Bad Idea to Flip First House Entirely from My Savings?

Question

I'm in a situation where there is very little banks will give me for leveraging rental homes despite having a good amount of assets and excellent credit because I haven't had any income in 4 years (long story short: I went back to school after my previous career as a professional poker player ended due to the online poker shutdown. I have been unemployed ever since).  I'm trying to turn real estate investing into a career.  Since I have been unable to find a paying job, I have spent the last 8 months as an unpaid intern with a local buy and hold investor and have been soaking up as much knowledge as I can (I also just recently got my sales associate license!).

Rather than siphon off all my liquid cash into 5 year mortgages on cash flowing rental houses leaving me with nothing more to invest, I've decided the best route for me to go with is to focus on creating quicker returns through flipping.  I have been focusing on houses that fit my criteria and where I have enough money in savings to buy the house and rehab it, since my assumption has been it's either that or hard money.  I know the obvious disadvantages to using my own money: lower ROI, more downside risk, tying my money up for months. I still have to imagine it's better than paying major points for hard cash.

Is it common/uncommon for first time investors to use 100% of their own cash?  Are there any other options I haven't considered (besides maybe asking family)?

Thanks.

William Allen · Answer

@Scott Le , this post hits home for me as I just did something similar with my first flip.  I used a LOT of my own money and it turned out very well for me.  I am probably on the more risky side of the spectrum when it comes to investing but I made sure I didn't put all of my money in the deal and had some reserves.  I also had a backup plan if the house didn't sell and the numbers worked very well as a rental.  It sounds like you are in a good position to jump in as it seems like you have been spending time learning REI over the last 8 months and have your license which could help you find a good property if you haven't already.  First, I have a few questions you may want to ask yourself to determine if it is a good idea. I asked myself similar questions when I decided to go for it.

Do you have enough funds to buy, rehab the property and still have a significant amount for contingencies?  Don't forget about holding costs to include taxes, insurance, utilities, etc.. and closing costs on the purchase.  There will always be something that comes up which you will have to go over budget to fix.  If there isn't, great, but certainly plan for a contingency.  You don't want to run out of money mid flip as your exit strategies will all go out the window then.

Do you have the numbers side of things down to properly analyze the deal and estimate the rehab costs?  This will be needed to create a realistic budget and stay on that budget.  I feel like I had done enough rehabs on my buy and hold rentals to know what the costs associated with the rehab were.  I also used J Scott's book from BP to help me out when something came up that I didn't know.  I recommend it as it is a good read even if you think you know everything.

Do you know the market well enough to properly calculate the ARV?  This is another very important part of the deal.  All of your profits could go down the drain if you estimate it too high.  Be conservative here and be happy when you can list it and sell it for more.  As a sales associate you should be able to do this or have an experienced agent or broker help you out.

Do you have another out if the house doesn't sell?  What are your other exit strategies if the house doesn't sell or you don't hit the numbers you want?  In my case, if our flip didn't sell in 2 months I was going to rent it out. Then, after 6 months or so I would do a cash out refinance into a 30 year investment home mortgage and that would have pulled out all the cash I had invested and possibly more.  It would have produced a fantastic ROI and cash flow if that is what happened.  This is because the numbers worked and I looked at that from the start, not at the end when it didn't sell.  This may or may not be an option for you since you don't have W-2 income like I do.  So, in your case make sure you analyze your exit strategies and ensure they work in your particular situation and the deal you are looking at.

Do you or will you need this money for anything over the next year or so?  From start to finish the flip could take anywhere from one month to 3-4 months depending on your scope of work.  After that, it could sit on the market for a few months and not sell.  If your backup plan is to rent it out and refinance, it could take at least 6 more months of rental income before you can refi and cash out.  This means it could be over a year before you see that money again.  Plan for that and if you need the cash in that time, you have no liquidity in the deal and I would say it is a no go.

I'm sure there are plenty of other things I am missing but this post is already long enough and I will let others add to or argue what I have suggested.

Good luck and I hope the answers to these questions are positive and you go for it.  I really enjoyed it and will do more in the future, although I like the passive income of rentals more.

-Bill

Account Closed · Answer

I have gone all in with my savings in the past, and it has always worked out well for me. BUT, you have to make sure you have to estimate very conservatively. You have very little room for error on a flip, so be sure to get an accurate estimate of ARV, rehab cost/time and days on market. Any one of these will kill the deal. I would suggest getting a property under contract and then getting as many second opinions on all of the above as possible.

