The Profit Advantage Using Fix-Up Skills, Fixer-Uppers part 3
The Profit Advantage Using Fix-Up Skills
Many people have a serious mental block when it comes to buying ugly rundown houses. Somehow they just assume that the present looks of a house have something to do with its long-term value. Nothing could be further from the truth. I’ll explain as we go along.
Learn to See the Money-Making Potential in Ugly Houses
I have watched many seemingly smart investor types, including real estate sales professionals, walk away from junker deals or advise clients to do so. Quite often that can be a bad financial decision, especially for the smaller, mom-and-pop investors who usually have very limited funds to begin with. Limited funds can earn much higher profits and earn profits a lot faster when they are wisely invested in ugly ducklings. Let’s discuss basic money-making techniques in this business.
Only Two Methods to Make Money in Real Estate
There are basically two ways to make big profits in real estate. The first method is to locate and purchase a quality property at substantially less than its current market value—not necessarily the appraisal value, but rather its true value in terms of how much money it can earn for you. The second method is to use the fix-up, “adding value” method, which I’ve described in previous chapters. Earnings from the first method would be a monthly cash flow now or as soon as possible, in addition to longer-term profits from a sale or exchange in the future.
My personal view is that the highest priority should always be cash flow now. The reason is rather simple: investors must buy groceries on what they earn now; otherwise, they won’t be around to reap any profits in the future.
Big Sharks Can Bite Harder Than Small Ones
The difficulties with this first method become painfully clear the minute you hit the marketplace in search of a bargain. What you’ll notice first, right away, is that there are a lot of investors out there with you. The competition is fierce. Not only that, but you’ll also discover there’s a bunch of dummies out there, with a lot more money to buy real estate than you have. I don’t need to remind you: cash always wins. Just in case that doesn’t bother you too much, I think you should also understand there are many experienced “real estate sharks,” who continually prowl the market in search of a bargain. They are smart investors who can move lightning-quick when they spot a good buy. Some are real estate agents who buy up listings before the general public gets out of bed.
Selecting the Right Strategy Is Key to Success
I think you can understand what you’re up against, if you are just starting or don’t have much money. The odds that you’ll find decent quality properties at a profitable discount and be able to snap them up quicker than the real estate sharks seem low, to say the least. But, don’t despair: there’s still hope for poor investors who don’t know much about the game yet. It’s the second method I mentioned for making big money—the “adding value” method.
This method works just as well. It’s my method of choice and certainly the one I recommend for do-it-yourself investors. Finding rundown ugly houses and fixing them up is the fastest way you can add value. It means that you will be able to buy cheap and sell for a profit in the shortest time. You can also increase rents and develop a positive monthly cash flow much more rapidly with these properties. With fixer properties, you can force values up by making improvements. Upgrading the property automatically increases its value. This way you don’t need to wait nearly so long to earn your profits.
Fixing Up Looks and Management Earns Profits
The fix-up, “adding value” method of investing comes in two flavors. The first flavor is where the property needs physical fix-up work—things like painting, landscaping, fixing leaky roofs, and building white picket fences. In addition to physical work on the outside, you may need to upgrade inside, things like plumbing fixtures and new flooring. Obviously, these will add immediate value to any property. The second flavor is changing the operating procedures generally brought about by bad management.
Improving Management Means Higher Earnings in the Future
A good example of poor management is when out-of-town owners allow the tenants to manage themselves. Tenants who manage themselves will eventually manage the owner right out of business. Once an owner realizes he or she is losing serious money every month, it doesn’t take long before a real estate bargain is available on the market.
Quite often, unwary owners learn the hard way that poor management not only robs them of everyday profits and cash flow, but it also costs them most of their long-term profits.
A good example of this would be buying a building like the one previously mentioned or one that’s always half empty because not enough effort is made to rent the vacant units. The seller of such a building will probably not be able to obtain the highest price possible because his or her income is artificially low. Income properties or rental units generally sell for a price that’s largely determined by the income they generate. Most often a factor called gross rent multiplier is used to establish a selling price.
For example, if a six-unit building—fully occupied most of the time—is earning $400 per month per unit (six times $400, or $2,400 a month and $28,800 annually) and if the gross rent multiplier for the local area is eight, all other things being equal, the building will likely sell for about $230,000. It’s figured like this: $28,800 (annually rental revenue) multiplied by eight (gross rent multiplier) equals a $230,400 selling price ($230,000, rounded).
