and fix it up, then rent it out, you're adding value with your repair work and then turning it into a (hopefully) income producing asset.  If you're doing the day to day property management, you're acting as a property manager.

You need to consider your goals.  Most people get into any of these businesses with the intention of creating income.  If you want to be purely passive, like buying a stock and collecting the dividends, then rental real estate is really the only path.  You want to either have a totally passive investment like a "triple net" commercial property (e.g., a Walgreens, where you own it and collect the rent but Walgreens does ALL the management ) or properties where you hire out the management.

If you're willing to do some of the management, you can increase your income, but at the cost of spending your time.

If you want to be actively involved, fix and flipping or building houses, or, if you have the capital and experience to swing it, development.

I'd caution you about two things in what you wrote.  First, if you buy with cash it will be difficult to get your money back out.  That's a "cash out refi" and those are very difficult to do right now.  You should plan on holding for at least a year before doing that.  OTOH, if you buy up front with a loan, you can conserve your cash.  If you have good credit, good income, and some cash in the bank, getting loans should not be too difficult.  If you have a banker friend, and their bank does portfolio loans (loans they hold on their books rather than selling on the secondary market) you have a huge asset.  If you want to build a large portfolio of rental assets you'll need to find a bank (or three) that will work with you to finance your portfolio.

In many areas, it would be impossible to replace most houses for what you could buy them for.  Values have been driven down to the point where replacement values are higher than purchase prices.  In environments like that, new construction is just not viable.  That may or may not be true in your area, but that's something you MUST figure out in detail before you start down the road of new construction.  Take a drive.  If you drive around all over your area and there is very little new construction (like around here), then that's a pretty strong hint its not profitable.  Fix and flips may be a better way to apply your skills and sources.

Patrick Karbon · Answer

Welcome to the site and RE Investing!  Your background will make you very successful in this industry.  It sound's like you not only have the personal experience but also the direct (even 'Childhood Friendships') most people don't have with your connections/family in the building industry.

I think you're very Valid in your 2-part Theory.  Regarding your First part, YES definately start a seperate entity (LLC) for your rental homes.  You can even form an LLC for each individual home if you like.  ex: "123 Maple St., LLC" to limit your liability.  Research this as I think it's one of the safest ways to hold title to properties.   Your spot on about leveraging your cash with properties to own free+clear, just make sure to purchase correctly.  
Have you found out what wholesale means yet?  In Detroit, we go by the rule of 65% of Fair Market After Repaired Value (FMARV).  You'll often see the abbreviation as you research of just ARV but beware of bloated or false comparable home-sale prices.  Wholesaling is the same in Real Estate as it is building supplies- think your buddy's excess yard vs. going to Home Depot to build your houses.  But with real estate you don't just settle on a purchase (Wholesale) price of 65%- you need to subtract your repair costs, holding/closing costs, and finally YOUR profit you want to make- usually $5-10k in Detroit.  The term to me means simply finding (or building!!) cheap homes and selling them quickly for that profit.  I think your ability to actually build homes within numbers that make sense is amazing and could allow you to form your own unique niche in your market that others don't have access/ability- if you can build cheaper than buying existing homes.  To clarify, your banker friend has clients with Vacant Land, correct?  In RE, 'Vacant Properties' means an actual Home that's vacant with no owner/tennant.   
"Real Estate Investing" is one of the broadest investing arenas and can be overwhelming to someone whose looking down that path for the first time.  Instead, picture a cartoon wall that is called 'Real Estate Investing'  The wall has 3 doors marked:
 
Residential
Commercial
Industrial

You see the wall?  Behind the Residential door is the Corridor with more doors marked as

Bird Dogging
Wholesaling-Flipping
Rehabbing
Retailing
New Contruction (Single Family Homes)
Landlording/ Rental
Land Contract Selling (WAY more Profit than Renting.  Less Headache too)

I don't think your way off in the weeds at all, Mike.  Actually, it sounds like you are sitting in a very unique cat-bird seat and if you leverage all of your stated available resources, I don't see why you cant create a VERY successful enterprise for yourself in the Real Estate Industry.  I look forward to hearing your progress!  Please stay in touch and feel free to reach out anytime!

Patrick Karbon

Steve Babiak · Answer

Start with understanding your local market conditions, because I asume that you will be attempting investing in your local area.  Although it is important to buy at the right price, it is also (maybe moreso) important to have some well-defined exit strategies ready to go (keep for rent, rehab and flip to owner occupant, wholesale to investor, etc).  Remember that you get paid when you execute the exit.
          
          So, learn what exit strategies are working, and what areas allow for them to work.  Then go after properties that allow for that exit, and study up on that exit strategy.

