Visiting properties prior to purchase. (Never buy a property you haven’t inspected yourself, or as I like to say, “Your eyes or no buys.”)
❯❯ Negotiating and closing the deal. (Your agent can advise you and present your offers for you, but call the shots yourself.)
❯❯ Planning and supervising rehab projects. (You can hire out the work, but visit the worksite regularly to ensure quality and control costs.)
You don’t need a lot of your own money to finance your first flip. You can beg, borrow, or partner up with an investor (see Chapter 5 for details on these options). Before setting out to flip your first property, however, tally the costs and your financial health, have a solid plan for obtaining financing, and know your debt tolerance, as I explain in the following sections.
Figuring out how much money you need
When you flip a house, plan on netting at least a 20 percent profit.
How much money you need to finance a flip depends on the grand total of all the costs for purchasing the property, fixing it up, holding it (taxes, utilities, and so forth), and selling it. You never know the actual costs until you resell the property, but you can do some ballpark estimates to determine how much money you need. See Chapter 11 for details on how to estimate the costs of repairs and renovations. In Chapter 12, I lead you through the process of estimating your total costs and the maximum amount you can afford to pay for a property in order to earn a 20 percent profit.
I currently live in house number 23, where my family has lived since 1990. I moved 19 times before getting married. Before moving into a house, I’d fix up the bathroom, kitchen, and one bedroom. Then I’d live there for a few months to a year, fixing up the rest of the house. When the house was in pretty good shape, I’d either convert it into a rental or sell it for quick cash. I drew up a mini business plan for each property. Each plan was contingent on the current economic climate, my cash-flow needs, and the estimated long-term appreciation of the property.
Not all my deals were blockbusters, but from 1976 to 1990, I amassed property and cash worth millions of dollars. You can do the same, but don’t expect it to happen overnight. Draw up a successful long-term plan, start slow, and stick to it.
Finding cash to fuel your flip
Coming up with a cool hundred grand, two hundred grand, or three hundred grand to flip a house may seem a little out of reach at first, but several financing options are available, including the following:
❯❯ Flip the house you live in.
❯❯ Borrow against the equity in your current home.
❯❯ Borrow from relatives or friends.
❯❯ Partner with someone who has money to invest but lacks the time, expertise, or motivation to flip properties.
❯❯ Borrow hard money – a loan from a private investor that typically costs money upfront, requires lump-sum payments on specific dates, and carries a higher-than-standard interest rate.
Chapter 5 explores these and other financing options in greater depth.
Taking stock of your financial health
To borrow money at a reasonable interest rate, you have a better chance if you can prove that you have money (or at least some valuable stuff), are currently making money, have a great plan, and generally pay your bills on time. Having a strong financial position is a big plus because it gives you access to cheaper loans, but it isn’t essential.
To take stock of your financial position, formulate a financial statement that includes the following figures:
❯❯ Everything you own – cash, investments, house, car, boats, coins, jewelry, retirement accounts, and so on
❯❯ Everything you owe – mortgage, second mortgage, auto loan, student loans, credit-card balances, back taxes, and so on
❯❯ Your net worth (the value of what you own minus what you owe)
❯❯ Gross monthly income
❯❯ Total monthly bills
Honestly evaluating your debt tolerance
Flipping properties requires a moderate tolerance for debt, especially early in your career. You have to owe money for extended periods of time before you reap a profit from that debt. Some people just can’t handle debt. What about you? You may be debt intolerant if you
❯❯ Pay cash for a vehicle even when you’re offered 0 percent financing.
❯❯ Pick up the tab every time you eat out so you won’t owe somebody lunch.
❯❯ Prepay your utility bills several months in advance.
❯❯ Own only one credit card and use it only for emergencies.
Not everyone has what it takes to flip houses. Some people are too nice, too nervous, too timid, or too lazy to pull off a successful flip. Others may get so emotionally attached to a house that they pay too much for it. And some people can’t handle the math and extra paperwork. Those who excel have the following qualities:
❯❯ Energetic: Flipping houses is stimulating, but the work involved can sap your energy faster than an overdue tax notice. Couch potatoes don’t
