Should You Flip This House?
Hello real estate readers. Today I am writing about a popular topic, and one more way to get started in real estate-The Flip! Flipping houses is a popular topic on television shows lately and I often joke about pretending to be Chip and Joanna Gaines, however this may or may not be the right first step for you. Let’s talk about why.
At Home Again Properties we flip some houses but it is not the central focus of our business. It is more like an auxiliary aspect of our business and a way to capitalize on some leads that aren’t great candidates for buy and hold (our favorite strategy). We are currently selling a flip that is beautiful and will generate some nice cash for our business but we still find it hard to sell these projects because we always see the potential long-term return we could realize if we kept them as rentals. We liken the Flip to a pile of cash. The buy and hold property is more like a stream of cash. In general, we are trying to create multiple “streams” of income.
Streams vs. Piles of Cash
The great thing about this business is that the skills acquired in one niche often transfer into another niche. When we buy rentals we usually have to renovate them. While the finishes aren’t generally as high-end as the flip property finishes, the project management and contractor relationships etc. are the same. This allows us to pivot and adjust based on what opportunities present themselves. So if a house has great value-add potential but is above the ARV we target for rentals, we consider flipping it. If we can generate a pile of cash to use elsewhere in our business, we will.
A serious consideration with a flip is what is your plan B? We always have multiple exit strategies. For instance, if it doesn’t sell, could you afford to make the payment for months on end? Could you turn it into a rental to cover the expenses and then refinance it? Could you turn it into a short-term rental like an Air BnB?
Often overlooked in flips (and flipping shows) are the cost of money. Even with private money, these projects are expensive to fund so the interest accrues even while it sits vacant on the market. In a typical BRRRR property we have tenants paying the interest after the property is renovated so much less of our money goes out of our pocket to interest. Another common oversight is the cost of buying and selling. Are you paying realtors on the sale end? Title policies? Insurance? Utility bills while holding?
Also, look at the tax rate for flips. Short-term capital gains taxes will take their bite, which is not insignificant. The end of the year makes profits look less impressive and can make you question the value of your time invested in the project.
This is not meant to discourage anyone from flipping but just to help see all the aspects and expenses associated with it. If the numbers work, they work. An extra 30,000 dollars could be great seed money for getting your business started. I recommend partnering with someone for a small part of a deal to get some experience if you don’t have any-maybe even for free if you have a skill to offer. The experience will be worth it. Perhaps find a great deal and “bird dog” it to an investor for no money, but with an arrangement to let you shadow them and learn. This would be some of the best education you could get.
Some Successful Flippers
The adrenaline and excitement of selling a flip can be addictive-you’ve been warned. The waiting for offers and seeing how others value what you have created can be very exciting. The sale of your project can be a little emotional for some as well but the payday can help soothe your pain. Now you will be wanting to find another deal. Starting out you will not want to overlap projects but my friends John Barr and Jon Barbera at Pryme Homes are very experienced and often have multiple projects going at once (sometimes as many as six!). They know this business well and will be the first to tell you that it isn’t easy. They have created systems for their business and have strong backgrounds in the trades. They will share so much of what has worked for them freely (in conversations and on their podcast “An Investor’s Journey”) but the main thing I take away is that it takes hustle. These guys hustle constantly to create profits. They also are prolific networkers. These guys taught me the value of networking and I didn’t fully understand it until I just did it. Opportunities began to appear. They were right and that is why you will read me constantly touting networking as the cheapest and best way to get moving in this business.
So if you love watching Chip and Joanna and HGTV, just listen to some of the stories from real, local flippers before diving in. Remember that there are a lot of things they don’t take into consideration on their “final numbers” such as holding costs, closing costs, marketing costs, and taxes. This can be profitable and a lot of fun but you’ve got to have the stomach for it; and the hustle. None of this is to discourage you, in fact I felt discouraged from buy-and-hold for a long time by naysayers so I certainly don’t want to contribute to that. This is to add a tad of reality to the “reality TV” stories. You certainly can make a good profit flipping if you educate yourself and buy right.
We’ve got a couple more installments on the “how to get started” theme but this is certainly a popular one. I hope that you will consider all of these methods and find one that suits your interests and strengths. More than anything, I hope you get started and don’t wait for years like I did. And during the hustle and grind, “keep the main thing the main thing”