Karl V. · Answer

Hi
          
          Great questions and answers all around. 
          
          My first advice is to read, read, read. There is a lot of wisdom in these forums, and getting at it is a bit like drinking from a firehose, but stick with it. Use the forum search to research specific topics. 
          
          As others have questioned, I worry that developing properties might not be the best approach right now. In many markets, it is cheaper to buy square footage than it is to build it. Check if your area is like most before you jump in.
          
          With your experience in construction, you may want to think about rehabs or additions. Robyn Thompson is pretty smart, and if you pick up one of her packages on ebay for less than $50. You probably don't need the estimating part too much, but the buying & selling bits might be useful.
          
          Another key point is the relationship between market rents and the purchase price. In some markets, you can buy houses for $50k that rent for $800 a month. In other markets, a property that rents for $800 a month sells for $300k. In the first market, renting the property works great, in the second it doesn't.
          
          I also agree that your first properties should not be bought with your own money. Borrow the money and pay the interest, use your cash for repairs and holding costs. I'd also argue against ever using your own money to fund your deals. Build up a list of investors, and you can have nearly unlimited cash to fund your deals without putting a pinch on your own finances. 
          
          Also make sure to structure your business to protect yourself. Use LLC's or corp's to insulate you personally, and don't put all of your properties into the same business. I've hear horror stories about people who had 400 properties in one business, and lost it all when the business got sued when a worker had a fatal accident. Spread out your holdings. 
          
          One last bit of advice: Don't go into a deal without having multiple exit strategies planned out. Things change, and your plan to sell a property in 60 days might not pan out. So have a plan-b that has you renting it. Make sure that all of your exit strategies will make money or don't do the deal. 
          
          Keep reading, keep asking questions, and good luck!
          
          Karl

Mike Johnson · Answer

Your also right about values. I don't mind if the value on a new home is less because I also pay less but the percentage difference should be equal. If the math works out it's a go, if not I keep looking.

Roofing is not a problem, I have family roofers and I have roofed many homes myself. A 12-12 pitch is steep but it's still a small roof with no valleys. The labor for the roof should be zero and I have free access to any lift I need so I can do it without ladders, just buy the gas.

On the basement frost is never an issue when it's 10' deep, that's actually pretty standard with new homes in this area. In Wisconsin code we go by a number on a chart called "predicted depth of frost" and that's at 5' 3". The square footage is small but I guess it is what it is, the stairs I designed at the end of the footprint and the mechanicals go under the stairs so it's wide open.

In the end numbers are all that matters I guess. My sister is a Realtor and she just checked other houses in the area. Considering they are all old a house in pretty decent shape is selling for about 170,000.....all things considered that's a very safe number, if not low.

I know I can build it for less than 100,000 lot included. I'm hoping for less than 70,000. I would be happy to own it for that, selling at 170,000 would be a great return.

Again, I still need more numbers to come in but the fact that I'm taking advantage of my own skills as well as friends and family who do this for a living like myself  is a very big advantage.

Still thinking
Mike

Diane J. · Answer

Doesn't this set off any red flags for you? Consider how your new house might appraise among older homes on larger lots than yours.  Even though you plan on renting it out,  I wouldn't expend the time and energy unless I could make a large profit selling it.

This is a pretty small foundation to support a 1000 sq. ft. footprint and your footings will most likely have to be below the frost line unless you're using FPSF.

Also, good luck in finding a roofer that will shingle a 12-12 roof! You can plan on paying double (if you can even find one) and you might be going over the height restrictions of the city code.

Mike Johnson · Answer

I'm not sure Kevin. I'm still getting numbers in and also improving the plans to maximize space, materials, and labor.

I just know that I have friends who own older houses and the maintenance costs are a real killer. Part of the design includes absolute minimum maintenance and replacement costs.

One thng to consider is the home design itself. Take a porch for example. This needs footings, flashing, transitional materials, and the use of 4 skilled trades. It adds a whole different level of complexity and cost. Most people don't think about this but costs to build can double very quickly just by being fancy. This house has no sofit so I just eliminated 2 days in labor and a bunch in materials just by eliminating this. Instead, I made it better looking because it has a vintage feel that fits in with the older homes. Venting changes, insulating changes, flashing changes, etc etc. All this really adds up in a hurry. What I like most about it is the competition. If a family wanted to rent they can have a choice of an old expensive to heat house that's falling apart, or a brand new one that has 4 real bedrooms with oversized closets and 2 1/2 bathrooms, and it's cheap to heat. What would you rather choose for the same monthly rent?

Maybe I'm wrong but I have ran 12,000,000 plumbing projects and also 100 repair jobs and based on experience and the numbers I'm getting back it's looking pretty darn good.

