What is the best advice to give someone who wants to start flipping?

[Katlynn Teague]

Good morning BP!

What is the best advice to give someone who wants to start flipping?

Taking the first step to getting over the hurdle into real estate investing can be scary for new people. If you had to give someone advice what would it be? 

I would advise finding your team, finding a deal you feel confident in, and going for it!

[Randall Alan]

Quote from @Katlynn Teague:

Good morning BP!

What is the best advice to give someone who wants to start flipping?

Taking the first step to getting over the hurdle into real estate investing can be scary for new people. If you had to give someone advice what would it be? 

I would advise finding your team, finding a deal you feel confident in, and going for it!

@Katlynn Teague

Your margin between your purchase price and your final sale price has to be SUBSTANTIAL!

How much?  You have to buy the property for a price that after you pay to buy it, pay to carry the property through your repair, pay your repair costs, and your sales costs, you end up with a profit that was worth your time and risk - including factoring in things that come after the sale such as capital gains.  It's really no small feat.  In principle it is simple.  But reality has a lot of variables all along the way that you are trying to estimate all up front. Know that it is not an exact science. 

  For me, if I can't net $50,000 on a flip, it likely isn't worth looking at.  This makes finding a flip a tall order - especially in today's market.  Down below I proforma a flip that shows just how tough it can be.  

Things to consider:

1. Buying the property from a wholesaler you may have to pay ALL of the closing costs - covering both the buyer and seller's side of the transaction.

2. Staying on the topic of closing costs, when you sell the property you will have to pay realtors fees along with closing costs again.  Between buying the property and selling the property, it is entirely possible to incur $10 - 20,000 in costs that just cover acquiring the disposing of a typical $100-200,000 property. 

3.  Carrying costs:  You will need electricity and water while doing your flip, and you will want your property insured while you are working on it.  .  If you cross a tax year during your renovation you will have to pay property taxes on the property as well.  You will recover some of these at closing, but it is still an additional cost of the flip.

4.  Repair expenses.  You estimated up front...  you thought you got them all.. but wait... is that mold?  Is that termite damage?  What do you mean the septic field needs to be replaced?  You mean the AC went out WHILE we were doing the renovation?   2023 code is different from when this 1950's house was built and I have to meet it with the things I repair?  My contractor hasn't shown up in 2 weeks... now what?  The inspector says you can't do it 'that way'... these are just some the things that could pop their ugly head.  Just know that no flip ever goes perfect.  Part of your margin on calculating your flip has to be to absorb unexpected expenses.  We usually add 20% to whatever we think it is going to cost to do the job.  If we come out ahead - awesome, more profit.

What this all can look like in reality:

Say you find a property from a wholesaler for $75,000 that you think you can sell for $195,000 after repaired.  Seems like an AWESOME margin: $120,000 to work with.  Let's buy it!

Let's say closing costs to buy the property are 5% (because you had to pay both sides of the transaction), and to sell the property 8% after commissions and transfer costs. That's $3,750 in costs to buy it, and $15,600 in costs to sell it at $195,000. That's $19,350 so far in expenses.

Let's say the repair estimate is $40,000... You are currently sitting at a margin of $60,650. Still looks great!

But, it took you 6 months to repair it, and utilities were $300 a month and you had to pay $1,000 in property taxes and $1,500 in property insurance... then it was on the market for 3 more months during the sale. Maybe we fudge those numbers and call it $4,000 in carrying costs. You are now down to $56,650 in potential profit. 

You go through all the repairs and you end up running over budget by $10,000.  Dang... alright.. but I'm still in the black.

Your buyer makes a full price offer but asks for concessions at closing to help cover their closing costs of $5,000. You reluctantly accept the deal. You are now down to $41,650 in profit. 

If we stop there and say you sold it within a year of buying it and you are in the 22% income tax bracket, your capital gains taxes would be $9,163. If you held the property for over a year, the 15% capital Gaines taxes would be $6,247 . So you are now down to $32,487 to $35,403.  

So after all that, this would have been a profitable deal, but would not have met my expectations for the amount of time and effort it took, and the risk taken.  I would have wanted a better spread going in.   And the above example assumes you did not finance the purchase... so no interest expense accruing on the money borrowed.  What if in the 6 months you were working on the project the market started to turn like it did in late 2022?  Interest rates double, and buyers start sitting on the sidelines, and you have to lower your house price to get the sale?  There are a lot of risks involved.  If you had financed the house and now you having to carry it empty you are faced with lowering your price more to get it sold, or maybe turning it into a rental. 

All of this is just food for thought for all the beginners out there.  Flips give you the potential to make serious chunks of money in a short span... BUT... they do come with risks and challenges.  Unless you have substantial resources at your disposal you can easily get into a bind along the way.  I wouldn't recommend flips for a beginner.  There is a pretty steep learning curve and if you go into it thinly capitalized you could end up in a bad situation.

All the best!

Randy