Читать книгу Flipping Houses For Dummies - Roberts Ralph R. - Страница 5

IN THIS CHAPTER

❯❯ Squeezing a house flip into your already hectic schedule

❯❯ Taking inventory of your financial readiness

❯❯ Checking your gut for the daring and determination to succeed

❯❯ Putting together the tools you need

Anyone can do it.

If I had a nickel for every time I heard someone say that about flipping houses, I could retire on my own private island in the Pacific. When a real estate investment guru says, “Anyone can do it,” what she really means is, “Anyone like me can do it.”

I prefer presenting house flipping in a more realistic light by saying, “Anyone who has sufficient desire, energy, and sticktoitism can do it.” By following the advice in this book, you can acquire the necessary knowledge, gather investment capital, and find plenty of properties to flip, but if you don’t have sufficient gusto and grit, your flips will most assuredly flop.

This chapter leads you on a journey of self-examination to determine whether you have the right stuff to flip real estate – time, energy, a strong financial position (with your own or other people’s money – OPM), organizational expertise, people skills, tenacity, decisiveness, imagination, endurance, a healthy sense of humor, and a good support system.

Tabulating Your Time Budget

Most casual house flippers are weekend warriors. They hold down a day job of 40 or so hours a week and then work nights, weekends, holidays, and vacations on flipping houses. They typically invest anywhere from 20 to 40 hours a week, depending on how dilapidated the houses are, how ambitious they are to turn a profit, and how much of the work they want or need to do themselves.

Full-time flippers, who have enough cash on hand to finance their flips and cover their living expenses, typically invest 40 to 80 hours a week.

Although you may be able to delegate most of the work that goes into flipping a house, several tasks demand your uninterrupted time and focus:

❯❯ House hunting

❯❯ Networking to develop relationships that expand opportunities and flip houses in less time and for less money

❯❯ Negotiating and closing the deal

❯❯ Securing financing for purchases and renovations

❯❯ Budgeting and other accounting tasks

❯❯ Planning, executing, and supervising rehab projects

❯❯ Marketing and selling the property

The amount of time required for these tasks varies greatly depending on how you choose to have them done. For example, if you hire an agent to help you find houses to flip, you may spend only a few hours checking out prospects, but if you choose to cruise the neighborhood for distressed properties, you may spend several days or even weeks finding a good prospect.

In the following sections, I explain the advantages and disadvantages of part-time flipping, tell you when you can safely start flipping full time, and list the tasks that you should (and shouldn’t) delegate to save time.

For the time-strapped: Part-time flipping

When you’re just starting out, consider keeping your day job and moonlighting as a house flipper until you establish yourself. Your day job provides steady income and security, which enables you to qualify for traditional financing at lower interest rates. Your paycheck helps you cover the mortgage payments, finance renovations, pay quarterly income-tax payments, and stay afloat when the housing market cools. Your full-time job also (hopefully) provides you with health and dental insurance, retirement planning, and other benefits you don’t get from flipping houses.

However, part-time flipping has a few drawbacks:

❯❯ Flipping part time dilutes your focus. You may be in the middle of a complex renovation project late Sunday night and then have to show up for work bright and early Monday morning.

❯❯ Working overtime on flipping projects can sap the time and energy you have for your family and your day job. Keep in mind that part-time flipping is like having a second job.

❯❯ When you work a full-time job, you’re less available for fielding calls and dealing with problems that arise.

To compensate for some of the drawbacks, consider the following solutions for integrating part-time flipping into your life:

❯❯ Work the second or third shift and focus on flipping during the day.

❯❯ Schedule vacations around your rehab schedule.

❯❯ Ask your spouse for help with paperwork and fielding phone calls while you’re at work – a perfect job for the work-at-home parent.

❯❯ Become a weekend warrior, performing cleanup, yard work, and other chores on your days off. If you’re married with children, make the project a family affair.

❯❯ Partner with a trustworthy friend or relative who has more free time or a more flexible schedule.

All the time in the world: Full-time flipping

Full-time flipping requires a big time commitment and a cash reserve to back it up. You need enough cash on hand not only to fuel your flip but also to cover several months of living expenses. Most flippers choose to become full-time flippers only after they successfully flip several properties, have a proven system in place, and have the financial resources to live without another source of income for at least one full year.