One more thing to consider is the old city double lots. Those people can't sell them because who wants them? I can now get a rental lot for a discount. If I wanted to sell it it's even better because my competition is an old inefficient house.

The square footage is also a big advantage. Old homes from the 20's etc lack space and storage. I would have to show you the plans because you can't get a feel for it unless you see it first hand.

Mike

Kevin C. · Answer

Sounds like a plan to me Mike.

Wish I had your knowledge and connections!

If you built new, as you've described, what is your projected all in cost?

What are the rents in the areas you're considering building in?

Would you be managing the units yourself?

Mike Johnson · Answer

Thanks for taking time out of your schedule to guide me along, I really appreciate it. I'll try and cover a couple more items.

I own CAD and can use it pretty good....for a plumber. :D

I use a drafting table because I like the product better and have more fun doing it, I'm an artistic kind of person and do it by choice. CAD is great, no doubt, it's just not fun for me that's all.

Anyhow, I have a few more numbers and thoughts to throw at you, tell me what you think.

The house I have in my head, and now on plans, does not compete with other new houses. In fact, I want it to compete with homes built in the 1920's-1950's. In my area we have some of the most wealthy people in America so rents tend to be higher than other type of areas.

When I look at the cost of buying an old one they come with baggage and it's expensive to fix baggage. I can replace things on an old home but in the end it's still old, no matter how much I fix it.

A new house is new, simple as that. The new house would have in-floor heat and a piggy backed combi-coil for potable water....a very efficient system. cabinets are all straight with no bends so counter tops are dead simple and cheap.

Being that it's a 2 story built on a single story platform reduces costs and labor because it's maximizing space. Keep in mind 32' x 32' is still small but it's a 4 bedroom 2 1/2 bath home. The basement is 10' deep and wide open for storage or a living area with an egress window, so now it can be a 3 story.

My goal is to own it for a very long time and hand it off to my kids. I'm not sure how to figure out maintenance costs on old homes but I see it as a real issue. With new I still have periodic maintenance costs but they are minimum compared to older homes.

Of course none of this matters unless the numbers jive right. Here is what I have so far.

Lot: I don't want to compete in new neighborhoods because that's not the plan, I want to put it in an old existing neighborhood right next to the old homes and compete on that level. Many homeowners, when they were originally build, bought double lots. I got in contact with 4 homeowners and asked them if they would be willing to sell the other lot connected to it. 3 of the 4 called back right away and said yes, make us an offer. I talked to one so far and he would let it go for 20,000. Keep in mind the house is designed on a small footprint so it can go on any older city lot.

Lots in newer type neighborhoods are going for 50-80,000. The thing is people don't want older city lots so I see that as an opportunity.

Materials: I have in my hand a bid package of 17,000. This is what it includes. All the wood,nails, hangars, and TyVek. Shingles and everything associated with the roof like flashing, vents, tar paper, nails and ridge cap. Siding and everything including nails. Windows, and all associated materials. Drywall, tape, corner bead, screws, and mud. Insulation and vapor barrier. All the trim, inside doors, exterior door , and patio door. All the cabinets and counter tops. All the hardware for the doors and cabinets.

A few more items but that's the basics. No flooring, paint or gutters.

That's where I'm at. My relatives are electricians, builder, I'm a plumber, and a I'll do the heating as well. This all needs to be added of course.

What's nice is the house is simple. The framing 100% done can be accomplished in 1 day. Electric, plumbing, heating, insulating and siding can all be done in 1 day for each trade.

This is where I'm at and still have a long way to go. I still need my excavator quote, foundation quote and a few others.

I guess I'll see what the end looks like and I'll keep you posted. By the way, the numbers look cheap because they are. The trim, interior doors, hardware, cabinets, roofing and windows are at a steep discount because they are all canceled orders from people who declared bankruptcy and didn't pay. I made a deal with my buddy that everything gets ordered from him so I have only one supplier....except flooring.

This made him happy and the discount was considerable because he can now unload inventory he can't sell. It's all quality items also. The windows are Pella and were ordered for a 800,000 home. One window retailed for 4,000 and I get it for 300.

Regardless, the older home that needs help has a bottom price near 60,000 and that's in rough shape. Houses like this need quite a bit of work....and it still ends up an old house no matter what I do with it, and a basement that's terrible and unusable. Remember, I want to collect assets and not flip.

Anyhow, that's where I'm at right now. Still a long ways out. I have a plumbing business that's doing well so this is something that's more of a pet project than anything else. It's pretty fun to figure out where the numbers land. I have a gut feeling I could build this house and many like it for a pretty good deal. A lot of money is saved in labor as well because the house has four corners that's it.....dead simple.

Mike

Holy cow, where do I begin?

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