How You Can Get Started With Fix & Flips

Fixing and flipping is an advanced strategy. If you are just starting out and trying to decide if flipping is right for you, I would recommend you do a couple of normal, long-term rentals first. Do some minor repairs to those properties.

Then, as you gain experience and confidence and start to meet some sub-trades (i.e. plumbers, electricians, painters etc.), you can focus strictly on flips if you wish. If you are dead set on starting with flips, please, start small so that your potential downside is minimized. There are lots of ways to lose money when you flip.

I would recommend having a mentor that can guide you through your first few jobs; plus don’t do any deeply flawed renos (really nasty mold, asbestos, foundation issues, or grow ops) until you have a few ‘lipstick and rouge’ jobs under your belt.

Finally, I would also recommend not doing a full-blown renovation in an apartment building until you have a) owned an apartment building as a rental; and, b) renovated a few single family homes or smaller buildings first. An apartment building as your first flip is a big mountain to climb.

In terms of financing, you shouldn’t do any 100% leveraged projects until you have 10 or 12 regular jobs under your belt. (I am not talking about joint ventures here; I am talking about where you borrow all of the money in a ‘Buy Real Estate With No Money Down Deal’.)

If you are going to be renovating property that is not in the same city/area where you live, please make sure you have a few normal renos under your belt first. Renovating from a distance can be very difficult. You need to be there a lot to oversee things.

I own several rental properties that are not in the same city where I live. One group of buildings is two-and-a-half hours southeast of me and the second group of buildings is two hours northwest. Both can be driven to, but it is a bit of a pain.

I wanted to update/upgrade these rental units, but not do anything major like knocking down walls, etc., just some simple “lipstick and rouge,” such as new flooring, paint, and some newer (not new) appliances. I thought, This is something my management company does every time a tenant moves out if there is any damage, so they should be able to handle this without me. Well, that is both true and untrue.

Yes, they could do it, but for some reason in both locations, they were not able to do it with any level of quickness. Unless I was there to oversee everything, things just didn’t get done as quickly. This is most often the case. Plus they spent more money than I would have.

If you insist on having a management company do your renos in a distant locale, make sure you add on a lot to both the dollar budget and the time schedule. The same thing happens when you go on vacation while you are doing a reno in your own town. If you are not physically there, your trades will do stuff but not nearly as quickly as when you are looking over their shoulder.

Another question I get asked by aspiring new flippers is: what should I do first, find my trades, find a property or find money partners. My favorite answer is ‘Yes’. Unfortunately, you really do have to work on all of these at the same time. A lot of people when they just start out want to find their trades first so that when they do find a property they can get an accurate quote quickly. Realistically though until you have a real job to quote you won’t get very accurate estimates from tradespeople.

Also until you find a property with real potential you won’t know for sure if your potential money partners are really in or not. That would lead us to believe that the property is the starting point. Well, you can find a property and then be left scrambling to get realistic quotes on renovations and money to buy the property.

So work on everything bit by bit all at the same time so that when you do find a good property a few calls to those trades and money partners that you have already contacted will move things along quicker.

The key point is not to get stuck worrying about finding trades, or setting up corporations or designing business cards and websites or analyzing potential purchases to the point where you never make offers or actually pull the trigger. That is called ‘analysis / paralysis’.

When it comes to getting started with fix and flips, Nike had it right- Just Do It. Get started. Be active. You will make mistakes when you first start out. Just protect your downside as best you can and keep those first deals small. You can always get bigger after.

Read more about this in Comparing Real Estate Strategies.

Tips On How To Maneuver Through a Personal Financial Crisis

In a down economy things can quickly get out of hand financially. A layoff at work, lower rents in your real estate investments lead to lower cash flow mixed with high debt can put you in a very precarious position. You start missing payments. Then your creditors start calling. The stress levels increase exponentially. I know. I have been there.