Consider flipping full time only if you have the following:

❯❯ Five years’ experience successfully flipping houses on a part-time basis

❯❯ At least one year’s income in reserves

❯❯ Health, dental, disability, and life insurance and sufficient funds to cover the premiums

❯❯ A blanket insurance policy that covers liability

❯❯ A line of credit that enables you to do two projects at the same time

❯❯ A solid business plan; check out Business Plans For Dummies by Paul Tiffany and Steven D. Peterson (Wiley)

❯❯ A team of experienced advisors with varied backgrounds – financial, legal, construction, and so on (see Chapter 4)

Without these essentials, along with a strong work ethic, determination, sufficient cash reserves, a well-defined goal, and a solid plan to achieve that goal, failure is almost guaranteed.

Delegating time-consuming tasks

You can get more done in less time by delegating tasks. But be careful when choosing tasks to delegate. You can safely farm out any of the following jobs:

Think of tasks in terms of time and money. If you earn $25 an hour, hire someone to do the $10-an-hour jobs, and do the $50-an-hour jobs yourself.

Some tasks are far too important to delegate, unless you trust the person nearly as much as yourself. Avoid outsourcing any of the following jobs:

❯❯ Securing financing for purchases and renovations.

❯❯ Anything that requires the handling of money, including making payments. You can hire an accountant to manage the record-keeping.

❯❯ Meeting city inspectors.

❯❯ Accompanying home inspectors.

❯❯ Managing your files and data systems.

❯❯ Visiting properties prior to purchase. (Never buy a property you haven’t inspected yourself, or as I like to say, “Your eyes or no buys.”)

❯❯ Negotiating and closing the deal. (Your agent can advise you and present your offers for you, but call the shots yourself.)

❯❯ Planning and supervising rehab projects. (You can hire out the work, but visit the worksite regularly to ensure quality and control costs.)

Shaking Your Piggy Bank

You don’t need a lot of your own money to finance your first flip. You can beg, borrow, or partner up with an investor (see Chapter 5 for details on these options). Before setting out to flip your first property, however, tally the costs and your financial health, have a solid plan for obtaining financing, and know your debt tolerance, as I explain in the following sections.

Figuring out how much money you need

When you flip a house, plan on netting at least a 20 percent profit.

How much money you need to finance a flip depends on the grand total of all the costs for purchasing the property, fixing it up, holding it (taxes, utilities, and so forth), and selling it. You never know the actual costs until you resell the property, but you can do some ballpark estimates to determine how much money you need. See Chapter 11 for details on how to estimate the costs of repairs and renovations. In Chapter 12, I lead you through the process of estimating your total costs and the maximum amount you can afford to pay for a property in order to earn a 20 percent profit.

THE NOMADIC FLIPPER

I currently live in house number 23, where my family has lived since 1990. I moved 19 times before getting married. Before moving into a house, I’d fix up the bathroom, kitchen, and one bedroom. Then I’d live there for a few months to a year, fixing up the rest of the house. When the house was in pretty good shape, I’d either convert it into a rental or sell it for quick cash. I drew up a mini business plan for each property. Each plan was contingent on the current economic climate, my cash-flow needs, and the estimated long-term appreciation of the property.

Not all my deals were blockbusters, but from 1976 to 1990, I amassed property and cash worth millions of dollars. You can do the same, but don’t expect it to happen overnight. Draw up a successful long-term plan, start slow, and stick to it.

Finding cash to fuel your flip

Coming up with a cool hundred grand, two hundred grand, or three hundred grand to flip a house may seem a little out of reach at first, but several financing options are available, including the following:

❯❯ Flip the house you live in.

❯❯ Borrow against the equity in your current home.

❯❯ Borrow from relatives or friends.

❯❯ Partner with someone who has money to invest but lacks the time, expertise, or motivation to flip properties.

❯❯ Borrow hard money – a loan from a private investor that typically costs money upfront, requires lump-sum payments on specific dates, and carries a higher-than-standard interest rate.

Chapter 5 explores these and other financing options in greater depth.

Taking stock of your financial health

To borrow money at a reasonable interest rate, you have a better chance if you can prove that you have money (or at least some valuable stuff), are currently making money, have a great plan, and generally pay your bills on time. Having a strong financial position is a big plus because it gives you access to cheaper loans, but it isn’t essential.

