The Big Deal About Starting Small in Real Estate Investing
As a sole actor in your nascent real-estate investment company, you are the only resource managing the process; from raising capital, finding the right property for the deal, building a budget, and working with all parties through to close. After this, you must coordinate to complete your project and list it for sale or find new tenants if you are looking to keep the property as a rental. This can get very overwhelming. Further, this process is riddled with potential to lose money. Western Capital recommends therefore, that you start small.
Four risks that must be mitigated to position a new real-estate investor for success:
a. Running out of money
As discussed in the prior article of the Getting Started Series, down payment is one of the biggest reasons we see deals fall through. When hard money lenders require 15, 20 or even 30% of purchase price plus project costs to close, borrowers quickly realize that they don’t have the money. Should rehab be needed, these funds are also due immediately after close. Costs such as labor, material, holding costs (construction time through to completion when the property is not earning money), taxes and utilities must be paid, regardless. These costs exclude surprises that pop up once work begins. We have seen inspectors issue code requirements that did not exist prior to acquisition.
For example, a city may change property status to “Condemned” and suddenly thousands of dollars that were not budgeted for, are due to upgrade from this designation. If code compliance requirements are not addressed and fines are not paid, Investors cannot sell or have tenants occupy this property when rehab is complete, so they are stuck, while daily holding costs still accrue. In many cases, work onsite is halted until code requirements are addressed. Availability of funds at the exact time of need is critical for these projects to succeed.
b. Your contracting crews are not fully staffed
Contractors and construction crews are notorious for not being upfront with their availability to work for you, for the duration of your project and they will take advantage of inexperienced investors, sometimes not showing up. Crews are aware that sometimes money may not be available on day 1 and to minimize their own risk of being out of work, they will schedule back-up jobs. This creates problems for a new investor when your project schedule competes with other commitments the crews may already have. Waste and delays that cost money is the result. It is expedient that a trusted relationship with a contractor that will manage the crew is developed so they can line up resources appropriately as they are needed, real-time.
For example, experience teaches us that carpeting is always done last, there is a specific window in which appliances are installed and painting completed before carpet can be delivered and installed. This needs precise planning with the crews so that they don’t get into each other’s way onsite.
c. Evidence of timely project completion
You will not be able to show evidence of timely project completion. As part of the underwriting process, hard money lenders always want to see projects that were successfully started and finished. During a loan application, a borrower may be required to provide experience that they have done this kind of work before, that is, buying and fixing to sell or to rent property. Many borrowers will say that they have done several, perhaps referring to projects that they were the lead contractor, or ones that they may have partnered with others in some fashion to execute.
Western Capital will ask for addresses of past projects and the new lender will pull up public records to see that property ownership is tied to the investor/borrower on record, to give credit for experience. If this is the first property you are tackling and it falls behind on time and budget, it becomes difficult to exemplify your capabilities to do these deals, successfully. It is critical therefore, to complete and see a project through, to improve your chances of getting better terms in your second transaction.
d. You spread yourself too thin
If you purchase more than one property at a time, when you have no experience, the ability to stagger and manage the daily activities in your plan and to monitor progress becomes very difficult, especially if you are planning to carry on a different day job. Perhaps doing just one at a time is best in the early stages to keep your learning curve manageable and your sanity intact.
This is Part II of our Getting Started Series.
Akinyi Williams is the President and Chief Operating Officer at Western Capital, a lending broker for non-owner occupied residential and commercial properties. She is also a real estate broker licensed in Minnesota and Wisconsin. She lives in MN with her husband and 2 children. Akinyi can be reached at email@example.com.