During the last recession, in 2007 / 2008, I was in the middle of finishing a 36 unit, bungalow villa, land development & new construction project. Between my bank and my sub-trades, I owed $3m when the bank told me they wouldn’t renew the loan because of the sub-prime mortgage crisis. Things went from bad to worse and by mid 2008 I was 10 days away from personal bankruptcy. Thankfully I managed to turn things around.

Here is some advice on how to deal with this situation – both how to avoid it and what to do once it becomes a real problem.

Be Honest and Open: It is human nature to just hide and hope things go away. You can’t do that. Honesty and open communications with your creditors is crucial. Answer their calls. If you miss a call make sure to call them back. Then as things progress, call your creditors with status updates instead of waiting for them to phone you. Without any response from you they will assume the worse and take matters into their own hands. They will either lien you, sue you, or start foreclosure or bankruptcy proceedings (whatever is applicable in your case). You want to avoid that at all costs. Once the first domino falls the rest begin to fall too. The more liens or lawsuits you have against you the harder it is to get out of trouble.

Have a Plan: Once you are communicating with your creditors have a plan. Nobody wants to lien you or sue you. Not because people are so nice but because it is a real pain and it is expensive. It is much easier for them to work with you. Have a plan and communicate that plan.

Be Aggressive With Getting Out of Trouble: With that in mind you have to be aggressive on finding a solution to your situation. Be creative. Think outside the box. Do you have assets to sell? Can you refinance something? Can you bring in new equity partners into your investments to raise cash? If you have a business can you issue bonds? Can you consolidate your higher interest debt into a single lower interest payment (known as debt consolidation)? Can you negotiate smaller payments or smaller interest rates? Can you negotiate a temporary stop to payments? In short, can you increase cash and/or lower debt?

Proactively Connect with Creditors: If possible you want to build relationships with your trades, material suppliers or creditors before things get scary. That way, when things get rough, you are not just a number but somebody they already know. For example, when I was building my villas I made a habit of going down to the Accounts Receivable departments of my larger suppliers every month to physically hand over my monthly payment. I got to know the A/R people personally; I saw pictures of their grand kids and knew where they went on holidays. When things started to go downhill for me I was able to talk to them as people. It saved my butt. I am proud to say that out of 25 creditors only 7 ended up liening me. The rest trusted that I would get them their money and I did.

Don’t Make Promises: Do not make promises that you can’t keep. Don’t tell somebody you will get them $2,000 next Tuesday if you aren’t sure that you can get them $2,000 next Tuesday. This destroys your credibility. When you are communicating your plan, stay at a high level until you know for sure when money will be coming in.

Pay Everybody: When you do get some money it is better to get all of your creditors something as opposed to paying off one creditor 100% and not paying anything to anybody else. That is general advice. Each situation is different. It depends on the security level that each creditor has. Secured creditors rank above non-secured creditors and must be paid in that order. Groups that are on title on your property, for example, like banks will get paid out first. However, when you have a group of creditors all on equal footing try to pay them all something if you can. If a creditor receives 25% of what you owe them one day, then two weeks later they receive another 15% they can see that you are trying and that you are true to your word.

Renegotiate If You Can: When you first start having problems and have no money you aren’t in a very strong negotiating position. You are relying on good will from your creditors. If you go up to your creditor and ask to pay 85 cents on the dollar most likely your creditor /supplier will simply say no. As time goes by, however, the supplier will begin to doubt whether they will get paid or not and will psychologically write off your debt in their heads. Once your plan starts to come together and it looks like you will get some money soon you can now go back to your creditors and maybe negotiate a smaller payout. Again, well secured creditors like your bank will not have to move on price; but lesser secured creditors or unsecured creditors will probably accept a discount. This is because if you do end up going into receivership the receivers will take most of the money and they will get nothing. Use this leverage to your advantage.

You Will Get Through This: I know it doesn’t look or feel like it when you are in the middle of the hurricane but this too shall pass. September 2007 to June 2008 was by far the darkest period of my life but I got through it and eventually my life got back to normal. Just stick with it. Persevere and don’t give up. Continually be looking for a way out.

