Common Mistakes Investors Make

Mike: Welcome back to the FlipNerd.com REI classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Blake: Hello, this is Blake Yarborough with Capital Concepts. I’m today’s host for the REI Classroom. Today, I just want to take a few minutes and talk about some basic mistakes that I see new investors make. Heck, and some more experienced investors.

Mike: This REI Classroom real estate lesson is sponsored by UglyOpportunities.com.

Blake: I’ve bought hundreds of houses in the last few years and I’m also a trainer for people buying houses. One of the basic things, when you’re talking to a seller . . . because that’s where the deals are. Some deals are on the MLS, but really, if you want to get the deals, where you’re buying them at the numbers you want to buy them at, you have to get face-to-face with the person selling the property.

But one of the biggest mistakes I see people making, they just won’t ask the sellers what’s the minimum they’ll take in current condition? A lot of times, they’ll just be ready to throw their number out instead of really talking to the seller and say, “What’s going on? What’s your pain?” and finding out what really they need to move on with their lot. A lot of times, that number will be lower than the offer you’re going to make. So that’s the first thing that I wanted to talk about.

The other thing, it stems from me being in lending, is it drives me nuts, but it greatly improved my real estate investing, especially early on because I was able to maximize leverage. Investors are not using enough leverage to control more properties. They might control one when they could have controlled four or five with the same amount of money out of pocket. And we do that using a hard money loan or private money.

Now, one of the things I want to touch on here is you always want to buy with equity and cash flow. And these types of loans will make you buy. Hard money loans and private money are typically about 70% of the after-repair value, the fixed-up value of the house.

Some people say, “Hey, I bought this house. I don’t have any equity in it, but it cash flow’s great.” If you get into a financial pinch and you had to sell that house, you’re going to lose your shirt. I don’t buy properties so I can turn around and lose money on them. So one of my basic rules: always buy with equity. And if you buy with equity, most likely, you’re going to buy with plenty of cash flow.

Another area where I see people make a mistake is not just when they’re overpaying for houses, but also when they’re overpaying for repairs. Just because a contractor tells you that’s the best he could do, well, it’s usually not. Over time, you’ll develop your own relationships where you’re getting paint done. In Houston, we’re doing it at 1.25 or 1.35 times square footage. Or you’re paying $1.50 to put tile down. Or double square footage of the house, add a thousand to put a new roof on. There are just certain factors over time that you get. And this all comes with experience and learning. And if you don’t really pay attention, you just take somebody’s word for what stuff costs, a lot of times, you’ll be overpaying. There’s an old saying, anytime you think you’ve been screwed in business, one of two reasons: you’re either too lazy to go do the work and find out what it really costs, or too greedy, you beat down and got an inferior product. So that’s what I wanted to talk about with repairs.

The other thing is, as you build up your portfolio, having uniformity in your paint, in your tile and things like that so you’re not going back and you got this one light beige, this one dark beige. You’re not sure what color you were using three years ago when you painted that house and you can’t find the tile to match that. Bigger investors, as they grow, they kind of narrow down the selection of what they put in each house so that way, you’ll always have the right paint or you always have tile on hand and it’s easy to do in maintenance.

And then, finally, once you’ve had it rehabbed and rented and you’ve already financed it earlier, we’re down to management. And it’s truly screening your tenants. Actually reading and verifying what’s on the lease application. Many times, it may be somebody trying to pull the wool over your head and the person they’re trying to verify is a person in the next cubicle who try to say, “Yeah, they rent for me.” Well if you look at tax records, those names don’t match up. Or you pull up and credit’s another issue. I don’t want to rent to somebody that right now having financial trouble. If they had trouble a year ago, that’s a different story than if they’re having trouble in the last 90 days.

Finally, read your lease, live by your lease, be strict on your lease, but once you’ve done that, you’ve got them trained where they’ll respect you. You take care of your business, they’ll learn to take care of their business. Once again, thank you for spending time with me. This is Blake Yarborough with REI Classroom.

Mike: HomeVestors, the “We Buy Ugly Houses Folks” is a franchised system of hundreds of real estate investors that have purchased of over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit FlipNerd.com/ugly to learn more.

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