Jarhett

By Tom Berry

When evaluating a real estate deal, you should always start with the end in mind. For example, with a single-family Fix and Flip, the end goal is selling that house. When you’re looking at a single-family deal you want to flip, always ask yourself, “What can I get out of this house and what is the end value going to be?”  This is where real estate investors may make a mistake.  Some investors will look at comps in the general area of the subject property. However, they are usually comparing their house to houses that are at a different level.  You want to use comps that are of similar size and similar nature to determine what your house is going to sell for when it’s done.  

Additionally, some investors use comps with a high-end fit and finish, but use their rehab budget or a very low-end fit and finish to calculate the value. You can’t put vinyl laminate floors in a house and expect to get the same ARV as a house down the street that has travertine or expensive wood floors. This also goes for kitchen countertops, appliances, etc.  Use houses that are similar to how you’re going to make yours.

The next step is evaluating the rehab budget. A huge challenge I see often when real estate investors look at their deal is that they calculate the ARV and then look at their rehab budget to find that the numbers don’t work. At this point, they don’t want to walk away from the deal, which they could do, and they don’t want to go back to the seller and try to renegotiate a better price on the house. Instead, they just cut the rehab budget and try to make the deal work.  If you cut your rehab budget, you’re never going to reach your expected ARV.  Cutting the budget just to try to make the numbers work on paper, might work on paper but it is not going to work in practice. Understand that the rehab will need to reach a certain level to hit your expected ARV.

After evaluating the price of the home and the rehab budget, most people think we’re done with an evaluation. The truth is that we are not done! There are other costs that we call hidden costs.  A great example of hidden costs would be the holding cost.  The holding cost includes the cost for an investor to own this project until it is sold. These hidden costs include interest, property taxes, property insurance, utilities, and lawn care. As a real estate investor, you must pay those bills the whole time you hold that property. All these costs add up. Before buying a house, it is important to calculate the monthly holding cost. This is done by adding up the monthly cost and dividing by 30 to get the daily cost of holding a property.

What does this do?  It puts a sense of urgency on the investor to get in and out as quickly as possible.

Lastly, it is important to ask yourself the following questions:

• Are you going to need permits?
• Are you going to need plans?
• When can contractors start?
• When will you be ready for contractors?

It is important to realistically evaluate how long it will take to rehab, market, and close on the project. There are a lot of steps to take, and those steps take time and money. 

Hopefully, this gives you greater insight into what it takes to evaluate a single-family fix and flip deal. As always, if you have a project and you’d like for us to help you with your hard money and private money needs, reach out to us today at 409-735-6267.

By Tom Berry

This is a question I have heard over and over every year since I started investing in real estate. And this question comes in many forms. My favorite is the negative form that goes something like this: “With home prices going up every year for the last decade, why would you want to get in real estate now?” Real estate, like any other investment asset, does fluctuate in price. However, this happens much slower than most other assets. When real estate falls in value, it tends to be for a shorter period, and then up it goes again. 

And of course, all real estate is local. Some high-growth areas didn’t even see price declines in single-family homes during the great recession. Others saw modest short-lived decreases. For these reasons, real estate has been seen as a great long-term investment for centuries. But there are other reasons why I always answer our original question with a resounding YES. 

When someone thinks of investing in real estate, they typically think of flipping or holding rentals of single-family homes in their town or neighborhood. When I think of real estate investing, I divide it into five columns. Then I pick one or two from each column. Here are the categories: Asset Class, Investment Strategy, Market / Sub-Market, Price Point, and Target Profit.

Here are a few options that I may pick from each category. But understand, some of these columns could have dozens of options to choose from.

Again, this is a very short list to show examples of what each list would have. What we are doing here is creating something the professional investors call a buy box. This buy box. Is used as a tool of discipline and efficiency. The buy box helps with discipline because you have set the criteria for what you will buy before ever looking at the first property. Now, all you need to do is stick to your own rules. The buy box helps with efficiency because the second I see a potential property that doesn’t meet my buy box, I discard it and move on to the next one. This allows me to analyze large numbers of potential deals in a short period. 

How many times have you heard someone say, “I think we can make it work if we just…?” You can fill in the blank for yourself. This is undisciplined investing. How many times have you heard someone beating that same project up for months trying to make something out of nothing? This is a time-waster and is incredibly inefficient.

Now, taking this conversation full circle, I would also argue that using a buy box allows us to be profitable investors in any market. All we need to do is pick different options from the columns above for the market we are facing at the time. 

Let me explain, in 2008 when I first got into real estate investing full time, we were fixing and flipping single-family homes in greater Houston. We found out quickly that our geography choice was way too large for a two-person team, and we re-adjusted to focus on Galveston County, TX. Mid 2008, as our flips sat on the market, we quickly realized we needed to change direction and switched to single-family homes and traditional rentals in Galveston County, TX with an after rehab value of $120,000 or less with $30,000 equity or more. 

After piling up 28 of those, we changed again in December 2010 to apartment buildings and apartment complexes in Galveston County, TX. This included traditional rentals: $25,000/ door all in or less, 12% CAP Rate or higher. I know! I haven’t seen those numbers since then either. 22 months later, the apartment market started going up again and we stopped buying and went back to houses. 

After accumulating around 425 houses and apartment units, we changed direction again and started selling off the apartments. A couple of years ago, we started selling off the rental houses. Some on owner finance terms and some outright. In the years between, we have bought office buildings, self-storages, single-tenant commercial buildings, a mobile home park, and shopping centers. As the market changes, I change strategy and asset class. This gives us the maximum opportunity to make money at any time. 

Make no mistake, I consider myself a buy & hold investor. I like to hold long-term and rent assets. This allows me to capture appreciation and let my tenants buy my properties for me through rent payments. BUT, if someone offers me more than what I think my property is worth, it’s SOLD! I am not going to hold a 70’s vintage apartment complex for 20 years. I’ll take the upside, and when the market gets hot, I’ll let someone else take on the ownership risk. Then, I will move my chips (equity) to a different table.

So, should you get into real estate investing right now? I don’t care if you are reading this in 2022 or many more years from now; the answer is YES! Although, the HOW you invest may be completely different answers in each case.