By Lloyd Segal
When flipping properties, you also need to consider repair costs, holding costs, real estate commissions, closing costs, estimated profit, and lost opportunity costs. Let’s analyze each of these costs separately.
Repair costs. The repair costs will likely be your largest cost, so you need to calculate them carefully. If you’re able to inspect the interior, you’ll be able to estimate the repairs and renovations needed to make the house salable. However, if you aren’t able to inspect the interior, use 10% of the purchase price as your estimate of repair costs. In the alternative, multiply the square footage of the house by $7.00. For example, if the property has 1,500 square feet, the estimated repair cost would be $10,500.
Holding costs. It’s going to take you approximately 2-4 months to repair, market, and sell the property. During those months, you’ll incur holding costs (i.e. mortgage payments, taxes, insurance, and utilities). Neophyte flippers frequently forget to include these costs in their budgets. If you’re worried about these costs, you can significantly reduce them by living in the house during this period, which is exactly what many flippers do when they are just starting out. Instead of chalking up your monthly expenses as holding costs, simply consider it rent. Another way to trim your holding costs is to price the house correctly the first time. By offering the best home in its class at the best price, you’ll sell the home faster and lower your holding costs to more than cover the cost of selling the home for a little less.
Real estate commissions. You can assume you’ll pay a 6% commission to your real estate agent for selling the house when you flip it. For that money, the agent will market your property for sale, list it in the Multiple Listing Service and related websites, advertise in local newspapers, receive and submit offers, negotiate with the buyer, and assist you with the timely close of escrow.
Closing costs. You will incur closing costs when it comes time to sell the property. These costs include escrow fees, title insurance, transfer tax, recording fees, and other miscellaneous charges. For a rough estimate of closing costs, figure 2% of the anticipated selling price.
Estimated profit: While we’re at it, let’s factor in profit. You want to make at least a 20-25% profit on each of your flips. In that way, if unexpected expenses do pop-up, you’ll have some margin before you lose money on the deal. (And if you sell the house for more than you expected, or your expenses are lower, you’ll make an even better profit.)
Lost opportunity costs: Opportunity cost is the cost of pursuing one investment choice instead of another. Every investment you make has an opportunity cost. With respect to flipping, lost opportunity cost boils down to making choices between various deals. For example, if you are considering two potential deals and can only make one, which one is likely to generate the greatest return? Which fits best into your workload, your skill set, and the time you have available? If you can spend the same amount of time and money on a property that will generate a 20% return instead of another property that will yield only a 10% return, which would you choose?
Time: Another cost that you may not have considered is your time. Successful flipping takes time. If you buy a property and plan to do some repairs yourself, you will save money on repair costs but you’ll also spending your time. How much is your time worth? If you’ll spend 300 hours repairing and renovating a property and will make $3,000 in profit, your time was worth $10 per hour. If that sounds good to you, great! If it doesn’t, you’ll need to adjust your cost estimates accordingly. For example, if your time is worth $50 per hour, you should factor $15,000 into your budget for those same 300 hours.
Chief Cook and Bottle Washer
Los Angeles Real Estate Investors Club, LLC
By Jessica Guisinger and Merrill Chandler
If you are a new or seasoned real estate investor and you have been looking for capital to fund your real estate deals, there is a good chance you have heard of credit card stacking.
Credit card stacking is the practice that credit brokers use to help individuals acquire credit by applying for multiple personal credit cards at the same time. The idea is that once you are approved for multiple credit cards, you can use the newly extended credit to fund your real estate deals. While getting multiple credit cards at the same time may initially sound like a great idea, doing so can create serious problems—especially if you attempt this strategy without fully understanding the consequences.
“I think just about the worst mistake I’ve ever seen an investor make is funding a deal by employing a credit card stacking strategy,” said Jessica Guisinger, the referral partner liaison with CreditSense, a firm that specializes in improving both personal and business fundability for real estate investors and small businesses. A cursory review of their website reveals they are nothing like a credit repair agency, but rather a Fundability Optimization firm, that gives its real estate investor students and clients a great deal of specialized insight into the inner workings of credit underwriting in general, and credit approvals in particular.
“We see a lot of offer there that oﬀer investors “funding” to do deals, but in reality they are just managing credit card stacking [for the investor],” Jessica explained. “These companies do not disclose—and investors rarely know until it’s too late— that getting the funding they need by maxing out these new credit cards will absolutely ruin the investor’s chance of obtaining future funding, and it inevitably tanks that person’s personal credit profile and score as well. And to add insult to injury, the 0% oﬀer that was so attractive almost always disappears when they try to liquidate their credit card limit for cash.”
What credit card stacking participants don’t know is that even if they pay on-time for the next 24 months, they will be flagged as high risk borrowers because lenders view this practice as an extremely high risk behavior. The investor will also be flagged as high risk because of the sudden spike in utilization (balance to limit ratio), and a demonstration of poor credit management.
