From long term buy/hold to flipping in Bay Area.... Doable?

Question

I have been on BP for a couple of months now, and I have done quite some analysis on what to do next..... I quickly concluded that out-of-state purchase is NOT for me, and also that C class is NOT for me either....

I now have this crazy idea in my head that I want to hear your advise on.....Can I get into flipping in Bay Area????

I have about $400K that I will get in Aug (hopefully), and I am thinking selling my one rental property to raise another $400K....With $800K, if I find rundown SFH in Santa Clara / (better part of ) San Jose / Redwood City, buy for $600K, Rehab for $100K, sell for $800K..... Is that doable?

For those of you who have done / is doing flipping in Bay Area, question:

1. How do you find those rundown properties? MLS? Drive around? Direct mail?

2. What are some of the traps I should watch out for? Thank you

Jeff Pollack · Answer

Hey @Diane G., with Account Closed shouting out I can't help but give my $0.02, which is worth at least half that.

A couple things. First, if you buy a house for $600k, put $100k into it, and sell for $800k you're not gonna make much money. Even if you use your own money (and don't account for opportunity cost) you'll be lucky to make $50k pre-tax after deducting agent fees, closing costs, insurance, utilities, staging, and property taxes. That is not much of a margin on a $100k rehab and $800k property in a softening market.

And i'd think long and hard before you sell a Bay Area asset generating $3100/mo rent with a $900/mo mortgage. You don't need your own money to flip houses in the Bay Area or anywhere else. In fact, having a bunch of money starting out can be a detriment to your flipping business as you will not learn the art of finding money and can't scale. With your $800k you may be able to get into one project if you're working the low end stuff in the Bay Area. Then you'll find all your money is locked up and you can't do anything until that project is done.

You need to use OPM (other people's money) and other sources of funds. Do you have a 401k at your day job? You can borrow up to $50k and pay yourself back. Do you own a primary residence? If so, get a HELOC. Shop around and get the biggest one a bank will give you. It costs nothing to get, nothing to have in place if you're not using the money, and rates are low. And hard money for funding flips is cheap these days. With $400k cash you should easily be able to get a hard money loan if you have a deal that actually makes sense. For your first deal you may not get the cheapest rates, or you might have to bring in a more experienced partner to get the funding, but you can get money.

If you want to sell your Union City property because you bought at a good time in the cycle, feel we are now topping out and want to take profits, great. But don't liquidate your rental under the erroneous assumption that you need a pile of your own cash to start flipping houses.

Happy hunting!

Account Closed · Answer

@Chris Mason,

You know your biz well. I closed on an investment property in early 2013 and locked in a rate of 3.75% fixed for 30 years. That was when mortgage interest rate was the lowest during that part of the cycle.

@Diane G.,

It sounds like you're killing a golden goose and intend to use the proceeds for something that may not materialize. As much as you're ready for new challenges, there's no guaranty that the challenges will be there.

There's a rumor that @Jeff Pollack recently flipped a 1,300sf SFH in Palo Alto and netted $400k profit. Jeff is up the street from you, and he travels south quite often. You might want to buy him lunch and pick his brain, or whatever is left of it. ;)

Account Closed · Answer

Diane,

You're a wise lady with your conclusion. Your idea is not crazy at all. Maybe @Jeff Pollack can share with you his secret ingredient on how to flip and make $500k+/year. ;)

1. How do you find properties? For me, it's networking. My partner and I get off-market deals from our network. It took us over a year to break into this inner circle. OVER 1 YEAR. How many people are willing to commit the time and resources to break into this inner circle. As my partner and I don't have a JOB, we had the time. We're about to list an 8-unit building for $2.8M where we paid $1.85M for it last spring/summer. We spent $75k on rehab. Not too shabby for a year worth of work and the time we spent to cultivate the relationship. The first deal we did with this broker was 3.5 years ago.

2. What are some of the traps? Some agents/brokers are sharks. They'll bury their mother just to make a commission. Well, there are shysters circling out there looking for fresh blood too. Know who you're dealing with and trust your instinct.

I'm into long-term flip, 1+ year, as I would qualify for long-term capital gains, which saves a bundle in taxes. Once you know how to flip multi-family, you're not going back to SFH flips. Why is that? There's no down time like SFH. The tenants are paying down your mortgage, and you're getting your cash flow while waiting for a buyer to take the property off of your hand at a premium price.

If you can break into 5+ units, do it. The trade for 4 units or less is too crowded. People are scared of 5+ unit aka commercial loans because they don't know what they don't know. Once you know how commercial loans work, you're not going back to residential loans.

Good luck.

Jake Knight · Answer

My $.02 as someone who has started within the last 12 months. It's not a trap but it's important to understand the very-real time or money commitment required.

Time: networking, working with agents, hitting the streets, creating marketing (mail and/or website) and a handful of other things that require time.

Money: If you are willing to start with a larger budget you could probably get some mailers out to sellers and start working leads sooner.

MLS: this one is complicated lol. A little easier for you than me since you would be working with cash; you just have to know your numbers very well (repair costs, comps).

I have enjoyed the process and enjoyed meeting people. I just closed my first wholesale and am in contract for my first flip. The hard work paid off and now I can increase my marketing budget and leverage the tools and relationships I have.

The field is very crowded as Account Closed mentions. I want to get a few flips under my belt and start building relationships that would allow me to get in on the 5+ unit deals. I'm not concerned about the financing part since I underwrite them for a living but I need to just focus one thing at a time build a stronger track record. If you are willing to put in the time you could pursue this strategy as well. Being liquid certainly helps I'm sure.

Best of luck!

Jen L. · Answer

@Diane G.  Hi Diane, I'm in similar situation.  I have long-term holds in the bay area and am trying to figure out what to do next.  After looking around other markets, I concluded that bay area is still the best town to be in.   Do you go to meetups?  Maybe we can connect.

Chris Mason · Answer

Aack, with that little baby mortgage on a $750k place, that you got in Q4 2012 so I know you got a killer rate, and the Prop 13 tax basis at that old purchase price!!! I know I'm totally one to over-focus on the financing, but I wouldn't be so eager to let that baby go.

Jake Knight · Answer

@Diane G.  Being an equity partner could be another way to get in. Learn from the other investor during the deal. I know a few investors who wouldn't mind JV'ing with an equity partner!

Diane G. · Answer

Account Closed

Thanks for your kind words.... Lets see how I will fare down this path...

Been doing corporate finance for 15 years now... While I am still looking for ways to enhance my career, I figure it is about time for me to try something new.....

By the way, I just put my one property on zillow.... Talk about moving into action.... Lol

http://www.zillow.com/homes/for_sale/24919557_zpid/0-300000_price/0-1143_mp/37.603777,-121.987317,37.584598,-122.017873_rect/14_zm/?view=public

Diane G. · Answer

@Jen L.

Hi Jen - never been to any meetup, but I am getting a little curious about it.... If I ever end up going, and see you, I will say hi... deal?

Sometimes I hear people on BP doing "100 doors" or '500 doors", I am like ugh......

@Amit M.

That is what I am afraid of too..... Any examples?

From long term buy/hold to flipping in Bay Area.... Doable?

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