I am honored to be a guest on Ray’s blog. This is something very special, but I can only hope to be as helpful as Ray.
I hope to offer some ideas on the great potential investing in real estate can be through our experiences of flipping and renting out homes. I do believe we have had successes, done mistakes, and learned a lot that are all worth sharing.
- Our Background
- How to find the right real estate property for investment
- How to start investing in rental properties
- Are rental properties a good investment?
- How to get started in the flipping houses business
- Mistakes to avoid when buying a house to flip
- How much money do you need to flip a house?
- Is flipping houses a good investment?
- Do your research and GO FOR IT
My husband and I started a small business in the real estate market in the beginning of 2016. It is a relatively new endeavor to us, but in that time we have bought a total of 6 homes: 3 of them we turned into rentals, and 3 of them we flipped.
We also sold the first home we ever bought and owned to move when my husband changed jobs and relocated. So far, we have learned that no experience has been the same and the learning experiences in each process have been great, as in massive, but also good.
I was a math teacher with very little construction knowledge. My husband was an environment compliance manager at the time we started, so he also had an unrelated job. He, however, did have finish carpentry experience, plumbing experience, and roofing experience from past jobs and working with family members in these fields.
How to find the right real estate property for investment
To buy a home at a low cost is ideal obviously. This takes a lot of time searching, establishing good connections, and sometimes having plain old luck.
Multiple Listing Services are the networks real estate agents in regions of each state link into to post the listings they have. Companies like Zillow and Auction will connect all of these regional networks nationwide.
Zillow and Realtor are what we use. I am afraid we have not ventured outside of these two.
Realtor does update its MLS feeds more often. This allows you to see the listings go up a little quicker and also the statuses change.
The various filters on Zillow, like looking at the maps, comparing costs, looking at tax histories, all make Zillow a little more user friendly. We constantly would be surfing and checking into these sites.
Sheriff sale schedules can be found on county websites. The sheriff sales are homes in foreclosure that the lender has handed over to the county to try to sell. On the sheriff sale site, there will be a time and location (often the courthouse), and it is an auction where the house goes to the highest bidder.
Buyers do not necessarily get to see or know the condition of the house. There is usually a reserve price (a starting bid), and the home tends to be sold in “As Is” condition. The risk, of course, is not knowing the conditions of the home, unless you have snooped around it- which I confess, I encourage.
Be aware of the “As Is” contract. In most contracts, the home comes with disclosures. The contract between buyer and seller is based on the agreement of the truths of the disclosures.
If the roof is leaky, and the seller lied, there are legal means the buyer can get out of the contract. Not in an “As Is” contract.
Our experience with buying through a sheriff sale was great. The reserve price/starting bids sometimes are surprisingly high, but those we just walked away from.
The homes eventually go up for auction again for another opportunity to buy at a lower reserve. Keep an eye on them. Go in with a set price you want and try not to budge.
The fine print really needs to be read for these homes because sometimes the foreclosure process is not as far along as you would hope. Closing could take a long time, and may not close at all..
Banks go to Auction.com to try to get a sale on their homes. These run the same risks as the sheriff sales with the “As Is” conditions.
I registered for a user name, and it was very easy to do. I also easily placed a bid. Four days later, after no one upped my bid, we won, and I was kind of in shock in the fact I had clicked a few buttons, and now we had bought a house. So, this was easy to use.. Almost too easy.
Auction had people contact me right away. Communication was very quick and also helpful. I would say Auction had good customer support, but they are an even more distant third person seller than a sheriff sale.
The one hiccup we had was the abstract never came to us. We ended up having to pay for getting a new one made. Abstracts run between $1000- $2000. Still, overall I would say our experience with Auction was very good.
Getting in touch with the real estate agents in your area can really save time on the searching; however, one thing to know is often times real estate agents already have a calling list of established real estate investor; be persistent!
Call and politely inquire. Really present yourself as someone ready to renovate or invest. If you can get a trustworthy, strong relationship with a real estate agent, that really sets you up for more success in the search.
Sometimes after all of that time, nothing will show up. Sometimes, it really just takes a little luck and good timing.
How to start investing in rental properties
Something we heard repeatedly as we looked into renting properties was screen your tenants.
