The Sad Truth About Flipping Houses

Rehabbing & House Flipping
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The Sad Truth About Flipping Houses

Account Closed
Investor · Fort Worth, TX · Member since 2016 · 20 posts · 17 votes

Hey Guys!

I wanted to share some knowledge I learned with you on this beautiful Saturday here in Fort Worth, Texas. I live only a couple blocks away from the TCU stadium and so I can hear when the big plays happen. This is a very electric atmosphere. Anyways, I have been into real estate investing for about 13 months. I have flipped 6 houses, built 3 houses and have 18 doors for rentals (just picked up another duplex). And I have been contemplating whether I am doing the right thing or not. But I found my solution through a mentor which is stated below. It was vague, but that was his intention. 

So I had a guy on BP ask me a series of questions about my flipping and holding strategy and this was my final message in the DMs. 

The last question he asked is if my strategy is short or long term?

"Long term. My strategy is all long term. You have heard before that real estate is not a get rich quick game. And the only way to truly become rich is through long term holdings. But, don't let that scare you, you get paid every month too!

The way I see it is this: If I flip a property and make 25k, I only make 25k, one time. But when I get a property for free (through financing), own 30% equity (free through financing), and charge a $1200 rent, I can make my money back in about 5 years. You do that 20 times in a year for 5 years, you have some serious cash flow and have enough earning power/assets to do anything you want. Ever.

This whole thought process started with one of my mentors, who is worth around $500m, asked me 6 months ago: "Beau, why are you selling your houses. Why would you want to give away net worth?"

And I thought about it. Best described in an example: say I make 25k off a 100k flip house. But through financing I can retain that house for FREE and have had a 30% equity, or 30k (increase your net worth). So technically, I am making LESS money up front selling the house (25k cash vs 30k net worth), and loosing infinite money down the road through rent and property increases.

The way to make your money back through retention is to slap a home equity line of credit on that house. Usually around 70-80% of your equity holding which would be 21-24k disposable money for business. So, what would you rather have? 25k profit up front OR 21-24k profit up front, a 30% equity stake and rent for many years to come?"

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:

And I thought about it. Best described in an example: say I make 25k off a 100k flip house. But through financing I can retain that house for FREE and have had a 30% equity, or 30k (increase your net worth). So technically, I am making LESS money up front selling the house (25k cash vs 30k net worth), and loosing infinite money down the road through rent and property increases.

Sounds like a guru pitch to me...  The only way you're losing "infinite money" down the road on the flip is if you're throwing away that $25K in profits.  If you invest that $25K in profits for -- let's say -- 10% compounded return, that $25K will be worth $40K in 5 years, $64K in 10 years and $168K in 20 years.  

Of course, you have to factor in taxes and you have to be able to make 10% compounded returns (which hopefully most good real estate investors and business people can do)...but, the math is still pretty simple.  If you need cash flow to sustain you as well, then just do the math for a longer compounding time.

Ultimately, there is more than one way to get rich/wealthy in this business.  If your mentor is telling you otherwise, find a new mentor...

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by @David Faulkner:

    The main difference I see is in long term exit strategy ... if you choose a buy-and-hold in the right market and neighborhood, then once rehabbed and stabilized it can become very passive, where as flipping seems to me to always be more active. Not to say that one is optimal over the other, depending on your needs and what the market offers, but that is the main difference I see. Out of curiosity, J., if you don't mind me asking, what is your long term exit strategy from the flipping business? Do you intend to grow a huge pile of cash from flipping and then at some point convert it into more passive investments to live on? Or do you plan to build your team and systems up such that you can essentially put your flipping business on auto-pilot any time and for extended periods of time (or maybe you already have)? Or do you love it so much that you intend to actively do it until the Dr puts a toe tag on you and hauls you away in the Hearse? 

    My long-term strategy is exactly the two things you mentioned above:

    1.  Put the business on auto-pilot; and

    2.  Reinvest all profits into more passive income streams.

    #1 above is facilitated by #2.  These days, my flipping business is mostly hands-off, as most of the deals we're doing are as equity partners or lenders -- someone else manages the deal, and we provide money and/or support.

