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 three mistakes I feel people make along the way (as did I.)
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 families 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 its 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 your flip 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 under estimate your carry costs
When you watch a house flipping show 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 $50K in additional costs on top of the construction! Thats a lot of money to forget when you estimate a project! Hopefully you get it done quicker and close fast minimizing these costs, but again, expect the worse and plan for it. If you build a spreadsheet and the numbers don't show the margin you want then you are paying too much. Don't let your emotions get in the way and cloud your judgement. Reduce your offer and trust your numbers.
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. Its 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.