Aspiring Property Flipper/Renter

[Nick Gauss]

Hey everyone!

My name is Nick and I've been extremely excited and motivated about getting into the real estate market. I'm looking for any advice to put me in the right direction for the first flip (or couple). I work in HVAC construction for a living and before that I ran a small gourmet mushroom farm. Had to take on the full time job to help swing the bills. I've realized what I truly want in life and that is financial freedom, neither of these are going to get me there. After seeing on the job ,many investors building new duplex's, flipping old homes, or turning something into a rental in the area I became very motivated to pursue that for myself. We recently contracted out our own home for a pretty major addition/renovation on waterfront property. This is our personal home but knowing the increase in value we were able to accomplish was another motivator for me. I know we can make this dream of being a real estate investor happen, I just need to get into that first deal. I was hoping someone here, possibly even a local, could help with getting me there. I think the biggest thing for us is securing the financing. I've heard hard money loans are a good place to start, or to look into local credit unions and use any equity in the purchase property to do the renovations. I do not have a ton of personal cash to get started. I know there are formulas for how much you can buy a home for and thats some more studying up on I will have to do. Where should i start to prepare myself for a success in this game? Is now an okay time to get into things with the markets the way they are? Hoping to get into our first property by the end of this year, any advice would be appreciated! Thanks in advance!

[Mike Klarman]

Nick, welcome to the journey.  Cathartic I think is the best way to describe it.

The freedom you seek lies within, but so does everything else that goes with it.  The road to freedom is paved in chains. 

I'm gonna give you the short, abridged version of what I think someone in your shoes should know.

There is a secret sauce to the BRRRR. It doesn't just work for everyone in every scenario. There's nightmare scenarios that arise if you are not in the right project with the right team. Everyone is chasing that sub 75% project cost to ARV ratio on deals but when you really add in all the closing costs and then the actual holding costs no novice ever really finds themself there, it's hard. You think those 67% projects are just floating around? There's a million, well connected sharks chasing those guppies down. Sourcing the opportunity is the hardest part of scaling. The guys that do the BRRRR very well, their project costs are 60%, sometimes less because they do not use the MLS and they buy for cash. They look for distress situations and look to get into a house for a quick close for cash at 70% it's value. So the house you buy for 100k, this investor bought for 70k. Someone using 3rd part GC may pay 80k for the rehab, someone connected in the market and has their own sub list may pay 60k. So now look, the novice is in this house for 180k, the seasoned capital heavy investor is in the same house for 130k.

If the Novice investor is correct and he/she is in a project with a 75% Project Cost then the ARV has to be 240k. The seasoned investor is in the same project at a 54% project cost,

Way bigger net for the seasoned investor, cause you rarely get your appraisal number on your exit.  This property may very well sell for 220k, not 240k, maybe less.  If your agent is taking 6% on the sale then you can take 14k right off the top, call it 15k after settlement charges.  You see how the investor margin starts shrinking quick.  Then you'll have 20k - 25k skin in the game you'll recoup and a payoff of a hard money loan and then what's left is yours.

Keeping your project costs as low as possible while trying to maximize profit. No different than if you ran a T-shirt business. How you do that in REI is just like I said. Become a strong cash borrower who is deeply connected in an emerging market. Then once you buy in cash, you can take to any HML and they will transition you into a delayed purchase bridge loan that will include rehab money. So the cash buyer can use financing, you just need the ability to close in cash first.

If you live in SD, which is a very high entry point, and you don't have SD money and you want to invest in Columbus OH let's say where you can get in something for under 125k, and you wanna google and look up GCs and you're gonna run this GC from SD then save your money. MLS prices combined with risk of 3rd party GC execution, combined with the exit comps you were sold on by the agent are legit, combined with just the volatility of the market - I've seen appraisals drop 30k - 40k between the bridge loan and the DSCR.

And yes, that's the abridged version...