The quality of tenants can make a world of difference in the experience and the profit of your real estate. You must be careful to be fair, however; and it is illegal to deny tenants for reasons related to sex, gender, race, sexual orientation, etc…
We did applications for our tenants. Applications serve a lot of purpose. You have the right to know who will be living in your property and the potential tenant can show their initiative and a bit of their character by fully completing an application.
You need fair rules for your screening. Check your state for laws on being a landlord.
When it comes to screening tenants, I would say of the most important things to include on the application would be information about the following:
- Criminal record: look into their records. I suggest state online court records. I also suggest looking at facebook.
- Work history: Look for steady employment.
- References: Call the references. You could even have something for the references to fill out.
You want responsible, respectful, and financially able tenants.
Eforms have tweakable applications for free and can be downloaded as a word or PDF file.
Are rental properties a good investment?
We purchased two rentals at about the same time a year into the start of our small real estate business. After a successful renovation and sale of our first flip, we rolled the profit we got into two low cost homes.
They have been doing great for us in bringing a nice stream of income. We have had good relationships with our tenants, low maintenance requirements, and a steady stream of income.
I highly recommend rental properties as a fairly passive income. We continue to be on the search to add more rentals to our binder, and will be happy to move on the right property.
The pros of investing in rental properties
1. Doesn’t require A giant capital
You are usually not looking for ritzy and glamorous homes. For the rentals we have, we never went in to transform them; we cleaned them. That’s it. Rentals are a good starter up project for passive income in real estate.
2. Passive income
With good screening practices, there should notbe a lot of the hands on stress of maintaining a good property with good tenants.
I do not think I need to say how great passive money is. Really we are just sitting back from a month to month basis, and we have an investment which is an asset to our financial folder bringing in income.
Again, assuming you have good renters, the property is for the most part maintaining itself. The home is truly an investment, growing in value with the market under the care of the renters and a little bit of your overseeing.
The steady monthly income is not huge after considering costs, but it is better than nothing. It is a $450 check a month in our hands that offset any of the costs, so we are losing nothing and coming out ahead.
3. A double money maker
After the home has provided affordable living for the rentee, and brought in a nice income for the renter, it can be brought up to date for resale.
Whether you have met the break even point or not through the renting period, the home can bring in a profit should you decide to sell.
The cons of investing in rental properties
1. Money gets tied up
Money gets tied up specially if you have a mortgage on the rental. I almost said a steady trickle of income above in the pros. The costs of mortgage, taxes, and insurance, not to mention maintenance, take away from a strong flow.
Make sure to do the math that you are coming out ahead. This is a slow and steady journey to break even, and your money is not as fluid to roll into other investments.
As an example, we have one rental we put $4000 down on. Based on our carrying costs and the rental amount, it will be about two years for us to break even on it.
2. Renter drama
We have not experienced renter drama. We have been fortunate to have great people renting. I’d like to say we did a good job screening.
But even with screening, tenants can go wild and thing can get legally ugly. The time taken to meet your renter’s needs and establish a respectful relationship is so worth the while.
3. Property damages
Things break. My husband has done some dryer troubleshooting. We have had to buy a new refrigerator all of a sudden. There has also been hail storms where we had to deal with a lot of insurance and hiring for repairs.
The responsibility as landlords to the tenants can cause for some sudden stress.
How to get started in the flipping houses business
We had a first dream flip that started us out. There was a little luck involved. We found a home that had been sitting on Auction. It was a first flip home in consideration, so we were kind of weary of Auction.
The auction ended having not met the reserve. Now, most times, the homes go right back up and through another “auction.” We did not know this and called a local real estate agent. It just so happened, the bank had listed it with a real estate agent specializing in foreclosures, and we called the day she got it.
We ended up with it. Here are some of the before and afters.
It was a mess, but we got it for very low. Again, this price will be trivial because it totally depends on the city you are buying in, but we landed this home for $27,500.
After you think you have found a good house- low in price and shabby, but not too shabby, you will want to weigh the possibility of flippling.
Flipping takes a leap. It is risky, but you also can arm yourself with some risk minimizers.
Mistakes to avoid when buying a house to flip
- Drug houses. Homes with ammonia smells are commonly associated with meth.
- Structural issues. We just are not knowledgeable of foundation fixes, and we would have to hire it out. Foundations can be expensive.
- Ugly Houses. This may be weird, but you should be able to have vision of what you can do to the house. We do not tear down walls and transform. This, I think, is a common mistake for new flippers. The goal is not to pour a fortune into making an entirely new house.
