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NOTABLE! AMA: Rehabbing & Flipping - Ask Me Anything

Go Oxy

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Thank you for the reply.

I've been in the Florida insurance business for 24 years. Feel free to ask me anything on insurance if need be.
 

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Rickchise23

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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.
Love your approach I look at things very similarly, agree about it being a good time to grab rentals. Atlanta is an interesting market, I own a property Valuation Business and we entered the Atlanta market recently. Distressed real estate numbers are very low there, do you see this as a good market to buy and flip in currently?
 
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JScott

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Love your approach I look at things very similarly, agree about it being a good time to grab rentals. Atlanta is an interesting market, I own a property Valuation Business and we entered the Atlanta market recently. Distressed real estate numbers are very low there, do you see this as a good market to buy and flip in currently?
We started in the Atlanta market back in 2008. Prices were literally 50% of where they are now -- we did over 100 flips in three years in that market basically without trying (little credit to us -- it was hard to mess up in that market). These days, there are still opportunities there (we moved up to Washington, DC in 2013), but they are fewer and farther between.

If you don't mind doing larger projects (additions, tear-downs, etc) there are plenty of opportunities, but if you're looking for the basic "paint and carpet" type flips, you won't find many in Atlanta metro these days (unfortunately). Prices have rebounded to pre-crash numbers and there is a lot of competition in that market.
 

MTF

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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...
What if you invest for cashflow only? I mostly see people talking about leverage and flips/appreciation play, not cashflow. Is leverage less powerful/not that essential in buying for cashflow?
 
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JScott

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What if you invest for cashflow only? I mostly see people talking about leverage and flips/appreciation play, not cashflow. Is leverage less powerful/not that essential in buying for cashflow?
Leverage works the exact same way with cashflow. If the return you're getting (cash-on-cash) exceeds the APR of the debt, they you have "positive leverage" -- in other words, the debt/leverage *increases* your return.

Of course, for most cashflowing properties, the return is going to be much closer to the interest rate on the debt, so a small change in cashflow can take the leverage from positive to negative (if the APR of the debt is higher than the return, then the leverage will have a negative impact on returns). So, you need to be careful in these situations.

That said, when plotted on a graph, the "leverage curve" isn't particularly what you'd expect. In most cases, less than 60% leverage (i.e., less than 60% loan to value) typically won't impact your returns very much. More than 80% leverage will have a significant impact, but will greatly increase risks -- if the value of the property drops a little, your debt may be higher than what you could sell the property for.

For more details (and to see a graph), check out this article I wrote a few years ago:

All About Leverage
 

MTF

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Thanks for the link.

I guess in the end it all comes down to personal preference as you mention at the end of the article.

If one wants to reinvest their profits from their primary non-RE business into RE for the purpose of relatively passive income (say from rentals like triple net leases), 100% cash might be a good choice because this person is not after maximizing their returns but after safety and stability. Math makes sense, but it doesn't account for increased risk and stress when you have to make payments while you're struggling to find a tenant (or for the headaches of dealing with banks).

When you achieve financial independence and are free to do whatever you want, maximizing your returns isn't going to change much in your life anyway (making 1 million a year and making 2 million a year isn't such a big difference as making $50,000 a year or $100,000 a year), unless dying with as much money as possible is your goal.
 

fastbo

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Been in real estate for 17 years now and nearly all GURU intro to real estate classes you will take will tell you to learn wholesaling. They'll get a star from your favorite real estate show and advertise on the radio to "meet them" at this special event. You'll show up and the only thing you'll meet is a cardboard cutout of the star, who licensed their name to the billion dollar educational company. They'll show you how easy it is to wholesale and make money with no money.

The truth is like JScott says, wholesaling is one of the hardest thing to do. You have to have superior marketing, bargaining skills than everybody out there, especially rehabbers, because you have to SELL wholesale. Which means you have to buy below wholesale. It's like MJ says, you have to have operational excellence. And that is impossible for a noob.

After one of these big seminars, which they'll have you max out your credit cards and pay up to $50k, you'll see these "wholesalers" running around with clipboards to every open house, every bank owned house. All from the same program. A month later they'll all be gone.

Rinse and repeat for your local market.

If you want to learn real estate, here's some tips:
1. Read every book you can. Learn what terms means, learn different strategies. So when you talk to someone with experience, they don't think "noob"
2. Join your local REIA (real estate investment assoc). Every medium size city or larger has one. Don't buy anything, just join, pay the dues, and go to every meeting. Network and talk to investors
3. Your goal is to eventually work with another experienced investor. You will get incredibly cocky after #1 and #2 and think that since you read everything, you're an expert. You're not, and don't fool yourself. Partner up with an expert and give them value. If you want to get into rehabbing, offer to volunteer to work for them, and work your butt off. You'll learn the contractors they use, the systems they use, their private money sources, how they acquire properties. If you do a good job, maybe they'll even hire you or lend you money to do your own rehab. The bottom line is you'll learn how to do thing the right way.
4. Or alternatively, if you have money, offer to do a JV (Joint Venture) deal with an experienced investor. They'll do the rehabbing and you'll split the profit. As an investor, learn from them. Help out on the job. You'll learn how to do things right.

