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 Limiting Your Exposure to Failure in Investment Properties
By: Kimberly Cameron, CRS and Darin "Sid" Cameron, CRS
Fri, Mar 11th, 2005 11:42 pm

Today I have had some random thoughts to the blog I wrote yesterday. I began a discussion on investment properties prompted by an ABC News story on Real Estate Flipping. You can find a link to the story with yesterday’s blog.

This afternoon, I had a discussion with one of my "new rehabber" clients. His only experience is in rehabbing his current home. He is in the process of putting together a business plan to rehab three homes by the end of 2005 (which is actually a pretty aggressive and organized plan for someone who is brand new).

As we discussed his interest and experience, one thing was clear- my client (let's call him Joe) didn’t have any real hands-on experience. Joe's plan is to continue working his day job and trust the work to an experienced crew. He intends to stop by before work, during lunch and after work. As we talked about his plan, it was evident that Joe's plan had tremendous vulnerability.

First off, a crew is only as good as its leader. As the saying goes, "When the cat's away, the mice will play"... In this case, the mice are paid by the hour, so time is truly money. Truthfully, Joe needs to be involved and hands-on with his property. The "candy store" that is his investment is too tempting to go unwatched. Material and tools will develop legs and mysteriously walk away. (Don’t even ask me how many cordless drills I’ve bought in my lifetime…)

As we continued to talk, it became evident that Joe's knowledge was very limited- almost too limited to ascertain if a job was done "right". For example: Joe is considering a project that will require updating the electric and plumbing, yet he has no experience with either, so his ability to "know code" on electric and plumbing is nonexistent. In my opinion, Joe would greatly benefit from having a partner at this time to learn the basics that can only be taught hands-on. A partner, in this scenario, would be best suited to have carpentry experience and an idea of a cost base for the project (which would off-set Joe’s shortcomings).

Now let me stop and note two things here:

1) A partner in the rehab business isn’t like a partner in a marriage- you aren’t stuck with them for the rest of your life. Basically you partner on a specific project or set of projects. After the project ends, you have the option to go do your own thing or re-partner with them again. It’s not uncommon for an experienced rehabber to have multiple projects going with multiple partners at any one time.

2) The first question I’m usually asked when I suggest partnering is, “Why would an experienced rehabber want to partner (and train) me when I’m going to eventually leave them?” The answer is simple- money. One thing to know about rehabbing investment properties is that lenders don’t like to see an investor working on too many projects. For an experienced rehabber trying to work full-time and employ a full-time crew, conservative lenders can be a serious handicap. What you, the “newbie” brings to the table is another checkbook and line of credit to allow the experienced investor to grow their business and keep workers working.

As a Newbie, when I began rehabbing, I would go into a project, take measurements, photos and fill in a check list prepared by my then expert partner- my brother. He would review my notes, ask questions as needed and prepare a budget and cost base for the property. As time when by and several homes later, I was able to walk into a kitchen or bathroom and determine a cost for the project within a few hundred dollars. This knowledge can only be obtained through experience.

I want to see Joe succeed. That’s why I suggest he focus on finding a worthy partner to balance out his area of weakness.

My overall point is to be successful with investment properties, it is advantageous to recognize your weaknesses and address them from the start rather than attempt to learn as you go at the expense of your financial future and personal wealth. Nothing is risk free, but you can limit your exposure to failure and financial ruin by seeking a balance for your weaknesses.

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Darin "Sid" Cameron spent 15 years working in the technology industry which in 1998 relocated him to St. Louis. In 2004 he took over web development tasks for Kimberly's real estate team and later became the full-time Marketing and Operations Director in 2005. In 2011 Sid launched two brokerages, The Realty Store, Inc. and Realty Referral Partners, Inc, while continuing to perform marketing and operations for Kimberly's team. Sid holds a real estate broker's license in Missouri, CRS certification and was the first CyberStar in the St. Louis area.
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