Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing why you do not flip houses anymore.
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Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing why you do not flip houses anymore. And I want to outline some pros and cons of flipping houses, and then the reasoning for me to discontinue flipping houses and really focus on long-term rentals. So some of the pros are quick profits. You can make $15,000 to $30,000 plus per deal. If you’re an experienced flipper financing is easier today than it’s ever been before for flipping. And you can find these hard money lenders online. There’s tons of nationwide ones. There’s also a ton of scams. So make sure that you know who you’re getting money from. But there’s tons of local lenders too. If you go to your area, you go to your meetup groups all in your local market, there’s going to be tons of lenders there, and then also private money lenders, which is what you really want, because then you can kind of figure out and develop them into lenders, which will make it less fee intensive for you.
When a property sells. There’s no additional responsibility on your end. So of course, if you’re sued, there will be. But if you’re not, your responsibility ends right there on the closing date. Now the cons of flipping properties, it’s very transactional. I mean, you need to keep on doing deals to make more money or make money continuously. And it’s very competitive today. I mean, there are a lot of the deals that are coming from these REO agents are going to probably seasoned investors that have been in your market for decades, and they have crews in place. They know their construction, budgets, they know everything about the market and it can be difficult for you to compete with them. They’re also probably sourcing the deals themselves through postcards or other mail campaigns or text campaigns. So there’s a number of different ways that they’re finding deals, but it is also very competitive.
Not saying you can’t do it. It’s just that you have to go into this with that knowledge that I’m going to lose out on deals. And I’m going to have to be pretty competitive with my, with my bids, with my offers. If I do want to buy these properties and flip them, you’re going to need construction experience. Yes. So you can bring in and you should bring in a contractor to estimate the rehabs, but that might not be possible with every walkthrough. And if you’re sourcing deals from a realtor and they have one that just came up and your con contractors not available, you’re not going to wait for your contractor to come on to review it. You’re going to go yourself and review the property. And then you have to make your decision. So when you put the offer in, because you don’t want that offer to come in days later, you want to do it right there on the spot.
The other thing though is when you’re doing with these, with these flips is that if you are sourcing the deals yourself and someone calls you and it’s on a weekend and your contractor’s not available, you want to go out there. And you know that they’re probably getting a ton of other mail calls and texts from other investors. So you’re going to go out there and you want to give them another offer on the spot and let them know that you’re serious and you want to, you want to buy it and you can close. You’re not going to wait to go in with your contractor. So that’s rookie mistake that you need to have that knowledge and you need you to be knowledgeable before going out and making offers, or you’re going to find yourself with a lot more unanticipated expenses. But it’s a, that’s a common thing.
Now, when you’re renovating any type of real estate, there’s always going to be expenses that pop out of nowhere that you weren’t thinking about, that weren’t in any of your underwriting. Now, if you’re renovating a small commercial or multi-family property to buy and hold, and you encounter a couple thousand dollars in additional expenses, it’s not great, but it’s not the end of the world in one month. You’ll probably make that back. And when flipping, however, it cuts right into your per deal profit and your return on investment and return on time just gets decreased. And if you have, if an expense is too much, you might lose money on the property holding costs and transaction costs, which I think a lot of flippers don’t really factor into a lot of their estimates. And this includes the mortgage, the taxes insurance. I mean, you’re not paying regular insurance.
You’re paying VAT, vacant home insurance, which is much more expensive than if you’re living in the property. You’re paying utilities, fees, attorneys you’re paying for agents. And when you’re, when you know, you’re paying attorneys in some states in both sides, maybe the title on both sides. So it’s this is all the expenses that you have to keep in, keep knowledge to be knowledgeable of, and then also keep your eye on because when you’re dealing with utilities, I remember when I used to flip it, I’d show up at the place two hours after people supposedly left and the heats all the way up. And we’re in winter, you know, in the Northeast. And these are things that you have to keep on content every day. You have to be there in the morning if you’re managing yourself or in have to be there maybe at lunch.
And you’re definitely gonna have to be there to verify that everything’s locked up at night and that works all, you know, been done. And in the morning, you want to make sure that people are actually showing up. So there’s a lot of management involved. The money you make is ordinary income. There’s no tax advantages with flipping com. Now, if you’re a real estate professional, you might be able to decrease your tax exposure, speak to your accountant about that. But if this is a part-time job and your full-time job as a non real estate business profession, you’re probably not getting any type of tax breaks. And another thing is the risk with it. What happens with the market slows down during your hold and you have difficulty selling now a lot of experienced flippers they are trying to do, or usually try and do a hundred days from the time they buy it to the time they sell it.
