When Lex Levinrad arrived on the shores of sunny Boca Raton, Fla., in 2003, he had never bought an investment property. In fact, he’d rented his entire life.
Suffice it to say, he was amazed when he noticed his new bosses pulling in some serious cash each and every month from storm-damaged and other distressed real estate properties.
“I watched as we drove around picking up rents from 11 or 12 houses,” Levinrad tells Deals & Dollars Weekly. “I thought, ‘How can these guys who aren’t even 40 years old own so many houses? How is that physically possible?’”
Their secret, he said, is the same one that has made Levinrad a nationally-recognized real estate educator more than a decade and 500 house deals later: other people’s money.
“After I learned the mechanics of how you can use borrowed funds to buy a property, I realized it is not that difficult,” he said.
Distressed Properties: An Investment Gold Mine
When most people think about real estate, especially those who are just getting started, their minds may wander over agents, property listings, but rarely extend beyond what Levinrad described as an underworld of wholesale real estate investors who play by an entirely different—and more lucrative—set of rules by investing in distressed properties.
Distressed properties are real estate traditionally described as having hurricane, water or fire damage that cannot be insured, and therefore are unable of being mortgaged by a bank. Property whose owner is facing or in foreclosure, or that is already seized (known as REOs, or real estate owned by the bank) also fits that definition.
One other distinction between distressed properties and other real estate: the banks will only sell them for cash.
Sold for anywhere from 60 to 70 cents on the dollar, Levinrad said these properties offer a wealth of opportunity and profit, with investors netting around $30,000 on a $70,000 home.
“The banks are not interested in putting these properties on the MLS for people who can quality for a mortgage. They are looking for buyers who can pay cash,” he said. “If you do have the cash, you can buy it for substantially less than what it is worth, fix it up, then resale it for what its true value is.
“The trick is just because you have to pay cash doesn’t mean you have to use your cash.”
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Buying Distressed Property with No Cash of Your Own
Just as Lex Levinrad learned while bird-dogging properties for his former bosses in Florida, you too can get in on the action with no cash or credit of your own.
First, look for companies who will front the cash for you to find a deal in exchange for a small fee. Levinrad’s Distressed Real Estate Institute is one of such institutions that lend to investors who then turn around and flip the property to someone else, making a profit on the lender’s cash.
Next, consider borrowing from friends and family. If that doesn’t work, Levinrad said it is not too difficult to find private money available from individuals in your community and across the country. It’s all about matching deals with dollars.
“There is $6 trillion sitting in checking accounts, CDs, and savings accounts, and money markets. There are a lot of people out there who have savings who are earning less than 1 percent on their money,” he said.
“If you can prove to them how you can give them say 10 percent of their money, and you can use their money to buy properties, fix them and rent them out, then it will be a win for you and a win for them.”
A major concern of beginners in the distressed property space is the cost of rehabbing and flipping these investments. As part of Levinrad’s real estate boot camps, one of the things he teaches is how to estimate the cost of fixing these houses so you are better able to project costs on future projects.
And it all starts not surprisingly at your local hardware store.
“The best advice I can give you is to take a notepad, go into Home Depot and just break down your components,” Levinrad said. “You can buy perfectly good 16×16 tile at Home Depot for 68 cents a piece. If you really shop, you can often find closeouts for substantially cheaper than that.”
In Boca Raton, Levinrad said you can find laborers who can tile floor for $1.25 per square foot. Add 68 cents to those costs, and you should be able to tile a 1,000-square-foot home for $2,000.
“Each component of that rehab can be broken down just like that,” he said. “If you need to spend a day at Home Depot, go to Home Depot. If you need to speak to general contractors, speak to general contractors.
“Just don’t be spending your weekends painting walls. That’s not a good use of your time.”
Levinrad said the best advice he can give for someone starting out who might be concerned about risk is to follow the path he did. You will see sooner rather than later, he said, that investing in distressed property works.
Find a situation where you can locate properties for another investor (also known as bird-dogging) who is putting up the cash or credit for the venture.
“When you get the swing of it, you can use your own cash or use the resources of others to buy properties and grow your business,” he said.