Every investment I have made has been done within 60 minutes of my home.
There’s no rhyme or reason, it’s just where I looked for opportunities. It works, so why look elsewhere? Don’t get me wrong, I’ve chased shiny objects everywhere but stuck to my market until a certain opportunity presented itself.
There are opportunities all around, and it is important that you understand which opportunities align with you. The opportunity to make money or network or build your Instagram followers may not actually get you any closer to achieving your goals. Don’t be afraid to say no to opportunities if they don’t align with what you’re trying to do or how you want to live your life.
I had an opportunity last year that I jumped at. James Dennard of the On the Market Podcast wanted to do a YouTube series on partnering with someone to complete their first flip. He wanted to document the entire process and make it easy for anyone to follow along if they wanted to flip the house.
Here’s how it would work:
We will each contribute 50% of the required capital. James would go on to take over the hard money lender, make a deal with a wholesaler, and manage the rehab. My responsibility was to trust James and his process, as well as show up to record content for his YouTube channel, Project RE, I was curious not only to be able to invest in one of James’ deals but also to learn more about his systems and processes.
Here, I’m going to highlight some of my favorite lessons I learned along the way.
Importance of Calculating After-Repair Value (ARV)
It’s important to rely on a solid comp to calculate your after-repair value (ARV). This means you should negotiate with a home that has been sold in the last six months or so. Don’t use a property that is under contract or the listing price of a property, especially in a hot market. Once you’ve identified properties sold in the surrounding area, look for similarities in square footage, bedroom count, bathroom count, acreage and finish.
It is important that you define the ARV because it can make or break your deal or cause you to lose a bunch of money.
Create a Budget Contingency
Add a 5% contingency for change orders that will affect your budget. You can estimate your rehab costs based on each nail you need, but there may still be issues that you probably didn’t foresee when you created your budget.
For example, there may be a delay in materials that can stall your project, increasing your holding costs, or a wall is exposed and dry rot is found on studs that need to be replaced. It is better to be conservative and keep a cushion on your budget than to underestimate it.
Find out who previously worked on the property
As you walk through the home, look for information about licensed contractors who have previously worked on the property, whether for installation, maintenance or repairs. Often they will leave a sticker on the unit with the date they serviced the unit and when the next service date is recommended.
Common places to look are the electrical panel for an HVAC tech or plumber, an electrician for a forced air furnace, a boiler or hot water tank. I also found a sticker for plumbers on the side of the toilet at another of my properties, after it was brought to my attention by James.
The contractor may be familiar with the property, which can save you money if you don’t have to pay someone trying to find out what another contractor has done. Of course, you still want to do your due diligence on the contractor and verify that they are licensed. You’ll already see whatever work they do on that property, so use this as a guide if you want to hire them anyway.
using a joint venture agreement
Since James and I were partnering on this one deal, it didn’t make sense to form a company together, especially an LLC. James presented me with a joint venture agreement.
The pros of using a joint venture agreement are more important than forming an LLC. We were doing a deal together and didn’t need anything for the long term. The joint venture was between his LLC (which took the deed of the property) and my LLC, which acted as a partner in the deal and contributed 50% and was entitled to 50% profits.
It also listed our roles and responsibilities. His LLC would maintain the books, which I had access to at any time, he would manage the reshoots, and I would fly to the property at least four times to record rehearsals on the property. Joint venture agreements still provide liability protection, defined responsibilities, clear expectations, and a legal contract.
excellent communication
There was an update every week. An email was sent with progress on the rehab, any change orders and what’s coming next. After the property is completed and listed, the updates continue with detailed notes on each open house or showing. As a partner on deals that were quite a hand-off, it was extremely helpful.
For future deals, I am implementing this process for my partners on deals. This will keep us aligned and on the same page with where we are going with the property. Although here you need to be careful. The partnership should have clear expectations as to who is the operator and who is the investor.
Maybe both of you are managing rehab or just one of you. Either way, you have to trust each other in their roles. James did me the courtesy of letting me know that the market was changing right when we were ready to list our property. He thought we should go ahead with the shift and lower our asking price. Immediately, I told her that I trusted her judgement. Communication should be informative, and you should be prepared to trust and not cross the line.
final thoughts
Even though I learned this through flipping a house, they are lessons or tips that can be carried over into most investment strategies or even partnerships. If you are new to real estate investing, you need to check out my new book, Real Estate Rookie: 90 Days to Your First Investment,
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
