Sooo... before I invest...

[Matthew Nixon]

So my wife and I engaged in a pretty heated conversation. My wife is amazing, but we are simply wired differently. My wife is totally ok with punching a clock Monday through Friday, the slow grow of a 401k, and possibly being miserable at a job if it means security. I have the same goal of security, however, a different approach towards it. To a person like me, investing in real estate makes great sense and is a calculated risk. To a person like her, all she can see is the risk. 

Please advise... I understand that taking on rehab investments comes with risk. I have no cash flow yet thus any project I take on will be on loaned money. I imagine that a few of the obvious risks with doing fix and flips is:

• There is a delay in the rehab and it starts to eat into profit margin, or possibly even into the negative
• The house doesn't sell as soon as expected or in the allotted amount of time
• The rehab is finished and the appraiser low balls you upon the house being purchased thus effecting your end profit 

Here are my questions:

1. What are other, if any, risks in fix and flipping?
2. Let's say everything goes to hell and all the cushion you left/calculated for yourself for holding costs etc. is exhausts? Like, let's say you calculated 6 months, but after 8 months the house still doesn't sell and you can no longer make the payments to hold the property, what happens then?
3. Will the lender put a lean on the now renovated house?
4. And last, I want to ease my wife's mind, in order to do that I need to know and understand how to protect my personal finances and assets from being involved? Will an LLC protect my family and our home? Do I need to put our home and finances in a trust? I guess I'm asking how do I protect us from a failed project?

Thank you anyone who takes time to read and respond to this.

[Jonathan Bombaci]

Hi Matt, let me answer your questions first:

1. What are other, if any, risks in fix and flipping?
   - Rehab costs can run higher than expected, accidents happen (property damage or personal injury) and you have inadequate insurance, operating on bad information (property in wrong neighborhood), or financing partner pulls funding. Basically - there are a lot of risks, when flipping you're running a business so you have all the risks associated with home ownership + those of running a business.  
2. Let's say everything goes to hell and all the cushion you left/calculated for yourself for holding costs etc. is exhausts? Like, let's say you calculated 6 months, but after 8 months the house still doesn't sell and you can no longer make the payments to hold the property, what happens then?
   - The bank can foreclose and take the property - but worst case scenario - you can overcome this by renting out the property and collecting rent that is greater than the payments + carrying costs, assuming you did the analysis on this and market rents are higher than carrying. 
3. Will the lender put a lean on the now renovated house?
   - sure they will do what needs to happen to get their money back
4. And last, I want to ease my wife's mind, in order to do that I need to know and understand how to protect my personal finances and assets from being involved? Will an LLC protect my family and our home? Do I need to put our home and finances in a trust? I guess I'm asking how do I protect us from a failed project?
   - I am not a lawyer or CPA - but I use my LLC's to protect my finances from liability claims (someone gets injured on your property and sues the LLC), plus there are some tax benefits. When just starting out your LLC does not have any credibility and inadequate capital. Most banks will probably need you to personally guarantee the loan, which will keep your personal finances entangled with the flips. Once you're up and running and the LLC has adequate capital and experience you can get out of personally guaranteeing the loans.

All this being said - real estate, in my opinion, is the best way to build long term wealth. You can mitigate all of these risks through educating yourself and by building a strong experienced team. You can network with experienced flippers in the area and get hands on experience which will help you avoid some of the early mistakes. Also take on easy projects in areas you know well to start, and have more than 1 exit strategy for every flip you take on. Avoid taking on properties that need plumbing or electrical updates since those require permits and licenses and in my experience ALWAYS run over budget. Stick to properties where all you need to do is replace the floors, and clean up/update the kitchen and baths. You want to be able to buy, fix, and put on the market within 90 days if possible. This will reduce your risk of market changes. 

It sounds like you're wife is skeptical which is natural for most people. Try keep this in mind and get her involved anyway you can. My wife dislikes rental properties but she knows they're key to our long term wealth. I found out she enjoys seeing properties after a major rehab and takes pride in knowing we're providing nice, clean, and safe accommodations for our community. So I make it a point to bring her to the apartments after we turn them over and have just completed major updates. Find something your wife likes about the experience, besides the money, and make sure to highlight that every chance you get. You'll need her on your team if you want to have long term success.