How Networking Is the Key to Completing Real Estate Deals

In my conversation with Dion Johnson, who is in the process of closing on his first and second flip, he explained why he believes that “your network is your net worth.” By attending 3 networking events every week and surrounding himself with people that know more than him, he was able obtain his first two deals, one of which required him to have zero money out of pocket!

First Deal Through Networking and Lessons Learned

The first deal that Dion acquired was a lead from another investor that he met at a networking event. The investor didn’t have time to work on a handful of lead and offered them to Dion. After following up with the leads, he was able to get one of the properties under contract. When he initially ran the numbers, Dion believed that it would be a slam-dunk first deal. At a $152,000 purchase price, $15,000 rehab budget, and $250,000 after-repair value, Dion was expecting a profit of over $80,000! Unfortunately, like most first time fix-and-flips, there was a gap between the project expectations and the reality of the situation.

The main culprit for this gap was the fact that Dion had difficulties finding a general contractor. Many different “gurus” told him that he needed to find a contractor before securing a deal. However, he quickly discovered that unless he already had a project, contractors wouldn’t give him the time of day. Therefore, once he had the property under contract, he had to scramble to find a contractor. With only two weeks until closing and no contractor, Dion decided that he would subcontract out all of the work. As a result, the rehab budget more than doubled to $35,000.

Another lesson that Dion learned was the importance of conducting due diligence before diving into a deal. In doing so, you will save yourself a lot of time and more importantly, a lot of headaches. Dion didn’t perform his due diligence upfront, and went with the first hard moneylender that qualified him for a loan. He wasn’t aware of the lenders terms, so he didn’t realize until it was nearing closing that the lender would be the first position (for the purchase price of the property) and second position (for rehab costs) on the loan. This was a problem because Dion was utilizing private money to fund the loan, and the private money source wasn’t comfortable being in the third position on the loan. Therefore, Dion had to scrap the construction loan and pay for the rehabs out of pocket.

Dion didn’t have enough cash to handle the budget increase, so he had to leverage credit cards to purchase the materials and obtain cash advances to pay the contractors. The takeaway that Dion will remember moving forward: always talk to multiple hard money lenders, finding out their terms, rates, and down payment required BEFORE selecting a lender for a deal.

Second Deal Through Networking with Zero Money Out-of-Pocket

Dion’s second deal went much smoother than his first. For this deal, Dion partnered with an investor that he met through a networking social media group. He brought nothing to the table except the desire to learn and grow, while the other investor brought the deal and the funds. Dion was just responsible for managing the entire project from start to finish, including preparing the scope of work, managing the contractor, picking out the materials, and meeting with the architect on site.

They purchased the property via seller financing for $255,000. The seller had the property listed at $330,000 and was having difficulties finding a buyer. Dion’s partner found the listing and after seeing that it was on the market for a while, proposed a seller-financing offer – $255,000 purchase price to be paid at the conclusion of the fix-and-flip, plus monthly payments at 7% – and the seller accepted the terms.

The structure between Dion and the other investor was a joint venture agreement that was drawn up by their lawyers. According to the agreement, at the sale of the property, Dion would get 40% of the overall profits, all with zero money out of his own pocket!

Actionable Advice

Dion attributed his ability to successfully complete his two deals to:

His ongoing commitment to attending networking events on a weekly basis
Learning from the investors that were doing bigger deals than him
His willingness to admit that he doesn’t know it all

Focus on One Investment Strategy and Don’t Chase Rabbits

In my conversation with the Craig Haskell, who owns over 7,200 units that he obtained via syndication, he explained the number one mistake the real estate syndicators make: they chase rabbits. He also provides the two lessons that he learned from chasing rabbits and the importance of focusing on one real estate strategy.

Based on mistakes that Craig has seen many investors make, including himself, is chasing rabbits. Many investor strategies are analogous to going on a hunting trip and shooting at everything that moves. Craig believes the culprit is a lack of focus. Investors are in the market trying to find deals and make the numbers work, but don’t really know what they are looking for. If you want to be a successful real estate investor, you need to be focused and can’t chase rabbits.