“A far better solution is to use true business lines of credit as your funding source. When you have the right credit profile these lines of credit oﬀer the lowest rates available and you can get these business lines of credit with full check-writing capability at 3% to 6% to fund your deals,” recommended Jessica. “This type of funding is not only check-accessible, but it is unsecured as well. This feature oﬀers a huge advantage for real estate investors because it helps make them MORE fundable while improving their personal credit rather than destroying it.”
Many real estate investors assume they cannot qualify for unsecured business lines of credit, or that they will need to pay high interest rates in order to obtain them without ever discovering the truth. Jessica noted that with the right borrowing strategies, this is patently untrue. “A lot of real estate investors need help becoming fundable because they have been playing the funding game without knowing the rules. And, not knowing the rules is made even worse because real estate investing is considered a high risk business by lenders—they don’t want to even talk to you much less give you money,” she said.
Jessica continued, “Thankfully there is hope. There’s a way for real estate investors to get inexpensive money from top tier lenders. They simply need to learn the rules of the funding game and then play that game at a professional level. In fact, if you know what you are doing, you can obtain these unsecured business lines of credit and then strategically grow them to $1 million or more in real estate funding,” she said.
“Experts who help others acquire this type of funding do not just jump in without exploring the current fundability of an interested investor,” Jessica concluded. “If someone does not do a little bit of fact-finding and a comprehensive fundability analysis before they lay out a plan for you, be on alert,” she said.
By Dr. Teresa R. Martin, Esq.
Are you ready for a mortgage? It’s a big step that requires careful planning. A mortgage will affect your financial future for years to come.
Before you sign that mortgage, consider these finance questions:
- What is your credit score? Credit scores affect mortgage rates.
- Before buying a house, check your credit score. Should you raise your score to get a better interest rate? In general, high scores with no late payments during the last three years are enough to get good rates.
- Are you capable of handling maintenance costs? It’s important to consider the cost of maintenance before buying a house.
- The mortgage is only one part of the total cost of owning a house. Maintenance is another important piece. Will you be able to pay for a new roof or air conditioning system when the current ones wear out?
- Does your monthly budget include enough savings for maintenance?
- It’s also important to consider DIY projects and hiring others to complete tasks. House maintenance can involve expensive and ongoing projects. Are you ready to pay for these costs?
- How secure is your job? Before signing a loan, evaluate your job security. Will the work last? How will you handle changes?
- Evaluating your job future is part of planning for a home purchase.
- Consider emergency funds and savings in your plan. If your job situation changes, will you be able to continue making monthly mortgage payments?
- Do you have the necessary financial paperwork? Mortgage applications require a great amount of paperwork. Lenders can ask for old tax statements, check stubs, savings account statements, and other information.
- If you have a high credit score, you may get a no documentation loan.
- It’s rare to get a no documentation loan, so it’s better to be prepared by checking your files and collecting the financial papers you may need.
- Did you calculate the hidden expenses of owning a home? Home ownership comes with multiple expenses that go beyond appraisal fees, property taxes, mortgage closing costs, and insurance.
- One of the hidden expenses of moving to a home is more bills. If you’re used to renting, then home ownership can change your monthly bills by adding new ones. You’ll add trash collection, water, recycling and sewage in most locations to the expense list.
- Home insurance is higher than renter’s insurance. In addition, older homes cost more.
- Homeowners’ association fees are becoming more common in neighborhoods. You may be aware of condominium association fees, but are you ready to pay homeowners’ fees?
- Do you have an emergency fund? Emergencies can vary from broken dryers to flooded patios, so you need to be ready for anything. Is your emergency fund big enough to handle common, unplanned expenses?
- Emergency funds are a better option than credit cards or loans. Putting enough money aside can help you avoid new debt.
- Are you applying for other credit? Mortgage lenders can see applications for other types of loans on your credit report.
- Applying for other types of credit while trying to get a mortgage can hurt your loan. Mortgage companies view these applications as risks, so it’s better to wait before trying to get another credit card.
- Applications for new credit lower your credit score and affect interest rates.
A mortgage is a responsibility that affects multiple areas of your financial life. Before you buy a house, consider how your current financial situation will be affected and plan for emergencies.
Dr. Teresa R. Martin, Esq.
Dr. Teresa R. Martin, Esq. is the founder of Real Estate Investors Association of NYC (REIA NYC). REIA NYC (www.reianyc.org) is a premier real estate investment association serving the New York City marketplace. Its primary focus and mission is “helping our members build, preserve, and harvest multi-generational wealth” in the areas of real estate investments, business ownership and personal development.
