Small Flip Rehab Deals?

Question

Hello all,

I currently have one duplex that I house hacked and am looking to build more capital to acquire more rentals. To this end, I'm looking to do a few flips in the near future. The strategy I'm looking to pursue is low to medium range purchase price, mostly cosmetic repairs, with a moderate ARV. The numbers of the type of project I'm looking to do are:

-$60,000 purchase

-$25,000 rehab

-$115,000-$120,000 ARV

Again, that's just an example, but that's basically the type of project I'm looking to do initially. I'm looking to this specifically because of the lower threshold to entry, smaller scope rehab, lower ARV would theoretically leave the door open (no pun intended) for both retail or investor buyers depending on area. Or, if worst came to worse, I could just refi and put a tenant in myself.

My question is: Why does it seem like most rehabbers forego this type of project? I could be wrong, but it seems like most rehabbers are looking for that $60,000 purchase they put $100,000 into and sell for $250,000. The way I've thought about it is that many are looking for the home run, whereas, this deal is a single. Is that simply the reason most don't pursue these smaller deals? Because it's not large enough? It just seems to me that the "singles" are so much more plentiful, so you could knock out a handful of those before you located and completed a "homerun". Maybe I'm missing something, though.

Thanks!

Will Barnard · Answer

@Mikael Winkler Aside from different thresholds from different people mentioned above by Joseph, much of the reason for this occurrence you stated in your post is the fact that our current market conditions in many areas of the country are highly competitive and finding the easier lipstick deals are few and far between so investors must adjust their strategy to include heavier rehabs and perhaps additions to create enough spread in the deal. Almost all of my flips in my first few years were more of the lipstick variety although I did often move or remove a wall or two to open up floor plans and such.
today, I must create my spread by building as those easy lipstick deals are super hard to find and typically only going to be off market deals direct from seller to investor.

Will Barnard · Answer

Analysis paralysis is very common amounts newbies, the key is to get out there and do one once you have the knowledge of the market and some basics on rehab costs and exit values (which you can get help with from other pros).

Even if you do a small deal where you make no money (try not to lose any), the real world education of doing one and getting that under your belt is priceless.

Joseph Firmin · Answer

Different investment thresholds for different people. You may be willing to work for $10/hr and someone else for $100/hr...  That's what it comes down to. For flips, figure out how much you need to make on a flip to undertake it and then make sure the numbers are not so tight that you end up making less than that.

Mikael Winkler · Answer

@Eric Michaels very true. I do typically factor those costs in when I'm looking at potential properties, but those are definitely very real things to consider. I guess I just feel there is an entire class of property that is going untapped, at least in my area, that I think many are overlooking. But, I can speculate all I want, until I go out and try a project like this, it's all just theory haha

Eric M. · Answer

Most people don't do those deals because after you account for all the costs of the flip, there is just not much profit.

Many flippers are using hard money and realtors. There is no room for any error in these deals.

Lets say you miss ARV by just 5% (very very common) and you find a problem(s) during rehab that costs you an extra 5K over budget (very very common).

Now you are all in at 90K for a 110K property. Your closing costs on the buy are 2k and 3K on the sell. You pay 6K in commissions. You pay 2K to stage. You paid 2K in points and 5K for 6 months interest.

Nothing surprising or really bad happened and you made nothing because your original margin was too tight.

Mikael Winkler · Answer

Absolutely. That's what I did with my initial project. Basically "burned the ships" as they say. And that turned out very well. A year and half later, it feels like my next one is basically my first again, but I do have that experience to draw on.

Mikael Winkler · Answer

@Will Barnard, yeah. At the end of the day, I just need to go with my gut. I think a lot of my (and other newer investors') reticence or hypothesizing is the fear of committing. I know in the short term my strategy is the smaller scale rehab, but sub consciously, it's like I always need validation for my decisions. Thank you for reminding me everything is individual and relative. More than ever, I'm starting to understand and accept that.

Will Barnard · Answer

It’s a catch 22. Going after the lower to midrange deals may have less rehab and in a turning downward market, may or may not get hit as hard, but the competition to acquire is also higher than with the higher end homes. Its difficult to give you advice on if the lower or higher end market is better for you as it depends on you, your goals, your skills, your team, your finding, and many other items. For me, I started out doing the standard 3+2 1500 SF or so home. As the market got more competitive, and as I became more experienced, I moved up to the mid range price points, then to the luxury market of the multi million dollar variety. Point is, you need to do what works for you and you also need to adjust to your market conditions and change your strategies accordingly to stay profitable.

I also can’t give you an answer on how I see the market as the “market” is local to each area. My market is entirely different than yours and so forth. In my market, I can tell you that it remains hot, remains competitive, and is still viable for what I do, buy old dated small homes in higher end neighborhoods, demo most of it and build a larger new modern home.

Mikael Winkler · Answer

@Joseph Firmin, that is absolutely true. I think the main thing is threshold for me. At least initially, I'm willing to have a smaller spread actual dollars wise, as long as I hit a my percentages.@Will Barnard, market conditions make total sense, as well. One thing I also see, maybe it's a byproduct of the rise of hard money/"other people's money" idea, is that many rehabbers may be going after the larger projects because they're not using much of their own money, so larger projects are just as easily funded as the smaller ones.

What do you both think of the overall market? That's one of the big reasons I'm intrigued by the medium range ARV projects. If the market does start to cool, those lower ARVs may be better insulated than the top of the market resells.

Small Flip Rehab Deals?

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