Flipper/Rehabber · Chicago, IL · Member since 2016 · 123 posts · 38 votes
Everyone talks like fix n flipping is dangerous and you could lose your *** doing it.
Say I buy 70% below market value - repair costs. Ok, I screwed up and was 10% off on my ARV, another 10% off on my repair budget, and my holding cost doubled because I was slower than I thought I'd be. Even if all of that happens I'm borderline breaking even.
My question is, assuming you have a little bit of margin in your purchase price, how bad can it get? Sure, it would suck to hold onto a project for 8 months and not make anything, but when I hear 'risky' and 'dangerous' I think having your money chopped in half.
Correct me if I'm wrong, but if you have done a decent amount of due diligence and have enough reserves in the bank, then you're rarely going to be negative on flips and if so, nothing significant.
Dangerous if your arv is 70% and ARV is under $200k. Not much room to work with.
Closing costs is already 6-7% so technically your spread is 23-24%. I would aim for a lower % of 50-55. Sorry it may be hard in your market with competition but no way I can sweat out a rehab with only 50k spread to work with bc I usually drop 20k alone on kitchen baths hvac appliances and paint. Holding costs is a killer especially with private or hard money.
Francis Rusnak I would tend to agree with you, especially in my markets where prices don't fluctuate Wildly. If I buy right then I'm not gonna lose my shirt.
This can be problematic for you in a market like Las Vegas if you're counting on appreciation or if the market has already appreciated and then takes a hit.
In my market I know if I buy at 100k with plans to sell at 200 then while I may not sell as high as I want to, I'm certainly not selling less than 100.
If your market and others price fluctuations could do that to you. Just be careful not buying (and expecting to sell) at the top
Dangerous if your arv is 70% and ARV is under $200k. Not much room to work with.
Closing costs is already 6-7% so technically your spread is 23-24%. I would aim for a lower % of 50-55. Sorry it may be hard in your market with competition but no way I can sweat out a rehab with only 50k spread to work with bc I usually drop 20k alone on kitchen baths hvac appliances and paint. Holding costs is a killer especially with private or hard money.
I wouldn't agree with your statement. There are many things that could go wrong that may go outside of you 10% repaid budget or 10% off on your ARV. If you are always only 10% in each of those areas then sure however that is really not the case. Furthermore, if you take too much time the market could fall from out beneath you. There are many variables that can be accounted for and their effect mitigated by doing due diligence the right way and have cash reserves but there are other variables you cannot always account for. Say your market all of a sudden wants tradition homes and you made yours too modern and it sits. You did everything you could and did a great job but it will continue to sit and get dropped in price for nothing other than market whims. If you have enough experience you can see potential issue and avoid landmines but if you are new, you're gonna run into some. I hope that helps re-frame the way you are looking at it.
Francis Rusnak One thing to think about (especially if it's a lower dollar flip) is that one "replace" instead of "repair" can make far more than a 10% impact in the repair budget. Think plumbing, electrical panels, HVAC, roof, etc. You won't get killed because of "more new carpet" but those other issues will cost you money and time. So if your repair budget goes over it also increases your carrying costs. However, your point is valid that if you have reserves in the bank you'll live to do another flip. But take a look at a lot of the posts here, people have saved $20K and are looking to do their first flip. With that budget, if things go wrong, you can end up upside down in a hurry. You'll never be able to dig out of a half completed renovation when it comes time to sell.
