My partner would rather pay top $$ for a flip than buy a fixer

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My partner would rather pay top $$ for a flip than buy a fixer

Adrian Rae
Rental Property Investor · San Diego, CA · Member since 2019 · 28 posts · 12 votes

His POV is that he’d rather have the cost of all the improvements built into the monthly mortgage payments than spend the time and credit card/debt to complete improvements on a fixer.

We focus on STRs but ensure the LTR rate out cover the mortgage (I double check expenses). So far we flipped a condo in Scottsdale and took out an interest free cc to pay for the contractor and furnishings. We still have the cc debt to finish paying off but the property has already appreciated 60K in 5 months. He’s not interested in long term appreciation, he wants cash flow so he can pay off the mortgage in 10 years or so. He’s rather not lose time and add debt making improvements on our own - he’s willing to pay for the work to be done, even if 10k’s of the purchase price and pure profit for the seller.

Is this a short sighted approach to developing a REI portfolio? Personally, I'm trying to make the case that the 30k we spend on our own flip can actually provide 2x as much value IF we were to sell it - but we aren't selling anytime soon so he doesn't see the value in that.

We're new, with only 2 STRs currently but looking to scale so we can quit our jobs and just focus on REI.

Can anyone else justify paying top dollar for turn key properties when just starting out as REIs? (we put 5 or 10% down)

Thank you!!

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Joe S.Pro Member
Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
4y
Originally posted by @Adrian Rae:

His POV is that he’d rather have the cost of all the improvements built into the monthly mortgage payments than spend the time and credit card/debt to complete improvements on a fixer.

We focus on STRs but ensure the LTR rate out cover the mortgage (I double check expenses). So far we flipped a condo in Scottsdale and took out an interest free cc to pay for the contractor and furnishings. We still have the cc debt to finish paying off but the property has already appreciated 60K in 5 months. He’s not interested in long term appreciation, he wants cash flow so he can pay off the mortgage in 10 years or so. He’s rather not lose time and add debt making improvements on our own - he’s willing to pay for the work to be done, even if 10k’s of the purchase price and pure profit for the seller.

Is this a short sighted approach to developing a REI portfolio? Personally, I'm trying to make the case that the 30k we spend on our own flip can actually provide 2x as much value IF we were to sell it - but we aren't selling anytime soon so he doesn't see the value in that.

We're new, with only 2 STRs currently but looking to scale so we can quit our jobs and just focus on REI.

Can anyone else justify paying top dollar for turn key properties when just starting out as REIs? (we put 5 or 10% down)

Thank you!!

 I had a very hard time following your train of thought and the story. One minute you’re saying you’re flipping properties and the next minute you’re saying short term rentals…which would be something you’re holding of course. Look there’s a big difference between flipping stuff and holding stuff and your inner changing so much it’s hard to give you clear advice. I’m assuming you want clear advice so I’m pointing this out to you.

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    No, It's a silly business strategy. Why leave any money on the table? But I'm guessing your partner is not a 'handy' sort of guy.....?

    Nonetheless, even if y'all pay to have all the work done, I believe the deals nowadays are in the slightly run down types of properties...

    1Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    4y
    Originally posted by @Adrian Rae:

    His POV is that he’d rather have the cost of all the improvements built into the monthly mortgage payments than spend the time and credit card/debt to complete improvements on a fixer.

    We focus on STRs but ensure the LTR rate out cover the mortgage (I double check expenses). So far we flipped a condo in Scottsdale and took out an interest free cc to pay for the contractor and furnishings. We still have the cc debt to finish paying off but the property has already appreciated 60K in 5 months. He’s not interested in long term appreciation, he wants cash flow so he can pay off the mortgage in 10 years or so. He’s rather not lose time and add debt making improvements on our own - he’s willing to pay for the work to be done, even if 10k’s of the purchase price and pure profit for the seller.

    Is this a short sighted approach to developing a REI portfolio? Personally, I'm trying to make the case that the 30k we spend on our own flip can actually provide 2x as much value IF we were to sell it - but we aren't selling anytime soon so he doesn't see the value in that.

    We're new, with only 2 STRs currently but looking to scale so we can quit our jobs and just focus on REI.

    Can anyone else justify paying top dollar for turn key properties when just starting out as REIs? (we put 5 or 10% down)

    Thank you!!