    I've put the rest of the money into rentals, notes (both real estate and business), angel investments and other businesses I own that generate income.

    My strategy isn't that much different than Beau's, except that:

    - Beau uses leverage to generate his equity; I flip houses to generate my capital;

    - Beau generates all his income from buy-and-hold real estate (as he must, because that's one of the few asset classes that can be easily leveraged); I put my capital into many different income streams.

    Because Beau is relying on leverage to generate income, his returns are at the whim of the market -- if average returns on rentals in his area are 7%, that's going to be his likely return on his portfolio.  But, because I'm starting with cash (from flipping), not leverage, I have a much larger number of asset classes (and an infinite number of assets) in which I can invest.

    The down side for me is that my cash is taxed when generated, whereas Beau's leveraged equity is not taxed upfront.  But, for me, that's a worthwhile trade-off for the flexibility I receive with that cash.

    As for your last question about loving flipping, absolutely not.  I love building and scaling businesses; I don't love real estate.  It was fun to scale the flipping business and -- for the most part -- put it on auto-pilot; but I've always been hands-off on the actual real estate aspects (I have project managers who handle the day-to-day and my wife and other agents who handle the buying/selling).  I prefer to spend my time on the systems and processes. 

    For me, it's the challenge of building the business, regardless of the sector.  Real estate just happened to be a sector that fell into my lap, so I ran with it.  But, to be completely honest, I don't find real estate to be very fun.  Specifically because the barrier to entry in this industry is so low that I spend way too much time dealing with difficult and incompetent people; I don't enjoy that.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Account Closed  you make the great assumption that everyone wants to be a landlord.  and you self profess to being new.. lets see how you like it in 5 years of landlording :)

    and in Texas Tax's and foundation issues along with hail storms and wind storms will eat into your cash flow regardless of what the market is doing.

    But go at it... by all means your young and energetic and once you figure out that landlording is a tough job and that maybe being the bank or JV partners is also an alternative.. Notes as Ryland above mentioned is usually the next step for buy and hold investors as they tire of the rental game.

    Fix and flip depending on where you do it can simply be a job.. or it can be pretty lucrative.. really depends on the area of the country your working and the velocity you have. 

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y

    Well, I got back from DFW yesterday afternoon after spend a few days there. 

    I don't agree with our radio jockey as to flips being more risky, in fact just the opposite as you period of risk is much shorter, limited to construction phases and not the general public. I do agree with a mixed approach, not to any % of any ARV or equity.

    You aren't getting a HELOC on investment property, you're getting a commercial line of credit, similar but much different.

    As you own more properties you'll also find the total borrowing power becomes less, the LTV will be reduced so you can't say infinite anything! In fact, if you're dealing with one lender, you'll hit a wall called the "loan limit" with that lender. When your ability to pay becomes hinged to your operating income alone, the lender's risk goes up, your liabilities come closer to your net worth and that formula takes you underwater, even in DFW!

    All major metro areas of Texas are popping, red hot, some hotter than others but Texas is hot (in more than the marketing area too!)

    When a market is that hot, the money is in flipping, new construction and development, not buying a sub 100K rental. Land owners aren't stupid, I'd call the DFW a seller's market for undeveloped land, seems along I 35 W there wasn't a 10 acre or more spot that wasn't for sale and prices aren't cheap. 

    Buying under that 70% of market is for beginners, rehabs that change the utility of a property will make money even if you pay market. The trick is to find selected properties that higher prices can be supported in that market area. Like buying a 200K rancher in an area of 350 to 500K homes, you have room to make significant improvements to profit from. 

    All of a sudden this went to bold type, ignore it :)

    Might consider going on a 4 deal plan, one deal you live on, 2 deals you grow on, the 4th you hold, select which one as they come, your living expenses come first, then growth from cash available then move to equity. 

    Don't think you want to hold a rental for 30 years, the economic benefits come between the 7th to the 12th years and from 12 to 15 as your depreciation impacts taxes. 

    There is also a cycle of cash available on cash out refis for investment properties, it can go from 80% to no cash outs! 

