Starting From the Beginning

Ok, tonight on the site I saw a post about contracts and I think I need to go there cause this is bothering me a little bit. Before all of you say it and start sending me hate mail, I know I am a little off topic, but hey I think this thing says “your” blog when I log into it, nuff said! Besides you will all thank me in the morning. I have some strong opinions about education in this business. I have had some very educated students, two pharmacists, three lawyers, two CPA’s, and two doctors, just to name a few. Now what makes them different from us? Well, I like all of them and all of them will tell you that there is not anything that is different, except education. They have superior knowledge about their chosen field, imagine that! They are successful because they learned their trade, is that hard to understand? So let’s look at the comparison; I know a couple of these doctors personally, and in fact my wife has passed the med school exam and was accepted, but has not attended as of yet, because we have made plenty of money in less time (school wise). So what is the point? Well the point is that in order for a doctor to make 300-400k per year gross and walk out with 140-160k they go to school for 4 years and have a residency for 3-4 more and if they specialize it is even longer, and all of this starts at 200k in cost and goes up. We as real estate investors are able to make their salaries in 4-6 months of the year and from a much better taxable standpoint, plus if we build a rental portfolio it pays us no matter what, and a doctor only gets paid when he is performing. Now I said all of that to say, how much education have you sought out to prepare yourself for this business? There are a lot of investors that get a $350 course from Carlton Sheets and then they are an investor. If that is true then when I got out of biology in my freshman year of college I was a doctor!So I am going to start from the beginning for everyone, and I hope that will help out. Once you decide you want to be in this business, there are some things that you will need to get started. This is not the entire list, and the list will grow as you go along in the business, but there is a list of things that you need just to get started.*Cell phone, this is probably the most important piece of your list. You must have a phone with a liberal plan, because you will drastically increase the amount of talk time that you use while in this business. It should be noted that if you are going to be busy at all you will probably need a Smartphone of some sort so start there with your cell phone decision, especially given contracts such as they are choose earlier than later.*Email, I know it sounds silly, but I have seen this one a lot. Don’t have the cool email address either, sexyguy69s is not the best email address from a business standpoint. Gmail, yahoo, and aol are free now, so get you an account asap. More latter on this. *PO BOX is necessary as well. If you are going to be in business it is best to get a PO BOX so that you will not have people coming to your house to look for you, especially if you are going to be in the rental business. *Fax line is important as well, and for an “office” phone system you can use a Hosted PBX system with a company like Onebox that will give you a dedicated virtual fax line along with a phone line and extensions to give your business a professional sound from day one. You can do outgoing messages only as well.*Get a map book and a mapping program. I use Microsoft Streets and Trips which is a easy program to use and only about 20 bucks. You will also need a map book or if you are enterprising get a nav system like tom tom to guide yourself to the properties. Don’t underestimate this point, you do not realize how many parts of your town you have not been to and do not know until you get a couple of calls to look at houses. *You will need to establish a business, and I advise the easiest versions in LLC’s. These are great, not the do all end all, but easy to set up and manage and great for real estate in general. In doing this I advise to set up at least 2 LLC’s to start with. More later*If you are going to have businesses you need a checking account for them, so that is next. Start thinking about a website to match the name of your business, to give yourself a more professional image.*In order to be in business the next thing you will need to make your business grow fast will be credit, and I advise to start building your corporate credit NOW! More on this later as well.*The easiest thing on this list to get is very important as well and that is motivation. You must be motivated to be in this business, it is not as easy as it looks on tv.*Now the hardest is the last and that is MONEY, you will need some to get started, and remember the more the better.The next thing that is imperative when you are starting out is to make a plan. This will determine and affect EVERYTHING ELSE in your business. You must have a plan in order to have something to change. The statistics are innumerable that show how people that set goals are more successful and happier, so I won’t go into detail on all that, but the main thing is that in our business it is imperative to have a road map to know where you are going to understand how to get there. One reason that goals are so important is because of the time line of our business. For example, if you purchase a house that you are going to sell retail and you are new to this business you will most likely go to at least 4-6 months depending on where you are at in the country before that house sells. That being said, if you want to purchase 4 houses a year to sell retail and you do the math, you will need funds to purchase and rehab at least 2 houses at one time, and maybe even 3. So this lets you know that if your average house purchase is 50k and your average fix up is 15k (using numbers from my market) then you need 65k plus holding costs for 2-3 purchases minimum. Also, if you are going to put 4 houses per year into your rental portfolio then add at least 1 and 2 to be more safe, because you will have to purchase it rehab it and refi it while you are doing the retails. In the cash requirement department you also have to compensate for start up costs of the list of stuff we talked about above along with some marketing money to start generating leads as well. From a timing standpoint it is easier to start with a total number like;How many rentals per year will I buyHow many retail do I want to doHow much money do you want to makeDo you want to improve your living statusDo you want to build your retirement incomeDo you have other personal goals as well like replace your job or your wife’s or put back money for the kids educationDo you want toysDo you like to travelDo you desire security and peace of mind for your personal lifeAll of these things should play into your goals and decisions in this business. We have a very distinct advantage in that we can structure our business to conform to our personal needs and wishes. You can stop and start your business as needed to be able to take time off if you like, but you must plan all of this. When getting started the next thing to think about is lending power. I believe you must start at the top and work your way down. The best possible money you can get from the bank is an unsecured line of credit. A commercial unsecured line functions just like a checking account and you can buy whatever you like whenever you like. The next best thing is a HELOC or home equity line of credit on your personal home. This is secured to your personal house, but it functions that same as an unsecured line, so that you can write checks for anything you need. The next best line is a guidance line. This line is usually capped by a dollar figure and a number of houses. It also has a “guidance” amount for your LTV (loan to value) that you must stay within. Most of these are 80% or less LTV. Usually they are tied to prime for the rate, such as prime plus 1 point and 1 point in origination and they are interest only for the monthly payments. There are normally no prepayment penalties and the term is usually one year. If you get a guidance line you should also ask for a semi-permanent financing line as well, so that you can move the houses from your guidance line to semi-permanent financing and keep it in your business’ name. these usually are for 1, 2, 3, mill and are on a 15 or 20 year amortization with a 5 year balloon. If these types of financing do not work the next step is to find yourself a hard money lender. These are asset based lenders that will loan up to 70% or so LTV including the fix up. They usually charge between 3 and 5 points in origination and 11-18 percent in interest. These are normally 6 month loans that may or may not be able to be renewed. If this doesn’t work for you either then you need to be looking for a partner to team up with that can get one of those types of financing. So you got everything you need and you have your financing lined up, you need to learn your paperwork next before you can make an offer, so next time I will cover paperwork…………………….