To take stock of your financial position, formulate a financial statement that includes the following figures:

❯❯ Everything you own – cash, investments, house, car, boats, coins, jewelry, retirement accounts, and so on

❯❯ Everything you owe – mortgage, second mortgage, auto loan, student loans, credit-card balances, back taxes, and so on

❯❯ Your net worth (the value of what you own minus what you owe)

❯❯ Gross monthly income

❯❯ Total monthly bills

Treat your financial statement like a report card and update it every six months to grade your progress. An A+ financial statement gives you the power to borrow money at lower interest rates. See Chapter 5 for more information about figuring out your financial health and using that information to secure funds for flipping. This is true for credit reports, too. The higher your score, the more access you have to other funds.

CYA: Cover Your Assets. Don’t overreach and put your current financial health at risk. To protect your assets, don’t finance a house flip with your retirement money … at least until you’ve flipped several properties successfully and are confident that you know what you’re doing. If you’re married, put real estate investments in your name or your spouse’s name, not both, so only one of you is legally liable in the event of a lawsuit involving the property. Establish a home-equity line of credit for financial emergencies and use it only for emergencies.

Honestly evaluating your debt tolerance

Flipping properties requires a moderate tolerance for debt, especially early in your career. You have to owe money for extended periods of time before you reap a profit from that debt. Some people just can’t handle debt. What about you? You may be debt intolerant if you

❯❯ Pay cash for a vehicle even when you’re offered 0 percent financing.

❯❯ Pick up the tab every time you eat out so you won’t owe somebody lunch.

❯❯ Prepay your utility bills several months in advance.

❯❯ Own only one credit card and use it only for emergencies.

Debt can be good or bad. Debt used to finance investments that have a higher rate of return than the interest you pay on the debt is good debt. Bad debt is any debt racked up on spending sprees for stuff that’s worth less now than when you bought it. When flipping houses, loans and their costs can be fairly steep, but if you account for those costs in your budget and still turn a profit of 20 percent or more, the loan and related costs are worth it. (See Chapter 5 for the lowdown on good versus bad debt.)

Taking Your Personality Pulse

Not everyone has what it takes to flip houses. Some people are too nice, too nervous, too timid, or too lazy to pull off a successful flip. Others may get so emotionally attached to a house that they pay too much for it. And some people can’t handle the math and extra paperwork. Those who excel have the following qualities:

❯❯ Energetic: Flipping houses is stimulating, but the work involved can sap your energy faster than an overdue tax notice. Couch potatoes don’t survive.

❯❯ Function well under pressure: Few crises are more stressful than real estate deals gone bad. Imagine that your financing falls through, or you discover that the house you just bought is infested with termites, or you put the house up for sale and it lingers on the market for more than a year. When your life savings are on the line and you find yourself in a situation that’s completely outside your control, how well do you think you’ll function?

❯❯ Organized: Flipping requires strong organizational skills, attention to detail, and the ability to schedule work for maximum efficiency. If you have these skills, you have an edge over less-organized flippers, but if these skills are lacking or completely absent, don’t give up. Get organized, perhaps with the help of a computer; hire a top-notch assistant; or team up with someone who has the skills you lack.

❯❯ Good with people: The most successful property flippers are approachable motivators with good people skills … or they partner up with someone who fits the bill. Being good with people means you can

• Knock on a stranger’s door without fear of being shot.

• Calmly motivate others involved in the deal to move quickly.

• Empathize with the needs of others and meet those needs in a way that’s encouraging and motivational.

• Be flexible enough to deal with ever-changing situations and quickly develop workable alternatives.

• Build solid relationships with agents, contractors, financial institutions, and others on whom you rely for help.

• Let everyone know how valuable they are.

❯❯ Assertive without being bossy: You need to know what you want, ask for it, and don’t settle for anything that’s outside your comfort zone.

While negotiating the purchase or sale of a property or trying to convince someone to do something for you, remember that “no” doesn’t necessarily mean “no.” Often it means “know,” as in “I don’t know enough yet to say ‘yes.’” Being assertive often means finding out what’s holding the person back and addressing that issue.

