Rehabbing and Raising Money

Mike: Welcome to the FlipNerd.com Podcast, this is your host Mike Hambright. And on this show I will introduce you to VIP’s in the real estate investing industry, as well as other interesting entrepreneurs who story’s and experiences can help you take your business to the next level. We have three new shows each week, which are available in the iTunes store or by visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting VIP interview, were I interview some of the most successful real estate investing experts and entrepreneurs in the industry to help you learn and grow. Today I’m joined by David Painter, who’s a real estate investor, he’s the president of the Kansas City Investment Group and David is a passionate rehabber. Today we’re going to discuss some strategies for rehabbing and being successful in rehabbing, as well as how to raise money for your rehabs. Before we get started though, let’s take a moment to recognize our featured sponsors.

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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.

Mike: Hey David, welcome to the show.
David: Thanks Mike. It’s a real pleasure to be here, looking forward to it.
Mike: I’m glad you’re here, like we said; a fellow mid-western boy.
David: Yeah, you know I was born and raised here in Kansas City and grew up in the mid-west. And you know, I hear a lot of people talking about California and the east coast and that kind of thing. But Missouri’s got its own little pleasures and its beautiful country, great place a kind of laid back but yet get the big city feel, so it’s a great place to grow up.
Mike: Kansas City’s a great place. Well I know that it appears that we have a lot of parallels, obviously the mid-west is one of them. But getting started in about 2008 right when the market was about to take a down turn, so it was an interesting time, I mean in hindsight for me that was a great time to get in. But why don’t you tell us about your kind of experience and how you decided to get started in real estate and what’s you’ve done since then.
David: Sure, you know as a middle aged guy and you start at that point, you start looking at your life and retirement and what you want to do, and what’s out there. And you know, that’s exactly what I did and I knew that my retirement was not going to support my life style and what I liked to do. I like expensive things, I like to travel, I like to buy nice things for my family, nice homes you know and of course we all do. I got together with my son and son-in-law and we sit down and started discussing what’s available. Everything from multi-level marketing, which I hate but I was willing, and looking at everything that was out there and the more the read and the more things that we looked at it’s just sort of seemed the probable down to real estate. And we started looking at the opportunities in real estate. Started reading some books by Robert Kiyosaki, “Rich Dad Poor Dad”, “The Cashflow Quadrant” I still have those in my library today. And those are books and some other books that quite often I go back and sort of refresh on some points there.
But we started reading this books and it created a mindset, which every real successful real estate investor has to have a specific mindset, and it’s not the average middle class American mindset. But that being said, we looked at everything and as we were reading some of those books, “Think and Grow Rich” by Napoleon Hill. There was a Friday night Rich Dad event that all three of us went to and we were just blown away buy what you could do in real estate, what the opportunities were what was there. And from there we attended a three day seminar taught by Rich Dad Education, and from there then we all three purchased education classes. We saw the possibilities, saw what could be accomplished, but we knew we needed to education ourselves.
A little side note there, I’m amazed just blown away with people who jump into this without knowing what they’re doing or having the right education. And then they about to lose their shirt and they call guys like me wanting to know if I’ll buy something that just doesn’t work. But anyway we educated ourselves, went through the process I paid for a mentor to come down spend three days with me and that was the absolute best investment I ever made in my future, in 56 years. I was 55-56 when we got into real estate. And so from then, after we spent the time with our mentor then we started marketing, and it took a couple months to get our first deal and we went through the whole process with fear and trepidation. And never having bought a house like that before. The way that you and I buy houses is not the typical way that the average person buys property.
Mike: Oh, right. For sure.
David: But with that being said, we went through the process, did the rehab, had a real estate agent who works with investor, sell my property and at closing we walked away with a $30,000 check, and at that point I thought I could do this, this is great. This is how it works I am in 1,000%.
Mike: Yeah, it’s one of those things were I think education is critical, and ongoing education is critical. I think there’s so many people that jump in with a lot of misinformation or incomplete education or you know more of the get rich mentality verses I’m going to build a business here.
