For a long time my investment strategy has been “buy and hold” rentals. Specifically, small multi-family properties. This has been a slow and conservative way to building wealth through real estate. I’ve read about people that “flip” houses for quick profits, and it never really interested me in the past. But, I took on a new mindset in 2018 and thought I’d research more and try a house flip.
First, a few interesting notes on house flipping:
Usually, it’s a team effort. This was a huge misconception for me because I used to think successful flippers personally knew everything about everything. Instead, most investors use a crew of people, each team member specializing in a different area. Since I don’t want to be personally involved at each level, I just need to find and partner with the right people.
It doesn’t have to be a big time commitment. Depending on your role within the team, you might not have to dedicate much time to flip a house. You can outsource almost every activity. For me, I wanted a role with minimum involvement, even if it means taking less of the profits.
Every team member makes money in a house flip. (The buyer, the seller, contractors, escrow/insurance companies, wholesalers, agents, the government, etc.) But, the people who make the most are the ones that take on the most risk and responsibility. Personally, I’m fine taking on more risk as long as it’s well calculated and all risks are known upfront.
The property was a 3 bed, 1 bath, single family home in Birmingham, Alabama. The house was already in fairly good condition, only minor upgrades were needed.
The goal was to buy the property (under market value), do some minor rehab, place a tenant inside, and sell it to another investor as a ‘turnkey rental property’.
Our initial time frame was 6 months from start → finish.
In this deal I was playing the role of “Equity Partner”. Essentially, the equity partner puts up a large portion (or in my case, all) of the money used to fund the project. I assumed the most risk in doing this, which I was OK with.
The other main person, Andy (not his real name), was my Managing Partner. In this deal Andy put up no money, but he had the biggest time commitment. Andy was responsible for overseeing all other team members, paying them, contracts, research, and making sure we stuck to the timeline. Although Andy didn’t put any money into the deal, he still had some financial risk (explained below).
Needless to say, I put a lot of trust in Andy.
Projections vs. Actual Results $$$:
My expectations entering the deal were fairly low. I wanted to make money, but my main goal was to gain experience.
Here are the numbers we were projecting and the actual results we achieved:
Property: 3 Bed / 1 Ba, Single Family Home in Birmingham, Alabama.
Other Misc costs/fees:
TOTAL Cash Outlay:
$50,100 (My cost)
MY PROFIT (50% split of total)
$11,494 (My profit)
22.9% (My return)
Time Start –> Finish:
All said and done, I made $11,494 in 81 days. It cost me ~$50k, and Andy more or less managed the entire thing.
Risks & Possible Bad Scenarios:
Before agreeing to any real estate deal I try to think through all the risks and things that could go wrong. Here are some of my thoughts on my risks for this house flip:
At first glance, the max possible loss would be exactly what I put in ($50k). Once I wire off the funds, there is no guarantee I will get them back.
But, this is not the full picture, because my JV agreement with Andy stipulates that he and I are “equal partners”. We split 50/50 in BOTH gains and losses. So in the event of a complete loss, Andy would actually be responsible for 50% of what’s lost ($25k). Sure, collecting $25k from Andy would be another hassle, but at least I have a contract in place.
Andy and I met within a reputable community and network. He came highly recommended and I spoke with his references. Andy and I have similar goals, and I trusted him to be providing accurate information.
It’s America. Of course I can get sued. For protection we put all contracts, purchases, bills and funds under an LLC. It’s very important that all business related expenses and activities are completely separated from personal expenses. Andy is well experienced in all this and has multiple LLC’s in place for his ongoing flips.
We got several bids for the rehab project to make sure contractors weren’t underestimating or overestimating. Also, we added a small buffer to the rehab numbers for things to be redone or if anything went wrong.
(Estimating rehab costs is apparently the #1 reason most investors fail at flipping houses. If you exceed your rehab budget, it eats directly into your profits. It’s imperative that this is estimated correctly. This is the reason I chose a ‘light’ rehab job. Mostly cosmetic upgrades that were easy for contractors to estimate.)
There are a few things we could do in this scenario.
We could sell the house quickly for cheap. This would mean no profit, or a small loss. Andy’s market analysis and research shows we should at least be able to break-even if we needed to quickly sell the property in a cold market.
We could keep the property as a rental. This would provide a decent amount of monthly income from rent. Average projections would mean about $300/m to me after all expenses, prop mgmt, and Andy’s profit split. $300/m or $3600/y return on my $50k downpayment is about 7%. Not a bad return, not an ideal scenario though either.
Holding the house empty with no tenant in place. This would only cost annual taxes and insurance. Estimate would cost about $200 per month to hold on to the property.
Given the minor rehab it’s highly unlikely the house will be incomplete within 30-60 days. If there are any unknown hold-ups we will have to wait it out and hold through the delay period. Based on the market research and Andy’s experience, the likely turnaround time is probably 3 to 4 months (and we have 6 months in our projections).
Too bad, so sad. My funds are more or less stuck in the deal until it’s fully complete. I need to make sure I have enough reserves for all other personal emergencies for at least full year. There’s a slight possibility I could sell the deal to another investor at a discount if absolutely necessary. Andy could also buy me out if he had the funds.