If you don't prepare to lose money. Every rehabber will tell you they lost money or broke even on their first flip. Working for 3-6 months for $0 sucks. It's guaranteed that you will underbudget and over pay on your work and squeeze your profit to zero or negative.




Hi Tony -

First, I'm not a big fan of starting with wholesaling. 99% of wannabe wholesalers I know never do a deal, get discouraged and completely exit the real estate business, never having given themselves a chance at success. I know a lot of people think wholesaling is easy, I promise you it's not.

To be a successful wholesaler, you need to be able to negotiate BETTER deals than if you were just rehabber or landlord. As a rehabber, I need to negotiate deals to a certain profit margin. If I wanted to wholesale that same exact property, I'd need to negotiate the price down to an even greater profit margin to accommodate the wholesaler's fee. Because of that, wholesalers will typically lose out to rehabbers or landlords when competing for the same properties. And even when wholesalers aren't competing with rehabbers and landlords for a property, they still need to convince the seller to sell at a greater discount than another investor (a rehabber or landlord) would require.

In my experience, wholesaling is much more difficult than rehabbing, as wholesalers need to have pretty much the same set of skills as rehabbers, plus MORE skills that rehabbers don't need. So, no, I don't recommend starting with wholesaling.
 

LiveHappy

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Hi J! Thank you so much for writing this thread and congratulations on your very well deserved success!! I have read your "The Book on Flipping Houses" and I loved it! I am in the middle of my first deal. My business partner calls it a "partnership" but its more of an investment. I bought the house and he is paying for and overseeing the rehab. His dad has a crew that does work for another investor so my partner began hiring him to do flips. This is his 4th and my 1st. His dad gave us the estimate on the rehab and the numbers worked so we went through with it. My business partner is a personal friend who I have known for years and we are splitting the deal 50/50. I would like to get to the point where I can replace my income (my w2 job) and be able to not to have to work 50 hours a week. This is because I have 3 kids and the youngest are 1 and 2 years old. For the time being however I want to keep my job.

1. How common is it for someone in flipping to give offer 50% of the deal to someone for funding half of it? I literally have to do nothing, not even go out to look at the house (although I did several times so far). If this is something common I think it would make sense for me to just continue investing this way but I suspect it is not common.

2. If question # 1 is no, then I would want to learn this business because I probably wont always be getting this type of deal. I would however only want to learn what is absolutely necessary and outsource everything else. I'd rather pay someone to outsource it and have the time to spend with my family. Since you are mostly hands off on the business now, would you be able to tell me what I should absolutely learn? For example I have heard of the 4 components of flipping on a bp podcast. Acquisition, Finance, Rehab, and Sale. So I am thinking I would outsource Acquisition to a wholesaler, I would take care of finance, (not sure about outsourcing rehab) and outsource the sale to a real estate agent. I guess my biggest concern is the rehab. I did read your book, and am starting on the "Book on Estimating Rehab Costs", however I would LOVE to just outsource this all together. The issue I have is that I think that in order for someone to know this business well, they may have done it themselves, and in that case why would they work for me. I know that you were all in with this business before you went hands off and I'm wanting to attempt to do it backwards, but my family time is very important and I really would only want to learn what I have to, thank you so much for reading this helping me.

-LiveHappy
 

Action Mike

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Thanks for posting a AMA JScott! Love your books and posts on other forums as well.

A few questions I would love to ask you are...

  • When you said earlier you were getting more into higher end flips would that still be median level flips but larger than the smaller homes like in Atlanta or have you started doing much nicer flips with higher profit potential (Like a 5,000+ SQF house)?
  • Have you done any multifamily investing for rentals or rehabbing or stick to SFH?
  • Has the move to more developing spec homes been a better option overall than doing the rehabbing? One of my thoughts on how to plan out the next several years was to do many median level SFH rehabs and then start moving into higher end higher profit houses and building new homes, so really curious how you feel that it all plays out and what is the best path for time freedom and profits in your opinion.
  • Do you still feel that 15% of ARV (if I read that right) in profit is a good minimum to shoot for for median level houses?
  • Long term, like retirement level thinking, what do you see being the best option to support ones finances? Stocks, absentee businesses owner, rentals, private lending, all of the above?
 
