How to leverage what I have - Newbie In Santa Monica, CA

Question

Hey everyone!

I've been reading up and listening to lots of the info on BP and in Podcast 37 Aaron Mazzillo talks about the "easiest" way to get started in REI.  Aaron says buying a property from a wholesaler is a good place to begin. It sounds like something that could be really good for me.  Below is what I bring to the table...I don't have any experience in REI but I do have other things that I think are valuable.

I have really good credit, about $40K saved, a good/trusted friend who is a talented rehabber who wants to work with me to fix & flip properties, project management experience, and another friend willing to put money into the fix/flip project (private money).

I would love to get feedback on what you guys think of entering the investment game using Aaron's suggestion.

Also, with what I have, anybody else have a suggestion on how I can start?

Thanks!Rodrigo

Nick Hedberg · Answer

@Rodrigo Donoso - I'm an investor and an active agent just south of you in Venice. I have three recommendations for your situation:

First - "House" hacking in the West LA area. You could do a live in flip on a fixer upper and utilize the personal residence tax exclusion of $250k for an unmarried person and $500k for a married couple. Once I'm married my goal is to do live in flips every couple years. A $500k tax benefit is tough to ignore.  I occasionally see condos that could be flipped in Santa Monica. For a SFR you would have to go much further inland but it can be done.

Second - Invest out of state. I've been hearing great things about Florida lately but do your own due diligence. My second real estate deal was an apartment complex out of state. You can buy an apartment building out of state for the costs of weekend parking in Santa Monica <sarcasm>.

Third - Partner with more experienced investor to build your capital stack and knowledge.

One of my favorite things about real estate is the options. There is an option for everyone to meet their goals, situation and lifestyle. Keep learning and hanging out on BP, and I'm sure you'll find the right type of investing for you.

Nick Hedberg · Answer

@Rodrigo Donoso - I would be very careful flipping in LA with $120k. The standard hard money down payment is 25%. Plus carrying costs, the actual rehab, etc. You are looking at some low price points in rough neighborhoods. You can find a place for under $250k along the 110 in South Los Angeles which might be a good area to start learning about. I'm not saying it can't be done, just be careful. Doing a live in flip would take much longer, but would be significantly less risky.

I've managed a property out of state and currently own a multi-family out of state and I agree there are definite downsides. I'm mainly focusing on the LA area now because their is still plenty of potential for investing in LA. You just need to know the market.

You have great energy and you are obviously doing a great job learning about REI. Keep at it and I have no doubt you will find the perfect niche for your goals.  Let's chat next week and see if our schedules line up.

David Faulkner · Answer

I agree that it sounds as if you are off to a great start. I think you may be a bit under capitalized with $40k for a flip anywhere near Santa Monica, and you would not IMO want to go hours away for a flip deal. The other potential issue is that there are far more bad wholesalers out there peddling garbage at an inflated price than there are good ones assigning good deals, and you as a newbie may not be in the best position to distinguish between the two and even if you were the good ones typically prefer to work with only a few experienced flippers who buy a lot of volume from them in a given year.

If you don't already own your primary, you could start there with perhaps 5% down conventional loan, and in time either do work yourself to add sweat equity and/or utilize your friend's expertise to help remodel and add value.

In the meantime, you could also get your RE license and work that way. You could also network and find an experienced flipper to see if you can add value to what they are doing and learn along the way. For networking and learning, there is a monthly REI meetup in Santa Monica hosted by @Jeff Greenberg. This may involve being a bird dog to find off market deals for them, and earn some $ and knowledge if you do. It eventually may evolve into helping them manage flip projects, but they may not wish to have you fill that position right off the bat as a newbie.

Finally, you could use that $40k to lend in second position as gap funding for rehab costs to a flipper, and/or sign for the HML loan, and ride shotgun in that deal to learn, but I would not recommend this route as that amount may be too little and it would be too risky IMO for a newbie to loan in 2nd position or sign for a loan.

Kody Broussard · Answer

Hey Rodrigo,

Sounds like you have a great base to start from, you are in a much better position than most. The Santa Monica real estate market is a little expensive, but I am sure there are still some deals out there.

If you do not want to becoming a marketing expert, finding a good wholesaler would be ideal. Best way to find one is join real estate investing club or group. These guys will typically have a buyers list at the back of the meeting and you can sign right up and start getting a flow of deals.

Make sure you learn your numbers, this is key especially for your first flip. Make sure the deal is really good because you will run into problems and it will cost you more money than you thought.

I am not a flipper, but it is a great way to make some cash to move into other investments. I specialize in multi family, so if you are curious about this business feel free to reach out to me.

Best Regards,

Kody

Rodrigo Donoso · Answer

@Nick Hedberg didn't properly tag you in the response above.

Rodrigo Donoso · Answer

Nick, thank you for responding.  I'll be going to REIC meetings coming up in March to meet other investors face to face.  The idea of partnering with them had crossed my mind. I am definitely open to the idea.

As for flipping SFR, how far inland would you suggest?

As for the house "hacking" it sounds like a really good idea, but one every couple of years seems a bit slow for me...considering other variables in my life.

As for going out of state, I've thought of this too, but I've heard staying local might be better. I'm thinking if I'm going out of state then why not just go out to places like Riverside or a bit further north like Bakersfield and Fresno.

If you are interested, I'd love to take you to lunch.

Again, thanks for responding!

Rodrigo

Rodrigo Donoso · Answer

David, thanks for responding. Lots to explore in your response.  I will reach out to Jeff.  I will be looking in LA area not just near Santa Monica.  Also, i think i can raise about $80k (private money) so partnership will be able to put $120k into deal.  This gives a little more flexibility. Again, thanks for responding.R

Rodrigo Donoso · Answer

Kody, thank you for the response! Yes, i read REIC are good places to find reputable wholesalers.  Im also contacting "we buy Houses" ads on Craigslist.  I'll be looking for a deal in LA area. Won't limit myself to just the westside.  Traffic is a way of life out here. ;)Again thank you for responding. And if i have a questions on a multifamily i will definitely reach out.  70% of ARV - repairs = offerSo, that means i should pay 75% of ARV so wholesaler gets 5%...generally, right?Best.R

David Faulkner · Answer

Sorry, message above didn't properly tag @Jeff Greenberg for the Santa Monica REI meetup.

How to leverage what I have - Newbie In Santa Monica, CA

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