The Flipping Lie; The Real Cost of Real Estate Investing
As I rushed into the master bedroom to answer my wife’s emotional shriek, I found her pointing at the TV saying, “You have to watch this — they are so cute!” She was referring to HGTV’s hit show, Fixer Upper, where stars Chip and Joanna Gaines introduced America to their life of remodeling homes for their clients, and living on a farm in Waco, TX.
I must admit, I enjoyed their humor and character, and we both fell in love just like many Americans did. But after a few episodes, we began to see how much the show was leaving out. We checked out some other shows out of curiosity (as we are heavily in the industry), and came to the same conclusion. We were only seeing about 10-20% (or less) of the real picture.
With over 1,000 projects under our belt and multiple real estate hedge funds, we’ve seen a lot, and it isn’t always pretty. Real Estate investing is a full time job — no matter what any show, or the latest guru trying to sell you a seminar tells you.
The idea is that the average viewer can invest a small amount of money, fix up a dump, and make massive profits in a short time frame. Often the stars of these shows go on the road with seminars, promising to share their secrets with anyone gullible enough to spend thousands of dollars for “advanced training.”
It begins with a radio ad or phone call about an upcoming, free local seminar which assures you will learn the secrets of how to flip homes with no money, poor credit and no real estate knowledge. You attend this slick presentation, and in an intense, religious-revival-like atmosphere, are persuaded into taking the next step to show that you’re committed to your own success, which costs about $495. In this session you’re urged to account every source of money you have; cash in your IRA, taking a loan, borrowing from relatives or increasing credit card limits — and after that, your starry eyed self has already spent your future profit of all those deals in your mind, and you jump right into paying $2,000 for a three day advanced program, and go on to be sold the diamond level seminar costing $30,000 – $50,000 to be given “the secrets.”
But they are the wrong secrets. They aren’t the secrets I would share. You couldn’t pay me enough to share all of my real estate secrets with you. That’s why I manage a fund and help clients make money in real estate so they don’t have to learn all the things I’ve come to learn over the years.
The “secret” here, is that the business model of many real estate training seminars is to sell a printed 250 page guide with an extensive glossary of terms and a couple Powerpoint presentations and follow up calls for a stack of 500 Benjamins. That’s a lot of money to spend with zero return on investment, plus, your investable cash diminishes before you’ve even began putting your money to work for you.
“But they have success stories!” Well I hope that they would for that kind of money. “I can make more money if I do it myself; how hard can it be, I know people.” Yes you can. You are smart, and capable.
If you are in a position to quit your job and pursue real estate investing full time (80+ hours a week), then you may be able to pull it off with minor scrapes and bruises.
It has been done!
The flipping lie is that your success will mimic the results the TV shows highlight, or mirror the conjecture the seminars promote. Diving a little deeper into the suggested (or promoted) success expectations of some seminars is where things start to unravel rather quickly.
In 2017 there were just over 200,000 flips completed across the Nation. The majority (90%) of those were completed by professionals and developers, the minority (10%) by newbie real estate investors. Recently, our Portland Regional Manager attended a seminar sponsored by a TV Star flipper to see what it was all about (and to see if he could rescue anyone). He shared his experience and noted that the TV Star never showed, only hired presenters that delivered the program. They promised that their system could show anyone how to get started and be flipping or wholesaling 2-4 deals per month. Other seminars and gurus promote anywhere from 6-10 deals per year. Taking the average of those numbers, we arrive at 22 deals per year. If that were true, that means that across the Nation, 20,000 deals are being flipped by approximately 909 seminar graduates. That’s an extremely conservative number which doesn’t account for all of the graduates across dozens of different programs, and the thousands of graduates that aren’t currently flipping properties. Yet, in that example, these 909 graduates successfully generated over $45,000,000 for the gurus (assuming $50,000 courses). In real life, one such company has reported gross revenue of over $500,000,000.
“Had that $45M been invested into Hillstone’s entry level fund, those 909 investors would be sharing $5.6M in profit.”*
– Blake E. Robbins
*assuming a target rate of 13% annualized, projected by one of Hillstone’s funds.
Cash is King
Real Estate is expensive — period. Leveraging hundreds of thousands of dollars into one project at a time is the opposite of diversification. If your funds are limited, finding a deal you can afford may be outside of your territory. In Seattle, $500k – 1M properties are the norm; if you have $200k set aside to invest, you may have to travel 1.5 hours away (one way) to find a project you can afford to flip. This also includes locating contractors and suppliers that will service the area.
Doable, but extremely time consuming.
OPM (other people’s money)
Think that data is shocking? Let’s discuss a matter that is very close to my heart and may make your blood boil. There is a movement of ‘education’ promoting the leverage of using other peoples money to invest into real estate. Don’t get me wrong, Hillstone practices a version of this by providing SEC Registered hedge funds whereby investors can participate into regulated funds by the management oversight of a fiduciary — this model is instilled with accountability, firm agreements, and extensive experience. Nevertheless, I’ve seen many individuals pursue real estate investments leveraging their Grandpa’s IRA, or setting up loose partnership joint venture arrangements raising money with co-workers to the tune of $450,000! I was recently presented an opportunity to invest into one of these projects and asked a few questions before running the project through my calculator. “How long have you been investing into real estate?” I asked. “About 2 years.” they replied. My next question was, “How many projects have you completed?” They replied, “About 3 deals. My goal is to do 6 this year.” At the time of my meeting we were a third of the way through the year and they had been having trouble finding new projects. My last question (out of disbelief and curiosity at this point) was how the projects were structured. “We usually do notes.” they replied. Being in the industry as long as I have, I’ve heard all of this before, but I still have the same gut wrenching reaction. How can someone with such little experience risk other peoples money to learn the tough lessons of real estate investing? It is a slippery slope in taking the role of a fiduciary, that no one should take lightly.
There are basics that every company or operation should have clearly identified; Mission, Vision, Model, and Message. One of the organic messages that has developed within Hillstone, is to reveal to our network and prospective clients the risk associated in the real estate investing arena. Please don’t misunderstand me; we invest in real estate — it is truly our area of expertise. That being said, we have no business telling you how to invest in the stock market, or alternative private equity projects. Our niche is our strength because of our experience. The take away here is to invest your hard earned money into real estate with groups, or firms that have embedded into their structures accountability, experience, diversification, and proven models. Our message also surrounds education— education that there are other ways to experience the benefits of real estate investing without the need to quit your day job, or spends thousands of dollars on seminars and training when that money can be put to work for the benefit of your portfolio.
“Unanticipated expenses or delays will arise even with careful foresight and planning, and major issues like cracked foundations, mold, asbestos, or the need for new plumbing and electrical could instantly lower or erase your profits.”
– Blake E. Robbins