J Scott - Author of Flipping/Estimating Book - Ask Me Anything!
Hey everyone!
First, thank you so much for all the support after my recent Podcast episode and the recent BiggerPockets release of the 2nd Editions of The Book on Flipping Houses and The Book on Estimating Rehab Costs. I've gotten a tremendous amount of email and private messages with the kindest of words, and I sincerely appreciate it.
Unfortunately, there's been so many emails and messages that I haven't had the ability to respond to everyone, despite my best attempts. Many of them contained questions -- and I hate not being able to respond to all the questions I get! So, I wanted to start a thread to give everyone an opportunity to ask questions -- and since I get many of the same questions over and over, I thought this might be a good resource for future questions I may get.
Anyway, if you have any questions about the Flipping/Estimating books, about any aspects of real estate strategies, about investing in general, about running a real estate business (or any business), etc., I'm happy to do my best to answer.
There are a lot of tremendously knowledgeable people on this forum, so don't post here if you have a question best answered by the whole community.
But, if you want to address something specifically towards me, this is the place! Feel free to post in this thread and I'll do my best to respond to everyone!
Also note that I created this thread a few years back -- might be worth checking first to see if I've answered it there:
Originally posted by @Eddie Kay:
Scott, what would you rather do if you had 60K as in @Eric Barber's post above.
Unfortunately, that impossible to answer without knowing a lot more about the situation and your goals. For someone who is 22 years old, has a good job, lives in Cleveland and doesn't want to retire for 25 years, my answer would be different than for someone who is 55 years old, is unemployed, lives in New York City and doesn't have much retirement.
Also, things like experience, risk tolerance, creditworthiness, etc. plays a big part.
Sorry I can't give specific advice...
Originally posted by @Chad Kastel:
I have two questions . In the interview you spoke about "6 things to prepare for." One of those concepts was to "figure out a reasonable worst case scenario" and then build the deal from there. In the interview you talked about worst case scenarios as somewhere in the 15% range This seems low to me, but I also use conservative numbers for worse case scenarios. My plan is to buy an 80k homes than need between 10k-20k worth of repair and then sell them for 140-150k (where the comps are now). I plan to sell them traditionally or by cashing out and refinancing. So what is a reasonable low? Or How did you determine 15% to be your "low"?
Every location is going to be different. Every recession is going to be different. I live in Maryland, and we're pretty well insulated from economic turmoil thanks to our proximity to DC. And I live in one of the most sought after school districts in the country. If you look at historic data, my area tends to see relatively little correction during recessions.
Now, that said, I've invested in some areas that could experience a 20-30% correction (or more during a bigger crash). If I were investing there, I would factor in a much bigger potential worst-case scenario.
Also, keep in mind that when I say 10-15% correction, I mean in the time period that it will take me to complete the deal. If I purchased a flip deal in Atlanta, I might assume a 20% worst case correction, but that's because I'd plan to resell in the next 3-4 months. The market worst-case might drop 50% in a recession, but I would think it's unlikely to drop more than 20% in the next 3-4 months, during the duration of the project.
This brings me to my second question. My original plan for those $80,000 houses was to cash out refinance. But you specifically talked about NOT leveraging and keeping as much cash as possible for the down turn. My thought was I didn't want to pay taxes on the flip and wanted to 1031 out of the properties later on. Is this a poor strategy considering the potential market downturn? Almost all my money is liquid cash as of today, very little is in the stock market. I know you're not an accountant or financial adviser but you are someone who I am taking advice from directly. If you need tangible numbers to make an assessment PM me and I can tell you how much cash I have.
It depends on your longer-term goals. Holding versus flipping to save on taxes never made sense to me. If you're optimum exit strategy on a deal is to flip it, saving 10% on taxes by holding for an extra 6-12 months seems sub-optimal to me.
On the other hand, if you'd be holding cash now to buy rentals later, but you find some really good rentals now, there's no reason to wait. I generally suggest holding cash in order to find better deals later...but if you can find those deals now, go for it!
Thanks for the quick response.
Hi everyone, I am currently preparing to close a Lease Option deal however I would like to know whether I can list my own trust instead of an LLC or myself as the Landlord/Seller of a property? Are there any drawbacks to this if it is possible? Any positive insight would be appreciated! :)
Originally posted by @Eric Barber:I am looking at a brand new house in the 140-150k range that will bring in about 1200-1300 per month in rent.