David: Yeah, you’re absolutely right. And I mean today we offer one on one training. And that’s the first thing that I tell people is that this is not a get rich quick think. This is not something that you can pay me a $100 for and then go out tomorrow make $10,000. It just doesn’t work that way you’re building a long term successful business. I just looked at property this last week, got a call from a young lady who bought this house it was foreclosure and she paid too much money for it, she didn’t know how to come up with what it could cost to fix it back up. Tried to fix it up, really didn’t know what would add value to a property and what wouldn’t. And so now she’s sort of under water in everything. And saw one of my signs my advertisements and called and wanted to know if I would purchase it. I went and looked at the property shot her an offer, after she got up off of the floor, you know I explained to her that I know what you said you paid for it but here’s the value of this market. A house is only worth what you can get somebody to pay for it.
Mike: That’s right.
David: I don’t care what the market is, it’s only worth what you can get somebody to pay for it. So when you look at that and all the other cost, and you know education is extremely important if you’re really going to build a long term, viable real estate business there’s several aspects as a business owner, that you need to have in place. You know for instance a power team we’re talking about I love rehabbing you know, well how do you structure a rehab, how do you know what to do. It’s all about education.
Mike: Yeah, and it becomes second nature after you’ve done it awhile. I’ve rehabbed probably a couple hundred houses and you just get to a point to where it’s like let’s just do what we did on the last 30 or 40 except for we’re going to change, tweak things a little bit because of this unique thing or because if this neighborhood or whatever it is.
David: Yeah, absolutely. We learned in some of our classes and this is something that I learned from my mentor is that, have you ever heard of the $3,000 rule.
Mike: I’m not sure, go ahead and tell us.
David: Well, the $3,000 rule applies at least here in the mid-west. Now I’m not sure about the market on the east and west coast or somewhere else, but in the mid-west if you take a 1500 square foot home then the $3,000 rule is this, if it needs painting inside that’s $3,000. If it needs new windows it’s three grand, if it needs new floors it’s three grand and you will be amazed at how close that really comes to what a contractor would charge to go in. I’ve used that many time but you made a very valid point Mike, is that after you do this for a while then it becomes second nature. And I know when I first started I would go through and I had this long list and I mean everything was detailed, and written down; which is good and it should be that way. But now when I go to a property I have that same stuff with me, but rarely do I open my notebook and start making all those notes. I walk through, it takes my about 15-20 minutes to go through a house and look at it’s like, yep okay it’s going to be about a $32,000 rehab job.
Mike: Yeah, you just have to come up with some rules of thumb and things like that.
David: Yes, exactly. So you apply those and you can be a successful rehabber, but it gets back to that point of education.
Mike: Well, why don’t you share some of your thoughts on successful rehabbing and just some of the strategies you use based on you know neighborhood or price point you know however you kind of categorize what level of a repave you’re going to take something to.
David: Sure, well you know the first thing I look at is what’s selling and what’s moving in this market, what price range are people really looking for in this market. So I know within the Kansas City market properties that range from about $100,000 up to about $160, right in there, then I can move those things all day long, because you’re looking at about a 14 to 15 hundred square foot house, maybe in some cases about a 12 hundred square foot house. Three bedroom, one bath. You get below that then things are a little bit tougher to sell, to rent, they’re even tougher to sell. And so typically, we stay within that price margin, three bedroom, one bath, basement is a plus, garage is a plus, but not absolutely necessary. Then we also look at a thing that we call segmenting the market, which involves looking at that part of the market which is primarily a rental market. Don’t plan on doing a rehab and selling a property on the retail market that is predominately a rental market. It just doesn’t work, you property may or may not sell it but it’s going to end up sitting there a long time.
