Which Deals To Go After
The perfect opportunities for early-stage investors
Welcome to this week’s issue The Un-Normal Investor. Each week, I publish one 5-minute read that’s written to make you a smarter real estate investor.
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Choosing the right type of project for your first investment is one of - if not the most - important decisions you’ll make along your real estate journey.
Overpaying for a property or biting off more than you can chew will leave an everlasting sour taste in your mouth. And this can easily turn your first project into your last project; causing you to turn your back on real estate altogether.
With that in mind, to help you avoid some of the major mistakes that I made, I’m going to break down the 3 different types of opportunities that early-stage investors should focus on.
Let’s get into it. . .
Outlines
Just like the outline of an essay, these types of deals come with nothing but the bare bones.
For a fraction of the cost of a finished build (i.e. Final Edit) you’ll start with a shell. This typically entails: the foundation, framing, a roof, new or existing plumbing, and electrical.
You get to skip architectural plans and some of the most arduous phases of the permitting process.
But when it comes to aesthetics, finishes, and all of the design decisions that go into a full build-out, you’re essentially starting from scratch.
Most early-stage investors shy away from these projects under the guise that they’re too challenging and expensive to take on. But this is far from the truth.
Your acquisition cost is low, which also means your debt service isn’t astronomically high.
You reduce the risk of surprise repairs that are often hidden behind the walls and veiled by the poorly executed improvements of previous owners.
And most importantly, you walk into equity before a single hammer is swung.
If you’re willing to line up the necessary contractors - once the build-out is complete - these projects can be highly profitable; even for a beginner that’s still getting their feet wet.
Rough Drafts
Rough Drafts are for the DIYers out there.
The weekend warriors that aren’t afraid to get their hands dirty.
These opportunities are priced lower than newly built construction and recently renovated homes, but higher than an Outline type of property.
They’re affordable enough to make you feel like you’re getting a deal, but they’re not cheap enough to be considered a steal.
As a result, the margins are slimmer and there’s less room in the budget to hire out certain aspects of the renovation.
In order for the numbers to work, you have to be willing to roll your sleeves up and carry out some of the cosmetic improvements yourself.
Now although the thought of painting an entire house or installing new floors may sound daunting, it’s not as scary as it seems. In all honesty, it’s more time consuming than complicated.
So for those that are willing to spend a few weekends in a hard hat and steel toe boots, these properties are a great way to get your foot in the door as an early-stage investor.
The renovations are more mild compared to the improvements that are needed to bring an Outline back to life.
They require less upfront capital than properties that’d fall into the Final Edit category.
And last but definitely not least, you’re still able enjoy some immediate sweat-equity.
Final Edits
Now let’s run through Final Edits.
These properties require the least amount of pain and brain-drain.
They’re perfect for remote and out-of-town buyers that are looking for more of a passive investment.
Unlike Outlines and Rough Drafts, Final Edits are often ready for a tenant immediately after closing.
They don’t require any major repairs or substantial improvements.
At most, they may need a deep clean and some touch up paint.
But here’s the catch, they come with a higher price tag and lower cash-flow.
This means you’ll typically have to put forth a larger downpayment, and you’ll likely take home less rental income at the end of each month.
However, if neither of these caveats are non-negotiables for you, Final Edits could be the route to take while you’re early in your investing journey and still figuring out how far you’d like to venture down the real estate path.
So there you have it.
We’ve turned a literature refresher into a real estate lesson.
In summary:
If you’re looking for the best bang for your buck and you’re not intimidated by a house with no walls, Outlines fit the bill.
If you’re looking to house-hack or do a live-in flip for your first project, go after a Rough Draft.
If you’re looking for a set-it and forget-it type of investment, stick to the Final Edits.
Through painstaking (and costly) trial an error, I’ve learned that 99% of “good deals” fit into one of these three buckets.
Anything in between or outside of these lines puts you in a bit of a grey area—which I equate to the danger zone.
But if you stick to this rubric when scouting for investment opportunities, you’ll save yourself both money and migraines.
What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?
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