I have about 60k to invest. Should I put it all down to pay it off quicker so I can move on to my second house investment after paying off the first or should I just put 20% down and purchase another house similar to the first with 20% down as well. I am 42 and looking to pay it off with a 10 year mortgage. My thinking is to put the 60k down and finance 80k on a 10 year mortgage which will definitely have positive flow coming in. I guess I like the idea more of a house that is paid off generating revenue than 2 houses generating less revenue. Hope this makes sense. Thoughts please.
Eric, I have a similar situation and would be curious as to what your final decision is in your case. How about this one.....
Scenario 1: An investor owns a rental property that has 80% equity (increasing rapidly due to 15 year mortgage) and nice positive cash flow.
Scenario 2: An investor owns two rental properties like the one above, but with only 40% equity in each (increasing slowly due to 30 year mortgages), and is currently barely breaking even.
Which is the better situation for the long term? Pros and cons of each scenario? Anyone??
@J Scott thank you so much for taking the time to do this. I have the first edition of your books and can't wait to get the new ones.
Originally posted by @Gary Floring:
Originally posted by @Eric Barber:
I am looking at a brand new house in the 140-150k range that will bring in about 1200-1300 per month in rent.
I have about 60k to invest. Should I put it all down to pay it off quicker so I can move on to my second house investment after paying off the first or should I just put 20% down and purchase another house similar to the first with 20% down as well. I am 42 and looking to pay it off with a 10 year mortgage. My thinking is to put the 60k down and finance 80k on a 10 year mortgage which will definitely have positive flow coming in. I guess I like the idea more of a house that is paid off generating revenue than 2 houses generating less revenue. Hope this makes sense. Thoughts please.
Eric, I have a similar situation and would be curious as to what your final decision is in your case. How about this one.....
Scenario 1: An investor owns a rental property that has 80% equity (increasing rapidly due to 15 year mortgage) and nice positive cash flow.
Scenario 2: An investor owns two rental properties like the one above, but with only 40% equity in each (increasing slowly due to 30 year mortgages), and is currently barely breaking even.
Which is the better situation for the long term? Pros and cons of each scenario? Anyone??
I am 90% going with the option of Scenario 1. Its a brand new construction house in a good area of town. I will go view its progress this weekend. I will also be putting extra money toward the principle and can pay the house off in 3-5 years. I have 60k to invest and can't just let it sit in the bank.
Originally posted by @Gary Floring:
Originally posted by @Eric Barber:
I am looking at a brand new house in the 140-150k range that will bring in about 1200-1300 per month in rent.
I have about 60k to invest. Should I put it all down to pay it off quicker so I can move on to my second house investment after paying off the first or should I just put 20% down and purchase another house similar to the first with 20% down as well. I am 42 and looking to pay it off with a 10 year mortgage. My thinking is to put the 60k down and finance 80k on a 10 year mortgage which will definitely have positive flow coming in. I guess I like the idea more of a house that is paid off generating revenue than 2 houses generating less revenue. Hope this makes sense. Thoughts please.
Eric, I have a similar situation and would be curious as to what your final decision is in your case. How about this one.....
Scenario 1: An investor owns a rental property that has 80% equity (increasing rapidly due to 15 year mortgage) and nice positive cash flow.
Scenario 2: An investor owns two rental properties like the one above, but with only 40% equity in each (increasing slowly due to 30 year mortgages), and is currently barely breaking even.
Which is the better situation for the long term? Pros and cons of each scenario? Anyone??
As usual, the answer is, "It depends"...
First, what are your goals? Do you need cash flow right now? Need more cash flow later? Need a big chunk of cash now? Need a chunk of cash later? Need more tax shelters? Need a place to live during retirement? Want ease of management? Want diversification?
Second, what do the numbers look like? If you have an 80% LTV loan with a 15 year mortgage that is cash flowing well, the numbers on that deal are likely great. If you have 60% LTV loan with 30 year mortgage that is breaking even, the numbers on that deal are likely pretty dismal. But, you should have the actual numbers -- COC, ROE, IRR. What are they?
Without more information about you and the metrics on the property, nobody will be able to give you a good answer to which is better. Keep in mind, I know people who will happily lose money on their properties every year because the tax benefits it provides.
