All Forum Posts by: Michael Ealy

Hi @Milena S.,

You ask 2 very important questions that a newbie investor ask:

1) How do I find out the cost of renovation?

2) How do I find good contractors?

The cost of renovation is the cost of labor AND materials for a particular set of task/ part of the project (like screwing a light bulb - LOL).

Cost of labor will depend on the area/city/town you're in.

Cost of materials is pretty much the same across the US (and the same across Canada - I'm assuming).

Now to have a good idea on both, specially the cost of materials, J Scott's book on How to Estimate Repairs will be a good one to read. It's very detailed. You can cross reference the cost through researching online as well.

Now to answer your next question: How do I find good contractors.

Answer: one way to do it is through networking with other rehabbers/landlords/investors/ real estate agents (who specialize in working with investors) and property managers in your local market. Ask them for referrals. Then interview 3-5 contractors per job (3-5 plumbers, 3-5 carpenters, etc). It's going to take a lot of work upfront but this will save you time over the long run.

Another way to find good contractors is by finding good GCs (General Contractor). Generally, a good GC will have good sub contractors. How do you find a good GC? Same process - networking in your local market then interview several prospective GCs. For GCs, you need to interview/meet 5-10 of them and you should go to 3-5 projects they are working on or have worked on to see the quality of their work.

Again, lots of work but it will save you the aggravation and sleepless nights of worrying about contractors/ GCs messing up your projects.

So @Steven Smith, just to summarize or to see if I understood this deal...

1.  There is no value add (meaning you're not renovating the place to increase its value)

2.  You will live in one of the units now and even if you move out and rent all the units and increase the rent 8%, it will still be negative $300/month cashflow?

3.  The only profit in the deal is IF the value goes up (which may happen but what if it does not happen - let's pretend it's 2007 now and a lot of people told you, the price will go up)

If it were me - NO, I will not buy it. There are still deals out there, even in your market that should at least breakeven from a cashflow standpoint, or negative cashflow NOW but you can do a value-add and sell it at a higher price.

Now, if you are buying it to live in one of the units and live cheaper than living in a house - sure, do it. Otherwise, don't.

Hi @Alex Lupo, that's a broad question and if I were starting out, knowing what I know now, I would ask this question from the point of a lender evaluating whether a particular deal and borrower is a good risk or not. You are the borrower and the deal, is whether SF or a small MF (example - 4 units).

Lenders use 5Cs:

1)  Cash - in this case, you said you have $30K cash. That's a good start. Assuming you will NOT house hack (i.e., live in one unit and rent the others for a MF, or fix a SF, live in it and then sell it after a year), $30K cash can buy you a $120,000-$150,000 property (excluding repair cost).

2)  Credit - do you have good credit? Good paying job? If not, you may need more than $30K cash to get into a deal, or you can bring someone in to help you (with additional cash and/or credit).

3)  Collateral - in your market, can you find good 4 unit MF in reasonable areas (not war zones), for $120,000-$150,000? If NOT, then go with SF homes as your first deal. It will be hard for a lender to lend you money for war zone properties.

4) Capacity - what is your capacity to pay back the loan in case things don't turn out as well as you expected? Do you have a high paying job that can sustain things if "Murphy's Law" happens? For example, what if you need to replace 4 furnaces or 4 ACs in the MF? Can you pay for all that? Does the property produce enough cashflow to take on the risk? If not, stick with a single family property as your first deal.

5)  Capability - what is your personal capability to invest in the asset you're considering? For example, even though you don't have real estate experience yet, do you have experience managing renovations (say as a contractor) or managing people on your current job, or leasing experience? For example, if you have experience managing renovations, then maybe going with MF is the way to go because you already have the capability, say to renovate multiple units if needed.

As you can see, there's no straightforward way to answer this question. It depends on your market, on the prospective deals you have in front of you and most of it all, it depends on YOU.

@Amber K., you've asked an excellent question and from your words, it shows that you're a good person and you want to do the right thing.

Saying to a seller you can buy her property all cash when you don't have the cash - yes, that can appear to be lack of integrity. So here's an idea for you:

1. Before you tell sellers you can buy their property all-cash but your intent is to just assign the properties (i.e., wholesale them because you don't have the cash), find rehabbers you can partner with.  These rehabbers need to be genuine cash buyers and by associating with them, you become a cash buyer too (because you can say with integrity "we buy houses all cash").

