All Forum Posts by: John Mireles

I don't disagree with what you guys are saying... but it's all too easy to go with a cheaper route when money is tight. For my latest project, my go-to A+ contractor wanted to charge $12,000 for my fence. Sorry, but that was way out of the budget so I had to got to plan B (that being myself, a handyman and a laborer). Because I know what I'm doing and I have a good team, it all worked out fine - for 1/3 of the quoted budget.

It's just all too easy when you're new to the business and money's tight to go with the low priced guy who doesn't have insurance or maybe doesn't even have a contractor's license. It's tempting to go with the guy whose quote comes in a 1/3 or even half of the established contractor. When money is really tight, as it often is with a flip, having a crew who can get the job done on a minimal budget is often the difference between a nice paycheck or eeking it out to break even. Cheap though is often way more expensive in the long run.

The problem with this plan is that everything depends on the contractor. Everything. Now if you have a contractor who you completely trust by virtue of a successful track record in working with you, great.

But... if you're just starting out and don't have much experience in hiring contractors and have no existing relationship with one, the odds are very good that you'll be burned. I would be very leery of going into a flip with an untested team and little to no experience of your own.

Contractors are a funny bunch. You'd think that they'd be motivated by the fact that you owe them money. But you'd be surprised. They're more motivated by making sure they have a string of jobs lined up so there's always a paycheck lined up. That means that they'll drop your job for another one for a few days or a week or two (or more) so that they can keep the funds coming in. Or they'll just drop your job for one that pays more if you don't cough up more funds.

Besides, no contractor is going to let you go too long without paying him. Most will set milestones that once they hit, you pay. In the beginning, things go quickly and all is well. It's once you get near the end that it's easy for the contractor to move on to other jobs. Penalties won't matter because the contractor will just move on. The amount of money left on the table for them isn't enough to bother with. Meanwhile you're pulling your hair out because you're losing money every day and bringing someone new on will cost a bundle.

I'd much rather give my job on a handshake to a contractor that I know and trust than give it to a stranger (regardless of his references) using the most airtight contract in the world. Most new investors spend their time looking for potential properties. Where they should be spending their time is finding the right team for the job.

I found, purchased - with my parent's money and in their name - and now manage a property for my parent's. The property is purely in their name, but I take care of everything for them. As far as the tenants know, I'm the owner. My name is even on the insurance along with my parents.

I have a separate bank account in my name set up just for their property. I use it for nothing else but cashing their rent checks and paying for the mortgage and various expenses. I keep a some extra money in the account for unexpected expenses and security deposits. I charge a monthly fee for handling everything. My parents then receive a profit and loss report/cash flow statement along with a profit check on a quarterly basis.

Having a separate bank account has made it easier to keep track of things (despite having a bookkeeper, managing the books hasn't always been as easy as I would have expected). Also, my parents know very little about real estate investing so I've been able to keep the sharks at bay. (The mortgage broker tried to swindle them out of $7,000 but I caught the little rat bastard red handed.) Hope that helps.

It's really just common sense. If you're going to fix up a property, where are you going to put your money? Everyone needs a kitchen. Everyone needs a bathroom. You can put a pool with waterslide in the backyard but we all know that's a waste. Or you can pimp out the garage, but what if your buyers are a couple of computer programmers who just park the hybrid in the garage and shut out the lights? If you've got a killer kitchen and bathroom, people will overlook barebones landscaping and other flaws. But if your kitchen and bathroom aren't up to snuff, you've got a fixer on your hands - and the price goes way down.

Most banks will accept 20% down depending on the property. Expect to provide at least two years of tax returns. I don't think there's any way to get around that.

Also, the bank must generate at least 120% more income than the mortgage - after all the expenses are factored in. Those expenses will include at least a 10% vacancy rate, 3% management fee (even if you self manage) et cetera, et cetera. Depending on the lender, they can really pile on the expenses that they use in their calculation. If the cash flow isn't there, they'll expect the buyer to come up with more down payment.

The deal with a flip is that you need to add value to the house if you want to make money off of it. The number one thing you can do to add value is by choosing colors that your buyer will L.O.V.E. The last thing you want to do is to just use whatever cheap boring cast-off paint colors you can get your hands on. That's being penny-wise, pound foolish.

Home Depot probably has the least expensive paint around. Sign up for their Paint Pro program and you'll save 10% on all your paint purchases. My suggestion to you is to come up with a pain scheme that will WOW your perspective buyers. It's not easy and it does take time. If you're completely color inexperienced, you may even want to bring in a designer/decorator to help you. If you put your time and money into one thing, it should be paint colors. Don't skimp!

In California you must have a Real Estate License in order to offer property management to the general public.

John

I agree with William - I'd be loathe to take the husband off the lease until I know that the wife is able to make the rent payments on her own. Divorce usually leave people significantly poorer (speaking from experience here) so you need to do some due diligence here to make sure that your tenant won't soon be falling behind on the rent. Unless you're feeling 100% sure about the wife's ability to pay, I wouldn't agree to take him off the lease. Just because they've agreed to it doesn't mean you have to.

If you do decide to remove him from the lease, I'd think a letter indicating that he's no longer bound to the terms of the lease would be sufficient. As William has pointed out, you'll also want to address who receives the security deposit check. (They can fight over the proceeds but that's not your problem.) I'd probably have the wife sign a new lease in her name only just to keep things nice and clean.

Hi Nicolo Nisbett:

I'd be happy to hear your suggestions on tapping that market!

John

It's hard to provide specific answers without knowing anything about your property or its location. That said, you have three options - one improve your marketing, drop your prices or improve your property.

Marketing - Are you being seen on Craigslist? Are there any other sources for advertising to consider? What do your photos look like? Are they blurry point and shoots or do they truly showcase your property?

Prices - It doesn't hurt to start high but if you either get no bites or just get ones that are questionable, then it's time to drop the rent. Better to make a little less money but have a grade A tenant than bring in more and have to deal with all the issues that come with a sub-prime tenant.

Improve Your Property - Is your house in need of an update on the exterior and interior paint colors? I'm not talking about just another coat of Arizona white but colors that actually attract top notch renters. Are there some details that you can add to the property that will add a lot of value without costing much money? Maybe wood blinds instead of the usual mini blinds. If you only do the minimum, you'll get the minimum.