Andy has the most to lose reputation-wise because his business is built on a track record of success. I have no reputation in the flipping world so nothing to lose for me.
Personally, I’ve told my wife this will be a profitable deal and if turns out bad, I may lose her trust. This impacts me funding risky investments in the future. Other family/friends relationships will not be affected regardless of the deal outcome since I’m using 100% of my capital. No promises to anyone else.
Timeline of events and notes:
Andy promised to check in with me every week or two with progress. He did this, mostly via quick text message updates. Since I was traveling at the time all work was being done, I wasn’t in a position to help – not that I wanted to help anyway. 🙂
Delay #1… Part of Andy’s due diligence is making sure there are no outstanding liens on the property. This involves checking water, electric, taxes, to make sure we’re not buying a property and assuming any outstanding debt. Andy hit a roadblock with the sewer company as they could not confirm the sewer bills had been paid up to date.
We delayed closing, and asked the seller to help verify all water/sewer bills have been paid prior to us taking ownership.
Painting is pretty much all completed. Received a few photos via text.
I met with Andy personally for the first time. We had a few beers in Los Angeles around the corner from his house. Great guy, trust him a lot. We talked about possible future deals if this one goes well.
We found a tenant wanting to move in, but they are Section 8 (portion of their rent is paid by government). This requires a government inspection to make sure the house is up to standard.
Inspection revealed a few minor things that need to be fixed (mainly for compliance reasons) so we had to call the contractor back to do them. Very small stuff for safety precautions.
Received multiple updates from Andy on the closing process and period. Even though it’s all cash purchase the closing period and due diligence can take time on the buyer side. Also, people in Alabama move pretty slow with paperwork.
WIRE received! Bank balance is now $60,794 higher. How many beers can that buy?
A Few Lessons Learned:
I was happy with the communication:
Andy provided me updates that were consistent enough, but didn’t involve me in the tiny little details. Any time I had further questions he was there to answer my texts.
I never had to talk with any contractors, tenants, utility companies, escrow agents or anything. Andy handled everything on our behalf so I put in zero work. This was excellent.
We overestimated the timeframe (Good thing!):
Things moved very quickly. When I first reviewed the project Andy said it may take up to 6 months. I knew it was a possibility to finish early but didn’t want to get my hopes up. I had it in my mind that I would get my money back at the end of 2018.
Having my cash back (+profits) earlier allows me to put it to work in other ways sooner. (I have already entered another partnership project with that $50k – not a flip though – more on this another time)
We sold for much higher than expected!:
We wanted to sell the property for $65k. But, we knew that people may lowball us, so we listed it for $75k. TBH, I’m not sure if it would have even appraised that high from a bank, but we listed it there anyway. You can always decrease your price later, you can’t increase it.
Investors interested in buying ‘turnkey’ properties are buying for cashflow. Because the rents were pretty high for the area ($775/m) and a lease was already in place, we were able to achieve close to our asking price. We sold for $74,000. This additional profit went straight to me and Andy’s pockets. Amazing.
Rehab + ‘other fees’ were overbudget:
I know, I know, I’m complaining about being a few hundred dollars over the rehab budget… But, remember this is the #1 reason house flippers fail. They underestimate the rehab budget. Although a small amount, this annoys me and we might want to build a bigger buffer in next time to account for re-doing work or inspections for Sec 8 tenants.
I feel a tiny bit guilty:
Deep down inside I’m wrestling with the guilty feeling of making a large amount of money and doing a relatively low amount work. I was raised to be a hard worker, hands on, pulling my weight with everyone else. I was taught to pay everyone else the bigger share, and take less myself. In this project I made the most money out of everyone, and did no work.
But, reminding myself of these points makes me feel better:
Without me funding the project, nobody else would have the job.
I helped provide a beautiful new home to a family that is in need.
I helped provide value to the community by increasing their neighborhood comps, and updating houses that would otherwise be neglected.
Another investor now has a cashflowing rental property in his portfolio. He’s making $775/m from a lease that my team put in place.
It’s OK to make money by working smarter, not harder.
I took on the most risk, so I should be paid the most reward, right?
Yes, deals like this are available to all. The reason I found this deal is because I knew about it in the first place. Networking and meeting people who are doing deals is the first step to knowing about opportunities. There are a ton of people out there hoping to partner up with investors, and they are wanting to connect with you.
Also, to take advantage of this deal I had to:
Know a little bit about real estate. It’s pretty easy to learn, you do not have to be an expert. But you have to know some lingo to let people know you are serious. ARV = After Repair Value. Stuff like that.
Have access to cash, and be ready to wire funds within 72 hours. If you don’t have money, you can’t invest in all cash projects.
Have investment goals and analyze deals against those goals. Must be able to do this is a relatively quick manner.
There are hundreds of “Andys” out there. They all hang out at local real estate meetup groups, online forums, and go to conferences. Meeting them is just a matter of putting yourself out there.
