Sooo... before I invest...

33 Replies

So my wife and I engaged in a pretty heated conversation. My wife is amazing, but we are simply wired differently. My wife is totally ok with punching a clock Monday through Friday, the slow grow of a 401k, and possibly being miserable at a job if it means security. I have the same goal of security, however, a different approach towards it. To a person like me, investing in real estate makes great sense and is a calculated risk. To a person like her, all she can see is the risk. 

Please advise... I understand that taking on rehab investments comes with risk. I have no cash flow yet thus any project I take on will be on loaned money. I imagine that a few of the obvious risks with doing fix and flips is:

  • There is a delay in the rehab and it starts to eat into profit margin, or possibly even into the negative
  • The house doesn't sell as soon as expected or in the allotted amount of time
  • The rehab is finished and the appraiser low balls you upon the house being purchased thus effecting your end profit 

Here are my questions:

  1. What are other, if any, risks in fix and flipping?
  2. Let's say everything goes to hell and all the cushion you left/calculated for yourself for holding costs etc. is exhausts? Like, let's say you calculated 6 months, but after 8 months the house still doesn't sell and you can no longer make the payments to hold the property, what happens then?
  3. Will the lender put a lean on the now renovated house?
  4. And last, I want to ease my wife's mind, in order to do that I need to know and understand how to protect my personal finances and assets from being involved? Will an LLC protect my family and our home? Do I need to put our home and finances in a trust? I guess I'm asking how do I protect us from a failed project?

Thank you anyone who takes time to read and respond to this.

If the house doesn't sell, then the lender can foreclose, just like a regular primary home. If you haven't flipped a house before, it might be a good idea to partner with a successful flipper until you can learn the ropes. A lot of people lose money on their first deal, but consider it a "cheap education." There are probably hundreds of posts on here about someone's significant other not being on board with investing. I'm not sure how much research you've done, but being well informed and having conservative and accurate numbers when discussing a potential investment can help ease your wife's insecurities. 

Hi Matt, let me answer your questions first:

  1. What are other, if any, risks in fix and flipping?
    - Rehab costs can run higher than expected, accidents happen (property damage or personal injury) and you have inadequate insurance, operating on bad information (property in wrong neighborhood), or financing partner pulls funding. Basically - there are a lot of risks, when flipping you're running a business so you have all the risks associated with home ownership + those of running a business.  
  2. Let's say everything goes to hell and all the cushion you left/calculated for yourself for holding costs etc. is exhausts? Like, let's say you calculated 6 months, but after 8 months the house still doesn't sell and you can no longer make the payments to hold the property, what happens then?
    - The bank can foreclose and take the property - but worst case scenario - you can overcome this by renting out the property and collecting rent that is greater than the payments + carrying costs, assuming you did the analysis on this and market rents are higher than carrying. 
  3. Will the lender put a lean on the now renovated house?
    - sure they will do what needs to happen to get their money back
  4. And last, I want to ease my wife's mind, in order to do that I need to know and understand how to protect my personal finances and assets from being involved? Will an LLC protect my family and our home? Do I need to put our home and finances in a trust? I guess I'm asking how do I protect us from a failed project?
    - I am not a lawyer or CPA - but I use my LLC's to protect my finances from liability claims (someone gets injured on your property and sues the LLC), plus there are some tax benefits. When just starting out your LLC does not have any credibility and inadequate capital. Most banks will probably need you to personally guarantee the loan, which will keep your personal finances entangled with the flips. Once you're up and running and the LLC has adequate capital and experience you can get out of personally guaranteeing the loans.

All this being said - real estate, in my opinion, is the best way to build long term wealth. You can mitigate all of these risks through educating yourself and by building a strong experienced team. You can network with experienced flippers in the area and get hands on experience which will help you avoid some of the early mistakes. Also take on easy projects in areas you know well to start, and have more than 1 exit strategy for every flip you take on. Avoid taking on properties that need plumbing or electrical updates since those require permits and licenses and in my experience ALWAYS run over budget. Stick to properties where all you need to do is replace the floors, and clean up/update the kitchen and baths. You want to be able to buy, fix, and put on the market within 90 days if possible. This will reduce your risk of market changes. 

It sounds like you're wife is skeptical which is natural for most people. Try keep this in mind and get her involved anyway you can. My wife dislikes rental properties but she knows they're key to our long term wealth. I found out she enjoys seeing properties after a major rehab and takes pride in knowing we're providing nice, clean, and safe accommodations for our community. So I make it a point to bring her to the apartments after we turn them over and have just completed major updates. Find something your wife likes about the experience, besides the money, and make sure to highlight that every chance you get. You'll need her on your team if you want to have long term success. 

@Matthew Nixon I think it’s important to remember that any business venture comes with risk. Gone are the days of businesses truly looking out for their employees. Whatever company she works for, what happens if she’s let go. Maybe there’s some severance or the 401K, but as an employee, you’re truly reliant on your boss and employer to keep you employed.

