During the downturn many remodelers (and others) took advantage of low interest rates and low home values and turned to house flipping for additional income. According to RealtyTrac, a foreclosure and real estate investing website, in the first half of last year nearly 100,000 properties were “flipped” — bought, renovated, and sold (ideally within 90 days). Contractors are in the perfect position to do this, says remodeling business consultant Dave Lupberger, a consultant to the industry and owner of Remodel Force.
LEARN TO EARN
House flipping can be lucrative, but it’s not for the timid. Jonathan Brooks, owner of Brooks Design Build, near Denver, was looking to offset the drop in revenue during the downturn when he got into flipping. He admits it wasn’t as easy as he thought it would be, since he knew nothing about the real estate market. He didn’t lose money, but he didn’t make nearly as much as he thought he would. As his remodeling business began to pick up, flipping took a back seat and he ended up paying interest on the newly bought properties.
“You can’t control the market, but you can control the risks through education,” Lupberger says. He suggests spending six months getting real-estate education (see this article online for resources). While you don’t have to become a Realtor, getting a Realtor’s license helps and gives you access to the MLS (multiple listing service) as well as knowledge of home prices. You also need to educate yourself about the various neighborhoods in your market.
FIND A KEEPER
Having a Realtor’s license might make it easier to find properties, but there are other ways too. Lupberger suggests using “wholesale strategies — send out a postcard telling people you buy houses ‘as-is’ and close in 30 days or less. Tell them you buy foreclosures.” By the time a Realtor has a property, Lupberger says, “it’s retail.”
But Brooks — who learned from his early efforts, got a Realtor’s license, and is making more money fixing and flipping and, in many cases, renting — suggests you find “investor-friendly” Realtors to learn about deals. And, he adds, anyone can have access to foreclosures, short sales, and estate sales (probate). With the latter, you market directly to personal representatives of people who have died.
Even during a housing boom and a tighter market, you can find deals, Brooks says. “You just have to dig.”
Know Your Neighbors
Ron Drummonds, owner of RDK Construction, in Valrico, Fla., went from flipping houses to funding others to do so. He knows to stay away from frame homes in his area because “they often have termite damage and a lot of hidden repairs,” and that three-bedroom, two-bath homes are more popular than those with just one bath.
Tony Szak, who owns Empire Development & Construction, in Lacrosse, Wis., spends a lot of time on Google Earth and Google Maps before he even looks at a property. “I want a neighborhood that’s not too run down or one that’s on the rise that will see future value,” he says. “I check to see the houses that surround the potential flip.”
While remodelers tend to think they can fix everything, buyer beware since for some properties the cost to fix them up will outweigh the return.
Investing takes money. Yet there are still some ways to purchase property with no money of your own down, e.g., working with a former client and investing with money from his or her retirement fund with proceeds going right back into the fund (called self-directed retirement).
But if you’re not quite ready for that, you can do as Szak did and pool funds with others. He and two friends each invested $3,000 in their first flip. Now the three work together as an LLC with Szak’s company doing the remodeling and the other two acting as investors.
However, you should be aware that “[house flipping] is a whole other business,” Lupberger says. Check with your lawyer and CPA to determine how you should put together a team and what kind of business entity to establish.
PRICE IT RIGHT
When you buy, ask yourself: “‘What’s my fix-up cost, my holding cost, my cost of sale, and what’s my desired profit,’” Lupberger advises. “If you can’t do all that for 10% or less than what’s selling in your market, then you shouldn’t do it.” Brooks aims to clear $20,000 on an under $200,000 after-repair home; $60,000 to $100,000 in the $400,000 and $5,00,000 market. That’s after holding, renovation, and closing costs.
Dream big, but be realistic, Szak says. “If the house next door sold for $125,000, don’t think you can get $160,000 for the same house with some upgrades.” And, if you don’t think you can sell it, you might want to rent it, says Janver Holly, owner of Holly and Associates, in Santa Rosa, Calif., who has been renovating and renting homes for 25 years. “Flipping generates cash, but buying generates wealth,” he says. “You make money when you buy a property, not when you sell it.”
Holly has properties in four states and in the next three years his first properties will be paid off. “My retirement is pretty well set up at this point,” he says.
To determine rents, Holly uses the “1% Rule: Your purchase price, carrying costs, and fix-it money should be approximately 100 times the monthly rent.”
Whether you’re flipping to sell or to rent, you can’t go it alone. Put together a team of trusted advisers. “You want an attorney to set up an LLC and refer properties to you; a really good CPA who can be aggressive and knows how to work with you; a Realtor who understands what you’re doing and possibly has properties him or herself; and the right banker,” Holly says.
Need Help Getting Started?
Renatus, gives courses in real estate investment
Book: The Millionaire Real Estate Investor, by Gary Keller
Websites: RealtyTrac, the largest database of foreclosures and bank-owned properties; <a href=”http://www.housingpredictor.com/”>Housing Predictor</a>, provides real estate news and forecasts —Stacey Freed, senior editor, REMODELING. twitter.com/SFreed