Thread by @TihoBrkan

1/ There are numerous strategies to make money in real estate.

Whether you’re a small investor buying single-family dwellings or a big-time fund buying whole buildings, it all boils down to these 3 strategies: core, value add and opportunistic.

2/ Today I want to discuss the value add strategy for those purchasing a single-family dwelling with an exit in mind. The industry calls this “house flipping”.

The key reason I invest in value add strategies is that real estate can be improved. This is called…

3/ forced appreciation. However, to correctly execute this wonderful strategy — which is not possible to do with almost any other asset class — you will need a fantastic team around you.

The team:
• real estate agent
• lawyer/attorney
• financing broker
• builder/contractor

4/ To accomplish a profitable & successful value add project and exit at the desired target IRR (internal rate of return), you will need to do almost everything right, without major mistakes.

In this game, unlike trading or stock picking, the mistakes are unforgiving.

5/ Several early mistakes will mean lower profit, a further few mistakes will mean no profit & the beginning of losses.

Catastrophic mistakes could mean a permanent loss of capital and/or a default on the mortgage (if you used one).

There are no stop losses to save you here.

6/ Assuming you’ve done your homework & are purchasing your property investment in a smart central location, the vast majority of the time prices will not be volatile.

Therefore, assuming you don’t mistime the market completely (i.e. 1972, 1989, 2006) it won’t the purchasing…

7/ that gets you into trouble. If you think about the mastermind group of people helping you — agent, lawyer, broker & builder — the first three will do their job up to a normal standard expected in the industry.

Headaches, problems, issues, mistakes, losses, more losses…

8/ and eventual lawsuits come from choosing the wrong builder/contractor. So here is the advice in a nutshell:

To be profitable in the (single-family) value add strategy, you will need to team up with an honest, reliable, efficient and well-organized builder.

How to do that?

9/ Some of you are probably thinking that you have a better chance of being struck by lighting. You might be right. 😂

Others are thinking all this sounds too difficult with a lot of work involved. I rather just buy the $SPY index fund or pick a few fast-growing companies.

10/ Nothing wrong with that strategy, but you will never understand the joys of making 30, 40, 50 or 100% plus in a single year.

If you choose your builder wisely, the return will be achieved without too much risk and without any volatility or drawdowns.

11/ Furthermore, what gives me great pleasure and joy (that the stock market never gives) is creating something and seeing it take shape in real-time, step by step, as you & others involved in the project fall in love the way it looks, it functions and feels.

12/ So how do you find a great builder, especially for someone like me who seems to be doing projects all around the world?

After doing my macro-economic & fundamental research on a certain country & the city within there, I will usually start the mirco-search of individual…

13/ properties recently renovated & sold, and try to find out how successful the exit was. I start by asking around who the owner was, who the builder was, where their office is or what their contact details are.

Here you accomplish a few things in one go.

14/ First thing, you have started learning about the market itself. Second, you have started building your network of people within the industry.

Additionally, you are also getting a reference on these people since you’re standing in a successful project. All of this is…

15/ a good starting point. You want to come up with as many references as possible. The best way is to actually ask the builder to take you to his previous projects.

If you are lucky, you might meet the owner who will shed some light on issues & difficulties s/he had dealing…

16/ with the potential contractor you are interviewing to work with you on your next value-add deal. Questions to ask:

• Original time frame to complete the scope of works? What about delays?

• Original pricing agreed? What about additional unforeseen costs?

17/ • Understand that’s the classic builder’s go-to card to rip you off.

• How were the builder’s communication & stress levels? Calm with a can-do attitude? Or negative (every day, problems everywhere)?

• How the owner felt during the rehab? And in the end? Score 1 to 10?

18/ You want to go through these questions & several others with as many references as possible.

You also want to do your own due diligence, on the internet & with the local building association, to see if there were any complaints during previous projects.

19/ Also, make sure your builder is licensed, has builder’s insurance & when getting your initial quote (pricing estimate), do research on their company & see if it has good standing.

Also, do a search to see if the builder ever filed for bankruptcy? If s/he has ever been sued?

20/ Here is an important tip for the beginners. Before you start looking for your first project, make sure you have found a solid team of people — especially your head builder/contractor.

Even a great rehab deal can be ruined without the right builder to help you execute.

21/ Finally, a few words on keeping the right team in place, once you are few deals down the track.

Don’t be a Scrooge McDuck of real estate, saving every single cent for you and expecting your team of people to do all additional work for free.

22/ They aren’t stupid. If you don’t treat them right, they will leave & go work with someone that is likely better than you, as well as more generous.

Look after your talent & they shall reward you.

On top of their fees, pay them additional bonuses — as long as they PERFORM.

23/ Unlike 95% of Wall Street, real estate is a business of hurdle rates and performance expectations.

This is great as everyone involved in the project has the same north star & everybody’s interests become aligned.

If the builder does well, you’ll pay him on time & reward…

24/ him with a bonus. You will also not have any major cost blowouts helping you stay on budget.

If the project is of high-quality workmanship (very important in the luxury space I work), the agent will be able to sell it for a premium & that also benefits their commission.

25/ The great thing about real estate is making it all come together with talented people & watching it all run smoothly as you achieve insanely high rates of return the index fund guys would never believe is possible. There is also a sense of comradery on a successful exit. 👍