Starting into REI, it's just another business... but you're the one in charge. You get to determine the success/failure. Sure there are risks, but if you learn as much as you can, the risk is hugely reduced.

Personally, I’d look towards longer term rei opportunities. Flips are great for short-term profit, but doesn’t plan for your future. Plus, the shorter-term the investment, generally the more risk of something going wrong outside your control. Definitely look at long term rentals or BRRRRs as we call them here. Might not be perfect for you, but at least worth looking into.

@Chris Szepessy

Thank youd for your response. I can definitely see the wisdom in working with an experienced flipper. I guess I just worry that no one will want to work with the newb. Plus maybe they will only see me as the competition.

What are some ways to track down flippers? Thanks again for your response.

@Jonathan Bombaci

There is a property about 20 mins from where I live. I feel like I'm running solid numbers however, the project feels big and risky. The numbers look good but I don't have the lender portikn yet i.e. how much interest and or points I will be charged. I know its about 105k on repairs and renovations including a 20% buffer for something to go wrong. But still I feel its a big project and may be out of my leagues. Foundation issues and all. Definitely not a 90 day project in my opiniion.

I want to be successful so bad. I feel like I'm about to the point of information overload and ready to get my feet wet, but I need to avoid as many mistakes as I can especially for my marriage sake.

Typically are the quicker fixer uppers more expensive to get into?

Thanks for your response and your time.

@Mike McCarthy

The BRRR formula always sounds great. I need to read the book completely. I think i may just need to pump my brakes a little bit and focus on one thing at a time. I want to get my real estate license and up where I live a lot of realtors invest on the side.

Maybe that is the best win win scenario for me. If I can be out in the field more learning from other agents that I trustmaybe that will lead me to learning how to invest safely.

Do you guys think that is a smart way to approach investing?

@Matthew Nixon I would consider what you're planning on getting out of having a RE license.  In my personal experience, it's not really worth it until you start flipping a number of houses each year.  Personally, I'd rather work with a realtor who knows the area, knows the process, and can be another person on my team taking some of the load off me.  I saw it as just another hurdle before actually investing - one that wasn't worth it for me.

Of course, your plan might require or make a RE license well worthwhile.  I'd just consider what YOUR goals are and how a RE License fits into those goals.  If it's central, go for it.  If it's just to save a few thousand dollars a year on fees, it likely isn't worth it.  (If it will save you lots of thousands, then it's probably worthwhile!)

@Mike McCarthy

I have wanted to be a realtor since we first bought a house. We had a really good realtor, she was professional, she listened, and in our opinion she was what we needed. I have always wanted to help veterans and families, especially first time home buyers the same way she helped us. So for me the RE license was always a forgone conclusion. 

At the end of the day I see myself investing as well as being a realtor.

Originally posted by @Matthew Nixon :

@Chris Szepessy

Thank youd for your response. I can definitely see the wisdom in working with an experienced flipper. I guess I just worry that no one will want to work with the newb. Plus maybe they will only see me as the competition.

What are some ways to track down flippers? Thanks again for your response.

Ive never partnered with anyone, but go to local RE meetups in your area and get to know local investors. I wouldn't be pushy and just ask them for help or to partner, but over time things will evolve. Try to find out what you're good at that they may need help with and offer to do it for free. Some may see you as "competition," but there's plenty of room in the game for multiple investors.
 

$105k in repairs budget with foundation issues, I’m sure there is money to be made there, but it sounds a little risky for a first flip. I’d encourage trying to find something where the repair budget would be $30k-$35k for your first job and stick to things that anyone can do and doesn’t require licenses like kitchen, floors, and baths. That way if budget gets stretched you can pitch in to keep costs down. Once you get a few flips under your belt you can expand and find a specialty. If you want to fix foundation issues there will be plenty of opportunities to do that in the future but keep your first deals as vanilla as possible. 

You’re going to make mistakes that’s part of the process. If you blow the budget on a $30k Reno it will cost you a whole lot less than if you blow the budget on a $105k Reno. 

@Matthew Nixon A lot of great advice has been given here. In my opinion, I would not to put all of your financial eggs in one basket.

I am very conservative when it comes to investing, so take this with a grain of salt. To me, if you have adequate savings, are on track as of today with your 401k, have paid off high interest debt like student loans and credit cards, AND have a moderately stable income that covers all of your current bills then great - time to take on some risk with your first venture in real estate. If not than you should not take this type of massive financial risk on. Especially with a wife who relies on you to be part of a team throughout life.

When I got started, the only money I had to invest was the cash left over at the end of the month that I saved. After five years or so I was ready to make my first rental purchase which I still have. A bad investment would set me back years in terms of being able to make another one.

@Jonathan Bombaci

This is true. That 105k is a HUGE reno. I want to get out of the starter blocks so bad but I really need a more sound approach. You're right if something were to go wrong on that project I'd be in a really bad hurt lock.

