Real Estate Investing Tips, Issue #014
Rehabbing Houses 1

Regards

Michael Barrett

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~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Today's Topic: Rehabbing Houses 1 - #014 August 29, 2005 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Rehabbing houses seems to be what most people think about when they hear the words ‘real estate investing’. They think of getting a loan, buying a fixer and then rehabbing it, keeping it a few years and then either selling it and trading up or keeping it as a rental, refinancing it and buying another project.

This is and can be a great business and can be a very solid way to create equity through appreciation, elbow grease and tax advantages. In my experience, I have always tended to be a hands-on kind of guy wanting to get involved and do the ‘work’ in any kind of project I get involved in.

Perhaps it is age – and perhaps experience – but I am finally learning that it is always better to ‘delegate’ than ‘do’, when it comes to physical renovations. I can not remember where I heard this lately, but I got it in one of the many online newsletters that I subscribe to – “the four d’s”. This is scribbled on a yellow sticky note stuck to the left side of my computer monitor.

Do
Dump
Delegate
Delay

How does this relate to rehabbing houses and real estate investing?

It relates to the whole idea of focus and using time effectively. Either you:

1) ‘do’ it right now - make the phone call, write the check, schedule the delivery, whatever; or 2) you ‘dump’ it because it is not relevant and will probably end up in a pile of unfinished business otherwise, or you 3) ‘delegate’ it to someone who has more expertise and time or who is personally responsible to you to get it done, or you 4) ‘delay’ because it is not a priority at the moment relative to your overall schedule.

I am trying to retrain myself to focus on key habits that create effective results on a daily basis; instead of being the walking ‘brain child’ who continues to come up with fantastic ideas and, as a result sometimes, doesn’t deal effectively with fundamental practical matters on a day to day basis.

Regarding rehabbing, a friend of mine said something a few months ago that really had impact on me at that moment. She corrected me when I said that I have been pretty successful at quick turning and rehabbing houses.

She said, “You have done really well at quick turning houses, but you really haven’t done very well at renovations.”

I had to stop and really think about what she had said because I realized when I got my ‘ego’ out of the way, that she was correct. She was looking at it objectively and I was looking at it more subjectively in the following sense.

To me a successful project has always been one where I get it done and learn at the same time. Perhaps I enjoy learning as much as succeeding. As I continued to think about this, I realized that this is fine and dandy in school or with a hobby or on the weekends when you are relaxing - but not when you are running a business.

The fact is all that matters in the rehabbing business is:

1) How long did the project last? 2) How much did it cost? 3) How much did you make? 4) How could you do a better job next time? 5) How can I repeat this success again?

This is a whole different approach than visualizing how nice the crown molding will look like in the kitchen after you gut it and replace it with new cabinets, floors, counter tops and appliances. It is imperative to realize that as a real estate investor, your job is to:

• stay on track,
• get really good people to do the work – fast – and within budget, hold them accountable and
• manage the overall project effectively

The hands-on part should be coordinating the alignment of the island with the over head lights when the cabinet installers are there – not doing the work yourself.

It makes sense that I would have trouble with this because I love tools. I used to manufacture carbide tools for woodworking operations and my bookkeeper told me one time that she had bought her husband a belt buckle that read:

"Whoever Dies With The Most Tools Wins".

She told me, "I really should have bought that for you."

Back to evaluating rehab performance...

I realized from a practical standpoint that I have personally been too involved with the rehabbing process myself – historically, over the last couple of years. In evaluating the deals that have been most successful for me, I realized that each one involved all the principles of good investing that the gurus have been talking about the whole time.

One: Sell Fast

The longer you keep the house the less profit you make. This involves all the hidden holding costs that are easy not to notice when you aren’t writing checks for them every day, like:

Prorated property tax
Interest on the rehab money
Utility bills, etc…

Generally this comes out in the wash at closing either when you refinance the property after you have created more value through renovation, or when you sell it to a new buyer.

Two: Control the closing

If you control the closing from start to finish, you can create the financial results you want and catch errors along the way – as they develop and before they get out of hand.

Three: Don’t write big checks.

The infamous Ron LeGrand command.

Four: Use the KISS principle.

Keep it as simple as possible. Greg Pinneo always says, “Eliminate the moving parts.”

In retrospect, in five transactions, I have violated one or more of these rules over the last several years. The interesting part is that none of the deals that went really smoothly - and were relatively simple - had anything to do with rehabbing a house or construction. Every one of those mistakes and violations cost me money – and some of them were very expensive.

