Novice looking to get into the REI - Posted by Sarkis

Posted by Ed Garcia on May 09, 2006 at 24:30:36:


I?m sorry I didn?t get back to you, but I was in Atlanta at the Convention.

I can understand you have the fear factor of making a mistake.

You?ve got to shake it.

Sarkis, even I am not right all of the time. But in life we play percentages. I may not win all of the time but I will win most of the time. The reason is my RISKS are CALCULATED.

I never venture into a deal, that I don?t feel I know the outcome.

As one of our other participants on this board said a few weeks ago, he never plays a game, that the odds are not in his favor. It?s time to start your voyage. And to do that, you?ve got to leave the dock.

As one man so eloquently said?

Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did. So throw off the bowlines, Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream.

Mark Twain [Samuel Langhornne Clemens] (1835-1910)

Ed Garcia

Novice looking to get into the REI - Posted by Sarkis

Posted by Sarkis on May 01, 2006 at 08:59:21:

I have been trying to get into the real estate market for quite some time now. For the past few years i have been researching and trying to get started but have been held back by my job and school. I have decided that this summer is my time to get started. I will sacrifice some time at work, wake up a little early and hustle a little to get things started.

I have done lots of reading on flipping and have concluded that it’s a hard thing for a novice investor to do. I definatly see it in my future when there’s a property i can’t rent right away and don’t have time to rehab.

Rehabbing takes cash, and cash is what i don’t have.

I think the best thing for me, right now, is to buy a rental property with positive cash flow possibly an occupied multi unit at a good price. I can probably get financing for about 150000 and believe that that’s enough for me to get started.

Can anyone give me any advice, motivation, wisdom to help me get started this summer???
I have been searching and have found many properties in my price range and in my area, perfect homes just waiting for an owner to collect the cash.

All responses are welcome.



Re: Novice looking to get into the REI - Posted by Mike D

Posted by Mike D on May 01, 2006 at 12:41:11:

Hello Sarkis-
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Re: Novice looking to get into the REI - Posted by Sailor

Posted by Sailor on May 01, 2006 at 12:25:01:

For some time I have advocated newbies cut their teeth on mobile homes:


Re: Novice looking to get into the REI - Posted by Ed Garcia

Posted by Ed Garcia on May 01, 2006 at 11:59:36:


You?ve said, ?I have been trying to get into the real estate market for quite some time now. For the past few years I have been researching and trying to get started but have been held back by my job and school.?

Sarkis, it?s not like Real-estate investors have leisure time on their hands. Most investors have jobs and commitments prior to REI.

You then say, I have decided that this summer is my time to get started.

Sarkis, I?m sorry, but when you say you?ve been researching for the past few years and now plan to wait until next summer to get started. I smell PROCRASTINATION, big time.

I also smell “Analysis?s Paralyzes” is causing your Procrastination because it shouldn?t take a few years to jump into the water. One thing about a procrastinator is they don?t know that their procrastinator or they wouldn?t be one.

Sarkis, I say start NOW. Summer is a good time to SELL and winter is a good time to BUY, that?s another lesson. So for now I?m going to give you a few tips I give to Newbies. Now I want you to know that there are many ways to view a deal considering RISK/REWARD and so for today, I?m just going to cover buy low/sell high.

Here is what I tell a Newbie who is starting out.

First, is to evaluate how much time you are going to be able to commit to Real-estate? If your approach is hit and miss, so will be your result.

Second: Go to the street. It is the best teacher. Rather than talk about doing deals, reading in the library, getting courses, JUST DO IT.

You’ll find in the long run, the street is the best teacher. Not only that, by getting out an doing it, you’ll learn your MARKET, meet people to build a NETWORK, learn the demographics as well as the geographics of your area, and of course you would have over come the biggest obstacle in getting started, PROCRASTINATION.

We need to do what we call, penciling out a deal. When doing that, we ask ourselves a battery of questions necessary in structuring a deal.

I’m going to give you 5 steps to get you started.

(1) How much do we want to make?

So many times I hear someone act as if they are afraid of loosing a deal because of the profit they put into it. Forget about it. I’d rather be sorry about the deal I did not make, rather than the one I did. The profit is what protects you in a deal.
Don’t be afraid to make it.

When doing a deal I want to make at least 30% and believe me when I tell you, when I structure a deal with 30% in it, I never get it. Some how the profit always dissipates, even after I thought I figured it to the penny.

Would I do a deal with less profit? Yes but I would do it as a flip, lease option, or as a leveraged deal with positive cash flow.

(2) Determine the Value of the Property.

The next thing I must do is determine what the property is worth. The obvious thing to do, is comp it. Don’t let the seller or real-estate broker tell you what it is worth. Get it compted yourself.

(3) Deferred maintenance.

Usually I figure my profit after taking off the deferred maintenance, otherwise it distorts my profit. So it must be figured in the beginning to determine your profit.

(4) Game plan.

What do I want to do with the property? Do I want to fix it and sell it?
Do I want to keep it long term or short term? When I buy a property, I have a plan for it.
And usually I buy it with that plan in mind. This part is so important, I’m going to go into more detail by giving you an example.

