It was a busy week this week. I turned out 5 new articles, with two at bloodhound and 3 at Suite101. I tackled a few questions about subprime lending (a homeowners perspective), property taxes, and the art of the quick sale. Over at bloodhound I showed people how to avoid the greater fool theory of market investing and talked about the key character trait of good investors, persistence. If you get a chance, have a look.
As much as I love blogging, I can only carry on three blogs at once. In stead of posting duplicate content, I thought I would simply refer you to the other two.
Bloodhound, a great site, which I am sure most of you are familar with. Here, I am one in a cast of almost a score of other great writers.
Suite101, a site that covers a variety of topics. This blog has been my experiment into the world of home buying and selling for the consumer. My post on bloodhound are more investor related, here, I try to give the first time home buyer some practical advice
Thanks for taking the time to read me.
A lot of people have asked me recently how to start their own real estate business. Over the last few entries I have tried to give a good overview of how I got into the business. Today I want to share some key differences between real estate investing and personal home buying. It is very important that anyone approaching one or the other understand how they are different.
Personal home buying represents turning a house into a home. In this situation you are looking through a very personal lens. If you like finished basements or large kitchens, you need to look for a house that either can be completely redone or that comes close to meeting your needs. You go in expecting to put in several years (or more) worth of work to get things just the way you like it. Have you ever wondered why some houses have more bathrooms than bedrooms or why the walls are pink under that wallpaper? The answer is simple; everyone who moves into a house makes it a home.
The goal of real estate investment buying is almost the opposite. In this situation you are taking a home and turning it into a blank canvas for future renters or buyers. Those flower window dressings you like so much, might not appeal to perspective tenants. Additionally, while you might be able to live with that hole in the door, future buyers might see that as a sign of disrepair. Most importantly, the properties you look for will be diamonds in the rough. Properties with broken doors and windows, but fairly new appliances, a good foundation, and an intact furnace make excellent investments.
Good investors have great vision. They know how to separate buying a home from buying a house. These investors know how to change little things to make a big impact. New door knobs, a new address sign, freshly cut grass, and a few shrubs in the front can turn a house completely around.
New investors need to keep this in mind as they approach an opportunity. The quickest way to kill a return is with expensive upgrades that you fall in love with. A keen understanding of personal home buyers is important. Home buyers expect to purchase or rent a house and make changes to fit their lifestyle (not yours). Save money by providing them a blank canvas and let them create the vision.
I have decided to start a blog chronicling the rebirth of Cook Squared Enterprises, the real estate business my wife and I started several years ago with our first investment in Detroit. The ups and downs, tears of joy and pain, will hopefully serve others well as they pursue similar endeavors. Friends and family alike seem to enjoy our tales of woe and comical misfortune as we battled the Detroit Water Company, an organization comparable to the relentless Borg for Star Trek fans, (for others, just substitute the most evil thing you can think of and that would be the Detroit Water Company).
Other more comical mishaps we hope to avoid this time around involved the surly contractors who drink on the job. The adage you get what you pay for really applies here. Projects filled with cost overruns, surely due to the high beer tax in
Detroit, along with an old house that seemed to be a death trap lying in wait for its next victim combined for some long penniless nights. For those of you who have ever tried negotiating with a contractor with nothing to lose (not even his teeth), you will know that my Cornell degree add very little value to this situation.
But for the grace of God and some great tenants, all is well that ends well. After taking a two year hiatus, Cook Squared Enterprises is back in business. Armed with a new Cornell MBA in Real Estate, we are pursuing our first apartment building in Greensboro, North Carolina, a great southern town experiencing moderate growth. Again, we are starting with a small budget, so the readers of this blog can expect plenty of hilarity as we try to save money using family, friends, and others to get off the ground.
After a tenuous start in the real estate business in California, we took our success on the road. A job promotion forced us to pack up our things in sunny California and move to the not so sunny Detroit, MI. A lot of people have a lot of bad things to say about Detroit, but not I. I think the city gets a bad rap. The people were great and there were a lot of things to do beside visit the casinos.
Despite the rocky start in California, the wife and I were eager to get back on the saddle. This time around we had real money and were much smarter. The real estate agent interviews were a huge surprise. Due to our age many agents didn’t take us seriously. A lot of them were unwilling to talk about what they had done in the past or even sit down for the interviews. Additionally, very few agents had good experience working with investors. Of course there were a few good agents out there. We selected a great one, Tamara Smith, who had great experience working with investors and strictly worked with buyers (very important).
A brief aside on buyers’ agents. Buyers’ agents only work with home buyers and investors, who are on the buying side of transactions. Their plus is the fact that they have a lot of great experience negotiating from the buyers’ side. They also build a relationship with a lot of buyers and can typically be counted on to find a buyer for almost any property; great people to know if you buy a lot of properties. If you recall from yesterday we decided to start the business with $30,000. For those of you who many not know the Detroit real estate market probably falls in the lowest 5% of all real estate markets in the US. This being the case we found it imperative to choose very wisely in the properties we selected. After some market research we found a great arbitrage opportunity. The average price of investment homes ranged from $20,000-$50,000. In addition, many of the homes were owned by the City, State, or local banks. This meant they could easily be purchased for $10,000-$30,000 below market value. With the average rental price of these units being $650-$800, there was a great opportunity to get mortgages of $200-$300 with these rents.
The opportunities for good investment were everywhere; unfortunately there was also a lot of opportunity for failure. Many buildings were actually worth less than $0 (that is not a misprint). Some houses were literally falling over or had so much internal work that needed to be done it just wasn’t worth it. When looking at houses with a finished value of at most $50,000, we could only accept houses that were in need of cosmetic repairs. After looking at over 1000 houses in person and on line, we settled on our first investment; a great house that appraised for almost double what we purchased it for. After several hundred dollars of cosmetic repairs we were up and running. Amazingly, the rental market was so hot, in one day of working on the house six people came by asking if they could rent the house. After some credit and reference checks we settled on our first tenant. Thus began Cook Squared Enterprises. Key Learnings…
- Great opportunities are everywhere
- Be selective. Even good opportunities may not be the right opportunities to start with
- Go where no else wants to go, there is less competition and often a lot of money to be had