So today is day 1 on BP. I've been listening to the podcast for about a month now and am very excited for what 2016 holds. Before I get to my questions - I would like to provide some background as to what has peaked my interest in investing.
Today I live in California and work in software sales. Back in October my wife and I went on our 5-year anniversary trip to Mexico. While on the trip we met another couple our age (early 30's) from Ohio and we hit it off. We spent the entire week with them, did a few excursions, dinners pretty much every night, etc. Our occupations came up in conversation and I learned that the guy is a contractor and that he flips houses in Ohio. I became very interested and bombarded him with questions. Basically he's done around 20-or-so flips and has about 8 rentals that he renovated and is managing. Towards the end of the week I asked him if he would ever be interested in partnering on some deals. He said he'd done some partner deals before and that he would be interested. I told him I have minimal access to cash (about $20k) I could put in. The majority of the properties he buys are sub-$50k foreclosure properties that he, on average, puts about $10k-$15k of work into, and sells for $100k+ (again, on average).
Now I don't know a lot about real estate at this point, but I know enough to say that the market I live in would make it very tough for me to begin this journey on my own here. This is why I am choosing to start with a partner in an area that's a little easier to find affordable properties.
About two weeks ago this couple flew out to California for his birthday to spend the weekend with us in San Francisco. I knew this trip would be good because it would allow for them to see how we live, and for us to further discuss partnering. He just finished up and has rented the two houses he bought the week before we met them in Cabo and is now ready to find another property. We've started an LLC and are in the process of putting an agreement in place. He and I discussed going in 50/50 on the property and then paying out him/his crew for the reno work and then splitting profits 50/50.
I would like BP's advice on anything I should know/do/consider in my first deal.
I told him I'm interested in flips to start so we can build some capital in the businesses name quicker and then we could look more into rentals - is this a good approach? If there's a solid deal on a potential rental would it be worth it to put in the only $20k I have for a slower return and then look to borrow against that home once ready for another deal?
I'd like to go about this without loans if possible and realize that can slow me down a bit - but are there significant advantages to building a portfolio faster with the debt?
What else should I consider?
Thank you in advance for your responses!
The first thing that jumped out at me when reading this was to make sure you do your due diligence on who you are dealing with. You can most likely check local property records to verify the rental houses he owns. With his consent you could get a credit report pulled to do a full check on him. That will show you how he manages his money and you should see outstanding mortgages that tie to some of the rental properties. You may be thinking you know the guy and it is all legitimate, which it probably is. I have just heard a lot of bad stories, so be careful. Anyone who is legitimate will have no issues if you ask questions and verify. It just shows you are smart and cautious.
The second thing is to make sure that since him and his crew get paid first, that they are taking reasonable payment. You don't want a situation where the flip breaks even and he made his money through his rehab payment.
Third though is when the home is purchased are you an owner on the title or will you have a lien on the property? That is just to make sure it doesn't sell without you getting paid. The question is how is your $20,000 secured against a physical asset?
Don't take my message wrong. I don't know anything about the guy. This is just advice to make sure you protect yourself. Lots of people have made money funding other peoples flips, so it is not a bad concept.
Thank you for the advice on being cautious. I am doing my due diligence now to verify his past work. As far as ensuring he is charging accurately for the work - what's the best way to know? Should I have him provide a list of the work needed and then come on here and post what he's quoting for the job?
@Mason Snyder I will be honest and tell you I have never done a flip. All my deals are buy and hold. I always get firm quotes from contractors on work being performed. It seems after doing 20 flips that he should be able to estimate the rehab cost and selling price fairly accurately. The risk is that he tells you one thing and then something unexpected comes up. Only what you have in writing will protect you. Hopefully someone experienced in flipping will respond on this post to offer better advice! Good luck.