This is an editorial that was first published by Marc Halpern in September 2011 in several REIA newsletters Summary: I PAY dozens of people and the government before I make a single penny, and even if I DON'T EVER make a single penny. You're welcome!
Let’s talk about what each one of us does as just one single investor doing one single rehab and offering it as a flip, rental or maybe even as a lease-option to someone recovering from a previous financial disaster (divorce, medical, foreclosure, etc).
I will write the word PAY in capital letters each time to show how many people are getting paid when I go through the business cycle of one project. In fact, I don’t mind the play on words that the word PAY is capitalized because that is what CAPITAL is all about. In addition, every time you see the word PAY below, keep in mind that every time someone gets PAID, that someone pays taxes (or is supposed to be paying taxes). That’s the revenue the government uses (abuses) to fund programs and with which it is supposed to balance the budget. The story starts with a distressed property that is an eyesore to the neighbors. I stumble across this property through a wholesaler or MLS or a postcard campaign or by driving for dollars. I decide that I’m interested in the property and I PAY a home inspector and/or my contractor to do a walk-through and help me identify problems and refine my repair estimate. I sign a contract of sale and apply for a conventional mortgage. I PAY an application fee so a mortgage broker can feed his/her family, I PAY for an appraisal by an appraiser who needs work, I PAY an exterminator for a termite certification and a few other people get PAID along the way.
I go to settlement. I PAY the closing agent, I PAY city taxes, I PAY the water company, I PAY the sewer bill, I PAY the FedEx guy, I PAY the notary, I PAY an insurance agent, I PAY for a flood certification, I PAY for people to do a title search, I PAY for title insurance, I PAY the first of many interest payments to the bank (which they use to install marble floors in their lobby), I PAY the county clerk to record my deed and mortgage and the seller PAYS an attorney $100 so he can have his secretary type up a deed (that I have to proofread to make sure that there is proper attention to detail, which there sometimes isn’t). Then I start the rehab. I PAY my handyman for all kinds of stuff, I PAY Home Depot for all kinds of supplies, I PAY an HVAC person (who pays other US companies for equipment), I PAY an electrician, I PAY a plumber, I PAY a roofer, I PAY a painter, I PAY a gutter & capping guy, I PAY a window company for windows (that PAYS plastic and glass suppliers), I PAY a flooring store for hardwood or laminate flooring (that PAYS chemical companies for polymers and lumber companies for wood and adhesive companies to keep oriented strand board in one piece), I PAY a mason for concrete work, I PAY the township official to inspect the work at various stages, I PAY for drywall, I PAY for paint, I PAY a carpet guy who PAYS for carpet (i.e., more polymers and dyestuffs), I PAY for kitchen cabinets made by workers (in the USA?), I PAY for ceramic tile (made in the USA?), I PAY for sinks, bathtubs, light fixtures and light bulbs (made in the USA?), I PAY for 6-panel doors, garage doors and bifold doors, I PAY for door handles, I PAY my local appliance rep for a frig, overhead microwave, stove and dishwasher, I PAY for a cleaning crew when the rehab is done.
I PAY gas stations for my gasoline to and from the job site and during the intense parts of the rehab, I typically BUY each day two disgusting unhealthy meals at a drive thru that I eat in my car. I PAY the electric company and the gas company for the power I use during the rehab. I PAY property taxes during the rehab. I PAY vacant dwelling insurance during the rehab. I PAY mortgage payments during the rehab. I PAY a CPA to make sure that I put all the right numbers in all the right boxes. I PAY an attorney to make sure that my contracts are good. I PAY a sign company to print my For Rent, For Sale and Rent-to-Own signs and I PAY for metal stakes to place them in the ground. I used to “not PAY” Craigslist to advertise my rental or lease-option (at last, someone doesn’t get MY MONEY), but I stopped due to better alternatives. I used to PAY the newspaper for ads that were a waste of money, but it made me feel like I’m doing something when the property doesn’t move as quickly as I hoped. I PAY for telephone to take calls from tenant-buyer prospects. I PAY Staples for paper and ink to print my applications and flyers for my infobox. I PAY for more gasoline to visit the tenant or tenant-buyer prospects at their current residences and I PAY for gasoline to show them my beautiful home. