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J Scott - Author of Flipping/Estimating Book - Ask Me Anything!
Hey everyone!
First, thank you so much for all the support after my recent Podcast episode and the recent BiggerPockets release of the 2nd Editions of The Book on Flipping Houses and The Book on Estimating Rehab Costs. I've gotten a tremendous amount of email and private messages with the kindest of words, and I sincerely appreciate it.
Unfortunately, there's been so many emails and messages that I haven't had the ability to respond to everyone, despite my best attempts. Many of them contained questions -- and I hate not being able to respond to all the questions I get! So, I wanted to start a thread to give everyone an opportunity to ask questions -- and since I get many of the same questions over and over, I thought this might be a good resource for future questions I may get.
Anyway, if you have any questions about the Flipping/Estimating books, about any aspects of real estate strategies, about investing in general, about running a real estate business (or any business), etc., I'm happy to do my best to answer.
There are a lot of tremendously knowledgeable people on this forum, so don't post here if you have a question best answered by the whole community.
But, if you want to address something specifically towards me, this is the place! Feel free to post in this thread and I'll do my best to respond to everyone!
Also note that I created this thread a few years back -- might be worth checking first to see if I've answered it there:
@J Scott
This sounds great. I purchased your 2012/2013 book and created a quick sheet/checklist that I use/ put notes on when doing the walk throughs. This really helps when looking back at issues and factoring in the whole picture. Awesome material, really looking forward to the new one.
Secondly is it fair to say that the overall market environment can effect labor/ material prices? If we were to transition back into a buyers market could I expect these prices to dip to an extent? Thank you for the great material that you have made available, it has definitely made the decision making process much easier.
Originally posted by @Nicholas Leimbach:
@J Scott
This sounds great. I purchased your 2012/2013 book and created a quick sheet/checklist that I use/ put notes on when doing the walk throughs. This really helps when looking back at issues and factoring in the whole picture. Awesome material, really looking forward to the new one.
Secondly is it fair to say that the overall market environment can effect labor/ material prices? If we were to transition back into a buyers market could I expect these prices to dip to an extent? Thank you for the great material that you have made available, it has definitely made the decision making process much easier.
The market is likely the second biggest contributor to labor and material prices (behind location). In a buyer's market, many contractors can't make a living and go out of business. Those who remain tend to be much more professional, diligent and reasonably priced. After 2008, contractors were the easiest part of this business, and for many things, I was paying 20-50% less in labor costs than I am now.
Material prices are less affected by the market cycle, but inflation certainly plays a role, as does competition. In the year or two leading up to a recession, we tend to see inflation (which leads to interest rate hikes which leads to the downturn), and prices tend to rise. During the downturn, many manufacturers will go out of business, and the lack of supply will put prices up further.
As we get out of a recession, interest rates fall, production increases as demand increases, and the spike in production generally pushes material prices down. As the economy expands, prices will stay pretty consistent, until once again we get towards the top of the market and start seeing inflation again.
There are plenty of other factors that contribute to labor and material costs, but where we are in the economic cycle is a big part of it.
@J Scott I am relatively new to BP. Love the culture and information everyone is sharing. I heard about your estimating cost book from Brandon Turners Rental income book. Similar to a lot of investors it seems, my main is having a systems for estimating cost and dealing with contractors is something that I have failed miserably at with my first deal. I am very interested in ready your estimating book but can’t find an audio version? Will that be coming soon?
Originally posted by @Aaron Diehl:
@J Scott I saw in a earlier post you said you assume about 45-55% for CapEx/Repairs/Vacancy? Minus 10 if no property management. Is that what you generally always assume?
I always use property management, and until I have better data, ill always model expense + rent loss + cap ex at 50% of gross rents.
I've usually been pretty close...
Originally posted by @Rich Jacome:
@J Scott I am relatively new to BP. Love the culture and information everyone is sharing. I heard about your estimating cost book from Brandon Turners Rental income book. Similar to a lot of investors it seems, my main is having a systems for estimating cost and dealing with contractors is something that I have failed miserably at with my first deal. I am very interested in ready your estimating book but can’t find an audio version? Will that be coming soon?
Hey Rich - The estimating book is very heavy on tables, which would make it very difficult to translate to audio book. For that reason, we don't have an audio version off that one.
Thanks for this opportunity, J. I read both of your books and look forward to reading the 2nd edition of each.