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JScott

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Hi J! Thank you so much for writing this thread and congratulations on your very well deserved success!! I have read your "The Book on Flipping Houses" and I loved it! I am in the middle of my first deal. My business partner calls it a "partnership" but its more of an investment. I bought the house and he is paying for and overseeing the rehab. His dad has a crew that does work for another investor so my partner began hiring him to do flips. This is his 4th and my 1st. His dad gave us the estimate on the rehab and the numbers worked so we went through with it. My business partner is a personal friend who I have known for years and we are splitting the deal 50/50. I would like to get to the point where I can replace my income (my w2 job) and be able to not to have to work 50 hours a week. This is because I have 3 kids and the youngest are 1 and 2 years old. For the time being however I want to keep my job.

1. How common is it for someone in flipping to give offer 50% of the deal to someone for funding half of it? I literally have to do nothing, not even go out to look at the house (although I did several times so far). If this is something common I think it would make sense for me to just continue investing this way but I suspect it is not common.

2. If question # 1 is no, then I would want to learn this business because I probably wont always be getting this type of deal. I would however only want to learn what is absolutely necessary and outsource everything else. I'd rather pay someone to outsource it and have the time to spend with my family. Since you are mostly hands off on the business now, would you be able to tell me what I should absolutely learn? For example I have heard of the 4 components of flipping on a bp podcast. Acquisition, Finance, Rehab, and Sale. So I am thinking I would outsource Acquisition to a wholesaler, I would take care of finance, (not sure about outsourcing rehab) and outsource the sale to a real estate agent. I guess my biggest concern is the rehab. I did read your book, and am starting on the "Book on Estimating Rehab Costs", however I would LOVE to just outsource this all together. The issue I have is that I think that in order for someone to know this business well, they may have done it themselves, and in that case why would they work for me. I know that you were all in with this business before you went hands off and I'm wanting to attempt to do it backwards, but my family time is very important and I really would only want to learn what I have to, thank you so much for reading this helping me.
1. There is no "typical" way to split profits in a partnership, but this is how I generally look at it...

I consider finding and managing the deal to be 50% and financing to be 50%. So, if one party does all the work, he gets that 50% and if one party does all the financing, he gets that 50%. That's a common 50/50 deal -- one party puts in all the money and the other does all the work. In your case, one party is doing all the work, so he'd be entitled to 50% (using my method). The financing is being split down the middle, so the other 50% would be split down the middle as well -- he'd get half (25%) and you'd get half (25%).

So, if I were splitting up this deal, I'd be giving him 75% and you 25%.

But again, there is no "typical," and what I may consider fair and equitable isn't necessarily what someone else would consider fair and equitable. Sounds like you have a good deal with this partner -- I'd try to keep going with him. But, in general, you likely won't find a lot of investors will to make this deal, unless you're a really good negotiator (or they are on the desperate side, which is concerning as well).

2. It was likely either my BP podcast or Marty Boardman -- we conceived of the "Four Flippin' Boxes" together a few years ago. Of the four boxes (Acquisition, Financing, Rehab and Sale), they all *can* be outsourced, but some are more difficult than others.

Acquisition isn't hard to outsource, but you'll have to accept that your deals are going to be thinner than if you were finding them yourself. Since you'll be paying wholesalers or agents to find you deals, they're going to take a cut. But, that's certainly possible, and I typically outsource most of my acquisition these days.

Financing will depend on the type of financing you're looking for. If it's bank financing, they're going to want to meet you in person. If it's private investors, they're going to want to meet you in person. If you're syndicating or doing a private placement, you can generally hire a salesperson to raise money, but you'll have to give that person a commission, which can get expensive (especially if he's good at his job). This is the part of the process that can be most difficult to outsource.

Rehab is easy to outsource, as long as you are good at building teams. You'll want a project manager and/or GC on your team who can manage the everyday process. You'll need to manage this person, but if they're good, they should be able to take 90% of the day-to-day work off your plate.

Sale is also easy to outsource. Hire an agent. Of course, you're giving up some control (that's the downside), but you can typically remove yourself from the process nearly 100%.

Personally, I think the first two boxes (acquisition and financing) are the ones that make or break a flipper. If you spend 40 hours finding a deal and getting money to do the deal, and the deal generates $20K in profit, you just made $500/hour on your time. That's worth doing yourself, if necessary. On the other hand, rehabbing work and sales work generally will generate closer to $15-50/hour -- probably not worth doing yourself unless you really enjoy it or are completely out of other options.
 
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JScott

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Thanks for posting a AMA JScott! Love your books and posts on other forums as well.

A few questions I would love to ask you are...