    Using equity should be more creative, IMO, using properties to pledge on other deals, like seller financing. The only way to tap equity is to sell it or pledge it.

    Next issue, neighborhoods have a life cycle, they generally appreciate to a point then at maturity, your property becomes outdated, the utility becomes less, demand drops and your equity stops growing. Market rents from an economic point of view, "buying power" begins to drop as well. 

    Keeping your rental inventory up with demand trends can get expensive and it's usually better to sell and buy up than fix up. This is simply inventory turn over.

    Infinitely you can end up with a slum area property! 

    There are always exceptions, historic areas, mansion avenue, the park area, the lake or river, or may be the university area. But you'll be looking at long term maintenance and upgrades as well. 

    You're also better off with the least expensive home on the block, this gives you room to improve much more than the white elephant. 

    Too many assumptions have been made here, appreciation, the economic holding period, the ability to invest at a given return at all times, and since real estate is not a liquid market, you have market risks, financing risks, opportunity costs associated with X dollars a month vs a lump sum being available, the IRR is rather irrelevant to attempt to measure and if it's not your money you don't have an IRR, you have earnings.

    There is much more to it than the simplified approach assumed by the OP, it works to a point but that end is not going to be the optimal path to wealth in real estate, someday you'll want to get out and kick back, how will that portfolio look then? It won't look like it does today I assure you. 

    Now, commercial portfolios can out live you and your kids, but that's another ball game. :)    

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  • JJ ConwayPro Member
    Financial Advisor · Stephenville, TX · Member since 2016 · 163 posts · 85 votes
    10y
    Originally posted by @Account Closed:

    So, what would you rather have? 25k profit up front OR 21-24k profit up front, a 30% equity stake and rent for many years to come?"

     Hi Beau, great discussion. I, personally, would rather have the 25K profit - duplicate that 4 times, buy a 100K property free and clear and then have BOTH the monthly cash flow AND the net worth. I realize that is not how most investors do it. Just throwing out my perspective.  I've had much less headaches since I switched to a debt-free acquisition model.

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  • Account Closed
    OP
    Investor · Fort Worth, TX · Member since 2016 · 20 posts · 17 votes
    10y

    @John Chapman Okay, I appreciate the comment. I think this will help. I am new to BP and still learning the ways to communicate to the crowd.

    I can agree that I sounded a bit like a guy knocking on your door selling a the unbeatable two-ball cure-all. FREE FREE FREE! You had the model correct:

    "If you are talking about buying at 70% minus repairs, fixing them up, refinancing so you're out no money, then I can at least understand that model" (VALUE AD MODEL)

    My whole point of the post is that some flippers in my area grossly undervalue long term holds. And many people are looking at the wrong places. 

    There is a threshold to these hold properties where a snowball effect comes into play (at least in DFW). Once you hit a certain point where cash flow is coming in, tenants are happy, contractors on lock, deals are healthy, the sky is the limit. And at this point, if you have to pay 5-10k for an investment property, then your rents will cover (the # of investments will vary depending on how people manage & charge rent). If you run out of money, put another LOC on your current equity holdings that are not levered. And those deals are easier to find than people make it out to be. In my opinion, if you are playing the game right, then your contractors and purchase price are the ticket. But if you are looking for these types properties on the MLS, Zillow, Realtor, NetWorth, or Western Acquisitions the you are certainly looking in the wrong places.

    The vast majority of the deals are found from your local "mom & pop" wholesalers. And where I am from, there are thousands. I have found that these types of people have full time jobs, they are looking at real estate for a new profession, and want to make some quick RE play money before they get fully invested. These are where you find your deals. 

    @J Scott I am not trying to "dis" the flip game. I've made good money flipping property. But I learned that it's a one time payout. And I didn't like that. Once I ran my numbers on how I can manage these properties, where I buy them and how I ad value to them, I realized that I am better off just getting investment properties. Not to say that I won't do a flip every now and then to get some cash. But it is not the primary focus of my business.

    The point of my post is to explain my opinion that flipping houses is not what it's cracked out to be if you haven't truley scaled the business. 