On the recent podcast episode you recommended having as much liquid cab as possible in addition to opening lines of credit in order to be prepared for the impending market shift. This got me a thinking as I’m a new investor and was hoping to buy my first two small multi family rental properties this year in the rust belt section of the US-in your opinion would you recommend holding onto that investment capital until we see the extent of the market shift then make a move, or would you just get started now to get the experience and not sit on the sidelines? Thanks in advance for any advice!
Originally posted by @J Scott:
Originally posted by @Aaron Diehl:
@J Scott I saw in a earlier post you said you assume about 45-55% for CapEx/Repairs/Vacancy? Minus 10 if no property management. Is that what you generally always assume?
I always use property management, and until I have better data, ill always model expense + rent loss + cap ex at 50% of gross rents.
I've usually been pretty close...
So this does not matter what market you are in? In my calculations for the Cleveland area I have 5 percent for vacancy 5 percent for repairs 10 percent for CapEx and 10 percent for PM. Do you think that is too low then?
Originally posted by @Aaron Diehl:
Originally posted by @J Scott:Originally posted by @Aaron Diehl:
@J Scott I saw in a earlier post you said you assume about 45-55% for CapEx/Repairs/Vacancy? Minus 10 if no property management. Is that what you generally always assume?
I always use property management, and until I have better data, ill always model expense + rent loss + cap ex at 50% of gross rents.
I've usually been pretty close...
So this does not matter what market you are in? In my calculations for the Cleveland area I have 5 percent for vacancy 5 percent for repairs 10 percent for CapEx and 10 percent for PM. Do you think that is too low then?
Does that 5% vacancy account for when we're in a recession and vacancies increase dramatically? Unlikely.
Does that 5% for repairs account for turnover costs and the costs to do repairs when you eventually have a bad who trashes your house? Unlikely.
What about taxes?
What about insurance?
What about utilities when you have a vacancy in the winter and don't want the pipes to freeze?
Does your PM company ever charge extra for things like placing new tenants, renovations or renewing leases?
Basically, it sounds like you're assuming the costs during all the good times when nothing goes wrong. But, things do go wrong. You'll eventually have a bad tenant. The market will eventually turn and you'll have increased vacancy.
You can go years where your expense ratio is 30%, and then have one really unlucky year where it's 80%. If you only factor in that 30%, you're going to be unpleasantly surprised when you hit that 80% year.
Originally posted by @Daniel Rivera:
Thanks for this opportunity, J. I read both of your books and look forward to reading the 2nd edition of each.
On the recent podcast episode you recommended having as much liquid cab as possible in addition to opening lines of credit in order to be prepared for the impending market shift. This got me a thinking as I’m a new investor and was hoping to buy my first two small multi family rental properties this year in the rust belt section of the US-in your opinion would you recommend holding onto that investment capital until we see the extent of the market shift then make a move, or would you just get started now to get the experience and not sit on the sidelines? Thanks in advance for any advice!
This is really going to depend on your goals and timeline to reach those goals. If you'd be extremely happy with rentals that generate 12% cash-on-cash return, and you come across a couple of those before the market turns, there's no reason you shouldn't put the trigger.
But, if you'd just be settling for those 12% COC deals, and your goals require you to find 15% COC deals, then you might consider waiting.
There's always risk when waiting -- what if those great deals don't come for another year? Or another decade? But, in my opinion, if you're not going to be happy with the returns you could get now, we're close enough to a potential downturn that it might be worth waiting and taking the risk.
That's basically what I'm doing...
@J Scott I know everyone loves the BRRRR method. But when you Refi, won't that raise your monthly mortgage and thereby eat up some or even all of your monthly rent income depending on the amount of increase?
Example: If a $90k foreclosure house has me at $700/mth, I drop $20k in Renovations, the ARV is $200-230k and I rent it for $3,800 gross (DUPLEX). I refi, pull out 75% of my equity, but now I'm paying a mortgage on the new appraised value which will UP my monthly payment and cut into my income/door amount.
So for buy & hold, is BRRRR not feasible?
@J Scott I just got your new books and am looking forward to reading them. Along with Brandon's book on managing rental properties, I'm hoping to BRRRR a property this year.
I was looking at a house on Zillow and noticed that it had some old wallpaper. I would imagine that it would need to come down when renovating. Since I didn't see an estimate for taking down wallpaper, I thought I would ask here. ... What would it cost to remove wallpaper and what kind of prep is needed once it comes down (if any)?
