Sacramento Real Estate Investing

Active vs. Passive Real Estate Flipping Investing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active Real Estate Flipping Investing

 

Typically, an active Real Estate Investor purchases a property(say, to flip or to buy and hold) and then exerts personal control over it. As the owner they put up all the cash and  handle everything having to do with the flip. This can involve a lot of work, spanning a multiplicity of different disciplines, from knowing how to swing a hammer to the  financial dealings, tenant relations, building codes, etc..

 

If you (or those who you work with) are thinking about getting into Active investing, one fundamental question to ask is this: Is real estate investing your CORE business? Are you already a trained professional in the field? Licensed contractor or realtor for example? Do you have the time and inclination and skill sets to say, confidently pick up a roller and spend the day painting?  

 

If your schedule doesn’t allow this or are not comfortable with confronting all these different areas, then you should think twice about active real estate flipping.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Passive Real Estate Flipping

 

It is for some or all of the reasons above, that many real estate investors opt for more passive flipping.  After careful consideration, they determine that they are just not psychologically, physically or financially suited for active investing.  

 

Passive flipping means you borrow funds to do multiple flips and outsource the property improvements to a team of pros.  Delegate the work to others such as a handymen, a property management company, licensed contractor, etc. Likely this team does a better job than you would at the improvements.  Building the right team allows the investor to leverage their time increasing the number of deals and overall profit.  Funds must also be leveraged. 

 

I was raised a “Saver”.  A penny saved is a penny earned right?  Early in my real estate flipping career I struggled and resisted borrowing funds or delegating construction work.  I believed that by avoiding financing costs and doing work myself I was saving money.  In a small way I was. 

 

The Ahhhhh!!! Moment

 

Sometimes I would run into other flippers around town.  Sacramento is a small city and after a while you come to know who is buying and flipping.  Funny thing was the best of these “competitors” didn’t drive trucks or wear construction clothes.  How is this possible?  My truck is dirty and im wearing a shirt with paint on it?  Ok fine frustrating but with all my hands on work I must be making more profit?

 

Years later I learned that I was thinking wrongly about profit.  By trading my hours for one dollar I was losing 3.  How is that possible?  Below are two examples of how to run a flipping business.  The first is how I ran my company for years.  The Second is how we learned to run it.

 

Example 1

Purchase one flip at a time                                                                     $100,000.00

 

Pay for purchase in full                                                                            $100,000.00

Pay for property improvements                                                             $20,000.00

Fix, paint, scrub, labor, sweat to get work done                                 $0.00

Total funds invested                                                                                 $120,000.00   

 

Sale price                                                                                                    $160,000.00

Money invested                                                                                       -$120,000.00

Net Profit                                                                                                   $40,000.00

30% Return on investment

 

Pretty good right?  Even though I was doing everything myself I could get a handful of flips done a year and I was a flipper.  Bummer was all the extra labor and abuse I was putting my mind and body through to “save money” was costing much more.  Not costing as in removing a dollar from my wallet but instead as in the difference between putting one dollar in at a time versus $3.  How can saving money cost money?  Example 2 shows how with borrowing funds and leveraging I was able to make more while keeping my truck clean avoiding paint brushes.

 

Example 2

Purchase 3 flips at a time                                                                                                                 $300,000.00

 

Finance purchases using a Hard Money loan with 30% down                                    (30%) $100,000.00    

Pay for property improvements                                                                                                      $60,000.00

Pay for construction labor and loan interest/costs “no more dirty clothes”                          $30,000.00

Total funds invested                                                                                                                           $190,000.00

 

Sale price                                                                                                                                              $480,000.00

Borrowed funds                                                                                                                                 -$200,000.00

Money invested                                                                                                                                  -$190,000.00

Net Profit                                                                                                                                              $90,000.00

47% Return on investment

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Wait a minute…… if I am borrowing hard money at 10% interest and paying contractors to do the work shouldn’t profits be less?  Nope.  When I was doing one flip I was investing $120,000 and making $40,000 a 30% return.  But once I allowed myself to borrower funds my returns increased to 47%.  Sure I expense $30,000 in labor and loan interest but who cares.  My quality of life is better while managing 3 flips from afar versus being in the trenches on one.

 

So there you have it.  Believe it or not even after realizing this I still spent a couple years getting dirty and avoiding borrowing hard money.  Why? Because unfortunately I prided myself as a “Saver”.          

 

 

What We Do: Quickly provide short-term, private capital funding throughout California, to real estate investors for flips, fix/flips, transactional funding, and more. Contact info: Adam Rehfeldt, 916-628-7692, adam@wtrfund.com