A Time For Multiple Exit Strategies

This is a challenging time for the real estate investor.  Regular negative economic news and ongoing concerns about the housing/credit markets likely mean that property values will continue to slide through 2008.  So, what does this mean for the savvy real estate investor?  Well, first and foremost, it means BE CAREFUL!!!  Do not just jump into a deal unless you have done your homework, analyzed your comps and feel very confident about the value of the property.  Also, it means that this is a time for MULTIPLE EXIT STRATEGIES.  Personally, I am advising everyone to be ready to rent their investment properties if they cannot sell them.  I prefer the lower end of the first-time homebuyer market, particularly the under $300K retail price market in the Washington DC Metro Area.  This means that I am buying houses at less than $200k.  Why?  Well, I like to have multiple exit strategies when I buy and it’s easier for houses to cash flow as rentals when the mortgage payments are more affordable.

In the current real estate market, we are all flying a bit blind with a record number of foreclosures looming on the horizon in 2008.  Will prices drop10%, hold steady??? No one knows for sure.  So, the smart investor does several things to always be prepared for the worst case scenario, and one of these things is to have multiple exit strategies.  In this market, I will not buy a house that I cannot safely rent or lease option.  So work your numbers when you buy and keep your eye on the rental market where you are making offers.  This “Plan B” will keep you out of trouble if you rehab a property that you can’t sell.

Choosing Your “Farm”

This one is easy for some.  They know exactly where they want to invest and focus on that area.  But most of us have trouble nailing down our farm, and we often end up without any area of focus.  I’ve learned from experience that I need to narrow my focus and just say NO to some types of properties and some areas. When you are learning to invest in real estate, you need a smaller area to hone your skills.  This is your farm.  In your farm, you should call the realtors who are listing houses and working as buyer’s agents.  You should have a realtor on your team take you through as many houses as possible in your farm. Go to open houses like crazy.  Read the classified sections of papers and check listings on Craig’s List.  The goal is to be so familiar with your farm that when someone contacts you about buying their 3 bedroom house in your farm, you will automatically have a pretty good idea of what it’s worth fixed up.  You still do your due diligence but what working your farm does is give you great confidence.  And once you master your farm, you are ready to expand to other areas.  So, where is your farm????  

Getting Started

For most of us, time is a precious commodity.  We have family, work, numerous commitments . . . oh yes, and we need to employ some kind of investment strategy if we are ever going to get out of the rat race.  So, for those of you working at becoming real estate investors, one of the first things you should do is choose a farm.  No, I don’t mean buy a farm!  Although that is real estate

 In real estate, your farm is the main zip code or zip codes that you need to know like the back of your hand.  Actually, it’s best to start with particular subdivisions and then branch out into the broader zip code.  Why do you need to know your farm so well?  Because in real estate investing, the window of opportunity for an excellent deal is only open for a little while, and you want to have done your homework so that when the opportunity presents itself, you can jump through that window, and get it under contract.  More on working your farm in my next real estate strategy tip . . .

Subprime Meltdown = The Back To Fundamentals Investment Strategy

Look around over the next few weeks and you will see something interesting.  Some investors will be struggling or going under, while other investors will be excited by the opportunities to buy which the changing market represents.  We are at the beginning of “the big shakeout.”  By that, I mean that almost anyone who bought a house in the DC area from 2000 to 2004 saw their property value skyrocket over this period.  We all knew that it couldn’t go on forever, but none of us knew just when this “meltdown/adjustment/downturn” would occur.  Some investors have been calling for it for years.  Well, it’s here and it’s going to be with us for a while!  Hopefully, this excites you, because while most people will be sitting out the next few years of real estate investing because they are afraid, those who understand the fundamentals are chomping at the bit.  I’m closing on a house ¼ mile from the gates of the Suitland Federal Center Metro this week at about 50 cents on the dollar.  Yes, I’ve been waiting for this!

 

So, what do I mean by the Back to the Fundamentals Strategy?  Many investors forgot the most basic rule over the last few years because the money was coming fast and easy.  Lots of folks thought the music would never end.  Well, it’s pretty quiet right now. And that presents opportunity. 

The most basic rule of the Back to Fundamentals Strategy is Maximum Allowable Offer (MAO).  And let me tell you that it is more important now than ever.  The MAO rule of thumb states that the ideal price an experienced investor should pay for a house is 70% of the After Repair Value (ARV, that is the price the house will sell for when repaired and looking nice) minus the repair costs.  An example is helpful: You get a lead on a house that has an ARV of $300k and it needs $30k in repairs.  The MAO for this house is $180k.  Unexperienced investors will look at this spread and think, “That’s so much of a cushion.  Seems like I’ll do great if I pay $230k.”  Wrong. When you properly analyze all the costs involved in buying (think closing costs, transfer taxes, commissions, etc) holding (think unexpected rehab costs, utilities, insurance, interest payments) and selling/renting (think commisions, advertising, closing costs, transfer taxes, etc.), you will find that MAO is a helpful guide that will keep you out of trouble. And when an experienced investor buys a house using this formula, he/she will almost always make a fair profit. 

The Secret To Becoming a Successful Real Estate Investor

“Scott, how do you find the great real estate investment deals?” &  “What should I do to get started in real estate investing?” These are the 2 questions which new real estate investors ask me more than anything else.  And you know what . . . these are excellent questions because they both seek to get to the heart of successful real estate investing – creating systems which keep great deals coming to you.   But as they say, “If it were easy, everyone would be doing it, right?”  Everyone wants to know what the one key ingredient is which will propel them to financial freedom in this business.  Everyone is searching for the magic pill to make the real estate business easy. Well, right here in my inaugural blog, I’m going to give you the answer you have been searching for . . .  The secret to becoming a successful real estate investor is really no secret at all.  The secret is really quite simple.  Choose a marketing strategy and TAKE ACTION until you accomplish your goal.  People who become successful as real estate investors don’t quit.  And believe me; it’s not easy for anyone.  Successful investors choose a system of finding investment opportunities and stay with it until they succeed.   In order to find great investment deals, you must move outside your comfort zone and take action.  There are so many ways to do this.  If you’ve read books on real estate investing, attended your local real estate investment association meetings or analyzed any number of home study systems out there, you have discovered that there is lots of good advice (and some really bad advice!) out there.  Most leads come from 2 sources: your network and your marketing program.  I like targeted direct mail as a way of finding leads.  If money is tight, then print off 1000 flyers at a copy shop and canvas your target neighborhood.  One month later, do it again. Call realtors and wholesalers.  One month later, do it again, and again.  I received a lead in 2005 from a realtor that I called every month for 2 years.  The deal netted over $100,000.00 when sold in 2006.  Was staying in touch with that agent worth the time and energy?  ABSOLUTELY! Set up a mail/flyer system (a certain number per month to a targeted group or area) and mail to your target list.  Put on your calendar the day you will do it, THEN DO IT AGAIN.  Take Action.   Work your action plan for 6 months, and then analyze what you’ve learned. Similarly, decide how many offers to make per week, how many calls to make to realtors, etc. And do it.  Write down your goals and post them in a prominent place.  This is extremely important because seeing your goals keeps you focused and motivated. Stick with your aggressive action system for 6 months.  If you do, you very likely will find a solid investment deal and you know what . . . you are now on your way to becoming a successful real estate investor.