I hope this advice helps you. The key is to have good communications with your lenders / trades / creditors and get them to work with you. Be proactive and don’t stop until things work out the best they can.

Read more about this topic in Cash Management in Real Estate Investing.

Uncovering Hidden Gems While Investing in Real Estate

Sometimes you get lucky and uncover a gem inside a property that you just bought that will save you a bunch of money. For example, houses that were built in the 1950’s and 60’s were quite often built with hardwood floors. Then it became fashionable to put carpet down.

Beautiful hardwood floors were simply covered up with carpeting. On several occasions, I have gone into a home of that era and pulled up the carpet to find a perfectly good hardwood floor underneath. A little finishing and polish and you have a gleaming hardwood floor at next to no cost. This can save you thousands.

Another time I renovated a 21-room turn of the 20th century apartment building. Inside were seven cast iron, claw foot tubs. They were badly beat up, but after getting them sand blasted, refinished and painted I was able to sell them for a considerable profit. If I had been doing any high-end renos at that time, I could have used one in my own reno. Keep in mind that you can sell or use things that you find.

In the basement of that same apartment building I found the chassis of an old motorcycle. Really just the frame, seat and gear box it was missing the engine, the tires and everything else of importance. However, it was old and looked really cool. My foreman on the job was a big motorcycle guy and we traded the bike against his services. That saved me some money.

I once bought a home to flip that had been previously owned by a house painter. After I took possession, I went downstairs to find dozens of cans of house paint. I guess there were too many for him to move. At first I was mad, thinking that I was going to have to spend a lot of money to dispose of them properly. Instead, I ended up using them. Some of the colors were too wacky for me to use, but I was able to others on future renos and even in that same house.

Another time I got an entire parcel of land for free. I had purchased a fourplex in a small town and didn’t even realize I had also bought the 50 foot x 100 foot lot next door. Six months later I received a tax notice in the mail for both properties.

I called my lawyer who had handled the fourplex purchase and he said, “Yes, you own the lot next door, too. I thought you knew.” I didn’t. The vendor had never mentioned it nor was the purchase price higher than comparable fourplexes for sale at that time. The previous owner had just thrown it in for free because that is how bad he wanted to get out of that situation. That lot was probably worth $15,000.

Recently, I bought an older, single story motel out of foreclosure and converted it into a regular long stay apartment building. Along with the motel came a house that had been used for the past 50 years as the managers home. I had the option of selling that separate property or renting it out. I decided to sell it and used the proceeds to pay down some of the mortgage AND reimburse myself for some of the renovations that I had done.

Keep your eyes and mind open for things in your new purchase that you can reuse, sell or barter to your benefit. These items do exist.

Read more about this in Comparing Real Estate Strategies.

Protecting Yourself In A Down Market

One of the negative aspects of living in a capitalist society is the occasional downturn in the economy. It happens to all regions every once in a while. Currently the region where I live is going through a recession. Known for its oil and gas, the area has been hit hard by the low price of oil. At the age of 49 this is my fourth major recession (I graduated from college in 1987 just at the tail end of that major setback; there was the late 90’s with the dot com crash and the savings and loan fiasco; then 2008 brought the sub-prime mortgage crisis).

While I can’t guarantee anything, I can tell you ‘this too shall pass’ and eventually things will get better. What advice can I give you to help you weather the storm?

