A friend and coworker suggested yesterday to me that we should go into business together buying, fixing up and then flipping houses. I think it would be fun, but I have no idea where on earth I would find the time to do it. Also, I know very little about it. Still, it seems the kind of thing I could learn about while doing. Anyone have any experience with this? Shout out to kleinbl00 and b_b
Greater fool theory. "I don't really understand this, but the people I see making money at it are stupider than me, so where could I go wrong?" The problem is they don't make reality TV shows about house flippers losing their shirts because it isn't in Home Depot's best interests for you to know that story. You're a businessman, TNG, and a successful one. Break it down like a business. - How much can I buy a house for? - How much can I sell a house for? - How much will I need to spend to get it there? - How long will it take? - How much will it cost me to carry the note for that long? - How much work will I personally have to do, and how much is my time worth? Friends of mine have been (what we now call) "rehabbers" and friends of mine have been flippers. The rehabbers exited the market in 2005-2007. They were used to making 50-70k on a house after spending 6 months restoring them to occupancy. Of the three people I know, two were contractors. They bailed because they knew their market, they knew what they could get out of a rehab and they watched as the hobbyists flooded in and took projects with $5k or less in profit potential. If your business model works at $10k a month but you're competing against people happy at $10k a year it's time to move on. Those friends didn't lose their shirts. They're doing quite nicely, one of them as a GC, one of them in another market entirely and another doing commercial renovations. On the other hand, I know three different couples that watched too many episodes of "Flip This House." Two of them moved into their "flip" to save face. One of them got foreclosed. You can make money rehabbing houses. Let me show you one. Let's do the math: This was a thrashed-out estate auction down the street from me (I'm in a good neighborhood surrounded by great neighborhoods). Jesse bought that place for $1.65m cash, and probably paid a 10% auctioneer's fee. Right out the gate he's into it $1.8m. Then he rehabbed it - it probably cost him $300k to do the renovations. He's at $2.1m. Now, Jesse sells crazy condos in Marina Del Rey. This is all gravy to him - no commissions to anyone. But he's still carrying $1.8m for 4 months, and another $300k for two. Jesse is gonna sell this sucka. I'll bet it goes for $2.5m, but I'll bet it takes 8 months to a year - even around here, there aren't that many buyers for $2.5m houses. Maybe Jesse is the kind of guy who can carry $2.1m for 18 months. I'll bet he is or he wouldn't have done it. But you or me? We're fucked, son. And he's doing this for 20% profit. Which, granted, is $400k... but neither you nor I have our faces on bus benches. Sure, divide by 10 for normal mortals. You're sinking $180k (or the money necessary to get the loan - and since this is an auction, it's gonna be brutal) on a $165k fixer-upper, throwing another $30k at it to get it into shape, then waiting 6-8 months for someone to buy it, all so you can make $20k. And that's assuming you know what you're doing. I never wanted to be a contractor when I grew up, so I don't rehab houses. If you've always wanted to paint and run a nailgun all day, it might be just the thing.
No, but I have watched a lot of HGTV. Looks easy. Kidding. I bought a foreclosure back in 2011. It needed a lot of work. I sunk about $30k into it, plus a bunch of sweat equity. I have no idea how much I saved on labor doing it myself, but probably about half, by my best estimate. The result was good, as I made a lot of money when I sold. It wasn't a flip, however, because I had the condo for 3 years. Remember that if you flip a house, you're on the hook for what could be some pretty steep taxes, as you get taxed at the short term capital gains rate (which is taxed like normal income for most investments; I don't know if houses are put into that category, but I do know that they're not exempt completely like they are if you live there for two years), so it could be pretty steep. Also, I think you have to make damn sure you know the market pretty well. Would you buy, for example, $100k of stock in a company planning to learn their fundamentals on the fly? There are a lot of people out there doing this kind of thing, so it would be foolhardy to think that it's as easy as phase one: buy a house; phase two; phase three: profit. I lucked out in my situation, because I was pretty aware of the goings on in the 'hood, I had a good sense that it was going in a positive direction, and I happened to be in the right place at the right time (that and I was fortunate to have learned a lot about fixing and building from my dad over the years). Lastly, home prices are up right now, in some places to pre-recession levels. If I were going to get into the real estate game, I'd wait another couple of years. Home prices can be volatile, so if you have the money when prices are pushed down, I think that's when you're best positioned to grab some loot.
Thanks to you and kleinbl00 for weighing in. I have never watched any of those home improvement shows, that's certainly not my motivation. My motivation would be to see how I can make my money make me more money. The arithmetic could make sense, all the fixed costs are known. It's the unknown and variable costs that worry me. I have no intention of sweating. IF I were to do this I would use contractor for the entire renovation, even painting. Frankly, I just don't have time. Also, like KB suggested, the opportunity cost of my time is greater than what it would cost to pay a painter. Etc. What I am considering is to start really small. Buy a $50,000 house put 10,000 into it and see if we can squeeze out 80 or 90. Even if I ended up breaking even, I would count it a success. The first house would be all about learning. Then, if I like the process and if it did make money, I could repeat it. It's always fun to try new things. But, myself and my wife are stretched pretty thin on time. However, my partner's wife, a former real estate agent, isn't working and could probably handle much of the logistics. Literally, we would just be capital. I am cautiously considering.
"Really small" still means sinking tens of thousands of dollars and carrying a note for half a year. Again: is it not wiser to invest capital like that into something you understand? With large market forces at play, six month swings of ten and fifteen percent are not unusual... And there are large market forces at play. Real estate investment isn't particularly tricky. You sink capital into real property because real property appreciates long term. Real estate speculation is another matter: you're banking on 50k and 10k being worth 90k because you need it to, not because it has any reason to. And at those prices you're competing against sweat equity, which doesn't pay contractors and is willing to undersell you in order to get out from under their ARM. Dunno, dude. Buy rentals or commit to doing this stuff fer real. Half-hearted measures are a great way to lose money.
I wouldn't be surprised, but I would be surprised if it were anything dramatic like '08. Anyway, a market correction isn't always a bad thing, so long as credit isn't severely hampered like it was back then. If credit is flowing, then a lot of first time buyers could get a great opportunity to buy into the market. If not, then we'll just see another repeat of rich getting richer.
True, but at this level and in this market (three major universities in rock throwing distance of one another) we could easily turn a property like this in to a long term rental, if need be.
I worked with a guy who did that for a while. Bought properties, fixed them up, and then rented them out. He's about 40 now and has a day job that he works only because he likes it. The rest of his income comes from that and he could retire if he wanted to. Seems like there's a lot of potential in that kind of business.