Also, be sure to leave yourself some emergency funds in savings for your personal life. You never now when you may get sick or injured and will need some funds to carry you through.

Larry Turowski · Answer

@Scott Le I've used a HELOC, so essentially the same as my own money.  Until you have the whole process down to a science, using your own money is the safest way to go.  Hard money will add 10% to the cost of a deal.  That is 10% more you need to be sure you'll cover.  You have a lot more margin with your own money.  And you are not going to want to do multiple deals at once anyway until you know what you are doing.

Joshua Houchins · Answer

@Scott Le A good way to tell if your deal is good or not is by using Hard Money loans in your figures if you can't afford to do the deal with Hard Money Loan it's probably not a good one to do with your own cash.  If you can turn it fast the points and interest are not a big deal.   Good luck to you!

William Allen · Answer

Account Closed

I concur on the emergency fund, that is very important for any investor/saver.  Great point.

Derek T. · Answer

I don't think there is an issue with it however you should do your due diligence to make sure this is a good deal and that it is bought in the right area.   Run your numbers,  check your comps and then do it 3-4 more times. You don't want to tie up your savings in a bad deal that takes 12-18 months to get out of or go $50k over budget from not doing proper due diligence.

Scott Le · Answer

Holding costs definitely down but still existent so 2 weeks idle does still hurt.

Got another 2 bids on my roof today for 7350 and 9600.  Original budget was 4k but then I discovered the only way to fix the flat roof was through an expensive TPO tapering system.  If I can find someone licensed to do it for 6k at this point, I think I have to jump on it.  Just going to have to cut some other small cosmetic items I wanted to accomplish.  I have an unlicensed bid for 6k fwiw (also get no warranty on that but he does have references).

William Allen · Answer

@Scott Le

I was going to mention that I use Angie's List as well, more to find people to contact as I find most people leave reviews when they are pissed off or really happy and not when they just have a good experience.  Referrals that I have gotten from other investors haven't panned out very well for me either, they either don't call me back or call me back weeks later.  I was in a similar situation this winter with my bathroom reno, I just ended up doing it myself because no one wanted to get paid around the holidays.  One other idea could be to go straight to a GC just for the roof,  you will end up paying his cut but you may get a better quote overall or one similar since he may get a better rate than you.

One good thing about using your own money is that the holding costs go down and allow for an easier timeline.  But, it sounds like you are still pushing to get it done quickly which is important.

Scott Le · Answer

I asked my REI mentor (who owns 30 houses in the area and co-owns a subcontracting firm) for roofing contacts.  Of the 3 he gave me, 2 of them didn't return my call and 1 no-showed an appointment.

It's been really shocking how horrible this has gone so far.  I find it so hard to fathom that not one roofer in this area is interested in a paying job.  I've called 6 more firms today.  2 of them I left unreturned voicemails for, 3 of them said "we'll call you back", and another is able to come out for a bid...in 9 days (if they even show up).

My mentor's firm is going to handle a lot of the other tasks for the house, but like I said everything is logjammed by waiting for this roof.  I'd be getting cleaned out if I actually used hard money on this.

As a form of catharsis this morning, I made sure to leave scathing reviews on every single roofer who no-showed's Angie's List page (god knows I have enough free time on my hands with the house just sitting idle).

William Allen · Answer

@Scott Le

First let me say congratulations on your first closing.

As for the roof and the contractors, that is certainly going to happen but I wouldn't have expected it to be that bad.   Do you have any other contractor contacts in the area that you trust and know do good work?  If so, I recommend contacting them for a roofer referral.  You may have already done this and if so, I'm at a bit of a loss other than asking some Tampa folks on here who they use.

One thing that I found is that if you find the one guy who does great work at a great price, hit him up for other people he works with.  I have an HVAC guy here who has sent me 3 different referrals this week, electrician, septic, and handyman.  These contacts have saved me a ton of money and would have been very hard to find on my own.  They are licensed guys who do great work but they aren't good at marketing and getting their names out there.  Just good old local boys who get business via referrals.

Good luck and I wish you the best of luck.  Keep us updated.

Bad Idea to Flip First House Entirely from My Savings?

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