I used to be an active member of this site as a poker player (this is me), but moved to the east coast to start a family a few years back and unfortunately, location and the new family made it hard to keep up the poker lifestyle.

When I moved across the country, my wife and I decided to give real estate a try, and rehabbed/flipped our first house in 2008. We've been focused on real estate investing ever since, and because I've been part of several real estate threads here on 2+2, I thought I'd do an AMA for anyone who might be interested in this business.

A little bit about me and my real estate experience/background (certainly hope this doesn't come off as sounding like bragging...just trying to give an idea of our successes so you know who's answering your questions):

• In the past 5 years, we've done over 60 rehabs ourselves (properties we've owned), and have helped others do about 100 more.
• We recently started building new construction (single family homes) and are just starting to move into luxury new construction.
• We are getting ready to start investing in large multi-family buildings/complexes (50-150 unit) for both short-term income and long-term cash flow.
• We have earned over $1M in income from flipping houses and have earned over $2M in income from all real estate investing activities...all documented in gory detail on my website (www.123flip.com).
• I've self-published two books on flipping houses -- while it changes hourly, "The Book on Flipping Houses" is currently Top 5 on Amazon in the Real Estate Investing category and "The Book on Estimating Rehab Costs" is currently Top 20 on Amazon in the Real Estate Investing category. (Unexpectedly, writing books has been almost as lucrative as investing in real estate!)
• We've invested in three states and are currently relocating to a fourth state, where we're building our personal residence and will likely start doing the bulk of our future investing.
• As mentioned above, I run a website/blog called 123Flip.com where I've chronicled all of my deals in gory detail for the past 5+ years.

When I started my first project 5 years ago, my goal was to use systems and processes to create a mostly self-sustaining business flipping houses, where I wouldn't have to "get my hands dirty" doing rehab tasks or managing contractors. Many people said that it wasn't realistic, and that my lack of construction background and desire to be hands-off would ultimately not work out. These days, my wife and I work about 10 hours/week in our flipping business, and other than when we're breaking into new markets (which definitely takes a lot of time and hands-on effort), we are pretty much entirely hands-off of the actual day-to-day rehab work.

So, for those who are wondering, it's definitely possible to build a "real" business flipping houses.

Now, that said, based on my experience, I don't believe it's possible to be completely hands-off in this business, nor is it possible to create a passive income stream flipping houses (though it's possible that someone smarter than I am could figure it out). For me, at least, flipping houses will always be -- to some degree -- a job. But, if you don't mind working a few hours/week and are smart enough to roll your income into other investments that are more passive, you should be able to make enough money at this "job" to retire sooner rather than later.

Anyway, that's the quick background on me...if anyone has any questions I might be able to answer, fire away. I've spent the past 5 years trying to help others be successful in this business, and always happy to help any way I can...

Btw, for anyone who might be interested in single family new construction, here is a (free) 150+ page eBook that I just released chronicling my first new construction project early last year.

How did you transition from flipping/rehabbing to pure development? How do you typically finance your projects? How detailed are your financial models? What are the biggest mistakes other than paying too much and underestimating expenses?

Answers to your questions:

- The transition from flipping to building came pretty naturally. We started doing larger and larger renovations, including several flood houses that were gutted down to the studs and some small additions. At that point, I had done pretty much every component of new construction, including some foundation work and framing (for the additions). So, the only new challenge with new construction was around the pre-construction processes -- working with architects, engineers, the city, etc. And, if you read the eBook I put together on my first new construction project, you'll see that all the pre-construction stuff took us about 6 months, while the actual build took less than 3 months. I also had a partner who was well versed in rehabbing/construction, though this was his for new build as well.

- I've used pretty much every major type of financing. I've self-funded some projects, I've used private money, I've used hard money and I've partnered with other investors who have brought funds to the table. If you want to scale, funding is the hardest part of this business, but you'll find that as you gain more experience, more doors open up with regards to finding capital. These days, people contact me out of the blue looking for opportunities to put their capital to work, so it's certainly gotten easier. But, as you do bigger and more expensive projects, you need to keep fund-raising. I'm looking at doing some large multi-family deals in the near future, and for that, I'll likely need to put together a syndication/fund and raise large sums of cash from high-net-worth investors.

- For my financial models, I use custom Excel spreadsheets for everything. Here's a sample spreadsheet of what a basic flip analysis might look like (Flip Analysis Spreadsheet). Or feel free to take a look at the eBook I posted above (completely free) and you'll see the exact analysis I did on that project (a bit more complicated), the exact spreadsheets I used for budgeting and the data I tracked throughout the project to see how we were tracking. Also, if you go to my site and search for posts titled, "Budget Update" (search box in lower right corner of site), you'll see some of the budget spreadsheets I've used on various projects and if you search for "Final Analysis" posts, you'll see the analysis spreadsheet that I tend to use.