❯❯ Good with numbers (or a calculator): Flipping for profit requires rudimentary math skills – addition and subtraction with a little multiplication and division thrown in for good measure. To keep your bottom line black rather than red, you simply have to make sure that you sell the home for more than you invest in it. Loan calculators and other useful tools are readily available in personal-finance programs, such as Quicken, and on the web. (Visit bankrate.com, for example, and click Calculators.)

❯❯ The ability to handle rejection, failure, and success: Flipping houses has its ups and downs. You need to be able to ride the waves:

• Rejection: Rejection can come in the form of denial for a loan, a buyer or seller backing out of a deal, investors or partners abandoning you, or nobody showing up at your open house.

• Failure: Even the most experienced and successful flippers encounter setbacks. They may underestimate the costs of repairs and renovations, underestimate the time required to sell the house, or even have to sell a property at a loss.

Don’t get discouraged if your first flip flops. Flip at least three properties before you make the decision to skedaddle. Some of the most successful real estate investors have failed their way to fortune.

• Success: Success comes with its own set of problems. You may find a great deal and talk yourself out of it. You may put the house on the market, receive a good offer the first day, turn it down waiting for a better offer, and never get that better offer; I know how hard that is to handle. Or success may lead to overconfidence that results in failure.

HOW BAD CAN A HOUSE FLIP BE?

We (Ralph Roberts and company) discovered a fantastic foreclosure property – a $2 million beauty we could get for a cool $900,000! Although the owners, whom we refer to as Mr. and Mrs. Rose, were going through a divorce, they seemed willing to work with us at first. They even convinced us to let them stay in the house while we were rehabbing it. (Letting people stay in the house is always a bad idea. We agreed to this to get the deal done, but when you’re flipping a house, you want to close on it only when it’s vacant and “broom clean” and, in the case of foreclosures, the redemption period has expired; see Chapter 8 for more about redemption.) Mr. Rose lived in one half of the house, and the Missus resided in the other half.

As soon as the contractors showed up, the War of the Roses commenced. Mrs. Rose declared certain areas of the house to be no-work zones, and these zones changed daily. She tried to seduce the contractors, and when real estate agents arrived to show the house, she called the police. During the rehab, the Roses’ son was caught doing drugs in the house.

Mrs. Rose moved out, only to be replaced by Mr. Rose’s girlfriend. When the contractors returned to work, they found the girlfriend at the top of the stairs, dressed only in her nightie, drunk and in a jealous rage. She proceeded to fall down the stairs, shedding her wig along the way. By the time the Roses cleared out, the place was completely trashed.

We finally managed to take possession of the house, complete the rehab, and place the property back on the market. We were willing to sell for $1.8 million, and when we got our first offer for $2.2 million, we were ecstatic, but we weren’t out of the rose bushes yet.

During negotiations we found out that the instrument the buyer was using to pay for the property qualified as an illegal use of treasury bonds. We informed the FBI, which set up a sting operation to nab the bad guys. The fraudsters showed up three hours early, discovered the sting, and split town.

We eventually sold the house for $2 million and netted a $250,000 profit for about a year’s effort. Not bad for a year’s effort, but it wasn’t the quick and easy money we had expected.

Gathering the Essential Tools of the Trade

Every job requires a collection of specialized tools. For flipping houses, make sure you have the following bare essentials:

❯❯ Flashlight, because you never know who or what is just around the corner or in the crawlspace – it could be someone in a nightie or pajamas, or it could be an animal.

❯❯ Digital camera for taking photos of properties and before-and-after pictures of repairs and renovations.

❯❯ Calculator for crunching numbers.

❯❯ Day planner or tablet for jotting down names, addresses, phone numbers, and appointment times and locations.

❯❯ Smartphone with plenty of useful apps, including GPS, a general-purpose calculator, a loan calculator, and a calendar. Realtor.com has an excellent app for iPhone, iPad, and Android (visit www.realtor.com/mobile). Google Maps is useful for scoping out a property, and Zillow has an app for doing a quick price check on a property (although Zillow property values aren’t the most reliable).

❯❯ Reliable transportation that’ll get you to and from the job site as well as any errands in between.

❯❯ For Sale signs (if you’re planning on selling the home yourself).

❯❯ Business cards to hand out to everyone you meet, so if someone needs to sell a home in a hurry, they call you first.

Of course, if you’re planning to do some or all of the repairs and renovations yourself, you also need a garage full of hand tools, power tools, and lawn and garden equipment.