Keys To Flipping Real Estate

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When you hear of a ‘system’ or ‘program’ to build a real estate empire with no money down…or with minimal time investment, you should be wary, and probably are. As you read, listen, watch, and sift through such advice, key questions often go unanswered and a clear picture can be elusive.

Despite what some of the seminar sales figures may suggest, there is no simple formula in this business. The keys to flipping real estate have more to do with YOU than a ready made package for purchase.

But that is not a bad thing. In business we talk about ‘moats’ and differentiators. The greater your differentiators the better, and the wider your moats (in an established business) the higher the barriers to entry for your competitors.

Said another way, real estate success is as individual as you are. And that is why this business is decidedly NOT one size fits all. Success is going to demand not only hard work on your part, but understanding WHO you are in order to follow the right approach for your circumstances. How do you consider your fit for flipping then?

You can think of the keys to real estate flipping to be a combination of Capital, Ability, and Approach…with the actual real estate in question almost an ‘extra’.

That’s it – your keys to flipping real estate. Not complex until you start to think about your own uniqueness and have to actually bet on yourself with actual money at risk. Let’s break it out in more detail.

Capital

Investment Capital – do you have the money to make your flip happen? Sounds basic, but plenty of people do not consider their total asset picture before diving in.  How long can you carry a property if financing? 

Can you address unexpected impacts to demand?  I don’t think you have to consider once in a century events such as Covid-19, but what about a longer selling period because of unexpected competition?  Can your bank account handle double the time you think you’ll need to sell your property?  

Use Leverage Wisely

Remember all those mortgage defaults leading to the Great Recession of 2008 and beyond? Many of those aggressive loans were based on self-reported income. There is a reason they are sometimes derided as, “Liar Loans”.

Risk tolerant individuals gambled on loans they could only service in the near term.

That could be achieved through different mechanisms, including lower monthly payments with future balloon payments in a fairly short time-frame.  Or “interest only” payments for an initial set period of the loan. Or some loans might forgo a down payment or defer interest to meet borrower limitations.

The bottom line is that the real estate and banking industry successfully got individuals into homes they couldn’t afford while simultaneously satisfying financial markets with ‘investment grade’ collateralized debt obligations (CDO’s) that paid steady returns.

Fingers Crossed?

The hope – and that’s what it was, a hope…was rapid appreciation for property investors without the required resources to pay future debts.  In the process, they’d make a killing by leveraging someone else’s money.  The investor would then sell on the home before their loan payments kicked in with a vengeance.  This ‘system’ was to be their long term keys to flipping real estate.  And it was a sure thing.

But at some point, payments – and large ones at that – must begin. When the economy slowed and home sales with it, those optimistic someday loan payments actually started to come due and inventories climbed while bank accounts sank.

The virtuous cycle of a ready supply of investors, sellers, and buyers stopped. Borrowers couldn’t meet their obligations because they didn’t have the capital reserves.

And with that, an entire industry imploded and real estate cratered. The house of cards formed by sloppy financing and irresponsible borrowers came down, along with many truly innocent homeowners.

Align Debt With Profit Horizons

I admit to being conservative when talking borrowing cash. I would never consider running a business on credit alone.  Nor counting on a future expected payout to cover a near term obligation – whether secured or otherwise.

You might disagree – many successful entrepreneurs would, given their personal risk profiles.  Just remember that the unexpected must be expected…particularly when we are talking investment properties. 

I also do not trust the market’s evaluation of a property (e.g., “the going rate”).  Do your own evaluation of a property to protect from the downside, rather than an agent’s comp analysis.  I go as far as to doing this from a nearly “zero budgeting” perspective. 

That is, forget supposed market realities, we work up from a worst case scenario when determining what to pay.  I detail how to do so in The Pessimist’s Guide.  But the main thing is, be conservative here.

LESSON 1:  The financing aspect of your property equation has to work in good times and bad. The easiest way to make that happen is to buy value instead of equating PREMIUM PRICING with VALUE, as many do.  And always have a significant cushion in capital reserves, as many don’t.