- Both with me and with talking to other investors, the biggest mistakes have tended to be around working with contractors. This is probably the most frustrating and difficult aspect of the business, as many contractors aren't going to be as professional as you are (and certainly they won't care about your projects as much as you will). Here's a post I wrote a couple years ago that outlined all the mistakes I made on my first project -- this is pretty indicative of the mistakes a lot of new investors make (in my experience): Top Ten Lessons Learned on House #1

Looking forward to this thread. I've been reading 123flip here and there as I try to transition out of poker. Had a couple questions
1.What is your construction background? Who guided you along on your first flip?
2.Do most of your deals come from foreclosures?
3.How do you price out if a deal is worthwhile?
4.What kind of ROI do you expect on flips and how many are you doing per year?
5.Do you feel new construction is more profitable then flipping?

It seems like flipping is more of a volume game while new construction is where you can make some really big money but also requires a higher risk factor/much more knowledge - do you agree with this sentiment? Thanks for taking the time to do this - I really look forward to reading the replies.

Actually, I have absolutely no construction background whatsoever (though obviously I've learned a lot over the past 5 years). My wife still (half-)jokes that I'm not allowed to change light bulbs, as I'll probably electrocute myself. There are good and bad aspects of this:

The Bad:

Obviously, the worst part about not knowing construction is that learning to manage contractors was tough. They could tell me anything and I wouldn't know if they were BS'ing me or not. Here are a few things I did to make sure I wasn't ripped off on the first couple projects:

- I tried giving myself a crash course in how construction SHOULD be done before I ever started my first project. This involved reading as many DIY renovation books as possible (Home Depot has a couple good ones) and talking to as many contractors as I could find, asking as many questions as I could think to ask.

- I hired a great property inspector to inspect my first couple properties, and I asked him (literally) hundreds of questions as we were going through the inspection. He was a former general contractor, so not only could he tell me what was wrong with the house, he could also tell me how it should be fixed.

- I used the inspection reports to create my scope of work, and I got LOTS of bids from LOTS of contractors before I hired anyone. By getting lots of bids, I could talk to lots of contractors about what needed to be done (and what didn't need to be done), and I started to hear the same things over and over. I'm sure the first contractor that walked the first house thought I was the biggest idiot in the world (and he wasn't far off). But, with each contractor I met, I could have a more intelligent conversation, and could sound less and less like a complete amateur. I'm sure the guy I ended up hiring still knew I was new at this, but at least he didn't think I was ripe for ripping off.


The Good:

There was also a very good side to not having any construction experience. I never felt the need to do any work myself and I never felt the need to micromanage my contractors. This allowed me to focus on what was really making me money -- running the business.

To this day, I firmly believe that my success has come from the fact that I wasn't very experienced with construction. It forced me to hire people I trusted (including a full-time project manager) and it forced me to optimize the business with systems and processes, so that I could make more money to afford the trusted contractors and employees.

On my first project, I pretty much went it alone. It was 2008, right after the real estate meltdown, and I didn't know anyone else who was doing this type of investing. So, other than relying on my wife for moral support and the resources I had around me (the Internet, books, contractor friends, etc), I didn't really have any help on the first few projects.

Our first 30+ deals were REOs (foreclosures). Then 2011 came along, things started to pick up in the market and REO deals were fewer and further between. Like everything in this business, you have to be able to adapt, so we did. We started focusing on short sales and finding our deals via direct mail campaigns. That worked well for a year or two, at which point we started looking at better markets (our home market of Atlanta got REALLY tough in 2012) and started looking at other investing models (that's how we decided to try new construction).

These days, we're buying REOs in some markets, working with wholesalers in some markets and buying raw land here and there.

I don't mean to keep linking to my website, but it's easier to just point to the article I've written on this topic:

The Flip Formula

Other investors use other formulas, and the most common is "the 70% formula" which basically is:

Max Purchase Price = ARV * 70% - Rehab Costs

While this formula tends to work pretty well for houses that range from $100-300K, when you work in markets where prices are higher or lower, this formula tends to break down. Also, this formula assumes that you're not getting high-interest loans on the deal (i.e., hard money).


We target 15% of the sale price as our minimum profit, with a $15,000 minimum (for resales under $100K).

