Wholesaling And Rental Properties: Un Unexpected Union??? By Robert Feol, Co - Founder, The Feol – Hinricher Companies www.fhcompanies.com Prepared for Memphis Investor‟s Group Monthly Meeting, February 14th 2008. When many people give consideration to entering into the world of investment real estate, they are doing so because of one or more very straightforward reasons: 1) To make more money generating large sums of taxable income, as in „flipping‟ a retail property. 2) To generate passive income through rental property, and ideally offset or replace entirely their „earned‟ income, as in from a „job‟. 3) To diversify their investment portfolio, and steer some of their investment dollars away from the volatility of stocks and other „risk based‟ investments. 4) To garner substantial tax shelters. All of these reasons are noble, to be sure. Students of Kiyosaki would say that any of these are desirable as reasons to get into investment real estate. At least you are moving in the right direction, the direction of getting assets on your balance sheet as opposed to liabilities. And in many ways, this is true. The path to real estate investing knowledge is one which is heavily laden with potential pitfalls, landmines, and traps. In my experience as a real estate investor for the last nine years, we see all types of people getting involved in the purchase, renting, and reselling of homes. However, many more people who get started never see the true path to investing success and end up falling by the wayside, giving up on real estate investing, or worse, committing financial „suicide‟ through costly mistakes and lack of experience. Why? There are many reasons, but I would be so bold as to state that people tend to fail in real estate investing for the same reasons that it is so difficult to get into real estate investing in the first place, as follows: Lack of start up capital Lack of knowledge of renovation and construction Lack of property management knowledge Rapid accumulation of properties resulting in increased liabilities on the debt service side of the balance sheet 5) Overpaying for properties in an attempt to ‘get into the game’. Yet for all of these endeavors, essentially you get a proverbial cart before the horse question. Think of yourself as a brand new, no experience “I want to get involved real estate investor”, itching to get started. Then, let‟s look at the problems stated above. 1) 2) 3) 4) 1) Lack of start up capital A new investor would say “how do I get start up capital when I don‟t have any money, which is why I want to get into real estate to begin with?” 2) Lack of knowledge of renovation and construction A new investor would say “how do I learn about renovating homes if I don‟t get started renovating homes? I can‟t just learn from a book!” 3) Lack of property management knowledge A new investor might say “how will I learn to manage properties if I don‟t have any tenants?” 4) Rapid accumulation resulting in increased liabilities on the debt service side of the balance sheet A new investor would say “I need to buy properties to be a real estate investor, don‟t I?” 5) Overpaying for properties in an attempt to ‘get into the game’. A new investor would say “It is IMPOSSIBLE to find great deals for what experienced investors say they pay for them, they must just be making it up. The seller told me the house was a GREAT deal!!!” All of these reasons are practical justifications to get involved in real estate investing without any knowledge. And, while they are not incorrect rationalizations, to be sure the only problem is that while some people do, in – fact, learn the hard way and succeed despite this, many people get taught such difficult lessons that they only lasting lesson that they learn is real estate investing is not for them, and they give up entirely!!! That is a shame. Even today, my partner Ryan Hinricher and I see many people who are VERY experienced purchase LOTS of properties from us with a plan which may seem sound, but it doesn‟t have any real basis in fact and is can become a recipe for disaster when a few houses go vacant or a tenant stops paying the rent. No one, regardless of experience, is immune from risk! Knowing this, the question then becomes is there any way that an investor can become successful with minimal cash and with no solid experience in managing or renovating properties? Is there any hope for new investors to generate capital AND succeed at the same time while minimizing their risk? Fortunately, the answer is YES. Enter Wholesaling. Wholesaling is a primary way where a new investor can learn valuable techniques which will add to his or her real estate skill sets and empower them to become successful real estate investors while learning the ropes of what exactly is going on when hunting for discounted deals. What Exactly is Wholesaling Real Estate? From “The Art of Wholesaling Real Estate’, Chapter 2, by Robert Feol Negative people see the problem, positive