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  • Account Closed
    OP
    Investor · Fort Worth, TX · Member since 2016 · 20 posts · 17 votes
    10y

    @Jay Hinrichs If I am a landlord in 5 years, I will give you a contract and my gun so you can shoot me in the head hah! Already in the works of getting that ironed out. On the fence about hiring a part-part time or get a management company to come down to 4% and use my contractors. I can get them to 6% using my guys, but they won't budge unless I pick up a few more houses.  

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by :

    @J Scott I am not trying to "dis" the flip game. I've made good money flipping property. But I learned that it's a one time payout. And I didn't like that. Once I ran my numbers on how I can manage these properties, where I buy them and how I ad value to them, I realized that I am better off just getting investment properties. Not to say that I won't do a flip every now and then to get some cash. But it is not the primary focus of my business.

    I still don't know where you're getting the "it's a one time payout" reasoning?

    I make 5-figures per month (mostly passively) on the flip income I've earned in the past -- that doesn't include the active income I'm earning by reinvesting some of that income into other projects.  In other words, my flip income continues to pay me every month, and will continue to pay me every month far into the future.  In fact, if I wanted to, I could retire today and just live on the monthly revenue coming from my flip income.

    The differences between you and me are:

    -  You don't have a lot of active involvement to generate income; I do, but only for a limited time;

    -  You use leverage to create a single income stream for you (rental properties) and I use flip income to create about a half-dozen different income streams;

    - You (presumably) carry lots of debt.  I carry none.

    So, we're both making monthly income, but you're doing it with debt and a single income stream and I'm doing it debt-free and with many income streams.  I had to work harder for a couple years, but ultimately, I like where I am better than where you are.

    What am I missing?


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  • Cary F.
    Investor · Lakewood, OH · Member since 2016 · 203 posts · 191 votes
    10y

    @Account Closed

    I personally see flips as something to do when you have extra cash laying around and you don't know what to do with it. For me, a flipping strategy from the start is simply too much risk. What if I'm in the middle of 8 flips and the economy tanks? Well I don't much care if I'm cash flowing with my rentals. But if I have 8 mortgages that I can't finance and I can't finance 8 rehabs, then I'm 'effed'. 

    Buy and hold is low risk and you still get the benefits of the flip with some forced appreciation. I can't wait to try flipping but I probably won't do a pure flip until I can do it with cash. 

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  • Jason Krick
    Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
    10y

    @Account Closed contributing. Bill, who literally knows everything regarding finance and compliance. Jay, who has done it all (timber, lending, rentals, development, etc) and ran an HML, so he's been on the other side of the flipping business. And J Scott, who has literally written the book on flipping.

    Some of these guys have literally made millions, lost millions, and made millions again.  Here's my point:  while I commend you for what you have accomplished since August 2015, realize that it is far too short of a time to take that experience and make blanket statements on what does and doesn't work.  It's not always this rosy.  Interest rates change the economy changes, availability of loans change.  These commenters are speaking from experiences that neither you, nor I have.  I don't think you meant anything negative, and were just stating what had worked in your short time in this business.  I just hope you keep an open mind when some members suggest that you may need to tweak how you view certain aspects of the business.

    DISCLAIMER--I am a complete newbie myself and have just completed my first deal.  So, my post is not coming from my personal experience, just from what I've read through on the forums.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y

    Disclosure, I only lost a lot of money to my Ex! 

    As long as I don't marry you, I won't be losing money to you!  :)

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by @Bill Gulley:

    Disclosure, I only lost a lot of money to my Ex! 

    As long as I don't marry you, I won't be losing money to you!  :)

    I've only lost a lot of money at one time to Phil Ivey...

    As long as you're not Phil Ivey, I won't be losing money to you!  :-)

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y
    Originally posted by @J Scott:
    Originally posted by @Bill Gulley:

    Disclosure, I only lost a lot of money to my Ex! 

    As long as I don't marry you, I won't be losing money to you!  :)

    I've only lost a lot of money at one time to Phil Ivey...

    As long as you're not Phil Ivey, I won't be losing money to you!  :-)

     Well, we're all good then, I'm not Phil Ivey and you and your lovely wife are already married!