We're averaging 10-15 per year ourselves and another 20-25 per year where we partner with others and/or help out others with their projects. We recently moved to Maryland, where we're just starting to ramp up our business locally, and hopefully we'll do 10-15 here in Maryland this year, along with 10-15 in other markets. And hopefully we'll do 4-5 spec builds as well.

It absolutely can be, if done well (something we're working on . When I say "done well," I actually mean "done efficiently." New construction takes a lot longer than rehabbing, and while the profits tend to be higher, you need to minimize your holding time to ensure your ROI is higher as well.

As an example, the first new construction deal we completed took almost exactly a year, we spent about $200K, and we had a profit of about $60K. That's over 30% annualized returns, which is pretty good.

But, a typical rehab deal could cost $100K and generate a 15% profit in 3 months -- that's a 60% annualized return. Not an apples to apples comparison (obviously), as you'd have to do more flips to get the same absolute profit and with the new construction, the money tends to mostly go in towards the end of the project, not the beginning.

But, you get the idea. Being efficient (reduced build/hold time), doing multiple builds simultaneously (small subdivisions) and doing larger/more expensive houses can certainly ensure that new construction is more profitable than smaller flips.

Keep in mind though, that there is a middle-ground. I know many investors who are doing major remodels and additions on higher end houses, and by doing that, you can maximize the profits while minimizing the hold times (since remodels don't require the same amount of upfront work/effort/time).

Yes, absolutely agreed!

Aces,

I live in Baltimore MD. Would you mind meeting for coffee one day. I want to show you some of the properties I am looking at buying.

I'm getting ready to start a rehab near Morgan State. Perhaps we can meet at the house one day next week or the following...

My email is j @ 123flip.com.

I was aware of 123flip.com and it is one of very few sites on the topic that is honest and balanced.

People should definitely check out your site.

been reading your site for a few years now, and its the most honest resource i've seen on the subject. Thanks for taking the time to make that info accessible to everyone (and for doing an AMA).

Yea love your blog as well congrats on your success.

What are your views on the current real estate market?
Can you still find profitable deals or has it gotten a lot harder to find good value?

What advice would you give a beginner living in NYC who wants to get started in real estate. My neighborhood home prices are 700k+ and very few foreclosures are on the market. Doing an out of state deal a big no no right?

I am in Baltimore MD as well. I am currently in an investment group here that covers foreclosures through out the entire state.

We cover auctions just about everywhere and some of the guys in my group have been doing this for over 40 years.

I personally cover Baltimore County, Baltimore City, Harford County, Cecil County, and Carroll County. But like I said earlier, amongst our partners, we cover the whole state.

What kind of properties are you targeting here in MD? We always have a decent amount of inventory on our hands and predominantly wholesale our stuff to other investors or developers.

If you want to chat or take a look at what we have send me a PM and i'll forward you our website and my phone number.

Thanks and good luck here in Maryland.

Thanks everyone for the kind words...sincerely appreciate it!

As for the current markets, short-term I think we're definitely starting to verge on a bubble again in some markets and I think other markets still have a lot of opportunity. I don't believe we'll see a nationwide melt-down like we did in 2008-2010, but I have a feeling that some specific markets will peak and see a severe correction again.

Longer term, interest rates will be the driving factor for real estate values. I have to imagine we'll see a 2-3% rise in rates in the next 3-5 years, and that will certainly impact values and sales velocity.

That said, almost every real estate market has opportunity -- you just need to find it and exploit it. And then be prepared to change strategies as the market changes.

As for investing in NYC, I agree it's probably not a great market, and I also agree that long-distance investing isn't the place to start (lots of pitfalls, even for an experienced investor). What I might recommend is finding some place in upstate NY that's only a couple hour drive and where there is a decent population and employment center. For example, if Pougheepsie where just listed as one of the Top 15 places people wanted to leave, I might recommend there...

As long as your within driving distance to your properties (and actually have the time each week to visit them), you can probably make it work. But, it will certainly be more of a challenge.

We're not too picky...in the past couple months, we've purchased a rental property in Reisterstown, a flip property (that we just sold) in Randallstown, we're closing on a flip in Baltimore City next week, and we're negotiating land in several areas (Laurel, Olney, Gaithersburg, etc). We're also building our personal residence in Ellicott City.

So, we're happy to buy great rental deals, flips, developed or undeveloped land, tear-downs, etc. Any amount of renovation (or new construction) is okay with us. Predominantly, we're looking in Baltimore County, Anne Arundel County, Howard County and Montgomery County, but we'd venture outside those areas if the deals were good.

Feel free to shoot me an email (j @ 123flip.com)...