Originally posted by @Adam Scheetz:
@J Scott I know everyone loves the BRRRR method. But when you Refi, won't that raise your monthly mortgage and thereby eat up some or even all of your monthly rent income depending on the amount of increase?
Example: If a $90k foreclosure house has me at $700/mth, I drop $20k in Renovations, the ARV is $200-230k and I rent it for $3,800 gross (DUPLEX). I refi, pull out 75% of my equity, but now I'm paying a mortgage on the new appraised value which will UP my monthly payment and cut into my income/door amount.
So for buy & hold, is BRRRR not feasible?
Any time you get a mortgage/loan on a property, you will be cutting into your income by having to make the monthly loan payments. And the more you borrow, the more you have to pay and the more it cuts into your income.
But, there are two financial advantages to having a mortgage:
1. You can put less of your own money into the property. The loan allows you buy the property with less cash out of your pocket.
2. You can increase your returns. Here's an example, if you invest $100,000 of your cash in a property and don't get a loan, and if that property generates $8,000 in profits each year, you're earning 8% return on your investment ($8,000/$100,000). But, if you get a loan for $80,000, and only put $20,000 of your cash into the property, and if you then generate $2,000 in profits each year, you're now earning 10% return on your investment ($2,000/$20,000).
Of course, if your loan is too big, it can eat up all of your profits, and then you're losing money every month. So, your goal should be to find a loan amount that allows you to get out as much cash as you reasonably need to do other deals, while still allowing you to generate good returns.
Try playing around with the loan amount to see what amount provides you the best combination of getting your money out but still getting a good return on your investment. That's the goal with a BRRRR property...
@J Scott this is gold and exactly the clarification I was seeking. Thanks so much. This will make the numbers on a Duplex I'm looking at make much more sense.
Thank you,
Adam Scheetz
Originally posted by @Eric Julien:@J Scott I just got your new books and am looking forward to reading them. Along with Brandon's book on managing rental properties, I'm hoping to BRRRR a property this year.
I was looking at a house on Zillow and noticed that it had some old wallpaper. I would imagine that it would need to come down when renovating. Since I didn't see an estimate for taking down wallpaper, I thought I would ask here. ... What would it cost to remove wallpaper and what kind of prep is needed once it comes down (if any)?
Unfortunately, it can be very hard to estimate the cost of removing wallpaper. In some cases, the old wallpaper can be easily scraped, the walls can be skimmed and everything will look great. For those situations, I would typically budget about $.50-1.00 per square foot of wall space (or about $1.50-3.00 per square foot of floor space).
If the wallpaper is difficult to remove, it can cause a lot of damage to the walls when it's removed, to the point where skimming over the old sheetrock won't work. In these cases, you may need to repair or replace some/all of the sheetrock. Given that replacing sheetrock is generally about $1-2 per square foot of wall space (not including demo), this is often cheaper than spending a lot of money removing the wallpaper and repairing the walls, especially if you're doing other sheetrock work in the house.
If you just need a placeholder in the budget, assuming you're not in an extremely high-priced area, I would assume $1.50 per square foot of wall space if you want to be conservative. If the wallpaper is relatively easy, you'll get some of that money back.
@J Scott
Hey man! Thanks for the help last week.
Re-posting from Brandon & David's "ask me anything," because I thought it would be fun to start some healthy debate. It's a long post... If you don't get to it at all or only want to answer part, that's cool. =)
Here it is . . .
1) For BRRR deals, what are your favorite, widely available materials and suppliers? (Also, they should sponsor this podcast episode, haha.)
2) I've read Brandon's, David's, and J's (excellent) books, so I know good rehab estimating principles, and would be interested in some personal anecdotes and detailed examples, to help put things in context. I will be leaning heavily on a GC for the detailed rehab estimates, based on a scope of work that we'll collaborate on. What I'LL be doing are the quick-and-dirty estimates before I ever send him the deal, though... Sometimes just from photos. Clearly practice makes perfect, but if I can learn from your experiences, it could save me some grief!
3) I like the book "Make It Right" by Mike Holmes and think anyone aspiring to do reno projects would benefit from reading it. But… The book is targeted toward normal homeowners, so some of his recommendations would not pay for themselves. What do you think of the following? When would they be worth it for a BRRR investor – if ever?
a. Kitchen/bath cabinets. When installing new ones in a gut reno, run the finished floor all the way underneath them, so if there is a leak, if flows out and can be seen and fixed, vs. soaking into the subfloor and rotting it.
