i'm just looking for advice on whether i should do a full gut rehab on a house flip as my first deal. the competition in my area is very hot as i'm usually beat out by all cash offers over the past few months so i feel like i have to look at properties that most investors would ignore. properties that may have higher risk...
the ARV of the property in question is about $370,000. rehab will cost me $110,000. land value is $156,600. it's actually already been fully gutted so i can literally see the skeleton of the house. there's not even anything to walk on at the second floor! Just beams of wood. I will be planning to use hard money 20% down at 11% interest rate. property is not livable so i believe a mortgage or FHA is not possible. so putting in the numbers on a random hard money deal calculator online, the return is about 12.5% or ~$40,000 which doesn't sound bad at all if the comps are right.
my real question is if it's worth the potential headache of doing a full gut rehab for an inexperienced flipper, as well as counting on the contractor to be doing work in the dead of winter in northern NJ. what are your experiences? what other risks should i watch out for?
Thanks for reading!
I would not recommend flipping, or using hard money if you're just starting out especially if you have limited funds. Hard money Is very expensive, you will need a larger down payment if you're just starting out and you need reserves to pay for your mistakes and cost overruns. The interest carry will eat your profits fast especially if you struggle to get the project done and sold quickly. You are better off finding private investors and doing a JV structure once you have the experience. Also $40k is not enough of a margin for a full gut rehab. If your off on any of your estimates that will go away quick.
One way to get started is by wholesaling (which is the assignment of a contract) Once you have done several deals, gained some experience and have set aside some cash then you could try a flip or other strategies. For now I recommend you focus on getting really good at finding cash buyers and finding good deals.
First step is to make sure you understand the laws in your area regarding wholesaling. While wholesaling is legal in most states, several states have passed laws defining wholesaling as brokering and are requiring a real estate license to wholesale property. If you are considering staying in this business long term I recommend getting your license. This will elevate your stature as a professional and open up a lot more opportunities for you to monetize deals you can’t buy or wholesale.
You should talk to a real estate attorney that works with investors in your area to ensure you are in compliance with any laws. They will also have the proper contracts as well.
Next you need to educate yourself on the business and your market. You really need to immerse yourself and learn all you can. Attend REI groups and meetups and network with other experienced investors.
Start with finding cash buyers. You want professional legitimate cash buyers so you know you can close on the deal and do what you tell the seller you will do. I can’t emphasize this point enough. You do not want to contract a property unless you know you have a buyer who can close it or take it down yourself.
Different types of cash buyers are flippers, buy and hold, subject to and lease option. You need to find several of each of these types of buyers and learn what they are looking for. You will learn a lot about the business and the market by talking with cash buyers.
Best way to find cash buyers is networking at local REI meetups, masterminds, Facebook groups, Realtors, title companies, closing attorneys, property management companies, auctions, Craigslist, google search, billboards and bandit signs. Some companies also run TV and Radio ads.
You can search real estate transactions in your tax database. Look for entities and individuals that have bought multiple properties with cash. You may need to search by the address of the buyer as they may change their name or the name of the entity on each purchase. You can also buy lists from companies like list source and there are some REI software companies that have a cash buyer search feature.
Some of best ways to find motivated sellers is to purchase lists from companies like listsource and or compile lists from city and county like 60-90-120 days late on mortgage, pre-foreclosure, delinquent taxes, water cutoff, code violation, probate, divorce, etc. Then you can mail or cold call or both.
Other cheap or free methods are driving for dollars, craigslist, Realtors, FSBO sites, expired listings, foreclosure sites and bandit signs if allowed.
If you have the funds you can use billboards, newspaper ads, other offline publications., TV commercials, radio ads, motivated seller websites, SEO, pay per click/adwords, facebook, Linkedin, Youtube, and other forms of online advertising and boosted/promoted social media postings.
Bottom line is integrity and consistency. You need to do what you say you will do and take consistent focused action every day, answer the phone when it rings and follow up and follow through.
Starting with a full rehab can definitely be difficult if your just starting out. There are a lot of moving parts and the hold time is always longer than you think. However if you have an experienced team it can be done.
I absolutely agree about hard money not being good on this of deal though. For all the points that were previously stated. I would recommend private money or a money partner on this one so you can negotiate a better deal, ranging from better rates to possible hold off on payments till the end.
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A return of 12.5% for a full gut rehab is very tight in my book, you could be a lender and make that passively. As a flipper, especially on a full gut, you should be expecting 18%+ returns or better and 18% is tight. Anything short of that, you risk not making money or even worse, losing money if anything major goes wrong.
That said, a full gut rehab is really not that much more difficult to perform although many state it is. But you should definitely have a good team in place before you attempt such a deal.
As to not using hard money when flipping, it is certainly expensive but if you don't have current access to private capital or a money partner, it is your next best option so as long as the numbers work, I think it is ok. In this case, sounds like your numbers are too tight for any financing.
Yes I've attended several local REI meets and have read some books already from BiggerPockets authors. I just feel like I'm stuck in the phase of getting my offer accepted. I feel like I can't really grow until I finally get a deal under my belt. If it's not right for me and too much risk for a newbie then I will find another deal with those suggestions.
If those margins are thin I think I will move on from this property and just stay patient about it. I was told that hard money was the best option for flips but if you guys recommended finding a private lender first then I will concentrate on that instead.
Thanks for all the advice!