I always enjoy the real estate investor stories where the person put the time into learning about a particular investing tool (such as flipping), established an awesome network of mentors to help/guide, then decided to take massive action thus knocking the flip out of the park. From that time on, they were hooked.
My most recently sold flip didn’t quite fit that narrative – but I sure did learn a hell of a lot. At a recent real estate investing summit, Scott Lewis of Spartan Investment Group (http://spartan-investors.com/about/) shared that if you are going to get into real estate investing, you’d better “be prepared to get punched in the face.” I was right in the middle of a hellacious flip where a punch to the face would have been preferred. This flip was kicking me in the face and then punching me in the mouth when it wasn’t kicking me.
The series of events that unfolded over a 7-month period became rather comical as the saga continued to drag on. From losing 10% of the land amount to a title dispute, to wood termites, contractors not finishing but getting paid, sales contracts falling through as well as a last minute mechanics lien. I had to laugh to keep from crying. Some of the mistakes are so obvious now that it is painful to reflect on. I may one day write a book on the ordeal (it will be in the comical-horror genre). For now, the most effective thing I can do is get some of the high-level lessons learned listed out for others to learn from and make DAMN SURE I never make the same mistakes again.
1. Review HUD-1 or settlement statement
Before going to your closing, be sure to get the good faith estimate or settlement statement and HUD-1 at least 24 hours in advance so you can review each line item. As a borrower, you are entitled to view the HUD-1 form 24 hours before the actual settlement. That 24-hour period is critical to allow you to ask questions and verify accuracy. If you are using a real estate agent and/or a title company to close on your purchase, they should help ensure you get this. However, not all agents or title companies are created equally so you need to make sure you stay on them both to get the documents you need for adequate review prior to closing.
Some things that stuck out on my HUD-1 were an excessive “assignment fee” from a wholesaler and a pre-paid payoff “bonus” where the hard money lender actually charged me up front and held my money (over $2,000) for when the time came that I paid off the loan. Assignment fees may be a necessary part of the transaction as well as “bonus” payoffs from hard money lenders. The point is, you should know what each line item is and why it is there BEFORE you ever walk in to sign.
The simple lesson here is – GET OUR HUD-1 TO REVIEW 24 HOURS PRIOR TO CLOSING.
2. Contractor Draws and Inspections
During critical points in the project, I was traveling overseas for my W2 income job. The timing was less than convenient for both me and the contractor – with me traveling and the holiday’s fast approaching on a project delayed time and time again. Ideally, I would have had a contractor who honored his word or an inspector on my team who ensured my interest was 100% protected prior to releasing funds. I failed to do this though and I paid the price. In hindsight, I would have been better off telling the contractor to not work on my job during my travels. That way, I could inspect his work myself prior to paying him.
Contractors are amazing creatures. I have met some amazingly talented and honest ones. I have also met some who will put duct tape in place of an A/C vent on the ceiling.
The simple lesson here is - YOU must either inspect the work yourself or YOU must have a trusted business partner/associate/employee who has nothing but your best interest in mind. Once the check is cut, all leverage is lost and no one (contractor or friend that was helping you out) seems to care quite as much as you about the shitty work done or the money you lost having to re-work and repair.
The responsibility to control that situation starts and stops with YOU – so MAKE SURE YOU COVER YOUR OWN ASS AND INSPECT WORK YOURSELF.
3. Conduct Inspections
I saved about $50 on a termite inspection that I could have had performed by my quarterly home servicer. That $50 savings prior to purchase cost me over $4000 at the end of the flip when it was discovered that dry-wood termites had been actively inhabiting the house for months. Ultimately, the new buyer of this property allowed me to treat the termites while we were under contract. That was lucky though – many buyers will run like hell when termites show up. And I don’t blame them.
Now, before we buy, I do a little bit more than just kick the siding around the exterior walls. A few simple termite signs to look for are found in this link: https://www.angieslist.com/articles/5-signs-you-might-have-termites.htm
The simple lesson here is - PAY FOR A DAMN TERMITE INSPECTION BEFORE PURCHASING.
4. Title Company issues
There were two title companies used during this flip transaction – one at purchase and one at sale.
The title company that I chose and used to sell my property did their job and discovered a 5,000 square foot plot of land in the back of my 47,000 square foot property that had been previously sold to another buyer (two years earlier).
The title company I did not choose but did use to purchase my property failed to make that same discovery when I was buying.
The result of the purchase transaction title company not doing their job adequately was a loss of 9.9% total land area that I thought I owned and represented as I was selling. In dollars – it was in the 10’s of thousands.
