Mitch Goldstein | Coach Mitch | August 18th, 2017Coach Mitch’s REFLECTIONS™
The best real estate investing conversations
Experienced real estate investors offer terrific input. They have a body of experience that I can learn from. When I share my own experiences from the past; since enough time has elapsed, I will often be able to have additional insight into the situation. In this case, being an armchair quarterback has its advantages.
People in the same business are competitors, but they can also be allies, friends, brainstormers, can empathize, find solutions, warn you, inform you, commiserate with you, etc.
Renting vs Flipping
A while back, I had a conversation with another REI guru. This Real Estate Investor guru and I spoke about about renting vs flipping.
A major part of real estate thinking is to hold onto the real estate for a long time and let the tenant pay off the mortgage.
On the surface it certainly sounds good and seems to make a lot of sense. However, reality rears its ugly face and when analyzing whether to rent or to flip, reality needs to be a factor.
Part of the conversation
Coach Mitch: “Have you, in your rentals, had experience with renting to a handy person who is given a reduced rental in return for work? Do you have contract language that would be appropriate?”
“I know that it would be best to lay out the work to be done as specifically as possible, however, where are the traps? With a contractor, I can say that the work done is not satisfactory. In a tenant scenario, what remedies do I have?”
Other Guru: “I have experience and no good language.”
Coach Mitch: “What is your experience?”
Other Guru: “It works well until it doesn’t.”
Coach Mitch: “Very, very well stated!!!”
“I have an interesting point. My rental experiences are mixed. In getting a rental house ready for sale, I am spending a significant sum, more than just a regular rental get-ready. I have found that the cost of the rehab negates the profit I made from the rental.”
“Therefore, perhaps it is wise to just flip, unless the plan is to hold long term, 10+ years.”
Other guru: “Say more about that?”
(A great question/statement, and a great lesson to learn – how an expert draws out information)
Coach Mitch: “I recently rented this house to two different tenants for about 5 years total. Upon purchase I had an extensive fixup which the first tenant paid for through the rental payments. But when they left, I had another big fixup from the 2nd tenant, at more cost. Upon their leaving, my current cost to fix is about $15K. That eliminates any profit I made from rental payments.”
Other Guru: “Oh No!”
Coach Mitch: “Oh Yes! The profit I will make will be the profit from the sale. The tenants do extensive damage, just in the natural course of living. The costs are significant to make a house salable in today’s marketplace. Today, buyers want homes in very good shape if they are to pay these high prices.”
“If I made $400 profit per month, times 60 months that’s $24K Potential Net Income After Expenses Before Taxes Before Vacancy. I did not get all that. My fix up costs have been about $30K, if memory serves.”
Other Guru: “Interesting.”
Coach Mitch: “If I sell for $58K net (after I pay for the buyers closing costs) I will be making a nice profit. But the costs of renting were extreme and ended up not being profitable.”
Other Guru: “Good post mortum.”
Observation
The only way to ensure that you can make $400+ profit per month from a rental is to buy that property at a very low amount.
Seeking tax delinquent property is a consistent way to put yourself in front of highly motivated sellers that often have huge amounts of equity that they can give away to you by lowering their selling price. See Coach Mitch’s “Ridiculously Simple System…” ™ for details.
Question
This rental house is now on the market. Since this conversation, I have had two more fixups adding another $15K to the bill. The profit over the mortgage on this house will be about $100K.
If we have that level of profit on each sale after rental, then maybe I can put up with the tenant headaches. But, if we have even half that profit ($50,000) on each flip, why rent?
Comment
I’m sure that you can see how valuable it is to find others in your profession that you can share experiences with. I urge you to go outside your comfort zone and seek out others who, like you, have the mindset to share.
A terrific way to gain as well as to give input is to join a Mastermind group (Google it). I’ve been in two Masterminds for long periods of time and they are a great experience. If your local Real Estate Investors Association doesn’t offer this feature, then start one up yourself. It’s easy, just see who wants to meet and talk REI. Often the Chamber of Commerce will host Masterminds.
Go For It –
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