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NOTABLE! AMA: Rehabbing & Flipping - Ask Me Anything

Chazmania

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Great AMA, thanks for taking the time to do it!

Is there a particular holding period you shoot for before selling?

I would think you get hurt if less than a year and paying short term gains. Sounds like you're doing enough volume to still come out pretty good though.

I'm a total buy and hold type by nature, but I've been wanting to flip something. My rentals are going so well that I worry about stepping away from that as my core business and buying something to flip, and then getting caught holding it. I am trying to expand my comfort zone though.

Also, how do you structure all of the people doing the work?

Are your project managers GC's basically and have their own crew(s) and bring in the other trades as needed?


Thanks again for your thread!
 
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JScott

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Is there a particular holding period you shoot for before selling?

I would think you get hurt if less than a year and paying short term gains. Sounds like you're doing enough volume to still come out pretty good though.

I'm a total buy and hold type by nature, but I've been wanting to flip something. My rentals are going so well that I worry about stepping away from that as my core business and buying something to flip, and then getting caught holding it. I am trying to expand my comfort zone though.

Also, how do you structure all of the people doing the work?

Are your project managers GC's basically and have their own crew(s) and bring in the other trades as needed?
First, it doesn't matter how long you hold a flip -- it will *always* be subject to ordinary income tax at your marginal rate (plus self-employment taxes in some situations). When you flip a house, the IRS considers the house inventory, not a capital asset (investment), no different than if you were buying and selling shoes through a shoe store or buying and selling food in a restaurant.

Unfortunately, flipping houses is not a good way to minimize taxes, and other than minimizing self-employment tax, there isn't much you can do to reduce your tax burden.

In terms of project managers and structuring my teams, it's different in each state where we do work. In Atlanta, where we do the bulk of our projects, I have a full-time project manager who essentially acts as a GC -- he is responsible for all day-to-day aspects of the projects, including getting bids, hiring contractors, managing the rehabs, quality control, etc. He's basically my right-hand man for the business.

In Wisconsin, we had a full-time project manager, but it didn't work out, as the projects we're doing up there require a more technical oversight than a non-contractor could provide. So, we've moved to a structure where my carpenter pretty much runs the projects day-to-day, while also contributing much of the carpentry labor. And in Maryland, where I just moved, I don't yet have a project manager, so I'm managing the bulk of the work myself, even though we've only done a couple projects so far. As we ramp up over the next few months, I'll either move my project manager up from Atlanta or hire someone else for the Maryland market.

In general, we don't use GCs, though sometimes we need to bring one in to pull permits in certain jurisdictions. We tend to just hire our subs directly and manage them individually. The nice thing is, once your subs have worked together on several projects, they tend to be self-managing. Most of our subs will communicate with each other as necessary to revise schedules and ensure things are getting done in the most optimal fashion.
 
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JScott

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Just thought I'd bump this thread, in case anyone has any questions and they didn't know it was here...

Since I started this thread 3.5 years ago, we've done about 100 more deals, and have branched out into spec building, landlording, lending and a few other areas. I'm mostly hands-off of the business these days -- most of our projects are with partners -- but am still well entrenched in the industry.

Any questions about any aspect of real estate investing, I'm happy to try to answer...
 

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Thanks for bumping, never saw this thread before.

I live in an area where I don't think flipping would work. Most of the houses that get flipped around here don't even make it to MLS, get bought by a real estate broker, and then flipped. Huge competition. A friend of mine is a realtor and will sometimes send deals my way before they get listed, but they are few and low margin.

The one's that are available need major work, like slab foundations that have cracked and broke the water pipes that were installed when the concrete was poured. I've looked into those, and it's actually cheaper to jack up the house and set in on a cinder block foundation than it is to repair the slab. In the end, no margin.

Is it possible to do this long distance, or do I need to move?
 

Midas

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@jcscott Thank you for your contribution, Sir. I look forward to being in a similar position someday and helping others. I was able to check out 123flip and just from the information you provided on your first flip, I know you're going to be my new inspiration.

