My First Flip was a Flop

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...

Why rentals?

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.

Lessons Learned:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

Written by Eric Bowlin
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