Flipping Real Estate

We’re starting off 2023 with a BANG! Candace Brawner returns, this time to share her experiences with the very thing that made HGTV famous – flipping real estate! Come hear from Candace about her punch-list for identifying properties, crunching the numbers, reviewing bids, making offers, managing construction, and the specific lending required to make it all happen.

Notes from the Presentation

Once again, our video failed to produce anything usable so Candace and I are working together to recreate some coherent notes from her presentation to share here. You can download her presentation by completing the form at right and it will be emailed to you automatically.

Getting Started

One of the most asked questions from fledgling investors is whether or not they should create an entity, such as an LLC, with which to purchase and manage their investments. And it’s not a simple question. LLC’s in Texas are not expensive, but if you’re not an attorney or a CPA, your wisest choice would be to consult both to discuss if a legal entity is right for you.

An attorney will advise on the requirements for owning an LLC and the protections that they provide. A CPA will be able to advise you on the tax implications of doing so. ALWAYS use an attorney to create your entity.

Secondly, you’ll need to determine whether you want to tackle your first (or next) flip as a solo entrepreneur or as part of a joint venture with another party. The obvious benefit of going it alone is having no one but yourself to answer to, and 100% ownership. But joint ventures offer advantages as well – namely capital (money), having a sounding board or possibly even a mentor to help you learn the ropes, and you split the risk.

But Candace is quick to point out that you should heavily vet your potential partners – understand their goals, their commitment, their work ethic and then clearly define expectations of both parties, using an attorney and a binding legal agreement.

Financing

Take some time to think about the best way to purchase your opportunity. How much cash do you have available? What’s the best way to deploy that cash? How much risk are your comfortable taking where it comes to financing? House hacks (buying a multiple unit property and living in one while renting the other) can qualify for FHA financing with as little as 3.5% down.

Traditional lending (through banks, brokers, and credit unions) is where most buyers turn when they’re looking to buy a home to live in. Borrowing for investing changes the game though. Traditional financing typically has limited options and is often a slow process. You’ll get good rates, but with the typical turn time it may make it harder to close good deals. A straight non-homestead property on a conventional loan usually requires 20 – 25% down making scaling your business extremely hard.

Hard Money

Hard money loans carry high costs and even higher interest rates – and are usually interest only loans, but when using them for a flip the idea is to get in and get out quickly, so paying 10-12% for several months won’t be painful as you’re probably anticipating. And if structured correctly, the purchase price and rehab costs can often all be borrowed. Hard money loans are fast, easy to scale, easy to deal with and make it a lot easier to secure deals since they are almost as good as cash. Which is precisely why the are more expensive. Remember the old adage – you can have it fast, cheap, and easy… but you can only have two.

Another option is to visit hyper local banks that hold the money in house for renovation loans in the area where you want to do business. They will have generous terms, but they are also slower.

Your final option is CASH. It is by far the fastest and easiest way to secure good deals. It also offers the highest return on flip projects as there is no loan to pay back. But cash will limit your opportunities because when you run out of cash, you run out of opportunities to buy… making it very difficult to scale.

Who’s Doing the Work?

Who is going to act as the General Contractor for your flip? How much is your time worth? Are you better served hiring a professional to oversee the project, who has relationships with the appropriate trades and will manage construction from start to finish? Or are you a DIYer, who revels in doing the job yourself, hiring and supervising each subcontractor and then making sure they show up and do their jobs? Hiring a GC will cost more, but we’d argue that acting as your own GC will cost more than just money.

Do you already have a demanding job that you would have to leave (or double up your work load) to manage a rehab? Are you planning on scaling past just one or two projects? How many hours can you commit to managing, staffing, overseeing, and doing site checks to make sure the job is being done correctly? And lastly, what is your timeline to sell?