  • When you said earlier you were getting more into higher end flips would that still be median level flips but larger than the smaller homes like in Atlanta or have you started doing much nicer flips with higher profit potential (Like a 5,000+ SQF house)?
  • Have you done any multifamily investing for rentals or rehabbing or stick to SFH?
  • Has the move to more developing spec homes been a better option overall than doing the rehabbing? One of my thoughts on how to plan out the next several years was to do many median level SFH rehabs and then start moving into higher end higher profit houses and building new homes, so really curious how you feel that it all plays out and what is the best path for time freedom and profits in your opinion.
  • Do you still feel that 15% of ARV (if I read that right) in profit is a good minimum to shoot for for median level houses?
  • Long term, like retirement level thinking, what do you see being the best option to support ones finances? Stocks, absentee businesses owner, rentals, private lending, all of the above?
1. We are getting into the $1M+ range, but that's mostly building new construction or doing big projects (adding a second story on a ranch or adding significant square footage). For pure flips, we're still in the $100-300K range.

2. We'd love to get into multi-family (and that was our original plan back in 2008), but I got distracted from 2012-2016 when the multi-family market was booming. I think I missed the boat during this cycle (unfortunately), and don't believe multi-family is a good segment to be focusing on right now. But, that's still a goal.

3. I like new construction more than rehabbing, simply because the process is less error-prone and you're less likely to run into surprises. It certainly takes some experience to be able to build efficiently, so it's not something I would recommend any jump into before they get their feet wet doing less complex rehabs. If you're going to jump into new construction, find someone who's done it before and do whatever you can to get them to show you the ropes. There really are a ridiculous amount of small details that can kill your project if you're not prepared for them.

4. I still shoot for 15%. I was getting 20% for a long time; these days, I'm closer to 15%. For a new investor, I think 10% is too thin and doesn't leave enough cushion to deal with surprises or a market correction.

5. I dislike stocks -- I don't feel like I have any control. Flipping is a great way to build capital, but I don't consider it a retirement strategy. Personally, rental properties, lending and passive business control are my preferred vehicles for retirement. For tax reasons, I lend out of my self-directed 401K and fund rentals and businesses out of my taxable savings.
 

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LiveHappy

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Speedway Pass
Oct 15, 2016
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1. There is no "typical" way to split profits in a partnership, but this is how I generally look at it...

I consider finding and managing the deal to be 50% and financing to be 50%. So, if one party does all the work, he gets that 50% and if one party does all the financing, he gets that 50%. That's a common 50/50 deal -- one party puts in all the money and the other does all the work. In your case, one party is doing all the work, so he'd be entitled to 50% (using my method). The financing is being split down the middle, so the other 50% would be split down the middle as well -- he'd get half (25%) and you'd get half (25%).

So, if I were splitting up this deal, I'd be giving him 75% and you 25%.

But again, there is no "typical," and what I may consider fair and equitable isn't necessarily what someone else would consider fair and equitable. Sounds like you have a good deal with this partner -- I'd try to keep going with him. But, in general, you likely won't find a lot of investors will to make this deal, unless you're a really good negotiator (or they are on the desperate side, which is concerning as well).

2. It was likely either my BP podcast or Marty Boardman -- we conceived of the "Four Flippin' Boxes" together a few years ago. Of the four boxes (Acquisition, Financing, Rehab and Sale), they all *can* be outsourced, but some are more difficult than others.

Acquisition isn't hard to outsource, but you'll have to accept that your deals are going to be thinner than if you were finding them yourself. Since you'll be paying wholesalers or agents to find you deals, they're going to take a cut. But, that's certainly possible, and I typically outsource most of my acquisition these days.

Financing will depend on the type of financing you're looking for. If it's bank financing, they're going to want to meet you in person. If it's private investors, they're going to want to meet you in person. If you're syndicating or doing a private placement, you can generally hire a salesperson to raise money, but you'll have to give that person a commission, which can get expensive (especially if he's good at his job). This is the part of the process that can be most difficult to outsource.

Rehab is easy to outsource, as long as you are good at building teams. You'll want a project manager and/or GC on your team who can manage the everyday process. You'll need to manage this person, but if they're good, they should be able to take 90% of the day-to-day work off your plate.

Sale is also easy to outsource. Hire an agent. Of course, you're giving up some control (that's the downside), but you can typically remove yourself from the process nearly 100%.

Personally, I think the first two boxes (acquisition and financing) are the ones that make or break a flipper. If you spend 40 hours finding a deal and getting money to do the deal, and the deal generates $20K in profit, you just made $500/hour on your time. That's worth doing yourself, if necessary. On the other hand, rehabbing work and sales work generally will generate closer to $15-50/hour -- probably not worth doing yourself unless you really enjoy it or are completely out of other options.
Thank you J! This is great feedback!

