Chapter 1

What Kind of Investor Are You?

You need to do one thing before even looking for an investment property:

Figure out if you want to be a house flipper or a landlord.  They are two different paths that require two different strategies.  

Flipping houses is a faster way to make money. You can use a hard money loan to finance the majority of the purchase and renovation, get approved much easier than you could for a traditional mortgage, and buy a property in just two weeks. You’ll need pay around 20-25% of the after-repair value (price the property would sell for after renovation) as a down payment and around 2-3 points as well. These points are one-time fees charged by the hard money lender and each point is equivalent to 1% of the total loan amount. You’ll also be paying around 12% in interest-only payments, so it’s important to get in and out of deals quickly.

Hard money lenders can be expensive, but being able to close on a deal in two weeks with little due diligence required allows you to offer favorable terms to prospective sellers.  Sellers love the idea of selling their property in just two weeks, and you can leverage this convenience to buy at a discount.

It takes practice to buy the right property at the right price, however, and with increased leverage comes increased risk.  Learn how to assess the condition of properties or partner with someone who does before attempting a flip.  You need to have an accurate budget for your renovations, or you’ll risk doing a ton of work for no money or even a loss. 

Some of the most expensive repairs are not something most people would notice.  It’s okay to bring a contractor in to look at a house with you, but keep in mind that you’re trying to get a good deal by buying a house that needs work.  Don’t focus on aesthetics or small repairs. 

Buy and hold investing is a more dependable but slower way to become wealthy.  It allows for a consistent income that can be automated over time.  Landlords also benefit from favorable tax advantages, mainly depreciation and 1031 exchanges.  Buy and hold investing also comes with a couple drawbacks (of course).

First, you’ll need to use a traditional mortgage lender since hard money lenders charge high interest rates and fees.  You will need to have anywhere from 20-25% of the purchase price available for a down payment unless you live in the in the property and your financing timeline will take anywhere from 30-60 days.  You will receive cash flow, but don’t expect to make your money back for at least 5-7 years unless you plan on refinancing within the first couple years at a higher valuation.  

You will also be in the landlord business with all its joys and terrors.  Tenant management will become a necessary skill.  It’s a combination of being someone’s friend, parental figure, business partner, and psychologist.  It’s not as easy as just running credit—you will need to develop the ability to judge potential tenants’ personalities and their ability to coexist peacefully with each other. Even the most professional landlords and tenants will need to have some type of relationship, and oftentimes, not a particularly pleasant one.  If you are an irritable person with sky-high expectations of your fellow human beings, then you may not be cut out to be a landlord.  

Here is a quick summary to help keep organized:

Flipping Houses
-More money required up front for downpayment
-Easier lending requirements
-Faster return on investment
-Riskier, much greater potential to lose money
-Higher level of knowledge abouthouses needed and less forgiveness for mistakes
-More susceptible to market swings
-More time/attention required
-One opportunity for profit. Once the house is flipped, it can no longer be monetized. 

Buy and Hold Investing
-More predictable.  Even if the market drops, you’ll still make the same amount of cashflow assuming you can keep the apartments rented.
-Dependable income.  You don’t need to constantly source new deals.
-Tax benefits like depreciation and 1031 exchanges
-Scalable and you can hire someone else to manage the property for you and/or automate processes over time
-Can learn as you go
-Dealing with tenants (assuming you don’t hire a property manager)
-Stricter lending guidelines
-Capital is locked in an illiquid asset
-Need a plan for maintenance, snow removal, landscaping, etc

So Ask Yourself: What are my goals, limitations, and strengths? 
-If want a safe approach to building lasting wealth, then buy a rental property to hold for the long term.
-If you obsess over water bills and the possibility of tenants having overnight guests, then don’t buy a rental property
-If you’re working full-time and don’t have a lot of time, then look for rental properties that you can automate or pay someone else to manage.
-If you’re starting out and want to quickly build a war chest, then focus on flips. 
-If you don’t know the difference a joist and a GFCI, then don’t try to flip a house without help.
-If you have time and know how to do fix-up work yourself, then you would probably make a good flipper. 

Figure out what kind investor you want to be, and then start looking for the right property to fit your plan.
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