    We all learn from mistakes !  :)

    1Reply
  • Brian Pulaski
    Flipper/Rehabber · Montgomery, NY · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    @Account Closed I would be interested in hearing how the flips you have done went. I'm in the camp of not wanting be a landlord. Just not something I want to do at this time. Turning houses is a "one time payout" however you use that money and make more money with it. It's not a steady income, like a rental should afford, but it can be leverage into more deals, and more money.

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  • Brandt Smith
    Cypress, TX · Member since 2016 · 132 posts · 49 votes
    10y

    @J Scott Flipping and buy/hold are two different mindsets. With buy and hold your initial profit is lower but you get it month after month, year after year. Most importantly this income is passive so I get paid for minimal work. Flipping is great for a cash infusion, but it is a job. If I stop flipping I stop earning. Also, the risk in flipping is higher.

    Some people want the quick cash. Some people want the long term cash flow. 

    And some of us want both. We buy and hold for a few years then sell before the repairs hit, when we can 1031 our profits tax free.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by :

    Some people want the quick cash. Some people want the long term cash flow. 

    I'm not arguing that (I agree with all you said).  Beau keeps pointing out that my flipping income is just a single payoff, whereas his buy-and-hold is producing monthly income.  My point is that I get monthly income from flipping --  I take my flipping income and invest it in income producing assets.

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  • Ron Yanuszewski
    Litchfield, NH · Member since 2016 · 21 posts · 6 votes
    10y

    I also don't recall a lot of investors In the mid/late 2000's saying" I wish I held more".

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y

    Let's say I flip a rehab and make 35K. I eat 15 K and use 10K on 2 properties to get in the door. I fix those and pull 15K on the average from each, okay, I eat 10K more and rinse and repeat, how is my initial profit just a one time pay day? As long as I can find a deal my business from that first sale keeps feeding me and/or the business. 

    Opportunity costs, how many opportunities do you have to obtain say a 10% return by investing $200 a month from rents? How many opportunities can you have to get 10% having 15 or 20K in your pocket rolling over every 4 to 5 months? 

    In 5 months rentals only give me $1,000 to work with and up to that point, savings are not really earning much at all if anything. 

    I'll take the 15-20K lump sum, take the tax hit and keep moving. :)

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y

    Another point: where did you start and where do you want to go?

    If your goal is *truly* passive income, you are not going to want to buy & hold. Collecting rent may not be as hour intensive as a 40hr W2, but it's not like checking your mutual fund returns once a month, either, even if you have a PM company. B&H *can* be leveraged into a very small time commitment, depending upon your abilities, what you start with, and your abilities to leverage the talent of other people (PM companies, tradesmen, etc). But it is never going to be work-free.

    Flipping is going to be a boatload of work in one crunch, with a payoff and off you go into the sunset. Flip enough times and you will be able to do as @J Scott describes, which is funnel the profits into another investment vehicle that is a much more passive income stream.

    RE is attractive because the sheer returns can outperform just about everything you can think of in terms of relative safety of principal vs. rate of return. That said, there's virtually no real estate investing that isn't "a job" in some sense of the word. In other words, if I roll $1 million into a 5 year federal issue - say Fannie Mae bonds - the only working I'm going to do is check to see if the brokerage deposited my interest payment every quarter. There's realistically nothing in RE that compares to that level of "set it and forget it". Even note-holding/equity partnering, which is probably the lowest activity level of RE, requires some active involvement and management of the investment to ensure its viability.

    The problem (or maybe opportunity, depending on your viewpoint!) today is that RE is very hot and "be rich tomorrow" people are crowding the platform. I B&H because it's a good investment in my area, I know my market well, am comfortable with the returns, and (perhaps most importantly) I like working with houses. I like rehab, I like improving them, I like driving around town and seeing all the stuff I own (yeah, it's an ego boost ;)  ). If I didn't like the job part of it, I would do something else, because pretending RE is not work is only setting yourself up for failure. 

