Newbie With A Need For Knowledge
I am just wanting to get started in the REI world and have been reading anything and everything I can on the subject and have tried to get it all to sink in and am ready to get going. This is where the problem lies, I have no capital and bad credit including bankruptcy. I have just about overcome this by finding someone with cash, my grandfather. I have him sold on the idea of becoming my partner and using his money to get us(me) started, which brings me to the next hurdle, the money is also my grandmothers and she is very much against it. Basically she wants to know when the bottom is going to fall out of this real estate thing? I am not posting this for someone to give me a date I understand the concept of the REI scene and that there is always risk, I was just wondering if anyone has any suggestions on exactly how I can explain this in a way that helps her overcome her fear of loosening her grip on her cash. Thanks in advance for any help.
Lane
Good point MYKLE!
You dont know how many times in the last 10 years I have seen newbies try to get in the game and purchase a property
for too much money.
A basic formula to use in the field is as
follows: 5 Things To Consider
-Purchase price
-Acquistion Cost
-Rehab Cost
-Carrying Cost x 6 mos
-Sales Cost x 9% - 10%
This is a basic formula to use when considering buying a house to retail.
Your acquisition cost can vary. Are you using hard money, private lender, cash or credit line? In terms of just thinking you are going to get away with $2.5k
in paint and carpet is ridiculous. Anybody with any rehab experience knows you are opening up a can of worms anytime you start a rehab. I personally figure $6k for the interior of a basic 3bedroom, 2 bath 1200sq.ft house if everything is there! My typical rehabs
cost $7k - $10k. In terms of carrying cost, houses tend to fall out of escrow
due to circumstances beyond our control, ie.. sellers remorse, divorce,
loss of job, transfer of job, etc.... I have had houses that were the middle of the block fall out 3times, so therefore it is a
cheap insurance policy to figure in 6 mos
payments. If it sells sooner, then that is more money in your pocket. I guarantee if you are going to rehab and retail houses you will come across that one deal that takes forever to sell and get closed. In terms of selling cost, one must consider FHA Non-allowables, escrow, title, termite, home-warranty, realtor commissions, taxes, buyer requested closing cost, etc..... This typically works out to 9%-10% if you are selling with a realtor paying the full 6%.
So dont underestimate what the "true" cost are to sell a house. Everyone has their hand out!
Best Riches,
Jeff Adam
_________________
"The only place success comes before work
is in the dictionary."[ Edited by JeffreyAdam on Date 03/30/2004 ]
hello their i am also very new to REI but my question for you is. Do you have a specific area or type of investment you are going to do? there are alot of options out there in the REI area i have some of the same Issues with my spouse. a possible more specific type of investments may help to over come some of the fear she may be ****Must Reach Freshman Investor status before posting URL's*** am no expert at this but i do know that it is a good thing to find a local. REI group to network with will help even having her go to a few meetings may ****Must Reach Freshman Investor status before posting URL's***his may give you all the win/win you need
I remember my grandmother had some particularly strong viewpoints on financial matters. Banks were not to be trusted, incorperating meant you no longer owned your business, and who would be so stupid as to give their business away?
I'm not sure she can be convinced, people have thier viewpoints, and those ideas seem to become more firmly imbedded the longer we carry them.
At least she is current on the state of the RE market, so that is a positive point, she's interested in what is happening. Maybe the right plan could be sold to her.
Value her opinion, she has had so many experiences you haven't. She is right, the bottom will fall out, it's inevitable, if for no other reason than so many people believe it will. Once the market slides everyone will be as quick to jump on the bailout bandwagon as they were to jump in for the ride up. They will over react and the smart money will jump on the bargains.
In the mean time, do not do speculative investing, any plan that includes what the property will be worth in 2 years to make it a deal is NOT a deal.
Prior to a purchase you need to have a plan for the property, many people now are flipping, kind of the stock market equivalant of daytrading, not too much risk really, you are in and out quickly, and probably have buyers lined up ahead of time.