By Mark Willis, CFPⓇ
Lake Growth Financial Services
“A banker is a fellow who will lend you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” — Mark Twain
Ain’t that the truth? As we look ten years back on the Great Recession, we can see how much has changed, and how much more has stayed pretty much the same. Home values are up again to 2007 levels. Unemployment is down to pre-crisis levels. The stock market is hitting record highs as I write these words. And yet, not much has changed since 2008 or since Mr. Twain wrote those humorous words – bankers control the money supply, and just when you need the money most, they are there holding all the umbrellas.
I have no problem with bankers, personally. Some of my best friends are bankers!
In fact, as investors we’ve been taught to use “other people’s money” (also known as OPM) as leverage to help us gain traction in real estate or to get ahead in our business. Other solutions include getting a business line of credit to buy new equipment, or securing a mortgage on an investment property to renovate and flip a property. These are the standby solutions used by many Americans.
But ask yourself – who are the “other people” when OPM is your strategy for leverage? (Remember, leverage can work both ways – for andagainst you!) And what do other people want so badly that they’re willing to part with their money and hand it to you? Were you just handed an umbrella on a sunny day?
When banks control the environment where your money lives, they win every time. When you control the financial environment in which your money lives, you win.
34% of all American income goes to servicing debt. If time is money, as the old saying goes, that means a full one-third of the day is spent working as slaves to a bank! Think of how many folks you know who are in debt up to their eyeballs and working 60+ hours a week, or stressing over non-paying tenants, or feverishly rushing from property to property, hoping they can sell a property before the balloon payment comes due.
For many real estate investors, the road to becoming a wealthy landlord turned south toward the highway of serfdom, with their banker holding the upper hand.
Is there any other way? How can someone who has skill and passion for real estate or their business keep control and a sense of sanity amidst a world gone insane? Is there a way to break free of financial slavery to the banks?
Yes, it’s simple.
Fire your banker!
Where is it written that you have to service your debts and pay off a banker before you can enjoy the fruits of your investment? Who says you have to pay interest on your properties, effectively turning all your real estate assets into liabilities? Where did we get the idea that banks were the only ones who could provide the function of banking in our society?
You can be your own source of financing – you can rid your financial portfolio of your banker and provide the function of banking yourself.
How? The answer may shock you. I’m talking about a modernized form of dividend-paying whole life insurance. It works like a source of capital, a bank, to provide a guaranteed pool of money liquid and available for whatever you need. The funds you accumulate in your life insurance grow safely and predictably every year, guaranteed – no matter what’s happening in the stock market. You can use the equity in your policy like a line of credit to yourself – and you have complete control over how, when and if you pay your money back to your policy. You are in complete control of the entire process.
When most people see the words: whole life insurance, their mind turns off. Mine sure did! I was taught to avoid whole life insurance even in my earliest days as a financial planner. Since then, I’ve come to see how useful and valuable a properly structured, dividend-payingwhole life policy can be, when issued from a mutual life insurance company that offers non-direct recognition loans. This vehicle helps my clients overcome the inertia of opportunity cost, accumulate a powerful warchest of capital, and deploy liquid capital for their real estate ventures.
It matters where your money lives. As a CERTIFIED FINANCIAL PLANNER™ I have investigated nearly every financial strategy available to investors. Well over 400+ products are available and tens of thousands of uses of those products have been hocked and sold to folks looking for that golden goose that will just help them sleep better at night. Financial pundits and Wall Street advisors will tell you that whole life insurance is the devil, and while I’m sure I’ll be ostracized by mainstream financial advisors for saying this, I think every person should at least KNOW that becoming your own source of financing through a properly structured whole life policy is an option worth investigating for yourself. Besides, if mainstream financial advice got us into the mess we are in, maybe it’s time for a new way of thinking!
We’ve had two major market crashes since the year 2000. Do you think another one will happen in your lifetime? Do you want your reaction to the next market crash to be the same as the last one? If you’d like to not only protect yourself from the next recession, but actually anticipate and take advantage of it, prepare for it now by doing what the banks do, not doing what they tell you to do. Banks purchase a huge amount of life insurance to run their businesses. Prepare by becoming the banker by using a form of capital that banks themselves take advantage of (Google “Bank Owned Life Insurance” to see what I mean).
Imagine we’re in the middle of another financial calamity. Everyone is seeing their 401(k) values drop and real estate prices are plummeting. Your friends are nervous about losing their jobs.
But instead of fear and instead of begging a banker to lend you his umbrella, you’ve established yourself as your own source of capital, using the cash value in your properly designed life insurance policy. You’re in control. When you see the real estate values crashing, instead of fear, you see opportunity. You borrow from your own policy’s cash, and within 3-5 days your policy’s cash value is direct deposited into your bank account and you’ve got cash at closing. No tax obligations, no government red tape. You are in control.