Following through with my evaluation, I started getting more feedback from fellow investors and members of a small ‘rehabbers’ group in Seattle of which I am a member and participant. I am approaching all aspects of rehabbing differently from here out – and very clearly – I will no longer be involved in hands on renovation on a regular basis.

This is difficult for me because I really enjoy the work.

But I had to realize that I am not in the contracting business, I choose instead to be in the real estate investing business.

I may, in fact, start a contracting company at some point in the future – but as a principle and not a carpenter. I also had to face the fact, that while I do really good work, I am slow because I don’t do it enough.

Recently, I got Chuck Smith’s Quick Turn Courses and am really paying attention to his advise as I study.

Find out more here if you are interested, Chuck Smith info here...

Why?

Because he knows what he is talking about. He has quick turned over 1720 houses in 8 years and what do you think his advice is about rehabbing houses?

“If you are inexperienced, do not get involved in rehabbing. Wait until you have a well developed team of experts on your team that you can rely on and have experience working with.”

He also suggests that he only does rehabs in 30 days or less – even major ones. That takes management skill, good planning and experience. The more I listen to him the more it makes sense. It is hard for me to imagine getting two of the major rehabs I did in the last two years done in 30 days. That tells me I need a better team and need to focus on orchestration and delegation, and I also need to focus on transactions that are not so complex, unless there is significantly more money on the table when the dust settles.

For me complexity means – in some strange way, historically - that somehow I have done a better job or am more capable, because I have been able to figure it out and conquer the complex aspects of something. In reality, it has only meant that often I have gone around in circles focusing on complexity instead of ‘the simple’ and the easy.

Another factor that is important in Chuck’s communication, as I study his course, is that he always has a buyer (or an exit strategy in place) before he buys a property.

Greg Pinneo also says in his lectures that part of his definition of a rehab is a 30 day project, that is, getting in and out, lock stock and barrel in 60 days or less.

Greg has another reason for this that makes a lot of sense. One of his base criterion for this choice is that the market can change in 6 months to the negative. So this is also a method and procedural mechanism for minimizing risk.

By the way, Greg is actually a very experienced builder and an excellent carpenter, where I am not.

Speaking Of Simplifying and Staying Focused

As part of my self evaluation process and refocusing efforts, I have had the fortunate experience in the last few months to learn from and meet a man named T Harv Eker. One of the primary reasons I am able to really be honest with myself about all this stuff and let go of a lot of the emotional garbage and take a real look inside of myself is because of this man and his teaching.

I had a life changing experience attending his seminars and workshops. I can’t say that the same thing will happen for you as it did for me, because we are different people and have different life experiences and abilities, but I think a lot of people achieve great results from his training. I have seen this repeatedly in the six events I have been involved in since May.

I would highly recommend attending his “Secrets of the Millionaire Mind Intensive”. If you click on this link you can buy his book and get two free tickets with the purchase of the book. If you choose not to buy the book, send me an email and I will mail you two free tickets myself to attend one of events this fall. It will not be free much longer.

This is really an awesome seminar.

If you really want to succeed at real estate investing, whether you are rehabbing houses or not, get your head and your heart right, it makes a big difference. I can not sincerely express my gratitude enough to T Harv Eker and his staff for what has happened and continues to happen in my life, except to pass it on to you and wish you the best with it.

All of these processes and self evaluation have led me in new directions in my life – in real estate investing, friendships and relationships and day to day life. I am sharing this with you because in some small way if I am able to provide even a part of what I have experienced through this, I want the same for you because it has made such a big difference for me.

In conclusion, if you are going to get into the rehabbing business – or you have done some rehabbing and have had a hard time with it (and I do recommend it by the way) build a buyers list and build your team.

Delegate, delegate, delegate.

Stay away from rehabbing houses in the very beginning. Only do deals where you can get in and get out quickly or where it is simple to execute the deals with as few moving parts as possible.

Start taking an attitude of really enjoying the work of real estate investing as a business and have fun everyday. Quit working so hard and start working smarter.

Simplify and focus.

And do something special for yourself and your loved ones regularly – every month. You deserve it and so do they. We all have a tendency to take ourselves too seriously and why should having fun and loving life be serious?

Laugh more.

Don’t get into rehabbing houses until you are ready and be clear about accounting and costs when you do. Get your crews in there and get the work done while you are on a cruise with the special people in your life or while you are buying another house.

That's it for this time...

Regards,

Michael Barrett

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