Remember, you make your money on the buy.


Each deal speaks for it?s self. For example, if I bought a house for lets say $50,000 and had to put $10,000 into it for fix up. I?m in this deal $60,000. Now what would that house have to be worth in order for me to feel comfortable to buy it, and debt service it on my line of credit.

$70,000 ? No I don?t think so. I have no room in this deal for error. What if after a month or two I don?t sell it ? Now remember, we can play the what if game all day. I can create a fast Sale for the purpose of this posting to make myself look good, but that?s Not the answer. So remember we have to always be careful with hypothetical questions and answers. The profit structure on this deal is not good enough for me to do the deal.

$80,000 ? Were getting better, but No. I have to keep in mind that things can go wrong with my deal. What if I sell it after 2 months, and then the sale falls through after being under contract for 45 days because of financing.

Now I have had the property for 31/2 months, and have to put it back on the market again. Also what if the market changes or slows down ? Even though I show on paper that I have a $20,000 profit, that?s not so.

For the fun of it, lets take this so call $20,000 profit and structure a Game Plan around it.

(1.) I plug in 6 month worth of debt service on my deal. I?m in the deal $60,000. Interest, depending on the interest of your credit line, Let say for the benefit of our example is 9.5%. Our payments would Then be $475 per month. 475X 6 = $2850.

(2.) What ever the market value you come up with, always cut it 5%. Because realistically, the potential buyer is going to want you to Discount your price. Now if you don?t have to, great. But lets face it. If you were trying to sell it for $80,000 and someone offered you $ 76,000, you know you wouldn?t want to wait for another Buyer. You would still be debt servicing the deal. With you luck, you wait another month or two and the next buyer would make the same offer. Terry Vaughan will tell you, that the first 10% of
a deal is water. I agree with Terry, but for the purpose of this deal we?ll just keep it at 5%. So lets take off another $4000.

(3.) I always plug in a realtor. Now I know that there are a lot of Geniuses out there that don?t need them. They are so great that they can sell the property themselves. Great, you plug in a Realtor. 76,000 X .06 = $4,560.

Lets recap. A sale of $80,000, gives us on paper a $20,000 profit.

-$ 2,850 Debt service
-$4,000 5% Discount
-$4,560 6% Sales commission.

Potential Profit $8,590.

As you can see the profit dissipates quickly. And personally I don?t think It?s enough to take the risk your taking with your line.

How about $90,000? Now all of a sudden the deal can make sense. We have between a $17,500 and $18,000 profit.

Lets look at our LTV (loan to value). 60,000 divided by 90,000 = 67% LTV.

So you see the deal speaks for it?s self, but the structuring of a deal with a Game Plan is what will let you know if you should do the deal.

(5) Financing.

How am I going to take my deal down? An I going to create a seller carry-back, and use a lender to give some money to the seller? Will the seller carry back the whole deal? Will I have to buy it with a combination of down payment and financing?
Or will I pay cash and then refinance it later, getting all of my money back.

These are just a few basic fundamentals of doing a deal. I hope this is some help to you.

Ed Garcia

Re: Novice looking to get into the REI - Posted by Berno

Posted by Berno on May 02, 2006 at 07:43:14:

So much for no advertising…

Re: Novice looking to get into the REI - Posted by Sarkis

Posted by Sarkis on May 03, 2006 at 21:56:34:

Mr. Garcia,

Thanks for the response. I am starting to understand the importance of buying low. my father always told me, “you make money when you buy,” if you buy low it is easier to make a larger profit.

Something that is holding me back is capital. The problem is i have none. I understand i can find zero-down loans or high ltv loans but suppose i can’t find a tenant in time or i can’t find a buyer. how will i make payments? I think it’s important for me to find a property that is occupied and in fair condition. this will take care of two problems for me.

Next, as far as financing is concerned, i just started building credit and as i said earlier i have no money to put down. do you think it will be hard for me to find financing? i was planning on getting pre-approved for a mortgage and realized that my current income is not sufficient to be approved for a loan, do mortgage companies take into effect that you will be renting the property out? HOW DOES IT WORK???(for a novice investor to get started)

I know you advised me to “just jump in the water” and “learn from the streets”. You are probably right about this, you have lots more experience than i do and i can probably learn a thing or two from you. i just don’t want to make a mistake that will end up costing me a lot now as well as in the long run.

Your advice is greatly appreciated, thanks ahead of time for your response.

(i was going to end this post with “i want to get my feet wet before i jump in the water. slowly get my body acclimated with the temperature, then jump in.” but i realized that your advice was right that i should just jump in. a very wise man once asked me to try and raise my right arm, so, i did. he said, “no, don’t do it, TRY to do it.” i then told him that i didn’t understand, and he said “exactly, you can’t try to do something, you either do it or you don’t do it.” I thought that was exactly what you were saying in your last post so i thought i’d pass it along.")


Great post! - Posted by Eric (MI)

Posted by Eric (MI) on May 01, 2006 at 13:54:52:

Nice post Ed!

You pegged me to a T with the beginning of your post. I finally realized it myself though about how I am always putting things off and have jumped in.

Great break down of the thought process involved in determining a deal.