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  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    10y

    @Account Closed  is trying to make I think is that when flipping is a business its the same.  When you rent a home you have people who go out, make money and pay the rent that is how you make money. As a flipper you have people who go out and work (contractors, project managers, etc.) and the flip sells thereby paying you as well. When you treat it as a business that money comes in just like it does in a rental. You have property managers, Jay has project managers. If you didn't have property managers you would be dealing with leaky faucets and complaining tenants and I am not sure why you think thats better than dealing with contractors, brokers etc. on a flip.

    Now what i think is probably more being discussed is the various characteristics of the two strategies and here is where I think it pays to have some perspective because it highly depends on your situation and the market. Do you need the money now, many people do which is why they flip. What is your tax bracket? In a lower tax bracket flipping makes much more sense than a higher one, etc.

     Than there is the market, if people are overpaying for properties flipping can make a lot more sense assuming you are ok with the timeframe. It can also be a lot less risky to flip than hold if the prices are not right. Also, TK companies who flip to investors often operate in areas that are def risky for holding properties without the right managers. 

    Also, considering you sound like you are getting in with little of your own money that means you are levered. It may seem like a dream but what happens when you have a huge capex hit in multiple properties or a string of vacancies, what would happen if you had 100 properties and that happened? 100 properties also means 100 properties you need insurance on, 100 properties you need to keep track of etc.  If you levered each one at $100K per property it also means $10MM in debt, good luck getting more debt if you find a great opportunity with that kind of balance sheet. 

    Oh and if the market goes down you have 0 equity which means those properties can't be sold or refied without taking a hit and if you overpaid the problem is even worse.  Ask anyone who said the same free money thing prior to 2008. 

    And when all is said and done let's say you make $200 a door cash flow per month which is $2.4K a year, it will take 10 - 20 years to make what the flipper made in 6 to 12 months. Of course, in the long run rentals will be better off its true, also taxwise its much better to do rentals at least for much of the portfolio and if you have appreciation rentals are way better but that is a lot of qualifications and as I said at the start not even fits that and not every market is in the right time for those assumptions 

    Not saying you are wrong just that there is a good reason and various risks with both strategies none are really right or wrong. 

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  • Sam C.
    Lehigh Valley, PA · Member since 2016 · 144 posts · 91 votes
    10y

    Great job! That's a lot of real estate in 18 months. How much capital did you start with. Is there someone seeding your purchases? What is your total overall leverage position today? What is your net cash on cash with the rentals?

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    Some thoughts:

    Flipping is about knowing your market to resell fast and valueing - comping precisely.  Flipping is also about gambling with hidden repairs and inept contractors.  Nerves of steel business.

    Buy and hold for appreciation in many areas is a long hold strategy.

    But there are other strategies not talked about here.

    Pretty houses - sub2, lease purchase sandwich (not TX), wrap purchases, etc.  Then buy and hold or lease purchase.

    Cooperative Rehabs - for light rehabs on free and clear houses - this works better than 70% of ARV - repairs.

    Buying on Installment Sales on Free and Clear Pretty houses - buy on a private first mortgage

    Be a Private Lender in 1st position

    ``````````````````````

    Know your taxation and plan with your CPA re Dealer Status

    @Brandon Hall

    may want to comment.

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  • Tom Frazier
    Memphis, TN · Member since 2016 · 3 posts · 1 vote
    10y

    What are "Cooperative Rehabs - for light rehabs on free and clear houses - this works better than 70% of ARV - repairs"?

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y
    Originally posted by @Tom Frazier:

    What are "Cooperative Rehabs - for light rehabs on free and clear houses - this works better than 70% of ARV - repairs"?

    Say you have a 200 ARV house needing 20 in repairs

    70 percent of 200 - 20 repairs

    Is that a good deal for seller?

    Instead buy on seller financing, get on title, fix and resell and get more money net to seller, and make 10k supervising a rehab

    0Reply
  • Account Closed
    OP
    Investor · Fort Worth, TX · Member since 2016 · 20 posts · 17 votes
    10y

    Well, @everyone 

    First, I would like to say thank you all for commenting and discussing on this thread. I am giddy about the topic. And I appologize if I offended anyone or if my tone came across aggressive or unfriendly. I am a happy-go-lucky guy and do not mean any harm to anyone. Also, I am still learning. I don't pretend to have all the answers or even half of the answers. But I will be excited as all get out finding cool new things. And new to me might not be new to you (talking to the old heads here).

