Things don't always work out the way you want them to. And to be brutally honest - when it comes to real estate, things RARELY work out the way you planned.
If I were putting my own money into a real estate project today, I would do things differently. Most importantly, I would prepare two plans - a Best Case Scenario and a Worst Case Scenario. My goal would be simply to survive the Worst Case Scenario. Anything better would mean profit.
When planning a deal, we would prepare an in-depth analysis, project plan and cost breakdown. We had to give this information to our lenders before they would underwrite the project. And, we'd use the information to track how we doing throughout the job.
Usually the money we needed was escrowed (held by the bank) and would be released as we needed it. This means we'd usually pay the bills or put them on credit, and write a weekly draw request for the bank to release needed funds. Then we'd pay the bills or reimburse ourselves for items we had paid.
When a project was on schedule with no surprises, this worked out pretty well. The banks liked us, and they liked the way we did business. Finding the money wasn't a problem.
But, when things went sideways, it could get a bit dicey. Banks get nervous when you're spending their money faster than planned, or you're not making progress as fast as you planned. But, bring the project back into line, and you're golden again.
Our crisis hit when our renovated properties stopped selling. Over the course of six months the market just completely dried up. You couldn't sell residential real estate for fifty cents on the dollar.
One of the dirty secrets about renovating properties is that the end of the project is the most expensive part. You've spent all the money and you're paying interest on it each month. Plus, you're paying other costs like insurance and utilities. All the expense of owning a home with none of the benefits.
Those holding costs eat up your profit FAST. To top it off, most of our renovation loans were one-year interest-only loans. When the year was up, we were obligated to pay the original amount of the loan in full - whether we had sold the property or not.
The only way to handle the bank "calling the loan" would be to refinance. We had a couple of banks who were willing to consider doing that, because of our history of working with them. And we had one bank who didn't care - they just wanted out.
They foreclosed.
And that foreclosure was the straw that broke the camel's back.
You see, we only had a Best Case Scenario plan. That plan was:
- Buy a distressed property with a one-year, interest only bank loan
- Fix the property
- Sell the property
- Pay the bank, taxes, etc.
- Rinse and repeat
When step 3 broke, the rest of the plan fell apart. We didn't have a parachute in case the plane decided to go down in flames. We didn't have a Worst Case Scenario plan.
For a residential single-family home, your Worst Case Scenario probably would include keeping the house, converting it into a rental property, and converting to long-term financing.
If we had developed Worst Case Scenario plans, we might have been able to ride out the storm and come out the other side holding a stable of residential rental properties.
Let's be honest. I DESPISE rental property. I HATE having to fix the plumbing or heating system in the middle of the night. And government has pretty much decided that landlords are evil and should be ground into powder, all for the benefit of endless deadbeat tenants.
But - and I can tell you this from hard-won experience - managing rental properties beats the HELL out of filing for bankruptcy.
So - when you start lusting after those untold profits from investing in residential real estate, the best thing that you could do is to sit down with a blank sheet of paper and write down EVERYTHING that could possibly go wrong.
Then make a plan to handle everything going wrong - all at once. The goal is simply to survive.
Anything better than that, and you win the game.
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