Investing in a House Flip
For a long time my investment strategy has been “buy and hold” rentals. Specifically, small multi-family properties. This has been a slow and conservative way to building wealth through real estate. I’ve read about people that “flip” houses for quick profits, and it never really interested me in the past. But, I took on a new mindset in 2018 and thought I’d research more and try a house flip.
First, a few interesting notes on house flipping:
- Usually, it’s a team effort. This was a huge misconception for me because I used to think successful flippers personally knew everything about everything. Instead, most investors use a crew of people, each team member specializing in a different area. Since I don’t want to be personally involved at each level, I just need to find and partner with the right people.
- It doesn’t have to be a big time commitment. Depending on your role within the team, you might not have to dedicate much time to flip a house. You can outsource almost every activity. For me, I wanted a role with minimum involvement, even if it means taking less of the profits.
- Every team member makes money in a house flip. (The buyer, the seller, contractors, escrow/insurance companies, wholesalers, agents, the government, etc.) But, the people who make the most are the ones that take on the most risk and responsibility. Personally, I’m fine taking on more risk as long as it’s well calculated and all risks are known upfront.
- The property was a 3 bed, 1 bath, single family home in Birmingham, Alabama. The house was already in fairly good condition, only minor upgrades were needed.
- The goal was to buy the property (under market value), do some minor rehab, place a tenant inside, and sell it to another investor as a ‘turnkey rental property’.
- Our initial time frame was 6 months from start → finish.
In this deal I was playing the role of “Equity Partner”. Essentially, the equity partner puts up a large portion (or in my case, all) of the money used to fund the project. I assumed the most risk in doing this, which I was OK with.
The other main person, Andy (not his real name), was my Managing Partner. In this deal Andy put up no money, but he had the biggest time commitment. Andy was responsible for overseeing all other team members, paying them, contracts, research, and making sure we stuck to the timeline. Although Andy didn’t put any money into the deal, he still had some financial risk (explained below).
Needless to say, I put a lot of trust in Andy.
Projections vs. Actual Results $$$:
My expectations entering the deal were fairly low. I wanted to make money, but my main goal was to gain experience.
Here are the numbers we were projecting and the actual results we achieved:
|Property: 3 Bed / 1 Ba, Single Family Home in Birmingham, Alabama.|
|Other Misc costs/fees:||$1,500||$1,826|
|TOTAL Cash Outlay:||$49,300||$50,100 (My cost)|
|MY PROFIT (50% split of total)||$7,100||$11,494 (My profit)|
|ROI:||14.4%||22.9% (My return)|
|Time Start –> Finish:||180 days||81 days|
All said and done, I made $11,494 in 81 days. It cost me ~$50k, and Andy more or less managed the entire thing.
Risks & Possible Bad Scenarios:
Before agreeing to any real estate deal I try to think through all the risks and things that could go wrong. Here are some of my thoughts on my risks for this house flip:
(I’m testing out some new wordpress features to save page space. Click the questions to drop down the answers/explanations)
Timeline of events and notes:
Andy promised to check in with me every week or two with progress. He did this, mostly via quick text message updates. Since I was traveling at the time all work was being done, I wasn’t in a position to help – not that I wanted to help anyway. 🙂
A Few Lessons Learned:
I was happy with the communication:
Andy provided me updates that were consistent enough, but didn’t involve me in the tiny little details. Any time I had further questions he was there to answer my texts.
I never had to talk with any contractors, tenants, utility companies, escrow agents or anything. Andy handled everything on our behalf so I put in zero work. This was excellent.
We overestimated the timeframe (Good thing!):
Things moved very quickly. When I first reviewed the project Andy said it may take up to 6 months. I knew it was a possibility to finish early but didn’t want to get my hopes up. I had it in my mind that I would get my money back at the end of 2018.
Having my cash back (+profits) earlier allows me to put it to work in other ways sooner. (I have already entered another partnership project with that $50k – not a flip though – more on this another time)
We sold for much higher than expected!:
We wanted to sell the property for $65k. But, we knew that people may lowball us, so we listed it for $75k. TBH, I’m not sure if it would have even appraised that high from a bank, but we listed it there anyway. You can always decrease your price later, you can’t increase it.
Investors interested in buying ‘turnkey’ properties are buying for cashflow. Because the rents were pretty high for the area ($775/m) and a lease was already in place, we were able to achieve close to our asking price. We sold for $74,000. This additional profit went straight to me and Andy’s pockets. Amazing.
Rehab + ‘other fees’ were overbudget:
I know, I know, I’m complaining about being a few hundred dollars over the rehab budget… But, remember this is the #1 reason house flippers fail. They underestimate the rehab budget. Although a small amount, this annoys me and we might want to build a bigger buffer in next time to account for re-doing work or inspections for Sec 8 tenants.
I feel a tiny bit guilty:
Deep down inside I’m wrestling with the guilty feeling of making a large amount of money and doing a relatively low amount work. I was raised to be a hard worker, hands on, pulling my weight with everyone else. I was taught to pay everyone else the bigger share, and take less myself. In this project I made the most money out of everyone, and did no work.
But, reminding myself of these points makes me feel better:
- Without me funding the project, nobody else would have the job.
- I helped provide a beautiful new home to a family that is in need.
- I helped provide value to the community by increasing their neighborhood comps, and updating houses that would otherwise be neglected.
- Another investor now has a cashflowing rental property in his portfolio. He’s making $775/m from a lease that my team put in place.
- It’s OK to make money by working smarter, not harder.
- I took on the most risk, so I should be paid the most reward, right?
Some Other Questions you might have:
Please feel free to reach out to me if you have any other specific questions. I’d love to hear your house flip stories and results if you have them!