You're a boss J Scott, I read just about everything you post at BP. Cool to see you on here, I never knew.

cool thread, thanks for posting. i have a feeling this is going to be a great resource for people.

i have a few questions --

once you figured out a formula for success in flipping, how did you transition into the educational side? it sounds like you didn't expect that part to be all that lucrative, can you walk us through the thought process and progression there? i'm thinking the path was "studying/learning how to profit flipping --> being confident that you know what it takes to be successful --> building the online resource --> being highly profitable on the educational side." i'm just interested in anything you can share about this path.

how do you spend your time? maybe walk us through a typical day or week. also, what are the biggest mistakes you've made?

Funny enough, it wasn't at all a planned progression. And I certainly don't consider myself to be in the *business* of education...I just enjoy helping people and like to pay it forward (I've had some big-name mentors in other industries I've been in and they've changed my life).

I actually started the website/blog several months before I did my first deal. Basically, it was a way for people I knew to track my progress, a way to keep me accountable and a way to document what I was learning as I went along. If you read the first couple months of the blog, you'll see that our original intent was to get into apartments, not single family homes. It wasn't until about three months in that we decided to try flipping houses.

As we were getting started, I found BiggerPockets.com and loved the fact that it was a free resource with lots of knowledgeable people (much the same reason I love(d) this site). So, I started to get involved in that community, both learning and providing information to others starting out. Before I knew it, between my blog and my BiggerPockets posting, I was starting to build a bit of a following. It was never intended...

After a few years, I started getting lots of emails every day, and many were along the lines of, "I love your website and your BiggerPockets articles/posts, but I don't know where to start...any suggestions?!?!?"

That led me to the idea of writing the books, which could provide more of a step-by-step methodology for getting started. Basically, I wrote the flipping book to address all the emails I was getting asking for all my information to be better organized. As I was writing the flipping book, the chapter on estimating rehab costs ended up being more than half the entire book (it was over 150 pages), so I decided to break that out into a separate book and publish them both. Again, not something I planned.

While I do a lot of educational stuff (my website/blog, forums, speaking, etc), the books are the only thing I make money off of. I really don't like the "guru" culture that's so prevalent in real estate, where people who aren't really doing deals are ripping off new investors by charging them thousands (or tens of thousands) of dollars to teach the "secrets" of the industry. While part of me doesn't even like the fact that I'm charging for the books, I spent a couple years writing them and I have incurred real costs to publish and print them, so I can rationalize it...

So, while I'm making some money on the books, it was more of a surprise than anything. Making money wasn't the goal, and I'm not looking to ever transition into real estate education as a business. I'm not a sales guy and even writing this post that talks about the book makes me feel a little sleazy...I make the bulk of my money in real estate (and a couple other businesses), and I don't expect that to change.

As for a typical day, there really is no typical day. I have two little boys and I try to spend as much time with them as possible (they'll be in school full-time pretty soon, and that's when I'll focus more on business stuff).

But, between my wife and myself, we probably spend a few hours/week looking at houses, a few hours/week dealing with the projects we have going on, a few hours/week working on strategy for the business and then I probably spend 10-20 hours/week writing and being a mod for BiggerPockets (purely volunteer work because I'm friends with the owner and that site has helped me a bunch). So, a typical week is probably 30-40 hours of work between my wife and myself on real estate stuff. And then I probably spend about 10 hours/week on other business stuff.

Like I said, once my boys are in school, I have a feeling my wife and I will both start to focus on some other stuff...

Do you put each flip into its own LLC after purchasing, or is this even a necessary step when flipping?

How about land purchases?

My friend and I are potentially purchasing a few vacant lots 50/50 for a long term hold (5-10 years) and I am wondering if they need to be in separate LLC's or there is a different structure recommended.

There are two potential purposes for a business entity:

1. Asset Protection
2. Tax Advantages

In terms of asset protection, using a business entity (LLC, Corp, Trust, etc) may allow you to protect your personal assets from business-related liability and vice-versa.

A lot of people think that you need to minimize the number of properties you keep in any given entity, but actually, it's more important to minimize the amount of equity in any given entity, as that's what you're at risk of losing. For example, given the following two scenarios:

- An entity that holds two properties, each with $100K of equity; or
- An entity that holds ten properties, each with $5K of equity

The first scenario is actually more risky than the second, as you have twice as much equity at risk should you get sued. So, the key is to minimize the amount of equity you keep in any given entity. I will generally spread my flips over a couple LLCs, and will try to place them in a way that balances the amount of equity in each. I know some investors who will have a separate LLC for each property, but I think that's overkill (especially in states like California, where maintaining an LLC is expensive). Just my personal opinion.

