Monthly Archives: May 2007

Every once in a while I get a desperation call from a real estate investor who has “just about had it”. Maybe the tenants are not paying on time. Or at all. Maybe the property has just been torn up again. Maybe the local housing authority has given a long list of inspection items that need to be repaired.

And I want to share with you what a very large majority of these callers all have in common:

They almost all own lower priced properties that attract lower paying clients.

Generally, an investor just getting started out will have to wrestle with whether or not they are looking for Growth or Cash Flow. And the would be income property owner that is strictly looking for cash will almost always end up drifting down into the lower price ranges of Kansas City. I’m talking about the homes priced in the $30s, the $40s and the $50,000 price ranges.

(Of course, they may also not be able to afford any more at this particular time. So you may be “forced” into this situation rather than be patient and accumulate more savings.)

Yes, it is true that homes for sale in those price ranges are very much more affordable. (Is that proper English?) It is also true that if you can pick up a rental house for $45,000 and rent it out for $500 a month that you will instantly be in a cash flowing position!

If you can collect the rent.

This is not a condemnation on every tenant only able to afford $300 to $600 a month for rent. Most tenants in that price range are good, hardworking and responsible people. It’s the ones that are not that get you in trouble. How good does that cash flow look when you have an eviction every 12 – 16 months? What about the cost of clean-up after a less than desirable person has finally vacated the property?

Turnover, for whatever reason, just seems to be a lot higher.

There are many real estate investors out there that focus on these lower priced homes as a strategy. And that strategy has served them well. But by in large, the calls I get suffering from Investor Burnout are almost always in the market described above.

Those of us that watch the show on A&E called Flip This House and work in the business of real estate investing have known for a while that there had to be a smoking gun out there somewhere on all these “flips” going on.

Cleaning up massive mold. Did you disclose it?

What about the massive water damage under the house? Disclose that?

All of this done in 14 days and everything is perfect AND you sold it in 4 hours? Are you serious?

Anyway, this link will take you to Broker’s First Realty blog in Atlanta. From there you can watch a Fox News piece that will pretty much put the “flipper” in jail.

There isn’t a week that goes by without me hearing at least three times “Chris, what do you think about flipping houses?”

Personally, I think it’s great. Professionally, I think it’s great.

IF, and I mean if, YOU KNOW WHAT YOU ARE DOING.

As a professional real estate agent specializing in investment property I am approached by almost everyone in the Kansas City area who has seen HGTV or been to a seminar or has a brother who works with a guy who is making a killing buying and selling houses.

There are plenty of gurus out there who will sell you books and tapes for anywhere from a few hundred to tens of thousands of dollars. On these tapes lie the secret to achieving your dreams. Or, more rather, the guru’s dreams.

I have a very good friend who owns and operates Get Real KC. He is a real estate “flipper”. (Mis-used word but that is a whole other post.) He is good at what he does. He enjoys it and works very hard. For that he is handsomely rewarded. He has spent years learning his craft from both his personal experiences and the experiences of others.

Employing several different strategies he has managed to make a good living at what he does. Check out his website. It will help you to see his business.

For most people out there, however, I do not recommend beginning a career as a “flipper” at this particular point in time. Here are some reasons that I hope you will consider;

• Days On Market have drastically increased and therefore your holding costs have increased
• Capital through traditional sources is quickly drying up so you better have deep pockets or private lenders at your beck and call
• You have never had any experience estimating costs or time
• You hear the words “can’t miss” when looking at a property

Of course, there are other key factors to consider. But that should get you started.

Understand a few things here before you get upset with me;

1. If you are currently a proven real estate rehabber I am not talking to you. In fact, it would be great if you would offer a mentoring program to someone looking to get started.
2. No I’m not negative about rehabbing and selling real estate. I’m just negative about most people with no experience rehabbing and trying to sell real estate.
3. As a professional real estate agent I am not able to point you to a bevy of homes that you will need to get you started. Homes with ARVs of $150,000 that need $30,000 worth of work and are for sale for $62,500 are few and far between. (Besides, don’t you think either myself or the listing agent would like a crack at that before we pick up the phone to call you?) You’ll need to find your own non-traditional sources to supply yourself with houses.
4. To me, and this is a personal thing, rehabbing/selling is a job replacement, not real estate investing. Think about it. Investments work for you. They are supposed to grow over time and reward you on the back end.

A Strategy I Do Like When Buying Distressed Housing

Here is what you should be doing if you are thinking long term wealth growth and you can’t get rid of that home improvement bug;

• Buy a distressed house significantly below market.
• Improve the home to good rental condition while leaving yourself a large cushion of equity.
• Rent the home out for 4-8 years (depending on appreciation here in Kansas City) utilizing and realizing the 4 Benefits
• After renting out the house for the prescribed period improve the house to pristine sales condition
• Taking advantage of the IRC 1031 exchange rule you can now trade the home for a better position

One Last Question To Ask Yourself

I hear people all the time telling me about this great home they can pick up from a wholesaler for “X”. The wholesaler loves the home but just doesn’t have time to do the deal himself now so you can pick it up for a steal.

Does it make any sense to you that a professional real estate investor (the wholesaler) would pass up on such a profitable opportunity?

I suppose it can happen. But you know what? I hear that every week. No kidding.