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Real Estate Flip or CF?

Discussion in 'Real Estate Investing' started by Merkin Man, Aug 31, 2007.

  1. Merkin Man
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    Merkin Man Contributor

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    I have been researching available properties in my area and have located two with good potential.

    One is a SFR that I would flip - if I can get it at the price I think I can, put 10k-12k into it, I could sell it for a profit of roughly $20k.

    The other is a 200 year old 3-unit in a good area that would CF in the neighborhood of $300-$400 monthly, depending on final price and other expenses that I have to verify.

    As cash is limited right now, am I better off doing the flip to put more cash in my pocket sooner? Or take the monthly CF now?

    Andy

    :banana:
     
  2. Yankees338
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    Yankees338 Bronze Contributor

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    Good question! I think you'd be better off posting the details of each deal on here to have everyone help you analyze them and to make sure they're as good as you think (not that I'm questioning your judgement! ;)). Aside from that, I think it depends on your goals. If ultimately just looking for some passive income for the future, I think the CF would probably be the best deal. If you're looking for the capital now, I'd say go with the flip that you could roll back into another larger investment after.

    Personally, I'd probably take the CF deal that you could collect around $4k from in the first year. Then you could just hold it and hold it and hold it some more! I'm sure you've already heard, but I'd definitely be careful of it because it's 200 years old. Definitely don't cheap out on some quality, in-depth inspections to make sure it's all up to date regardless of what the seller tells you.

    Keep in mind you'll likely face higher taxes on the flip than if you hold it one of them for a few years. You can look into a 1031 to avoid that, though, I believe. And, of course, good luck with whatever you choose!
     
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  3. JesseO
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    JesseO Contributor

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    How much down would you put on the cashflow property? I'm sure you know there are plenty of variables. Would it make more sense to make a one-time profit of $14,000 or so, or take the cashflow? Just not too sure what your situation is, but I look forward to maybe seeing a little more details on this one.
     
  4. tbsells
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    tbsells Contributor

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    It depends alot on your investment goals and risk tolerance. The flip is more risky, so be real careful on your calculations. Make sure you figure all the costs. This is how a good flip goes bad quickly. I've seen it happen.
    1) Buyer gets emotional about an already marginal deal and pays $2k more than he wanted to. He buys the house for $100k instead of the $98k he had set as his maximum price. He thinks "What the heck its still a great deal." "It will be worth $135K":smxF:

    2) Buyer forgets to include the $2k in closing costs in his calculations.:bgh:
    3) Buyers estimate of $10k to 12K in repairs is off a little. It turns out the water heater and the A/C compressor needed replaced and repairs total $15k.
    4) Instead of a quick 3 week rehab life gets in the way and it takes 3 months. Thats 3 months of unanticipated house payments, utilities, insurance, lawn mowing, etc. at $1,000 per month.
    5) According to the realtor the market has slowed a little in the last 3 months. "We better list that house for $129,900 instead of the $134,900 you were thinking Mr. Investor."
    6) After 90 days on the market Mr. Investor accepts an offer of $125K that will close in 30 days. Thats another $4,000 in monthly expenses.
    7) The deal closes. Closings costs to seller are $7500 realtor fee (6%), $400 conveyance fee, $100 misc. fees.
    8) Mr. Investors check is not what he expected. Turns out he lost about $5k for his efforts even though the house sold for $25k more than he paid for it.:cuss::cuss::cuss:

    The moral of the story is be careful with flips. Its not as easy as it looks on TV. Make sure you know what the house will sell for using a conservative estimate. You want a quick sale price which is probably 5% below the comps. Don't pay more than 70% of after repaired value minus repairs. Leave a margin for error on repairs because it will cost more than you think. Don't forget about carrying costs. There is alot of money made flipping. But, there is alot of money lost also. Just be sure you know the risks.
     
    Last edited: Sep 1, 2007
    Merkin Man and 8 SNAKE like this.
  5. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    First, tbsell's advice is pretty good --be careful with flips.
    Second, I think cashflow is great... but I suggest you suggest first on getting more cash so you can get bigger/better properties, that can appreciate and also cashflow. That all depends on what is your goal. You plan is the one that determines what you should do next.

