Should i try to break even to learn Rei?

Question

I run my own business and i make good money about 8-9 k a month. I save most of it cause my bills for the month are 1000 dollars. I have about 200k saved and i want to get into rei but i seem to scared to deal unless it too good to be true so i end not doing any deal. Well i am getting tired of that! Is it smart for me to buy a house not at a crazy discount and just buy it rehab it and sell it and even if i break even that will get me out of my hump and i learn some rehabbing tools as i go along. In my eyes even if i break even i will have learn so much by the process . Is this a smart way to go? I was thinking about purchasing a hud home to start.

Jon Holdman · Answer

I recommend against a break even deal for the first one.  Quite the opposite.  You need an especially juicy deal for the first one.  Being new and inexperienced you'll make mistakes.  Those mistakes will cost you money.  A break even deal will turn into a loser.  A juicy deal will turn into a just OK deal or break even.

With cash you have a huge lever.  You might consider finding an experienced rehabber in your area and offering to partner with them.  No matter how much cash a rehabber has available, more is always better.  You put in the money at a reasonable rate, e.g., 10% with the understand you get to participate in the actual work.  That's better than hard money, so the rehabber is getting a good deal.  You earn some money on your investment and also gain experience.

Stinson Bland · Answer

IMHO, aiming for break even is a sure way to lose money. With little rehab experience, you may make a mistake... or a few. As John stated, find a really good deal or a partner.

I'd let an experience rehabber find the deal, you could put up money, and help with the project.

Michael Zuber · Answer

To put it simply NO that is not an okay strategy.  You need to have a framework for an acceptable deal and then go find one that meets that mark.  
Everyone has different benchmarks.  Some is minimum Cash Flow, Some it is yield, some it is discount, etc.

Get a model, do your homework and don't settle for break even - especially in this market!!!

Joe Delia · Answer

To go into a deal yourself and fail is plain stupid.  No other words to it.  Find a rehabber with a good rep at your local REIA group.  Have a real estate attorney draw up the docs to where you're the BANK that he makes payments to.

Part of the deal is he walks you through what he is doing.  You do a 50/50 profit split, or just charge him interest for the time the money is out.  8-12%.

It's really not that hard, or confusing.  Your the bank, he doesn't pay, you take the property back.  Any attorney should be able to coach you through it.

Whatever you do, don't go in to lose money "Because your hard headed".  Guaranteed your in and out of the business quickly with that thought process.

Jim M. · Answer

well, if you end up losing x amount of dollars on your first deal you may be out of the business for good or decide that you need to get that money back and take an even bigger risk.  I was of the same mindset about a year ago...ready to flip houses.  I was looking at all the wrong houses in the wrong neighborhoods and had the wrong agent.  Finally, I decided to become a private lender to a local company and completed four deals(3rd closes next friday and 4th just went on a market monday) this year. This is how I am learning the business and making a nice percentage on my cash as well.  I have partnered up with another local investor and we closed on a house about a month ago and am learning a ton from him.  Think long term.

Jason C · Answer

Sounds confusing....I may be better off buying some Hudson and hud it up with some rehabs. And sell it for a very small profit and learn the game.  I'm one of them people who has to learn the hard way to learn. I can be honest about that. Only way to learn is to jump balls out right!!!

Jon Holdman · Answer

If you're making a loan secured by the property, it will be in the rehabbers name and you will have a deed of trust (or mortgage, depending on the state) on the property.  He will own it, but you will have a security interest.  If he doesn't pay off the loan based on the agreed-upon terms, you could foreclose and take it away.  A rehabber would probably be unwilling to do this deal if you insist in the property being in your name.  Too much risk on his part.

Typically, you would get an appraisal by an appraiser of your choosing.  The appraiser would consider the proposed repairs to come up with an ARV.  You could then lend based on that.  65-70% would be most lender's maximum.  Or, could could lend based on the purchase price.  In any case, you want to borrower to have some money in the deal.

Jim M. · Answer

No, the local rehabber who has the deal and you would fund the deal.  You would hold the mortgage on the property while it is being rehabbed and paid back after its sold.  Have an attorney take care of the loan docs to make sure your protected.

Curt Davis · Answer

I agree with Jon,  Get your money working either as a hard money lender or partner with someone first to get some experience.

Jason C · Answer

Thanks for the replies . So i would acquire the property  according to him and give him 10 percent. I really want to get started. Been ready! I would want the property in my nAme correct. Man when it comes my wholesale business i know the INS and outs, but the real estate game is a doozy!

Should i try to break even to learn Rei?

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