Originally posted by @Sava Vukovic:
Hi everyone, I am currently preparing to close a Lease Option deal however I would like to know whether I can list my own trust instead of an LLC or myself as the Landlord/Seller of a property? Are there any drawbacks to this if it is possible? Any positive insight would be appreciated! :)
I would recommend consulting a good attorney and tax professional...
Hi J. We just picked up your second edition books and how to analyze the market by economic factors. Great reading! We are looking at an REO that has been on market 7+ months, had 3 price drops by the bank (down 30k), for a potential rehab and flip. It is a 1970 build under 1000sf/floor, and in need of complete gut, is short of FHA qualification (right now) which is why it hasn't moved. I have a couple contractors looking at it to provide bids for remodel and rehab. My question is about dealing with the bank: what kind of approaches have you used to pick up REO's? Cash in hand at offer? Fast closing to remove non-performing asset? We have investors ready to move, but have not dealt with banks on how to approach the offer. Some direction of where to further research how to make an offer that is highly likely to succeed while still getting the a deal would be greatly appreciated.
Originally posted by @J Scott:
I know people who will happily lose money on their properties every year because the tax benefits it provides.
???
Are you suggesting that because their expenses exceed income they are OK with having a loss? I have not seen a case where that scenario happens year after year. Even if it did, any "loss" is simply subtracted from overall annual income, right? In that case, the taxable income is reduced, but usually not by a significant enough amount to realize a substantial "gain" from the rental loss. Please elaborate.
Originally posted by @Gary Floring:
Originally posted by @J Scott:I know people who will happily lose money on their properties every year because the tax benefits it provides.???
Are you suggesting that because their expenses exceed income they are OK with having a loss? I have not seen a case where that scenario happens year after year. Even if it did, any "loss" is simply subtracted from overall annual income, right? In that case, the taxable income is reduced, but usually not by a significant enough amount to realize a substantial "gain" from the rental loss. Please elaborate.
Yes, I do this every year. Do research on conservation easements. I essentially throw away a large amount of cash every year in return for a much larger tax write off.
For example, I might invest $50,000 in return for a $200,000 tax deduction. At a 30% effective tax rate, that $200,000 write-off is a $60,000 savings. Essentially, I've invested $50,000 in order to save $60,000, for a $10,000 real savings.
There are plenty of investors who will harvest tax losses in order to reduce their taxable income and save money year after year.
About managing contractor..... very timely discussion for me. I am working on a full rehab - now in gut stage. House has been stripped of everything but block and foundation. Very costly and today, the contractor suggested demolishing the rest to start over. Somewhat expecting this, I spoke with my architect who said no way was that necessary. After meeting with the contractor and me holding my own with information from my architect and my past experiences, I am now cautious and concerned. Demo cost was $21,000. Told contractor today that estimations and contract must be received before proceeding. Area is great. Footprint and plans are good, but now I am very worried about the contractor.
@J Scott
Hi J Scott,
I realize this is a general question and without hard numbers it falls under the category of it depends.
What are your thoughts on turn key investments. For instance, a brand new townhouse construction that is immediately ready to begin renting. Yes there is a premium in the purchase price, however hopefully there is little to no repair costs for the first 5-10 years. With a 30 year 5% loan after putting 20-25% down there is decent cash flow. The purpose would be a buy and hold scenario with the intention being a long term investment.
Comparing this vs buying an older property that will take a decent amount of work and time to bring up to speed. I apologize if you have answered this earlier (if so would you share that link).
Thank you for your thoughts and input,
Ben K
Originally posted by @Reva Harris:
About managing contractor..... very timely discussion for me. I am working on a full rehab - now in gut stage. House has been stripped of everything but block and foundation. Very costly and today, the contractor suggested demolishing the rest to start over. Somewhat expecting this, I spoke with my architect who said no way was that necessary. After meeting with the contractor and me holding my own with information from my architect and my past experiences, I am now cautious and concerned. Demo cost was $21,000. Told contractor today that estimations and contract must be received before proceeding. Area is great. Footprint and plans are good, but now I am very worried about the contractor.
First, I'm curious how that $21,000 demo cost breaks down -- that seems extremely high in nearly any market for a single family house. Was there something that made this demo more complex or extensive than what would be expected?
