Archive for April, 2015

Builders – An Excellent Source Of Buyers To Have On Hand

We always hear how it is important to get a solid Buyers list whether large or small but ultimately of people that can perform. One such Buyer that is relatively untapped for wholesalers are Builders. These are in many ways some of my favorite Buyers because they can oftentimes pay higher prices than investor Buyers who have to hire them. Let’s take a look at why this is:

  • Builders can choose whether or not to pay themselves during a build process. If they choose just to get paid on the end profit, this averages a savings of 15-20% that an investor Buyer would have to pay to them.
  • Builders can save on their construction costs by not marking up anything. Investors are often billed a markup for these materials costs since they or their subcontractors have to source and pick up the materials.
  • Builders save on the overhead of timing. Time is money and a builder has less people to coordinate with to accomplish building a house whereas an investor has to manage more people.
  • Builders may do some of the labor themselves. Some of them just love to get their hands dirty no matter how good their crew is.
  • Builders may have their own capital. Many investors leverage private capital but a well funded builder may have their own capital, thus saving on interest fees.

When you start mixing some of these potentials savings together, you can see how they can pay more for a house than an investor can thus making the difference in having a deal done vs having no Buyer. Let’s look at a specific example.

The market in Atlanta has been hot and new construction is picking up momentum so now is a great time to leverage this information to wholesale your deals to these Buyers. You can get some handsome profits as a result. Let’s dive deeper, shall we?

Let’s say, we want to build a 2000 sq. ft. house on 123 Main St. The projected ARV of the house is 500k. Using 70% of ARV for a safe number to be within, that give us $350,000 to work with max.

The land can be acquired for $80,000 by an investor that perhaps wants to try building a house. How would these numbers break down for the investor and a builder?

Let’s start with the investor:

  • Land price: $80,000
  • Closing costs: $1800
  • Prep costs for survey, site planning, architectural costs, engineering, permitting – $13000
  • Construction Costs for Moderate Finish Home – $90 sq. ft. x 2000 = $180,000 – includes 20% for profit and overhead for the contractor
  • Total subcost for project: 274800
  • Private capital at 12% for one year for everything: $32976 (274800 x .12)
  • Total project cost: $307776

While with an ARV of 500k, these numbers are certainly attractive, however not every investor is ready to take on a significant project of this magnitude nor have the track record or private capital available to pull it off. So what if the investor wholesales the deal? What would the builder’s numbers look like?

  • Wholesale Land price: 125000 – builder pays with their own capital
  • Closing costs: $1800
  • Prep costs for survey, site planning, architectural costs, engineering, permitting – $13000
  • Construction Costs for Moderate Finish Home – $70 sq. ft. x 2000 = $140,000 – contractor absorbs this upfront and banks on profit potential
  • Construction loan at 5% for one year, plus 1 point interest from a local bank for everything but the initial purchase: 9288
  • Total project cost: $289088

Notice how the savings on private capital and construction costs allow for the purchase price to be higher yet the total project cost is still lower. There are numerous ways to calculate these numbers as every Builder is different however the key point is always the same. Builders, especially funded Builders whether by their own capital or leveraged can almost always pay more for a new construction project than an investor can. In the process, the wholesaler can make a hefty $45000 fee and still leave over $125,000 in profit potential for the builder. With that kind of room, the builder can do things to make his product move faster, add touches to further its value, add incentives for their Buyers and so forth. A true win for everyone!

As a wholesaler, I would strongly recommend reaching out to Builders and get to know the ones that buy for investment purposes. Keep them close on hand when you have a deal that fits their criteria. Some very handsome profits that create nice win-wins all around are very achievable as a result!

Frank IglesiasFrank Iglesias is an active wholesaler, rehabber and landlord in the Atlanta metro area who enjoys creating win-win real estate transactions. Leveraging a mostly virtual staff, Frank has taken working with virtual assistants (VAs) to a high level where they do the majority of the work necessary to run his real estate investing business. As a result, Frank is able to do less while accomplishing more so he has the freedom to spend more time with friends and family and teach others to do the same. Frank is also the leader of the Atlanta Wholesalers Group.

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The Way You Spend Your Money Can Make a Huge Difference Creating Your Real Estate Wealth – Part 2

The real beauty of owning rental property when the seller will allow you to pay them directly every month allows you to collect rent from each rental property you buy to pay for those properties.

The key to make this strategy work is to buy each income property so a tenant who will be renting the property will pay enough rent each month to cover 1/12th of the annual property taxes, 1/12th of the annual property insurance cost and at least 10% to 15% of the monthly rental income to cover the cost of the maintenance for that property when needed. This money for maintenance is set aside to pay for making the property look new when a tenant moves out such as new carpet, paint and any other damage to the property the tenant did during their stay. Also money for when the roof on that property eventually wears out, when the water heater eventually goes bad or the furnace or air conditioner breaks down and also enough money remaining each month to make the monthly payment to the seller and hopefully provide extra money each month for the owner to put into their pocket. Here is an example to show what I am talking about.

For this example each rental property brings in $1,000 in rent each month. This is the formula I use to determine if enough rent collected for each potential rental property to support itself and also provide extra income for the owner each month.

Example

This excess money from the (9) nine rental properties gives you, in this example, $900 each month to make the payment on the house you and your family live in. If you deduct the $600 from the extra income from the rental properties which is $900 each month ($900 – $600 = $300) leaves you an extra $300 each month to cover the cost of the property taxes and the property insurance for the property you and your family live in. If you did this simple example the house you live in would truly be FREE.

So as you can now see it would be far more advantageous for you and your family if you use the $100,000 dollars you have saved by dividing the money into $10,000 increments to use as down payments and buy a total of ten (10) properties than to buy only one house. Here is how you can use leverage to create wealth using this strategy.

Over the next (15) fifteen to (30) thirty years you not only lived in your home for FREE your tenants went to work every day to earn money to give you every month in the form of rent you use to pay all of the costs of each rental property and give you extra money each month to pay for the house you live in. Someday when all (10) ten properties are completely paid for you then no longer owe any monthly payments to sellers for any of your (10) ten properties and even if the value of all of your properties never increased in value over that time you would still have a net worth of $1 million dollars (10 houses X $100,000 = $1 million dollars).

Once all of your ten properties are completely paid for the rent each property brings in each month minus 1/12th of the annual property taxes and 1/12th of the annual property insurance cost and 10% of the monthly rent from each rental property has been deducted for needed maintenance costs, all of the remaining money will be yours to spend or save as you wish because you no longer have to make a monthly payment to the sellers you bought the property from. This income from all of your rental properties minus these costs could also be used as a nice pension plan to allow you to live a better life in your retirement years. The question you need to ask yourself……

Why Would You Only Want to Own One House Valued At $100,000 When You Can Own $1 Million Dollars Worth of Real Estate With the Same Amount of Money?

This is just one way “Leverage” can help you create wealth for you and your family.

This is why I always tell everyone to definitely be conscious of how they spend their money or their ability to borrow money. By just thinking a little differently, you can and will definitely compound your future financial wealth and get to financial freedom sooner.

Until Next Month, Good Luck and Happy Investing!

Larry

Larry HarboltLarry Harbolt is the nation’s leading creative Seller Financing expert as well as a popular national real estate speaker and teacher whose time-tested strategies and nuts and bolts teaching style has helped thousands of aspiring real estate entrepreneurs realize their financial dreams with little or no money and without the need for credit. Larry has been successful creatively buying and selling real estate for over 30 years and has written numerous popular articles and real estate courses.

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