You Cannot Be a One Trick Pony
Times are changing, and you need to change with them. If you don't, you could find yourself in a serious cash flow crunch.
As interest rates rise, houses are sitting on the market a little longer. In some areas, it's taking as long as six or seven months to sell a house. If your whole business is based on rehabbing houses then selling to retail buyers, it will take much longer to get to payday. Unfortunately, there are still checks that need to written every week to cover holding costs, contractors, and other operating expenses.
To make matters worse, house prices are dropping in some parts of the country. So that $35,000 paycheck you were counting on, could turn in to a $15,000 check or less.
How Can You Solve The Problem?
If you’re a rehabber, instead of rehabbing each deal you find, wholesale some properties for quick cash. Sure, you'll make less profit. But the quick cash will help keep you in business.
Quite often when retail sales slow down, rents will go up. So think about refinancing some of the properties you rehab and keeping them as rentals-if they will cash flow.
What if you don't want to go to the bank to refinance? You could team up with a private lender who will provide the cash to buy and rehab the house in exchange for half of the profit or perhaps all the depreciation. You could agree to split the monthly cash flow or you might work out a deal where you keep all the monthly cash flow now in exchange for less of the profit later. When working with private lenders, there are endless opportunities. The only rules are the ones you mutually agree to.
Real estate runs in cycles. Even though appreciation may be flat or going in the wrong direction, it will come back again. So don't think you have to jump ship and buy in another state just because times are changing in your city.
Another alternative is to sell with a lease/option, if it is still allowed in the state you live in, or to sell with owner financing. With both of these techniques, you'll be able to sell at the top of the market and sell quickly. The option consideration or down payment will help offset your expenses. You will also be able to charge a premium monthly payment which will increase your monthly cash flow.
Speaking of lease/options, many investors in Texas have based their whole business model on doing sandwich lease/options. They would make a spread on the cash flow and the equity in the property. It's a great model until the state says you can't do it anymore. And that's exactly what happened in Texas. The investors who were "a one trick pony" are now scrambling to find a different method of operation.
In Maryland, new laws were passed that make it almost impossible to buy houses in pre-foreclosure. Many investors in the area based their whole business on working the pre-foreclosure market. They are frantically trying to develop a new way to make money. Some will easily pick up the pieces, many others will fail.
In several other states, new laws are being passed that are not investor friendly. You never know when the one thing you have based your whole business on could be outlawed by the government. Investors who do only one kind of real estate technique are getting left behind to play catch up with those investors who have multiple ways of buying, selling, renting, and wholesaling houses.
To avoid the problem of a changing economy or changing laws, don't base your entire business model on one technique. It's time to diversify.
Real estate is a constantly evolving opportunity. It's your job to keep your finger on the pulse of market conditions now and market conditions that are coming, then look for ways to capitalize on them.
You can do this by reading the business section of the newspapers and keeping track of new laws that could affect your real estate business. When the business section shows that there are more houses on the market now than ever before, it's time to slow down your rehab operation. When the local news reports show that there's a shortage of rental housing, it's time to offer more rentals. Or, when the news shows there's an excess of rental houses, it may be the best time to prune your rental portfolio and sell a few houses.
When the late night "guru" comes to town there will be a whole new crop of new investors just itching to get their first rehab. You can wholesale a house to them and/or supply the financing.
Diversify! Look for new ways to play the real estate game in your market.
Reprinted by Permission. Copyright 2018 All Rights Reserved. Visit www.legalwiz.com or call 1-888-587-3253. The author, CEO of Legalwiz Publications, is a nationally known attorney, author, entrepreneur and speaker. He has been practicing law since 1990, and has been involved in over 700 transactions.