can newbie rehabbers start out using other people's money?

Question

Hello Bigger Pockets.  This forum and this website are really terrific and hoping you can help us out of our quandry.  My husband and I want to flip houses.  He is a licensed contractor.  I am a kitchen and bath designer with remodeling experience.  We know how to rehab. I spent too much money on gurus and boots on the ground (who sadly focus on wholesaling) . We did a cash out refi on our house and have a little of $20K sitting in the bank, and we also have about $30K available in credit for materials.  But we can't figure out how to borrow money and actually make money on a deal.   We live in Rockville, Maryland where property values are high.  We are working with an investor friendly agent who is helping us to locate deals both from REO properties and wholesalers who gain properties via tax liens.   Today we looked at what we thought was a good deal.  A house in good condition selling for $279K with ARV of $380K.  Sounds good right?  But if we have to replace 2 bathrooms and a kitchen which requires opening up a wall, paint and carpet throughout, we are probably looking at $15 to $20K min for the rehab, more likely $25K.  However, in this area, wholesalers are asking for a whopping $30k for earnest money.  Also, we would have to use hard money with 4 points and 12% interest.  When all is said and done, after paying for the financing and the real estate agent, we would net - wait for it - about $3000.  :(  How do newbies get started? Apparantly you can only make money in this market if you don't have to borrow money.   I know that the gurus encourage wholesaling as a means to grow capital, however, wholesaling is much too hard for someone who already works about 50 hours a week.  And, it appears, that having $20K in the bank is a joke in this area. It's about what I'd need for carrying costs!    I'm hoping some of you have advice as to how we can approach this differently and get started with what we have.  Thanks in advance.

Beth H. · Answer

Linda I am in your area.  It is a hot market.  I have rehabbed dozens of houses in Montgomery, Prince George's, Frederick and surrounding counties. The scenario you described is not a deal.  I see a lot of newbies coming in as motivated buyers and buying properties whether the margins are so thin.  Don't get into a property because you want to do a flip.  The numbers don't lie.  I think your rehab numbers are also too light even for contractors. We lend hard money to contractors who do their own rehabs and they still need more money.  Also kitchens sell a house. You will need to put new kitchens. Be patient and make lots of offers.  I have eight rehabs going right now. Good luck.  Be careful about putting down such large deposit on a property until you are experienced and have reliable financing.

Russell Brazil · Answer

$100k price differential between nonrehabbed and rehabbed homes is not very significant. I'd focus on price differential of $150k plus. Some parts of the metro area offer as high as $200k differentials. Not every location in the metro area is good for flipping. Focus on the areas with the largest price spreads.

Christopher Phillips · Answer

@Linda Granville

The problem you're having is a common one.

If you go through a wholesaler, you are automatically giving up some profit. But, at the same time, they are doing the grunt work of digging up properties.

You have to figure out a better way of sourcing potential properties so you can get them at deep enough discount to making flipping worth it.

Driving for dollars while doing your day to day work is one way. Find vacant properties and follow up on those. Talk to for sale by owners that need a lot of work. Eventually door knock and farm areas around where you are doing work (we're doing work on your neighbor's house have you thought about selling your home...). Get referrals/leads from existing and past clients. Network with agents in the area that do a lot of shortsales and other distressed properties.

Either way, I agree with the others, if the numbers don't work for you it's not a deal.

Christine Kankowski · Answer

Is there an area near you wher the property values are lower?  If you could find a house in the $100K price range, it would make it easier on your first flip

Also i would recommend really pricing out your rehabs, because for what you listed, $25K seems really low.  2 bath and a kitchen, paint carpet, removing wall, permits, materials, holding costs, taxes, utilities,   Are you using an agent , so real estate commissions, closing costs, escrow fees, title insurance...

Nereo Mendoza · Answer

@Lisa Phillips is a contributor here, she has a very good group and lots of videos full of information, she focus on Sub 30k  properties, maybe this can be a good starting point, specially having Baltimore close by

The other option is to partner with an investor and you provide the labor and a little money in exchange for part of the profit, have you tried that?

Linda Granville · Answer

Thank you all for your feedback.  We have been looking in lower priced counties (PG County and Baltimore County).  However, we've only looked at REO and wholesale properties.  Even in those areas, it seems that anything 100K or less is going to be a condo with high holding costs due to condo fees.  I think Russel's advice of targeting a $150K+ spread is a more likely scenario to aim for.  Also it's time to start marketing on our own to find motivated sellers!  Then we will at least have control over earnest money and more negotiating power.

I completely agree that $25K is light for a rehab with 1 kit and 2 ba in this area, and if the house weren't otherwise immaculate and if we didn't have tons of experience with K&B I would have budgeted considerably more.

can newbie rehabbers start out using other people's money?

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