I'm somewhat of a local handyman. I love doing the work, painting walls and cabinets, flooring, molding, and fixtures. If I could be at Home Depot at 6AM every morning, I would be living a dream. My wife and I decided to get into flipping. She is currently studying for the Real Estate exam and I'm networking with contractors hoping to get in where I fit in.

My question is: The market we would more than likely start in(due to financial constraints) would probably yield poor returns, but I'm ok with that. 99% of the properties($65k-$100k) in my area listed are outdated. Sellers do not try to fix them up and there must be a reason. But I see a property that could use $.99 sq ft laminate flooring, painted kitchen cabinets with new hardware, countertop resurfacing, crown molding. $2500 could easily bring these houses up to date. Since I love to do this kind of work myself. Do you think I could find a little profit in these lower end flips?

Sorry for the long post. Thanks in Advanced!
 

Chris Milan

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Would this also be your answer if I were to ask the best/easiest way to fund a first time rehab without any initial capital?
There is Hard money lenders that do 100% financing if you show them the deal you have and comps of what it will sell for after rehab. Use zillow to check for sold properties same room and bath, around same sq ft and call up some agents with listings in that area. get some bids from contractors and present numbers to lender.
 

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I fix up houses to rent and do all the work myself. I need to start hiring out the work but am having a hard time letting go in this area when I can do all the work myself. Any and all advice welcome when it comes to hiring out work and shifting my mindset to more of an investor instead of a handyman is appreciated!
 
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JScott

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Is it possible to do this long distance, or do I need to move?
First, it's certainly possible to flip long-distance. There are lots of investors who make a living doing just that, and we've done it a bit ourselves. That said, I don't generally recommend it, as here are things to consider:

- The only way to be successful long-distance is to have a team on the ground that you trust. It takes time, energy and experience to build a team, and if you've never done it before, you'll spend months at the remote location building your team before you get it right. Are you willing to spend months remotely to build a team? Will you do enough projects in that location to make it worthwhile?

- You're going to have issues come up on your flips. If you're experienced, you may be able to handle those issues remotely (especially if you have a good team on the ground). But, if you're not experienced, you'll probably be making trips back and forth to that location to handle the issues. Are you willing and able to do that?

- If you've never flipped before, you'll spend 60-80 hours/week on your first project (if you're doing it right). If you're doing your first project long-distance, that adds additional time/complexity/risk. I couldn't imagine the learning curve of both flipping and remote flipping at the same time. Learn to flip first, then branch out remotely.

- Unless you plan to get your real estate license in another market, make sure you find a GREAT real estate agent who can help you with data, buying and selling. I don't know anyone who has been successful long distance without a great agent supporting them.

- If you've flipped before, expect that when you start doing it long distance, it will be 10x more frustrating and time consuming than your local flips. It will also be more expensive. Will the profit margins you expect justify the extra cost and stress?

For most people, I don't recommend long distance flipping. We did 40 houses in Milwaukee back in 2011-2013, and it was hell. Tough market, bad weather, difficult contractors, relatively long plan flights, etc. We made a decent profit, but it wasn't worth the extra stress, time and energy that went into it. These days, we only flip long-distance when we have a partner on the ground who can handle 100% of the work.
 

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Thanks for the detailed answer!

I've flipped 2 houses, and over a dozen mobile homes. So I wouldn't say I'm "experienced" with flipping at all, because I found out that flipping mobiles is much different than actual real estate.

Remote flipping is probably out than, with my "job" and all that taking my time.

That leads to the question, how would I determine if where I want to move is a "good market" for this?
 
