In the last blog post I showed you how most amateur investors invest in real estate.
They only profit from one aspect of the deal and end up leaving a ton of money on the table. It seems like a money-making way to invest but there is so much more profit they could be earning from each deal and the income "peaks and valleys" that they get from investing the wrong way isn't a good way to run a business.
Cash flow is the way to go
So I introduced a better way to profit from investing. I call it the Trifecta Profits method. It's a way to make money at 3 points in the deal:
- Cash Up-front (from when you buy the property)
- Cash flow (from rental income)
- Trailing cash (from when you sell the deal to someone else)
Now I’m going to use an example of a deal to show you how it works. I'll use the same deal as in the last blog, just so you can compare the numbers easily.
In the last blog, we were looking at an example deal of a house in the Midwest worth about $75,000. You could get the property under contract for $19,000, you could rehab it for $6,000 and you expected the closing costs to be about $2,500. Therefore, you're expecting to be in the deal for $27,500.
We're also going to assume that you need to get some money in order to make the deal happen (because most investors don't have $27,500 sitting around... and besides, if you did I’d still say use this strategy as you might want to share some of the risk with other people, too).
So, you've got a few options to move forward on the deal:
- You can lose the deal. Yes, this is an option. It's not a great option but many people lose great deals because they don't have enough money themselves to make the deal happen, or haven’t dug their well before they were thirsty.
- You can skip a lot of the cost to rehab and turn the property over quickly by wholesaling the deal to another investor for a fee and make between $500-$5,000. That's an okay option and it's a good exit strategy if you need it, but it's not the best option.
- You can find a lender. (There is a lot I can say about this and I plan to blog much more about it in the future). A lender will loan you money but they are not likely to give you 100% of the money since they want to make sure that you have some "skin in the game" too. So they might lend you a percentage of the deal -– let's say about 70% -- and that will leave you to pay 30% of the deal (30% of $27,500 is $8,250).
So, if you have $8,250 sitting around, you're maybe good to go for the third option. But that amount of money can be hard to put together, especially if you're just starting out. (In fact, many successful real estate investors I know don't have that CASH lying around. They've put their money to work).
The deal isn't dead, though. Here's how to make option 3 work for you
Find another investor/lender... find someone who has the $8,250 and partner with them as well. So this would mean you get a loan for 70% of the deal and you partner with someone else for the remaining 30% of the deal. You make 50% of the profits, which isn't as much as you'd like (but it's better than the ZERO you'd earn by not doing the deal at all!)
Let's imagine that this is what you do (because it's fast and easy and makes a lot of sense)...
You get your money (70/30 split between a lender and a partner) and you go into the property to get to work. Unfortunately, you hit a snag. There are plenty of snags that might spring up but here is the one rule of thumb I've learned over the years as a real estate investor: Every deal goes awry just a little bit. Maybe the rehab cost more than you expected (which happens ALL THE TIME). Maybe repairs take longer than expected. Maybe the property doesn't rent as quickly as you anticipated.
These are all typical issues you might see in a real estate deal. Unfortunately, the financial deal you've worked out with your lender and partner don't account for these snags. For example...
- If your $6,000 rehab comes in at $7,500 (which happens almost every time), who comes up with the extra money?
- If the repairs on the house take 1 month longer than anticipated, who makes the monthly payment on that month?
- If the property doesn’t rent for 6 months, who pays the mortgage, the utilities, the taxes, and the insurance?
Suddenly, your good deal is starting to sour and you're forced to come up with more money on a deal that seemed like a great opportunity (and now feels more like a money pit).
Here's how to solve that problem
NEVER go for what YOU need. ALWAYS ask for MORE MONEY!
You're still going to make a profit AND you're building some "cushion" into the deal just in case the inevitable happens (and it will).
Here's how you can make more money from this deal:
When you present a deal to investors/lenders/partners and they give you money, always ask for more money. This is the "Cash Up-front" part of the Trifecta Profits. It will provide you with a cushion just in case something goes wrong. However, it will also give you extra money just in case nothing goes wrong!
You can use that cash to fund new deals (which, in turn, increases your own profit).
Oh yeah and borrowed money is tax free money until exercised! (VERY IMPORTANT DM DISCLAIMER: I am not giving any financial advice here; I'm only sharing my own experiences here… and am not saying this will be right for every person in every situation! Be sure to ALWAYS seek the counsel of a trusted and licensed professional to guide you here).
Excited to far? I'm excited to just tell you about it!
In the next blog post, I'm going to go through a deal and show you how the Trifecta Profits work together to help you make more money on every deal.
Your friend and mentor,
Mark Evans, DM, DN