** This is part 6 of me documenting my fun and often stressful real estate journey
The nightmare is finally over.
Today I close on my second flip ending what will hopefully be the roughest period of my investing journey. I detail here how my first flip essentially bankrupted me which resulted in this house losing money as well.
It’s easy to blame others for all that went wrong. Making the wrong hire, overlooking the risks, taking on too much debt. But ultimately the responsibility lies in my hands.
I jumped on a seesaw of risk hoping that the momentum would catapult my bank account into six figures only to find out the hard way that flipping houses isn’t as easy as I had predicted.
This house was purchased for $64,000 with an expected rehab of $100k to $120k depending on how much work the dilapidated and neglected house needed.
The midwest is lovely but the houses carry the weight of weather storms nearly a century old leading to more damage than a beginning investor could expect.
The appraisal came in at $225k for my lender meaning our all-in cost would be around 85% of the sales price worst case. That number seems high but the neighborhood was “hot” and houses sold really quickly.
What I cared about most was completing my second deal to gain experience. I actually didn’t care about making any money. I simply wanted to exit two deals to begin gaining credibility in the eyes of hard money lenders. I knew the value of exiting deals as a beginner. Experience carries more weight than a few numbers on an appraisal.
Everything was going smoothly for the first 4 months. We were lined up to have this project complete by August which would still be in the prime time frame for selling this house.
TLDR of my previous post - I ran into troubles with my first flip which was going on at the same time as this project.
I had to pull my contractor from this house to save the day on my first flip. Two months and $20k later, I was out of money and now my contractor for this house was pulled into other projects.
I don’t blame him. I was out of cash and he needed to get paid. He had other projects that he committed to.
Want to play a challenging game? Try to rehab a house 2,000 miles away with no money as a beginning investor.
I basically had to run a pyramid scheme in order to finish this project. I used my tenant income and w2 income to put towards the next phase of rehab. When that portion was complete, I could then receive draw money which allowed me to pay my utilities, taxes, and mortgages. In layman’s terms, I took all of my earned income to continue with the rehab only paying down my debt when someone else paid me (my lender via draw money).
I won’t bore you with the details, but this lasted about 6 months. I ate nothing but rice and black beans and protein shakes. I had to sell my car. I rode the bus 4 hours a day - 2 hours to and from work.
I had to walk to Wal-Mart to get groceries and had a lot of fun walking back. I had holes in my shoes but came to not mind it because I couldn’t afford to buy new ones.
One day I wanted to go watch a movie. I arrived at the next stop with 48 minutes to spare. The next ride would take me straight to the movie complex in 20 minutes. But the next bus wasn’t arriving for 52 minutes. So my only choice was to walk. Just another few miles added on to my weekly odometer.
But I made it just in time. (I wasn’t going to miss Uncut Gems)
But I’m proud. I wasn’t late on one credit card payment. I didn’t miss one mortgage payment. Everyone got paid. I paid all of my utility bills. I had enough food to get by.
And I had to deal with a worldwide pandemic slowing down the economy when it came time to list my house.
But life has a great way of balancing out the good and bad. This house actually didn't even make it to the MLS. A lady who works for my lender had a buyer walk the property before it was complete and made a full list offer.
The payoff at closing will completely wipe out all of my debt that I’ve been holding for 16 months ($50k) and get me back to $0. I’ll never be so happy with $0 in my account.
I was close the other day. I had $0.30. That was fun.
Because of this setback limiting my ability to leave my house, I sunk more time into my YouTube channel where I’m seeing exponential growth and am on pace to make over $6k this month from ad revenue alone.
Life is good. I may have lost all my money and my car, but I can hang my head high knowing that I did it.
I completed two flips 2,000 miles away without any prior experience.
After every dark night, a brighter day appears.
@Spencer Cornelia I just listened to your podcast episode two days ago and read through your 6 part series. It is crazy how similar my process has gone. I just closed today on the sale of the second house and have ended the nightmare!
Similar to you I was doing well in real estate, had 3 cashflowing properties as well as my primary home and then thought it would be a good idea to flip some early 1900's homes. I bought these two houses that were next door to each other with a partner using hard money (3pts, 13% interest, and 1% extension fee every 3 months after the initial 6 month term). The plan was to have the properties completed in 6 months make some money and be on our way to real estate riches.