Buy and hold is still good, as long as you get the right price. Bargains are harder to find, but they are there. Just don't try to hard too convince yourself it's a deal if it isn't. If you are keeping a property all the numbers stuff is just a game anyway. Supposedly my personal house has appreciated about 30% in the last 3 years, I'm paying $100 a month less for it after a refi, it's all relative. Rates go up, prices come down, price per month stays about the same. Rentals that cash flow continue to cash flow. If you want to sell, hope you have an assumable loan
The previous poster was right on in saying you should pick your nitch in the market, especially starting out. I'm a simple man with a simple plan, I buy junk, fix it and rent it out. There are many creative techniques I imagine to be good at more than one of them would be very difficult for a new investor. Hell, I can't fathom learning even one of them.
Lastly, be very cautious mixing family and business. I wouldn't do it personally. Imagine if you lost your grandmothers money! Sleep would be difficult to come by.
Mykle
thank you both for the replies. I am wanting to get into the mobile home and rehab markets, but am thankful for the valid points both of you made. Especially the one in regards to the lack of sleep(mykle).
Another option you have is to create proposals for your grandmother that outline how each deal will work until she trusts you enough that you don't gave to bring them to her.
Let say you find a deal and you get it under contract. It's a $100,000 property that you have under contract for $75,000 and it only needs $3,000 for paint and carpet. You can create a proposal with photos, an estimate of the repairs, comps, the signed contract, and an outline of what you plan to do with it once you close on the property. If you plan to sell it right away after painting and carpeting, then put a projection of say 3 months to sell. You can write a break down of the expenses and profit once the deal is completed. The breakdown can look similar to this:
Address: 123 Easy Street
Fair Market Value (FMV) = $100,000
Purchase Price = $75,000
Expenses:
Loan = $75,000
Closing Costs (3%) = $2250.00
Carpet = $1750.00
Paint = $1250.00
Holding Costs (3 mo. payments x $500/mo.) = $1500.00
Total expenses = $81,750.00
Projected Total Profit = $100,000 - $81,750 = $18,250
Give her an overview of the deal so that she will feel more confident with investing their money. Just make sure you have a written Joint Venture Agreement or document that outlines how the profits are split once the property is sold. Have each party sign it (you, grandpa, and grandma) and notarize it so no one can cheat the other person. Be as professional as you can about REI and you will earn their respect and confidence. Show you mean business...
Tanya
This is a great tool(website/forums), I am very glad I signed up. Great information Tanya thanks, I think I will be using all the tips.
Lane
It is good advice, but be sure to count all the expenses, and error on the safe side. If you say you can profit 10K and get 8 you did bad, if you say 5 and get 8 you did good.
I'm sure Tanya didn't intend for her list to be a template to be followed, but so you know, there are a few things missing from it. IE, the $500 per month would cover the loan, but you need insurance and taxes. You would have utility payments during the holding time. 3 months is being optomistic, you should be pessimistic, 6 months anyway, deals can and do fall through, putting you back at square one. It's likely you would need to use a realtor to sell, add 6% plus closing costs again. I'm sure I'm forgetting stuff, but you get the idea.
I recall Hibby posting a very comprehensive list a month or so ago, very good post if you can find it.
Mykle
how many times have we heard the saying "honesty is the best policy"? this is true to life and especially to the older generation that was raised on the idea, a hand shake was your bond.
In reality how many get rich quick? not many, so dont expect to do so or imply you might. The slow careful approach to a deal that is well researched will be the key to sucess. Even if its just a few thousand on your first deal it will biuld confidence in the next.
Mykle,
You're right. I meant it to be used as an example to start out with. I didn't factor in everything. I don't know about the post that Hibby wrote, but there is an article here on TCI that will help. They are....
Using Financial Judo Series (Part 1 of 2)
Using Financial Judo Series (Part 2 of 2)
They have good examples of a tool you can use to convince a seller that there is not as much equity in a property as they thought. Just something to add to your REI toolbox.
Tanya[ Edited by tanya1215 on Date 03/30/2004 ]