How I Made $56,135 on 1 House Flip!
You’ve probably heard hype-filled headlines like that in the real estate investing space before. And chances are pretty good you’ve gotten e-mails from “gurus” claiming even bigger profits.
Yep, I know.
They come in my e-mail inbox nearly every day. I get way too many of them, in fact. The difference is that this “hype-filled headline” is actually true.
Hyped Up Real Estate Investing Profit Claim Revealed!
Haven’t we all gotten sick and tired of these kinds of over-hyped headlines from the gurus?
I have. So let’s not go down that road. Instead, let’s be perfectly clear: not all of my house flips end up with profits like this. In fact, most of them don’t.
Most of them usually net me between $20,000 and $30,000 (not too shabby), but this one was one of the best ones I’ve done so far — although still not THE best.
In fact, about 14 months before this one I had what I would consider a “failure” where I made a profit of only $14,015.
But I’ll save that one for another post.
Until then, let’s get into this one, the one that I now affectionately referr to as “The Home Run.”
The Home Run: Behind The Numbers
Many real estate investors claim that you shouldn’t use wholesalers. I found this deal through a real estate wholesaler, so that should be enough to quiet the critics. In fact, even though I had to pay him a $5,000 commission, it still was a home run.
So, if anyone tells you that you can’t make money flipping houses while using wholesalers, don’t listen to them. This blog has outlined some of the many benefits of using wholesalers in real estate investing, so there’s no need for me to get into that right now.
Let’s just get right into the really good stuff.
Here are the vital stats:
- Where: Wareham (Onset), MA
- Type of house: 3 Bedroom, 2 bath cape style
- ARV (after repair value): $209,000
- 70% Rule: $209,000 x 70% = $146,300
- Projected profit at 20%: $41,800
- Projected other expenses at 10%: $20,900 (including closing costs, attorney fees, real estate commissions and financing interest)
- Estimated Repairs: $90,150
- MAO (maximum allowed offer): $56,150
Financing: No Money
On this flip, I didn’t use any money of my own. As I’ve talked about here before, it is possible to flip houses with no money. And this flip is proof positive that it can be done.
Of course, the money has to come from somewhere (it’s not like you actually flip it for free), you’re just using other people’s money or “OPM”, instead of your own.
In most cases, especially if you’re new to flipping houses, you may not be able to flip a house without any money of your own, especially if you’re using private money lenders. They usually do want you have some skin in the game. However, the more you do it, the better your relationships become with your lenders.
Even though I did use a hard money lender for this deal, I have a very good relationship with him. He knows that I’ve done plenty of other flips, and I’ve gotten him consistently good returns. So he gave me preferred lending rates.
This is one of the real benefits of having a successful track record, as well as one of the benefits of networking and building solid relationships when investing in real estate. For this reason alone, if you’re first starting out, don’t discount hard money lenders. I use them all the time on my flips.
From the profits that you see here, this flip would still be a “home run” even if I had used “traditional” hard money lender terms.
Hard money lenders can definitely get you into deals, and you can still turn a profit with them as long as you follow all the other rules like the 70% rule, sticking to your MAO and using highly accurate ARVs.
The Home Run: What Went Right
I think it goes without saying that there were a number of things that went right on this house flip.
The market did get just a bit hotter during the six months between initial purchase and final sale, but not much. Even without market-based price appreciation, I still would’ve made a pretty nice profit on this one.
It’s “the system” that made me the big profit…not the market.
But “the pluses” on this deal far outweighed “the minuses” as you can see:
- Although my MAO was $56,150, I paid $48,000. So immediately I was + $8,150
- My cost of repairs was projected at $90,150 , but came in at $104,668, making me a - $14,518
- Other expenses were projected on $20,900, but they actually came in at $22,697, so there I was - $1,797
- And lastly, and perhaps best of all my ARV was projected at 209,000, but we ended up selling it for $231,500, making me + $22,500
- Total upside over projection: +$14,335
- Projected profit was $41,800 , but we were + $14,335
- Netting +$56,135 before taxes
Although most of the factors in this flip were in the positive, the only cost overruns were on the repairs.
This was primarily due to some extra unexpected framing repairs we had to do to make the space behind the walls as beautiful as the space in front of the walls.
Although these were additional framing details we probably didn’t need to do, I’m not in this business to “put lipstick on a pig.” If we know that there’s something we need to do, even if we know that we could probably “get away with it” at the inspection, my house flipping team is committed to doing the right thing.
We do responsible rehabbing, period. No exceptions.
Why Was It a Home Run?
- Granite countertops in the kitchen
Although this house didn’t necessarily require granite, I really felt that Formica countertops just wouldn’t look as good. The kitchen wasn’t enormous and counter space was relatively small. But making the countertops granite instead of Formica definitely added a lot to look and feel of the house, while only adding less than $500 in costs.
- Cathedral ceilings in the master bedroom
We had to do a lot of framing anyway, so I talked to my builder and I suggested doing cathedral ceilings in the master bedroom. He agreed and felt it would only add a little bit to our costs, so we went for. We expanded two-bedrooms to make them into one very large master bedroom and totally changed the look and feel of the upper floor, which made it very attractive, light and airy – a beautiful space to live.
- Deck off the back of the house
Adding a back deck was a killer idea from my builder Billy Bachant. Of course, it certainly added a few dollars to his bill, but I gotta hand to him, it was a great idea. The backyard was fairly small anyway and probably not that usable. So, adding the deck was a great addition. During the open house, people were even hanging out back there as it was a beautiful day. It’s ideas like this that come from people on your team that show how important having a good house flipping team really is.
Big Profits, But REAL Ones
What I didn’t mention before is that we staged this house, and I believe it really helped sell the house quickly. Although I normally don’t stage lower end flips, because this house came out so nice, it seemed appropriate.
We had an open house on a Sunday and we had an accepted offer two days later on Tuesday; I think the staging had a lot to do with that. As I said, I don’t do staging on every house flip, but on this one, it was definitely worth it.
When you get a $78,670.43 check at a closing, it feels pretty nice. These are the numbers most people will typically use to show how much money they made on a house flip.
No, no, no…it’s just not true.
Yes, the check we got it closing was $78,670.43…but my actual pre-tax profit was $56,135.
You see, there’s things like attorneys fees, broker fees, financing fees and holding costs that diminish those profits. I don’t hide them because they are a part of this business. Even WITH those costs reducing my net, there’s no doubt this flip was a total “home run.”
Although you hear of tales of people making five and even six-figure profits flipping houses, so many people either don’t believe it or they just feel that it’s not possible. Although it doesn’t happen on every flip, it is very possible.
I’m certainly not saying you’re going to go out and do this kind of thing on your first flip – especially if you’re first starting out. But if you have a solid plan, have the discipline to stick to the rules and use a trusted and systematize your business, you too can make profits like this.
What do you think? Please leave a comment below to tell me about YOUR best house flip or real estate investing deal – or just ask about anything about real estate investing or house flipping.
Photo: granite-charlotteA Home Run House Flip: Details, Numbers, & How You Can Do It Too by Michael LaCava