Deciding wether or not to pull the trigger

Rehabbing & House Flipping
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Deciding wether or not to pull the trigger

Johnny Young
Hendersonville, TN · Member since 2016 · 16 posts · 9 votes
So I have been studying the strategy of rehabbing for almost a year and half while we built credit scores and retired debt to increase our debt to income. I've been actively looking for houses and running analysis on them to try and find one that the numbers work. Few and far between in and around Nashville, at least for a beginner. Then, all of a sudden there it is. A house where the numbers work. A SFH 3 beds 2 baths, unfinished basement with two car garage on an acre and a half. The house is being sold from probate and it's in terrible shape. They are asking 10900, an offer of 90k was my goal. About 40-50k in repairs for an ARV of 200,000. So I see the house take my measurements and do a take off and talk to hard money lenders and find one that bites. The trouble I am having to make the decision is we aren't quite all the way there with the down payment. I have access to enough money to get there... but it will be leveraged. Borrowing money to borrow money on the hopes I can get a house and get it flipped with as few as possible issues makes me very nervous. To cover the payments until we sell will push our budgets to the max. Since I am doing 85% of the repairs myself to make the numbers work I won't have time to work an extra job to cover payments. I feel like it's a good deal but I also feel I should wait until we have more cash to work with. What do you guys think? Risk it with all the borrowed money and high payments and costs to borrow or wait till we have more cash on hand to lessen the struggle to make payments and risk only losing cash and not cash and credit?
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Luka Milicevic
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
9y

Assuming they take your offer of $90k....

Your repair estimate is 40-50k. If we use those numbers alone and you get your asking price of 200k minus closing costs of, at the very least 6%, you net $188,000.

This will give you a tentative profit of $48k.

Now.....

You have to factor in your holding costs which are expensive when you use hard money. You are looking at about 12-15% interest on your loan plus points.

What I have seen on repair estimates for first time homebuyers, and first time flippers is that they come in WAY low. I priced repairs line by line for the first ever house I purchased (primary), and actual cost was 3x higher than my budget. My first rental I priced in the repairs line by line and added a 20% buffer. Actual cost came in 2x higher. 

If you're budgeting 40-50k for your first flip my guess is it's going to come out at about 80k. 

I don't say this to scare you off at all but you have to factor in your holding costs and also factor in when you open those walls who knows what you are going to find on the other side. 

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  • Rod HanksBusiness Member
    Insurance Agent · Dallas, TX · Member since 2013 · 743 posts · 462 votes
    9y

    Rehabbing is a pretty tough way to start in this business. There are too many pitfalls that can sour you on the business. I would start at getting the deal under contract and wholesaling it to another experienced investor for a fee and shadowing that investor thru the rehab and sell process. It sounds like you have done your homework, but borrowing money to borrow money is a recipe for disaster. I would either flip to another experienced investor or partner with another investor on this deal.

    Good Luck!

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    1Reply
  • Johnny Young
    OP
    Hendersonville, TN · Member since 2016 · 16 posts · 9 votes
    9y
    Thanks so much. I have grown up in and around real estate my whole life. I know houses inside and out and have worked for more than 20 years in construction. I know in my heart that it's a good flip deal, provided the purchase price is accepted, but my gut tells me I'm flying too close to sun by leveraging leveraged money. Thanks again for the input. I think partnering up with an experienced investor would be the best bet.
    0Reply
  • Matt Leavell
    Involved In Real Estate · Nashville, TN · Member since 2014 · 70 posts · 26 votes
    9y

    Hey Johnny, 

    It sounds like you are so eager that you are jumping the gun a little.  Think about it, if anything pops up that was not seen prior to the purchase, you will not have the means to cover it without borrowing more.  That could put you years behind.  It sounds like if you stay a little more patient and save a little more money during that time frame, you will be in a much better position to weather a storm if it happens.  It just doesn't sound like the risk is worth the reward.  I second the idea of wholesaling the deal.  Make some money and build your piggy bank.  Basically get paid to learn.  Then get involved.  Good Luck.

    1Reply
  • Johnny Young
    OP
    Hendersonville, TN · Member since 2016 · 16 posts · 9 votes
    9y
    Matt, you are absolutely correct. I have been studying and diligently saving and getting prepared that I am chomping at the bit to get started. Of all the different ways to invest in real estate rehab is my favorite because I know how it all goes together, and love it. You are right I'm jumping the gun. I'm going to take the advice hold back and wait for the money to build more on my end. I guess I was so excited I finally found a deal that works I was ready to do whatever had to be done to get my foot in the door. I would really like to wholesale it, however I don't have a buyers list yet. I'm working on the networking to get to know more people, but just don't have a list of people ready to jump on a deal yet.
    0Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y

    I'll jump on the other side: I have often used LOC's to purchase and rehab properties when I didn't have enough cash on hand. I have even put a lot of rehab materials on credit cards too. I have done this for BRRR properties and would pay off all the short term when I refinanced a couple months later. I have also pulled from LOC's to purchase a home-run buy and hold properties and then used the cash flow to pay off the LOC.

