If you are a real estate agent or a home improvement contractor, sooner or later you will be having the following thoughts: “I see my clients making money in real estate. I am an essential part of these transactions. Shouldn’t I try to strike it on my own and keep the profits I am helping my clients make for myself?” First of all, I am glad you are having these thoughts. As a self-employed entrepreneur, it’s part of your job to always think always ponder new money-making opportunities. And under the right circumstances, the answer to that question might be a resounding “Yes!”
Keys for Success in Real Estate Investing
There are two pillars to being a successful flipper. First, you need to have a knack for finding the right properties at the right price. Second, you need to be able to manage a successful renovation. You need to be thorough, efficient, and fast – while being laser-focused on producing quality and visually-appealing results. Neglect one of those pillars to success, and you are dead in the water. You either cannot find a good deal or, perhaps worse, are buried under escalating costs and mounting problems of a failed renovation.
This is precisely why not all real estate agents and not all contractors can successfully navigate the transition to becoming a real estate investor. Real estate agents are naturally positioned to uncover hidden gems – homes in distress priced below market. If they regularly represent real estate investors, the time will come when they start wondering why they cannot do it themselves – instead of just helping other people make money. The same goes for the contractors. They might feel as they are bearing all the brunt of hard work while being nickeled and dimed by an aggressive investor. Can’t they strike it on their own and make much more money in the process?
The answer is yes, they can… if their talents and skills expand well beyond the current scope of work. Yes, they can… if they can safely dedicate a certain amount of time to their fledging real estate investing enterprise without negatively impacting their core business. And yes, they can… if they have adequate amounts of capital to support their new venture. Let’s look at each of those components for success more closely.
Private Lender’s Experience of Working with Realtors and Contractors New to Real Estate Investing
We roughly get the same number of realtors and contractors inquiring about our hard money loans. Both groups often have a significant amount of tangential experience in the business but might lack what we call “direct experience” – having their name (or the name of their LLC) on the title of the transaction. That means that though they’ve been deeply involved in some specific aspects of the transaction, they have not been ultimately responsible for that entire transaction.
Realtors tend to convert to active borrowers more frequently than contractors for obvious reasons. They are in a much better position to find a strong deal: after all, their day job is raking through MLS and pursuing deals on and off the market. Many of them go on to have profitable careers as flippers and real estate investors, supplementing and often surpassing the income they derive from selling real estate. But some do flounder.
A year or so ago, we’ve funded the transaction for a realtor in Charles County. Though she had extensive experience selling homes, it was her first time buying and flipping a property. The transaction made sense, offering healthy profit margins based on solid comps in the area. Though her own capital was limited, we were able to convince her to set aside more money for the rehab that she initially intended. However, it soon became apparent that she was overwhelmed by the project’s scope. She was relying on numerous different contractors, all charging retail prices. When the roof problems were discovered, she called a local roofing company. For floors, she called the local flooring company. The kitchen remodel was done by local Lowes. The expenses quickly escalated way beyond the initial estimates and the draw schedule we’ve agreed upon. She was able to finish her project by the skin of her teeth, with her profits significantly reduced. I suspect she would have made more money using that time and effort to do what she is doing best – being a real estate agent.
The contractors have more difficulty finding homes to flip, but once they find something, they often perform better than a borrower without direct renovation experience. Well-established contractors with their own crew and exposure to the latest design trends have a particular advantage. They already have a trusted formula for success and a team that can operate primarily on its own. One of our most successful clients is a contractor specializing in rehabbing commercial properties such as boutique hotels and restaurants. Though technically a brand-new flipper, he hit it out of the ballpark on his first fix-and-flip.
Challenges to Success in Real Estate Investing
However, both real estate agents and contractors do struggle when they are undercapitalized. When we see both groups performing well, they are looking to augment their already successful businesses, not to make extra money for the struggling one. As we tell all our clients, regardless of their profession, being a real estate investor is never a way out of financial trouble. You need to have money to invest and adequate reserves to do it safely.
Time is also a consideration. If you are a real estate agent or contractor, you may ask yourself this question: “Can I afford to spend time developing my newly fledged real estate investing business without taking away from my core business?” Perhaps you just hired a junior agent under you, and she will now be handling such time-consuming tasks as open houses or initial inquiries. That frees some of your time to effectively manage renovations. Perhaps you are a contractor who has a battle-proven crew you trust. You now feel comfortable not being involved in every minute detail and no need to invest your own labor into a project. Congratulations – you’ve reached the point when your time is better spent evaluating potential properties to flip rather than painting the walls for your clients.
The issue of time can be sometimes alleviated by a willing (and competent) spouse interested in partnering with you. We’ve seen many such successful partnerships where spouses of real estate agents or contractors can effectively help them expand into real estate investing without neglecting their primary business. Make sure that your spouse understands their responsibilities and time commitment. Not all domestic partners can work well together, and that additional income might not be worth new conflicts at home.
New Funding Resources is a private lender that funds promising real estate investing opportunities in Washington, DC, Maryland, and Virginia. If you are a real estate agent or a contractor looking to invest in the DMV area, we can help position you for success. Let’s have a conversation today about how to get started.