Welcome to. Brownstone. Beginning the Journey. Congratulations!

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1 Beginning the Journey Welcome to Congratulations! You re probably reading this because you have a genuine interest in the world of flipping houses. Maybe you ve seen some television shows about house flipping and always wanted to give it a try. or perhaps you re a contractor and you decided you want to get into the game yourself since you already have the knowledge of the trades. Maybe you ve heard about how lucrative this business can be...or you just have an eye for design and have always fancied yourself as a real estate investor. Or, like I was, maybe you re tired of the 9-5 Corporate grind (or the 7am-7pm grind, if you have a job like I did) and are looking for a better alternative! Do you want to be your own boss? Do you want to make your own hours? Do you want to have the freedom to call the shots and benefit the most financially from your own hard work.instead of making someone else rich? I know I sure did! Brownstone Whatever reason you have for beginning, I want to congratulate you for taking steps to learn everything you can about the business, so you don t make the same mistakes so many folks in the industry do. I ve been in the business for over twelve years and I ve seen a lot in that time. I ve made my share of mistakes and have learned a lot from them. For the last 5 years my team and I have worked with hundreds of investors, some just starting out, and some who have done a few deals already. We ve helped many folks start their investing business from scratch, and others who have done a few projects before but needed a lift to really take it to the next level!

2 Back in 2004, I was in the same place as many of you.i was working full time in corporate, but yearned for more freedom. I got my feet wet and started working this business part time while holding down my day job too. After about a year of that, I decided I needed to make the break and quit my J-O-B if I were really going to be able to achieve the freedom of lifestyle and finances that I really desired. It was one of the BEST DECISIONS of my life, one I have NEVER regretted. Never Give Up Early on, I had my share of failures, too many to even count. But I learned from every failure, every misstep, so that my next deal went that much better. I even spent my share of money on training programs and coaches to help my business grow. Some were a bust and some really helped. As my business started to take off, initially, the biggest reward for me was the money I made, because it allowed me to have the lifestyle I wanted. I was able to spend more time with my family and really enjoy life, while still making a lot of money. As my business continued to grow, things started to shift. I was able to spend more time giving back, more time helping others. Real estate investing was the vehicle I used to earn a great living while having the freedom I really desired, but it has also allowed me to serve another passion of mine. It has allowed me the freedom of time to do things that really get me pumped. I ve learned, true happiness isn t about making as much money as you can. Don t get me wrong, money is important. However, it s not the end all be all, it s actually just a tool to help you along life s road to accomplishing your goals - to living out your real passions. Over the last few years, the most exciting part of my business has been helping others along their path to success. It s been so fun helping others get their investing businesses off the ground or really take their business to the next level.

3 Work HARD and OFTEN! We ve seen a lot of people find great success, and there is one common denominator to all of these folks - they take consistent action and work hard! My team and I always tell folks who want to get started that they need to be prepared to work hard. You need to set goals and draw up a plan for how you will achieve those goals...step by step, day by day. What do you specifically want to achieve? Why is this so important to you? Who will help you achieve your goal? Where do you currently stand in relation to this goal? How do you plan to accomplish this goal? When - set a date by which you will achieve your goal. You need to take consistent, purposeful action if you want to be successful in this business. I really love helping people create those plans and giving them the tools they need to truly find success. The good news is, there are plenty of deals out there, plenty of opportunities to add tremendous value and make great money doing so. Don t let anyone tell you otherwise. A lot of people ask me if I think the market is saturated, if there are too many people chasing the deals and not enough to go around. The answer is an emphatic NO! There are way more opportunities out there then there are people to take advantage of them! Once you get the right mindset, the sky's the limit. Rehabbing is an amazing experience. There s something beautiful and especially gratifying about taking something that was once so ugly or dysfunctional or outdated, (and likely such a source of stress and despair for someone) and turning it into a beautiful place that buyers can t wait to call home. That s the other thing you ll learn about rehabbing, it s truly a way to help out those in need and be a service to the community. Since we generally deal with distressed properties we re fortunate enough to give people a way out of properties that are a burden.

4 Always Look To Benefit Others It s all about creating the win-win scenario. You need to find a way to add value to the situation. That s where you ll find the best deals, the best opportunities. As a rehabber you ll also learn a lot. Once a project begins and you immerse yourself you ll find a steep learning curve. But on the other side of that curve lies tons of valuable information that will serve you for years to come in your business. Of course, as with anything, there s also a chance of failure as well, but you can learn how to mitigate your risk by making sure you don t fall into the typical traps that so many rehabbers fall into. Believe me, I ve been there. Anyone who s been in the business for any length of time has made mistakes. Sometimes, mistakes are the best way to learn things. But you need to go into this business with your eyes wide open, and really understand what some of the common mistakes are, so you don t make them yourself! So, let s jump in and talk about what I believe to be the three most dangerous mistakes newer rehabbers make, and how you can protect yourself against them.