There is usually more work in a flip than a beginner might think and certainly more than you may have reasonably planned for (think leaky roofs, electrical issues, hidden structural problems). Address it up front by utilizing a margin for error in your funding and consider your valuation of a property very carefully before you write any checks.

Skill Set

In addition to conservative funding approaches, how will you make the project a success?  What specific changes will make a property a ‘must have’ after improvements.  We, of course, are talking about the impact of a flipper’s actual skills here, and that is manifested through focal points.

Focal Points

Focal Points are the differentiators to get your property sold on the other side.  They are mighty important.  And your skills are the source of those focal points.  They are the bedrock of property improvement and establishment of uniqueness in the buyer’s eyes. 

You can read about the concept of Focal Points and creating demand under my posts.  But I cover it in one of the books in greater detail with examples to get you thinking about it in real world applications.

Maintaining the Margin

It is not uncommon for me to receive work quotes on a property that are many multiples of what the job should be if it were only materials at cost. I know because I often do the work.

While everyone deserves to be paid for their time, too often, particularly for new investors who don’t have contacts…there appears to be a tendency to gouge the homeowner or investor. 

Couple this ‘draining of the budget’ with a loss of project control (someone else setting the timeline) and you have a recipe for problems.  I’m talking about maintaining the margin here by doing it yourself.

Homeowners Aren’t D-I-Y

And speaking of doing it yourself, homeowners don’t take care of their homes.  Stuff doesn’t get done.  And ultimately, delayed maintenance can become a big issue for an investor who pays too much.  So consider not only the cost of improvements and repairs, but the timing of those efforts by you, before buying.  But even if you make a mistake on this front, skill can save your bacon.

If that weakened floor joist needs to be attended to, or new framing needs to be installed to build out a bedroom and closet, you don’t want to rely on a sub-contractor to take care of it when they “can get to it”.  Can you apply your abilities to solve the problem?  Can you fix it!

Other trades and sub-projects, including electrical, plumbing, wallboard, and finished carpentry, will depend on resolution of those structural items before they can proceed. Delays mean more mortgage payments and/or missing out on the prime selling season.

This also gets to “SPECIFICITY”. That is, detailing what is required and how it must be done. This ‘shakes out’ what you can do and what you need to pay sub-contractors for.

Role play examples in The Pessimist’s Guide detail the approach for this kind of thing.

LESSON 2:  Skill Set is the differentiator for real estate beginners. Why?  Because an appropriate level of expertise for the project avoids reliance on others and allows retention of both MARGIN and CONTROL.  It is very difficult to ‘win big’ when starting out with minimal capital – doing quality skillful work that looks pro is the secret.

Attitude

Mixing a “can do” approach with a bit of heart felt modesty is what we are getting at with attitude.

In addition, if you have the attitude that you will do the work that can be done safely, legally, and expertly by you, you will find that appraising the next property is a far less complex endeavor. You will better understand what needs to be done in that next flip.

What is a “quick hit” and what is not?
What is an opportunity and what is a money-pit?

Other investors may bypass that diamond in the rough because they only delegate their property “to-do’s”. While those investors see big problems, because you’ve done the work in the past, you see big opportunities.

I have seen this first hand in my own work. Properties that sat, until we came along…because of apparently ‘glaring’ issues that were resolved in less than a week of onsite labor. All that was needed was some hard work (attitude) and some minimal expertise (limited skill).

Don’t Get Confused

Some people confuse the concepts of “skill” and “attitude” in this business. And from a distance they do seem to be the same thing. We’ve all met people in our professional lives who are the office “all stars” (maybe you’re one of them). They are highly competent and confident.

But the latter does indeed inform the former. With a good, patient attitude, you will build the skills you need for the variety of issues involved in a flip. And with the right attitude you may find strategizing how to fully leverage a flip to be less of a challenge and more of a rewarding thrill.

LESSON 3:  If your approach stresses self-reliance, the budget will be the obvious beneficiary.  But you will also INCREASE your skillset and future self-reliance.  Benefits that accrue as your cycle through the next property flip.

So there you have it, some of the top level keys to flipping real estate.

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It can be done!