1. I figured this was a good deal and not too common. I will continue to do deals with him so long as he wants and they are going well. If we wants me to also finance the rehab portion I would not mind doing so. I really like this set up as it requires almost no time on my end as I am pretty much just putting my money to work. What I don't like about it is that I don't have a lot of control over my outcome, and if he decides not to do any more deals I will be SOL until I can find someone else. Which is why I am looking into getting my own flipping business going by doing the minimum necessary for maximum effect ("minimum effective load" - to use a Tim Ferris term, and I know if Josh Dorkin were reading this now he'd be cringing lol).

2. So in analyzing the "Four Flippin Boxes" for Minimum effective load...

Acquisition - Combined with financing in an example ($500 per hour) it seems to have a good minimum effective load. It seems like out of everything to learn, if i had to choose this would be one of them if I based it on the ROI of time. I was however actually afraid you'd say this, bc if I'm honest its the part of the business that seems least attractive to me lol I think for this I would want to start with wholesalers (if I can find some that bring me deals that are actually good), if I find that Im not getting many deals, I will likely have to look into learning this side of the business and then outsourcing whatever parts I can, i.e. answering service etc.

Financing - This is an interesting part of the business, and again a great minimum effective load. I've always considered this to be a part that I would be doing myself. I paid the house that we got in full, however in speaking to other flippers that Ive met it seems they prefer to finance. At first my plan was to keep rolling over my profits and using the power of compounding. I have a FT job so I wouldn't need the money to live on. So I would keep funding deals until I can fund 2 at a time, then 3 at a time etc. After speaking with some flippers however I don't know if this is the best strategy. I met one flipper that used lines of credit to fund his deals. They are unsecured so he doesn't have any skin in the game if something goes wrong, aside from his credit score of course. I think its smart as he is leveraging a lot more, and has an insane ROI, however it also seems like he is over leveraged and kind of scary. Would you be willing to share your preference on financing your deals?

Rehabbing - this seems to have a poor minimum effective load ($15 per hour), but I guess what I'm trying to figure out is if a good GC/Project Mgr should be taking 90% of the work off my hands, what would the 10% look like. I guess the gc I would bee looking for would be one that already has a rehab company and does work for other investors. I would get a bid from them to rehab the house and if the numbers work hire them (I know there is a lot of info regarding this in your book even on how to pay them and who buys materials etc. but my question is - do you think some GCs would be able to come up with what finishes to use etc. based on the area, or would that be my 10% input. Or do I really want them making that choice? Would you consider this to be one of the things worth learning about the rehab - or that has a good minimum effective load?

On the sale side - it's kind of a toss up for me right now. I would feel very comfortable getting a RE license, however I don't have a network to be able to actually market the houses. I would only be able to list them.

Thank you again for your help with this - I am very grateful. Separately I think I saw some posts on BP about you speaking at events. If this is accurate do you have any plans of coming by San Antonio, TX?
 

LiveHappy

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Oct 15, 2016
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1. We are getting into the $1M+ range, but that's mostly building new construction or doing big projects (adding a second story on a ranch or adding significant square footage). For pure flips, we're still in the $100-300K range.

2. We'd love to get into multi-family (and that was our original plan back in 2008), but I got distracted from 2012-2016 when the multi-family market was booming. I think I missed the boat during this cycle (unfortunately), and don't believe multi-family is a good segment to be focusing on right now. But, that's still a goal.

3. I like new construction more than rehabbing, simply because the process is less error-prone and you're less likely to run into surprises. It certainly takes some experience to be able to build efficiently, so it's not something I would recommend any jump into before they get their feet wet doing less complex rehabs. If you're going to jump into new construction, find someone who's done it before and do whatever you can to get them to show you the ropes. There really are a ridiculous amount of small details that can kill your project if you're not prepared for them.

4. I still shoot for 15%. I was getting 20% for a long time; these days, I'm closer to 15%. For a new investor, I think 10% is too thin and doesn't leave enough cushion to deal with surprises or a market correction.

5. I dislike stocks -- I don't feel like I have any control. Flipping is a great way to build capital, but I don't consider it a retirement strategy. Personally, rental properties, lending and passive business control are my preferred vehicles for retirement. For tax reasons, I lend out of my self-directed 401K and fund rentals and businesses out of my taxable savings.
Hi J! Great info here. Would you mind expanding on how a self-directing IRA helps your taxes? I met an investor that uses Quest, but I was not aware of the tax benefits.
 

LiveHappy

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Hi J, I think you mentioned prior in this thread that you might be working on a systems book, is that accurate? If so, any approximation on the release date?

-LiveHappy
 
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JScott

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Hi J, I think you mentioned prior in this thread that you might be working on a systems book, is that accurate? If so, any approximation on the release date?
I'm working on a few different things, but the scaling/systems book is low on the list, simply because I've come to the conclusion that there isn't a big audience for that book (unfortunately)... While I love the topic, there aren't a lot of investors in a position where they are consistently doing deals, but haven't figured out how to scale their business. Most of them are still figuring out the basics, and many of those who are past that point either don't want to scale or figure it out on their own.