    The goal of my strategy is to have assets so I can leverage against them to get more assets. Repeat over and over. But not endless. There is a exit at some point. When that point will come is a better question. Residential real estate is a starting point for me. The launch of my empire. A hedge against riskier investments. Real estate or not. But will most likely be commercial value ad strip centers. The same thing I am doing in resi but bigger numbers (in a sense). 

    So say in 7 years I have 100 rentals (I will be 31 years old in 7 years), 50 free and clear, and the rest with 30+% equity. All of the properties I have received great returns, steady through the years, and a huge net worth from my assets. Now, I sell all of my free and clears and make anywhere from $5-10mil. BUT I still own 50 other income producing assets with high(ish) equity. When you are exclusively or heavily in the flip game, would you be able to hold you pockets to save $5-10mil? And how long would that take? And would you have income producing assets still pumping with that much cash on hand? I think everyone would say no. Especially in residential. Now, with your $7.5mil (avg) in cash, 50 properties to partially leverage against and producing income, the sky is the limit. And that sky is commercial RE where you follow the same pattern as you did earlier. But the numbers are much bigger, barriers are harder to breach, and you have millions of dollars cash on hand. Does that sound like the perfect storm or what? 

    I have flipped my fair share for my time being in the game. I have done big, small and scape & builds. And out of everything I have done, investments properties with rental income is my favorite for the many reasons I have listed. But, I am not against small, quick flips. I recently did a 4.5 month overhaul to this historic property with a 900 sq ft addition. Between working with the Historic Committee in Fort Worth and the hassle connecting one house to another house, I can tell you I will not be doing that again. The stress, capital and time does not make it worth it for me. I made a pretty penny, but I won't do that again. Ever. 

    But putting in "work" for these investments are minimal. A quick 2-3 week reno, and the 4th week its rented. And my two, full time workers are super easy to deal with and work their butts off. I could flip if I wanted, but I rather throw a LOC on it and lever up. Get my money back for other investments, get rental income, gain property increases. And on average, I put in 2 hours a week in PM for all 18 properties (some weeks as much as 5-10 hours, most weeks 0 hours). I manage all of the properties too. I can tell you the most popular call has been a plumbing issue. So I call my plumber, and he tells me the kids flushed a stuffed animal or whatever down the toilet, and I give them the bill. Very typical from my tenants.

    I said this earlier and will say it again. I have nothing against flipping a property if it's easy and quick to get some cash. But I don't think I would do that full-time again. But in Ft Worth, those quick flips are few and far between to make it worth your while. 15-25k sounds nice. Equity and LOC sound much better to me most of the time. Esp when your under my "ARC70 Rule".

    For flipping, you can bust your *** and make 7-figs a year. But what if you don't work the next year? What's your income then if your asset holdings are small. If it takes me an average of 2-3 weeks to fix and rent my houses. Double that for finishing touches to flip. Putting me around 17-20 house a year with my crew. Income producing. @J...I get that you're scaled, but I'm not necessarily talking to the people who already set themselves up like you have. 

    But I said this earlier and I'll say it again, my goal in real estate is to set myself up for the long term, but more importantly, have my money work for me. Not me having to work for every dime I put in my pocket. 

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    10y

    Example - Purchase $100 property, $20 in rehab, $150 ARV. These are the assumptions whether you flip it or hold it and the work is identical under both strategies. The choice is then what to "invest" the $150 in. You can either hold the property (i.e. "invest" the $150 in the same property) or invest the $150 in another passive asset class that achieves, let's assume, similar returns as the rental. It does not have to be re-invested into continuing active flips.

    Beau is describing one strategy...buy and hold.  J Scott is describing the same strategy but it is buy one asset (sell) and hold a different passive asset (plus a separate incremental flipping strategy).

    On a side note, I personally decide what to hold based on each individual asset and that can change with time.

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