5 The Number One Most Dangerous Mistake For those who are new to rehabbing, the concept of holding costs can be confusing, and are often greatly under-estimated when doing an analysis of a potential project. Some folks don t even realize they re a factor to consider at all! This can be a deadly mistake, one that can really hurt your bottom line in the end. Often, new investors looking only at the purchase price and estimated rehab costs on a potential flip, and feel comfortable that they can make a nice profit. Purchase Price = $230,000 Rehab Costs = $70,000 Resale = $360,000 So, $360k (resale) - $230k (purchase) - $70k (rehab) = $60k in Profit! Not Factoring In Holding Costs A flip that will make you $60k in profit sounds pretty good, doesn t it?!? However, once you factor in holding costs you can whittle away that profit very quickly. So, let s talk about what goes into the holding costs of a project (sometimes also referred to as soft costs). This understanding is critical to your success as an investor, so pay close attention.

6 Typical Holding/Soft Costs Money Costs Closing Costs (on the purchase and the sale of the property) Taxes Insurance Utilities Real Estate Commissions on Sale Maintenance Costs (yard mowing, snow removal, etc) Lets tackle each one of these briefly Money Costs - Most of the time newer rehabbers don t have the money available to purchase and renovate a home. If you do, you are one in a hundred and that puts you in a great position, as you don t need to factor this part of the holding costs in. I ll assume you need to borrow the funds however, or at least part of the funds, because most people do! The typical process for newer investors is to use hard money or private money to finance the deal. Traditional bank financing isn t usually a great fit on a rehab due to underwriting timeframes, borrower requirements, etc. Hard money lenders are lenders that specialize in lending to investors. They make a business out of it. Private lenders are typically high net worth individuals that aren t in the business of lending, but like to passively invest in real estate to diversify their portfolio because they know how great of a return they can make.

7 You can google hard money lenders in your area and you ll get a whole list of companies to call. You can find private lenders through networking events, your own network, or through colleagues, etc. Every lender is different, but you should be safe to assume you would pay roughly 2-5 points and 8-15% interest for the money you would borrow. To simplify for this example, we ll go in the middle and say we ll pay 3 points and 10% interest. Each point is 1% of the total amount borrowed. The interest is prorated for the term of the loan. Add the two together and you ll get the total cost of the money you are borrowing. If you are borrowing 100% of the cost to buy and renovate on our above example, and you held the property for 6 months, you d be paying $24,000 in money costs. That s not a small chunk of change, and definitely something you would need to factor into your analysis, right?!!? You may be able to bring on an investor who wouldn t charge you points - perhaps just a straight 10% return. You are doing great if you can work this scenario out with someone you know who wants to lend you money. But even at this lower rate, the cost of the money still adds up. 10% of $300k would be $15k over 6 months, which is still a lot of money! When you first start out, you will probably end up working with hard money lenders who will cost you an arm and a leg but there s plenty of them out there. Hard money lenders will generally charge between 3-5 points and 10-16% interest, and usually they won t fund you the entire purchase and rehab budget. To work with hard money lenders you will usually have to bring something to the table, either 20% of the purchase cost or fund the rehab yourself and the lender will cover the purchase cost. Similar to private lenders, the fine details depend on a case-to-case basis but just know that hard money will generally cost you more than the other methods of financing.

8 Closing Costs You will also need to factor in closing costs on both your purchase and your sale. These costs include title insurance, attorney or title company fees, recording fees, document prep fees, and the like. In the example above, the closing costs will be about $6-8k total. Taxes, Insurance, Utilities You can find out what the tax cost will be by researching what the yearly tax bill is and then cutting it in half or 2/3rds for the length of time you will hold the property. You will surely want to get property insurance on the house as well. That will run you between $ a month, depending on the amount of insurance (price of the house). Utilities can add a little to your holding costs as well. These are the costs for things like gas or oil, electric, water and sewer. Real Estate Commission On Sale When you are preparing to sell your property, you will likely hire a real estate agent to list it for you. This way you will get the most number of potential buyers looking at your property. You can factor in 5-6% of the sale price for real estate commissions. These are split between the sellers agent and the buyer s agent. In our example, if we sell the house at $360k, we will pay somewhere between $18k-$21.6k. While that number may seem like a lot, if you find a really good agent to work with, it s totally worth the fee! Maintenance Cost Lastly, you ll need to factor in the expense for property maintenance while you own it - things like grass cutting or snow removal. This can add a couple hundred dollars to your soft costs as well. So, now that we ve explained what all the holding/soft costs are, let s get back to our example and see how these costs affect the deal. So now lets review...