Obviously, $230,000 is a “ballpark” number. Many factors will come into play during sale negotiations—such as location, economic climate (is anyone buying?), financing, condition of building, and motivation of the seller. However, remember this point—skilled buyers will pay pretty much in line with the building’s actual earning record, not its potential earnings in the future. Higher earnings in the future should be your reward for better management.
However, if the property is always partially empty, the value and selling price change. For example, let’s say an average of two units were not rented all last year. In that case, two times $400, or $800, per month times 12 months equals $9,600 in lost income. The reason doesn’t matter. What’s important is that the actual income earned is only $19,200, rather than $28,800 when all units are full. Now, when we calculate the selling price, it will be eight times $19,200—$153,600. That’s a big difference: $80,000.
Real estate agents will often do their best to conceal or downplay the actual income because it makes a tremendous difference in the asking price of properties.
Fixing Houses Is Equal Opportunity for All
There are those who incorrectly believe that fixing houses is a job that only experienced carpenters or contractors can do. Nothing could be further from the truth. Almost anyone can do this job. And, as a general rule, owners who fix up houses for themselves do not need licenses. However,if you do it for someone else—for example, as an employee or independent contractor—that’s different. It’s very likely you will need a license to be perfectly legal.
Fixing up houses, physically doing the work, is much easier than most people imagine. It’s also much more profitable than most folks realize at first. It’s not the least bit uncommon to earn back double the amount of money invested for a down payment and fix-up costs in a very short time. Quick, 100% returns are commonplace among experienced fixers. Obviously, you’ll need to get the hang of it first. Fixing houses is the best “fast track” wealth strategy for common, everyday people. It’s also the most inexpensive and safest way to invest in real estate today.
The Women’s Advantage Shows Up
Fixing houses is definitely equal opportunity. The job is not gender-sensitive, with perhaps one small exception—I think women understand living space better than most men I’m acquainted with. Take as an example cupboards and closets, cabinet space, and electrical outlets in the bathroom. My male fixer team often ignores or overlooks the importance of these items. They are often called to our attention when a female renter calls to complain about having only one cabinet or not enough electrical outlets for all her bathroom goodies. Women seem to have a natural instinct for house remodeling and I suspect this comes from their home-making abilities. I have caught my male fix-up crew building a bedroom closet just large enough for three wire hangers; female fixers seem to know better than that.
Most everyone can eventually stop a leak in the toilet. Likewise, everyone can do a halfway decent paint job if they really try. Knowing how to turn those chores into cash is a horse of a whole different color. In the final analysis, it matters very little who performs the physical fix-up work, as long as the right things get done.
Save 70% Doing Your Own Fix-Up
Fix-up work has two parts that cost money. First, and most expensive, is the labor. On average, labor will cost about 70¢ of every fix-up dollar you spend. Supplies and material will cost 30¢ of every dollar. Certainly these numbers can vary a little for jobs such as adding or overlaying exterior siding, where the siding materials (4- x 8-foot sheets) are expensive and the labor involved is relatively quick and simple. However, the 70/30 split is well within the ballpark for estimating average fix-up jobs.
Let’s say that you are able to purchase a fixer property for 30% under the estimated “fixed-up” market value—for example, a house with a market value of $70,000 for $49,000—and you estimate it will cost $10,000 to fix it up to its full market value of $70,000. The 70/30 split means that it will cost you somewhere around $3,000 for material and supplies. If you do all the labor yourself, you can expect to have about $18,000 equity in the property when the job is done: that’s the $70,000 value minus the $49,000 purchase price and the $3,000 for materials. Doing fix-up or “adding value,” as it’s called, means you won’t need to play the inflation game to make profits in this business.
Fix-Up Skills Earn Average Wages but Knowledge Builds Fortunes
Owners doing their own fix-up work will enjoy a money-saving advantage only if they fix the right things at the right time. This is very important. As you will learn, knowledge is what makes the big money. Having fix-up skills can certainly be an advantage, because it’s one less thing you’ll need to learn about, but swinging a hammer or swishing paintbrushes will merely earn you average wages or save a few bucks in the short run.
