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How to Make More Cash with Real Estate

September 24, 2014August 8, 2012 by Julie Broad

Think Buy and Hold real estate is your ticket to early retirement?

For the odd person with luck and good timing on their side, it can be. For most people, unless you’re talking early retirement in 15 – 20 years, it’s not.

Buy and hold rental property is a critical component to every real estate portfolio. I think it is THE greatest wealth creator over time, but if you want to live off your real estate without waiting to pay off the mortgages or working your butt off to buy 100 houses, then you’ll need to find a way to bring in some cash today.

Besides holding down a job to pay your bills which is a great strategy if you like what you’re doing (it will be MUCH easier to get financing for your deals if you have a job!) most real estate investors create their cash today using one of the following five strategies:

Wholesaling or assignments
Flipping
Becoming a realtor
Creating a property management business
Adding a strategy like rent to own that will increase your cash flow on a monthly basis. (this is what we did when I quit my job four years ago).

So what are each of these strategies?

Wholesaling to Make More Cash with Real Estate

Wholesaling is basically where you do all the leg work to find under market deals and get them under contract. Then you assign them to someone else for a fee.

Traditional wholesale models are where an investor just wants to be assigned a profit producing property. You put in the effort to market, filter and negotiate the great deals and build a network of investors that will buy the deals off of you, and then when you have a good deal you assign it to an investor.

This model is a great way to add thousands of dollars to your pocket ever deal you do. Of course, the challenge with wholesaling is you always have to work your funnel of deals and build your investor network so you have supply and demand for the product. It is a lot of work – but it does help fill your bank account once you get your systems in place.

Flipping to Make More Cash with Real Estate

Most people think they know what it takes to flip a house thanks to all the tv shows on the subject.

Ian Szabo, a guy who knows what it takes to make $50,000 – $150,000 on a flip (he does 2 or 3 like that a year), author of From Renos to Riches, and creator of FlipSchool.ca says he flips houses in two ways:

Buys a derelict house in a great area, fixes it up, and sells it for a juicy profit.
Buys a house that needs work, adds a legal suite, refinances to pull out all his money and some profit, and then rents it out to make cash flow.

Flipping is a high-risk strategy, however, and even Ian doesn’t recommend anyone approach it without a back up strategy in place.

With the right strategy, the right house and the right plan, most flippers starting out can make about $30,000 on a flip, according to Szabo. And that’s about right! One of our VIP Coaching Clients just finished her first flip & made pretty close to that too.

With that kind of profit potential, you’d only need to do one or two a year to really fill in your ‘cash today’ needs.

Becoming a Realtor to Make More Cash with Real Estate

We don’t have an official survey or anything but I’d venture to say this is one of the most common ways real estate investors make their cash today. When you’re an active buyer of real estate, it doesn’t take too many deals where you see your agent make $10,000 in commission for doing minimal work, to begin to see the value in working as a realtor on your own deals. When you also consider that you can help a few of your investor friends and make a bit of commission on their deals too, it can be very appealing for you to become a realtor to satisfy your needs for cash today. Plus you’ll get access to all the MLS data for your area.

That said, it IS a distraction. No matter how little you do as a realtor it takes time and money to have your license. We’ve considered it but ruled it out because we think that it will distract us from our primary business which is buying real estate. There are some other challenges with being a realtor and an investor such as ensuring you follow disclosure and other licensed realtor rules. Further, there can be considerable ongoing brokerage and marketing costs to stay licensed as a realtor.

For many investors though it’s been the ticket to freedom. If you can stay focused on your investment business and build a successful side business as a realtor, this seems like a very popular way many real estate investors make cash today.

Creating a Property Management Business to Make More Cash with Real Estate

At one point, with property all over Canada, we were working with 6 different property management firms. When we quit our jobs and began to spend more time evaluating our cash flow, we began to spot a lot of cash leaks.

To plug some of the holes, we began bringing our property management efforts in house. With the money we saved on property management expenses each month we could afford to hire someone to help us. By doing most of our own property management, we find that we make more money every month and spend less to do it.

Many other investors come to this conclusion as well. And if they do their own property management well, their investor friends take notice and ask for help managing their properties.

But it takes a lot of work and it’s not exactly fast cash. You also should take note that some provinces require a Property Management license to manage properties that are not your own.