    Everytime I see these questions --should I go for flip or CF? should I sell or rent? should I flip or offer in lease-to-own?-- I know that the one asking is not clear on his financial/business plan. If you were clear on what your financial goal is then you would know the answer to your question. If your financial plan calls for increasing cashflow to, say, $500 a month, then you would go for the CF; If your plan calls for increasing your net worth to $100K in the next two years then you would go for the flip. It all depends on your goal.

    so, have you done any flips before? are you handy?
     
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  6. Merkin Man
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    Merkin Man Contributor

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    Great answers...I appreciate the replies. tbsells, your reply was great and you bring up some points that I am considering already.

    To Andviv, your post is eye-opening. One of my issues right now is focus, or lack thereof. In the longrun, $500/mo would be nice, but it isn't what I really need or want right now. What I do want (and again where you're right, I don't have a defined financial plan), is to learn the game, know it well and be able to take from this deal a confidence and experience into the next one that I currently lack.

    You're so right, I have to truly sit down and define what my personal and financial goals are and what my best plan of action to achieve them will be.

    As I mentioned in another thread, real estate is where I want to make my living. I am not particularly handy, but I think with what I am capable of, I could do a flip without hurting myself too much. And no, I have never done a flip before.

    With the place that I am looking at as a potential flip, I wouldn't put a timeline on it that I felt was overwhelming. Probably aim for 4-6 months to get myself into the game, meet good contacts and really use this first flip as an education. If profit came as a result, good for me. In reality, I would hope to at least break even so that I got the work done, didn't lose money, and was able to walk away from the deal in the end with a positive and encouraged outlook toward future deals.

    As well as a much better defined plan for the next deal.

    I guess right now my OJT education is what matters most.
     
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  7. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    Suggestion 1: Join Habitat for Humanity and offer to volunteer to build a few houses for people that need it. You will do something good while learning to do handy work in a house. DISCLOSURE: I tried this but they rejected me as they have enough volunteers. They wanted me to donate materials/money instead of my labor and time. Good luck for you in this, maybe in your area the situation is different.

    Suggestion 2: Attend RE Investors groups or meetings in your area. I know there are lots in your state, not sure in your immediate area. When I was starting I had to drive 1.25 hours each way to get to the weekly meetings. Great place to learn people and to get close-to-free education.
     
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  8. Russ H
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    Russ H Gold Contributor Read Millionaire Fastlane Speedway Pass

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    andviv has some great suggestions. Rep speed! :)

    The first (build a house for habitat for humanity) will show you-- quickly-- what is involved in building just a simple house, and how houses are put together. If you're not already a contractor, this is a superb way to learn how houses are built.

    (and PS: Buying, Refreshing, and Flipping a house is NOT, repeat NOT easy. I've been rehabbing houses for income for almost 20 years (started in 1989).

    The second suggestion is one of the best ways of learning about REI from people who really know what they're talking about. After thinking you know a little bit from reading the CREO and RD forums, you will be SHOCKED at the level of expertise of some of the REI's you meet face to face. Well worth a long drive, esp at the beginning.

    Just don't buy anything from anyone right away-- give yourself 6 months to learn, with no interest in buying! This way, fellow members will share stuff with you without trying to sell you their delapidated fixer uppers.

    Last but most important, you need to develop a PLAN-- now-- before you invest any $$.

    To aid in developing your PLAN, play cashflow 101 (the board version, not the e-version), and ask lots of questions of the REI's at the meetings.

    My challenge: I dare you to post an initial PLAN under the PLAN forum on this site by Tuesday am. :)

    It should contain:

    1. Goals (what you want to accomplish via your plan)
    2. How you will achieve your goals (both $$ wise and others)
    3. Timeline (how long each step wil take, in your estimation)

    Be sure to incorporate what is most important to you-- if you like free time, build that into your plan. If you want to travel the world, make it part of your plan, etc.

    And I know what you're thinking-- that I challenged Kinnery and then did nothing.

    Truth is-- I forgot about the post, and appreciate your reminding me. I'll be answering it in the next day or so.

    Lots of irons in the dang fire . . . but I do so love it that way!! :hurray:

    -Russ H.
     