9 Holding Costs Factored In Purchase Price = $230,000 Rehab Costs = $70,000 Resale = $360,000 Holding/Soft Costs Money Costs = $24,000 Closing Costs = $6,000 Taxes = $3,000 Insurance = $1,500 Utilities = $500 Real Estate Commissions on Sale = $18,000 Maintenance Costs (yard mowing, snow removal, etc) - $200 Total Holding/Soft Costs = $53,200! So let s do a quick recap on deal profit, factoring in these costs. $360k sale - $230k purchase - $70k rehab - $53k holding = $7k Profit! Yikes! Now you can see how important it is to factor in holding costs when doing your analysis. What looked like a good solid deal before accounting for holding costs is now a deal that is totally NOT WORTH doing!

10 The Number Two Most Dangerous Mistake Leading With Your Heart, Not Your Do Your Research It s absolutely imperative to understand Head the markets you are working within and not let emotions drive your decisions. People just getting started in the business are so pumped to try and get their first deal, they sometimes overlook key aspects of the required analysis. They tend to see thing with rose colored glasses. Now, don t get me wrong, I am definitely a glass half full kind of person.but when it comes to business, you need to do proper analysis and not jump into something because you are desperate for a deal. Leading with emotions can cause a number of problems. Being to excited to get into your first rehab can cause you to hurry through the analysis and not really understand the market you are working in. You need to really have a beat on what s going on in the current market. You need to ask yourself things like, what are the current inventory levels in the town? What are the average days on market? What are buyers looking for in homes in that area? Stick To The System If you don t do your due diligence at each phase of analysis, it s very likely you can find yourself inaccurately assessing the potential sale price and possibly getting yourself into a deal that doesn t make sense. For this reason, we have a three phases system in place when evaluating deals: the first is Desktop Analysis, then a Site Visit, and finally taking the time to really Crunch the Numbers. Let s take a moment to go over what you should do at each step of the process.

11 #1 Desktop Analysis When a deal is brought to you through one of your marketing channels, you have to check it out online first to see if it s worth your time to do a property visit. Don t waste time running around to every property that comes on your radar without first doing some desktop due diligence. This saves you a lot of time in the long run. You can do this by looking at the property on Google Maps, which can help you determine the type of neighborhood the house is in, the kind of street (is it a quiet dead end street or is it directly next to a highway?). You can also get some kind of idea of what type of condition the house is in. You can then go to websites like Zillow/Trulia/Redfin and see information about the property - when it was sold, how much it was sold for, what the site estimates the value to be on the property. View these value estimates with caution. They are just one indication of value - one single data point. You need to take the big picture into perspective and not rely on these online value estimates solely because sometimes they can be way off! It s also a good idea to check out the tax records to obtain general info about the house as well as any sales history. After your desktop analysis gives you an indication that it could be a good deal, you can prepare for your onsite visit. #2 On Site Analysis You ll need some tools for this endeavor - your repair estimate sheet, notepad, and a camera to take LOTS of pics (also a flashlight to be safe). Make sure you walk the entire property, both exterior and interior. While doing your walk through, take a lot of pictures so you can remember the details once you leave. Take some street shots of the neighboring houses and street as well. Use our repair estimate sheet to get an idea of what the rehab costs will be. If you re involved in any of our programs, we usually give our repair estimate sheet as a bonus. If you don t have a copy, go to to download your free copy. This sheet is extremely comprehensive and gives you information on how to figure out rehab costs using our rule of thumb pricing. However as a new investor, once you ve done the estimate sheet and you think it will be a good deal, it s not a bad idea to bring a contractor through the property with you again

12 and get their opinion. #3 Crunching the Numbers After you have done a site visit, take time to drive the comps that you reviewed in your initial desktop phase of analysis. Check out some of the other properties in the area that have sold to see what they look like and compare them to what you re property will look like when you re finished. Remember to look at SIMILAR properties, take note of size, style, and finishes. Take note of average time on the market and number of houses sold. Typically, you should look at houses within 1 square mile or less of hte subject property (.5 miles is best) and look at houses sold within the last six months. The next piece of this lesson jumps back to the first point in this report - don t forget the soft costs and holding costs! Generally people forget to add these costs into their budget and this can seriously hurt your bottom line. Be Analytical NOT Emotional Leading with your heart can also cause you to over-rehab a property by spending too much money fixing it up. You need to set a budget and stick to the budget. If you don t, you end up eating away at your bottom line substantially. You have to remember that you are in this to make a profit. You need to really understand what a typical buyer for your subject property expects and what they don t. If the roof is 10 years old, you likely don t need to replace it. If competing houses all have laminate countertops, you can go with a low grade granite and still knock their socks off! You don t need top end granite at $100/sq, because you won t get the difference in price back on the resale. Rehabbing one level above competing homes can be a good idea, but spending $5k on appliances on an entry level home is not. You aren t rehabbing the house to make it YOUR dream home. You are rehabbing it to make it a great place to live for the typical buyer in that area. Make sense? I think you get the picture.