Me in my business, I’m not sure about you, but I look for a quick sale. If I’m going to rehab and put it back on the market it kills me if it’s on the market more than 2 months. You know, but one of the things that I found that is really successful for me, is that if used the real estate agents and their expertise in marketing ability, if I make it worth their while… For instance, one of my houses hits the market, my agent, if we get a valid signed contract within the first 30 days then she gets a $1,000 bonus and I’ll bump the buyers agents up full percentage point. And I’ve done the math; it’s cheaper for me to pay that right up front then to let it sit on the market for two months. So I would much rather have both of them out really marketing this property and getting the bonuses, rather then it just sitting there and it may or may not get some showings or that type of thing. But they’re really pushing it because that’s a pretty significant bonus.
Mike: Yeah, that’s a big incentive, yeah.
David: So, that’s one thing that I really try to do, anybody that helps me in the rehabbing market reach my goals I make it worth their while. So, we put together a power team that we use specifically in our rehab whole strategy. I’ve got a contractor that when he gives me a bid it’s a line item bid to the penny and if there’s anything missed then he eats the cost, not me. Nothing will kill a rehabber quicker than for a contractor to come back and say, you know Dave we’ve under bid this we need another three grand to finish out this part of the project. Nothing will kill your profit any faster Mike, than somebody coming back and eating up that side of it. So we put a great contractor in place I’ve got a great title company in place, I have a great real estate agent in place that knows that if she doesn’t do well selling my houses then there are others in line, you know, who are waiting to do the same. So you take all of these people… I’ve got a great real estate attorney, and I try and pay all of these people well so that I can do well and then it creates a win, win situation for everybody.
Mike: Sure, sure. Why don’t you talk a little bit about your kind of your strategy for rehabbing in terms of whether you’re trying to knock things out the park or whether you have kind of an entry level, I’m just going to clean it up and more what I would refer to as kind of a wholetail type strategy were we just kind of pass on a traditional whole sale deal maybe to an end user on the MLS. Just talk about how you think about how far to go in your rehabs.
David: Okay, yeah absolutely. You know one of the things I’m always going through new properties what people like, I’m looking at magazines, that sort of thing to know what’s out there, how they’re building the new properties and so then that’s what we generally try to do if we’re going to rehab it. Then specifically when depending on let’s just for example, let’s say that we have a $100,000 house and a three bedroom, one bath and we’re looking at 1100 square feet, so typically that would be a good starter home. And so what I’ll do once I know that I’m going to purchase the property then I’ll go in and start designing what we want to do. Right now one of the big things it’s an open floor plan. Everybody likes it open. So we’ll go in and if we can blow out a wall between the living room and the kitchen or between something, so that you’re house doesn’t look so boxed up. Then if we can open up the floor plan then not only does it appeal to people but it makes the house look bigger, you know because it’s got that nice openness.
And we will go in and whatever that markets dictates as far as nice properties, properties that people are looking for. My properties will be one notch above that. Because as rehabber you have to ask yourself, why is somebody going to buy my property verses any of the other inventory that’s out there? And that’s a question that when I mention that it seems like something so simple, but yet there’ as lot of people that don’t think that way. They just think you know they just do this and do that they’ll put it on the market and make all this money and it just doesn’t quite work that way. So for instance I will … I can go in with my contractor and for $400 difference I can put granite verses a high end Formica. So to me that’s a no brainer. A $400 expense to get the market value of what I’m asking for the property, oh yeah I mean that’s a no brainer. So I will go in and we will in most cases I would say on this same example what we’re using for a $100,000 house I will gut the kitchen. And we’ll put in new oak cabinets, we’ll put in a 60/40 sink, granite countertops, if there’s room for an island we’ll put an island in there, if not we’ll look for ways to put even a short counter. Most people just love having a bar stool at least be able to put one or two at a counter, it’s just a selling feature.
