This article is part of our “Ask an Investor” series with Jerome Fazzari and Lorna McManus of GreenPen Investments. After working on dozens of properties, they are now here to answer your questions about real estate investing, home renovations, property management, and real estate in general.
My husband and I have owned rental property our entire 18-year marriage, but want to purchase a flip in the coming months. I’m curious how you obtain your properties, i.e. sheriff auctions, through the MLS, auction websites? Any insight would be helpful. Thank you!
There is no easy answer to this as there are so many buyers and investors in the market right now that there is very little inventory available, and practically none of it is available at a discount price. Even this question is a sign of the times. A few years ago, everyone was asking us where we get the money to invest and now everyone is asking where to get the properties.
We use all the methods you listed above, but most of our properties come from the network that we have built up over the years based on our track record and history of performing the way we say we will. The most critical factor to get right when doing your first flip is to make sure that you know your after repair value before even writing an offer. This is the biggest mistake we see new flippers make. It’s practically impossible to make any kind of profit if you don’t fully understand the market in which you are working.
Do you do joint ventures, borrow from investors, etc? How can we reach you? Where are you located?
We use a variety of financing options based on the deal and our resources at the time. I can’t say that one is preferred over another, they are different and best used for different scenarios. The idea is to use the right strategy at the right time.
When we first started flipping houses, we used an equity splitting structure with private investors that worked out well for us and the investors. However, as we built up our track record and financial reserves, we realized that we were giving away too much of the profits. So, we transferred to a debt structure where we guaranteed specific profits to the investors and we kept everything over that. We did lose some interest from a couple of the initial investors that were used to the profit split but it was unrealistic for them to continue making 50 percent-plus return on investment as passive investors. They were replaced with other investors that were eager to earn the guaranteed return on investment instead.
We like to offer equity opportunities to private investors for longer term projects like purchasing apartment or commercial buildings. The longer term shows the investors’ commitment to the deal. So, we are okay parting with equity, as the profits will be realized together over several years.
For us, joint ventures don’t happen as often as we would like since a more specific set of circumstances has to exist in order for the venture to make sense. An ideal scenario for us is partnering with either a property owner or a contractor and we finance the rest of the deal, purchase, or construction, whatever is needed. Unfortunately, it seems like the contractor often runs out of capital before the project is complete or takes on other jobs for quick money and puts the project as second priority, neither of which is going to be good for our ROI.
Can you talk about your first investment property? How did you find it? Financing? Did you hold or flip it? What lessons did you learn?
Our first true investment property was a flip that we purchased through an auction. There was no fancy financing, just cash that we had been saving up for over 10 years. One of the main lessons we learned is that book/classroom learning and reality are completely different. Practically everything we thought we learned before our purchase seemed not to matter or didn’t apply to our situation and we began learning a whole set of new things.
Construction was not brand new to me, but it’s completely different when it’s not your personal house or you’re not getting paid. The feeling of laying out all the money that we were saving since we were teenagers was a new experience (similar to a mild hangover at times) especially since at the time everybody said that flipping a house was next to impossible and nobody would buy a house in “that area.”
Our renovation schedule was completely off, but we still finished in the time that we originally budgeted for and finding a buyer wasn’t difficult either since we were the only renovated house on the market in that price range.
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The information provided in our “Ask an Investor” series is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.