I also have separate entities for my buy-and-holds. Those have more exposure, as I'm keeping them longer and the longer I keep them, generally the more equity they have (mortgages are paid down). Land would be in this category as well. If I were to purchase land for a long-term hold, I'd probably separate it from the rest of my short-term holdings.

The second purpose of an entity is potential tax savings. If you flip houses, you *will* pay ordinary income taxes at your marginal rate (same as a regular W2 job), and you'll also likely be on the hook for self employment taxes. By creating the right entity, you may be able to avoid part of the self-employment taxes on part of your income, which -- if you have enough income -- could be a decent amount of savings.

Specifically, with an S-Corp (or an LLC taxed as an S-Corp), you can pay yourself a reasonable salary (which will incur self-employment taxes) and then pay yourself anything above the reasonable salary as a distribution (which doesn't incur the employer's side of the self-employment taxes). That's why a lot of rehabbers will hold property in an S-Corp or an LLC taxed as an S-Corp.

I'm not a tax professional or an attorney, but if you have specific follow-up questions, I may be able to answer them...

Are you able to be your own GC on the jobsites through your business entities and does that require you to have a contractor's license or are you allowed to do the work without the license since you are the owner updating your own property?

Do you have any advice on flipping condo units?

Laws are going to vary by state. In Georgia, I'm not allowed to pull permits unless it's on my own house (that I actually live in) or I'm a licensed contractor. I'm not licensed in Georgia, so if I need to pull permits, I have GC who I'll pay a few bucks to pull the permits for me (and then I'll hire the subs myself). Likewise in Wisconsin where I do a lot of projects.

In Maryland, I can pull permits as long as I own the property (even if I don't live in it), so I don't need to be licensed to pull permits on my properties. But, Maryland is the one state where I am getting licensed, as it's required to build new construction (under some circumstances), and I plan to do a bunch of new construction here. Plus, that will legally allow me to help out other investors on their projects (every contractor in Maryland must be licensed, regardless of trade...and penalties for non-compliance are stiff).

All that said, I never do any work on my properties and I rarely even project manage. I have project managers who deal with contractors, so I haven't hired one in Maryland yet, so I am project managing here until I find someone.

Not much...I've never done it before.

The two biggest pieces of advice I would have are:

1. Make sure the condo association financials are in good shape. Buyers (and lenders) will often examine the financials to ensure that they aren't buying into a property that won't/can't be maintained because the condo association is bankrupt or hurting for money.

2. If FHA is common in your area, ensure that the condo is FHA approved, meaning approved for buyers to get FHA financing. Many condo and townhouse communities aren't FHA approved (it costs a good bit to get approved and some associations don't want to spend the money), in which case FHA won't finance units in those communities and it can be harder to resell.

I'm curious what you think the true minimum costs of entry are? Obviously this is going to depend on the cost of real estate in your geographic area. In the city where I live (which is about 90 miles W of you) we don't have much new construction. As an example - I see remodeled townhouses (budget living, not what most are used to seeing) selling for 130k. Even in the worst shape they are being sold for 80-85k and purchased by the occupant who can make the repairs and still be able to live in the house without worrying about making a profit. I've often thought of attempting to flip one of these, but the price is never low enough to be able to complete the work and show a profit. The next step up in real estate in my area would be single family houses, but the price multiplies several times.

I'm curious if, in your market, you have thought of a dollar value that would be the minimum necessary to give yourself a chance at success? Clearly you are well above it and doing great things :-) but for the newbie, what is the threshold you wouldn't want to be below?

Are you in Maryland (where I currently live) or Georgia (where I used to live)?

In both areas, you can find single family houses in the $50-100K range that can be rehabbed for $20-40K and sold for a reasonable profit (at least $15-30K). You may have to leave your immediate area, especially if you're in a small town, but I don't know too many areas of Maryland or Atlanta where you can't drive 30 minutes to find a decent market.

Let me know where you live and perhaps I can provide some more detail/examples...

Hey man. Potential deal or stay away?

Asking price 175k.

Fully rented triplex that.brings in $2235 gross per month. 100% occupancy.

20 minutes from the city and 20 minutes from my house.

Sales history of property is as follows. 82k in 1996. 165k in 2006. 75k in fall 2013.

Extensive renovations done to boost the purchase price. Brand new water heaters and ac units. Etc. Each unit has private garage and two bedrooms.

The triplex building is 3k sq feet. How much would you pay for.this property and how much net income would you expect to earn on that 2235 gross since no management company is needed due to it being super local, and since its been fully renovated?