13 Emotions can also cause you to overinflate the after repair value of the subject property. It s important to be analytical when running your numbers. We strive to price our homes at slightly under market value to ensure they sell quickly. When you expect top dollar for your rehab, you can get yourself into a longer on market time, which ends up eating into your profit substantially. (See above for the #1 mistake and don t forget the holding costs!) After putting significant time and effort into a rehab, you have a tendency to overvalue the work you did, and want to list higher than market value, believing buyers will be feeling the same way you do. This can be the kiss of death when looking to sell quickly. We recommend you take the transactional perspective, and look to sell your rehabs as quickly as possible so you can make your profit and move onto the next one. On that note lets move to our third mistake that first-time rehabbers tend to make..

14 The Number Three Most Dangerous Mistake Trying to do it all yourself.. Instead of Build Your Team In rehabbing, knowledge and building your preparation is EVERYTHING. The good news is, you don t have to dream team! know everything to get started! In fact, we encourage you to build a team of people who are specialists in specific areas so they can give guidance and help as you grow your business. This is one the biggest leverage points for you as a business owner. If you want to be successful, don t try to do it all on your own! Surround yourself with people who are smarter than you in the critical areas of the business so you can gain leverage and drastically cut down on the mistakes you make. So, who should your teammates be, you may ask? You ll definitely want to get some good real estate agents on your team, along with some good general contractors, tradespeople, attorneys, mortgage reps, lenders, and other rehabbers who have more experience than you. When you change geographic areas, the people, prices, customs, and regulations change. There are so many different ways that rehabbing may differ from town to town, county to county, or state to state. That s why you want to surround yourself with intelligent folks who can guide you through these differences. For example, you ll want to build relationships with good local attorneys who can close transactions for you. You ll also want to get to know the local attorneys and engineers who understand zoning matters in the town you are working in so they can give proper guidance when you are considering subdividing a parcel of land or considering putting on an addition to a home, or if you want to get involved in some new construction projects.

15 You will also need a solid rehab crew, to include a general contractor and tradespeople who have experience working in the towns you are doing business in. Your projects will go much smoother if the GC has a good relationship with the building department. This also shows that the GC does good work, as the town inspectors can be some of the most critical folks you ll find. If the work passes their muster, you know it s being done properly and the GC isn t short cutting things. Real Estate Agents Now let s talk about real estate agents; as they can be one of your biggest assets in this business. Having trustworthy and hard working agents at your side is extremely valuable for rehabbers. Building a network of agents will bring you many profitable deals over the long term, and help you get them sold fast. When you become involved with a good agent they help you learn the area, they ll run comps for you, they can help you meet the other big players in the area, give perspective on what buyers are looking for in the area, etc. Just like any other industry, you find good and bad. So be sure the agents you work with are educated on the market, have significant experience, and are straight shooters who will provide conservative numbers and are looking to build long term relationships. Of course, you can t solely rely on your agents, you need to stay informed, getting practice at desktop analysis, running comps, and running repair estimates on properties yourself as well. But you can learn a lot from a good agent, so make sure you get some on your team as soon as possible!

16 So, there you have it...these are three of the biggest mistakes we see newer rehabbers make. But if you follow the advice we ve given you in this report, you ll be miles ahead as you get started in the business. And hey, let s not let things end here... we also do a lot of other free training, to include videos, blogging, live meet-up events, guest speaking engagements, and webinars. Check us out on Facebook to stay up to date on our free training opportunities. Or, if you want to take a closer look inside what we do every day, check out our YouTube Channel at You can snag some free training as you meet our project managers and watch us find, flip, and resell properties throughout New England and the Midwest. If you are looking to get into the field of real estate investing, or have already completed some projects, but are looking to grow your business, we d love for you to keep in touch! Thanks so much for sticking with us to the end...i can already tell you are one of those who will really make things happen because you finished what you started. As we sign out for now, we ll leave you with some of our before and after project pictures below...enjoy! Now get out there and take some action to secure your next deal today! Sincerely, Kim Harrington, Chris Coute and the Brownstone Development Team! Coaching@Brownstonerg.com

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