A Recipe for Success
To flip a house is to buy it low and sell it high in a short amount of time. It’s fun, it’s easy, and it can be quite profitable if done right. Without preparation, though, a lot can go wrong on the way to the bank.
Flipping a house like an investor is even more fun and easier because there’s a sure-fire process in place. Success is almost guaranteed because you control all the variables and you’ve set up a repeatable process. You can call it a recipe for success.
Ingredients
- 1 Lg. Plan
- 1 Lg. Team of Professionals
- 7 Properties, Revolving
- 1 Pile of Cash, Investable
Large Plan
Buy low and sell high. The difference between the high and the low is your profit – after ALL expenses – including paying yourself for the time spent managing the process. For mid-priced single-family homes, most investors are looking for a profit of between $20,0000 and $40,0000 per project. The profit is related to your risk. Some projects will lose money, some will fetch more than your target range. The range is important because it’s THE determining factor on whether investing in a particular property is worthwhile.
As an investor, you’ll be well paid but you’re going to EARN every penny of it. You’re risking YOUR capital. You’re also making all the decisions and are responsible for keeping the team of professionals busy. You also have to manage cash flow. Any part of this is no easy task. Juggling it all at once is the sign of a professional.
The goal is to get in and get out as quickly and painlessly as possible. And get onto the next project.
Beginners start with one house, experienced investors have at least seven properties in various stages of readiness. Some houses will be “on the radar.” Others will be in the process of being bought and sold. A couple of houses will be in active renovation.
When you’re buying the house, you’re evaluating the purchase price against what the house will sell for after renovation. Consider all expenses including the cost of labor and material (yours, too!) as well as carrying costs. Remember, you’ll be paying the mortgage and interest (if any), taxes, insurance, and utilities all during the time you own the property. Add in your profit range. If the purchase price plus all expenses and profit is greater than what you can sell the property for, don’t buy it. Move onto the next property. Read The Magic Number in Negotiations
It’s clear that buying property is going to take up a lot of your time – in fact, you make your money when you buy the property. This is the “investing” end of the business. The rest really takes care of itself.
Large Team of Professionals
Two schools of thought: Commit to a core nucleous of professionals or spread the wealth and diversify among a larger pool of professionals. You’ll need:
- Accountant
- Lawyer
- Insurance Agent
- Tradesmen/Contractor
- Real Estate Agent
- Lender
Here, you’re looking for reliability and cost containment above all else. If you commit to a smaller core of professionals, you’ll want to become one of their largest customers so that they drop everything to work on your account. You must insist that your team to be there when you need them. If you’re one of their largest customers, they’ll perform because they don’t want to lose your business. The drawback is that if one of them goes out of business or stops performing, you have to find a replacement. This ALWAYS happens at the worst of times.
If you diversify among a larger pool of professionals, you have a ready backup in case one of them goes bad. The drawback is that the replacement may not be any better than the original. TIP: In all cases, draw up contracts that include penalties for non-performance. Your deadlines are crucial and they MUST be met.
Try to strike a balance between reliability and cost containment. You’d prefer to become a large customer so that you can negotiate a quantity discount for their services. All businessmen place a high value on repeat business and they should be willing to strike a deal to win it. Your demands will be more intense than the average retail customer so show loyalty at all times and flexibily when possible. TIP: Buy as much of the material as possible yourself to avoid contractor mark-up.
Properties, Revolving
Investors are full-time entrepreneurs. House flippers are part-time hobbyists. The number of houses in play at any one time is often the deciding factor. Investors are constantly on the prowl for discount houses. The houses are usually abandoned, boarded up, and in bad shape. These houses are probably foreclosures. On the other hand, house flippers are happy working on one or maybe two houses at a time. Read Do You Know Why Location is So Important?> and How to Analyze the Layout of a House Like a Realtor®
An investor knows that foreclosed properties take a long time to buy – as much as three-five months. It’s unpredictable when the houes will finally belong to them. They’ll have offers on several properties and as soon as one deal closes and the house is theirs, they’re ready with a plan of attack. Their team is in place. The renovation plan was drawn up before they made their offer. They’ve executed the Large Plan countless times before.
The house flipper is carefully shopping for properties. They’re looking for something needing only cosmetic updating or minor structural repairs. They’d prefer not to deal with a “distressed property.” House flippers are at a disadvantage to the investor because their risk is greater. If one project loses money, they don’t have a fall-back project. The single biggest cause of failure is time. The longer a house flipper takes to complete a project, the higher the carrying costs pile up. Read The Secret of Sure-Fire Sweat Equity and Here’s a Quick Way to Know When to Buy and When to Sell
Investors have properties in the pipeline at all times. They’re shopping for the next project, negotiating a current bargain, renovating something for as little as possible, and marketing full-value properties for sale. All of this is done with a plan, a team, and investable cash already in place.
Pile of Cash, Investable
It’s a funny thing about money: It’s almost never a problem in America! This is not to dismiss the housing crisis that the country is just now coming out of, but it IS to say that if you have a plan – a workable business model – there will always be investors willing to risk their capital in your venture.
You’re still going to need some working capital. You’re going to have to put up your own money to fund your business. You’ll have to risk your treasure to pay the team of professionals in order to turn a profit. This money should disposable. That is, if you lost it all, your children should still be fed, your wife should have a roof over her head. Your family will not be destitute.
Beyond that, if your plan is solid, access to credit should come easy to you. Your contractors will extend favorable payment terms to you. Your lender will be willing to take a little risk knowing that overall, you’ve been a profitable partner. Your professional team will extend every courtesy and discount to win your repeat business because they know that you’ll be around for the long-term.
When you’re thinking of how much cash you’ll need, you come full circle to the list of ingredients. You start with the plan. You know how much profit you require. You know that you have to buy property far below full market value in order to provide that profit. You know what the full market value of the property is. You know what it’ll cost to renovate the property and how long it’ll take. You know that you’ll be paying carrying costs like taxes, insurance, utilities, and maybe a mortgage and interest. You know that there’s no guarantee of success but, with a solid plan and a reliable team of professionals behind you, making money in America with a wise investment in real estate can be just as repeatable as a recipe for apple pie.
