Every investment I’ve made has been within 60 minutes of my home.
There’s no rhyme or reason, it’s simply where I’ve looked for opportunities. It works, so why look elsewhere? Don’t get me wrong, I have chased shiny objects all over the place but stuck to my market until a certain opportunity presented itself.
There are opportunities all around, and it is imperative you understand what opportunities align with you. An opportunity to make money or network or build your Instagram following may not actually get you closer to achieving your goals. Don’t be afraid to say no to opportunities if they don’t align with what you are trying to do or how you want to live your life.
I had an opportunity arise last year that I jumped on. James Dainard, from 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 whole process and make it easy to understand for someone to follow along if they wanted to flip a house.
Here’s how it would work:
We would each contribute 50% of the capital required. James was going to acquire the hard money lender, source the deal from a wholesaler and manage the rehab. My responsibility was to trust James and his process, along with showing up to record the content for his YouTube channel, ProjectRE. I was not only anxious to finally be able to invest in one of James’ deals but to also learn exactly how he has his systems and processes in place.
Here, I am going to highlight some of my favorite lessons I learned along the way.
The 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 comp with a home that’s been sold within the last six or so months. Don’t use a property that is under contract or the listing price of a property, especially in a hot market. Once you have identified the sold properties in the surrounding area, look for similarities in square footage, bedroom count, bathroom count, acreage, and finishes.
It’s critical that you define the ARV because it could make or break your deal or just lose you a bunch of money.
Create a Budget Contingency
Add in a 5% contingency for change orders that will affect your budget. You could estimate your rehab costs down to every nail needed, but there could still be issues that arise that you just couldn’t possibly foresee when creating your budget.
For example, there could be material delays that hold up your project, which increases your holding costs, or opening up a wall and finding dry rot on studs that needs replacing. It is better to be conservative and have a cushion on your budget than to underestimate it.
Find Out Who’s Worked On The Property Before
As you go through the house, look for information on licensed contractors that have worked on the property before, whether for installation, maintenance, or repair. Oftentimes 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 electrician, forced air furnace, boiler, or hot water tank for an HVAC tech or plumber. After James brought this to my attention, I even found a sticker for a plumber on the side of a toilet in one of my other properties.
The contractor may be familiar with the property, which could save you money if you don’t have to pay someone trying to figure out what another contractor did. Of course, you still want to do your due diligence on the contractor and verify they are licensed. You’ll be able to see whatever work they did on that property firsthand, so use that as a guide if you would even want to hire them anyway.
Using A Joint Venture Agreement
Since James and I were partnering on this one deal, it wasn’t worth creating a company together, specifically an LLC. James presented me with a joint venture agreement.
The pros of using a joint venture agreement far outweighed creating an LLC. We were doing one deal together and wouldn’t need anything 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 contributing 50% and was entitled to 50% of the profit.
It also listed out our roles and responsibilities. His LLC would maintain the books, which I had access to at any time, he’d manage the rehab, and I’d fly out to the property at least four times to record walkthroughs on the property. Joint venture agreements still offer liability protection, defined responsibilities, clear expectations, and a legal contract.
Every week was an update. There was an email sent out with the progress on the rehab, any change orders, and what was coming up next. After the property was completed and listed, the updates continued with detailed notes on each open house or showing. As a partner on the deal that was pretty hands-off, this was extremely helpful.
For future deals, I am implementing this process for my partners on deals. It will keep us aligned and on the same page as to where we are headed with the property. Here’s where you need to be cautious, though. There needs to be clear expectations in the partnership as to who is the operator and who is the investor.
Maybe both of you are managing the rehab or just one of you. Either way, you have to trust each other in their roles. James gave 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 get ahead of the shift and decrease our asking price. Right away, I told him that I trusted his judgment. The communication should be informational, and you have to be willing to trust and not overstep.
Even though I learned this through flipping a house, they are lessons or tips that can be carried over to most investing strategies or even partnerships. If you’re new to real estate investing, then 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 opinions written by the author and do not necessarily represent the opinions of BiggerPockets.