'My net worth went up at least $100,000 on each purchase.' A 27 year-old real-estate expert shares how he sniffs out the perfect deal with 'virtually no risk'
- Kevin Paffrath, real-estate investor and YouTube sensation, says he increases his net worth by at least $100,000 on each deal with a simplistic investment strategy.
- He focuses on tract housing - or "cookie-cutter" homes - where he can easily identify value and negotiate effectively.
- He also explains how spending money on paint, carpets, and cabinets nets much more profit than tackling the bigger problems such as plumbing and electrical.
- Today, the 27-year-old's real-estate portfolio is nearing $7 million in value.
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Kevin Paffrath, real-estate investor and YouTube sensation, got his start in the real-estate industry on a whim.
"My father-in-law started training my girlfriend - who's now my wife - to be a real-estate agent," he said in an exclusive interview with Business Insider. "I said: 'Huh, real-estate ... I'll get my license too - sure, why not?'"
At the time, Paffrath was 19 - and he was growing tired of "dead-end" jobs at Jamba Juice and Red Robin.
"I realized that if I just do one real-estate deal - just one deal - I will make more money than I can make all year long working at either Jamba Juice or Red Robin," he said.
Once he acquired his license, insatiable curiosity led Paffrath to search out all aspects of the real-estate business.
He'd spend his time walking through home inspections, grilling contractors, and picking the brains of seasoned brokers and investors for any insight. Paffrath knew that having an in-depth, all-encompassing knowledge of the industry would give him the upper hand when it came time to make an investment.
"If I'm going to sell smoothies, I have to like smoothies and know them. If I'm going to sell burgers, I have to know them. And if I'm going to sell houses, I have to know houses," he said. "Anything I could do to listen to somebody's perspective was my opportunity to differentiate myself in the industry."
Once Paffrath had a solid knowledge of the industry in place, he started to etch out a strategy that was simple and repeatable. He wasn't interested in bending over backwards to try to squeeze a few dollars out of a deal - and that led him to the straightforward approach he still employs today.
"If I can go into a neighborhood and find a simple tract house - a three bedroom, two bath that's 1,333 square feet - I can zoom out and I can find 20 other sales of that same floor plan within the last six months," he said.
A tract house is often referred to as a "cookie-cutter" home. In neighborhoods where tract housing is the norm, individual houses are nearly indistinguishable from one another.
In theory, these houses are so similar that they should sell for about the same price - and this is where he's found an advantage.
Instead of having to assess a particular subjective value to a home, he can look at what exact replicas have sold for. He thinks about these potential deals as commodities - much like a gold, oil, or soybean investor would. If he can negotiate his way into a property that's selling below market value, he knows he can make a quick buck.
"Then I know I've got a slam dunk of a deal and virtually no risk because I feel like I'm buying a commodity," he said.
What's more, as a general rule of thumb, Paffrath doesn't go into a deal trying to rebuild a property from the ground up. He's not going to tear out the kitchen and bathroom, or replace a foundation or roof. He refers to these properties as "money pits," and thinks that putting capital to work there isn't wise. To him, the return on his investment isn't worth the initial outlay. He'd rather look for more low-hanging fruit.
"You have this weird thing that happens in real estate where the really expensive stuff makes you the least money and is the biggest headache," he said. "The really easy stuff makes you the most money and takes the least amount of time."
Paffrath likes to put his money to work on more mundane aspects of a property. Paint, carpet, flooring, cabinets, and hardware all fit the bill and he says will provide him a greater return on his capital when he eventually decides to sell.
Today, Paffrath's portfolio has a value of just under $6.2 million - and he's only 27-years-old.
"Every single property I have bought, I've bought it at a point where after I've paid the price for the house and after I put my money in for a fix-up, my net worth went up at least $100,000 on each purchase," he concluded. "We just opened escrow on a $660,000 dollar property, so we'll be knocking on the door of $7 million."