The following story is a great example of one of my experiences working with investors who were completely new to the practice.
Steve and Greg were two good friends who’d known each other since high school. As they both found themselves in their early thirties and doing quite well financially, they decided to partner up and try to invest some of their money into real estate.
They approached me about the idea of doing a flip, and since this is an area in which I have a wealth of personal experience with, I was more than happy to sit down with them and guide them through the process.
The first thing I try and establish with any would-be real estate investor is their tolerance for risk. Many people think doing a flip is a sure way to make a profit; nothing could be further from the truth.
So Sean… what can we expect to make on this one?” This is a question I get a lot.
I always respond by telling them that even with some solid guidance and a great team to support you, things are highly unpredictable in this business, so if you don’t have a high tolerance for risk, then you should walk away now.
After laying out the groundwork and explaining some key DOs and DON’Ts, the boys and I started hitting the pavement and visiting some potential properties. Luckily, here in the West Island, the inventory is endless as many homes around this area are in need of a complete overhaul. But that doesn’t make the selection process any easier – trust me.
I got a call from Steve and Greg asking me to show them a home they had picked out which they seemed very excited about. I knew about the property and already had my reservations, but decided this would be a good learning experience for my young Jedis in training.
It was a large, 1940s home in a desirable neighbourhood. Greg, a talented and experienced renovator himself, wasn’t intimidated by the amount of work that needed to be done, and Steve was quite taken with the home’s unique character: six-inch mouldings, a claw-foot tub, original strip wood under the carpets… sounds like a winner doesn’t it?
But what they failed to notice, and which I already knew about this house, was that it had a cinderblock foundation that was leaky. The cost of digging, sealing and redirecting ground water with a French drain would be an unforeseen expense, and they’d soon find themselves with a massively depleted budget for all the improvements they had planned. Their one-year timeline would turn into a 2-year grind with half-finished projects, mounting debts, and exhaustingly long days.
Secondly, although this was a prestigious and sought-after neighbourhood, the home was located on a busier street near the local high school. Those with intimate knowledge of the area know that the local teenagers like to hang out nearby and smoke on their lunch break, as this is not allowed on school property. Not exactly an attractive element when trying to re-sell for top dollar. Needless to say, we walked away from that one and kept looking.
A few weeks later, I asked the guys to come and see a great looking home on a great street. The house needed some major TLC but the foundation was solid and the potential was excellent. We quickly made an offer that was accepted and the boys now had their first project underway. They hired a great contractor and got to work on plans and permits.
A few weeks later, I got a call from Greg asking me if I could meet him at the house. I arrived to find him in a completely stripped space. No walls, no floors and no ceilings – a blank slate. Greg had a layout dilemma that he, Steve, his contractor and their designer could not agree on. He figured that since I would be re-selling the house once complete – he had better get me in for my advice.
It was a tough one. There was a supporting wall running down the middle of the house that didn’t lend itself to the open concept design we had envisioned for the main floor. There were also lots of large windows that made placing kitchen appliances difficult along exterior walls. We had to get this right so I asked them for the measurements and went home to get to work on some graph paper to try and come up with a design that made sense.
Thankfully, after a few glasses of wine and some trial and error, I came up with a layout that would make sense. We would close in one window, throw in a beam across a 13 ft length of that support wall and voila! We had an amazing new layout that would maximize the space.
Steve & Greg’s story does not end here, but they are on the right track. Surprises, dilemmas and delays can pop up at any time, and they have to be ready to manage those along the way.
If, like Steve & Greg, have a high tolerance for risk, you’re willing to seek out advice when necessary, and you have a solid team around you to help you make the best possible decisions and avoid disaster, then you might have what it takes to be a real estate investor!