Preparing for my first flip!

[Brian Garrett]

My name is Brian and I currently reside in Palm Beach, Florida. I've been toying with the idea of investing in real estate for the past 5 years or so and I'm finally ready to take the plunge. I've been spending a lot of time here on the forums reading, studying, researching and learning. What an incredible wealth of knowledge and experience from all of the users on here!

A little background information on my current situation:

I own a couple of other businesses which are pretty well automated at this point. Since I'm not hands on with those endeavors anymore I now have all the free time in the world to focus on REI. I'm planning to get involved full-time so I'm looking to network and build solid long term relationships. I've been fortunate enough through smart financial decisions and discipline to not only be 100% debt free but I've also managed to save up a decent amount of cash to get the ball rolling with my REI aspirations. As of now I think rehabbing and flipping is what I'm primarily interested in although I am starting to like the idea of BRRRR as well. Since I have cash on hand the rehabbing and flipping strategy seems like a more lucrative option to me for larger quicker returns without having to deal with conventional loans, FHA, HML, etc. The BRRRR strategy is something I will continue to dig deeper into learning so that when I do need access to additional capital I can explore that route and refinance to pull cash back out to continue investing and scaling up my investment portfolio. I'm not opposed to buying and holding for a few years to let a property appreciate while collecting cash flow during the process but I feel that strategy is more suited for the BRRRR method than for using cash and having money tied up in one project for an extended period of time. My primary goal and focus with REI is to build wealth through flips and eventually cash flow through buy and holds. What are your thoughts on this mindset? Am I leaning in the right direction?

Since I do have cash on hand I've also considered the possibly of partnering with mentors and seasoned investors on some deals to gain more experience and knowledge. I know in order for it to be lucrative to them I need to bring something to the table so I'm assuming cash would do the trick. It would be a win/win since I'm learning and profiting while they are saving on interest, up front points from HML, PMI, etc. What are your thoughts on this? Would anyone that's actually successful and reputable even have interest in something like this?

Here is my plan of action as of now:

1. Keep reading, researching, learning and networking to gain as much knowledge as possible on REI, the different strategies, different peoples success and failure stories, etc.

2. Formulate a team for my rehabs so that I have them in place already BEFORE working on my first deal. This way it should help cut down the turnaround time and help the process move more efficiently and timely, especially for my first property. Besides establishing a relationship with a reputable and trusted general contractor, who else do I need to have in pocket and ready to go? Do I need to have an electrician and plumber or anyone else for individual jobs lined up or is that something the GC typically handles and already has within their network? Am I better off paying for the rehab materials on my own and hiring GC's on a "labor only" basis or am I better off letting them source all the materials since I'm new to this and want to be as time efficient as possible? I'm assuming letting them source the materials just adds to their mark up and cuts into my profits but in all honesty I'm thinking that might be worth it at least until I get my feet wet and learn for the future.

3. Study my surroundings extensively to get a better understanding of the market in specific cities, pocket areas, neighborhoods, etc. To me, this is the most critical part to "buying right" and will help me learn the general sale and rental price points of particular areas to ensure my deals are solid.

4. Network with reputable investor friendly wholesalers and realtors that can help me locate and secure deals. Remember I'm planning to do this full-time and scale this up as quickly as I can so deal flow will be a challenge. I will drive for dollars occasionally as well. Any other suggestions?

5. Cross my fingers, pull the trigger and start learning further through first hand experience!

Sorry for the long post I just wanted you guys to have a clear understanding of my situation and I'm hopeful that you will be able to provide insight and guidance. All input, feedback, criticism, advice, suggestions and recommendations are welcomed and appreciated. Thanks in advance!

- Brian

[Ritch Bonisa]

Brian sounds like you have a great plan.  I manage rehab projects for remote investors, so I work with different GCs.  I don't work in your market, but I will touch on one of your questions regarding GCs. 

If you purchase the materials and want to pay labor only - You may pay higher labor costs.  Good GCs generally want to be get their own materials.  Many times they get discounts, then mark up the cost a little.  This offsets their labor costs and is just another way to make what they need overall.  I'm not saying it's right, wrong, or anything.  This is just what I see.  

You also have the issue of material delivery, returns, etc. If you just want to pay for labor, then you might have to be the one to worry about transporting, storing, returning, in general, dealing with materials.  

I have seen in the past where if the investor handles the materials, they are more apt to change their mind and make numerous changes.  It's your project, but these changes can also delay a project and create more work, AND increase cost.

You can have a successful project either way - it's just good to know the pros and cons ahead.  

If time really is money, then you might consider the time it will take to handle the material side.  

A good GC will have a nice stable of subs, so you shouldn't have to worry about that.  If you do find a really good GC, and want to go that route - I would say to put a plan in motion and then get out of the way and let them do their job.  BUT - you have to have a good GC that can be trusted.  Don't be too quick to trust!  Monitor and inspect on a regular basis, but try not to slow them down.

Have a contract for each job and put some detail in it.  Depending on how you structure and what your model is - use a draw schedule to fund the job. Devise construction phases and a draw plan.  Make sure you inspect the work to ensure that draw 1 requirements have been met before you issue the next draw.  Don't pay early and don't get taken advantage of, but do understand that the first draw is usually the biggest because of materials and ordering some selections ahead of time.  Also know that whatever the estimate is - you may need 10-15% additional for any unforeseen issues.  Make the contractor prove to you that an unforeseen issue actually exists and document everything.  You start moving walls and opening things up - you WILL find things that were hidden and were not possible to know. 

It is common to fine a GC if they don't hit the targeted completion date.  But also understand that weather, slow material selections, special orders, YOU, and many other things can push completion dates off target.  If you fine or dock the contractor say $50 or $100 per day if they are behind schedule - that's a good method.  If time is of the essence, you can put that all in place, but you could also consider adding $50 or $100 per day for a quality project that comes in ahead of time.   Just like with kids, it is sometimes better to provide a benefit instead of just focusing on punishment.  I have used this method many times and it works extremely well.  It is one thing that can enhance and develop a good working relationship with a contractor.  You just need to inspect weekly for quality control.

I love this area of the business. I find it fascinating. In the past, I have seen deals that were bad from the start and there was the expectation that the contractor could perform miracles or work for free to turn it into a good deal - hit ROI. Never once did I see it work out well for the investor.

Don't take my comments as condescending in any way.  You probably know most of what I mentioned.  I deal with these things on a daily basis and eventually had to devise methods to counter all of them.  I'm a much happier person now!!  

If you have questions - PM me.  I don't work in your area, but I would be happy to share what I know (or think I know).