The fixer-upper house business is a great business to be in these days. But, if you are just starting out, and are as green as a gourd, as I was, you need some help.
To speed up the learning processes, you need to have a collection of reference books on home repair, buying and selling houses, rental properties, tax law and all other aspects of real estate.
If a home without books is like a body without a soul, then a fixer-upper business without reference books is like a cook without a cookbook.
You may not know everything at the start of your new business and you may need help in some areas, especially in the initial stages. However, each time you pay to have someone do work for you, or go through some new process, you should observe everything, ask questions and learn the process.
That way, the next time you will be able to do it yourself, or at least perform a larger part of the project. The key is to keep doing things over and over until you master how it works. You will eventually reach a point where you make decisions of where to make repairs and which houses to buy based on your instinct.
Books will help you to reach that point sooner.
Here are some books that I have found particularly useful to have on hand:
1.Fix em Up, Rent em Out, by yours truly. Yes, believe it or not, I read my own book! Anyone who says otherwise, is just itching for a fight.
2. Investing in Fixer Uppers, by Jay DeCima. His first, and still my favorite, of his books.
8. Tiling 1-2-3, by Home Depot. Are you getting the impression that I like the Home Depot books? In addition to mastering the art of tile installation, I made my first grout repair after reading this book.
My wife and I were watching the movie the “Peaceful Warrior” Saturday night, and I was really inspired by the movie.
In a nutshell, one night when a gymnast, Dan Millman, cannot sleep he wanders in to a service station and meets a mysterious man. Dan injures his leg in an automobile accident and the mystic helps the gymnast to overcome incredible odds and tap into new worlds of strength and understanding. Here’s one of my favorite scenes as Socrates teaches Dan a valuable lesson.
Dan Millman: Life has just three rules?
Socrates: And you already know them…
Dan: Paradox, humor, and change.
Socrates: Paradox…
Dan: Life is a mystery. Don’t waste time trying to figure it out.
Socrates: Humor…
Dan: Keep a sense of humor, especially about yourself. It is a strength beyond all measure.
Socrates: Change…
Dan: Know that nothing stays the same.
At the end of the film, Dan is trying out for the Olympics, after making a startling comeback from his accident. A teammate asks him if can share some tip that he has learned from his training with Socrates to help him do his routine. Dan tells him to get rid of the garbage in his mind, to just forget about winning and his parent’s expectations, and to just focus on the routine.
But, the teammate just doesn’t get it. He replies that he has to win the gold medal, and everyone is counting on him to win. If he loses, he will let himself, and everyone else down, and he’ll never be happy.
What’s really interesting is the expression on Dan’s face as he listens to his teammate, and his realization that he used to think exactly the same way.
How this relates to fixer-upper houses
The movie made me think about how the fixer-upper business is like being a peaceful warrior. The Peaceful Warrior said, “Service to others is the highest good.”
I don’t think its stretching things too far to say that we provide a service. We purchase properties that are worn out and shunned by society. We rehabilitate the houses, make them presentable again, and provide a nice place for people to live in.
“The greatest real estate fire sale in the history of the United States rages on.”
— CNBC
Foreclosed properties are selling like hotcakes. Now is a great time to get some great deals on investment properties Besides the price, below are four reasons why you can count on real estate to provide you with security today and in the future.
Cash flow
With a good rental property, after all the expenses have been covered, including mortgage, vacancy rate, repairs, and property management, you can still receive a good cash flow. This provides a reliable monthly income for as long as you want to keep the property. As the amount of rent that you charge goes up, your profits go up. See Table 1 (U.S. Census Bureau, 2012) for historic monthly rents in the U.S., from the U.S. Census Bureau.
Demand for Housing
There will be always be people in need of a place to live. With our growing population, a gain of one American born every 14 seconds, we will have a population of 400 million by 2050. Based on our current immigration patterns and population growth, there will continue to be a demand for housing well into the foreseeable future.
Appreciation
In the short term, housing appreciation seems to unpredictably rise and fall. However, in the long term, over a 60-year period, house values show a steady and consistent upward trend. According the U.S. Census Bureau, from 1940 to 2010, the average increase in the value of a house was about 5% per year, adjusted for inflation. Table 2 (U.S Census Bureau, 2012) shows historic home values.
While appreciation of 5% may seem low to some people, when we consider that we only put a small percentage down, between 5-20%, and we receive monthly rent checks that more than cover mortgage payments, it begins to make sense. If we don’t allow periodic dramatic rises and falls in home values to shake our confidence, we can count on steady, long-term, profits from our investment properties.
Tax savings
Our kindly Uncle Sam wisely gives tax incentives to real estate investors. The federal government allows you to depreciate your investment (or reduce your taxes to account for physical deterioration of the house) on Schedule E of your annual tax form. In addition, you deduct expenses related to your investment from your gross income on IRS Form 1040, and reduce the amount of income that you pay taxes on.
Are you like me and never socked much money away for retirement? We are not alone. The Employee Benefit Research Institute’s Annual Retirement Confidence Survey found that pre-retirees (Americans between the ages of 55 and 65) greatly underestimate how long they are likely to live and how much money they will need in retirement.
Experts say that we need to change our mindset from “assets” to “income” in retirement planning. It’s not enough to know how much money we have in savings; we need to know how much income our savings can generate over time.
There is no better way to change our mindset and our portfolio from “assets” to “income” than by investing in real estate. If we invest wisely before we retire, and can have a stable of reliable rental properties that generate steady monthly income. We can look forward to a retirement that provides security instead of uncertainty.
Don’t rely on politicians to provide you with retirement security. If you want it done right, you must do it yourself.
