Notable! AMA: Rehabbing & Flipping - Ask Me Anything

JScott · Aug 3, 2017

Action Mike said: ↑

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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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.

LiveHappy · Aug 3, 2017

JScott said: ↑

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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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 · Aug 3, 2017

JScott said: ↑

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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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 · Aug 3, 2017

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

JScott · Aug 9, 2017

LiveHappy said: ↑

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?
Click to expand...

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...

StevieB · Aug 12, 2017 at 12:10 PM

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.

JScott · Aug 12, 2017 at 8:23 PM

StevieB said: ↑

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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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.

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