I haven't even invested yet and my head hurts lol. So much to consider. But I do want to be successful. So back to the drawing board I go.

@Michael A.

You speak wisdom there as well sir. You are right. I don't have any cash reserves. I think I may have drank a little too much of "other people's money" kool aid. I need ti focus on getting my finances in order so that a mistake isnt crippling.

In the mean time I will still keep my eye out for abandoned homes. Maybe a wholesale or 2 is possible with less risk?

Thanks for your response.

@Matthew Nixon You’re a good man. I really appreciate that you have such a level head when it comes to this. I spent a lot of time getting my finances straight - and I even have a kid now, so my appetite for risk is down, but desire to make my next real estate investment deal is not. I am not ever giving up on the idea of continuing with my real estate investment path, and neither should you. This industry will always be here when anyone is ready to participate. You will absolutely sleep soundly and enjoy life knowing that you did not overextend yourself to take on such big risk if there’s not much to back it up.

And it sounds like our wives are very similar. This is not her cup of tea, so I have to be the one to communicate to her when I think I have found a good deal.

@Matthew Nixon I understand your position. My wife was always so uncomfortable with the thought of getting a second mortgage to finance our first investment property. We finally came to a comprise. She wanted us to be in the position to be able to pay the mortgage on the property monthly as well as our primarily residents mortgage in the even t doesn’t sell or rent. To that end we have been paying off credit cards and student loans quickly and have almost reached the goal.

My advice is to look at compromises. Good luck!

@Daniel Townsend

That's a very good idea as well. One thing I considered doing was beginning a apprenticeship in electrician at the local JATC. I still have to pass the aptitude test and then an interview. The test will be in August some time. Pro and con of that move:

Pros:

  • I can get paid to learn vs. paying to learn
  • Financial stability and good benefits
  • Learn a trade that could possibly help me do my own rehabs
  • It's a mobile job that I can take with me anywhere in the country

Cons:

  • it's a 5 year commitment in the apprenticeship
  • Doesn't leave a bunch of time to look for deals

I also really wanted to get my real estate license. I don't know if I can be a realtor, electrician, investor. Does that seem feasible? The way I look at it is being an electrician can carry while my realtor circle expands and basically forces me to go full time realtor. As my realtor business takes off I can hone in on investing to supplement my retirement. 

Thoughts?

@Matthew Nixon my question would be do you want to be an electrician? It sounds like you’re going to work for years before investing. I was a realtor for several years but I let it lapse. I wasn’t investing at the time and I decided I didn’t like it. Now I don’t think I need it because I’m not looking for deals in the mls.

If I had advice on this it would be to make a plan. Where do you want to to be in 1 year or in 5 years. Then work backwards. It sounds like you’re good at research because of all the electrician info, but don’t get analysis paralysis.

If being an electrician is something would really love to do then id say go for it!

@Daniel Townsend

I don't know if love is the operative word in this case. I see it more as a vehicle to put us in a better financial situation. Maybe I would love it, but I've never done it so I don't know for sure. What I am really passionate about is freedom.

I love real estate for several reasons but the bottom line is financial freedom and wealth building that I can teach my kids. I've already done the college thing and the grinding for other people or companies and I HATE it. That is my fuel. I want off this hamster wheel.

@Matthew Nixon

Consider a buy and hold strategy with some base hits instead of swinging for the fences with flips that are difficult to do in a competitive environment. My wife wigs about throwing a lot of $ into my real estate hobby. However, once I get them rented out and making a few hundred bucks per door she's happy again. But whenever I buy a new one, she gets silent again then occasionally lobs out negative comments about this kind of investing. But the BRRR method has slowly worked and I've acquired 7 properties over the last 4 years that cash flow about $3,500/month. Not great, but not bad. Once they're paid off after these 15 year loans (on 5 of them) cash flow will be about 9k/month. I keep telling her that, but all she sees is that I just dropped 4K on a new HVAC system or another foundation repair. lol.

@John Morgan

I love that. I don't need a get rich scheme but if I can get ahold of some properties that will cash flow that is ideal. I think I should read that book on the BRRR method. It sounds sustainable. How did you obtain your first property?

Originally posted by @Matthew Nixon :

@John Morgan

I love that. I don't need a get rich scheme but if I can get ahold of some properties that will cash flow that is ideal. I think I should read that book on the BRRR method. It sounds sustainable. How did you obtain your first property?

I paid 135k cash for my first property 4 years ago. I took out $ from Roth IRAs, savings and a HELOC. But it got me in the game. I just did a cash out refi on it for 140k. It appraised at 195k. Bought a property in bad shape last week with the cash and putting 25k into the rehab. It should appraise for 200k when it's all done next month and I'll repeat the process. I'll do a cash out refi and buy another one..and fix it up. It's a slow process, but works. And keeps the wife somewhat happy since I'm not going crazy with flips.