My First Flip was a Flop
I was recently back from an overseas deployment and I knew I had one shot to get into real estate on my own. I sank my entire life savings into my first flip, maxed every credit card, and borrowed $50,000 from a friend. In total, I was into the project for nearly $200k.
Things were going along great, until they weren't. I under-budgeted and overestimated the resale value (rookie mistakes right?) To make things worse, one week before closing I had only $200 in my bank account, no credit available, and bills to pay. I made everything even more stressful by scheduling another purchase in the same week I was scheduled to sell the flip. I truly left no wiggle room at all and we really had a lot of sleepless nights.
Imagine this, you have no money, up to your ears in debt, and have a sale and purchase in the same week and anything can go wrong. Wow! Looking back on this I realize how crazy I was.
Selling my first flip
Everything that can go wrong did go wrong. I spent at least $10,000 more than I wanted to and one of the contractors cut a lot of corners which hurt my resale value.
The house sold on schedule and I was fortunate that I didn't lose any money. I earned only a couple thousand dollars for several months worth of work, but I was just happy to not lose my shirt! In hindsight I can say that it's great to learn while earning money. At that time it seemed like the end of my dreams.
Purchasing Another Multifamily
I closed on the purchase of a four unit property just two days after closing on the sale of my first flip. I don't even know how the cash cleared the bank before I had it drawn out again but I'm glad it all worked because I truly got it for a steal!
The owner of this property lived in Florida and had her heroin addict son manage the building. In one apartment was a convicted bank robber (who robbed another bank shortly after I purchased it), a woman with her arsonist son, and a young woman who was a drug mule, and possibly doing tricks on the side for cash. Wow Eric, what a steal...
This is really where everything changed for me and I realized that I should focus more on passive income. The truth is, the property was in great condition and needed nearly no work. I purchased it for $75k cash and just a couple months later it appraised for $175k. I was able to refinance it, put a lot of cash in my pocket, and create a nearly $20k/year net revenue stream.
By dealing with someone's problems, I was able to make a lot of equity and long-term revenue stream. I didn't have to worry about having no cash, selling to a fickle buyer, or dealing with strict and difficult time-lines. For me, rentals was my future in investing.
- Be very specific in your contract with your sub contractors. Many less-honest contractors will get their foot in the door with a low price and try to find every possible thing to charge as an "extra." An extremely detailed contract should solve this.
- Get to know the inspectors in the town. Working with them before hand will ensure everyone is on the same page and will avoid surprises later.
- Do not change your own numbers to make the project work on paper! I really wanted this deal so I reduced some expected costs to make the numbers work. No matter what I put down in my estimates, I still had to pay the real amount.
- Education is worth something. If you can learn a lot and still earn a little money, it's a lesson that pays you. It sure beats paying someone else to teach you.
So, in my first few months of investing I nearly lost my shirt but I wasn't deterred! I was able to make my second deal even better and it has been great ever since.
Key Takeaway: Don't expect every deal to be great. You will be successful as a new investor if you can lose on the first deal and still have enough left over for the second one.