Find your Sweet Spot for investing success–
Where Risk and Opportunity Are In Balance
Successful real estate investors work with a short list of tools and strategies that Manage Risk while maximizing Profits. In sports, we’d call these “sweet spots”. Hit the ball just right, and it goes right out of the park!
In this session we look at investing sweet spots that will help you hit it “right out of the park” too.
Video Notes / Transcript
Find your Sweet Spot
For new investors it is a fair question: Where & how to start? For most, it is more than just ‘find a property, fix it, etc…’
One way to start is to find your own personal ‘sweet spot’
Let’s see just where that sweet spot might be for you…
So, what is a ‘sweet spot’?
In tennis, squash, racquetball, a baseball, cricket or golf a given swing will result in a more powerful hit if the ball strikes the racket, bat or club on the latter's sweet spot.
When it comes to Real Estate Investing–
Your Sweet Spot is that area where Risk and Opportunity are in balance
Not just “in balance”, but that place where your effort will make the greatest impact…
We manage risk 4 important ways–
- Find extraordinary Value
- Leverage our Capital (using OPM)
- Maximize our Resources
- Have a built-in Plan B
ONE WAY WE FIND – AND STAY – IN OUR SWEET SPOT IS BY MANAGING RISK
EXTRAORDINARY VALUE– Need to know how to find projects with the greatest “upside potential”, and maybe where there is also less competition
IN REAL ESTATE WE CAN USE “LEVERAGE” – Conserve our own capital by using that of others (OPM)
MANAGE RESOURCES – When we astutely (accurately) bring our skills, our judgment and our networks, into the effort
AND WE DON’T NEGLECT OUR “PLAN B” (if all does not go as planned)
Pick the Right Opportunity–
- Understand the Market & Market Cycles
- Go for ‘distressed’ (in any market!)
- The ‘right neighborhood’ still counts
- Stick to the standard 3-4 BR 1½ Bath
- Consider ‘Affordable Housing’
Why ‘Affordable’ Housing?
Demand exists at every price point
Affordability means housing priced at 30% of area Median Income
Example: Median HH income of $60,000 / year. Housing costs should not exceed $18,000 ($1,500/month) $1,500/month ‘buys’ a $150,000 house today (4% FHA)
By definition: Anything over $150K exceeds affordability for half of the neighborhood households.
Your ‘sweet spot’ can be Affordable Housing!
There is a Sweet Spot in Project Budgeting too–
Investor or Builder/Rehabber, we want our Total Costs to equal no more than 65-75% of After-Repaired-Value (ARV)
This is a good “short hand” (rule of thumb) way to figure how much you can pay for a project house: At the stated (or negotiated) purchase price, can the property be rehabbed (covering both hard and soft costs) for 75% or less than the expected ARV?
Meet that test and you should be “good to go”.
If costs, in the end, go higher, you always have the option to rent the home as an investor and wait out the market (for some, Plan B).
Project Example 1
South St. Lawrence Avenue, Chicago
3 BR 1½ Bath Brick Row House
St. Lawrence row house ( PICTURES before)
Where’s the Sweet Spot in this deal? [ SPREAD - PROFIT ON SALE]
Where’s Plan ‘B’? [SPREAD SHEET]
Project Example 2
South Sangamon Avenue, Chicago
4 BR 2 Bath Frame House w/ Garage
[ READ FEATURES / NEEDS ]
South Sangamon Avenue 4br frame (images/before)
Where’s the Sweet Spot in this deal?
Where’s Plan ‘B’?- (as rental) [SPREAD SHEET]
Plan C (Bonus!)
Skip the Landlord thing– Sell “on contract”
Tenant as Prospective (effective) Buyer
Same qualification process: If you’d have ‘em as a tenant, they might qualify as a buyer (non-Sect. 8).
Same “income” (only now as interest, not rent)
Less expense: Contract buyer pays everything, including maintenance.
Not subject to Landlord/Tenant Ordinances (Chicago)
Easy termination in event of default
Gives your buyer a real chance to own.
(Let’s see how the numbers compare…)
Plan C Example (Sangamon)
NOTES: Seller sets sale price (no appraisal). Buyers mostly interested in cost per month, not end sale price.
Price determined by RENTAL VALUE/MONTH (adjusted for taxes, insurance & nominal reserves).
Upon final sale, price can be adjusted (down, if necessary) to meet appraised value.
Your Sweet Spot is where–
Social Enterprise = Where private sector initiatives result in socially beneficial outcomes. (A “win-win” scenario)
[LAST SLIDE] — By staying within your Sweet Spot, it’s like “growing your own money…"