Sorry about that...
 

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What's your opinion on flipping homes vs. short term rental?

It seems like flipping requires more work, but you get more cash out of it in a shorter time. Short term rentals, once the home is setup is more passive but the cash takes time to accumulate. It seems like it would make more sense to do flipping in the beginning to build up cash, then go into rentals for more passive income. Unless you had another primary income as opposed to flipping homes.
 
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JScott

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What's your opinion on flipping homes vs. short term rental?

It seems like flipping requires more work, but you get more cash out of it in a shorter time. Short term rentals, once the home is setup is more passive but the cash takes time to accumulate. It seems like it would make more sense to do flipping in the beginning to build up cash, then go into rentals for more passive income. Unless you had another primary income as opposed to flipping homes.
What do you mean by "short term" rentals?

Regardless, I definitely agree that the best strategy is to focus on some form of active income creation and then use that income to plow into passive investments. Using flipping as that active income creation and rentals as the passive investment is one form of that, and I consider that to be a great strategy. In fact, that's what I would recommend to anyone starting out in real estate who wants long term financial freedom.
 

StevieB

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What do you mean by "short term" rentals?

Regardless, I definitely agree that the best strategy is to focus on some form of active income creation and then use that income to plow into passive investments. Using flipping as that active income creation and rentals as the passive investment is one form of that, and I consider that to be a great strategy. In fact, that's what I would recommend to anyone starting out in real estate who wants long term financial freedom.
Thanks. The only issue is the time it would take to rehab the home, then to sell it. I would need to eat up the monthly cost from the lender from start to finish. So if it took 2 months to make the home in sellable condition, then another 2 months to sell... that would be 4 months of mortgage payments plus the cost to fix up the home. So I would need to purchase a cheaper home in order to be able to eat that cost until I was able to sell it.

Short term rentals, meaning nightly or weekly. Like listing it on VRBO or AirBnB. I currently rent out my primary residence and live in the basement and was looking to Panama City at some investment homes. I was going to do a short term rental on it as well (I also have an Engineering job) but am now considering flipping instead. In order to come up with the 20% I'd need to refi my current home, but estimate the investment property short term rental can generate around 35k/yr.
 

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Great post. Great blog. I love it. Thank you for being so generous and transparent. Do you have any advice on how to find realtors that work w investors? Tx.
 

LiveHappy

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1. There is no "typical" way to split profits in a partnership, but this is how I generally look at it...

I consider finding and managing the deal to be 50% and financing to be 50%. So, if one party does all the work, he gets that 50% and if one party does all the financing, he gets that 50%. That's a common 50/50 deal -- one party puts in all the money and the other does all the work. In your case, one party is doing all the work, so he'd be entitled to 50% (using my method). The financing is being split down the middle, so the other 50% would be split down the middle as well -- he'd get half (25%) and you'd get half (25%).

So, if I were splitting up this deal, I'd be giving him 75% and you 25%.

But again, there is no "typical," and what I may consider fair and equitable isn't necessarily what someone else would consider fair and equitable. Sounds like you have a good deal with this partner -- I'd try to keep going with him. But, in general, you likely won't find a lot of investors will to make this deal, unless you're a really good negotiator (or they are on the desperate side, which is concerning as well).

2. It was likely either my BP podcast or Marty Boardman -- we conceived of the "Four Flippin' Boxes" together a few years ago. Of the four boxes (Acquisition, Financing, Rehab and Sale), they all *can* be outsourced, but some are more difficult than others.

Acquisition isn't hard to outsource, but you'll have to accept that your deals are going to be thinner than if you were finding them yourself. Since you'll be paying wholesalers or agents to find you deals, they're going to take a cut. But, that's certainly possible, and I typically outsource most of my acquisition these days.

Financing will depend on the type of financing you're looking for. If it's bank financing, they're going to want to meet you in person. If it's private investors, they're going to want to meet you in person. If you're syndicating or doing a private placement, you can generally hire a salesperson to raise money, but you'll have to give that person a commission, which can get expensive (especially if he's good at his job). This is the part of the process that can be most difficult to outsource.

Rehab is easy to outsource, as long as you are good at building teams. You'll want a project manager and/or GC on your team who can manage the everyday process. You'll need to manage this person, but if they're good, they should be able to take 90% of the day-to-day work off your plate.

Sale is also easy to outsource. Hire an agent. Of course, you're giving up some control (that's the downside), but you can typically remove yourself from the process nearly 100%.