Looking for a General Contractor

Assuming you decide to hire a General Contractor for the work, you’ll want to get recommendations and interview them before hiring them and paying them. Ask the right questions. Do they visit job sites regularly? How small of a job is too small and how big of a job is too big? Will they travel outside their immediate area for a job? How many of their trade crews are dedicated purely to working with them? And what does their payment structure look like?

Finally – do your research before launching. Read some books. Gorge on podcasts. Find a spreadsheet or an app that you trust to run your numbers, then analyze your deal from start to finish.

Here’s some great books to get your started:

1. Flip
2. The Book on Flipping Houses
3. Buy, Rehab, Rent, Refinance, Repeat
4. The Book on Estimating Rehab Costs
5. The Millionaire Real Estate Investor
6. Investing in Real Estate with Low and No Money Down
7. The Book on Advanced Tax Strategies
8. Start with Why
9. Permission to Screw Up

And here’s a few podcasts to get hooked on:

1. Bigger Pockets
2. Seven Figure Flipping
3. Flipping Junkie Podcast
4. Flipping Houses for Rookies

Identifying Properties

What is your end goal?

In general, when investors talk about Flips, they’re usually referring to buying a distressed property for cheap, rehabbing it, then selling at or above market prices for a nice profit. But selling the property is not the only end goal for a flip project. Instead of selling, you may want to consider BRRRRing the property into a long term rental or even a short term rental.

When you sell a flip, you walk away with cash profit from each project. But you also may find yourself on the hook for some fairly considerable capital gains taxes. By BRRRRing the property into a long or short term rental, you can pull out up to 75% of your equity tax free, and still maintain ownership of the property and create monthly cash flow. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. So you’ll want to decide what your end goal is, and adjust as market changes or changes in your circumstance change.

Choosing a Location

When identifying properties that you want to take on, you’ll want to consider where they are located. Are you OK driving to a location several times per week for a few months? Is the market appreciating or depreciating? What do you like about the area and what do you hate about it? And just as importantly, can you find contractors and tradesmen to do the rehab work in the areas that you’ve identified? And lastly, is this an area that you can scale your flipping business in?

Do the numbers work?

There’s one rule to real estate investing that rules above all others: You make your money going it, not coming out. In other words, you can only control what you pay for a property – the market will dictate what you can sell it for. So run your numbers backwards, forwards, and sideways before putting a property under contract.

Pinpoint for each project what kind of profit margin will make a flip worth your time and effort and stick to it. You’ll want to have contingency funds built into your budget for the unexpected items that invariably come up in every rehab. Estimate holding costs for things like utilities, interest payments, insurance, taxes, and HOA fees if applicable.

It’s always a good idea to have a backup strategy in mind if option one fails. For example – you may want to flip a home, but what if the market shifts, prices plummet, and you’re no longer looking at the profit you thought you were. Making sure the property cash flows as a rental to hold you over until prices rebound is the smart move.

Candace’s quick and easy calculation works something like this:

Asking Price

– Profit Margin (10 – 20%)

– Rehab Costs

– Closing Costs (2 – 5%)

– Holding Costs (Utilities + Interest Payments + Insurance + Taxes + HOA Fees)

– Contingency (10%)

= Offer Price

A Tale of Two Projects

Candace shared two of her recent projects with us – one of which was a massive gut renovation and the other was a quick flip. The former, while a much bigger project requiring more time and energy, also offered a much larger profit margin despite the higher costs going in. The latter was a quick and easy project that offered decent returns with very little cash up front. Candace shared with us that the biggest downfall in such a project is the minimal room to deal with major problems and the biggest upside was the cash entry point and very quick turnaround. Here’s what the breakdown looks lke:

MASSIVE GET RENOVATION

$225,000 Purchase Price (from MLS)

+ $160,000 Renovation (Rolled into loan, 3 months to complete)

+ $8,000 Holding Costs (Interest, Taxes, Utilities)

+ $29,000 Closing Costs (w/ Great Negotiations)