Rent to Own to Make More Cash with Real Estate

Rent to own is when a tenant rents your property with the option to purchase it. You set their purchase price at the beginning, they pay a fee for the option to purchase it in the future, and a portion of their rent is a credit which builds up over time towards their purchase.

It generates more cash flow because the tenants are paying a higher than market rent for their property in exchange for credits that build up towards their purchase and they are responsible for basic maintenance. You also don’t typically need property management because of the quality of tenants that move in and because they are responsible for taking care of repairs up to a certain dollar amount ($300 in our case but many other investors have their tenants handle up to $500 or even $1,000).

When I quit my job, we evaluated all of the options for cash today. Wholesaling requires constant marketing and funnel management. If you’re not constantly finding sellers and buyers you aren’t making money. Flipping is stressful and higher risk. It also requires you consistently be working on a flip or you won’t be filling your cash needs.

We felt being a realtor would reduce the focus from our own deals and since we were planning to do a deal every month or so, we knew we’d need a lot of focus for that. And property management is not something we really enjoy, so we didn’t want to create a business around it.

That left us with rent to own as the best solution for us.

By changing a few of our existing rentals to rent to own, and adding just a handful of rent to own properties to our portfolio we were able to boost our cash position with the option fees and the increased cash flow to a point where we felt comfortable financially from our real estate holdings. We also like the fact that rent to own helps good people get into home ownership. Our rent to own tenants give us big warm hugs, invite us for dinner, make us handmade thank you cards and invest in fixing up the homes.

We do have to continue to add properties in order to keep the cash flowing because rent to own deals do turn over every 12 – 24 months after purchasing them. That has largely been the reason we so aggressively added property to our portfolio in the last three years adding 10 – 12 new properties a year. But we like rent to own because if we want to take a month off from working on our deals, we still make money. We can’t say that about any of the other strategies.

And for us, our real estate business has been created so we can live the life we want. For us we wanted to maximize our freedom and minimize the amount of ongoing work that has to be done in order to generate the income we need.

Regardless of how you do it, if you want to become a full time real estate investor, you’ll need to find a cash today strategy that works for you so you don’t have to wait 10 years before you can call it quits.
Image Credit: © Sorin Alb | Dreamstime.com

Flipping Real Estate: A Rev N You Reader’s Tale

December 11, 2012March 29, 2009 by Dave Peniuk

Susan* and her two partners hit the streets in Toronto earlier in 2007 to find a payday by flipping real estate. Their mission: to find a really beat up house in an up and coming Toronto neighbourhood, fix it up and sell it within 5 months.

The three of them wanted to gut the property and renovate just about everything in the house. They expected to do all the big jobs from ripping out walls, redoing the plumbing and wiring, to putting on the finishing touches! Unfortunately, Susan tells us the “planning” was A LOT easier than the “doing”.

Flipping Real Estate Sounds Easier Than It Is

This wasn’t their first reno project. Susan and her two partners had undertook a smaller project in early ’06. With that experience under their belt, they decided to take it up a notch with this project. The house they found was in need of a large scale renovation. They purchased it using some cash and an Open Variable 5 year mortgage (the rate and payment floats with the Prime rate and there is no penalty for paying the mortgage out within the 5 year term). They anticipated it would take approximately 4 months to complete the work and a few weeks on the market to sell – it was going to be a masterpiece!

Well Murphy’s Law was busy during this project. The basement flooded due to shoddy, unlicensed “plumbers” cutting the water main line inside the house. The dumpster bin outside the house was being filled by neighbours while the walls were ripped out over a painfully slow 3 weeks (and the neighbours didn’t help pay for the extra costs of the garbage). And the best part, during the delays and stress, the workers were playing the partners against each other! One would say “Jack said it was okay that we do this with the wiring”, while Susan was trying to say “this is not how we agreed to do this”! And when they finally were done most of the work, and were almost 2 months past their planned completion date, the building inspector went on vacation leaving them to wait a couple of more weeks for his return.

Six months after they started work on the house, they were finally ready to sell the property. But, thanks to delays, the sale landed smack in the middle of summer which is just about the worst time to try and sell a house. Every day the house remained unsold meant additional carrying costs (financing, hydro, heat, taxes, insurance, etc.), so waiting for the fall market to hit was financially not an option. As for the neighbour who agreed to split the cost of a beautiful new fence that separated the two properties? Let’s just say Susan and her partners are still trying to recoup the neighbours half of the fence. Unfortunately, our “word” no longer is good enough. Get it in writing folks!

