What should I do? (Flipper thinking about quitting job)
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Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4yQuote from @Josh H.:
I am REALLY confused about what to do. My wife and I have grown our flipping business over the past couple of years to doing 10 flips currently.
I was just getting ready to quit my job that pays $150,000/year to focus on real estate full time, but the rising interest rates has me very concerned, with no end in sight. We just had a .75% rate rise yesterday and will likely see another one by the end of the year (maybe two?). We have enough money to last at least a year. The hope was to quit my job and focus on finishing our 10 flips because it has become too much for my wife to handle. We are in the Northern Virginia and Maryland markets in case that is helpful
I am concerned that if we see a big dip in prices, I will regret it because the 10% profit we typically get ($50K on a $500K flip) will basically mean we are doing flips for free.
I would love for some very seasoned investors to give their opinion on whether I should stay in my job, or focus on our flipping business that is doing well
Thanks,
Josh
With a W2 of $150,000 you should be cash flowing, not flipping. Meet with a tax professional, ASAP.
66 Replies
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
As far as REI, you can turn the 400k into cashflow by investing in cashflowing properties, with leverage. However, you've mentioned in a post that you don't seem to have deals like this. I'm not a big fan of out of state investing, but that could be one way to go. You might consider investing with leverage so that you can generate more wealth over time --- so, yes you'd have to wait. Then, with greater wealth and potentially a different market you could cash flow better. You might look into private lending with that 400k. Or, diversify into different investing types and classes, i.e. not real estate. I do it, as do other investors... Good luck.
- Real Estate Agent · Orlando, FL · Member since 2020 · 39 posts · 20 votes4y
Quote from @Josh H.:
A few weeks ago, Freddie Mac said that prices would likely remain flat or go up a percent or two in 2023. Other articles from large entities that I read said this trend was likely as well. That is where I was getting my data from. This was before the Fed said they would be very hawkish, so that might change what they say next.
I know you are very doom and gloom lately when it comes to real estate based on your other posts that I have seen, so I guess we will just see what happens. No one has a crystal ball. In fact, for the last couple of years (and even before the pandemic) many real estate experts were saying that prices would start to lower, including experts on bigger pockets but prices have only increased. I'm not naive to the fact that interest rates will effect the market - but I wonder if large hedge funds scooping up as much property as they can, will have a stabilizing effect and keep the market somewhat steady.
I will likely keep my job to see how things play out, since it pays well and I don't hate it. Thank you for your input.Take this as a grain of salt however, I had heard a month or two ago that the big wallstreet names stopped buying. You still have the homeowners that are looking for homes but it isn't nearly as hot as it once was. In my area, we went from having a supply of .91 months in August of 2021 to 2.02 months in August 2022 (source Orlando Regional Realtors Association). Now that the summer is over, home buying is slowing down even more. In my opinion, if the big names were still into buying properties at the level they were, we wouldn't have such a growth in inventory. Keeping a loose track of our local inventory rates, it appears that the rate of the growth of inventory is also increasing.
- 4yJosh H.Flipper/Rehabber · Northern Virginia · Member since 2019 · 58 posts · 32 votesOPThank you, David! This is a very helpful response.
Quote from @David M.:
As far as REI, you can turn the 400k into cashflow by investing in cashflowing properties, with leverage. However, you've mentioned in a post that you don't seem to have deals like this. I'm not a big fan of out of state investing, but that could be one way to go. You might consider investing with leverage so that you can generate more wealth over time --- so, yes you'd have to wait. Then, with greater wealth and potentially a different market you could cash flow better. You might look into private lending with that 400k. Or, diversify into different investing types and classes, i.e. not real estate. I do it, as do other investors... Good luck.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Marcus Auerbach:
@Josh H. tough decision, I have been there. I read a lot of professional research, here are some key points.
Freddie, Fannie, MBA, NAR and HPES expect home prices to moderately increase 2023 at about 3-4%. Zelman is to only one predicting -3%. Personally I think you have to consider your local market, some markets (TX, FL) have seen +40% last year and are much more likely to actually correct than where you are (or my market in Wisconsin).
Prices might increase nominally more. The wildcard is inflation, because if we continue to de-value the dollar, home prices have to nominally go up with inflation just to retain value. RE has historically always been a good hedge against inflation. If home prices go up 4% and inflation is around 8% that really means the housing market has corrected -4%. In this case home prices have technically come down, you are still up, because of the time you have held the property. I would not be surprised if we see homes values go up 5% to 10% nominally next year (because of the dollar devaluation, which actually would mean home prices are flat).In the end it all comes down to supply and demand. And unless we "find" somewhere in the US 5 million homes we did not know about are loose somehow 20 million people that dynamic will not change.
Rates have always come down during recessions, on average 1.8%. And often they continue to drop after the recession for a little while. I don't think we will see sub 4% again, but a lot of expert comments I read are suggesting that we should see a trend towards 5% next year. However, in historical context rates are still pretty normal now at 6.5% - we just have sticker shock coming from 3% (which was insanely low for a 30yr fixed!!)