= $422,000 Total Costs

$40,000 Down Payment

Interest Only Loan @ 7.5% from a Local Bank

$485,000 Sales Price (2 Days)

~$63,000 Net Profit in 3 Months

QUICK FLIP

$170,000 Purchase Price (Expired Listing that she pursued for months)

+ $35,000 Renovation (Rolled into loan, 3 weeks to complete)

+ $2,000 Holding Costs (Interest, Taxes, Utilities)

+ $15,000 Closing Costs

= $222,000 Total Costs

$8,000 Down Payment

Interest Only Loan @ 7.5% from a Local Bank

$245,000 Sales Price

~$15,000 Net Profit in 7 Weeks

Where to find deals?

Ahhh.. magic question. And the truth is that deals can be found everywhere. First and foremost in the MLS – look for properties that have longer Days on Market, and that are located in areas that haven’t already been picked apart by other investors (think outside of your local zip code). Candace will go an hour West before she’ll go 5 minutes East. She’s looking in areas like Sealy, Bellville, Columbus, Brenham and College Station – not right here in Katy.

You can also look to divorce attorneys, probate attorneys, lawyers, and other investors. Make sure everyone you know knows that you’re an investor and are always looking for deals. Make it easy for them to come to you. Join local investor groups – both in person and online – and search for investor groups on social media. Join Bigger Pockets and peruse their forums. And get your name in front of wholesalers. They’ll barrage you with deals via email, most of which will be junk, but it will be on you to weed out the good ones.

Here’s a list of local wholesalers that send opportunities:

1. Homevestors
2. Houston Flip Deals
3. Trudo Properties
4. Texas Property Group
5. We Have Deals for You
6. Equity Cash Offer
7. American Property Group
8. Sanmore Investments
9. ARKS Home Ventures
10. Padua Partners
11. Nationwide Deal Source
12. Mr. Brown Buy Houses
13. Equity Now

Reviewing Bids & Managing Construction

The best flips aren’t usually about just applying lipstick. Painting, flooring, lighting and cleaning will only push your profit margin so far. Look for places to add value. Adding square footage is great, but adding bathrooms, bedrooms, and an office will really make your flip pop. Can you expand a kitchen? Remodel a master bathroom? Open up small rooms, or even break up really large rooms – it’s all about how the home flows.

When budgeting, you need to be keenly aware of what type of neighborhood you’re working with. While you do want to be the best home in your market, you don’t want to over-improve the home so much that it will never appraise for asking price, and you need to always assume that your end buyer will be using financing. Just as you wouldn’t put marble and quartz into a D class neighborhood, you wouldn’t put vinyl and laminate in an A class neighborhood. Research recent sales and homes for sale in each neighborhood and plan your design choices just a step above.

Planning and Designing

When planning out your rehab and redesign, look for places to save money: cluster bathrooms near each other or over each other so they can share supply and sewer lines; paint window frames rather than replacing them altogether; buy items in bulk for multiple projects; re-use existing shrubbery when overhauling your landscaping; and lastly – find the items that you can do yourself (DIY) quickly.

But before you tackle items on your own, ask yourself a few questions. Are you actually good at what you’re planning to handle? Can you finish it faster and cheaper than your contractor? Calculate what it’s costing of your time to handle these items, and if you earn more at your day job – why aren’t you paying someone else to do the work? Know your rate!

Do you need a designer? Candace says YES, without a doubt. Most people think they have an eye for design and ironically, those are the homes that usually make the best flips. How many times have you walked into a home where the colors didn’t match, the hardware finishes were all different, the flow of the home was confusing, or it was either insanely dark or blindingly light? There’s the DIY designer for you. Now think how amazing new build model homes look. Designer. Get one.

When the work begins, plan on being on site regularly. Don’t trust your general contractor to always be there because they won’t be. Finding a general contractor that you can trust is imperative and often takes a few stabs. So in the meantime, oversight is a must… supervise the supervisor and supervise their subcontractors.