Personally, I think the first two boxes (acquisition and financing) are the ones that make or break a flipper. If you spend 40 hours finding a deal and getting money to do the deal, and the deal generates $20K in profit, you just made $500/hour on your time. That's worth doing yourself, if necessary. On the other hand, rehabbing work and sales work generally will generate closer to $15-50/hour -- probably not worth doing yourself unless you really enjoy it or are completely out of other options.

When you say you outsource your acquisition do you mean you use wholesalers or you have an employee marketing for deals or looking for forclosures, REOs etc.?
 
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JScott

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When you say you outsource your acquisition do you mean you use wholesalers or you have an employee marketing for deals or looking for forclosures, REOs etc.?
I use other people (not employees)... This includes wholesalers, agents, partners, etc.
 

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steelandchrome

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I use other people (not employees)... This includes wholesalers, agents, partners, etc.
Do you have wholesalers come direct to you? I have been signed up to a few wholesalers lists and some facebook wholesale groups but I find most of them have severely inflated expected ARV and the comps I find are much closer 10-15% below what they post and make the deals too tight margins. Just curious.

Sent from my SM-G935V using Tapatalk
 
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JScott

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Do you have wholesalers come direct to you? I have been signed up to a few wholesalers lists and some facebook wholesale groups but I find most of them have severely inflated expected ARV and the comps I find are much closer 10-15% below what they post and make the deals too tight margins. Just curious.
One of my "secrets" in this business is how I find good wholesalers who bring me deals before they offer them to anyone else...

I train them. I find people who have the motivation and intelligence to make wholesalers and I teach them how to do it. Sometimes, I'll even bankroll their marketing efforts. When they have questions, they come to me. When they are having trouble closing a deal, they come to me. In return, all I ask is that they bring me their deals first, and I agree to give them a fair value for the properties. I typically don't hold them to having to bring me deals first for very long (just the first few; after that, they can often find others who will pay more), but because they learn that I'll always stick to my word and I'll always close quickly and without any drama, they usually still bring me deals first.
 

Action Mike

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I know you mentioned that you will probably not write a scaling book but for those that are interested in scaling their RE business do you have any key suggestions or recommended learning material, books etc. to help one facilitate the process of scaling a RE business?
 
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JScott

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I know you mentioned that you will probably not write a scaling book but for those that are interested in scaling their RE business do you have any key suggestions or recommended learning material, books etc. to help one facilitate the process of scaling a RE business?
In my opinion, scaling a real estate business -- or any business, for that matter -- boils down to doing 5 things:

1. Delegation: Have other people do the work, whether employees, contractors or virtual assistants. For example, hiring a project manager and using the same crew of contractors on every job. Do as little work yourself, other than what required based on #3 below. If you try to do everything yourself, you'll never scale.

2. Replication: Do the same things over and over so that you don't have to spend time making decisions or communicating your intent to your employees and contractors. For example, we use the same materials on each rehab, we paint the same colors, we use the same service companies (dumpsters, portapottys), etc. If you have to make the same decisions over and over, you'll never scale.

3. Prioritization: Focus your decisions on prioritizing efficiency over other things (like money). For example, you may pay a little more to get contractors to finish quickly (and therefore be able to move onto the next job), but in many cases, the added efficiency will generate greater long-term profits than the extra cost of those efficiencies. Most investors focus all decisions around wringing out the most profit in every part of the job; if that's your priority, you'll never scale.

4. Segmentation: Have each person on your team focus on what they do best to reduce the amount of time spent. A lot of employers like to ensure that each person on the team can do multiple jobs (to fill in when needed), but this is typically inefficient, and someone who has to do lots of different jobs is likely never going to figure out how to get ultra-efficient at any of them. On the other hand, someone who has to do the same thing over and over and over and over and over will figure out how to do it much faster and more efficiently. If you try to have an organization full of people who can do every job, you'll never scale.

5. Documentation: Make sure you have checklists and documentation for every aspect of the business. This is important for two reasons: 1) anyone can cover for anyone else when necessary (though we try to avoid that based on #4 above) and reduces training time when you need to bring in someone new for a job. Since training can be the most inefficient (yet most important) part of any job, documentation can go a very long way towards scaling your business. If you don't have everything documented and need to spend lots of time training new and fill-in people, you'll never scale.

I could certainly write a book on this topic, but ultimately, if I did, it would boil down to these five points...
 

LiveHappy

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In my opinion, scaling a real estate business -- or any business, for that matter -- boils down to doing 5 things:

1. Delegation: Have other people do the work, whether employees, contractors or virtual assistants. For example, hiring a project manager and using the same crew of contractors on every job. Do as little work yourself, other than what required based on #3 below. If you try to do everything yourself, you'll never scale.

2. Replication: Do the same things over and over so that you don't have to spend time making decisions or communicating your intent to your employees and contractors. For example, we use the same materials on each rehab, we paint the same colors, we use the same service companies (dumpsters, portapottys), etc. If you have to make the same decisions over and over, you'll never scale.