Final thought. Buying in fall and selling in spring takes advantage of the seasonal pattern. We always see a very strong seasonal price pattern here in Wisconsin, that provides an additional buffer.
Nobody can predict the future and the decision you are making is really who do you want to be for the next decade. There is always a path, if the market softens on you, maybe sell some and rent some, maybe go back to W2 for a while. I think it's always prudent to have contingency plans.
Maybe talk to someone who has been through a few cycles:@Jay Hinrichs
thanks for the Mention Marcus:.. Real Estate is most certainly regional . as to the question should I give up my job and that security. At this point in time I personally would not do that unless you have not only multiple years of living expenses in the bank but the needed capital to keep your flipping business going you dont want to run out of your reserves and investing capital paying for your living expenses is my personal opinion. Keep in mind you will also have to pay your own health insurance most likely. This is why many folks in our business their wifes keep their day job just for health insurance and added security. We simply cannot deny the math sales are slowing so your going to hold inventory longer and if your like 95% of the flippers out there and are borrowing private or HM you holding costs are going to go up and your profit is going to get squeezed not only in payments but tax's insurance utls etc we all got really spoiled ( myself included) by being able to close on homes within 3 to 10 days of Cert of occupancy or having the refurbed home being habitable and pass apprasial.
- Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes4y
I think you're asking the wrong question. Your house flipping is providing you with cashflow, but what do you have to show for it in the end? It's not building any wealth for you. Look down the road and project how much did you earn from flipping vs how much wealth are you sitting on at the end of 20-30 years if you would have acquired and held onto assets, which are providing you with cashflow. It's an easy answer.
- Investor · Brooklyn NY · Member since 2021 · 17 posts · 2 votes4y
i would suggested you that you should quit your job for filliping and if the market soddenly tanks and you cant sell it for profit you should refinance and rent it out ant wait at lease till the market recovers. in fact a always thing that holding is better then selling since you don't have to pay any tax on those gains' and you don't pay realter fees and also you keep the preparty which gives you cash flow principle pay down and appreciation . but it lease you can do it if the market tanks . but of course its better to be in a place which brings you 500 k a year than in one which brings you 150k a year
- Real Estate Agent · Washington DC · Member since 2016 · 847 posts · 656 votes4y
Quote from @Josh H.:
I am REALLY confused about what to do. My wife and I have grown our flipping business over the past couple of years to doing 10 flips currently.
I was just getting ready to quit my job that pays $150,000/year to focus on real estate full time, but the rising interest rates has me very concerned, with no end in sight. We just had a .75% rate rise yesterday and will likely see another one by the end of the year (maybe two?). We have enough money to last at least a year. The hope was to quit my job and focus on finishing our 10 flips because it has become too much for my wife to handle. We are in the Northern Virginia and Maryland markets in case that is helpful
I am concerned that if we see a big dip in prices, I will regret it because the 10% profit we typically get ($50K on a $500K flip) will basically mean we are doing flips for free.I would love for some very seasoned investors to give their opinion on whether I should stay in my job, or focus on our flipping business that is doing well
Thanks,
JoshDefinitely don’t quit you job lol. I would highly advise against flipping rn unless you can find some amazing deal that factors in price decrease’s. Long term this is gonna be great for us flippers, multiple flippers I know are losing money right now a good number of them will likely be forced out of the flipping business, hard money lenders will likely tighten up or exit the buissness and many others will be scared off, give it 6 months or so and I’m confident we can get back to the margins we saw pre covid, labor should come down too. Flipping is much easier in slow markets than the type of market we saw last year.
- 4yJosh H.Flipper/Rehabber · Northern Virginia · Member since 2019 · 58 posts · 32 votesOP
Quote from @Matthew McNeil:
I think you're asking the wrong question. Your house flipping is providing you with cashflow, but what do you have to show for it in the end? It's not building any wealth for you. Look down the road and project how much did you earn from flipping vs how much wealth are you sitting on at the end of 20-30 years if you would have acquired and held onto assets, which are providing you with cashflow. It's an easy answer.
Matthew,
I respect the reasoning for your answer but it is not correct. A few years ago (before we started flipping) we had a negative net worth, now we are a few hundred thousand in the positive because of flipping. If that is not wealth generation (several hundred thousand in wealth generated), I don't know what is. We will be getting into buy and hold, but in order to get a nest egg to invest in real estate, we chose to start with flipping. - 4yJosh H.Flipper/Rehabber · Northern Virginia · Member since 2019 · 58 posts · 32 votesOP
Quote from @Jack Seiden:
Quote from @Josh H.:
I am REALLY confused about what to do. My wife and I have grown our flipping business over the past couple of years to doing 10 flips currently.