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  9. Inphinity
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    Inphinity Contributor Read Millionaire Fastlane

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    As a followup to the warnings against flips, I will agree you have to be VERY accurate with your evaluating condition etc, I'm currently involved in a project which thankfully is being done as a hobby and thus profit doesn't matter. But it is an older house, about 100 years old, to be renovated with a mixture of original and modern styles. The work was planned to take 10 months and cost around $1m, so far we are into month 17 with costs so far over $2m, because of things that have arisen in the course of the work that were not obvious at the start or were slightly different than expected.

    Like others, I don't know your situation, but for myself - I would look at the cashflow opportunity. I don't know if you have bad debts loans etc, but the cashflow could be used to pay these off. That would be what I would do, but then, I'm not exactly far ahead myself :)

    Maybe it's just the level of risk I like, but to me it seems more risky to do the flip, hoping prices go up for you, unless you know the market in that area very well.
     
  10. Merkin Man
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    Merkin Man Contributor

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    You guys are all being terrific in your responses and your advice. Thanks to all that have posted thus far.

    Russ, I am working on those goals right now. Infact, I have been for the last few days. If I don't get them done by Tuesday a.m., look for them within a day or so after. A lot of what you referenced in your post ties into what I'm putting together. The one thing I have never really considered is attending a REI meeting in my area - :smx4:. Pretty obvious suggestion, too. It has just never crossed my mind!

    I'll let you know when I post the goals. For now, thanks again to everyone for your advice.

    Andy
     
  11. Peter2
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    Peter2 Fastane Legend. RIP.

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    Here's some information about two different real estate investors meetings in your area.


    Affordable Homes Real Estate Investors Club. Contact:Sylvia Black, Telephone:716) 605-4627 When:Last Saturday of each month, 8:00am Where:1807 Elmwood Ave., Ste. 283, Buffalo



    The Wooley Group. Contact:Joseph Wooley, Telephone:716) 743-7567 When:1st Tuesday of each month, 6:00pm Where:Varies, Buffalo
     
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  12. Merkin Man
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    Merkin Man Contributor

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    Excellent, Peter. Thank you for those.
     
  13. Russ H
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    Russ H Gold Contributor Read Millionaire Fastlane Speedway Pass

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    Andy-

    Cool beans.

    I got a hernia this weekend, so I might be in the hospital when you post 'em (want to get patched up and put out ASAP).

    Give me a day or two to get back on my feet. :)

    -Russ H.
     
  14. Yankees338
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    Yankees338 Bronze Contributor

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    Hope all goes well and you make a speedy recovery, Russ!
     
  15. Jason_MI
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    Jason_MI New Contributor

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    Why not try to do both? Flip the first, then buy/hold the second. Put an option on the second if you think it'll go fast.

    And write your contracts so the other party pays closing costs, if that's a concern, or do a private closing.
     
  16. Yankees338
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    Yankees338 Bronze Contributor

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    How exactly do real estate options work?
     
  17. tbsells
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    Its a negotiation between buyer and seller. Much like anything else. Typically it involves the buyer paying a small price for an option to purchase real estate at an agreed upon price and agreed upon terms within a specific time period. If he elects not to buy, he simply walks away and the seller keeps the option money (which may be nothing or close to it.) Its a way of tying up a property to see if you can do something with it. Its hard to do in a strong market. Sellers have many buyers to choose from. It will be getting easier pretty soon.
     
  18. Yankees338
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    Yankees338 Bronze Contributor

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    I see. Thanks for the response. Is this something that's a complicated process involving a lot of paperwork and confusion or is a simple process involving just an attorney and some signatures?
     
  19. tbsells
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    tbsells Contributor

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    Its a fairly simple process. Just specify price, terms, option fee, time frame in which the option can be exercised, disposition of option fee if its not exercised, and a few other things. Its always best to consult an attorney. These can be as simple or as complicated as the buyer and seller's needs. An option top buy a SFR would probably be less complicated than an option to buy commercial property for potential mall development.
     
  20. nomadjanet
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    In texas your real estate agent can write the option contract it is a form provided by the state. I would ask the realt estate agent if he/she is familar with options. This is exactly what I was going to suggest. You can write the option offer, we have had them for as little as $50.00, the seller can continue to take offers, but they have to comeback to you and give you the opportunity excersize your otpion before they can sell to someone else.
     

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