3. Prioritization: Focus your decisions on prioritizing efficiency over other things (like money). For example, you may pay a little more to get contractors to finish quickly (and therefore be able to move onto the next job), but in many cases, the added efficiency will generate greater long-term profits than the extra cost of those efficiencies. Most investors focus all decisions around wringing out the most profit in every part of the job; if that's your priority, you'll never scale.

4. Segmentation: Have each person on your team focus on what they do best to reduce the amount of time spent. A lot of employers like to ensure that each person on the team can do multiple jobs (to fill in when needed), but this is typically inefficient, and someone who has to do lots of different jobs is likely never going to figure out how to get ultra-efficient at any of them. On the other hand, someone who has to do the same thing over and over and over and over and over will figure out how to do it much faster and more efficiently. If you try to have an organization full of people who can do every job, you'll never scale.

5. Documentation: Make sure you have checklists and documentation for every aspect of the business. This is important for two reasons: 1) anyone can cover for anyone else when necessary (though we try to avoid that based on #4 above) and reduces training time when you need to bring in someone new for a job. Since training can be the most inefficient (yet most important) part of any job, documentation can go a very long way towards scaling your business. If you don't have everything documented and need to spend lots of time training new and fill-in people, you'll never scale.

I could certainly write a book on this topic, but ultimately, if I did, it would boil down to these five points...
For those who are interested, J goes over these in detail on his second podcast through BP
 

Action Mike

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In my opinion, scaling a real estate business -- or any business, for that matter -- boils down to doing 5 things:

1. Delegation: Have other people do the work, whether employees, contractors or virtual assistants. For example, hiring a project manager and using the same crew of contractors on every job. Do as little work yourself, other than what required based on #3 below. If you try to do everything yourself, you'll never scale.

2. Replication: Do the same things over and over so that you don't have to spend time making decisions or communicating your intent to your employees and contractors. For example, we use the same materials on each rehab, we paint the same colors, we use the same service companies (dumpsters, portapottys), etc. If you have to make the same decisions over and over, you'll never scale.

3. Prioritization: Focus your decisions on prioritizing efficiency over other things (like money). For example, you may pay a little more to get contractors to finish quickly (and therefore be able to move onto the next job), but in many cases, the added efficiency will generate greater long-term profits than the extra cost of those efficiencies. Most investors focus all decisions around wringing out the most profit in every part of the job; if that's your priority, you'll never scale.

4. Segmentation: Have each person on your team focus on what they do best to reduce the amount of time spent. A lot of employers like to ensure that each person on the team can do multiple jobs (to fill in when needed), but this is typically inefficient, and someone who has to do lots of different jobs is likely never going to figure out how to get ultra-efficient at any of them. On the other hand, someone who has to do the same thing over and over and over and over and over will figure out how to do it much faster and more efficiently. If you try to have an organization full of people who can do every job, you'll never scale.

5. Documentation: Make sure you have checklists and documentation for every aspect of the business. This is important for two reasons: 1) anyone can cover for anyone else when necessary (though we try to avoid that based on #4 above) and reduces training time when you need to bring in someone new for a job. Since training can be the most inefficient (yet most important) part of any job, documentation can go a very long way towards scaling your business. If you don't have everything documented and need to spend lots of time training new and fill-in people, you'll never scale.

I could certainly write a book on this topic, but ultimately, if I did, it would boil down to these five points...

Awesome, all excellent points. Point 5 Documentation is something I have thought a lot about and how important it is. In IT documentation can make a terrible job a breeze if done right!
 

Olie Sins

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I can attest to this. As an active wholesaler myself, I can tell you it's not easy. There are numerous things that the so called gurus don't tell you about this business. I had to learn a ton before I closed a deal. It gets easier with every deal though!

Thanks JScott for doing this AMA! I'll be adding questions soon ...
Hey Mike,

With wholesaling, what are some of the most important things you learned that were crucial to getting that first deal? I'm 4 months into the business so far, and am learning quite a bit about it. Particularly that it's a numbers game and that thus far has proven to be a lot of work.

Thanks.
 

Mckenzie

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The other topic I've started writing about is long-distance flipping. About a year ago, we moved into a new market, 1000 miles away from home. We've done 15-20 deals there in the past year, and I've learned a ton about the difficulties of long-distance investing. Hopefully over the next 12 months we'll actually get half-decent at this long-distance thing, and I'm trying to document my learnings throughout the process. If we can figure out how to be successful at it, maybe I can help others be successful as well.

I like writing, but putting together the first two books took a LOT of energy and I'm trying to get up the motivation to do it again...
Have you got this long-distance flipping book published yet JScott? I’m thinking it might help me to get my feet wet in the States.? I’m in Australia. Thanks
 

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