At The Crossroads
Okay here it is. I have been rehabbing for about 10 years. The first 8 were as a part-timer (1 or 2 a year). About 2 years ago I resigned my $95k job to go fulltime. Here is my problem...
My current business is not drawing enough deal flow to make this a full-time occupation. (Last year we did 10 houses). Addtionally I have an opportunity to take a JOB for about $110K.
To further complicate the problem I have a partner that also quite his job and is drawing income from the business as well. My background is in Finance and we have a very sophisticated purchase model. Suffice to say we average $16,500 net (when I say net I mean NET. To many investors do not count all their cost in ther net numbers) per deal. Is our buy criteria too high?
Not sure if anyone has ideas on expected growth or experience from their first two years as a fulltime. For this business to make sence I need to be doing north of 20 properties a year. We have had absolutely no luck w/ MLS (worthless for leads), REO's (banks not negotiable enough to be attractive). Most of our deals come through private owners via our advertising.
This is only my second post, but a critical point in my REI career. Thoughts, comments, ideas????
Thanks All
You have a finance background and your rehab business is a business like any other.
Use that training you received in college. Three ways to cover financial issues: lower expenses, raise revenue, or borrow (raise) money
Your main issue relates to Salary. From the sounds of it, you are drawing all of the money out of the business to pay your partner and yourself which leaves you with little money to compound into other deals. (At least this is what it sounds like to me, tell me if I'm wrong. I think that your $16,500 Net is not Net of employee payroll is it?)
Your answer will be in how do you increase the coffers so that you can cover the draws on salary and still have money left over which will grow with the business:
1> go back to work for a year or 2. Have your partner do whatever work he does, and keep him on the payroll, you do what you can part-time. See about keeping some of the properties as Rentals. If you can end up with 5 or 6 rentals after the 2 years, this will do alot towards offsetting salary costs when you want to go back full time.
2> How can you lower expenses? How much impact would there be in getting rid of the partner if it would lower your total homes by anything less than 5 than it is a good idea.
3> Borrow or raise money to get more deals running. Find an investor, or get a business loan to cover more of what you are spending as expenses. If you can spread the expense out over time, it will do great things to your cashflow. If you don't think that you can find more deals, you can use the money to buy a no-fixer rental which will spit off cashflow. Get the money to do more of the work for you.
I hate to say it, but from personal experience, #2 was the one that worked best for me. I realized that without a partner, I could maintain just about the same productivity, but with alot less overhead and headaches.
Thanks MCL,
I agree, #2 is the right decision. Definitely will reduce overhead!!!! As far as more deals, I have a solid war chest of private investors, but not enough deals to go around. I cannot seem to find the deals that fit the model. If we were a couple margin points from a deal, I would do it. However, I am way off the competitive bids by other rehabbers. They seem to be doing deals for $5K. When I have conversations with them, they all say deal profits are north of $15K but I have found they are doing alot of the labor and not including a charge.
I do not have the resources to compete among the big players (20MM+ a year gross revenue) and cannot seem to outlast the mom & pops that dont understand how to calculate profitability. Are you experiencing similar problems?
I am absolutely dreading a return to corporate america, but given the last two years and a reasonable assesment of the market place and forecasts I cannot financially justify staying in REI full time.
This may be a little off topic but I wanted to respond anyway. I am new to all this and want to be sure I am not missing something! I have read over and over in many different posts, that REO's are not what they use to be and most don't leave any room for profit. I have found it to be totally opposite in my area.(greater Cinci)
Most of the REO's I look at are at least 25-40% below FMV. Granted most of them need some type of work and I realize the amount of work needed often dictates the price point(or seems to), but even so, the ones I've been concentrating on seem like potentially good deals. Maybe it's because I am only seeking out props in the lower end of the price spectrum. Or maybe I don't see what a seasoned pro see's and I will learn the hard way! Do you guys find that REO's vary that much from one town to another?
BTW-My idea of a good deal is 10k profit, net, net.
Thanks,
Sickdog
Would moving into higher priced properties make it possible to make more money per deal. Would this be feasible in your market? Given your finance background have you considered becoming a mortgage originator?
I have been "rehabbing" my own homes for years, and even as a newbie I realize that a lone individual working on a house is extremely time consuming, physically tiring and down right impossible in some cases. So, saying that, and wanting to do rehab deals, even as a newbie I realize there will be limits...
I would think it is a typical scenario to move from rehabbing which "makes sense" as a startup methodology for most people, into a financially, deal based scenario, which makes more money and with your education, more sense for you.
Just a thought, but I intend to work hard at first, to earn my stripes, but move into the work smart group as soon as I can play with the big boys.
You may try to find larger deals like an abandoned commercial building or apt house. It gets pretty hard to do 20 house deals per year without adding even more expenses like an additional supervisor. Some can be easy rehabs I guess but they demand higher prices if much discount at all. It aint an easy business. I am trying to do three at once and am getting bogged down. I am going to sub out more of the work to free up some of my time but the net will be less. Hopefully I can do more deals that way.
Good LUCK and Thank You
Hope this helps some
Ted Jr