Starting a Brokerage vs. a FLIPPING: Which business is more sustainable in the long run?

Question

Both businesses are non-passive businesses:

In your opinion, if you had to decide between starting a brokerage or a flipping business which would you choose? A brokerage would need to constantly lead generate for new buyer and sellers whereas a flipping business would need  to consistently lead generate for deals to flip.

It seems that a brokerage will have smaller start up costs with more revenue potential. You need a certain amount of capital to start a flipping business. A team would also look different in brokerage (listing specialist, buyer specialist, admin, transaction coordinator) vs a flipping business (project manager, contractors, etc)

I think the skills and personaltiy types are very different between the two businesses.  If all things being equal which business (when starting out) is more sustainable, easier to build momentum, possible to build up to a $1M GCI or revenue in the next 5 years, more profit margin?

Let's assume that both businesses have a team of 5 or less. Both businesses are targeted on a specific farm area.

Joel Owens · Answer

Samantha I mail to sellers as a broker/agent to list or possibly buy so my strategy is different than people looking to wholesale or flip houses as I target commercial properties.

I have been using a hand written white envelope with print on the inside. The problem with that is if I want to scale up volume. I might hire someone out cheap to handwrite the outside for a few cents per envelope if I can find it.

I just think handwritten on the outside sets you apart as the receiver thinks you are not sending out mass junk to everyone but specifically trying to communicate with them.

So I haven't ran a test if handwritten on the outside over time would be worth the extra expense say if I did 1,000 a month.

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James the test before was just multiple choice just like the agent exam. When it moved to the situational test it was much harder as there was not black and white just a worse and better answer on a weighted scale.

This was years and years ago so I have no clue what format they are using today.

Since I do commercial my average transaction is in the millions of dollars in sales price and I am the broker and owner so I keep it all.

Had agents and it was a lot of babysitting and drama and I would end up doing the deal for them and collecting a small fee. This was agents I had doing residential for 300 per trans fee but I didn't focus on that just once it built up so big I was going to sell off the residential side but I got rid of it instead.

I am at my best working one on one with my clients and also doing my own investments. I do not like working with agents that do not have the drive and passion for commercial real estate that I do. Agents act like that have what it takes but after a few weeks of training fizzle out.

I can tell people what they need to do all week long but if the response is "That's too hard" or "Can we skip a few steps" or "Isn't there an easier way" then I know they do not have what it takes.

Everybody wants quick and easy and they search decades and do not find it.

James Park · Answer

Hey Joel,

In my area, the average transaction is around a $350,000 per home. 3% commission minus the brokerage fee is around $10,000. If you join a big brokerage like KW your margins are less as they take $18,000 a year. It seems that a one man real estate agent seems to cap out around $80,000 - $120,000 GCI with no leverage, which would require 8 - 10 transactions a year. This is not counting any marketing expenses. I have a really good assistant who has been with me for 5 years.  Initially i would work both the buy and listing side, but eventually would hire a buyer's agent and feed him the leads so that I focus on the listing side.

I would love to hear J Scott's opinion if what i am thinking is a myth or truth. It appears to me you would get more leverage in a brokerage than a flipping business. You can be on vacation in Hawaii with 10 listings and still make money when you are not working. Assuming a flipper can make $80k, but % of that is expenses and cost to the bottom line? For me, operating a flipping business seem to be a lot more work with a lot more stress. In a flipping business, how much can you scale? How many homes can one flip throughout the year? How feasible it to reach a $1 million in revenue in a flipping business with a small staff of 3-5?

On the investment side, my 10 year goal from today is to own to 12 real estate properties. My primary residence, a small office ware house, and 10 SFR rentals with a average purchase price between $200 - $300k all in Forsyth county.

One off topic question Joel.

I read somewhere before that you took the Georgia broker exam and it was one of the toughest exams you took with the new simulation. Was the GA broker exam very easy pass before they implemented the new simulation test format?

Samantha M. · Answer

Joel Owens are you a fan of post cards or yellow letters? If you like post cards what do your cards typically say, if you are willing to share with everyone else.

Thanks

Joel Owens · Answer

It would depend on average flip margins for the area. If you make 20k profit on a flip with no partners and it takes you 3 months from purchasing to re-selling then 4 a year is 80k gross margin.

If you are selling small houses with your brokerage then you would have to sell a ton of little houses to make the same money with more headache.

Conversely if you work on much larger deals where the income is much, much greater then brokering makes sense. It all depends on what you enjoy doing. Some people are great at rehabbing little houses and flipping them. I am not into  SFR or rehabbing like that. It's just not something that gets me very excited.

I used to have 50 agents but it's just me now and I like working that way by choice. I work with my clients and do my own investment deals and work as much or as little as I want to. For ROI my mailers give me the greatest return on investment.