Is this dangerous?

Question

I was recently laid off from my job.  My wife has acquired an opportunity to work from home for 3000 net per month.  Our expenses to run our home and live our life are 2000/month.  This puts us into the exact same position as when I had my job.  1000 a month extra.

I am getting job offers for 25,000 and 30,000 and I'm not feeling it as it would be a pay cut.  There aren't many jobs in this small town.

I have experience in flipping two homes in the last 1.5 years.  I did them in the evenings after work when I had my job.

I am considering going full-time into flipping one home at a time, as I have a private lender ready to go.  The deal is for me to invest 20% of the purchase price and the private lender would put up the rest, including repair costs and holding costs.  The average purchase price would be 35,000.  The After Repair Value would be around 85,000.

My thought would be to do this two times in one year.

Is this reasonable to jump right in?

Justin S. · Answer

I took the plunge a year ago and it has worked out for me.  The hardest part is finding deals, so if you are good at that and have a lender willing to work with you, then you should be okay.

Kevin Yeats · Answer

Financially, it sounds great:

Buy for $35,000
You put up 20% = $7,000
Lender puts up remainder $28,000 (35K - 7K) plus all rehab costs.  Assuming $10,000 in rehab, your loan is $38,000.  If it takes you a full year to rehab and sell then the interest paid is 10% of $38,000 = $3,8000.

Your net IF you can sell it for $85,000 is:

$85,000
- 38,000 principle repaid =
  $47,000
- $ 7,000 your equity =

$40,000 "profit" or nearly 6 times your money per house.

The BIG QUESTIONS are can you rehab it in reasonable time without hiring lots of outside contractors and can you sell it for your projected price and in a reasonable amount of time.

My $0.02

Roy S. · Answer

A couple of thoughts.

$85,000 * 70% = $59,500.  If you're doing $25,000 in rehab, you're ok, but $30,000 is too much.  But I think this if for getting *other* contractors to do the work.  Unless your time is worth $0, you should get the houses cheaper.

$85,000 sale price
-$58,000 loan
-$5,800 interest
-$7,000 your down payment
-$8,500 selling fees (assume 10% of sale price)
-$1,700 buying fees (guessing 5% of $3500 buy price)
-$1,000 real estate taxes for a year
=======
$3,000 profit

Is $3,000 worth 6 months of work?

I don't want to be a downer.  I originally planned to tell you to go for it, or you'd be kicking yourself for a long time.  But I don't think the numbers work out.

As Justin said, the hardest part is finding the deals.  Why not take one of the job offers, and continue to do RE after work, but hire someone else to do the rehab?

Also, before you jump into it full-time, how much cash reserve do you have?  You want to be able to cover yourself when Murphy comes to visit :)

Good luck!

Chris Calabrese · Answer

I took the plunge just over a year ago, and have done well.  If you can find good deals, you will always have a lot of equity in your flips, and you should be able to convince your lenders to loan at attractive rates.  I find that at the low price points, it's pretty easy to find someone to put up $50,000 or so at 10% once they know that you know what you're doing.  Afterall, they're probably not making nearly that much on their money sitting in the bank.

Bryan P. · Answer

I understand alot of this depends upon my ability.  Let me just ask it this way...

Have you or anyone else taken this "plunge?"

Everyone talks about the economy not allowing flippers to do well, but I think it's fear talking.  I don't want to live by fear.

Kevin Yeats · Answer

I can't really address the operational/execution of the rehab work.

But, IMHO your profit will depend greatly on your ability to accurately estimate the needed repairs before you make the purchase and your ability to get the repairs/rehab done as fast as possible so the house is on the market.  Once the house is sold, it frees up your money to make the next purchase and start on the rehab,  In fact of you roll some of your profits into the second house, you will need less "borrowed money" = less interest.

I wonder about the condition of these houses.  You are buying for about $35,000 and put another $25,000 or $30,000 into them.

Have you also considered the transaction cost of buying and selling each house?  Realtor commissions, your share of closing costs, etc?

Bryan P. · Answer

Ok let me ask you this.  If this private lender backs out and I'm stuck with 18%, like you said, is going in full-time a risky move?  It's easy to do a flip on the side in the evenings, but to go in full-time....give me some thoughts.

Bryan P. · Answer

oops.  I meant 58,000 at 10% is 5,800.

Bryan P. · Answer

I was thinking:

20% of purchase price=7,000

Lender loans 28,000 for purchase price.
Lender loans approximately 35,000 for repairs and holding.
Total lending amount= 58,000
48,000 at 10% is 4,800.

For me, my profit would be 20,000 minus taxes=15,000 or so.
 
Those are just some estimations.

Justin S. · Answer

It depends, some will charge a higher rate (closer to 18%) and some will want a profit share (50% or so).  Just know your money is very cheap.  Kevin's post above gives a nice breakdown of your gross profits.

Is this dangerous?

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