Turns out a lot of the framing was rotten and we had to completely reframe the back of one of the houses. This along with a multitude of other issues ate through every bit of reserves we had before we made much of a dent in these rehabs. This lead to piecing together payments here and there and drastically slowed the construction process and major cost overruns. I even sold my townhouse rental just like you sold your 4-plex to keep the process going. The first house sold after 15 months and the second was today after 20 months. All in all I will be loosing 10's of thousands.
This process killed all of my real estate momentum, but has ignited a drive to succeed. I learned so many lessons and the unfortunate thing is most of them are things I have heard or read before. We all hear great advice on the podcasts but until you go through the process it is hard to know what to do. After listening to @Brandon Turner and @davidgreene do the recap it is true that you sharing your story will save BP member millions of dollars. I know it would have helped me.
Now that I am out from under these two properties I am waiting on a HELOC on my primary to get approved I will be getting right back on the horse but with much smaller rehabs.
Below is the house that sold today.
@Kevin Wyn it's a brutal experience to take on a flip for that long. Yours turned out amazing (based on those pictures) at least. We both got lucky that the market stayed hot and allowed us to exit. The losses would have spiraled out of control for me had I not been able to sell my second house immediately.
I don't look back on my experience with any regrets since I know the risks we take playing this game. It's just an unfortunate side of house flipping when you're first starting out - you typically don't have your downside covered. MOST INVESTORS don't understand this and are fortunate to not get stuck in a position similar to the ones we faced.
People don't seem to comprehend just how much "luck" has to do with success. I don't doubt that guys like me and you will succeed over a long enough time frame due to drive, ability to go do it, and determination, but the timeline shifts drastically due to the momentum killing L's we took early in our career.
This is why it's hard to compare yourselves to the real estate winners of the past decade. If you nail your first 1-3 flips, your trajectory is SIGNIFICANTLY different than someone who stumbles on one or more of their first 1-3, like us.
This is certainly not meant to take anything away from those who succeed. I've just been reading Nassim Taleb lately and he talks about this kind of situation all the time. Many investors are playing a coin flip game with risk and MANY come up heads, and they make money. While a small handful comes up tails and lose a bunch of money. Both investors made the same decisions and bought similar deals. One wins, the other loses. That's the game sometimes.
Best of luck to you. I have a feeling our next flips will go a lot smoother than the previous haha.
@Spencer Cornelia Yes, both houses turned out gorgeous. My second house was under contract before it was even listed, but the combination of my GC disappearing and having to restart the permitting process for the carport in March right at the start of Corona lock downs dragged that out and eventually feel out of contract. All in all it ended up taking just over 2 months to get the plans approved because everything had to be done by email. Luckily my agent lined up another buyer right away. We even had to do a lease back to them while the carport situation was being finalized.
There is definitely some luck involved with every deal, but I think as investors we can create our own luck as well based on knowledge and experience. The ability to see the major issues before you buy is key especially when buying dilapidated early 1900's homes. This was a learning experience that will fuel many success to come.
On the podcast you mentioned you were going to take a few months off. I am curious if that is actually what happened?
@Kevin Wyn It will be more than a few months because I don't have any money. I'm putting all of the cash I do have into my house right now. It needs cosmetic upgrades and I'm going to try pushing the appraisal for when I am able to buy (on lease purchase right now). I closed my second flip in May and probably won't have the ability to take on my next deal until later this year.
Thanks for sharing your experiences guys! It's a good reality check to be cautious and to do the proper due diligence, even with some early success.
@Spencer Cornelia can't believe i missed this part. i was actually browsing youtube and came across your channel, small world! (+1 sub)
speaking of uncut gems. it's interesting that was the movie you were going to watch, given your situation. can't really compare RE to gsmbling, but the guy had heart and wouldn't give up for nothing.
great job on persevering thru this storm!
@Victor S. I had wanted to see Uncut Gems for like 6 months before its release. When it was released, the reviews were thru the roof. I was definitely not going to miss the opening weekend haha.
A movie is definitely more enjoyable after walking 3+ miles to see it.
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