Flipping Fundamentals – Forcing Equity for Fast Profits

Flipping properties is a fantastic way to make money quickly. But if you’re not careful, it can also be a way to lose a lot of money.

We have both done property flips and walked away with more cash in our pockets. In our latest episode, we share the inside scoop on what you need to know to be successful with flipping properties.

This includes different ways to make money in a flipping market, what you MUST avoid, and where to find money. Tune in to our studio for this flip-tastic edition of The Real Estate Guys™ radio show with:

  • Your flip-it-good host, Robert Helms
  • His flippin’-out co-host, Russell Gray

Listen


Subscribe

Broadcasting since 1997 with over 300 episodes on iTunes!

real estate podcast on itunesSubscribe on Androidyoutube_subscribe_button__2014__by_just_browsiing-d7qkda4

 

 

Review

When you give us a positive review on iTunes you help us continue to bring you high caliber guests and attract new listeners. It’s easy and takes just a minute! (Don’t know how? Follow these instructions.)  Thanks!


Will flip for a profit

Some people think The Real Estate Guys™ are not fans of flipping. However, we see a lot of value in it! Our take on property flipping is that it’s a great way to make money, but it’s not necessarily real estate investing.

For us, “investing” means putting in capital now (whether that’s cash, time, expertise, etc.) to acquire streams of passive income. We’re talking the kind of cash flow you can live on. Overall, The Real Estate Guys™ teaches you to set up investment strategies that look like this:

Asset > Cash > Asset

We aim to teach you how to build assets that give you cash flow that allows you to invest in more assets.

Flipping is a different animal than long-term investing. Any type of activity where your primary activity is reaping cash, like flipping, looks like this:

Cash > Asset > Cash

With that in mind, there are benefits to making money quickly with flipping properties.

Many ways to make money in real estate flipping

If you’re not currently in the financial position to take advantage of an amazing real estate deal, you could be a “bird-dog,” meaning you scout out opportunities and pass them to investors.

When you have more time than capital, you can use that to your advantage. There are finder’s fees for finding the right deal and knowing the market.

We see bird-dogging as one of the greatest ways to get started in real estate.

The next level is wholesaling.

Real estate wholesaling has a short time frame. That’s when you buy a property, don’t make any repairs, and market to your own group of potential buyers. You then assign the contract to a buyer, not purchasing it yourself.

Then there’s forcing equity, or buying a property and improving it before you flip it. This is a short-term value add, a way to get in and get out quick.

The classic example is a “fixer-upper.” In lots of places right now that works well, as you’ll see on HGTV. However, you’ve got to be careful when you’re going into a market if it’s not vibrant.

We encourage you to add value. Robert Kiyosaki slams people who buy a property and sit on it, hoping the market will rise. “Hope” isn’t a strategy.

Real-life example with Russ’ first house

Years ago, Russ bought an old home. It was the ugliest duckling in a decent enough neighborhood.

He planned on a two-month fix time with a $20,000 budget. Six months and $60,000 later the house was almost done!

During that time, Russ took advantage of interacting with the trades guys. He watched, learned, asked questions. He figured he should understand the basics of how a building is put together.

When you have hands-on chances to learn like that, take them! It will serve you in future projects to understand how to speak with plumbers, electricians, painters, carpet installers, etc. The more experience you can get, the better off you’ll be.

Flippers MUST pay attention to the numbers

If you’re a flipper, you have to make financial decisions based on knowledge.

Remember, as a flipper, you’ll get Uncle Sam’s attention.

Although investors enjoy long-term capital gains, as a flipper, you’ll be paying a large percentage of your capital gains in taxes.

You’ll have to do enough volume for flipping to make sense.

From the fact you’re reading this, you’re likely familiar with popular flipping shows on TV. Like when they add up the numbers at the end?

Sure, they may money. However, on TV they often show the GROSS profit, and there’s a BIG difference between the gross and NET profit. You have to consider the sales commissions, taxes, transfer fees, income tax, and all the other variables.

As we like to say, do the math and the math will tell you what to do.

Something else to consider – don’t mess THIS up!

You only have one reputation.

If you’re tying up a property someone wants to sell, it’s always best to operate in good faith.

When you throw a contract down, you better make sure you have some money to put on the line. If you’re not careful about the terms of a contract, you may end up on the hook if you don’t find anyone.

Say you’re looking to syndicate with a group of investors and you’re pulling together investors. If you’re not ready to act, you need to fully disclose your intentions to the seller. Pretending – and holding up a property without full intentions to buy it – gets you a bad name in real estate. Don’t do it!

We repeat: If you find a great deal and THEN run around looking for people, you can get yourself a bad reputation.

If you go out and tie up properties, and don’t close, that’s that kiss of death in the real estate world.

To be prepared in advance, build a database. Ask your potential investors:

“If I were to find a deal like XYZ, would you take my call if I asked you to invest in it?”

It’s better to know NOW than miss out on that incredible deal later.

Where do you get the money to flip properties?

Lenders are concerned with two things: 1) How are you going to pay them back, and 2) what happens if you don’t? You always run the risk (as do your investors) that you won’t be able to get your profits out of it.

If you have your own cash, that’s the easiest.

Then, there’s the traditional mortgage through a bank.

If that’s not your favorite option, you can put together a simple syndication.

You can put together credit lines. Say you have a 30- or 45-day term credit line at your local home improvement warehouse and can use that time to make fixes to the property.

There are specialty hard-money lenders who understand the risks. You’ll pay more in interest rates, but that’s something you’ll have to factor in to your overall proforma.

You can also use equity from something you already own. An incredible example is Terry Kerr, president of Mid South Homebuyers, in Memphis. He started out fixing up two or three homes, used the equity in one property to finance the purchase of another. Over time, he’s built up a portfolio of hundreds of properties. He does a turn-key investment where he finds a home, fixes it up, gets tenants renting it, then sells it to investors. It’s a brilliant business model!

Terry understands a crucial concept in real estate … we make our money when we BUY, not when we sell. You have to know the take-out market.

Those who don’t buy right on the front end, pay for it on the back-end.

You read to the end! Hungry for more? (All this flipping talk makes us want some burgers… ) If you’re interested in creating a future as a flipper, or as a long-term investor, take a look around. We’ve got all kinds of resources to help you on your equity journey.  


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

Comments are closed.