Three Common Problems for New Real Estate Investors

NetworkingProblems
  1.  Finding Properties
  2.  Being Short on Cash
  3.  Finding a Good Contractor

Solutions

The Property:

  1.  Finding Properties

Your best friends here are your local wholesalers and the good real estate agents in your market. If you are an experienced investor, you will have other options and other relationships in a place where you might be able to get properties more directly. New people usually don’t have that benefit and might have to rely on working with someone else who does have those connections.

There are a few ways to meet and connect with your local wholesalers, but one of the best is to attend your local investment club meetings.

  1.  Finding Investment Clubs

The magic here is REIA, which stands for Real Estate Investment Association. National REIA has a page on their site where you can find local groups by your address: nationalreia.org/find-a-reia/

You can also use a google search. The best way to get started is your local area, using county or metro area, and add “REIA” to the end of it. So, in Dallas, you might way to use Dallas-Fort Worth REIA.

In larger metros, you will have multiple groups. I recommend reading reviews if possible, but I also recommend trying them all to see which is the best fit for you.

Meetup.com and BiggerPockets.com are great places to get more groups outside of official REIAs.

  1.  What Now?

Once you are at the group, your job is to advertise what you can provide, and explain what you need. Most people approach this as a time to say, “I am a new investor looking for properties.” That’s the wrong approach. These wholesalers and agents likely already have people who are buying their properties, or else they wouldn’t still be in business. You have to be a little different or get lucky and meet them as they are looking to expand faster than their current customers can buy.

The key difference here is you want to talk to people, and explain what you do have, or what you can do. Everything you do have and everything you can bring to the deal should be stated. Then you make your ask. Giving a timeline may also be helpful. It helps the property provider to determine how seriously they should take your comments.

An example might be, “I worked in residential construction for 10 years, have $100k in cash to use toward this, and I am looking for a property to purchase within the next month.”

If you have the funds, and the time, can provide the labor or have contractors ready, and the only piece you are missing is the physical property itself, you are going to be an attractive partner to agents and wholesalers who are looking to sell properties quickly. They don’t want to wait for investors to slowly piece together the rest of the deal.

 

The Money:

If you don’t have all the pieces except the property, you will need to find those as well. From my experience, most areas have a lender who is willing to do at least 75% of the purchase and renovation costs, and the vast majority of markets will go into the range of 85-90% of the purchase and 100% of renovation. This means you are going to need between 10-25% down. If you’re new, assume 20-25% to be safe. If you don’t have the cash, there are a few options:

  1.  Short Term Loans

These are sketchy at best, and predatory at worst. Most unsecured short-term loans are going to have extremely high closing costs and interest rates and will eliminate a chunk of your profit margin. Many lenders are also not willing to accept them as part of the funds needed to close, so make sure you double check with the lender ahead of time.

  1.  Bringing in a Partner

Many first-time investors partner on at least their first few deals so they can split the costs. This helps lower the barrier to entry and helps with the management of the property. My one cautious comment here is to make sure you partner with someone who know and trust. Even if you do know and trust them, spend time having a contract written up ahead of time to protect both of you the best you can. Things go wrong in some projects, make sure this doesn’t bankrupt you.

  1.  Save Your Own Money

It’s not a sexy avenue, but sometimes the best option is really to save for longer. It is the slowest way to accomplish this, but it is still an option.

 

The Work:

If you are doing any kind of renovation, you are going to need to be able to do the work yourself or find a team that can do it for you. I almost always recommend going with the second option, unless the renovation is extremely minor.

Finding a great contractor is often the hardest part of the deal, especially in popular markets. I attend an REIA in Long Island where even experienced investors are struggling to find good contractors.

There are a few tips here.

  1.  Blast it Out to Everyone You Know

Tell everyone you know that you are looking for a contractor. It’s an easy step, and you might get lucky with one that comes with a recommendation.

  1.  Check Craigslist and Angieslist

Gone are the days where you could open a phonebook and call every contractor looking to see who was willing to give you the lowest quote or could get to the property fastest. Even though the medium has changed, the concept is the same.

  1.  Vetting Contractors

Statistics tell us that 50% of contractors are worse than average. The other 50% is better than average. Over time, it would make sense that the better contractors receive more jobs and are therefore busier. This means the contractors that are most likely to be able to take your job may not be the best in the area. Make sure to vet your contractors for a few things in your preliminary conversations with them: previous properties worked on/other jobs completed, current other projects, licenses, insurance, do they work by themselves or with a team, when can they start your project?

Make sure that they are capable of doing the work that you want to be performed and have them provide examples if possible.

Your contractor having other projects ongoing is not inherently a problem, even though many people treat it like it is. Other projects are only a problem if the other projects interfere with yours. You will likely not be providing enough volume to be their only client.

Licenses and insurance are a must. If you are lucky, you can save money by working with unlicensed and uninsured contractors, but the quality of work is almost certainly going to be lower. And if you get unlucky, your project will stall at best, and go under at worst. Don’t mess with unlicensed or uninsured contractors; they aren’t worth the risk.

One of the most important questions to ask is when a contractor can start on your project. This is ideal to know before you purchase a property, as it heavily dictates your potential profit. A great contractor that can’t start your renovation for 9 months, isn’t going to be helpful on a flip you just purchased last week. Your profit margin would be eliminated by interest payments as your property sits and waits for him to begin, then waits for him to finish. Make sure they can start soon or wait to purchase a property until closer to their next opening.

 

Hopefully, these tips are enough for you to avoid a minor issue or two.

As a direct private lender, RCN Capital is here to help you fund your next fix and flip or fix and lease project. Our experienced loan officers and in-house underwriting help the process run smoothly and quickly, and we look forward to working with you. Also, be sure to ask about our new 30-Year Rental Loan Program! 

If you have any questions or comments, please feel free to reach out to our Business Development Coordinator, Stephen Ballard at sballard@rcncapital.com or comment below.