Simple minded folks, like myself, would think that title insurance is paid for at purchase by the buyer to prevent the buyer from being out of pocket if it is found later that the land they purchased is in fact, not land they own. Depending on the title company and the title insurance group involved, that is not always the case. Just like lenders and agents, there are good ones and shitty ones. The good title / title insurance companies stand behind their work and protect buyers from purchasing property that they do not own. The shitty ones do not. The result of using a shitty title company and title insurance group seems to end up with them forcing you to sue them to do the right thing. Don’t worry – Title Insurance and ways to protect yourself before, during and after your purchase is an upcoming topic.
To eliminate the possibility of falling victim to a shitty title company or shitty title insurance group, YOU can have a new survey conducted (or negotiate the fee during purchase if you have a good agent or are working with an aligned wholesaler). A survey (typically) costs less than $500.
The simple lesson here is – if you are purchasing a property where land equates to a fair amount of the overall value of the asset you plan to sell, then it is in your best interest to get a new survey done. This can help mitigate the risk of relying on a title company or title insurance group to do their job. To protect yourselves as home buyers you should insist on an Owner’s Policy with a Survey Endorsement based on a professionally prepared current land survey.
The lessons learned on this flip may end up costing tens of thousands of dollars in potential profit when you add it all up.
In summary, make sure you:
Do you have any key items you would add to this list of simple lessons you've learned on past deals - perhaps the hard way?
Please share in the comments below.
Selecting a real estate niche to focus on can be a daunting task, to say the least. The sheer volume of real estate niches to participate is simply overwhelming. From buy/hold to rehab/flip; from notes, to rentals, to AirBnB; from single family to commercial (multi family, self-storage, office, mobile home parks, etc.) - the list and combinations of ways to get involved in real estate seems endless.
I share the story of how my interest in real estate went from a hobby to a necessity HERE. Suffice it to say that my reasons for investing in real estate and business are very personal to me as the platforms have helped to bring a level of financial stability to my family during a very tragic time in our lives. From certain events that occurred in 2016, I have developed (and continue to actively build) a rather unique portfolio of investments in a variety of asset classes. While some of my real estate investments are active (flip/rehab and note investing), others are passively made through syndications (multi-family, mobile home parks and self storage).
Some people have very passionate positions related to only focusing on one niche at a time. While I agree there is value in that, I ultimately believe a selection of niches to get involved in are best chosen when one gets educated, establishes clear goals taking into account their "why" and assesses their unique skill sets accompanied with their time available.
EDUCATION & MENTORSHIP
Learning a new subject, for me, is a process and takes a lot of time. I am very analytical in nature. Ultimately, I learn best by experiencing (seeing, touching, feeling, etc.) as well as reading and studying. I enjoy receiving feedback and personal growth (both on my own and in a team environment). To just read, I cannot comprehensively grasp various concepts. In real estate and business, failure to get adequately educated can be a rather expensive misstep. I have spent a little over a year reading books, listening to podcasts, attending classes and investing in myself. Without a multi-faceted approach to education, I would feel less than adequate as I set out to put my money (or my family's) to work.
I started my education, like many, by reading Rich Dad Poor Dad. From there, I played board games, read articles, attended meetups and listened to podcast interviews. From there, my web of resources continually grew. For example, I listened to a podcast interview, dug into the guest’s website and content and found three other resources. Every week I was finding new content. To this day, my network of tools and resources seems to grow by the week from reading/listening and then digging around the internet for other guest content.
As a side note, who you get your educational resources or mentorship input from is an important step. After some bad choices, my decisions are now based on input from people I trust who have used or worked with the same people offering training or mentorship. I am no longer the guinea pig. There are many guru’s out there teaching lessons that may be applicable in some circumstances and not in others. Ultimately, you have to make educated decisions on who to listen to or what deals to invest in. I would suggest that you achieve some level of alignment with any of those parties by ensuring their interests and yours are consistent and fair to you. If they can win (big or small) while you lose alone (big or small), that is not alignment and not a mentor or resource worth investing your time or money with.
YOUR "WHY" & SPECIFICS
Ultimately, the selection of where to focus your money and energy needs to be fully aligned with your WHY. If it is not, it will be nearly impossible to maintain momentum or push past obstacles when the going gets tough.
For me, I have a goal of financial independence through multiple streams of income. Ultimately, my WHY is to provide stability and peace of mind to my family allowing us to live a life of fulfillment. I lose sleep thinking about having all of my eggs in one basket (W2 income job, single property, single region, single business, etc.). Other people are perfectly content having diversification in a single niche (multiple assets in one zip code or city). Neither method is right or wrong. Both are right based on one’s WHY.
