THE BLOG
09/20/2013 10:53 am ET | Updated Nov 20, 2013

How Mom and Pop Real Estate Investors Can Compete With the Wall Street Big Boys

Unless you've just recently been rescued from decades stranded on a deserted island, you've heard of someone buying, fixing and flipping single family homes. It has long been the staple method for the everyday person to make money in real estate.

This is the primary real estate investing strategy mom and pop investors turned to when they got sick and tired of their slow performing retirement accounts and wanted to supercharge their (ROI) return on investment.

Many people enter the world of the "house flip" because they had money in a CD and it was no longer exciting. The heyday of plopping your savings into a Certificate of Deposit started in the late 1970s and reached its peak in the early 1980s.

In August of 1981a 6-month CD generated an average of as much as 17.98 percent APY. Besides, it was insured by the FDIC and with high returns and no risk, it was a smart way to grow a portion of your savings.

It's not the place to grow your money anymore. CD rates have nosedived to below 1 percent since 2009. To earn over 1%, you'll need to deposit a minimum of $25,000 into a CD to earn a whole 1.05% in exchange for locking that money up tight for 12 months. Do you hear that? (It's the sound of me yawning with excitement).

In that last 5-7 years, parents and grandparents whose retirement and savings were not growing, or who lost much of what they had gained when the economy tanked, started looking for safer options.

Enter the buy, fix and flip or buy, fix and hold solutions.

An abundance of foreclosed properties and increasingly high rental rates have made buying single family homes an attractive and profitable solution for everyday people with money to invest.

For those who don't have money to invest, small fortunes have been made by people who become wholesale investors. They find great deals and pass them on to the mom and pop investors making a profit in the process.

Recently, private equity firms and hedge funds have been pouncing into the hardest-hit markets nationwide and snapping up single-family homes by the tens of thousands. Just since 2011 at least $10 billion in institutional funding has flowed into single-family housing. They're grabbing distressed properties out of the foreclosure pipeline with the goal of playing the housing recovery in the most direct means possible-as landlords.

So how can the mom and pop investor compete? Simple...you don't. The private firms and big boys on Wall Street can't (or won't) use the same techniques that will work for you.

Here are some ways to find diamonds in the rough.

  • Use bandit signs- these are those 18"x24" corrugated plastic signs you see planted in the ground with wire stands. A simple message, handwritten in black marker does the trick. For finding properties use: I Buy Houses, Any Condition, Cash Call Tom 555-555-5555. For finding buyers, use: "Must Sell, 3b 2 Ba $XX,000 Any Offer Considered Call 555-555-5555.

  • Use Craigslist - With it, you can build your buyers list and find motivated sellers. Find buyers by looking for properties for rent that say "newly rehabbed"... this is an investor who buys and holds. Find sellers by looking for motivational key words... "for sale or rent", "lease purchase." All of the buy and hold buyers in your area are on Craigslist, look for keywords like "newly rehabbed", "new kitchen" etc. Call the people who are selling and ask if they are looking for more properties; if so...add them to your buyers list.

Call the sellers and find out what their situation is. You may be able to lock that deal up and pass it on to your buyers fast.

  • Drive for dollars - Take a drive and look for distressed properties. Mail piling up out of mail box or on door step overgrown grass, hedges, and landscaping, excessive flaking exterior paint, rotted or exposed wood, lock boxes on doors, (railing, or poles) with no for sale sign in yard. Boarded up basement windows, outdated exterior design, zoning/municipal notices posted on windows and doors. You can look online at tax records to find an owner of a distressed property.

In the past 18 months, I have purchased and rehabbed more than 350 homes. Here are some things I've learned that can help you get the best results for your efforts.

  • Build a team. Doing it all yourself is possible, but I prefer to have rehab crews, attorneys and property management teams so I can focus on finding deals.

  • If you plan to buy and hold, aim to complete any renovations in two to three weeks at a cost of about 10% of the purchase price. This is the timeline if you want to do deals fast.

  • The most attractive properties are three-bedroom, two-bathroom homes with two-car garages and a lawn for the kids. This property type attracts families-the best and "stickiest" kind of tenant.
  • Single-family home renters stay 4.5 years and typically take good care of the property, since they care about what the neighbors think.

If all of this seems like a foreign language to you, don't stress. There are plenty of books and online resources that can give you the knowledge you need to get started. The important thing to keep in mind is you don't have to compete with the big boys and girls, just use stealth strategies and with time and experience, you'll create a system that works for you.

- Dean Graziosi

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