Ron Drummonds is the owner of RKD Construction, a renovation company in Valrico, Fla., just outside of Tampa. He has been in the construction industry for more than 20 years, and his specialty had been bank renovations. Four of the nation’s largest banking institutions were regular customers.
Drummonds also had an interest in real estate. Working with the banks, he developed a relationship with a bank’s special assets manager and was hired to work on some houses that had been foreclosed upon. After remodeling several of these bank-owned properties, Drummonds saw an opportunity. He asked whether he could purchase some of these properties in “as is” condition. Being familiar with the Tampa real-estate market, Drummonds could “cherry pick” the properties he liked best. This opportunity allowed him to use his construction skills to generate an additional source of income, doing fix-and-flip property renovations, generating $15,000 to $20,000 per flip. Drummonds completed two or three fix and flips per year until 2008.
Then the banking crisis took place. Almost overnight, Drummonds’ bank renovations came to a halt. Bank holding companies stopped investing in renovations. Does this sound eerily familiar to what happened in the residential remodeling market? With his day-to-day overhead still in place and no work on the horizon, Drummonds had to find a new business model. In October 2009, he went back to the real-estate market. By the end of 2010, he purchased and renovated 13 homes. He wasn’t getting rich, but with proceeds of anywhere between $12,000 to $20,000 per sale, he was covering his overhead and making a good living.
This year, Drummonds already has purchased and renovated eight homes in the Tampa area. He has begun to examine a long-term strategy of keeping two remodeled homes per year for 10 years, which will allow him to create his own retirement strategy with the passive cash flow from his rental properties.
Like Drummonds, remodeling contractors are uniquely suited to work with distressed, discounted and foreclosed real estate. Consider the following:
- You already have an in-depth knowledge of construction, allowing you to take on projects most investors would avoid.
- You have established business/supplier connections for better pricing to increase profit margins.
- You have established work crews and the expertise to complete the job.
There are additional benefits to working with real estate:
- If you need money quickly, you can flip the properties you work on.
- There is no downtime between projects. You can use your investments to keep crews busy.
- If you want a long-term investment, you can keep the properties and rent them to build wealth through asset management.
- You decide what to buy and where to buy, and you control every phase of the project.
Drummonds finds his properties on the Multiple Listing Service and by working with brokers that represent and sell bank-owned properties. He has built a reputation in the Tampa area as someone who will work with distressed properties that scare other investors. He recently purchased a 2,400-square-foot house with fire damage for $90,000. With some major cosmetic improvements, he hopes to sell the home for more than $200,000.
I asked Drummonds for the best tips he would give contractors considering working with real estate. He said you must know your area because values can change quickly. With a 15 percent reduction in Tampa real-estate values last year, Drummonds had to keep a tight rein on his purchases to know what was and wasn’t a good deal.
You also must pick a market, Drummonds said. His primary market is first-time home buyers. With 30-year fixed mortgage rates the lowest they have been in 40 years, he follows a simple formula, targeting buyers who can afford his homes. His margins may be smaller, but his formula works. People always will need clean, affordable housing, and Drummonds is providing just that.