I'm not sure why you're concerned about your contractor? It sounds like he hasn't given you a bid on the construction work yet, right? If he gives you a bid and it's out of line with what you would expect, why can't you negotiate it or find another contractor?
Perhaps I'm missing some important detail here?
Originally posted by @Ben Kornblatt:
@J Scott
Hi J Scott,
I realize this is a general question and without hard numbers it falls under the category of it depends.
What are your thoughts on turn key investments. For instance, a brand new townhouse construction that is immediately ready to begin renting. Yes there is a premium in the purchase price, however hopefully there is little to no repair costs for the first 5-10 years. With a 30 year 5% loan after putting 20-25% down there is decent cash flow. The purpose would be a buy and hold scenario with the intention being a long term investment.
Comparing this vs buying an older property that will take a decent amount of work and time to bring up to speed. I apologize if you have answered this earlier (if so would you share that link).
Thank you for your thoughts and input,
Ben K
In general, I have no issues with turn-key investments. Like you already seem to know, the deal is going to be a little thinner, but if the numbers pencil out, go for it!
Now, that said, don't try to convince yourself that a few years of reduced maintenance costs is going to skew your long-term numbers. If you're evaluating the deal based on low maintenance numbers because the property is new, what happens in a couple years when those maintenance and capex items creep up on you? Will your returns drop? Are you prepared for that?
And what happens if you get a bad tenant who destroys the place in the first year? Long story short, I don't like factoring in lower costs just because a unit is freshly built/rehabbed. I prefer to look at returns based on long-term expenses.
We'll try a serious question this time. Do you add a contingency for unforeseen expenses on a rehab and if so, how much? Thanks!
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Originally posted by @J Scott:Originally posted by @Ben Kornblatt:
@J Scott
Hi J Scott,
I realize this is a general question and without hard numbers it falls under the category of it depends.
What are your thoughts on turn key investments. For instance, a brand new townhouse construction that is immediately ready to begin renting. Yes there is a premium in the purchase price, however hopefully there is little to no repair costs for the first 5-10 years. With a 30 year 5% loan after putting 20-25% down there is decent cash flow. The purpose would be a buy and hold scenario with the intention being a long term investment.
Comparing this vs buying an older property that will take a decent amount of work and time to bring up to speed. I apologize if you have answered this earlier (if so would you share that link).
Thank you for your thoughts and input,
Ben K
In general, I have no issues with turn-key investments. Like you already seem to know, the deal is going to be a little thinner, but if the numbers pencil out, go for it!
Now, that said, don't try to convince yourself that a few years of reduced maintenance costs is going to skew your long-term numbers. If you're evaluating the deal based on low maintenance numbers because the property is new, what happens in a couple years when those maintenance and capex items creep up on you? Will your returns drop? Are you prepared for that?
And what happens if you get a bad tenant who destroys the place in the first year? Long story short, I don't like factoring in lower costs just because a unit is freshly built/rehabbed. I prefer to look at returns based on long-term expenses.
That's a great answer @J Scott. Rental properties are rental properties and residents are residents. So whether it is new or not, that may hold down some early maintenance costs and even delay some capex - that is only in theory. I love buying new houses for rentals, but I still prepare for what will occur. If things go smoothly, it is a bonus.
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Originally posted by @Andrew Syrios:
We'll try a serious question this time. Do you add a contingency for unforeseen expenses on a rehab and if so, how much? Thanks!
Sort of. For each line item of my Scope of Work, I'll round my estimate up to either the next $100 or next $500 (depending on how big the expense is). If I do that for each line item, I typically find that my overall estimate is about 10% higher than it would have been had I used the exact estimate I calculated. So, this is my 10% contingency on the estimate.
Then, if there is a major item that I'm not confident in the cost, I may add an additional contingency there. For example, if I know a property needs some foundation work, and the contractor tells me there's a chance he'll have to excavate from the exterior, adding $10K to the cost, I'll add a few thousand to the estimate to cover that possibility. In many cases, I won't spend that extra money, and it's a bonus. Every once in a while I'll spend more than the contingency amount, and it will eat up the contingency and some of the past "bonus" money. In the end, it all averages out and I end up about where I expected.
Originally posted by @Chris Clothier:
Originally posted by @J Scott:
Originally posted by @Ben Kornblatt:@J Scott
Hi J Scott,
I realize this is a general question and without hard numbers it falls under the category of it depends.
