In today's video, I'm going to be going over five different reasons why you should not flip houses.
Now there's some very good reasons why you should flip houses. You can make some pretty good cash,
it can be rewarding and it beats a nine to five job. This is actually a duplex in Washington, DC.
My plan is to do a BRRRR strategy where basically I'm going to rent it out long term, refinance it
into a 30 year loan and hold onto it and ride the appreciation. So let's go check it out.
And the numbers on this deal. So I purchased it for 290 from my wholesaler. He actually
had it under contract, I think for 240 or 250. So he made a significant profit.
I got a good deal. I'm going to put about 20 to 30 to maybe $40,000 into it. As you can see,
it needs a lot of landscaping and we'll show the front as well, it needs some curb appeal.
But all in, I think I'm going to be at about 40K and fixed up, I think it can appraise for,
or even sell for around the 425K mark. Duplexes, and two units, and multi-families especially in a
city like Washington, DC can oftentimes sell for significantly more than just a residential house.
So this house is pretty small. It's only about ... Top floor is only 650 square feet.
And luckily we were able to have enough space for laundry. So the person that's
going to rent it out is going to have a washer dryer right here. If you look at Home Depot,
we're going to buy the smallest combination washer dryer that you could possibly
have. I don't know the dimensions, but it's tiny, but it also works. It's efficient.
So here is the kitchen, not a huge kitchen, but it's a two bedroom, one bath top level unit. And
we're just going to put some cabinets here. The appliances are around here somewhere. So
there's really only going to be a few cabinets here, but it's going to be enough space. We're
going to have gas appliances so it should be pretty nice. That leads me to point number one,
why you should not flip houses. So flipping houses is very
risky. People don't like flippers. I mean, if you look in the news, if you just Google flippers,
they don't exactly have the best reputation. And not only that, but homeowners, I've had
properties where you sell them and then six months later, the homeowner comes back and says, "Hey,
this was done incorrectly." And in some cases they even want to sue you. So there's lawsuits,
negativity, people coming at you, there's also permit and zoning issues that you can run into.
I remember I had a house under contract. I was purchasing in Washington, DC. And by the time it
was getting to closing, it had gone from not being a historic property to being a historic property,
which drastically changed what you could do as far as the after renovated value and things like that.
There's also a lot of permit issues. I know some developers and this is getting more to
like development instead of flipping, but it's somewhat similar because you're doing a lot of
construction. Where they think they can build a condo project, they get the initial approvals,
something in the zoning changes or something with the permitting, there's some issue.
And all of a sudden they can't build their $4 million condo project. Now they might be
losing money because they have to just get rid of the house. So there's a lot of things
you need to factor in when you're flipping. So this is one of the bedrooms here. It's not
a huge bedroom, but we have a pretty good size closet. We were trying to fit a fan here, but we
would've had to have like the tiniest little fan. Actually it's kind of funny looking, the fans I
was looking at were these stubby little fans. So we're just going to do a light. We have central AC
in here so a fan is probably not even necessary, but reason number two, why each shouldn't flip
houses. You have to be extremely picky with your deals. Most people when they buy houses,
and you see it in the news. The news articles are the worst because they'll say house flipping made
an average of like 100K per deal, but all they're factoring in is the purchase price
and what they sold it for. They're not factoring in closing costs. They're not
factoring in repairs. And they say, oh, house flippers make like 20, 30% every single deal.
However, in reality, I might look at 100 different deals before purchasing 1. You
have to be extremely selective. A lot of times if you purchase a house for 300K and you put a
little bit of money into it and you sell it for 400K, you might actually be losing money in that
scenario because of all the transaction fees. Now, a couple ways to cut down on those
transaction fees. This is actually saving me about 20 or 30K, sometimes more than that
every single deal, is instead of using hard money, I found some private money lenders,
which is saving me a fortune. Instead of using a real estate agent to list a property, I'm a
licensed agent myself. So I've been trying to hold onto more deals as opposed to selling them,
but I can easily save 10, 20, $30,000 by just being my own agent. And I would recommend if
you're a real estate investor to absolutely get your real estate license. It's the world's easiest
test. It's actually scary how easy it is. And actually if you're interested in getting licensed,
reach out to me in one of the links below. As far as the profit margin that you should
be looking for on your deals, it should be an absolute minimum of 10%. Meaning if you're
going to sell the property for 400,000, you should easily be clearing 40K in net profit, not gross
profit or anything like that. That's going to give you enough margin of safety because there's
so many different things that can come up when it comes to flipping houses. And I was actually just
talking to a very successful, hard money lender. And he gave me some really good advice. He was
basically saying, he's not really buying any properties right now. And he's being extremely
selective. And he's like, "I would rather be buy 5 amazing deals per year, then do 30 mediocre
deals." Because you see a lot of people talking about all the deals they're doing, but a lot
of times they might not even be making a profit. I just did a deal where the house flipper, he had
to bring like $10,000 to the table just to get rid of it. I mean, imagine working for like 6 months,
putting $100,000 into a house, whatever they put into to it,
and then having to pay to just get rid of that. So they weren't very selective obviously with that.
There was actually a house flipping company in the DC area. And I remember I met with them one
time because I had wholesaled them some deals. I had found them some deals. And they were talking
about, we're just buying deals just to keep our guys happy or keep our guys busy. And that is the
worst absolute reason to buy house. That is not a profitable strategy. Never buy houses just to keep
people busy. You have to be extremely selective. So here's the bathroom. It's a little small,
but we didn't have much space to work with. So the vanity's going to be right here. And again,
we got one of the world's smallest vanities. Like this thing is like, the vanity's going to
come out to here, but I think it works for this space. We did some nice subway tile.