     I had a very hard time following your train of thought and the story. One minute you’re saying you’re flipping properties and the next minute you’re saying short term rentals…which would be something you’re holding of course. Look there’s a big difference between flipping stuff and holding stuff and your inner changing so much it’s hard to give you clear advice. I’m assuming you want clear advice so I’m pointing this out to you.

    4Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    4y

    @Adrian Rae

    There's more than one way to make money in RE. There are those that prefer to buy low and capture the sweat equity, and others who will have nothing to do with renovations and want something to park their money in and keep it as passive as possible. 

    Sounds like you and your partner need to sit down and figure out which direction you want to go. It does not appear that you are in lock step with one another at all. The biggest problem with buying at the top or over the top of the market is that there is no safety net if things turn downward. I've seen many homes that were purchased for too much in 2006 and 2007 that didn't get their equity back until about 6 months ago...

    3Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Originally posted by @Bob Okenwa:

    @Adrian Rae

    The biggest problem with buying at the top or over the top of the market is that there is no safety net if things turn downward. I've seen many homes that were purchased for too much in 2006 and 2007 that didn't get their equity back until about 6 months ago...

    Bob is right.....it just gives you a whole lot of room if you buy something that needs some fixin'.....Now of course some people have the ability to take on places that many people couldn't, but you can find more time and you can learn a lot of stuff. Nobody starts off knowing everything, we all learn it, usually the hard way.

    I just hate to see anyone leave tens of thousands of dollars on the table.......the average deals I'm picturing would be $30 - $50k...?

    1Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    4y

    @Bruce Woodruff

    Same here. Leaving money on the table or spending too much of it on a deal doesn't make too much sense to me either. I sure hope the numbers work out and everything goes to plan because nothing ever goes wrong in real estate lol.

    When buying turnkey, the person who rehabbed better be trustworthy. I've seen a lot of rehabbers cut major corners and try to leave unsuspecting buyers holding the bag.

    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Originally posted by @Bob Okenwa:

    @Bruce Woodruff

    When buying turnkey, the person who rehabbed better be trustworthy. I've seen a lot of rehabbers cut major corners and try to leave unsuspecting buyers holding the bag.

    Not only that but they rarely pull permits, and if a future buyer ever checks for permit status and finds none, the property value goes down, I've seen sometimes dramatically like 50% per SF for non-permitted living space.....

    0Reply
  • Axel MeierhoeferPro Member
    Rental Property Investor · Escondido, CA · Member since 2017 · 679 posts · 550 votes
    4y

    I think the main issue for your partner and possibly yourself is the perspective. If you were to look at it purely as a business, you would develop a strategy that allows the business to generate cash flow, have equity gains through appreciation and keep cost and liabilities low, unless that are covered by other sources, i.e. tenants. 

    In my business, I buy my properties from turnkey providers. Maybe people also say I pay too much. What I have found in the last few years is this:

    They find the property, renovate it according to SOW, put a price on it at which the property appraises, I get it financed 20/80 and they then manage it for me in perpetuity.

    Since I started that strategy I never missed a rent payment, (except during turnover) and got the full appreciation of each property. I could even HELOC that part if I wanted.

    2Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 826 posts · 810 votes
    4y

    @Adrian Rae I used to focus solely on distressed value-add flips, and over the years I’ve learned that while that approach can still make you money, it’s not the most efficient way to make money. Like others have said, it depends on your strategy and motivations. It also depends on where you think we are in the real estate cycle.

    If we are at bottom or cycle then I would not waste time finding value-add properties as time is better spent acquiring assets. At top of cycle I’d be cautious buying too many assets and may pick up more value-add to hedge risk.

    The real question is how do you value your time. If you don’t have much opportunity cost and over-seeing a flip doesn’t distract from other deal-making opportunities, then go for a flip. Your strategy should evolve as your personal situation and market situation changes

    2Reply
  • Melissa Roybal
    Realtor · Folsom, CA · Member since 2014 · 52 posts · 28 votes
    4y

    I would have to agree with @Allan C.  Hindsight is 20/20 and I could have just purchased several turnkey properties (and I don't mean from a turnkey company, just no work needed) and come out on top instead of buying primary fixers and spending a ton of time fixing them up.  However, @Adrian Rae makes a solid point, and that is why I am not buying turnkey properties right now. It all depends on what your long term strategy is. The cashflow on STRs is potentially much higher, so I would be more comfortable buying an on market STR in an area that sustains STRs.

