There are numerous ways to make money in real estate. I started buying rentals, then moved to flipping houses.
I know Paula is a fan of the buy-and-hold approach to real estate investing. Owning two rental properties myself, I am familiar with the pro’s and con’s of that approach. One of the things I don’t like about rental properties is having a mortgage payment.
So as I was looking for my 3rd rental property back in 2009 I was thinking, what if I could buy rental properties outright or with a big enough down payment?
In order to do this I needed one thing … CASH!
The idea of producing cash that I can reinvest into real estate got me considering “flipping houses” — the art and science of buying distressed real estate, fixing it up and reselling for a profit.
From Landlord to Rehabber
An agent alerted me to a foreclosure she found in my target area. It was a 3-bed, 2-bath with a full basement. I placed a bid on it of $60,501, and lo and behold, I was the winning bidder.
Giddy as I was about having found my 3rd “rental property,” the wheels in my head started turning…
I needed to do some work to the house to make it rentable. Why not do enough work on it to make it sellable?
I found that similar homes nearby had sold in the $130,000 – $155,000 range WITHOUT a basement. This house had two rooms and a full bath in the basement. I figured that if I could get this house back in tip-top shape both the improvements I would be making and the features it offered would make it an attractive resale.
However, there was one issue. What did I know about rehabbing and flipping houses?
The answer was simple … NOTHING.
As you can imagine making the decision to flip this house scared the living daylights out of me. The amount of money involved, managing a construction project, trying to resell this house, something going wrong, etc.
More than once I thought about bailing on the whole idea.
Then again I had spent the previous two years educating myself. I realized that fear is usually a product of ignorance. Most of the things that scared me about rehabbing were due to the fact that I did not know how to do them.
The first thing I realized was that I was not going to be able to manage the construction process myself, both because of lack of knowledge and time. So I decided to let a general contractor (GC) handle the construction instead of me. The GC would oversee the painter, plumber, drywall, carpenter, etc.
I went out and found three GC’s through recommendations from other investors. Then I gotwritten bids (very important) for the work. This allowed me to put together a rehab budget of $28,000. Based on what I paid for the house and what I thought I could sell it for, this budget number would work.
Because I don’t have enough space here to walk you in detail through the whole project (you canread the full scope on my site) I will tell you that the rehab was what I will call a thorough “cosmetic” rehab. We kept the structure and layout of the house intact, but updated the features.
The work included new kitchen cabinets, counters and appliances, new flooring in the entire house, remodeled bathrooms, interior and exterior paint, new mechanical systems, new fixtures and numerous drywall and carpentry repairs.
Were there any problems? You bet!
Right after we were done with the rehab and just days before we were going to put the house in the market, a basement water leak surfaced. I wanted to freak out. I thought I was going to end up loosing my shirt on this.
But again, as I started researching the problem and how to fix it, I discovered there was a $5,000 solution. Yes, this did put me over budget on my rehab, but I got the problem fixed and still had room left for a profit.
After all was said and done, the house went on the market for $150,000 and within about two weeks we had an offer … 30 days later we sold the house!
Now, since Paula and I are both “numbers people,” I’m going to show you something you will not see on most real estate investing blogs. These are actual numbers from an actual deal so you can see how it really turned out:
- Purchase Price: $60,756 (including closing costs)
- Repair Costs: $34,915
- Materials: $2,714 (includes appliances, staging supplies and misc. parts)
- Holding Costs (5 months):
- Insurance: $218
- Interest-only payments on loan: $780
- Utilities: $697
- Total: $1695
- Selling Costs:
- Closing costs: $4,350
- Agents commission: $7,250
- Advertising and other fees: $1,293
- Total: $12,893
- Total Cost of Investment: $112,973
- Selling Price: $145,000
- Return on Investment (ROI): 28.3%
- Annualized ROI: 68.9% (try getting this in the stock market ;-))
- Adjusted ROI after taxes (projected): 22.7%
What do you think?
I was ecstatic and grateful that I did not bail on this. But before you think that this story ends with me riding into the sunset with my new wad of cash let me tell you about what happens when flipping houses does not go so well…
When a Flip Turns Into a Flop
I think it would be a bit irresponsible to give you only a rosy picture about flipping houses. One of the reasons I blog is to share the stories I could not find when I was getting started in this business.
Let me briefly tell you of another deal I did …
I went out and found myself a house in an area I did not know, that needed too many repairs, for which I overestimated the resale value and for which I paid too much.
Can you see where this is going? …
Long story short, the house got broken into, the appliances and A/C unit were stolen, the house sat on the market for more than 5 months, and it sold for $15,000 less than what I thought I could sell it for.
When all was said and done I walked away from this house with a whooping $1,804 profit.
What do you think now?
Don’t misunderstand me. I think flipping houses is a fantastic way to invest in real estate. If I didn’t think so, I would not be flipping my 10th house as I write this. But it is very important that you go into this business with your eyes wide open.
Is it risky? Absolutely…
Can it be very profitable? You bet…
My average profit out of 9 houses over the last 3 years is $17,600 (not bad for a side business, hah?). But I have also realized that the “bad” deals have taught me as much if not more than the good ones. And considering that education is a HUGE part of this business then I guess I am just paying my dues.
Flipping houses has allowed me to create “cash now” as compared to the “cash later” approach of holding rental properties. As a result I now have enough cash to buy that 3rd rental property free and clear.
P.S. – I don’t want to jinx it but I just got an offer on House #10 and it looks like it’s going to significantly improve my average. Stay tuned and I will let you know how it turns out.