With this kind of leverage, the kind of leverage you own, you can borrow from your policy and still have it earning interest as if you did not take the loan. You read that right. That’s a rare feature often misunderstood and overlooked by most insurance agents. And when it’s properly implemented into a policy, you overcome the biggest hurdle in the financial universe – opportunity cost, and giving you uninterrupted compound growth – what has been referred to as the 8th Wonder of the World. You can pay your policy back on your own terms, when and if you choose. Do you think that will make you more or less competitive as an investor? Could this help you with more than just investing? How about buying the stuff of life – cars, medical expenses, paying off debt… which financial situation would it NOT make sense to be the banker?
The only thing better than being debt free is to be the banker. Then you’re the one lending the umbrellas!
There’s more to this than just picking up the phone to call your local insurance guy. Most insurance agents (and certainly most Wall Street brokers) have neverheard of this strategy, and you don’t want to put your money with an “I’ll just Google it” advisor. If you’d like to talk to someone who has been specially trained and authorized to specifically design a Bank on Yourself policy as described above, please contact us at [email protected]or call us at 1-800-962-9141.
by Teresa R. Martin, Esq.
Financing is indeed the most crucial of the puzzle for almost every business. Unless you have access to enough capital to bootstrap your business or raise it from family and friends, chances are, you’ll need a loan or investments.
When a conventional bank loan isn’t right for you, or if you’re looking for an additional injection of capital to grow your company, there are plenty of other options. Here are five alternate ways to finance your startup or grow your small business.
This is money loaned by a spouse, parents, family or friends. A banker considers this as “patient capital”, which is money be paid later as your business profits increase.
When borrowing love money, you should be aware that:
- Family and friends rarely have much capital.
- They may want to have equity in your business: Be sure you don’t give this away.
- A business relationship with family or friends should never be taken lightly.
As with borrowing money from friends or family to buy a business, some might consider using money from a retirement nest-egg risky. That said , it can often be an effective way to invest in your entrepreneurial endeavors for more and more of today’s business buyers.
As laid out by the government’s ERISA law, you can invest your existing IRA or 401(K) funds to the purchase of a business without taking any early distribution and incurring penalties.
It’s even possible to combine money from your retirement fund with loans and other funding methods for greater flexibility. Many entrepreneurs choose to invest in a business they control because they believe the growth opportunity is greater; and they want to diversify a portion of their retirement holding outside of the stock market.
Angel investors invest in early-state start-up companies in exchange for a 20 to 25 perfect return on their investment. They have helped to startup many prominent companies , including Google and Costco.
Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts, but also their technical and/or management knowledge.
They tend to finance the early stages of the business with investments in the order of $25,000 to $100,000. Institutional venture capitalists prefer larger investments, in the order of $1,000.000.
In turn for risking their money, the reserve the right to supervise the company’s management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency.
Angels tend to keep a low profile. To meet them, you have to contact specialized associations or search websites on angels.
Increasingly today’s more business-for-sale transactions are resting on a seller-s willingness to finance at least part of the sale. In a deal that includes seller financing, the seller takes part of the purchase price in cash and the remainder in the form of a promissory note that the buyer will pay back with interest over a period of three-to-five years.
This has become essential; buyers are having difficulty accessing funds through traditional methods, therefore there’s a natural gravitation toward seller-financed business to help offset some of the cost upfront.
Conversely, sellers who continue to say no to seller financing are finding it difficult to close a deal, and as more of them have realized this, there has been an increase in seller-financed businesses on the market. If you’re in the market for a small business it’s important to be aware of alternate funding options, but know that in some cases it’s still possible to borrow from a bank.
Government stimulus and bank policy have been trying to promote ongoing small business lending, although many banks are still more conservative than they used to be about when and to whom they’ll loan money.
Crowdfunding sites such as Kickstarter and Idiegogo can give a boost to financing a small business. These sites allow businesses to pool small investments from a number of investors instead of having to look for a single investment.
Make sure to read the fine print of different crowdfunding sites before making your choice, as some sites have payment-processing fees, or require businesses to raise their full stated goal in order to keep any of the money raised.
Today’s business-for-sale marketplace is full of exciting opportunities that will allow you to take your destiny into your own hands and with various options available there’s no reason to let a shortage of traditional capital sources get in the way of your dreams.
ABOUT THE AUTHOR
Dr. Teresa R. Martin, Esq. is a motivational speaker, author, million-dollar real estate wealth coach, business strategist, and legal counsel. She is living the life she loves and an teach you how to do the same!
As founder of the Generational Wealth Zone Group, Teresa R. Martin formed the original vision for a group of companies that would help clients create, manage, protect and grow their wealth. She is dedicated to showing individuals and entrepreneurs how to become financially empowered by turning the work they love into a profitable and sustainable business.