PJ’s Perspective: So you want to flip houses, huh?

When I started this business I had a strong knowledge base of real estate, how to value it, and how to read market trends.  I also had a strong understanding of construction and project management.  In theory a perfect mix of skills to allow me to jump into the business of flipping and hit a home run out of the gate.  Well, I have done okay, and overall I guess you could say I am successful.  But that success did not come without a ton of mistakes and misconceptions.

Today I thought I would share the top six mistakes I feel people make along the way (as did I.)

 PICK THE RIGHT TOWN AND STAY IN YOUR LANE!

That's right.  This is a Hingham based publication and of course we build in Hingham.  So we are bias of course.  BUT Hingham is a tough town to figure out.  We have been very lucky.  (VERY) The important thing is to pick the right town for the type of business you want to build.  If you want to go with quicker flips that just need quick facelifts a more affordable town for acquisition is probably a better way to go.  If you are looking to gut and fully remodel from the studs out then a higher priced area may work for you as you need to pay more for the homes and do more to get the margins to work.

Don’t Quit Your Day Job!

I can’t take credit for this point but it was a huge influence when I was thinking of starting.  Robert Kiyosaki, author of Rich Dad Poor Dad, said this and it really hits home.  No matter how much you want to ditch the job and flip full time, WAIT.  Get a few under your belt on the side and start slow.  I like this rule for a few reasons.  It is way easier to make big costly mistakes if you still have an income.  It also takes the pressure off when you get a big hit financially or if a listing doesn’t sell quickly.  Lastly, it allows you to learn while getting paid.  Make sure you have a bunch of cash in the bank and are ready to carry your family's lifestyle.  Be prepared to not pay yourself for six months at a time.

Be realistic with estimated costs

Listen we all do it.  No matter how much we say it's a business we get caught up emotionally.  Real estate investing is an emotional process.  We try to limit how emotionally invested we get, but we always have a tendency to slightly underestimate things in order to make our brain think it is a good investment.  Build spreadsheets.  Get quotes.  Beat it up and always estimate the project on the highest possible costs.  This will help you create a realistic budget and hopefully give you a pad of costs for when the unexpected hits.

Don’t underestimate your carry costs

When you watch a house flipping shows (NOT OURS!) you see the overall costs of construction but the one thing always overlooked is carrying cost.  What do I mean?  Every estimate I add the following for a minimum of a 6 month carry no matter how quick I think I can get it done.  Construction insurance, mortgage interest, utilities, closing costs, realtor fees, and any additional legal, permit and engineering fees.  All of these add up!  Obviously the big nut here is the realtor fee which is negotiable and very different depending on the market price but to give you an example, a house I list for 500K will have approximately $40K in additional costs on top of the construction!  That's a lot of money to forget when you estimate a project…

Waiting until you close is a time suck

The most important contingency clause in my offer is a full access clause.  Every house I buy has to have it.  This allows me full access to the house once the P&S is signed.  The 30-45 days before the closing is super valuable time that I can use to estimate the job, get ahead of special orders and begin the project before I even own it.  It's free time that allows us to hit the ground running literally the day we close.   I will have the building permit ready to submit, dumpster in the driveway and my demo crew there day one thanks to the countless hours of work done before I have ever made a payment on my loan.

Last but most importantly - SAVE FOR TAXES!

Yup - that’s right.  It’s a simple but brutally hard thing for many people to do.  Once you are doing this full time there is no such thing as capital gains tax.  That's right that 150K you just made?  It's ordinary income.  You could pay up to 40% of that to the government!  I could talk about this all day but that’s for a different post.  For now make sure you are saving the second you get a payout and most importantly hire a great CPA immediately.

Now get on it and go and find a property!  It's that easy!  (well sort of)