So we will do that, we will go in and of course as a rehabber you have to look at who buys the house. The lady actually buys the house the guy just pays for it. And I’m not certainly I know we have to be politically correct, but and I’m not trying to put down the ladies, but that’s their domain and they want what they like. So, we actually market to the women. And so the bathroom and the kitchen, we make those jaw droppers. Put travertine tile in both the floors, we’ll do the tile surround in the bathroom. New sink, new toilet, and the whole nine yards there you know so to speak. We’ll put the block window if there’s a window there we’ll take the traditional see through window out put a block window in. And there is some ways, some simple things you can do to a property to get a high end look without really spending high end dollars. For instance, a lot of times we’ll go in and have the two tone paint job, have my contractor put a chair rail up in the living room. We’ll do a two tone paint job or you can put crown molding up and there is some little things like that, that you can do to get a high-end look without spending high end dollars. And as far as detail Mike, we even go in and put in new walls switches and covers. The white ones.
Mike: Yeah, we do that too.
David: Because it gives it that crisp, clean new look that everybody wants.
Mike: Yeah, I think it’s important, it’s just a little tip that you said about adding new outlets and covers and switches is, a lot of real estate investors I think new real estate investors, they think they look fine well the covers are just 39 cents or whatever they are. So they assume they don’t have to replace them, the problem is when you get fresh paint on the walls, then they just look terrible, they’re yellowed.
David: It sticks out like a sore thumb.
Mike: Yeah, so you’ve got to plan to replace those things, pretty much a 100% of the time.
David: Right, exactly, you do. And then you know another new thing that in fact it actually cost a little bit less if you have to do sheet rock work, it’s called the knock down look. Where they go in splatter the wall and then when it’s semi-dry they take a troll and flatten it out a little bit and that give it a higher end look. And that’s actually a little bit cheaper to do that, versus if they have to go in and then after they put the sheet rock in and do all the mud work and all that you know. It’s actually, at least here for me and my contractor, it’s a little bit cheaper because then they just go back and after that’s done and it’s ready to paint. They spray it and it’s pretty much a done deal.
Mike: Well David what advice would you give to a newer real estate investor or at least those that are newer into rehabbing to kind of developed their strategy of what they’re going to use in term of materials and other things like that? Because for guys like you and me we’ve been doing it so long that it’s just kind of second nature. In fact I’ve rehabbed almost 200 houses, we’ve used the same interior paint color on all of them with the exception of a couple and that’s when I tried to outsmart ourselves and use customer colors and that came back to bite us. So, you kind of developed a rhythm for what you’re going to use, same types of materials, but for people that haven’t kind of built yet or don’t have that experience yet. What advice would you give them?
David: Sure, yeah. You’re using works and that’s what you stick with. The new as far as people who are newbies and I deal this this all the time specially at KCIG new people who are coming in and wanting to know what we do and how do you get started. I would say that the first thing you need to do is education yourself. Well, even let me back up a little bit more Mike, let me say this and I say this out of respect for everybody but it’s something that I learned early on is number one; be willing to pay for your education. Because if you look at it you’re really asking somebody to set you up in business. And that doesn’t come cheap. It doesn’t have to be super expensive but be willing to pay for your education. And then following that it would be find somebody who’s successful and then see if they’re willing to let you shadow them or meet you on a Saturday or weekday for coffee. Be able to pick their brain. I know right now if somebody wants to meet with me one on one and first I find out if they’re serious, you know, guys like you and I have we have more than enough to do without wasting our time with somebody who’s just curiosity seeker. Not really serious about real estate and they pick our brain for an hour and then never do anything.
So what I started doing presently is meeting with people but I charge $50 an hour. Which is still on the cheap side but it does filter out those for me who are not really serious, just want to get together and talk, that type of thing. But I do that and make sure that when we meet that they have all of their answers answered. That they have everything that they came for, that they have it and they’re completely satisfied. The last thing I want to do is just take somebody’s money just for the sake of taking it, that doesn’t do anything for me at all. But, they need to meet with somebody who’s successful, to be able to talk with them about how you get started, listen to what they have to say. Because guys like you and I who’ve been there, made the mistakes. We can help them avoid the mistakes and have a much more successful and pleasurable real estate experience if I can put it that way.
Mike: Yeah, I think that probably the best lessons for any new real estate investor to learn is more of what not to do then what to do .
