We just wanted to take a few seconds and not only explain why we purchase
homes at the values that we do, but also explain how we come to our numbers.

Months of inventory is based on the current number of homes available divided
by number of homes sold in the last 12 months, then multiplied by 12.

San Antonio’s Numbers are Below

Total # Available 10,700 * 12 = 7.23 Months of Inventory

Total # Sold 17,750

6-7 months of inventory is a normal market.
<5 months is a seller's market.
>9 months is a buyer’s market.

As you can see we are slightly above a normal market, still in a buyer’s market.

Here are the Numbers, Broken Down by Value

Price Range: $0.00-$100,000

Total # Available 2152 * 12 = 6 months of inventory

Total # Sold 4284

Price Range: $101,000 – $200,000

Total # Available 4328 * 12 = 6.3 months of inventory

Total # Sold 8168

Price Range: $200,000 – Above

Total # Available 4222 *12 = 9.59 Months of inventory

Total # Sold 5278

So as you can see, we are typically purchasing homes under $200,000 for
rentals or flips. At this price range, tenants/homeowners are able to qualify
to rent or buy, and our homes move off the market faster.

Finding the Right Deals

Every real estate investor knows that to be successful you have to find the right deals. However, sometimes it’s hard to know where to look. Finding a deal at a great price can solve most real estate investing problems- tough rehab budgets, unforeseen expenses, trouble getting financing. It can even help you find great tenants!

Most real estate investors learn pretty quick that to find the right deals you need to know the right people. That’s why we’ve been telling people to network for years! However there was no clear way for the buyers and sellers to meet.

So then we had a great idea- why don’t we just connect them? We decided that the service should hold sellers to the same standards as real estate investors. Each property should provide information like how much is it worth? How much will rehab cost? What’s the all in and financing options? How much equity and cash flow? Plus every home would need to come with comps for both sales and rentals.

So we did just that- created a website that makes finding deals easier! There’s even an option to receive a text message as soon as a deal is posted. We also have a forum for members- kind of like facebook for real estate investors.

Now it’s up to you to fill out the members form and start getting deals right now!

Right-Click to Download Quicktime

Wholesalers, Rehabbers, and Hard Money Lenders

In the business of real estate investing, three major players feed off of each other to spin the wheels of wealth creation. Wholesalers, rehabbers, and hard money lenders form a symbiotic trinity in which each one is dependent on the others.

Wholesalers need rehabbers to buy deals, rehabbers need hard money lenders to finance deals, and hard money lenders need wholesalers to find deals to lend on.

If you want to become a part of the real estate investing community, it’s important to know which one you are.. and then get to know as many of the the others as possible.

Three Levels of Investing

The three players in the trinity represent three levels of investing. The higher the level, the more passive the income. The lower the level, the less money and credit is needed. The natural progression is to move up in level as your equity and life stage develops.

Young, aggressive investors without money or credit start out as wholesalers; which means they hit the pavement to find deals to sell to rehabbers. Once a wholesaler develops decent credit puts a little money away to invest… say $20,000; he’s ready to start buying and rehabbing homes to either flip or rent.

Once that investor has built up more than, say $100,000… (and is getting tired of rehabbing homes and managing tenants); he becomes a hard money lender and lives off of the interest on his loans.

Level 1: Wholesaling

Wholesaling is tremendously popular on the internet and in guru bootcamps because anyone can do it regardless of money or credit. If you’re broke… this is how you get started in real estate investing.

The catch is: you make up for lack of money and credit with sweat equity. I hesitate to call it investing because it’s more akin to owning your own business. The good news is that it can be a very profitable business.

Like any business, it requires an investment of time, money, or both to make it work. Don’t let the gurus fool you into thinking that wholesaling is free money.

The Basic Idea

The idea behind wholesaling is that investors are willing to pay up to 70% of the after-repair value (ARV) to buy and rehab a house. For example, if the ARV of a house is $100k, and it needs $20k in repair; an investor would be willing to pay $50k for that property. Got it?

Here’s where you, the wholesaler comes in… If you can get that property under contract for $45k, you can sell the contract to a rehabber for $50k; banking $5k in the process without ever taking possession of the house.

Pretty cool huh? Yeah, I didn’t believe it either until I actually did one… for $15k.