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. I PAY. All these people and entities are getting PAID. All these people are paying taxes. Why? All because I decided to buy and fix this one property! So far, I have NOT RECEIVED one penny!! I have not received one penny yet, but nevertheless, to get to this point, it took a lot of investment of MY money, MY time, MY expertise, MY intelligence, MY drive, MY resolve, MY problem solving, MY confidence, MY courage (or stupidity, depending on your point of view), MY training, MY compliance with laws & regulations, MY accurate calculations, MY risk management, MY assessment of market cycle, MY sense of style for choosing colors, light fixtures & staging (pitiful, as I am a chemist), MY psychology & ability to read the body language of tenant-buyer prospects and a lot more. I’m so drained after all this investment, no wonder my La Z Boy is second in life importance only behind my wife and kids. When you think about it, this is crazy. We real estate investors lay out HUGE amounts of money and time in a highly uncertain environment. This is the opposite of having a job where you show up and get paid for your time, whether the enterprise makes money or loses money. If the rehab makes money after you have PAID all these people and entities, then the government wants a big chunk of that! They did nothing to help the rehab along. But they want their money and they want us to issue 1099’s to every person we PAID figuring that we have nothing better to do with our time than generate more paper. So, I screen the tenants or tenant-buyer’s and I finally approve one. Finally, I get some money which is one month of rent from the new tenant (security deposit is not mine) or option consideration from a tenant buyer that covers maybe 10%-20% of my rehab costs and then I get a piddly $250/month positive cash flow after all that. If I sell the property to the tenant-buyers after a year or two, finally I get PAID. Yes, I make a net profit. It’s MY payday! Yippee! I give a good chunk to the government because…well because. When I sell the property, I PAY the title company, I PAY the attorney again and if it wasn’t a lease-option, I PAY a realtor commission. I PAY a realty transfer tax because…well because. So, a lot of people get PAID because I had the guts, energy, initiative, resources, self-discipline, expertise, intelligence to do all this with zero guarantee that it will generate a profit that when/if I do see it, I will see down the road with very delayed gratification!
Yes, I create a lot of jobs. Did I mention the people in the supermarket from whom my contractors and I bought food every day? Yes, I keep a lot of people making money because of all the work I did and the all the risk that I took while they were ALL getting PAID and I was not yet making any money. Now imagine that I DIDN'T buy that one property.
Go back and read about all the people who DIDN’T get paid. The neighbors who lived with an eyesore in the neighborhood. The tenant-buyers who couldn’t get a rental or a mortgage and continued living in bad conditions. The banks that continue to have a non-performing asset. I came along and with no help from anyone, not the government, not anyone, I PAID all these people, I beautified the neighborhood, I made people’s lives better, I didn’t get my money back for months and years and sometimes decades! And then the local authorities make it hard for me to do all this. And then the federal government over-regulates what I can do or can’t do that runs the engine of our economy. And then the local, state and federal governments demand that I PAY them more and more and more for the privilege of helping all these people before I get paid a penny myself!
If you want to stimulate jobs, you don’t have to incentivize me with gifts and praise and money. All you have to do is stop standing in my way a little bit. I’ll do the rest. I’ll PAY ALL these people. I’ll make the neighborhoods better. I’ll save people from foreclosure. I’ll give a chance to people who are in true financial recovery get into a pretty home in a pretty neighborhood. I’ll generate tax revenues for all you local, state and federal governments. All I ask is that you don’t stand in my way a little bit. That’s all. Don’t give me any handouts. Just let me do all the work and take all the risk. Is that so hard? If you make it hard for me, maybe I’ll do just one less rehab and all those people won’t get paid and one more house will continue to be blighted. What a shame to waste the initiative of an entrepreneur. Not for the entrepreneur, but for society. Allow entrepreneurs to expend the energy and take the risks and we will create more jobs and more tax revenues than can be imagined. We will get back to running a federal budget surplus...like we used to have! The message here is to just let the 10% of us in the population who are entrepreneurs create the jobs. We are not billionaires. Most of us aren’t even rich. But we actually do create jobs and tax revenues. Just let us entrepreneurs do the hard work and the rest of you can live off of us. We are happy to pay all of you. Just let us do what we are naturally driven to do. We will do it all on our own. We don’t need your help. We just need you to get out of the way a little bit. Now that I got that off my chest, I’ll return to reality. It ain’t gonna happen. Egotistical politicians that care about self-aggrandizement more than anything (including money) will blow it with petty bickering like we saw in the face of crises in September 2008 and July 2011. And we have it good here in the US! Nearly half the world lives under dictatorships or monarchies. They have no rights and freedoms. But we are supposed to be better than that in the US. I am disgusted with both political parties in the US today, but that’s not relevant. So what do we do with this reality? We do the best we can and enjoy the journey. Happy journey and happy investing! Real estate investors...be proud of how you keep the economic engine running. View every single rehab like you are creating multiple jobs for people who really need them. Be true to your values. Enjoy every day of your life and appreciate what you have, even if it’s not perfect.