people see the possibilities – Anonymous Wholesaling real estate is the process of purchasing and reselling property at a discount to end investors, generally without doing any kind of rehabilitation to the property in between the time that you put it under contract and you close(sell or ideally, re-sell) the property. While there are general guidelines that true wholesalers follow, various aspects of a wholesale transaction can be manipulated based on your local real estate market and the common practices that lie within. You can wholesale real estate of all classifications: residential(single family), multi – family, commercial, land, and so on. In order to be a successful wholesaler, you have to not be thinking about yourself when you engage in a transaction or be focused on YOUR profit. While you will, in fact, make money from wholesaling real estate, to encourage repeat business you need to focus on leaving the lion‟s share of the profit for the end investor. Simply stated, you must pride yourself on bringing high quality, discount deals to true investors and make them happy by finding deals that they want, that fits their criteria, and that make them happy. Wholesaling real estate is NOT Bird Dogging. Many people confuse real estate with bird dogging, and to be a bird dog requires little to no knowledge, skill, understanding, or commitment to overseeing the various aspects of the wholesale real estate transaction. Bird Dogging is simply finding a prospective opportunity that an investor may be interested in, and they pay you a nominal(read: $250 - $500) fee when they close, if they close, and if the stars align into place. In bird dogging you are at the mercy of the various parties involved, and you may or may not ever get paid. As an active wholesaler, you control the property initially by GETTING IT UNDER CONTRACT. In this way, you are in control of the property itself and this is for a variety of reasons. Principally, controlling the property allows you to set the price and terms of your exit strategy(i.e., selling) to your end buyer. You arrange and build in an appropriate wholesale profit as part of your sales price, and in doing so present the property as an attractive package(at an attractive price) with due diligence to an end buyer. You also can set the terms of the closing(date, cash only or whatever) and use those as various points of negotiation. Secondly, you want to control the property TO PREVENT UNSCRUPULOUS BUYERS FROM STEALING THE PROPERTY FROM YOU. This is pretty important unless you enjoy working for free and having people steal from you and your family. If you like doing business in this manner, then please ignore the important principles as stated in this course and do things your own way, you may want to become a non - profit so you can get some tax write offs from your “charity.” It is important to distinguish yourself as a wholesaler to investors in your community, and your reputation will build depending on how you conduct yourself, business - wise. Wholesaling real estate is a valuable service to serious investors and most of them have no problem with you making money as long as they are brought homes that are priced very attractively. It is ok for you to make money, because if you are a true wholesaler when you make money everyone else in the transaction, usually more money than you make, and people will start to come to you and ask “do you have anything I can buy?” because they know that you find good deals. As a rule, just because you can make lots of money by wholesaling a piece of real estate, that doesn‟t mean you need to. For example, if you can make 20k by wholesaling a property, it is better to only make 10k because investors will appreciate you making the choice to not be greedy. Making a “killing” on a home may net you a large, one - time profit, but it will probably never happen again with that same investor once he sees your spread and begins to feel that he was taken advantage of. I encourage repeat business by finding great deals and marking them up marginally. In my first year as a wholesaler, I sold (wholesale) over 100 homes. This was because I built my business(with the help of my mentor) in an ethical, compassionate, and honest way. In order to be a wholesaler you need to have the highest amount of character, ethics, and integrity – no less will suffice. A true wholesaler will oversee every part of a transaction with precision and professional conduct. You must study each part of this course and become a master of the material, and in this way you will become a true master of wholesaling. The beautiful thing about wholesaling properties is that you can learn all of these things without having to take an expensive(read: school of hard knocks) seminar, including: How to identify and evaluate discounted properties How to find motivated sellers How to establish and determine rental ranges in rental areas How to discriminate about geographic locations