After closing the doors of North Georgia REIA forever, we have been reminiscing about the best lessons we’ve shared with our group.
With this in mind, here’s some sage advice from an old investor.
How do I know whether a deal is good or not? How do I know what I’m looking at? And if I decide to take the deal down, how do I get it funded fast without going to a bank?
When Kim and I began our investing careers in 1995, we thought all houses were pretty much the same. But over time and with experience, we’ve learned what types of houses make the best investments.
If we are going to keep it as a rental, our favorite house is a three-bedroom, two-bath ranch with a two-car garage, in a pleasant, non-rental, and convenient-to-everything neighborhood. These kinds of houses are always in demand, attract great tenants, and never stay empty long.
If our goal is to flip the property, location is the most important thing to consider. The house needs to be in a neighborhood where families want to live. This means that amenities like schools, churches and shopping centers play an important role in whether a house will sell fast or not.
The second most important thing to consider if you’re flipping is equity. You need lots and lots of equity! Remember: For most new investors, a house costs twice as much and takes twice as long to rehab than estimated! And don’t forget about selling and holding costs. And be sure to figure in your minimum acceptable profit before signing the contract!
As to knowing what I’m looking at, experience plays a key role. These days, I can do a fifteen-minute walk-through and determine a house’s fair market value, as well as estimated rehab costs. If you don’t have this level of experience, then partner with someone who does.
When you’re sure you’ve found a good deal, pull the trigger! Many of our best deals have come from sellers who’ve already met with four or five buyers who were either too scared or too unsure of the deal to make a written offer. Crazy!
Getting our deals funded used to be a difficult process. After getting a house under contract, we’d go meet with a banker. The banker would ask for a…ummm…colonoscopy – at least that’s what it felt like to me! Then, after 30 to 40 days of the lender dragging his feet, we’d finally buy the property.
It’s so much faster and easier to get a loan these days because Kim and I work with a number of private-money lenders who fund our deals. Why would an individual loan us money to buy a house? Most folks keep their savings in the bank. What interest rate is the bank paying right now? Probably less than one percent. The bank makes its money by loaning out your money at five percent. So what if you loaned your money out at five percent interest and cut the bank out of the equation? You’d make more, right? In business school, I learned that when it came to money, more was better than less. And this is why someone will make us a private-money loan that’s secured to the property.
Here’s one last piece of wisdom. It’s not about how much you make, it’s about how much you keep that’s important. If you earn $50,000 laboring for a living, the government will steal about $10,000 of your earnings. But if you make $50,000 as a landlord, because it’s investment income and not earned income, the government only steals $2,000 – which means you have $8,000 more to spend and invest. And more is better, right?