It was stressful, time intensive and a lot of work. So, why bother with doing a flip? Well, Susan says they did make a decent profit (about a 10% return on investment in about 8 months). And, she enjoyed the opportunity to be creative and handy! Susan said she loves interior decorating and seeing the fruits of her labour. Turning an ugly duckling into a shimmering Swan is a thing of beauty. It also gave her ideas as to what she would like to do with her own home. And, for those who like shopping – be it for doors, windows, faucets, door knobs or curtains – it’s a great excuse to check out all the latest trends at Home Depot, Ikea, or Rona!

Susan gave us 4 Do’s and Don’ts of Flipping Real Estate:

Do’s

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Have a detailed, set budget with a healthy contingency;
Get 3 or more quotes on all jobs;
Get permits for all work to be completed; and
Have a detailed partnership agreement from the beginning.

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Don’ts

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Don’t sell in the Summer or launch on a long weekend;
Never assume that a carpenter can do drywall taping or plumbing;
Do not let the trades people pit the owners against one another; and
Don’t get greedy when selling…often the first offer is the best!

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It wasn’t a bomb, but it was a bigger challenge with a lower pay out than she expected. Will Susan complete another Flip project?

She has every intention to, although it may be a few months or a year until she is ready to jump back into it. Besides her great advice above, she said it is very, VERY important to hire the right people. Just because General Contractor X is cheaper than General Contractor Y doesn’t mean you will profit more in the end because you “saved” some cash. The old phrase exists for the housing industry just like anywhere else – you get what you pay for!

9 Tips for Success with Flipping Real Estate

by Julie Broad

If we are going to go to all the work to renovate a place, we want to reap the benefits for years to come. When we renovate we do it with renters in mind, not future home owners. But, if we were going to pursue a hobby or business in flipping here are some things we would consider when looking at a house:
My requirement for a home to live in, and a good rental property would probably hold true in this case too: Find the Starbucks area
Find the ugly house on a street of well maintained homes.
Know your prospective buyer – are you fixing the house up to suit a young family, an urban couple, or someone whose kids have left the nest? Figure out who is most likely to move into that area, and renovate to suit their needs.
Where is your biggest place to add value? If you can easily enlarge the kitchen or make it more functional then you can add a lot of value to the home quickly. You can also consider adding a bathroom or creating more storage as ways to add value.
Inspect the house carefully. Have there been renovations done on the property? You will often pay a premium for previous renovations, and in so many cases you will end up having to redo what was done before so it costs you more for the house, and to do the work.
Determine your budget, and then add an additional 30 – 40%. Things always cost more and take longer than you expect.
Find a real estate agent that has flipped houses themselves, or that has a few clients that have done it. And, ask for references. A good agent will go a long way to helping you understand the needs of your prospective buyers, and in getting the price you want for your house.
Talk to a mortgage broker about your financing options. There are plenty of financing options to suit a flipper purchase.

*Not her real name. She has asked to remain anonymous, but will answer questions through us if you are interested in learning more.

Buying Rental Property from Motivated Sellers

December 11, 2012February 19, 2009 by Karysa

We bought our very first investment property in a foreclosure deal. It was our first introduction to a motivated seller. The bank didn’t want to own residential real estate and was anxious to get rid of the property. We bought it under market value and it’s rental income and value has doubled in the last 7 years.

Our current home was just about to be listed because the owner got transferred from Vancouver to Victoria. She didn’t bother to price her home any higher than what she’d paid, as she just wanted out. We bought the property for under market value and avoided a bidding war by scooping it before it hit the market.

These are just two examples of good deals we have made by finding motivated sellers. On the other hand, we’ve also found that some of the most motivated sellers were motivated because they wanted to ditch their piece of garbage property! In the same vain that we always say “No money down doesn’t mean it won’t cost you” we also say that a “motivated seller may be motivated for the wrong reason“!!

