Quote:
Originally Posted by SNGplayer24
1.What is your construction background? Who guided you along on your first flip?
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.
Quote:
2.Do most of your deals come from foreclosures?
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.
Quote:
3.How do you price out if a deal is worthwhile?
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).
Quote:
4.What kind of ROI do you expect on flips and how many are you doing per year?
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.
Quote:
5.Do you feel new construction is more profitable then flipping?
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).
Quote:
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.
Yes, absolutely agreed!