I was just getting ready to quit my job that pays $150,000/year to focus on real estate full time, but the rising interest rates has me very concerned, with no end in sight. We just had a .75% rate rise yesterday and will likely see another one by the end of the year (maybe two?). We have enough money to last at least a year. The hope was to quit my job and focus on finishing our 10 flips because it has become too much for my wife to handle. We are in the Northern Virginia and Maryland markets in case that is helpful
I am concerned that if we see a big dip in prices, I will regret it because the 10% profit we typically get ($50K on a $500K flip) will basically mean we are doing flips for free.I would love for some very seasoned investors to give their opinion on whether I should stay in my job, or focus on our flipping business that is doing well
Thanks,
JoshDefinitely don’t quit you job lol. I would highly advise against flipping rn unless you can find some amazing deal that factors in price decrease’s. Long term this is gonna be great for us flippers, multiple flippers I know are losing money right now a good number of them will likely be forced out of the flipping business, hard money lenders will likely tighten up or exit the buissness and many others will be scared off, give it 6 months or so and I’m confident we can get back to the margins we saw pre covid, labor should come down too. Flipping is much easier in slow markets than the type of market we saw last year.
Hi Jack,
I really hope you are right. If inflation starts to come down, it would be great since the costs of construction materials and fixtures has gotten out of hand. - 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votesCost of materials doesn't always return to where it was when inflation abates. Usually doesn't as a matter of fact. People like to hold on to their gains...
Quote from @Josh H.:
- Member since 2022 · 1k+ posts · 1k+ votes4yThe impression I got from the post was that holding on to some of these properties as a BRRR instead of a flip could result in greater long term wealth than the cash value you get from the resale.Matthew,
I respect the reasoning for your answer but it is not correct. A few years ago (before we started flipping) we had a negative net worth, now we are a few hundred thousand in the positive because of flipping. If that is not wealth generation (several hundred thousand in wealth generated), I don't know what is. We will be getting into buy and hold, but in order to get a nest egg to invest in real estate, we chose to start with flipping. - Member since 2022 · 12 posts · 12 votes4y
Quote from @Josh H.:
Quote from @Carlyle Gianni:
I did a few fix and flips in early 2020, and you are right there has been a change in the market. The turning point for me to make the jump out of my career was hitting a certain bench mark of cash flow. I turned the capital I got from the flips into private loans, and I now use that as income to replace my W2 income. I am not semi-retired. I work as a consultant on projects I genuinely enjoy and continue to learn more about private lending. MAybe a better analysis would be not so much how long could you live with the cash you have now, but what level of cash flow would make you feel better about cutting the apron strings?
That's a really good point, if I had more cashflow it would be much easier to make the transition. But my net cash flow from my job is about 9K per month from my job. I would need at least 5K a month in cashflow to feel comfortable - how can I get that from the 400K in equity that we have in our house, from a HELOC that I have? I've been adding all of the money we have to paying down our mortgage, so I have 400K to allocate.
Perhaps this is the question I should have asked from the beginning. How can we turn this 400K into as much cashflow as possible?
That was exactly what I thought about when making the decision to leave. I had to take a long hard look at our family budget, what expenses would increase after leaving W2 (health insurance was a huge factor in my case), and what were we hoping to gain as a family from me leaving. Once we established a number, it then became a game to figure out how to get that number coming in every month and save it, as we were able to live off W2 income well already. That's how I found private lending because I wanted pure cashflow, not a million rentals to deal with. So we turned to lending to allow us freedom to travel and have cash flow without the overhead of a mortgage. When we looked at what we would want as an emergency fund for ourselves and then separate funds for each property we held as a rental, the numbers were so large that it didn't make sense to even try because it would be years. Instead with lending, it was a matter of how much capital did I need to get my hands on to lend out in order to generate the income. For example, we needed about $750k at 12% annual to cover basic living costs. We obviously didn't have $750k at the beginning, so then it started the conversation of leverage. If I had access to $1.5M at 6%, and then I lend it out at 12%, that also gets me to my goal on a monthly basis. Then the conversation is how do I get ahold of $1.5M. It gave me a target I didn't have before, and something that seemed doable.
- Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes4y
I think you need to wait simply because you are unsure. Sometimes the best decisions are the ones you don't make. You might want to keep some of these flips as rentals to increase your cash flow so that if the market ever turns for the worse you at least have income. Flip the ones that make you the most money and keep the ones that provide the most cash flow. Eventually the goal is to take active income like flipping and your job and invest it in passive income assets.
- 4yPatti RobertsonBusiness MemberProperty Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes
How long have you been flipping? Long enough to have it on two years of tax returns? I am wondering what affect quitting you job will have on your debt to income ratio and your ability to borrow. Have you considered holding rentals as part of your diversification of income and assets? You flip to create income, but hold to create wealth.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes3y
@Josh H.@Josh H.
This is meant to be a constructive comment. I don't know how you file taxes, but talk to your tax professional about what you can do to isolate your dealer operations from any LTR activity you may pursue. As an example, see also IRS "Real Estate Dealer" status permanent? Buy/Fix/Flip 4x year? It's clear to me that your intent historically is flipping, as in non-depreciable property held-for-sale, so would be treated as inventory. If you change intention, say for example converting inventory to LTR, run it by a tax professional. - Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes3y
It is always hard to predict the future, but I tend to agree with most of the sentiment in responses that, in general, the US housing market will be impacted by changes in housing affordability. Historically, you can see that the 2022 rate changes have not yet had an impact on the House Price Index on a macro level.
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