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JScott

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My question is: The market we would more than likely start in(due to financial constraints) would probably yield poor returns, but I'm ok with that. 99% of the properties($65k-$100k) in my area listed are outdated. Sellers do not try to fix them up and there must be a reason. But I see a property that could use $.99 sq ft laminate flooring, painted kitchen cabinets with new hardware, countertop resurfacing, crown molding. $2500 could easily bring these houses up to date. Since I love to do this kind of work myself. Do you think I could find a little profit in these lower end flips?
A few things:

- Make sure you approach investing/flipping as a BUSINESS, not a job. Don't think about your investments as a contractor -- think about them as a business owner and investor. If you approach investments as a contractor, you'll find that you're focused on buying yourself a job, and you'll never make the profits you deserve. When evaluating deals, assume that everything will be hired out to other contractors -- if you can still make a reasonable profit in that situation, it's a good deal. But, if you can only make the numbers work by YOU doing the work, it's a not a good deal. Perhaps it's a nice hobby, but it's not a good deal.

- Along with the above, you're never going to maximize your profits by doing the work yourself (I have a feeling you realize this). If you're doing a job (like painting) where you could be hiring it out for $15/hour, you're basically earning $15/hour. I prefer to hire it out and take on more projects with the time I'm saving.

- That said, if you're a contractor and you don't mind essentially earning $15-50/hour (whatever you'd be paying your contractors), doing your own properties provides the advantage of control and the additional profits that come the investment. I know many contractors who have started by doing their own work, and then transition to hiring it out. But again, make sure the deals work WITHOUT YOU, as you never know what might happen -- you might find another opportunity, you might break your hand, etc. If the project is going to blow up without you doing the work, it's not a good deal.

- As far as slim profits go, that's up to you. I would caution that if you've never done this before, slim profits can turn into a loss pretty easily/quickly. But, if you're VERY confident of the numbers, and if the profits are worthwhile to you, go for it. I know people who are happy to make $10K on a deal, expecting that they can do one every 2-3 months -- they are happy earning $40-60K/year. I know other people who won't get out of bed if they can't make $100K on a deal in 4 months. That's a personal decision, and only you can determine what level of profit is reasonable for you. But again, you MUST be sure the numbers work before taking on a slim deal, especially when you're new at this.

- Btw, I started with low-end flips. I was buying $30-50K properties in the Atlanta suburbs, putting in $15-25K in rehab, and reselling for $70-100K. We made about $15-20K per flip, and were doing enough volume that we were thrilled with our results. It's certainly possible to be successful in this type of market. Just make sure there is buyer demand at that price point and for those types of houses (a real estate agent can help you with this), and make sure that your rehabs are at least as good (if not a little better) than the other properties selling in that area and at that price point.
 

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JScott

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I fix up houses to rent and do all the work myself. I need to start hiring out the work but am having a hard time letting go in this area when I can do all the work myself. Any and all advice welcome when it comes to hiring out work and shifting my mindset to more of an investor instead of a handyman is appreciated!
Ready for some tough love? :)

Start by asking yourself two questions:

1. How much would you be paying contractors on an hourly basis to take over the work you're doing yourself?

2. Do you want to work for that much per hour?

For example, if a painter is going to cost you $15/hour, then you need to ask yourself, "Am I looking for a $15/hour job?" If so, do it yourself. If not, hire it out. Personally, I don't want to work for $15/hour -- it's part of the reason I got into this business. So, I wouldn't do a job that I can hire out for $15/hour. Likewise, I personally wouldn't do a job that I could hire out for $25/hour or $50/hour.

People will argue that doing the work yourself increases your profits. In my opinion (and I can basically prove this mathematically), that's not true. Your profits are exactly the same. All it does is provide you some contracting income in addition to your profits. The cost of labor is the cost of labor, whether you're doing the work yourself or you're hiring it out. You can play accounting games and trick yourself into believing that you're making extra money by doing the work yourself, but in reality this is no different than hiring out the work to a contractor at $15/hour and then going to work a retail job for $15/hour. The math is the same.

Again, when you do the work yourself, the most money you're saving is typically about $50/hour (in theory -- I actually can't think of any contractors I pay $50/hour to that don't do VERY specialized work). But, I can name lots of RE tasks that consistently generate more than $50/hour (fundraising, marketing, strategy/planning, networking, etc) -- do those and you'll make more than you're saving by swinging a hammer.