My company missions contain specific language related to diversification of income streams and capital preservation. My vision boards and sticky notes remind me daily that I MUST FOCUS on ensuring that I develop and maintain these multiple streams of income.
With the income streams in mind (driven by my WHY), I segment that into my household’s goals and that of my mom’s retirement. This segmentation may be unique to my situation, but the principles of each segment apply to anyone.
Segment 1 – my household/personal financial goals
For my household, in addition to a W2 income job where I have a small equity interest and fiduciary responsibility, I have chosen to focus on generating additional monthly cashflow through real estate and digital business investing. To accomplish this strategic scope of work, JBG Capital was born. In real estate, I create mortgage notes in target zip codes where rental rates and rehabbed property values merge to form a unique opportunity for renters who want to be home buyers. This is conducted through a partnership, NoteFlow. We will get more into my reasons for creating mortgage notes (acting as the BANK rather than the landlord) as well as the power of a partnership in another post.
As a side note to this post - In the digital arena, I buy existing web-based businesses (affiliate, AdSense and e-commerce) where I can make slight tweaks to existing operations to realize immediate increases to the bottom line. Again, we will get more into my thoughts on each monetary model in another non-real estate specific post.
Each of my cashflow focuses requires my active participation currently. However, the long-term vision is to set up each cashflow funnel to operate with its own management, then becoming passive for me and allowing me to spend my time doing things I find more fulfilling.
Segment 2 – my mom’s financial investment goals
As the stock markets fluctuated, we found ourselves worried about the potential of my mom’s monthly income being negatively impacted during a down turn. Rather than sit on the sideline waiting for that day to come, we decided to act by forming M56 Capital.
In order to achieve diversification to a level we felt most comfortable, we have chosen to get 65% of our capital into passive real estate syndications and 35% in balanced market holdings.
Our family’s objective with this investment split is to have the syndications produce repeatable income protected by physical assets and spread across multiple asset classes and geographic locations throughout the country.
When reviewing a deal, we are most concerned with the OPERATOR/SYNDICATOR and then the business plan they plan to execute. Further, from a very high level, we look for:
Based on the business plan and opportunity presented, the investment return is more of a rule of thumb – not a requirement.
SKILLSETS & TIME AVAILABLE
The next things to consider when choosing a real estate niche is understanding what your skillsets are and how much time you have to spend. Time spent means not only project execution in a niche but the education to learn how your niche works, as well.
One usually has a good idea of where they may be strong or weak on specific tasks. If not, it will be exposed through experience as you get involved in a niche of interest.
Single family investing
Through my experience on personal rehab/flip as well as renting, I had a difficult time babysitting the progress of each project or tenants. With a W2 income job, I struggled to find the time to manage each project (contractors, inspections, etc.) as well as adequately service my rental when something came up. A better contractor and outsourcing property management are both ideal solutions to each of my issues but I was unable to effectively pivot for various reasons on each example.
As a solution to filling voids where I lacked proper skill or time, I was able to plug in an aligned business partner by forming Noteflow. Through a relationship I had developed over 6+ months, I decided to partner with an experienced full-time investor that could offset the areas I wasn’t able to cover well. I enjoyed and was better at sourcing capital (private and institutional). I also enjoy the regulatory and compliance related matters of our business model when inserting consumers into home mortgages. This is something my partner can do but is able to leave to me so she can focus on other areas where I either do not have time or am not good at.
Commercial Syndication investing
I believe in the power of multiple doors and the economies of scale one can achieve through proper business planning and execution. I don’t like the idea of not collecting income on an asset just because one guy moves out or one industry’s growth bubble bursts. With time, I plan to get actively involved in the commercial syndication arena. At this time, with my stated mission, available time and other fiduciary obligations, I have decided to align myself and my family’s capital with trusted business partners known as syndicators or operators.
Not being an expert in any of these specific asset classes, I find myself learning a massive amount and networking considerably as I look to find partners that align with our goals and values. Next week’s post will cover the methods I use to determine which deal as well as commercial syndication/operator to invest in. That is a whole other animal (and a critical topic, for that matter).
As stated previously, I believe in the power of diversification. Not only in niche or business types but geographically as well. To meet our diversification goal, M56 Capital currently has invested passively in:
If you can get a solid foundation based on education to build from, you are focused on your “WHY” and you have clarity on your unique skillsets as well as time availability, your choice to pick one niche or multiple is well justified and can be successfully executed.
What do you think?
Is it better to have just one niche as your sole focus or multiple?
Please comment below.
Justin Grimes has been an active real estate investor since 2007 participating at various levels in asset classes from single-family rehab and mortgage note creation to multi-family, self storage and mobile home parks.
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SALES LEAD GEN.