While Chicago is still fluctuating between 50F and 85F in any given hour, real estate season is continuing as if it were 75 and sunny all day, every day. I am currently starting up the Wolcott project and, as we have started scope conversations, it gets more and more complex – what are we trying to DO here? To a General Contractor, the sky is the limit (and please aim high)! To an Investor, it’s not that simple. You need to know who you are and clearly define what your goals are before you soak one cent into construction of any kind. This is absolutely necessary to give you the best odds for a return on investment (ROI) later. Without a clear sense of self and defined goals, real estate will not be what it should be: fun and profitable.
So, here is my self-help guide to defining your real estate style:
THE 4 TYPES OF REAL ESTATE INVESTORS
1. The Lovebirds. You love life! You love each other!….at the very least, you love your house! It might be a duplex with a rental, it might be a single family home. You’re in it to live in it. It’s where you want to have some serious memories and watch old photos of wacky hairstyles evolve over time in photos taken in the same living room in front of the same fireplace year after year. You may even leave this house to your kids.
The Approach: You have A LOT of flexibility to invest as much as you want and still safely reap ROI. You want to add a roof deck with a floating steel bridge that connects to the hot tub in the garage? Go for it. It’s yours. Most likely, the land value will appreciate more than the building over multiple decades. If you maintain the building, you can make even more! Take care of the big stuff – HVAC, Electrical, Plumbing, Basement, and the Roof.
GGGGGOOOOOAAAAALLLLL!!! (Sorry, Blackhawks game..) (https://www.youtube.com/watch?v=VP5Yow0YGYE)
2. The Handyman. You can do stuff. You can measure less than 7 times before making your first cut. You like projects and you wouldn’t mind making a good investment in the process.
The Approach: Limit your scope and know your timing. Whether you own a 3-flat and live in one of the units or are buying a single family home, remember that everything takes time. Know yourself and take on projects that you can manage. The prices change dramatically once the labor needed to finish a project is not your own.
3. Napoleon. You want all of them. All of the rental buildings. You want to build your dynasty one building at a time and eventually sell them off one by one when you retire at 45 years old.
The Approach: Minimum construction, maximum rental value. Watch your market carefully and ONLY renovate what you have to in order to get as much bang for your buck on rental. You also need to calculate how long you plan on owning the building – for the most part, if you’re looking at 10-15 years, the majority of your equity will be based on land value. Keep your future buyer in mind which is a younger version of yourself. An investor wants a solid building with no red flags. So, maintain the big stuff – don’t sweat the small stuff unless the market is showing you that you’ll make your money back. Just like you, your buyer will not want to buy the nicest building on the block unless it’s going to make them money the day of closing. This approach is NOT “flipping”. You will likely only have ROI if these buildings are a long-term investment. Consider it a good deal if your renovation cost equals your equity afterwards and your rental income is profitable. For example: If you buy a building for $750k and renovate for $250k, your resale value should be about $1M. Your rental income should then cover your mortgage. Then, the rental income should eventually pay you back so when you sell later, you’ve made profit. To build your empire, in the short term, you can refinance that $750k to $1M and use the $250k in “equity” to purchase another building.
4. The Flipper. You’re not big on long-term commitment. There’s something exciting about those first 6 months of a relationship that’s so blissful. Then, right when you start getting attached, it’s time for it to end. Three words, my friends: Single Family Home. Really, no exceptions. The only buyers paying top dollar in the market are purchasing single family homes. This is because it’s a safe investment – see item 1. This is your ideal market.
The Approach: Do it right the first time. That’s right, cough it up. Do the HVAC, Electrical, Plumbing, Roof, anything Structural, resolve any Facade issues. Don’t get hung up on how much money you’ve spent on things you can’t see – your permits are priceless in the eyes of a dream home buyer. In addition to spending money on not-so-fun stuff, you also need to spend money on fun stuff. Finish carpentry is King. Make it pretty, make it awesome…truly, you want buyers to walk in and be awed. You should be getting a minimum 20% ROI so watch your market. Hope for the best and plan for the worst. Assume the lowest priced renovated house is what your bottom line will need to be. If you need to reduce construction to make your numbers, don’t do it. You will likely not be able to reduce the construction when all is said and done. Construction is sneaky.
5th Place is the NOODs this weekend!