To illustrate my point, just think about all the thousands of licensed building contractors who can do almost anything to a building—they have plenty of skills. Now think about what most of them don’t have plenty of. If you answered, “Money,” you’re right. Big paydays do not come from fix-up skills; they come from real estate skills and specialized “how-to” knowledge. When I started out in this business, I had no idea how important this really was, although now it makes perfect sense to me.
Sizzle Fix-Ups Provide High Investment Returns
When I talk about fixing for dollars, I’m primarily referring to what I call “sizzle items”—things like white picket fences, fresh paint, window coverings, and ceiling fans. These items have lots of customer appeal. This appeal translates into big dollars at the box office (a.k.a. my rental office). The very same appeal makes selling your properties much more profitable because they look better. It’s not uncommon to get three or four dollars back—in the form of higher rents from tenants—for each fix-up dollar you spend on these items, which puts you into the high-profit mode.
Biggest Payday Comes from Knowing Where to Kick
Allow me to share the story of an electrician who repaired sawmill motors. He specialized in heavy-duty electrical motors and his job was to keep the big, high-speed machines running smoothly. Large crews of mill workers and their families depended on the giant motors; when they didn’t run, the crews were sent home. Obviously, their paychecks stopped at the same time the motors stopped.
One afternoon the repairman got an emergency call. The biggest motor at the mill had quit running.
“Come quick,” they pleaded. “We had to send all the men home. We’re losing thousands of dollars’ worth of business. We need you right now.”
The repairman arrived shortly thereafter, carrying only a small leather tool pouch. Very methodically, he opened the pouch and pulled out a weird-looking wrench; then he stood there a moment staring at the lifeless machine. When he finished looking, he began adjusting the bolts and turning a couple of screws. In less than 10 minutes, he was done and yelled to his helper to turn on the switch. The helper did, but nothing happened. Once again the repairman paused and stared at the giant motor. Suddenly, with a renewed sense of direction, he walked around to the other side of the motor and gave it a swift kick with his hard-toed work boot. With a loud pop and a couple of squeaks, the giant machine began to turn. Within seconds it was running at full speed again. Everyone smiled and the crew was called back to work.
Several days later, the repairman’s bill arrived in the mail, and the mill owner, who had stood by and observed the complete repair job,stared at the bill in total disbelief. “$500 for only 10 minutes’ work,” he screamed. “That’s outrageous. I demand an itemized statement of the charges. I demand some explanation. Why so much?”
Two days later, the amended bill arrived in the mail. It was itemized as requested:
Travel time $30.00
Adjustment to motor $20.00
Knowing where to kick $450.00
Please remit promptly $500.00
Thank you.
Almost anyone can eventually fix a leaky toilet and most folks can do a halfway decent paint job, if they really try—but knowing how to turn these chores into big paydays is the real secret to fixing for profits. Understanding where to kick is what pays the big bucks.
Size Yourself Up—What Are You Capable of?
You can’t build big bank accounts on what you think you can do, only on what you really can do. You can save yourself a lot of time and effort by sizing yourself up correctly to start with.
For example, when I began buying houses, I was not really a very skilled investor. I was actually a telephone man. I had over 23 years’ experience doing telephone work. People still thought of me as a telephone man even when I owned 18 houses. It took three or four years after I quit my telephone job before people began to think of me as a real estate investor.
You’re probably thinking, “What does all this have to do with investing?” The answer is “Plenty.” You can benefit yourself a great deal by doing an honest self-evaluation. Figure out what you’re really capable of doing right now, not what you imagine you can do. In other words, level with yourself. It’s not wrong to know almost nothing about real estate investing when you’re starting out. What is wrong is to fool yourself into thinking you do. This is a serious mistake that can hold you back, permanently. Also, it makes you an ideal target for any “snake oil salesman” with a “get rich” program to peddle. It’s most certainly true: you can make a ton of money investing in real estate. You can do it gradually, at home, part-time, on your kitchen table. You can build an unbelievable amount of wealth and security for yourself and your family. You can also be your own boss and insulate yourself from the ups and downs of a shaky economy that besets most ordinary people. I’m convinced you can do all of this, but you must be completely honest with yourself when you start.
The Profit Advantage Using Fix-Up Skills, Fixer-Uppers part 3
To Be Continued . . .
Fixer-Uppers part 4
Fixer-Uppers part 2
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