So How the Heck…

Most people don’t realize that they can do this without money or credit because they have always had to show a pre-qualification letter to buy a house listed with an agent. Good agents will only consider offers from potential buyers who have proven their creditworthiness to a bank.

BUT… Nothing is stopping you from signing a purchase contract with someone who doesn’t have an agent. For example: if your neighbor decides to sell you his house and he doesn’t care about your credit, you could sign a contract with him to purchase the house.

But… How are you supposed to come up with the money?

You’re not. You are going to find an investor who can, and sell them the contract.

But… What if you can’t find anyone?

If you’re smart, you’ll give yourself some time on the contract… say 45 days or so. If you’ve done your homework and it really is a 70% deal, you shouldn’t have a problem getting rid of it. (Send it to me!)

Okay… I get it. So, how do I find these people?

That’s where your investment of time, money, or both comes in. You’ll need to market to two separate groups: Sellers and Buyers… but not just any sellers or buyers; you want motivated sellers and investment buyers.

Motivated Sellers

The average seller with a house in good condition and no particular pressure to sell isn’t going to take 70% of the ARV on their house. Most of those homes don’t need repair; so they sell for retail, not wholesale.

The types of sellers that you are looking for are in situations where the only buyer that can help them is an investor. For example:

A homeowner who has lived in a house for 20 years and never fixed anything.


Someone who inherited a house in disrepair and doesn’t have the time to worry about it.


A divorce situation where the sellers want quick closure.


Someone who is about to be foreclosed on and needs cash quickly.

All of these scenarios produce situations where the traditional retail market cannot help the sellers. Only an investor who is willing to take on the risk of a large rehab or quick cash closing can solve their problem.

Bandit Signs

The cheapest, but most labor-intensive marketing channel for motivated sellers is putting up bandit signs. Have you ever seen a sign on the side of the road that says “We Buy Houses” and a phone number? That’s a bandit sign and they work.

You can buy blank signs for about 50 cents a piece and large permanent marker for 5 bucks and you’re in business. The downside is that it takes some hustle to run around and put the signs up, navigate city ordinances, and fight off other wholesalers who will pull down your signs.

But.. that’s how many of us got started.

Farming

The next cheapest form of advertising is walking neighborhoods and placing door hangers or flyers on houses that look like they are under duress. Overgrown lawns, neglected repairs, etc.

Realize that some of these houses will have out-of-state owners. Look up their mailing addresses on the county records and send them a letter.

Mailers

Good old fashioned snail mail can work wonders. Just send out some letters to homeowners explaining that you help solve real estate problems by getting people cash quickly for their house.

You can buy mailing lists from a list broker or just blanket neighborhoods by getting addresses off of county records.

It typically costs about 50 cents to a dollar per letter if you use a service… Or just recruit your kids and start licking stamps!

Internet Leads

Tech-savvy types can find seller leads on the internet by paying Google to place ads when people search for terms that indicate they might be a motivated seller, or paying a service to do this for you. Expect to pay $50 – $100 to get someone to fill out your form and only 1 in 20 will be be a deal.

Cost Per Buy

After you have found a few deals, you can calculate your cost-per-buy ratio (CPB). Bandit signs should produce the lowest CPB, but take the most effort. Paid advertising will produce CPB’s in the range of $500 – $2,500. The object is to keep your CPB below what you make on the deal… or you’ll be out of business in no time.

Finding Investors

The best way to build your buyer list is to hang out at local investor groups. Find a group near you here.

You also might try mailers, or bandit signs, or internet leads for this one as well.. Get creative.

Level 2: Rehabbing

Real estate investing, as most people know it, involves fixing up old houses to sell or rent. To do this, you need access to enough money to buy houses.. with either a loan or cash.

The average borrower will need credit in the 700 range and cash reserves of 10-$20,000 in order to get a hard money loan.

The key to rehabbing houses is to buy at the right price. Remember the 70% rule? It’s to protect your downside.

Your Profit

Of the remaining 30%, 10% will pay a realtor and title company when you sell, 10% pays for holding costs, and the remaining 10% is your profit… or protection against a down market.

Investors who hold properties to rent reduce the burden of transaction costs, but don’t get to realize their profits as quickly.

Flip or Hold?