Join BiggerPockets.com (it’s free), read some of the forum posts, and reach out to the people that interest you. Earlier this year I sent a private message to Andy introducing myself and asking for a 15 minute phone call to pick his brain. This private message that was only 3 sentences long lead to me doing this flip deal with him.
Great question, this was my first question for Andy when he approached me with the deal. At that time, Andy had all his capital tied up in 3-4 different flips at various stages. He couldn’t pull together the 50k in time to fund this himself. If he had the money he would have done it himself.
Before me, he offered it to several of his partners and friends. They all turned it down (thankfully for me!). Andy was upfront about this and honest. When successful real estate people find good deals, they offer the best deals to their friends and family first.
Because I was quick to make decisions and built a good partnership with Andy, I’m hoping to be one of the first calls he makes next time he finds a good deal.
You probably noticed that Andy approached me with the deal, and I had to wire funds within 24-48 hours later… Well, most all-cash real estate deals need to close quickly. That’s one of the reasons you can purchase at a good price.
Once Andy finds a good looking project and gets it under contract, he has 7-10 days usually to conduct due diligence, make sure rehab numbers look good, write a proposal, find investors, get boots on the ground to check it out, and a whole heap of other crap. Having a money commitment is most important, because without money the deal can’t happen. It’s the duty of the investor to act as quickly as possible, so that Andy can get on with the other things needed in the small window he has.
This year I made a plan to learn learn learn. I wanted to try something different, and a little risky. I pulled $50k out of other investments and made a bet with myself that I could make higher returns in a new opportunity. I could have had the money sitting in the stock market, but accessing it quickly would mean selling immediately (whether the market is up or down) and waiting the 2-3 days for various transfers to my checking account. Since I wanted to act as quickly as possible, I chose to have the money sitting in my checking account from the beginning.
If returns were always this good, everyone would be doing it all the time. Remember, when I first agreed to this deal, I was only projecting a 14% ROI in a 6 month time period. Excellent market conditions and a good team lead to me overachieving. If these factors weren’t working for me, it could have gone the other way.
My advice for your first deal: Don’t try to hit a home-run. Try to gain education and knowledge out of your first deal, even if it means low or no profits.
Andy (and other Andys out there) are looking for good deals all day every day. They put out hundreds of bids, mail out letters, make cold calls, and are finding deals. But, in a hot economy it’s getting harder and harder to find deals. Andy hasn’t brought me a single deal since closing on this one.
My goals for 2018 were to try several different strategies. Specifically, small house flips and apartment complex syndications. A few weeks ago I moved $50k into a new partnership with a company that is purchasing a large apartment complex. The learning is starting all over again and I’ll write about syndications another time maybe.
Real estate investing isn’t for everyone. Some people love it, and others don’t think the risk is worth the reward. I’m not here to argue with anyone – my goal with these stories is just to share personal experiences and be transparent about both the goods and bads of real estate investing. Whether it’s a fit for you is, well, up to you.
Please feel free to reach out to me if you have any other specific questions. I’d love to hear your house flip stories and results if you have them!
10 thoughts on “Funding a House Flip – Numbers, Notes, and Q&A!”
Really thorough, good info. I’ve thought about doing a similar venture, but had a friend who got seriously burned and went through a lawsuit on his first deal. Unfortunately, his “Andy” didn’t hire the right contractors and it turned into a mess pretty quick.
I’ll have to check out the Bigger Pockets forums. I keep hearing good things.
I’ve also heard horror stories and maybe that’s why I’ve stayed away in the past. I just got to the point where I thought the only way i’ll know for sure is if I try it out! Having the right team in place is absolutely key.
Thanks for reading!
Well dang. If I had $50k sitting around this is the kind of real estate I’d like to get into! Much easier than dealing with neighbors complaining about tenants and unclogging toilets.
Dude, let’s talk about apartment syndications! Truly passive investing.
You got a rough deal with your last rental. Hope it hasn’t turned you off real estate for good!
See you in FL 🙂
The mindset to organize and follow through with this long-distance project is remarkable…your key being able to find the right team to work with. This case study truly shows it can be done within your perimeters, and knowing how much you need to improve to flip successfully. You could have gone all out with improvements and not gain anymore equity in the sale. Incredible foresight.
A well-organized, informative study.
Thanks, Gloria. Yeah, I was surprised at how much economical improvements make a big impact on the sale price.
Thanks for reading 🙂
I don’t think I will ever get into real estate (never say never, right), but this is a good list of questions and answers on things to think about in the process. Thanks for sharing and congrats on the nice profit!
Cheers! I tried to think of the questions I had when talking to my flip buddies when I was new. Let me know if you have any others that pop up. I’m still learning!
Oh and the profit… Well, I’m about to publish another post about my worst real estate investment. The loss will bring tears to your eyes.
Sounds like your experience was on the positive side. I’m still not sold on real estate, but you’re definitely making a good impression with it. Maybe one day you’ll be able to talk me into it.
‘Real Estate’ can mean so many things… Keep researching until you find a path that you feel comfortable with.
In the meantime, sit back and watch me make some mistakes! I’ve made quite a few and will share those too.
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