| | Q&A: How Successful Can I Be?
Q: I'm just getting started in real estate. If I have about 10 hours a week to spend on my real estate business, but less than $1,000 in spare cash, how much money can I reasonably expect to make in my first year? -B.Q., Pittsburgh
A: Many new investors ask me some version of this question. Unfortunately, knowing how much time and money you're starting with does not tell me much of anything about how successful you're likely to be.
In my experience, it’s factors OTHER THAN cash and time that determine your ultimate success in real estate investing. Ask yourself these questions: How educated are you? Do you understand the mechanics of low-cash strategies like flipping and creative financing? Are you good at negotiating? Are you willing to spend the time and money to learn these things? How patient are you? Do you have the "sticktuitiveness" to continue to make offers, even when you're only getting rejection after rejection? Are you self-disciplined enough to really use your 10 available hours wisely each week? Do you have a support network in place, including a real estate agent, title company, attorney, home inspector, appraiser, and lawyer? Do you have the support of your family or significant other? Do you know several ways that you can use to find good deals? Do you have the financial self-discipline to plow some or all of your profits back into marketing and buying properties? These are the things that will really determine your level of success.
Once you’ve decided to make laying this groundwork a priority, the next thing that you need to understand is that there are different kinds of profit in real estate investing. There’s CASH, which you get one time when you sell or refinance a property. There’s CASH FLOW, which is an ongoing income that results from bringing in more in rents or other regular payments than you’re spending in expenses. And there’s EQUITY, which is the difference between what you owe on a property and what it’s worth. Equity makes you wealthy, but is awfully hard to spend.
The exit strategy that you choose will determine which of these types of profit you’ll make. For instance, wholesaling (quick-turning) properties provides cash, but no cash flow and no equity. Buying properties to hold for rental can provide cash flow and equity, but rarely produces any up-front cash. How MUCH of each kind of profit you’ll make will depend on the type of property you’re dealing with, the price range, and how successful you are at getting properties at below-market prices or with favorable financing.
In your cash position, I suspect that your best exit strategies will be wholesaling junker properties and purchasing properties to hold with low-money down financing. Wholesaling will generally produce a profit of $4,000-$7,000 per deal, and an effective wholesaler with a good marketing system can find and flip one property for every 20-30 hours of concentrated work. It follows that in a year of 10 hour weeks, you could gross as much as $68,000 before expenses. At first, of course, you’ll be “learning the ropes”, and your profits will reflect this. But with practice and education, a six-figure income in wholesaling is not unheard-of.
Because wholesaling does not produce long-term wealth by itself, I’d recommend that you also work on purchasing some properties to hold for long-term income and appreciation. Because you have limited cash, this will probably mean finding properties where the owner is willing to carry some or all of the financing. By purchasing "bread and butter" properties - that is, properties in decent areas that are affordable to tenants - with low money-down financing, you will add both net worth and cash flow to your financial statement. Assuming that you carefully arrange your deals so that there is a net profit every month, these properties will become the true source of your wealth. For instance, imagine that you find a duplex with a motivated seller who is willing to carry back a mortgage for the full purchase price. The property is worth $50,000; you negotiate a price of $40,000. The day you close, you are worth $10,000 more than you were the day before. Purchase 5 deals per year under these terms, and your net worth will grow by $50,000 each year.
In order to assure that you reach your goals and don't make any major errors along the way, I suggest that you join your local real estate investor's association and spend a lot of time talking to folks who've been where you are. In Pittsburgh, the local association is called ACRE, and should be in the phone book. Call 1-888-7NaREIA to locate other groups throughout the country. Good luck to you.
Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto regoddess.com