Flipping houses is the more glamourous of the two, but rental real estate is where the long-term wealth is created. In our business, we use a combination of the two. For every house that we flip, we hold 2-5.

When you hold property for longer than a year, there is huge tax benefit when compared to flipping. Most importantly, rental income produces cashflow.. which is the only way you can “retire” without killing your golden goose.

Property Management

Most people’s biggest fear in rental property is dealing with tenants. Most tenant horror stories stem from mis-management. Take some management classes to learn how to properly screen and handle situations that might come up.

While I won’t try to convince you that land-lording is all roses… It’s a heck of a lot easier if you know what you are doing… and I’d rather be a landlord and be my own boss than work for the man any day.

Level 3: Hard Money Lending

Hard money lenders are a special kind of bank who loan exclusively to real estate investors. They understand the needs and risks associated with fixing up investment properties in a way that traditional lenders don’t.

Hard money lenders can be institutions with large pools of capital to draw from, or simply a private individual who wants to earn a strong interest rate on his or her net worth.

Private Lending

In the case where the hard money lender is a private individual, they are typically referred to as a private lender.

Private lending done correctly is the most passive form of income in real estate investing. Once your due diligence has been done to be sure that you have a borrower with a strong track record and a solid investment property, you simply sit back and collect checks.

Protect Your Downside

The key to successful private lending is protecting your downside. We do that by:

a) Never lending more than 70% of the ARV
b) Getting 1st lien on the house
c) Working with borrowers with a strong track record

These protections are in place in case your borrower stops paying you. Private lending becomes less passive when you have to take back houses that you’ve lent on… But, if you’ve stayed within the 70% rule, you can sell it and recoup your money.

The Symbiotic Trinity

Wholesalers, rehabbers, and hard money lenders all rely on each other to keep their businesses flowing. As a rehabber myself, I can tell you that we love wholesalers… and hard money lenders. As a wholesaler, I can tell you that we love rehabbers… You get the idea.

Networking is the key here. Get around as many of these people as possible and start building relationships.

Bread and Butter

Shauwn and I just finished a great little bread and butter property called Artemis. We bought it mainly for its character and what we thought we could change and do with the house.

When we bought this house it looked really scary, and a lot of investors passed it up. But we bought it ourselves, rehabbed it, and invited some of those investors back over so they could see what a finished project looks like.

Rehab

When we bought the house it was all carpet, so we replaced the entryway with wood. We also converted the garage into an extra room and opened it up to the rest of the house instead of just putting in a door. We put in these great two inch blinds which ended up being a great touch, but left a lot of great details that came with the house like the wood trim above all the windows.

We thought the kitchen was the focal point of the house, so we added new tile back splashes. This great antique ventahood came with the house, which is operating and looks great- all we had to do was refinish it. We tore everything out of the back, including the shed, and ended up with a nice clean backyard.

In the hall bathroom all of the counter tops and walls were pink tile. So we came in and refinished all of it, changed out all the fixtures, changed the hardware on the cabinets, and refinished the tub.

We chose to put carpet in the bedroom because we thought it felt a little better, and updated the entire master bath. We changed the tiles, the sinks, and the back of the shower, which we think is a big selling point for this house.

Ugly Houses

We bought this property for $45,500. Rehab was $16,000, and there was $2,000 in closing costs which puts us all in for $63,500. We expect to sell it for $92,000, which would give us a profit of $28,500.

The best thing to take away from this is don’t pass on an ugly house just because its ugly!

Right-Click to Download Quicktime

September was a really fantastic month for Passive Equity and our clients.

We closed on two rental houses; generating $1,975 a month in cashflow and $42,000 in equity for our business and our lender/partners.

We’ve been busy with rehabs and the results are really exciting.

Total Cashflow in 2010: $3,893 Per Month

Our cashflow on these two deals totals $1,975 which brings us up to $3,893 for the year, the majority of which goes to our private lenders in the form of interest payments. These interest payments provide passive cashflow on their investment in the deal.

$1000 Rector
$975 Waxwood
$800 Blue Lake
$700 Glendora
$418 Artemis
$3,893/mo. Total

Total Equity Captured in 2010: $98,946

One unique aspect of our program is that we share a portion of our equity with our clients in addition to the above interest payments.

