Today’s REI Classroom Lesson
Frank Cava talks to us today about getting the most out of each deal and how you have to price the purchase, rehab, and sell correctly in order to maximize your profit.
REI Classroom Summary
By knowing the value by getting an accurate price range from comps, you’re able to effectively price costs. Also, learn what to do if the deal isn’t quite right for you.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
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.
Frank: Hi, guys. Frank Cava, again, and I’m here to once again host the REI Classroom. Thanks again for having me back. All right. If you didn’t watch it, last time I talked about deal analysis. Watch that one first. That’s the precursor to what we’re talking about now, which is maximizing profits.
Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com.
Frank: Most people that I meet that want to get into this business want to either give up on the job that they have now because they feel trapped, or they’re not making enough money, or they don’t have enough free time. Whatever it is in your life, moneymaking goes hand in hand with wanting to get into real estate. Having cool pictures is fun, but it’s the cash that I think gets everybody involved with this.
So we talked last time about how to pick the right house and the right deal. Today, we’re going to talk about, “All right. I picked the right house. But how do I get the most out of it?” That’s a big thing. We do 60 to 100 deals a year. If I can squeeze another $5,000, $10,000, $20,000 out of a couple of deals, I can do one, two, or three fewer deals over the course of the year.
Or I can get those same deals done with maximizing the profit. What happens is my margins go way up. My cost to do business gets driven way down. My returns go up in exponential fashion, and I make more money and so do all the people in my office. So this is the crux. I talked in the first video that I did about like not being a hobbyist, about being a pro.
This is what separates the two groups is the being able to not only do deals and repeat them but also being able to get the most out of them. So here’s a really telling statistic and kind of statement. Something I always say in my office is, “Profits are made at the purchase of a property and they’re realized at the sale.” Most people think that the money is really made at the end, but that’s not the case.
Now, I don’t know if you know this or not, but during the home building crisis and when everything took a swoon, what happened is people with good business practices still made money and made it through. People that either had too much debt or were not properly running their businesses before, it’s kind of like the tide goes out at a nude beach. Right? Everybody is standing there and you can see what’s going on because the water’s not there to hide it.
The same thing happens with a downturn. So right now, we’re in a favorable market. But if that market goes away, these habits that we implement in our business and you can implement into yours are going to really help you to make sure that you’re making money in any market.
So here are the statistics and this comes from the Home Builders Association of America. During the housing boom from 1998 to 2008, more than 90% of builder profit was made due to appreciation. That’s appreciation in the market. The market bailed people out 90% of the time. So that goes to show you that the people that are doing this and building homes, they had sloppy practices.
For those of us that don’t have huge bank accounts, we don’t have that ability. So we’ve got to make sure we’re really, really tight and we have to make sure that we can preserve our profits and our cash, and we can continue to make money. That’s what we focus on here.
So how do you ensure profits and then maximize them? The first thing is you have to be real on the value. Don’t lie to yourself or allow press clippings or excitement to help you drive the price up. Look at the real number. Number two, you are not smarter than the comps. I’ve said this before. You may have heard it. It’s the truth. The comps are kind of the little tricks or the little tips that show you what’s gong on in the marketplace.
Now, there are outliers on the high end, the low end, and you might be one of them if you do a house just right. But the comps are going to give you a range. And what I use is that range to help define what I think the house will sell for. Then, if the market conditions improve or if we can make the home look even better than I thought it was going to look when we started, we’ll tick the price up a little bit on the back end to really ring the bell.
On deals where we’ve made north of $50,000, it’s always worked this way. Where we might have pro formad it for like $35,000 to $50,000, where we just made it awesome and people got excited about it, or something cool happened. We tick the price up and we said, “We’re going to just smash this deal.”
Those are the deals that you make $50,000, $60,000, $75,000 on. But you’ve got to be conservative when you buy it. Don’t be emotional at purchase. I’ve talked about this before and I’m reiterating. You want a deal, you need the money, this is the best time to lose cash, and never, ever do this because you want a cool set of pictures.
All right. So questions to ask. First of all, what’s the property going to be worth? What’s the ARV? What’s the cash value? Then, what is an acquisition price that you can actually pay? The other thing you can do if you have flexibility in your business model, if you’re a home flipper, you can look at a house and say, “This one might have a little bit too much work. But there’s probably value in it for somebody else.”
So those are the kind of deals where I won’t get greedy. I’ll look at it and say, “You know what I want to do on this one? I want to just wholesale it.” Sometimes I have to buy it. Sometimes I can sell it before I buy it. But those are the kind of places where it’s like, “You know what? Just take it right to market and take a little bit of cash.” I’d rather have $5,000 to $25,000 in my pocket than the potential not to make anything or to lose. So always be mindful of that up front.
The other thing is, if you do go and sell something, there are a couple things that are important. Make sure you appeal to the sensories that people have and that they’re paying attention to. They don’t know quality nearly as well as they know cleanliness so make sure a house is clean. Make sure it’s staged and looks good. Make it irresistible to the marketplace and of value. If you do all of those things, you’re going to be able to sell your homes really quick.
So just a quick way that we make money on every one of our deals and ratchet up in some instances. Once again, my name is Frank Cava, the experienced investor, and I look forward to seeing you again real soon. Take care.
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