My comment: Most production homebuilders don’t do this, because if anything goes wrong with the flooring during the later stages of construction (tile crack, blemish/scuffing, whatever), it’s much more expensive and time consuming to fix it after the cabinets are installed on top. Plus, if there’s a leak, it’s still not guaranteed you’d find it with the finished floor in, especially if there is a slight backward slope to the floor.
b. Kitchen/bath exhaust fans.Don’t buy a $50 exhaust fan for the bath or kitchen. Splurge on a $500 model with a stronger exhaust, to avoid future repairs caused by excess moisture and mold.
Worth it? Would you only do it if you’re redoing the bath, or would you do it even on a “paint and carpet” rehab, to protect your investment from sloppy tenants?
c. Finished basements. He lays out in great detail all the ways people screw them up, resulting in leaks and mold. To be safe with anything except a fairly new house, you’d need to excavate around the house, parge the outside of the foundation with asphalt, install a dimpled plastic membrane over that, and then on the inside, fastidiously install rigid foam on the floor and walls, spray foam/tape all seams, etc… Then frame, then drywall.
Seems ungodly expensive. I like his solution, if it’s done by a normal homeowner as a labor of love and money is no object. I cannot imagine it ever being cost effective for an investor, even if you’re adding an extra bedroom or unit! Have you ever finished a basement for a rental? Did it work out in terms of cost, payoff, and nuisance factor? What about long term? Any leaks or mold issues?
d. Moisture barrier systems for tiled showers. He recommends the Shluter Ditra/Kerdi systems plus their pan assembly kits, to minimize leaks and mold. They seem cool. Not sure what they cost. Any thoughts on these systems or others that you like to use?
A lot of these questions overlap with J's book, so I'll post this on his thread, too, for a little healthy debate. ;-)
J Scott,
First I want to say your book is awesome. It was the first real estate related book I ever read and it also guided me towards BP. I ended up gravitating more towards the rental side of RE but the information has still helped me a ton.
I saw in some thread from forever ago where you talked about buying homes with foundation issues. My only question is regarding that because I am interested in some homes in my market with foundation issues. My question is- In your experience did your properties having "Foundation Repairs" ever turn away would be buyers? I understand that a lot more goes into the equation but lets assume everything was done correctly ie: structural engineer inspected the property- repairs were done by a reputable company with a long term warranty etc.
I'm basically asking do people fear foundation problems so much that they turn away from your properties regardless of how well the work was done/or what experts inspected it? Thanks
Originally posted by @Dan Cotter:
@J Scott
Hey man! Thanks for the help last week.
Re-posting from Brandon & David's "ask me anything," because I thought it would be fun to start some healthy debate. It's a long post... If you don't get to it at all or only want to answer part, that's cool. =)
Here it is . . .
1) For BRRR deals, what are your favorite, widely available materials and suppliers? (Also, they should sponsor this podcast episode, haha.)
2) I've read Brandon's, David's, and J's (excellent) books, so I know good rehab estimating principles, and would be interested in some personal anecdotes and detailed examples, to help put things in context. I will be leaning heavily on a GC for the detailed rehab estimates, based on a scope of work that we'll collaborate on. What I'LL be doing are the quick-and-dirty estimates before I ever send him the deal, though... Sometimes just from photos. Clearly practice makes perfect, but if I can learn from your experiences, it could save me some grief!
3) I like the book "Make It Right" by Mike Holmes and think anyone aspiring to do reno projects would benefit from reading it. But… The book is targeted toward normal homeowners, so some of his recommendations would not pay for themselves. What do you think of the following? When would they be worth it for a BRRR investor – if ever?
a. Kitchen/bath cabinets. When installing new ones in a gut reno, run the finished floor all the way underneath them, so if there is a leak, if flows out and can be seen and fixed, vs. soaking into the subfloor and rotting it.
My comment: Most production homebuilders don’t do this, because if anything goes wrong with the flooring during the later stages of construction (tile crack, blemish/scuffing, whatever), it’s much more expensive and time consuming to fix it after the cabinets are installed on top. Plus, if there’s a leak, it’s still not guaranteed you’d find it with the finished floor in, especially if there is a slight backward slope to the floor.
b. Kitchen/bath exhaust fans.Don’t buy a $50 exhaust fan for the bath or kitchen. Splurge on a $500 model with a stronger exhaust, to avoid future repairs caused by excess moisture and mold.