And that’s a really aggressive goal. I think for flipping houses, I think most flippers are trying to do it within four or five, six months. And that’s still pretty good. But what happens if during this six months, I mean, six months is a long time. A marquee can really cool off in that time. If you really sharpen your pencil to get a deal out ahead of other offers that were on the property and now it’s slowing down, what, what, I mean, what other avenues do you have? You might be to rent it, but if you’ve renovated the whole property for sale, you’re, you have a lot of money that’s out there that you’re not going to get a return back on renting. You know, when you’re renovating a property for rent versus renovating a property to resell, maybe most likely to a first-time home buyer or an FHA buyer it’s completely different.
It’s completely different. How you do it, the amount of money you’re spending, the finishes you’re doing. And you want to make sure that you’re not put in that position. Now, main reason why I stopped flipping houses 10 plus years ago was the difficulty of finding and keeping good contractors and handyman, you know, it’s very time consuming to manage contractors and the handyman number one is finding them. And then there are two was like, I was just saying, is that you’re there at 7:00 AM, 8:00 AM making sure they’re actually working. If they’re not, if you don’t have, if they’re not going out and buying stuff, they might call you for every little thing. Now you have to go to the supply store and you have to pick up everything. And it could be something where you’re at the property. Two, three times a day, managing those contractors and handyman acting as really a general contractor for what’s going on.
Now, if you have a good crew of people, this could be something that could be alleviating now, very time consuming to manage the contractors and handyman. And when I always I’m always putting in here, the handyman is because there’s going to be a lot of jobs on the project that you don’t need a contractor for. You know, if you’re changing over some lights, which is, you’re not going to have electrician to do that most likely, okay. You’re most likely going to have your handyman do that. Now, if you’re running wires and all this type of new outlets and here and there, and going up to the box and everything like that, you’re going to have an Iwan electrician do that, but it’s, you have to know what’s, what’s what goes where and what you do to save money, but also you know, being, being on par with what’s going to be allowed in that town and making sure that you don’t have any issues when it comes to sell.
If you don’t have permanent work, it’s a whole nother ball game that I want to get into right now. But that’s something you have to think about a transactional income. I don’t like making transactional income. I try to avoid it. So I stopped working. I stopped being paid. I try to avoid that. That’s why I’m really working on long-term rentals and focusing on that. Now it’s much risky. It’s much riskier than long-term rentals, as well, as we said, you’re speculating that a house will have X amount of repairs and expenses and sell for Y. And there’s usually not a huge margin of error, especially when you’re in a hot real estate market like we’re in now. And if you’re in a market another market today let’s even hotter. Some of these places in the Southeast, some of these places in the mid south, you know, if you’re in Texas, you’re in Florida, you’re in Atlanta.
I mean, these places are red hot. I mean, there’s going to be tons of offers going in. If you’re sending out postcards, there’s dozens of other people sending out postcards. There’s dozens of people calling those people. There’s dozens of people texting those people, trying to buy their property, and you’re going to have to compete with all of them. Now, obviously price isn’t the only factor, but it is a pretty big factor in most situations when you’re buying property. Now, the main issue that I had was I didn’t have a system and set team in place, and I would have put together a group of subcontractors and handymen that I could have consistent work for from one house to another. I have one friend, he has two crews. And what he does is they can keep he can do four houses per month with these two crews.
Now he just has to worry about deal flow because he’s got the money from private lenders already. And it’s not a problem he’s been doing it for 15 years or so. So if in that situation, he’s just working on getting deal flow and and then dealing with the disposition of it, selling it later on, I would increase my deal flow with more REO agents in direct to owner marketing. I really would have turned the heat up on that. And really working with banks and the agents they work with, and a lot more maybe postcards or direct mailing pieces. I would have connected with a lot more private money lenders, private money lenders versus hard money, lenders, hard money lenders. This is like a business to them. There’s going to be fees. There’s going to be points all this kind of stuff. If you can find some high net worth individual, most hopefully, hopefully with a retirement account and really cultivate them and develop them into a private money lender.
Now you might not be paying 10, 11, 12% for money. You might be paying six, seven, 8% of money, and then just their costs. You don’t have to pay them points if you cultivate and develop that person, that high net worth individual into a lender. Now doing a flip here, and there is much harder than doing one plus flips per month. And if you’ve ever spoken to large flippers, they’re doing dozens of flips per year and have one to two who’s on salary. And once that place is done, you know, you’re just, once that’s in place, you’re really just focusing on consistently finding deals and you’re moving them from one place, one home to another and you can keep them when you keep them busy and you have managers that are watching them. It makes your job a lot easier where you’re just working on. As I said, finding more deals and really disposition because if you have a network of private lenders that kind of completes the whole circle. So please remember to rate, review, subscribe, please submit comments and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then [inaudible]
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar LLC exclusively.
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