    I was perfectly comfortable and 100% confident doing these things because I really knew my numbers and everything was factored that in. I always left a contingency amount on my LOCs because I know projects can often go over time and over budget as well as leaving a contingency for the CapEx stuff that could come up on my other properties during that time too. I knew exactly where the line was to do this safely. It wasn't risky... for me.

    Risk comes from not knowing what you're doing.  I don't recommend this strategy to other investors because you have to really know what you're doing and really know your numbers and all that can happen.   But if you do know that stuff and are confident in your numbers, timelines, and know how much you might need for the unknowns, it's doable.

    1Reply
  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    9y

    Assuming they take your offer of $90k....

    Your repair estimate is 40-50k. If we use those numbers alone and you get your asking price of 200k minus closing costs of, at the very least 6%, you net $188,000.

    This will give you a tentative profit of $48k.

    Now.....

    You have to factor in your holding costs which are expensive when you use hard money. You are looking at about 12-15% interest on your loan plus points.

    What I have seen on repair estimates for first time homebuyers, and first time flippers is that they come in WAY low. I priced repairs line by line for the first ever house I purchased (primary), and actual cost was 3x higher than my budget. My first rental I priced in the repairs line by line and added a 20% buffer. Actual cost came in 2x higher. 

    If you're budgeting 40-50k for your first flip my guess is it's going to come out at about 80k. 

    I don't say this to scare you off at all but you have to factor in your holding costs and also factor in when you open those walls who knows what you are going to find on the other side. 

    2Reply
  • Johnny Young
    OP
    Hendersonville, TN · Member since 2016 · 16 posts · 9 votes
    9y
    Thanks Austin, I do really know the numbers, and my timeline. Where the problem for me lies is the excess for contingencies. If I go this route everything I have access to is maxed for the duration of the project. In my rehab estimates I have a 15% contingency built in and that should cover anything construction wise. It's the fact that all the payments on the money during the flip push our budgets right to the limit. It's doable but if the house goes one day over my estimate, or a paycheck comes short we will sink. Fast. During the flip we will be adding 1400-1700 a month to our current bills which is all our extra cash in our budget. If I had a good contractor already doing 85% of the work I could work some extra jobs to give us that extra cushion. However at this moment I'll be doing the 85% myself. Doesn't leave room to wiggle. I think it's just too close to the line for me. Especially for my first flip.
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  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y
    Originally posted by @Johnny Young:

    Thanks Austin, I do really know the numbers, and my timeline. Where the problem for me lies is the excess for contingencies. If I go this route everything I have access to is maxed for the duration of the project. In my rehab estimates I have a 15% contingency built in and that should cover anything construction wise. It's the fact that all the payments on the money during the flip push our budgets right to the limit. It's doable but if the house goes one day over my estimate, or a paycheck comes short we will sink. Fast. During the flip we will be adding 1400-1700 a month to our current bills which is all our extra cash in our budget. If I had a good contractor already doing 85% of the work I could work some extra jobs to give us that extra cushion. However at this moment I'll be doing the 85% myself. Doesn't leave room to wiggle. I think it's just too close to the line for me. Especially for my first flip.

     It does sound too close to the line with that info IMO.  Look into setting up additional LOCs and other contingency cash sources to have ready for the next one. 

    1Reply
  • John Cushing
    Investor · Patchogue, NY · Member since 2017 · 69 posts · 11 votes
    9y
    Luka Milicevic when you say your rehab budget went over was that with or without a GC and if you subbed it out yourself how did it go over?
    0Reply
  • Johnny Young
    OP
    Hendersonville, TN · Member since 2016 · 16 posts · 9 votes
    9y
    Luka, you are right as well. From my experience in the building trades and remodeling, I have the repair costs down pat and know the unknowns are there waiting inside the walls, I have seen it. That was what made this house work for me is the knowing what it needs. Line by line, square foot by square foot I can tell you the exact costs of materials and how long it will take me to do it. It works out to about 43,934. The issue is time and making the holding costs payments. With me working a full time job and working full time on the house, I don't have time to work side jobs to cover my rear end make double sure I make those payments. That's where I think I'm too close to the limit. Thank you all so much for the invaluable input!
    0Reply
  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    9y

    @John Cushing Was all my own work. It was when I was just starting out and thought I should do work myself to save money. I would never do work again because you can't scale and it's more expensive when you factor in your precious time. 

    0Reply
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