within a region to find the best value for investment homes with the highest likelihood of quick tenant placement How to determine renovation costs and provide a cost analysis of repairs The thing is, if everyone began their investment career out WHOLESALING homes and looking for deals, the learning curve would be much lower and students new to real estate investing would empower themselves by risk free exposure to real estate investing. In taking this approach, they would generate quick cash, be able to pay off debt, improve their credit stance, and then enter the world of purchasing rental properties, get on title, and start to generate long – term wealth. THIS IS A CONSERVATIVE APPROACH TO ENTERING THE WORLD OF REAL ESTATE INVESTING Owning Rental Properties Owning rental real estate is, in my mind, one of the greatest joys of wealth building, The care, maintenance, and selection of rental properties can be a very rewarding endeavor. Even today, I have very fond experiences of spending Sunday afternoons with my wife „driving for dollars‟, and looking for the best deals, only to put a contract on them and purchase them a month later. Is owning rental property for you? These are the benefits of owning rental property: Provides passive monthly cash flow if purchased properly Provides substantial tax shelters for earned income Provides appreciation – historically, homes values have improved over time Provides equity through the tenant paying your mortgage principal down each month Yet many people say „I don‟t want to be a landlord.‟ They cite any of a number of reasons for this, among which follow here: I hate unclogging toilets I don’t want midnight phone calls I know someone who had their house TRASHED I don’t want to be sued by tenants What if someone deals drugs out of my home? What if the house burns down? All of these points are not invalid – but what most people fail to remember is that LANDLORDS HAVE ALL OF THE SAME REASONS TO NOT HAVE RENTAL PORTFOLIOS. Landlords, believe it or not, hate unclogging toilets too. And they hate midnight calls as well. In fact, they despise all of these objections that people who don‟t own rental property cite as reasons to not consider purchasing investment property. Here is a simple way you can purchase rental properties AND have zero headaches: 1) Use a skilled property management company 2) Get homeowner‟s insurance. In this way, you insure the placement of a quality tenant while dodging the clogged toilets and midnight calls AND you are covered if you have a fire! Simple! How Do You Find a Great Investment Home That Will Be a Great Rental Property??? From The Real Estate Power Course, by Robert Feol and Ryan Hinricher www.realestatepowercourse.com We want to buy a Single Family Residence. The ideal property will be (ideally) a 3 bedroom, 2 bath home with a moderate amount of square footage(1200 –1600), ideally with central heat and air. It should need minimal to no renovation to get a tenant in. We need the house to be in a good neighborhood where it will rent easily. We need to be in an area where we feel safe. Let’s review: Characteristics of Our First Investment Home 1) Single Family Residence (SFR) 2) 3 Bedroom/2 Bath (3 Bed, 1 Bath is okay) 3) 1200 – 1600 Square Foot 4) Central Heat and Air 5) Minimal to no renovation needed for tenant to move in 6) House will be easy to rent 7) House is in an area where we will feel safe. There are additional characteristics we look at when buying a home, such as trying to find a great deal and so forth. But once you identify the area and understand the type of area that we are looking at, the deals will naturally present themselves. The beautiful thing about this convergent approach is, you can use wholesaling to generate capital AND knowledge while watching your end buyers tell you specifically WHY or WHY NOT they might purchase a deal. And those end buyers have more knowledge and skills than you do as a beginner, so why not simplify the learning curve and make some money while you are doing it? IT IS LIKE CHOCOLATE AND PEANUT BUTTER – THIS APPROACH OF WHOLESALING FIRST, AND GRADUATING TO RENTAL PROPERTIES SECOND, WHILE VERY CONSERVATIVE, SIMPLY WORKS. If you are considering getting seriously into real estate investing, you have choices in the ways which you can learn. You can: 1) Try to reinvent the wheel and pay for your education through the school of ‘hard knocks.’ 2) Pay for lots of expensive seminars and boot camps which are taught in a class setting far away from your home or geographic region, which may or may not help you learn how to be effective in your hometown. 3) Get into YOUR field and get YOUR HANDS DIRTY trying to find deals that have value to experienced investors and which will make you money and generate lasting knowledge. The choice is yours, but remember: every real estate investor, regardless of background, will pay in one way or another for the lessons they learn. Do you want to reinvent the wheel?