Fix & Flip Financing

[Ryan Butler]

I recently decided to start flipping houses as my full-time job. I’ve known for a while now that I wanted to make a career switch into real estate and was waiting for the right opportunity but decided I was tired of waiting and decided to go all in. I bought a 2-family house in Wakefield a couple years ago that I have been using as a house hack so I’ve had a little bit of experience but not much compared to what I will be doing now.

Currently I have around $50k of savings that I can invest and $300k in my 401k that I am very willing to use, either as a loan (I believe the max is $50k) or a full withdrawal (which should be a little over $200k after taxes & fees). I am looking into all options for funding though, including private money lenders. I think this is the biggest hurdle for me at the moment and the area I am most uncertain about. If anyone has any thoughts on this or general advice about getting into the house flipping business, please feel free to comment or reach out to me.

[Mike Klarman]

Flipping and Brrrring are two very different things.  The Brrrr, since it is a long term strategy, it can overcome short-term overages.  Flipping is a spot market investment and short-term changes to the market, overages, what have you.  It can crush you.

The key to flipping is to flip when it is right to and when it is not, you don't even try.

Investors that flip for a living, I know about a dozen ppl that do it full time, they all pretty much operate the same way:

They have a private money guy that covers them 100% and rolls all payments into the payoff. They're in for zero. But since they are buying in cash it is off market deals, foreclosure deals, auction deals. They are using the strength of cash to buy a discount. They are in for less than the market buyers. When it comes to the rehab, either they are the construction piece and have it all in place, or they run their own subs sans any GC. They have the demo, mechanicals, roof, floors, paint, finishes, kitchen/bath remodel. they run their own projects. Their all-in project costs/ARV is always in the low 60s%, compared to a traditional investor who is hoping and praying for a project between 70% - 75% cost to ARV.

Brrrring and being wiling to not recoup 100% of your capital on the refi is a strategy that can work.  Time can heal the money wounds of the purchase and rehab premiums.  In 5 years, the property is worth 15% more, rent is 5% higher.  You can get your head above water, eventually over time.

Flipping is a whole different ball game.  Losing money is a real possibility unless you have a great eye for what can be flipped in what market during what kind of economic atmosphere.

The higher your project cost is, the more you need to worry about the x-factors.  The cheaper your project cost is, the impact of the x-factors lessen and your probability to exit with profit heightens.

I've learned lots about flipping the the last few years.  Between coordinating 40+ projects for clients, and being privy to the materials of many, many high priced seminars, I see that there is a science to this.

Your first step really is the purchase and you need to be in for under market, if it's a flip.  Brrrrs can be bought on market because of the time bandaid.