Look at it this way -- I typically earn about $25K on a house flip. I spend about 40-50 hours on a deal these days, between raising funds, finding deals, managing my team, etc. Simple math says that earning $25K on 50 hours of work is putting my time at $500/hour. Why would I spend time swinging a hammer (saving $20-25/hour) when I could be doing more deals earning $500/hour. And why should you???

That said, if you're doing the work because you love the work or because you take pride in doing it yourself, go for it. Those are excellent reasons. Just don't try to convince yourself that it's making you a better investor or making you more money. It's not... :)
 
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JScott

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That leads to the question, how would I determine if where I want to move is a "good market" for this?
I'm not looking to promote my Flipping book here, but I will say that I devote an entire chapter to this question.

There are both quantitative and qualitative measures you can use, but for me, it boils down to 5 sets of data:

1. Price Ratios Between Distressed and Retail Sales

2. Are There Buyers In The Area?

3. How Much Real Estate Supply Does The Area Have?

4. Are There Other Investors Active In The Area?

5. General Market Indicators and Trends

Again, not pushing the book, but if you're interested, I have a chapter where I delve into the quantitative measures behind each of those sets of data. Unfortunately, it's too much to post here in one post... :)
 

MidwestLandlord

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I'm not looking to promote my Flipping book here, but I will say that I devote an entire chapter to this question.

There are both quantitative and qualitative measures you can use, but for me, it boils down to 5 sets of data:

1. Price Ratios Between Distressed and Retail Sales

2. Are There Buyers In The Area?

3. How Much Real Estate Supply Does The Area Have?

4. Are There Other Investors Active In The Area?

5. General Market Indicators and Trends

Again, not pushing the book, but if you're interested, I have a chapter where I delve into the quantitative measures behind each of those sets of data. Unfortunately, it's too much to post here in one post... :)
Well, you sold a book anyway lol. I'll make sure to read that chapter.

Chiming in on not doing the work yourself:

I've never done any of the work myself with any real estate deal, rental, not even my own home. There is no way I'm going to spend my precious time doing stuff like that, when I could be either out earning more money or spending time with my family. It's just not worth it to "save" $50 an hour or whatever.

It helps that I despise manual labor though haha.

Does the CEO of Ford assemble his own cars?
 
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JScott

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For anyone interested, I released a new book a couple weeks ago. A topic that is not discussed often enough, but is key to success in this business these days. I'm obviously biased, but I think it's better than my first two (which have sold over 100,000 copies):

The Book on Negotiating Real Estate

If you decide to check it out, please let me know what you think!
 

Chitown

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For anyone interested, I released a new book a couple weeks ago. A topic that is not discussed often enough, but is key to success in this business these days. I'm obviously biased, but I think it's better than my first two (which have sold over 100,000 copies):

The Book on Negotiating Real Estate

If you decide to check it out, please let me know what you think!
@JScott,

Saw your thread update, went to Amazon and book arrives next Monday. One click, baby. Amazon is frickin' dangerous to your wallet! Looking forward to it. Congratulations, Jason!
 
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JScott

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@JScott,

Saw your thread update, went to Amazon and book arrives next Monday. One click, baby. Amazon is frickin' dangerous to your wallet! Looking forward to it. Congratulations, Jason!
Thank you! Let me know what you think and if you have any questions!
 
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JScott

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Number one new release in buying and selling real estate. Impressive, and congrats. Ill have to pick it up after I finish your book on flipping houses.

Hows the Maryland/DC market treating you?
The Maryland/DC market is always tough. A LOT of investors around here, the market is typically hot -- mostly because of the DC political turnover every couple years and also because we are centralized between three strong markets (Baltimore, DC and Northern VA). The downside is that there is a ton of competition; the upside is that the market tends to stay strong and there isn't a lot of risk of a big downturn.