2. Your role in this partnership with these cash buyers is to be their acquisition assistant and you're paid a profit share (1099 or independent contractor). Notice I didn't say you're a wholesaler and these rehabbers are your buyers. You help the cash buyer find good deals, including analyzing and negotiating the deal. They sign on the purchase contract.

3. Just to be sure you cover all your bases, get your real estate license. Side benefits are acces to the MLS and easier to get comps.

4. Once you've done 1-3 (and have some experience acquiring properties with rehabber-partners), and have accumulated some cash, you can talk with hard money lenders and prequalify with them. Now, you're a real cash buyer.

Invest with integrity. Being good is a good business strategy. Over the long term, you'll make more money and sleep well at night. Hope this helps!

Agree with @Lee Ripma.

Rates are better for larger projects. That's one of the reasons I love larger multifamily (50+ units) vs. 5-10 units.

@Alyssa K., I have been investing since 2006 and I've never encountered chickens as an ESA. As everyone here advised, try to find how to decline the tenant based on your leasing criteria. 

When I was starting out, one advice I heard was to make your leasing criteria so high that technically NO ONE will pass it. I didn't understand it the first time I heard it but this situation you have is a prime example as to why you should do it. 

Now, having said that, check with an attorney in your state and learn the Tenant-Landlord laws just to be sure that this is even applicable where you live.

Totally agree with @Jay Hinrichs. Seller might sue you but will it be worth it? The time and effort and money and aggravation factor will all but demotivate a seller to sue you. The EM deposit is all that the seller can usually get. After doing more than 100 deals, I have not seen any seller get more than the EM deposit but who knows?

Good luck and let us know how this turns out.

I totally agree with @J Scott - learn before you jump in. However, don't spend 6 months listening to podcast or attending webinars, etc. You will learn a whole lot more by actually doing it. Here are the things I can advice after doing hundreds of real estate transactions since 2006:

1.  Don't quit your day job just yet. Having $100K in equity in your home and then selling it and hoping you can convert that to $200K by doing a flip or two is not realistic. Not all projects will succeed. I have rehabs where I didn't make any money but I have rehabs where I made over six figures!

2.  Make finding, analyzing and securing good deals your primary focus and become an expert at it. Going through Trulia and Zillow is not the way to find good deals. I specialize in apartment complexes and hotels but I found a good post here on BP on how to find good deals (single family homes). Here's the link:

https://www.biggerpockets.com/forums/311/topics/63...

The money is in how much lower than market value you can acquire a property for. 

3.  Find good contractors by networking online here on BP and offline by attending your real estate investors association. Having good contractors who work on your flip is crucial to your success. Buy J Scott's book on rehabbing houses as well as how to estimate repairs. Compare the costs with what contractors in your market tell you. Get 3 bids from 3 contractors - and don't always trust the lowest bid.

There are so many things to learn so don't quit your day job just yet. Real estate investing is not as easy as the "gurus" portray it. Learn here from BP, learn more by doing and find a good deal and a good team. When you do, you will likely succeed in your first deal.

I totally agree with you @Sochima Eze

No one cares about your projects more than you do. Not the contractors, not the GC...

No one cares about your real estate acquisitions more than you do. Not the real estate agent or wholesaler who are pitching you properties, not even your real estate attorney or title company...

You got to be diligent, and you got to buckle down and get to work.

@Shayla Keyes, it depends. Are you the kind of person with an eye for details? Do you have experience in managing other people, say at your job? If the answer is "YES" for both questions, I would suggest you actually GC your first rehab as it will be a great learning experience for you. You will learn the cost of materials and labor for each aspect of the renovation process and you will also learn how much time each aspect of the rehab process takes.

Getting a GC will not always save you time, specially if you get the wrong GC. NO one cares more about this project than you do. I had some GCs waste my time because I had to follow them up because some of them don't update me on what's going on and I have to push them to get them moving. I don't have that problem anymore but I learned that truth the hard way.

If on the other hand, you don't thrive with details or managing people is not your cup of tea, then by all means find a good GC to work with. But, get referrals from successful rehabbers in your area or get referrals from real estate agents in your city. Take your time to find the right GC because the GC can make or break your project. Here are some things you should do when looking for the right GC to work with:

1)  How many crews does he/she have?

2)  How many projects is he/she doing right now?

3)  What is his/her experience in the permit process in the city where your project is at?

4)  Go to his/her projects to see the quality of his/her work

5)  Is he/she bonded and insured?

Good luck and congrats in buying your first investment property!