  • Cash Flow is King: There is nothing worse than being rich on paper but being unable to meet your cost obligations (been there, done that). Do what you can to increase revenue and cut costs during this period. While you may have to reduce rent to be competitive, can you gain some income with extra parking or storage or advertising? Can you cut costs by reviewing your insurance or utility costs? Is now the time to upgrade windows or toilets to reduce utility costs? Remember that every little bit helps. Even an extra $50 per month is $600 a year. Over a five property portfolio that would add up to $3000 a year. Make sure you have some cash reserves.
  • Retain Existing Tenants: It is a well known business maxim that it is easier to retain an existing client than it is to attract a new one. This is especially important in a down market. Be prompt when responding to tenant maintenance calls, keep your properties clean and keep the grass cut or snow shoveled regularly. Give your existing tenants gift certificates on a regular basis. Work with your tenants and be flexible if they need to make uncommon payment requests (i.e. “Can I start paying rent twice a month instead of on the first?”) If you do set up an alternative schedule make sure they pay when they say they will pay.
  • Avoid Furnished Places in the Short Term: I have a couple of furnished suites that have done very well for me over the past few years. However, recently I have had some problems keeping them full. In good times we had a) people moving to our city from other locations needing a place to stay until they got settled, or b) consultants coming in for a few months on contract, or c) people who bought new homes needing a place to stay for a couple of months while their house was finished. In a downturn all of those streams of income dry up. Normal rentals tend to do better in down markets in my experience.
  • Ensure You Have Sufficient Cash Flow Before you Buy: Stress test any potential purchases by playing with the numbers before you buy the property in the first place. What happens if interest rates go up 1%? Will you still have positive cash flow with $200 less per month per suite in rent? Avoid problems before they come up. I try to buy buildings that offer really good cash flow in the good times so that I know I can afford to move a bit on rent in the bad times. For example, I have a fourplex that had a positive cash flow of $1200 per month during the good times. It had 2 x 1 bedrooms renting for $600 per month and 2 x 3 bedrooms renting for $1100 per month. The average rent was $850 per month while the average profit per suite was $300 per month. So that means I can afford to drop the rent on all suites $300 per month OR I can have 1 of the 3 bedrooms vacant OR both 1 bedrooms vacant for a significant period of time and still break even. I personally look for a minimum $350 per month cash flow in good times for single family homes and $200 to $250 per month per suite for buildings with multiple units before I buy a property.
  • Diversify Geographically: While some advocate being a geographic specialist, that can come back to bite you if you put all your eggs into the same basket (i.e. city). I currently own property in six cities and towns within a 2 ½ hour drive of my home. Once city in particular is going through an awful time right now and vacancy is high. If all of my buildings were in that one city I would be in a world of hurt. Thankfully (and somewhat surprisingly) I am full in a couple of the other smaller centers. Being geographically diversified is helping to spread the pain around.
  • Diversify With Building Type: I also have a range of building types in my portfolio from single family homes to fourplexes to apartments from 9 to 15 units. If you can afford it buy a duplex vs. a single family home or buy a fourplex as opposed to a duplex etc then do it. Having more units will lower the hit if one or two units become vacant. With a duplex even if one suite is vacant at least you still have one unit bringing in some money.
  • Keep Debt Low: Just because you can buy or refinance your properties at 80% loan-to-value doesn’t mean you necessarily should. Having more equity in a property results in lower mortgage payments which means a lot in a down market. Try to put 30% down on new purchases if you can. Nothing leads to bankruptcy quicker than high debt and low cash flow. Also keep track of your loan-to-value percentage across your entire portfolio and not just individual properties. Keep that as low as possible. Having room to take on more debt allows you to react to emergencies that come up during a down turn or it allows you to take advantage of a real deal and buy more property. Some other tips:
    • Avoid taking on new debt and self-fund renovations if possible.
    • Think about consolidating multiple higher interest loans with a single lower interest loan.
    • Try to eliminate bad debt (cars, boats, quads etc)

Economies will go up and down over time in all regions. The trick is to anticipate that and make sure your portfolio can handle lower rents or a change in expenses or interest rates. Be proactive and make conscious decisions with an eye to the future before you buy. Once you already have a portfolio of properties and the market turns, do what you can to keep revenue up and costs down.  Also do what you can to retain those existing tenants. It is very hard to bring in somebody new with all of the competition.

Read more about this topic in Cash Management in Real Estate Investing.