Personally, I'm still doing more deals outside this area than I am here. We are building a couple new construction in Maryland, but most of our rehabs are in Atlanta and upstate NY...
 

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@JScott

You mentioned a few posts back about the "qualitative" measures. Does that include the current climate of record high RE prices?

Interested to start finding one to rent out, but feel prices have gone up so fast, it might be best to wait a year or so and see where the prices are then(?)

Do you just look at the micro data or do you also look at more macro trends as well?

Thanks!

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JScott

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@JScott

You mentioned a few posts back about the "qualitative" measures. Does that include the current climate of record high RE prices?

Interested to start finding one to rent out, but feel prices have gone up so fast, it might be best to wait a year or so and see where the prices are then(?)

Do you just look at the micro data or do you also look at more macro trends as well?

Thanks!
Before purchasing a property, I look at data on three levels (this is actually from the new book):




First, I look at the market from a macro level. Which direction are housing prices at a national, state and local level trending, what types of governmental regulation is trending, how are employment/immigration numbers trending, etc. This will give you a big picture idea of what real estate is doing and how to approach it based on that data.

Next, I look at the neighborhood and the specific property. Talk to neighbors, do county-level research, do Internet/social media research, etc. to determine if there are any issues or concerns with the area that my buyers or tenants might notice. I have an example in the book about a property we purchased where I never visited the property on a weekday before purchasing it, so I had no idea that the neighbors left their two huge dobermans in the yard from 8-5 every weekday -- and these dogs were NOT friendly to people walking near the fence-line. Took a long time to sell that property...

Finally, I investigate the specific buyer/seller that we'd be working with. Try to determine motivation, which will indicate "pressure points" we can use to negotiate a great deal.

As for finding a rental these days, my recommendation would be to go for it. The nice thing with rentals is that -- even when the market turns down -- rental numbers aren't going to change drastically (a profitable rental should be profitable in any market, so long as you're not over-leveraged). Sure, you might get a better deal a year or two or five in the future, but trying to time the market is tough, and I'd rather "dollar cost average" my rentals than wait around for years and only purchase when the market is down. After the market crash in 2008, those landlords who weren't over-leveraged still did well enough to get through the bad couple years.

I'm actually purchasing more rentals these days than flips -- once the market turns, I want to continue to get the cash flow, even if I can't generate the flipping income.
 

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@JScott

That makes much more sense. We've been on the fence because we think the real estate market will drop in the next year so didn't want to get in at the top.

I went ahead and picked up a copy of your new book to get more of your thoughts.

Thanks for that!
 
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JScott

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@JScott

That makes much more sense. We've been on the fence because we think the real estate market will drop in the next year so didn't want to get in at the top.

I went ahead and picked up a copy of your new book to get more of your thoughts.

Thanks for that!
Thank you! Let me know what you think!
 

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90% of the deals we do today are with borrowed funds. Wish I had realized the power of that earlier on...I'd have done a lot more deals by now!

JScott, thank you for this thread. I am new here on the FLF. May I ask you for your opinions on setting up a personal line of credit with a local bank to fund this type of investment, and any thoughts on the Florida market?
 
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JScott

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JScott, thank you for this thread. I am new here on the FLF. May I ask you for your opinions on setting up a personal line of credit with a local bank to fund this type of investment, and any thoughts on the Florida market?
I'm a big fan of lines of credit. The interest rates are typically low, there are no tax consequences (generally), banks are typically pretty easy to work with, rates tend to change slowly, there aren't a lot of hidden fees and getting access to the funds is quick and easy (important for real estate transactions).

When I built my house, I chose not to get a mortgage, but I did get a HELOC so that I can tap the equity if I ever need to. There aren't too many loan products that I'm a fan of, but this is one...

As for the Florida market, I don't currently have any thoughts. But, one of my old project managers is getting ready to relocate to an area outside Boca Raton, and he wants to partner on deals...so I will likely be getting familiar with that area in the near future...
 