Example of Consequence of Chasing Rabbits and Having No Investment Strategy

When Richard first arrived in Phoenix to begin his investment career, he didn’t have strategy. He was simply chasing rabbits, looking at any and all deals. Eventually, he caught a rabbit, purchasing an apartment building known as Red Rock. However, this was back in 1991, and the Phoenix economy was less than ideal. The prior year, over 34,000 units were built. There was a ton of supply and very low demand, with an average vacancy rate of 20%. As a result, Richard struggled to fill the building. Even after he fixed up the property, he had a hard time competing with other local apartments, which were offering a lot of concessions (free rents, TVs, etc.).

Everything turned around after Richard asked himself, “Who is going to live in this apartment and actually stay?” After searching for the type of tenant that was shopping around, he determined that the main demographic was a Hispanic, B and C tenant. The next question he asked was, “What must I do to get Hispanic B and C tenants to live in and stay at my apartment?” After conducting additional research, he found the answer. He concluded that his target demographic, Hispanics, was extremely family and community oriented. Therefore, he created a community center, a playroom, and started an English class at a local church. As a result, he was able to take his occupancy rate from 70% to 92% and raise rents by 25% in 3 months!

Two Lessons Learned From Chasing Rabbits

Focus on one investment strategy and don’t chase rabbits – While Richard was able to salvage the Red Rock situation, if he would have had an investment strategy from the beginning, he wouldn’t have purchased the building. It didn’t have an area to convert to a soccer field. It didn’t have a large enough area to create a BBQ pit, basketball court, or volleyball court to provide a park atmosphere. These are the types of amenities that his target demographic demanded.

Your investment strategy has to solve a problem. Find a problem and then build your business plan around solving it. For Richard’s Red Rock example, he determined that there wasn’t an apartment community in the area that catered to Hispanics, so he created one. Again, Richard didn’t discover this problem until AFTER he purchased the property, but things happened to work out. However, they could have just as easily gone awry. Therefore, it is important to identify the problem first, create a strategy, and then purchase a property.

Bonus Investment Strategies – Additional Problems to Solve

For office space investors

  • The Problem – Due to multiple reasons, there is currently a huge flood of medical issues occurring
  • The Solution – Buy small office buildings and reposition them towards the growing demand for medical space (doctors offices, medical supply stores, pharmacies, etc.)

For retail space investors

  • The Problem – People buy most of their stuff from online retailers. As a result, many brick and mortar retailers are struggling or closing their doors.
  • The Solution – Buy retail buildings and reposition them towards tenants that provide services that cannot be purchased online. (Dentists, perishable foods, haircuts, etc.)

For apartment investors

  • The Problem – There isn’t a mainstream lifestyle like there has been in the past. People have a ton of different lifestyles.
  • The Solution – Based on your target market and demographic, buy apartment buildings and reposition them to senior housing, student housing, green housing, Millennial housing, etc. They will pay more for a community that specifically accommodates to their specific lifestyle

Investment Property For Beginners

Real estate investing is one of the best ways to build wealth, and you might be surprised to find out that you don’t need to be rich to invest in property. Here are some tips to keep in mind as a beginner in the industry.

Knowledge Is Power
The most important thing you need to invest in property successfully is knowledge. Any investment requires research and information to function efficiently, and an investment property is no different. Working in the real estate industry is the best way to acquire the necessary knowledge, and you can earn an income while learning. There are quite a few professions that may interest you, including real estate agents, appraisers, title company representatives, and property developers. Another advantage to working in real estate is that you can build a strong network of influential people within the industry to lean on once you begin to invest.

Make Money With These Properties
There are more than a dozen types of investment properties that will turn a profit. Most people think that an investment property is a home that is rented out to a tenant, but that isn’t the only case. Real estate developers can make money on vacant land. If the vacant land is large enough, it can be subdivided and sold for profit or can be developed into a subdivision with homes for an even greater profit.

Property investing can also be done with the investor acting as a middleman through contracts and paperwork. For example, there are lease option contracts which allow an investor to tell a seller that they will pay a monthly “rental” amount with the option to buy the home within a certain number of years. The investor then rents out the home with the same option and a shorter time frame to someone else. When the tenant exercises the buy option, the investor pays the seller and has made a profit. The investor never actually lives in the house and gives someone who may not be able to buy a home in the traditional method an option to buy.

Many real estate investors also choose to flip homes. This often involves buying a foreclosed home from the bank. These homes are generally not in the best shape. The investor remodels the house and sells it at a profit over what he paid.

Become Independently Wealthy
Owning an investment property and becoming a real estate guru is a great way to build wealth. Begin slowly by learning about the real estate industry and then dive right into earning profits through your investments.