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Notable! AMA: Rehabbing & Flipping - Ask Me Anything

Discussion in 'Real Estate Investing' started by JScott, Oct 7, 2013.

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  1. Flyboy
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    Flyboy New Contributor

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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?
     
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  2. Chitown
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    Chitown Silver Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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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!
     
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  3. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    Thank you! Let me know what you think and if you have any questions!
     
  4. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    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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  5. Chitown
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    Chitown Silver Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    @JScott,

    Will do!
     
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  6. Joe Cassandra
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    Joe Cassandra Gold Contributor Read Millionaire Fastlane Speedway Pass

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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!

    Sent from my SM-G928V using Tapatalk
     
  7. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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

    [​IMG]


    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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  8. Joe Cassandra
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    Joe Cassandra Gold Contributor Read Millionaire Fastlane Speedway Pass

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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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  9. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    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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  11. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    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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  12. GameOver
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    GameOver World Domination Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER

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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.
     
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  13. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    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
     
  14. GameOver
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    GameOver World Domination Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER

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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.

    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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  15. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    I'm an engineer by education and spent my career before real estate career in the tech industry, so yes, definitely a similar background...

    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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  16. 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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  17. Rickchise23
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    Rickchise23 Passive Income Ninja I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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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?
     
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  18. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    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.
     
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  19. MTF
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    MTF Never give up Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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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?
     
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  20. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    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
     
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  21. MTF
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    MTF Never give up Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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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.
     
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  22. fastbo
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    fastbo Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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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.




     
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  23. 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
     
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  24. Action Mike
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    Action Mike Contributor Read Millionaire Fastlane

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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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  25. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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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.
     
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