@Francis Rusnak Here's one for thought. Back in March 2016 I bought a property that contained 2 homes on one lot for $34k, 1 in the front and a smaller home in the rear w/ally access. These homes on the lot show on the APN map and approved structures. I proceeded to rehab the front house and was able to get the property under a resell contract for $119k with the closing after the rehab completion of the rear home. The rear house rehab cost $6500. One day I got a call from L.V Police Dept stating that a neighbor called them to complain of a squatter in the rear house. The night before a lady broke in and tried to move in, very important to know your neighbors, they can keep a eye on your property if your absent. I didn't want the lady to be arrested but the officer insisted. About a week later while in Florida checking on some other property flips I had going on I got a call from the same neighbor telling me that my rear house burned down the night before. The first thing I thought was that the workers did this, but after some conversations it was determined that the fire started around 4am. So did the squatter come back or fireworks, it was the week of 4th July. It really didn't matte,r I just saw my money go up in smoke. Insurance companies don't cover vacant homes especially ones that has been vacant 3yrs prior. Builders Risk insurance only covers what you have in a rehab not the value of the home. Well after doing some pencil work and getting estimates from local contractors $50k, it became apparent that I was going to lose my ( you know what on this one). Luckily, I own a General Contracting Company in Cal, but after doing the math I was still going lose by bringing my crews out to Vegas for a 3 weeks. So, I put on my boots loaded one of my work trucks and got to work. I torn down and built the house myself. Keeping the drywall, painting and flooring for the subs. Most investors will not have this resource and would have lose big time. So to your question.... Yes flipping can be dangerous in many ways not only by bad rehab numbers or inexperience sometimes we get hit by the unforeseen issues
I would say fix and rent out is less dangerous if you can find good long term funding and good long term tenants. It should at least be a back up option in my opinion if a buyer doesn't come along within your desired timeframe.
@Robert Rayford, I just heard on BP Podcast today (Ep 209 with Kevin Carroll) about Berkshire Hathaway and one other company offering vacant property home insurance. It's much more expensive then occupied properties, but sounds like it's worth it.
Yes we use APIA and they have insurance for vacant homes builders risk policies that protect against forces of nature but also cover theft and vandalism. The last two are not normally covered but we get them anyway just in case. Furthermore, our builders risk will cover up to what we think the sales price of the home is. For example, say we buy a house for 150k and put another 150k in it and sell for 400k. Our policy is at 400k so if anything were to happen even our profit is insured. (got that tip from my lender in fact). the general cost is about $120 per month per 100k of coverage. So for a 400k insurance amount it runs me $480 a month for insurance which is hefty but worth it to us. I hope that helps with the insurance. Moral of the story, there are many things that can go wrong and sometimes despite your best efforts they will. Just make a killing on the next one to make up for it.
Robert Rayford
Here's the actual needed policy, renovators risk. It's vacant home coverage with builders risk attached. A true hybrid. Covers the house at depreciated value (actual cash value), covers the renovations at replacement cost.
Costs are much better than Berkshire, but I only know of three insurers that offer the renovators risk coverage. Depending where in the US it's usually about $350 per $100,000 in coverage per year.
Here's the actual needed policy, renovators risk. It's vacant home coverage with builders risk attached. A true hybrid. Covers the house at depreciated value (actual cash value), covers the renovations at replacement cost.
Costs are much better than Berkshire, but I only know of three insurers that offer the renovators risk coverage. Depending where in the US it's usually about $350 per $100,000 in coverage per year.
I do not work for free and depend on what I make to live on. If I invest 100K in a property, tie up my cash for 8 months and break even it is disastrous and it can very easily happen especially with a novice.
If you fix and flip as a hobby why care after all it's only a hobby not making a profit is no big deal.
Have you ever seen a house for sale that is partially renovated by a flipper, if so you are likely looking at a investor that went bankrupt doing the flip. Very common and I would consider that a disaster.
Flipping is very high risk especially for a novice that is cash strapped and only financially able to do one property at a time.
PS: if you are holding a flip longer than 3-4 months your risk and costs increase exponentially.
REI Guard offers some of the best options for investors. Vacant, Occupied, etc. They also provide month-to-month cancelation, so you don't pay for months you don't need coverage. They also cover "Actual Cash Value" instead of "Replacement Value", which will save you money if it fits your needs. I use REI Guard on all my properties and it saves a lot in premiums.