We bought two houses in September; both fantastic deals in the same great neighborhood. I don’t know how we got so lucky, but these two houses popped up at the same time within ten blocks of each other in a very desirable part of San Antonio.

The two houses added $42,135 to the equity we share with our clients, bringing us up to $98,946 over five properties for the year.

$14,572 Glendora
$22,939 Blue Lake
$19,300 Artemis
$21,155 Waxwood
$20,980 Rector
$98,946 Total

Waxwood

When I first walked into Waxwood, I knew it was a home run.

The average person would have been terrified by the tilted foundation, cracks in the walls and floors, and marks on every surface.

What scared away most kept the price down, and gave us an opportunity to restore a house to greatness.

3 Bedrooms
1 Bathroom
1057 Square Feet

I liked the neighborhood because it was on the high end of our “bread and butter” model: after-repair values in the $80k – $120k range. The rents were strong and houses didn’t stay on the market more than a couple of months.

We bought the house for $51,345 in a $100k+ neighborhood. After fixing the foundation, replacing the roof, refinishing the kitchens & bathrooms, painting the walls, replacing the fixtures, and refinishing the wood floors, we will have spent $20,000 on the rehab.

$ 51,345 Purchase Price
$ 20,000 Repairs
$ 2,000 Closing Costs
$ 73,345 ALL IN

It will be worth $105,000 after the repairs, which gives us an equity capture of $21,155 after discounting for the cost of sale if we sold it (realtor commission and closing costs).

$105,000 After Repair Value
$ 73,345 All In
$ 10,500 Cost of Sale
$ 21,155 Equity Capture

A portion of the equity capture will shared with our private lender upon the sale of this property.

The cashflow is solid, as houses on the block are renting for $975 – $1200. We plan on putting it on the market for $1,000, sticking to our “best product, best price” model.

Rector

A week after we locked down Waxwood, a house popped up just 10 blocks away on Rector. Shauwn was the first to see this one and he thought it was an even better deal.

3 Bedrooms
2 Bathrooms
1402 Square Feet

We were getting it a little cheaper than Waxwood, so it gave us a little more room to breathe on the rehab. Once again, it was pretty scary on the inside to the average eye: Foundation was off, cracks in the walls, marks everywhere.

We bought it for $50,500 and once again, it’s in a $100k+ neighborhood. .

$ 50,500 Purchase Price
$ 23,000 Repairs
$ 2,000 Closing Costs
$ 75,500 ALL IN

It will be worth $107,200 after the repairs, which gives us an equity capture of $20,980 after discounting for the cost of sale if we sold it (realtor commission and closing costs).

$107,200 After Repair Value
$ 75,500 All In
$ 10,720 Cost of Sale
$ 20,980 Equity Capture

We leased this property before the rehab was done for $975/mo.

We’re ready for a new round of deals, hopefully to get started in the next few months!

I want to share with you our most recent investment property- 342 Waxwood. We’re closing on this house tomorrow so we haven’t started the repairs yet. It’s a solid 3 bedroom, 1 bath house located in central San Antonio, and it’s after repair value is $105,000.

We’ve bought this house for $51,000, and we expect repairs to be $20,000. We’re going to go in and fix the foundation- it’s about 2 inches off so we’re going to have a company come in and level it. Then we’re going to go through and repair all the hardwood floor, the entire bathroom, and obviously the sheet rock.

We’re also going to do some small remodeling. There’s a wall that blocks the kitchen and we’re going to turn it into a bar. The kitchen will be completely redone with new counter tops, tile floors, and all new fixtures. The entire house will get new electrical fixtures.

In about three weeks this house will be basically brand new. We’ll replace everything that’s five years or older and get central heat and air- giving us a solid, clean, 3 bedroom, 1 bath house in central Texas.

Our closing cots on this house will be $2,000 so we’ll be all in for $73,000 which is roughly 70% of what it’s worth. We have a private lender funding this property who funds purchase and repairs. In return we pay him a monthly interest check which is much higher than what he was getting on his money market account.

So all and all this is a win win for passive equity and their private lender. We’ll shoot video on the new repairs and see you next time.