Here was another home. You can see how we really just worked on what was there; refinished the floors and painted.
How much money do you need to flip a house?
This is hard to go into because it will vary entirely on the region you are working in. I did just want to show a glimpse of some costs to consider.
For our first home, our most successful, here is the profit we got.
It is also good to keep track of how many hours you spend. We tracked our time doing all of the work as well as any expenses we made using a shared Google spreadsheet. We documented about 800 hours.
Keep the receipts and this documentation to help with income taxes, which as seen in the table is a big chunk we kissed goodbye.
Is flipping houses a good investment?
We were hooked on flipping homes on our first home, and it profited enough to get us rolling into more rentals and more flip homes.
Despite the hard work, the satisfaction and profitability makes flipping another great investment if you are willing to put in the work and time.
I have to sometimes remind myself of the great light at the end of the tunnel when we are in the middle of the project, sweaty and on our knees in renovations, but the investment is worth the while.
The pros to investing in flipping houses
1. can be very profitable
I put this statement here ignoring its counter argument. There is risk, obviously of the opposite, a flop. Some homes can be huge money pits, and we have seen some in the walk through where it would take more renovations than you could ever get out.
With good managing, however, the profits can be huge- another whole income to the yearly income. As I showed in our table above, we nearly doubled our investment in the end in a year’s time. We walked away that year with an amount written on a check larger than we had ever seen on one little piece of paper.
We have not ever gotten into the larger markets around here (we have tried, but they are very competitive). We have stuck to rural locations with smaller home costs. The gross profit in the larger markets would be riskier, but as the saying goes, also could be much a much higher reward.
2. Being your own boss
Our flips have been done on the side of full time jobs. My husband would go to his job, and then off to the renovation home he would go. Or, he would come home to watch the kids, and I would go do my jobs. I am a stay at home mom, but I too consider that a full-time job.
We worked with our schedules, and it was manageable- tiring, but manageable! We both enjoyed having the power in our hands to make this business work.
We have had great satisfaction in the end. Though the process is rough at times, the finished product is amazing. We had the opportunity to dive into something we really loved to do. This job is a job of being the boss of yourself.
I do believe, the harder you work in this job of flipping houses, the better the pay off. It takes a lot of time, bargaining, work, and sweat, but if all of those are played right, a hugely profitable reward comes.
The cons to investing in flipping houses
1. It is A LOT of work
The man hours we recorded were on the low end of 800 hours. On shows, you see crews getting homes done in a month. We, being just two people took a lot longer. It always seemed we would miss our goal to finish by a couple months.
The end is particularly difficult, getting the last touch ups and details done, cleaning all of the construction out. It is not glamorous; it is dirty, sweaty, ugly, and exhausting.
I also do not know I would encourage flipping without having some construction skills and background. The profit margin would be greatly reduced if needing to hire out the jobs.
2. Flops happen
We have not had any loss, but it is tricky. The costs add up, and you need to be careful. Having said it is a lot of work, we have had a home come out to have $8,000 of gross profit. The return rate was still better than putting gaining interest from letting that money grow in a savings.
Still, better than nothing, but if you consider we put about 1000 hours into it, we were managing and working an $8 per hour wage. The type of work that goes into it this is not an $8 an hour job. Flops will happen. This market can be risky.
Do your research and GO FOR IT
If you have read all of this, I commend you. You are getting a good start with researching. If you have not already found “Bigger Pockets,” I definitely recommend their content and joining their network.
They have a vast amount of experience to offer dealing with most of the questions concerning investing in real estate, whether it is renting, flipping, airbnb, or whatever else. They have a podcast and blog, and they are both great with very relevant and helpful experiences.
A lot of being a successful real estate investor is to be proactive and not reactive. With any business endeavor, the more risk, the more reward.
Real estate is risky, yes. We have found it very rewarding. We have been able to use our skills, learn new ones, and pave a foundation for a working business we enjoy. I wish this fortune to everyone.
Thanks, everyone, and thank you, Ray.
Erin is a blogger at Erin Baby Steps where she ponders out and takes on a mission to spread an awareness for math as it relates to toddler home learning/education, finances, projects, and even date night activity ideas.
She would love any support and suggestions as she takes one baby step at a time in raising family and meeting some personal goals.