And actually this light, I don't even remember buying this light, but it looks really cool. I
mean, it kind of stands out. It's a light fan. So it's a nice little bathroom. And that leads me to
point number three, which is a lot of people get into real estate for like passive income, and they
think it's just easy, and you're just going to be laying on a beach after you do a few deals.
But there is nothing passive about flipping houses. There is an extreme amount of work.
There is an extreme amount of decisions that need to be made. Finding the deals is tough enough. I
do a lot of marketing. I have some wholesalers that bring me deals, but you've got to find the
deal. Then you've got to line up the financing for the deal. Then you've got to choose all the
finishes. You've got to choose a contractor. And these projects can take easily 3 months and more
realistically, somewhere between 6 to 12 months. If it's a big project, there's going to be delays,
you might even have to fire your contractor, but there's different things that can happen.
There's a massive amount of work and you have to be at the property quite a bit. I mean, there's
some people that say project manager and whatnot, but I've heard some horror stories with that. I
know some very successful investors that wanted to do like the whole e-myth and just outsource
everything. And they ended up losing a lot of money. Now, there there's some investors that can
manage that properly, but you really have to be experienced and really know what you're doing.
So the next reason why you shouldn't flip houses is the tax consequences of flipping houses.
You're paying capital gains tax. So every time you flip a house, you're paying a very ... I don't
even know what it is at this point, but it's a very significant amount. If you were to just hold
onto that property, I've had properties where if I had held onto them, they've appreciated,
100, sometimes 200K over the course of like 3 or 4 years. To make that as a house flipper, you've
got to do so much work to do that. Whereas if you're just holding onto it long term, it can just
appreciate, you don't even need to do anything. And not only that, but if you hold onto it,
you can oftentimes 10-31 that deal if you were to use it as a rental property or even your principal
residence. You can 10-31 that into a bigger and more profitable deal and not pay any taxes or
you defer the taxes until you actually sell the property. And there's some investors that like
Ben [Mahler 00:08:02] for example, he just keeps doing that. He started with like a duplex or a
four unit, kept selling those deals, but doing a 10-31 exchange into bigger and bigger commercial
properties. And now he hasn't paid taxes on those for years, in terms of capital gains taxes.
Eventually there are some tax consequences, but you can really scale up a business doing that.
So the next reason why you don't want to flip houses is that this is a capital intensive
business. Like if you buy a rental property or do an FHA loan to house hack, that's 3.5% down.
Buying a property like this, all cash, I used a private money lender,
but on this deal because it was an okay deal. It wasn't like the best deal ever. I had to bring
like 40 or 50K to the table. Not only that, but now I'm paying my contractors 30 or 40K and just
holding onto this property for a while, then I've got to rent it out. I've got to do exterior work.
I'm paying high interest rate loans. I'm using using a private money lender who gave me a pretty
good deal. It's at about 8% and 1 point. However, and most hard money is really more in the 10%
and 1 to 2 points. So it's a pretty good deal. However, every single month that goes by,
it's costing me a good amount. So speed is really key in this and you really have to have access
to funds. Now there's ways to find private money lenders and ways to find hard money lenders. And
actually my favorite way is really just asking different mortgage brokers in your area if
anyone in their company does hard money lending because mortgage lenders understand the business,
and oftentimes it's like their little side hustle. So be sure to try to find
some private money lenders, just ask around. You can ask different investors. Sometimes investors
don't like sharing their private money lenders, but they might refer you to hard money lenders.
I like to use a combination of hard money as well as private money. And then I try to get
equity lines on every property I have. So if you have a lot of equity in the house, you can get
a home equity line of credit. You might even be able to get a personal line of credit, or
I just purchased a property where I was able to cross collateralize,
meaning I took some of the equity in one property and used it as a down payment for the other
property because it was a really good deal. I just had the equity sitting there doing nothing for me.
So the bottom floor unit is currently occupied with tenants and it's in livable condition.
So we're not going to do anything. We're going to keep them there, and then just fix up the top,
do some curb appeal and then refinance it and BRRRR the deal and hold onto it long term.
Now the moral of the story for this, I had again, a hard money lender kind of telling me a story,
this guy, I think, I'm pretty sure he is a multi-millionaire. And when he was getting
started as a hard money lender and investor, he was asking different people for money.
And he came across this one guy who had a ton of funds that he could give him money for to
fix and flip houses. But the guy told him, he was like, "I'll lend you money for these deals,
but you're an idiot for flipping these houses. And you're an idiot because these values are
going to go up significantly over the next 5 to 10 years. So you might make your 20K, 50K, 100K,
but you're going to be missing out on 2 or 3 or 400, 500K on some of these houses."
And the guy said back to him, he's like, "Look, yeah, like I understand it,
but I kind of also need some cash." So it's one thing, sometimes I cash out my property,
sometimes you just need the cash and you have to do it. Or maybe you don't want to deal with
the property wherever the location is. Or maybe that's just your business model. You just flip
and then put the money towards something else. But you should try to flip some, but also definitely
look into holding onto some of these properties. If you're buying off market deals at a discount,
fixing them up, refinancing them over the course of 5 to 10 to 20 years, you're going to look back
on those houses, if you sold them and just be kicking yourself. I'm looking back at deals like
two or three years ago. Some that have gone up in value by over 600K in Washington, DC.
And so I should have held onto those. Now, it's not always easy to hold onto them. Sometimes you
do to sell, but just be sure to keep that in mind. So if you are a real estate agent
or real estate investor who's looking to kind of gain some more consistency and start doing,
maybe flips, buying holds. I currently own five multi-family properties, and I usually have a
flip or two going on here or there. So if that's something you're interested in, definitely reach
out to me in one of the links below to see how we can work together. Thanks for watching this
video and definitely subscribe to the channel for more real estate investing videos. See you.