Deal Boards

I want to take a few minutes to break down our deal board, the way we keep track of everything we’re working on right now. Anyone can do this anyway they want- a lot of people do it on a computer. We like to do it on a whiteboard so at any moment we can take a quick snapshot of what’s happening.

So we start with the address in the first column, then vacancy where we write down if the house is occupied or vacant, the appraisal value, what we bought the house for (including closing costs), if we’re selling it what we’re selling it for, repairs, how we found the house, the title company, it’s status, and when it’s closing.

We write our properties in blue, or if it came from a different source (in our case Brownie) we write it in a different color so we know that’s the wholesaler that sold us the property.

This is how we keep track of our properties on a daily basis. We change the status regularly from under contract, active, time commitment, and sent docs. That way Brian and I can keep track of things, and if someone who comes in who’s looking to buy they’ll know what to purchase it for.

It’s a great source for anyone who comes into our office to know what we’re doing and where we stand.

Equity Goose

Most people save for retirement by setting up a single savings account that they tap into from time to time for emergencies. They’ll save and save but inevitably have to draw down multiple times due to financial emergencies or splurges like vacations. When your retirement and emergency funds are in the same place, it’s very difficult for those funds to grow.

The solution to this problem is to have separate accounts. You should have one savings account that you can never touch or tap into- this is what I like to call the “Equity Goose” (see the link below for more information). The Equity Goose is a sum of money that never decreases in value, it’s only purpose is to purchase assets that cash flow like real estate or to earn interest.

So the ideal situation is to have your Equity Goose account that only increases in value, and a separate emergency account that may rise or fall depending on circumstance. In addition to these accounts, you should have multiple other accounts for all the other things you’re saving for- vacations, a new car, your kids’ college educations.

Compartmentalization

A great resource for creating these multiple accounts in INGdirect.com. While I don’t get any financial benefit for mentioning them, I like them because they have a higher interest rate- 1.5% at the moment, which is much higher than other money market accounts. They also allow you to open up several accounts online very easily, which sure beats sitting down with a banker who’s questioning why you need six accounts.

Learning to compartmentalize your accounts is an extremely valuable tool! Practicing it will allow you to save much more money and put you a few steps ahead most Americans.

Links

For more information read “The Equity Goose and the Cash Flow Golden Egg”

To visit INGdirect.com click here

Goals

Today I want to talk about partnerships. I’ve actually had two members come in today and ask the same question- “How do you do this?” The first person called in and said “I’m looking to create a partnership, how do I structure it?” The honest answer to that is that there are a million ways to structure your partnership- you can structure it however you want to.

I recommend that you sit down with an attorney and structure it within the legal limits of the law and where everyone is on the same page as to what the partnership is. Have it drawn up so everyone understands it and it’s on paper. So that’s really the first step- figure out what you want to achieve with your partner, what you’re going to do, and what the goals of that company are.

Deals

The second question is, “Ok, I have a partnership but how do I structure a deal?” There’s several ways to do that as well. One way is for one partner to be the lender. We look at all our private lenders as partners in our deals because not only do they get an interest check but they also receive a portion of the equity in the property.

Another way is to have both of you be on title. So your company and their company both go on title for the property and both have a piece of ownership, and you share all the responsibilities with the loan.

There’s other ways where one can be an elite and one can be a passive. That way one person may be doing all the work- finding the property and rehabbing the property and managing it, and the other is just financing the deal.

So there’s several ways to do every partnership. The key is to sit down, structure it and write down what you want to achieve in the partnership and move on from there. So day one, start figuring out what you want and go for it.

Contractors

Today I want to talk about dealing with contractors. I actually had somebody go into my office today and complain that since I’ve been doing this for seven years I get better deals from contractors. I get a better deal because I deal with them in a different way.

Most people are afraid- they get emotional and they kind of get bullied by contractors. They may commit money up front, but then their time lines make it out of whack. You have to remember that this is a business relationship, so every time you’re dealing with a contractor leave it that way.

When I meet with them I have a budget, and we both sit down and work out a time line that fits our numbers. But you can’t allow yourself to get emotional and change things. You have to establish everything up front as far as what you want to achieve when dealing with contractors. Then you have to hold them to that and if they can’t meet or exceed it then it may be time to get a new contractor.

You need to find someone who can work on a daily basis with you, who you trust, and is someone who can achieve what you want to achieve.