We’ll call the type of motivated seller I’m talking about a “flipper”. A flipper is someone who bought the property, fixed it up and is now selling it…and wants to get rid of it quickly. When you find a flipper that is anxious to sell you often will find someone who has cut corners on the work just to get it done, and you may just find yourself spending a lot of unexpected money on repairs and surprise problems.

We made the mistake of buying from a flipper in Toronto. It was a land mine of a property full of shoddy work and the cheapest possible materials. The worst example of this was the telephone wiring that had been used instead of electrical wiring – and yes, it melted and started to spark because it wasn’t the right grade for the electrical currents. Thankfully the lights had stopped working, so it triggered us to get an electrician to start punching holes in the walls before any fires were started!

The property had all the signs of being a cheap fix up, but we weren’t really aware of what could go wrong at the time. We ignored the signs and bought the property from Mr. Flipper and he was so helpful that he even assisted with getting us financing.

In addition to spending $25,000 to completely rewire the house we had to redo the plumbing in the basement and totally renovate one of the three bathrooms. Shown to the left, the basement flooded thanks by tree roots dissolving the clay pipes and plugging things up. We had to dig up one of the bedrooms in the basement and the entire front yard (which we had just landscaped a month before) to get to the pipes. While the plumbing work was being completed we had to put our tenants up in a nearby hotel for $200/night each.

The first picture below shows the main floor bathroom we renovated because cracked tile and an awkward 5 inch “step up” to reach the sink and toilet were frustrating to deal with. We discovered lazy plumbing practices had created the 5 inch “step up” that the toilet and sink had been on… and the cracked tiles were as a result of tile being laid on top of tile! The next picture is of our front yard after they dug it up to get to the pipes.

The red flags were waving in our faces but we didn’t really recognize the signs and looked the other way. The property had so many good things going for it:

It was priced right,
It was located in a perfect area for a rental property near downtown Toronto and steps from the subway,
And, it had good rental income from it’s three units.

We were too new at the investing game to realize the trouble we were about to get in because this motivated seller was motivated to ditch his crappy property BEFORE he was responsible for cleaning up the mess.

When we tell this story so many people smugly say to us “Well, that is what you get for not having the property inspected by a professional”. The issue is: WE DID HAVE IT INSPECTED!

Wiring is BEHIND the walls. The wires aren’t visible unless you punch holes in the walls. Bad plumbing isn’t visible unless you get underneath the floors or send a camera down the pipes, and other things seemed minor on the surface but were serious once you tried to repair them.

That said, we were still at fault and could have avoided this big mess because there were warning signs and we ignored them.

So – Dave and I want you to avoid buying a disaster property from another Mr. Flipper so here’s some warning signs to be aware of:

An investor that wants to sell because they want to invest in something else. This is not a red flag; but it would prompt us to ask more questions. The reality is, many investors will hold onto a property forever if it’s making them money. So, if this property doesn’t fit in their portfolio anymore or isn’t making them money, try and figure out why. Is something in the area changing that you should know about? Is it a problem you can fix, like bad tenants or poor management? There are a lot of reasons why an investor might sell, and many of them are legitimate, but try and figure out if there is a reason that should concern you or if it’s an opportunity to solve a problem.

Someone who says they ‘have to sell’ but refuses any offers below what they paid or below what they think it’s worth.

Someone who bought the property, renovated it, and is anxious to sell it. There are a few reasons why this is a red flag, but the biggest one is that the reason this person bought it and renovated it, was to make a profit from the flip. This can mean they cut corners to save money and it definitely means they are going to be trying to get top dollar for the property. Trust your gut; ours was giving us warning signs on the Toronto property but we didn’t listen. We love that property, and we even lived there for a few years because its location is fantastic, but the property’s problems have cost us over $50,000 in five years. Even though it puts over $500 a month of positive cash flow in our pockets, it’s going to take us a LONG TIME before we ever make that money back. We’ve even put it on the market a couple of times to sell it, thinking that we should recover our costs, but we never ended up getting the offers we wanted so we still own it today. And, while it’s a good money maker, it still gives us problems.

We don’t have good electronic pictures of the electrical wiring that was discovered behind the walls but I think the pictures will say more about what we went through than I could ever describe!

Published February 8th, 2009

Update February 10th, 2009: We received some reader mail about this article. You can read that email and the response here:Upset about the Article:The Motivated Seller You Don’t Want to Buy From.