If your circumstances are such that it is impossible for you to start investing in real estate today, you can start by just meandering in that direction. You can program your mind to pay attention to anything related to real estate. Cut articles out of the newspaper, buy books at book sales, ask friends and co-workers how they purchased their house, watch for free classes or seminars.
You can be constantly learning and preparing for the day you will purchase your first fix-up property. Virtually anything you need to know is available to you through books, audio recordings, workshops, seminars, public education programs, consultants and training programs.
I meandered for approximately 11 years before purchasing my first investment property. Now I wish I had started sooner, but you can’t begin until you have the desire and the knowledge. Sometimes, desire and knowledge can be acquired simply by observing someone else operating a successful business.
Reason to Not Invest and Reasons to Invest
There are always reasons not to invest in real estate. The most common reason used to be that people thought house prices were too high. Now, the situation has reversed itself and housing prices are at historic lows.
The time is ripe to start meandering in the direction of Fixer Upper Houses.
See What’s Happening in Your Neighborhood
You might want to check out how low houses are selling for in your neighborhood. You might be surprised.
Although I used my handyman friend to inspect the first fixer upper house that I bought, in later houses I hired a professional property inspector to go through the house and to provide me with a complete inspection report.
The Value of the Inspector’s Report
The inspector’s report can be used to help you negotiate a lower price on the house if they uncover anything in the house that is in need of repair. Hiring a qualified property inspector is a good way to make sure that you are really getting what you pay for in a house.
Due Diligence Allows You to Correct Deficiencies
Once you have made an offer on a house and it had been accepted by the seller, the “due diligence” period begins and you have until the close of escrow (or completion of the sale) to check out the physical and financial condition of the property. If you discover that the property has problems, but you think the deal is still worth pursuing, the seller may be willing to correct any deficiencies, or give you money to complete the necessary work yourself.
Two Key Components of Due Diligence
There are two key components of due diligence process:
This is your way to verify that the impressions you have of your applicants are true. Everyone who wants to rent my house has to fill out an application form. I will select usually the top one or two candidates, based on the processes mentioned above, and then call all the references and former landlords listed on the application form.
Always try to verify the references by telephone. You wouldn’t be the first landlord to be given a fake reference, and people will often give more candid opinions when you speak to them.
I don’t run credit checks, but I do like to see copies of their paychecks. I do a criminal background check by searching county court house records, and I check the sex offender’s registry list.
A high priority for me is that they make enough money to pay the rent. Don’t go by what they say; go by what their paycheck says.
They may say, “So anyway, my wife/girlfriend is going to get a job in a couple of weeks, and we operate a successful E-bay business, so the rental payments won’t be a problem.” Weeks turn into years and all the while they will have trouble making their monthly payments. Someone who has a stable, good paying job is an ideal tenant.
I have been the landlord of a triplex for just over 5 years. For most of that time, I simply maintained the property that I owned after making a couple of bigger renovations (windows and insulation). The biggest challenge I had was that my existing tenants paid way below market rent and rent control would not allow me to increase rents beyond 0.7%-2.2% each year. I felt stuck.
Recently, one of those tenants moved out. I managed to gut and redo the one bedroom unit and once it was finished I rented it out for almost double what I was getting before! This took the pressure off quite a bit but I realized I had to get my other “long term” renter out of her apartment. I ended up paying her to leave (2 months free rent) but it looks like it paid off. Her rent for a 2 bedroom was $474.77, but I have a lease now on the apartment for $799 a month. Surprisingly, I got this tenant because they saw pictures of the first unit I did and knew that I was finishing the second unit the same way. When they did the walk through the place was gutted and I didn’t even have the walls framed in yet!
I have looked at some other systems out there, but it seems to me that the only one that really works is finding a run down property with below market rents in a good area, fixing it up, and rerenting to higher classed tenants. If I knew a few years back what I know now, I would get the old tenants out ASAP even if I need to use my “cash for keys” program.
Right now I work full time so I rely on a dependable contractor that I feel I can trust. I hope to start renovating my own houses down the road, but I think I might need to get rid of my job to free up the time. Currently, I just do a walk through each day to see what work has been done and simply manage the renovation. Once the triplex is completely turned around next month I figure I will start looking for another project; I just need to convince my wife who still has fresh memories of my less stellar tenants.
Naturally, people are nervous about making financial changes during a recession. But, refinancing your existing house to take down payment money out of your equity and buy a rental house is one of the safest ways to start investing in real estate. It’s the most common way that real estate investors use to purchase investment properties.
If you have a steady job and a good credit rating, now is a rare opportunity to get a loan in the 4% interest range. And, houses are selling at fire sale prices!
It’s a good idea to refinance a house that you have owned for a few years before reinancing to take some equity out of it.
Refinancing an existing property for downpayment money is a lot better than waiting until you have enough cash to purchase a rental house withouta loan. Having a loan gives you leverage, because you don’t have to use all of your own money, which could take 20 years or more, to save.
The great benefit is, after you have purchased your rental house, is that you have a stream of income that is in addition to your regular 8:00 to 5:00 job.
You can be laid off, or fired from your regular job, but you can never lose your rental property job!
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FIX EM UP RENT EM OUT
Purchase FIX EM UP RENT EM OUT (paperback)Award-Winning Finalist in the Real Estate category of the National Best Books Awards, sponsored by USA Book NewsGreat information for anyone starting out in the fixer-upper business. The author has served his apprenticeship in the trenches.
-- Fixer Jay P. DeCima, Investor and AuthorTerry Sprouse has created a profitable rental business in his spare time. What sets him apart is he took action.-- Bob Zachmeier, Investor, Educator, Author With the wit of Will Rogers, this book provides simple guidelines for restoring homes, and sanity to our crazy lives. --M.D. Matlock, Ph.D., P.E., C.S.E.