David: Exactly. You’re 100% right. And you and I have both been there, you know and so if you’re willing to learn from somebody who’s been successful, then the next tip that I would say is take that advice and be aggressive. My natural temperament is more of a laid back, you know take it easy, take it as you go. But when I got into real estate I realized that man the opportunity is there and you need to run out, grab it and take it. So after you met with somebody and you began to have some knowledge, be aggressive. Don’t be afraid to make mistakes. Catastrophic mistakes yeah bounce those off of somebody before you go make something like that. But all of us still make mistakes, even I do. This last week I was working a property and I don’t know that was really dumb, why I did that. But you’re always learning is my point. And so be willing to take that knowledge, by aggressive don’t be afraid to make some mistakes. Make some because those are the best learning tools you’ll never forget those.
Mike: Sure, absolutely. Well David, I know you’re going to share a tips too, on raising money on rehabs as well. Just a kind of raising money 101. Do you want to take a couple minutes to just share some general thoughts on how you can raise money?
David: Absolutely Mike. There are still banks out there number one who they’re far and few between, but there are banks out there who will still do investor loans, and so it’s important those are done a relational bases. You need to develop a relationship with that particular bank; yes they’re going to ask for some specific things and because a little bit higher risk, but that’s available. The second thing is that there’s hard money available that’s out there. Learn what hard money is, it doesn’t mean it’s hard to get. It just means that you’re going to be paying a higher interest rate and some points and they do have most of them- hard money lenders have some criteria there that you need to follow. But that being said, even though it’s a higher interest rate you just figure that into the deal. You and I both know that the interest rate is immaterial because we don’t end up paying that anyway. We figure that into how we buy the house. And you make your money when you buy the property not when you sell it. And that’s something that’s foreign to a lot of people.
And the last thing that I would say about money is that there are private money investors out there and I’m amazed at where I find these people. They’re everywhere when you learn what to look for and what to listen for, you’ll find that that’s more money out there then you can, to quote an old proverb you can shake a stick at. And so I would say that with these three avenues of funding and there are many other avenues of funding that for time sack we can’t get into but those three main ones there if you will be aggressive, if you’ll take the time to look at those, what they require, and then be aggressive about that you will be able to fund probably almost any property that you come across that you need to.
Mike: Yeah, when you start to consider that most people have their money invested in … a lot of people that are close to retirement or in retirement in very safe things, and 1% or less in CD’s or just sitting in a savings account and if you could tap into some of that and it’s good for them and good for you I think there’s a lot of opportunity out there for sure.
David: That’s absolutely correct. And if you understand that if people have their money in CD’s or money markets they’re actually going in the hole. And if you do your homework put some formulas together that becomes a powerful tool when you can present that to an investor and say, look here’s where you are with the inflation rate, here’s what you’re losing and here’s what I can do for you through this property, through this deal, it becomes a powerful, powerful tool for you to get private money.
Mike: Yeah, absolutely. Well David, any kind of final comments on maybe just generally on rehabbing, what investors should consider when they’re looking to either get started or looking to kind of ramp up their rehabbing business?
David: I would simply say this Mike, that they need to be aggressive they need to be- they need to see the opportunity they need to be passionate about it, they need to join a local REA club, and expand their network. And I tell people all the time, that simply the more people that know what you’re doing, the more successful you’re going to be. So the opportunity is out there and regardless of what the evening news says this absolutely the best time to be in real estate.
Mike: I agree. I agree. Well David, hey thanks for joining us today. We appreciate your time.
David: Oh, my pleasure Mike. I’ve looked forward to this and it’s a great show and this is fantastic.
Mike: Thank you. And we’ll add a link down below the video here for folks that want to find David’s club the Kansas City Investment Group. And of course even on FlipNerd.com we have a REA club directory for clubs all over the country. We have about 300 clubs on our site, so if you’re not in Kansas City and you’re looking for a club and you don’t know where to look then check out FlipNerd.com. David, thanks again for joining us again today appreciate you.
David: You’re very welcome Mike, thank you.
Mike: Stay in touch my friend.
David: Okay, you bet.
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