What are your thoughts on turn key investments. For instance, a brand new townhouse construction that is immediately ready to begin renting. Yes there is a premium in the purchase price, however hopefully there is little to no repair costs for the first 5-10 years. With a 30 year 5% loan after putting 20-25% down there is decent cash flow. The purpose would be a buy and hold scenario with the intention being a long term investment.
Comparing this vs buying an older property that will take a decent amount of work and time to bring up to speed. I apologize if you have answered this earlier (if so would you share that link).
Thank you for your thoughts and input,
Ben K
In general, I have no issues with turn-key investments. Like you already seem to know, the deal is going to be a little thinner, but if the numbers pencil out, go for it!
Now, that said, don't try to convince yourself that a few years of reduced maintenance costs is going to skew your long-term numbers. If you're evaluating the deal based on low maintenance numbers because the property is new, what happens in a couple years when those maintenance and capex items creep up on you? Will your returns drop? Are you prepared for that?
And what happens if you get a bad tenant who destroys the place in the first year? Long story short, I don't like factoring in lower costs just because a unit is freshly built/rehabbed. I prefer to look at returns based on long-term expenses.
That's a great answer @J Scott. Rental properties are rental properties and residents are residents. So whether it is new or not, that may hold down some early maintenance costs and even delay some capex - that is only in theory. I love buying new houses for rentals, but I still prepare for what will occur. If things go smoothly, it is a bonus.
Absolutely. I look at turn-key versus not turn-key just like I look at hiring a GC versus hiring the subs directly when I do a rehab...
If I hire a GC, I'm going to spend more money, reducing my profits. But, I have the advantage of less stress, less time spent hiring and managing individual contractors, less risk, etc.
When I buy turn-key, I'm going to spend more money, reducing my profits. But, I have the advantage of not having to deal with the rehab, not having to learn a new market (if the property is far away), not having to find workers, etc.
Typically, the extra money you're spending (in the case of a GC or a turn-key property) is the trade-off for not spending as much time, effort and expertise of your own. For a lot of investors, that's a worthwhile trade-off.
Thank you for your thoughts and input!
My first post on BP! I listened to your appearance on the podcast today and thought it was great info. I'm finishing Brandon's book on investing and plan to start your books next. The discussion on flipping had me wonder, have you ever or did you ever consider tailoring a flip to a specific buyer? I.e. you purchase a house to flip and then work with a realtor who may have a buyer in the market for a home. This way, the future buyer can provide direction on the paint colors, flooring, etc that they want as you complete your flip. It seems like you could command a premium for something custom tailored to someone's desires while also saving them the hassle of dealing with contractors.
I’m new to this and I’m trying to figure out how do I find the properties to write a contract for?
Originally posted by @Chris Battaglia:
My first post on BP! I listened to your appearance on the podcast today and thought it was great info. I'm finishing Brandon's book on investing and plan to start your books next. The discussion on flipping had me wonder, have you ever or did you ever consider tailoring a flip to a specific buyer? I.e. you purchase a house to flip and then work with a realtor who may have a buyer in the market for a home. This way, the future buyer can provide direction on the paint colors, flooring, etc that they want as you complete your flip. It seems like you could command a premium for something custom tailored to someone's desires while also saving them the hassle of dealing with contractors.
In my experience, the risk and headache of doing a custom rehab outweighs the benefits.
The obvious benefit is that you already have a buyer and you might get more money. But, finding buyers for a nice renovated house these days isn't difficult, and it's unlikely that you'll get much more for a custom renovation -- remember, the most that the house is likely to sell for is the appraised value.
On the negative side, dealing with buyers who want to customize can be difficult -- buyers are slow to make decisions, they may end up changing their minds, and in the worst case scenario, they back out of the deal (or can't get their financing) and you're left with a house that is customized for a specific buyer.
Just my $.02... It's possible that others have had a better experience.
Originally posted by @Jeremiah Golston:
I’m new to this and I’m trying to figure out how do I find the properties to write a contract for?
There are lots of ways to find properties:
- Buy stuff that's listed on the MLS
- Auctions
- Direct mail marketing
- Advertising
- Knock on doors and talk to potential sellers
- Facebook advertising
- Craigslist "For Sale"
- Etc...
I spend an entire chapter talking about acquisition strategies in "The Book on Flipping Houses" -- check it out for more details...