Worth it? Would you only do it if you’re redoing the bath, or would you do it even on a “paint and carpet” rehab, to protect your investment from sloppy tenants?
c. Finished basements. He lays out in great detail all the ways people screw them up, resulting in leaks and mold. To be safe with anything except a fairly new house, you’d need to excavate around the house, parge the outside of the foundation with asphalt, install a dimpled plastic membrane over that, and then on the inside, fastidiously install rigid foam on the floor and walls, spray foam/tape all seams, etc… Then frame, then drywall.
Seems ungodly expensive. I like his solution, if it’s done by a normal homeowner as a labor of love and money is no object. I cannot imagine it ever being cost effective for an investor, even if you’re adding an extra bedroom or unit! Have you ever finished a basement for a rental? Did it work out in terms of cost, payoff, and nuisance factor? What about long term? Any leaks or mold issues?
d. Moisture barrier systems for tiled showers. He recommends the Shluter Ditra/Kerdi systems plus their pan assembly kits, to minimize leaks and mold. They seem cool. Not sure what they cost. Any thoughts on these systems or others that you like to use?
A lot of these questions overlap with J's book, so I'll post this on his thread, too, for a little healthy debate. ;-)
First, thanks for the kind words, and happy to help last week!
There's a lot to unpack here, and a lot of this stuff (especially the BRRRR stuff) is out of my area of expertise...
Honestly, I would recommend cutting and pasting this post into a new thread on BP for everyone to answer!
Originally posted by @Aaron Millis:
J Scott,
First I want to say your book is awesome. It was the first real estate related book I ever read and it also guided me towards BP. I ended up gravitating more towards the rental side of RE but the information has still helped me a ton.
I saw in some thread from forever ago where you talked about buying homes with foundation issues. My only question is regarding that because I am interested in some homes in my market with foundation issues. My question is- In your experience did your properties having "Foundation Repairs" ever turn away would be buyers? I understand that a lot more goes into the equation but lets assume everything was done correctly ie: structural engineer inspected the property- repairs were done by a reputable company with a long term warranty etc.
I'm basically asking do people fear foundation problems so much that they turn away from your properties regardless of how well the work was done/or what experts inspected it? Thanks
Foundation issues are highly location dependent. If you're in an area where foundation issues are common, you'll find that there are very few buyers who will be turned away from foundation repairs -- in fact, there will be LOTS of buyers flocking to your property because they know that's one less thing they have to worry about.
But, if you're in an area where there are very few houses with foundation issues, this could very likely scare away a lot of buyers. They won't understand the issues, they won't know other people who have dealt with the same issues, and they won't trust that the issues are resolved.
As an example, when I was rehabbing in Milwaukee, we rarely came across a house that didn't have bowing basement walls that needed reinforcement or excavation. We also put "drain tile" in nearly every house we purchased. Buyers loved this!
But, when we dealt with foundation issues in Atlanta, a lot of buyers were turned off and didn't even consider a purchase. They didn't expect foundation repairs and it led them to believe there would likely be additional issues in the future.
Here's the big thing -- if you're going to do foundation repairs, work with a reputable foundation repair company and then bring in a structural engineer both before and after the project is done. Having a pre-renovation assessment and a post-renovation assessment by a licensed structural engineer who stamps his report saying that everything is good will go a long way towards making buyers comfortable with the work that was needed/done.
@JScott, I just purchased your book and am looking forward to diving in. The struggle that I have is finding a partner to JV with for a fix & flip...
Hi Jay, I have both of your books from previous versions and listened to the podcast last week.
What would you say the optimum ARV is for the projects you do in your market. When I was looking to flip a house here some months back, I was having a very hard time finding something I think I could turn a worthwhile profit on. I set a target profit minimum at 15k. I found financing costs were eating up alot of the profits.
@JScott, I am working on a long term retirement plan in my RE goals. One part I am looking at is flipping one house a year, netting $14,000 in broker commissions and about $18,000 in profits after all expenses, for retirement. I thought I'd do this eight times. All of the net would be invested in equity and bond funds. I'd recycle the original about $200,000 cash each time and have that left at the end. One a year. I don't intend to take a year each time, just being conservative about the facts, and it's easier to put into a calculator.
The $200,000 seed money is from property sales.
Any thoughts?
Kate
Originally posted by @Scott Scheel:
@JScott, I just purchased your book and am looking forward to diving in. The struggle that I have is finding a partner to JV with for a fix & flip...
Spend time at your local Real Estate Investor Association meetings and network!!!