    2Reply
  • Tucker Cummings
    Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
    4y

    So are you doing a BRRRRnB type strategy? Buy, Rehab, Rent, Refinance, Repeat, AirBnB.

    It sounds like time is the important factor with your partner, not money. If so, I think you can easily show that the fixer uppers will be quicker.

    For example, you buy turnkey with a down payment, there’s going to be a several year period that it will take to recoup your investment to do it again. If you do BRRRRnB strategy, you can recoup your total investment in 6 months when you refinance and do the entire thing again with the same money. If you’re fortunate enough to do it through delayed financing, you can recoup your investment in as little as 3 months.

    Having said all that, you mention you’re only having to put 5-10% down on deals, which is pretty amazing. If that’s the case, you might want to just do the turnkey route, because it will be way easier to break even on a 5% down payment than a 20-25% down payment.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    If you are flipping properties, how does he expect to make money if you buy them and then sell them again as is? It sounds more like you are doing STR which is not flipping.

    I'm not sure how you are buying rentals with only 5-10% down as those are numbers for owner occupied homes, not rentals.  For rentals, some people buy places requiring little to no work (I've done that it a few properties), others buy places needing mostly cosmetic work (flooring, paint) or major work.  At the end of the day, you need to do what works for you and in all instances, the numbers have to make sense.  It sounds like you and your partner have different ideas about how you want to do that.  Both can work, but unless you sort out what you are doing and are both on board, they won't work together.  His idea of paying down the mortgage faster means in the short term, less money in your pocket, but 10 years down the road you will have a lot more money in your pocket as the mortgage will be paid off.

    1Reply
  • Zachary Collins
    Denver, CO · Member since 2017 · 33 posts · 15 votes
    4y

    @Adrian Rae

    His logic is sound and this strategy makes sense if you don’t have time to fix a property, don’t have the knowledge to fix a property, don’t have the desire to fix a property

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    4y

    @Adrian Rae Is it possible he didn't enjoy the process of renovating the property as much as you did? He may just not think it is a good use of his time. Does he have income coming in from other sources so it doesn't make sense for him to spend a lot of time on RE investing? Find out why he didn't like the first flipping experience and take things from there. 

    0Reply
  • Taz Zettergren
    Real Estate Agent · Memphis, TN · Member since 2019 · 365 posts · 264 votes
    4y

    @Adrian Rae It all comes down to what you're wanting to do long term. Also how much time, effort and money you are looking to spend as you go through the learning process. There are turnkey providers that do high level renovations and even manage their own properties so the investors experience is handled all through one company. Now I understand your way of thinking. You may save some money if you were to do it yourself but you're trading your time and the risk of the unknown. With a turnkey you can scale quickly while the entire process is handled for you. If you do chose to go the turnkey route I would definitely dig deep into their processes with renovations and property management. 

    2Reply
  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 818 posts · 639 votes
    4y

    Find a new partner

    1Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    4y

    @Adrian Rae seems your partner needs to find a new career, simply clueless 

    All the best 

    0Reply
  • Andrew Watson
    Rental Property Investor · Atlanta, GA · Member since 2015 · 36 posts · 44 votes
    4y

    If both strategies produce your target results, then neither are wrong.  Like your partner, we look for "guaranteed" cash flow so we can pay off the mortgage in 8-10 years.  I say "guaranteed" because we're really good at estimating our real cash flow, but not so good at predicting appreciation.  

    That being said, we prefer your approach for one big, expensive reason: we believe buying an SFR where all the work has already been done is a big risk. Spray-n-Pray (shotty workmanship and major issues covered with a coat of paint) is running rampant these days and we want to spec the work, INspect the work, and decide when the wall is sealed, the ditch filled and the work is complete. This approach gives us 10+ years of very low maintenance costs and fewer headaches.

    1Reply
  • Account Closed
    Rental Property Investor · Austin, TX · Member since 2019 · 21 posts · 65 votes
    4y

    It sounds like you two may not make the best business partners. Both of you have ways you'd like to invest in real estate that can be highly successful, but they're not compatible. If neither of you is willing to change your ways then it's probably best to end the partnership now before it sours your whole relationship.

    2Reply
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