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For anyone interested, I released a new book a couple weeks ago. A topic that is not discussed often enough, but is key to success in this business these days. I'm obviously biased, but I think it's better than my first two (which have sold over 100,000 copies):

The Book on Negotiating Real Estate

If you decide to check it out, please let me know what you think!
I read the first bit for free on Amazon; from what I saw it's a really well-written book. I like your writing style... it's conversational, but smart. Also, the cover art is very professional looking.
 
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I read the first bit for free on Amazon; from what I saw it's a really well-written book. I like your writing style... it's conversational, but smart. Also, the cover art is very professional looking.
Thank you...

Interesting piece of trivia: The book was edited by the same guy who edited the first "The Millionaire Fastlane" book. Just a pure coincidence -- he was recommended by friend...

For anyone who wants a free chapter of the book, go here: http://www.negotiatingbook.com
 

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...and to be honest, while it's nice to have the cash to do the deals ourselves, 90% of the deals we do today are with borrowed funds. Wish I had realized the power of that earlier on...I'd have done a lot more deals by now!
It has been interesting reading through this thread. You kind of remind me of a friend of mine who was an engineer for many years, and focused on processes and moving things around in the pipeline in his line of work. He got laid-off from his corporate job one day and decided to start his own house-flipping business. He applied the same types of processes and disciplines that he had been doing in the engineering world and was immediately successful. I don't know what your background is, but some of the things you have explained here remind me a lot of the things my friend does.

Your comment about using other people's money is interesting... friend has reached the same conclusion, even though he can easily pay for anything himself now. Would you please talk about that a little bit more... what are the pros that you find so attractive? Is the added cost of the loan generally not a big deal because it is essentially a small monthly holding cost until you can sell the house?
 
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JScott

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It has been interesting reading through this thread. You kind of remind me of a friend of mine who was an engineer for many years, and focused on processes and moving things around in the pipeline in his line of work. He got laid-off from his corporate job one day and decided to start his own house-flipping business. He applied the same types of processes and disciplines that he had been doing in the engineering world and was immediately successful. I don't know what your background is, but some of the things you have explained here remind me a lot of the things my friend does.
I'm an engineer by education and spent my career before real estate career in the tech industry, so yes, definitely a similar background...

Your comment about using other people's money is interesting... friend has reached the same conclusion, even though he can easily pay for anything himself now. Would you please talk about that a little bit more... what are the pros that you find so attractive? Is the added cost of the loan generally not a big deal because it is essentially a small monthly holding cost until you can sell the house?
For me, the biggest benefit of using other people's money is positive leverage... For those who don't intrinsically understand what that means, here is an example:

Let's say I have $1M of my own cash to allocate to real estate investments. And let's say that a typical investment requires $200K in cash and returns 15% cash-on-cash in an average of six months (projects are shorter than that, but there is a lag to turn over funds to the next project).

Using just my own cash, I *could* do ten projects per year, turning over all my cash twice and earning about $300K in profit per year (15% of $1M twice per year). Not a bad return.

But, the other option is that I borrow the $1M at 10% per annum, paying $100K in interest per year for the benefit of borrowing the cash. That generates $200K in profit per year (the same $300K as above minus the $100K in interest), but leaves me my $1M in cash to invest somewhere else. I could invest in another ten projects per year for myself, I could invest in someone else's deals, I could invest in something outside of real estate, etc.

And, as long as I'm generating at least 10% per year on my $1M, I do better than if I hadn't leveraged. For example, if I do another 10 projects per year, now my annual profit is $500K instead of the original $300K. If I lend that money at 15% per year, my annual profit is $350K instead of the $300K. Etc...

In other words, as long as I can surpass the 10% hurdle (the rate at which I'm borrowing) on my own cash, leverage is positive and I make more money. The more I borrow, assuming I surpass the 10% hurdle, the more I'll make and the higher my IRR (internal rate of return) will be.
 

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