I am fairly certain that I am not the only person who has binge watched fix and flip shows on tv with the urge afterwards to jump into real estate renovations for a quick buck. I mean, seriously, if those people can make $50,000 in 5 weeks...I am pretty sure that we can...right??
For the average viewer on a Sunday morning, it looks relatively simple. Purchase a decrepit, post-hoarder home for pennies on the dollar, rip down some drywall, put in some new cabinets and flooring, and 4 to 6 weeks later, Bob's your uncle...you sell the home for a huge profit to a more than eager buyer.
Let's dissect what is really happening on the majority of those tv shows.
1. The investors who are finding the really good deals are not finding them in their local, public real estate listings. These folks are established, wholesale buyers who see the deals even before the local realtors see them. They have connections in their local market that the average person might not, and they are actively working the neighbourhood for off-market deals.
2. The investor is purchasing with cash on a very short time line. They don't need to obtain bank financing, appraisals, or third party inspections. This increases their purchasing power significantly as it is appealing to the seller who may be in a tough spot.
3. The investor has access to extremely inexpensive labour to get the job done as quickly as possible for a bargain-basement price. Fix and flips are all about quantity over quality.
4. The investor is typically also a licensed real estate professional, so they do not have to list the finished product with a realtor to realize the profit. This creates a significantly more lenient profit margin. (continued below)
Real estate investing is possible with the right partners.
For the average investor who doesn't have the construction experience or the proper connections, this is not what real estate investing is going to look like. A more realistic approach for someone who has the funds to invest, is to partner with an experienced builder. This allows the investor and the builder to split both the risk and the potential profits.
For example, when we come across a good opportunity, we often partner with local investors who want a piece of the real estate pie. Typically, the investor provides the funding for the project, and we provide the construction services. Most of the time, we prefer to deal with new builds from the ground up rather than fixer uppers. New builds will often require more initial capital investment, but the chance of major renovation cost surprises is eliminated.
Once the new home is sold (often built in desirable, high-demand locations) the profit is split 50/50 between the builder and the investor. Keep in mind, that while the profit is split between two parties, so is the risk. The builder now has a vested interest in keeping the cost within budget and the project completed on time to maximize profit for both parties.
If you are approaching a builder to partner with, be sure you approach a builder who is experienced in building the type of home you'd like to bring to market. We specialize in mid to high end homes with state of the art technology, above average energy efficiency, and on-trend design, so we aren't the builder you'd want to partner with for a low-end, entry level home project. It's just not our wheel house nor in alignment with our brand. (Continued below)
Partnerships offer a way to reduce risk in real estate investing. (Richard & Jennifer Knappe - Owners of Cedar Creek)
If you are interested in partnering with a builder, put the word out. You'd be surprised how many builders are open to opportunities that split the risk and the profit with an investor given the chance. Go to your local building association and ask who is reputable in your area and builds the type of home you're looking to invest in.
If building well designed, executive-quality homes for resale in high-demand neighbourhoods sounds appealing, give us a shout. We are always willing to discuss possibilities with like-minded investors.
Until next time,
Jennifer Knappe