How To Start Flipping Houses with No Money and No Credit!
Alright, listen, I’ve got some incredible financial strategies we're going to share with you. I've got some awesome real estate strategies that we're going to give you in this video. So, what I want you to do is just turn to whomever is next to you and just apologize for all the brain matter that's going to splatter all over the place, because I’m going to blow your mind. It's going to be awesome.
Fixing and Flipping homes has become quite the pop-culture dream in the last couple decades, and I think most of the popularity has come from the rise of the fix and flip TV show. Now, I have a little bit of a problem with the TV shows. In my opinion, they make you think that any guy with a hot wife can flip a house and make 90 grand. And there's just a little bit more to it than that. There's some strategy that goes into it. There’s an art to it. There’s a business to it.
I drive a pretty nice car, and I used to have some advertising on my car that said, We buy houses, fix and flip blah, blah, blah. And so, I’d get hit up all the time in parking lots, and in shopping malls and grocery stores. And because fixing and flipping is such a hot thing right now, people would come talk to me about fix and flips. But it was the weirdest thing… I would think that if you meet an expert at something that you want to do that you'd have a lot of questions, but I rarely got questions, I usually got stories about how they think it's supposed to be done. And I've talked to enough people now that I've kind of created three different categories in my head of different types of fix and flippers that there are, and the methods people create to try to break into the fix and flip game. So I'm going to share those with you. I'm going to show you two ways not to fix and flip a house. And then I'm going to show you the way that we do it…
Now it’s important to me to show you why I think certain methods are flawed rather than just tell you. In order to do that we’re going to do some math. Now don’t get scared. We’re not going to be doing trigonometry or calculus today, just some basic arithmetic on a hypothetical deal that will illustrate why certain methods are better than others, and dispel some of the bad ideas out there. SO, let’s set up this hypothetical deal…
Okay, let’s say we bought a rundown little house for $250,000, we plan to put about 50,000 into fixing this thing up. Now our holding costs we’ll put at 10 grand. What are holding costs? Holding costs are any costs that are associated with just owning a property. We’re not talking about construction here. Just the basic costs associated with owning a house: utilities, insurance and interest on money borrowed. Now, for me, my fix and flip business is just a cog in a wheel that is a much bigger real estate investing strategy, and as part of that, I never use my own money when when I do fix and flips. I always use other people's money. There’s a whole other video worth of content on why I would never fund my own fix and flips, but we’ll save that for another day. I’m also working on the assumption that most people wanting to break into this space don’t just have the cash sitting around to fund an entire project themselves. So for this video, we’re going to talk about how to get it done using other people’s money.
Now, we don't borrow from banks, because banks take too long and require way too much work. They want to know what your credit score is, they need to know who your boss is. They need to know what you ate for breakfast over the last month, and they want to know your great grandmother's birthday and genealogy. There’s a list as long as your arm of things that they need from you, and then it takes 30 to 60 days to fund a property. Just the time it takes to get a loan from a bank would cause us to miss out on too many deals. So, we don't mess with that. We find private parties that have money. Sometimes we get a bunch of them together. And we can go fund a deal in 24 to 48 hours. They usually don't ask about your credit score. They don't ask for W2 income verification. They just want to see the deal. We borrow the money, we pay the interest, so it's a win-win.
Let’s say our projected selling costs are $25,000. That includes some marketing costs and possibly some real estate agent fees. So, All-in on this property, we are at $335,000 and our after repair value, or we use the acronym ARV, is $380,000. That's what we would plan to sell this property for.
Let’s say it takes us about 120 days, or 4 months, from buy to sell, to do this project. The profit is projected at $45,000. With me so far? Now, if $45,000 for four months of work excites you, you’re in the right place. Especially knowing that, if you do it right, this model is scalable. Meaning you can duplicate it and start doing multiple deals at a time. Excited? Yeah, me too! I love it. Okay, well, let's jump in. Let’s talk about the 3 different types of investors that I mentioned earlier…
Type 1 Investor - The Move-in Investor
Okay, so the first type of investor is probably the most common type of investor I’ve come across. In fact, maybe some of you came to this video with this idea about how to do fix and flips. And if you did, don't be offended by what I’m going to say, just learn from it.
Let’s call this first type of real estate investor, the move-in investor. This is the person that looks at this deal and says, “Wow! You’ve got a really good deal here. You’re going to make a lot of profit, but you know what, I could make more… You’re spending a lot of money on that remodel, I would just move into it and work on it in my spare time!”
I don't like that strategy for a couple of reasons. Let’s try an experiment. Go home to your significant other tonight and say: “Babe! I got a new business model. We're going to move into one of these… And we're going to work on it while we live there! We're going to live there for about four months and just because it's starting to get pretty, we're going to sell it and we're going to move into another one of these. What do you think?”
What are they going to say?
“But babe! I know how you love the open floor plan, look at this thing!”
Look, I don't care if you're single, the idea of moving every four months is crazy! It may happen once or twice, but by the time you get to your third, fourth or fifth property, the timeline is going to stretch out. I see it all the time. It’s not sustainable. The four months is going to turn into six months. And then six months is going to turn into nine months. And then 12 months.
We agreed that making 45 grand in four months is pretty cool. Anyone think that 45 grand in 12 months is better? For a construction job? Where you live at the construction site? you can't go home because that is home. That kind of sucks, right? Yeah, I don't really like that idea either.
The biggest reason I don't like the Move-in strategy is because, at the time of this recording, my wife Maeli and I have 10 fix and flips that we’re working on concurrently. If my strategy were to move into each one of them and work on myself, what is my scale limited to? One. One at a time.
Let me share something with you: you will never become a millionaire by doing one single family fix and flip. You will never become a millionaire by doing one fix and flip at a time. You need to understand how to scale your business. And that's why I don't like the move-in strategy.
Type 2 Investor - The Debt Investor
Let's talk about the type two investor. Have you ever heard that real estate investing is risky? I hear it all the time! “Oh, you're a real estate investor? Isn't that, like, super risky?”
It can be! And you know what, this type two investor is who gives us as real estate investors that bad name. I call them the Debt Investor. This is the person that's read like one and a half Robert Kiyosaki books and thinks they're ready to jump right in. They may understand some terms like “other people's money” and “other people's time”, but they haven't gone very far with their knowledge. They might even understand that they only need to raise enough money to buy the house and fix it. They don't need cash on hand for these other fees, they're not due till the back end when they sell it. So they’ll need to raise $300,000 to this property. They open their Google machine and clickity clack, up pops a list of hard money lenders. If you haven’t worked with hard money lenders before, they can be a great resource, but let me tell you what kind of terms they give you…
I’ve found, on average, they charge about 12% interest annually, which is about three times what a normal home loan would cost you right now. They usually have a 2 or 3 percent origination fee that they charge you up front. And they usually only let you have the money for about 6 months.
So what happens if you're not done with it within the timeframe that they give you? They'll just come take the house.
Anybody think that these are super nice guys. They're just like, “just pay me when you get it, we're good!” No, these guys are sharks, they'll foreclose on the property. It’s not out of malice. That’s their business model. If you’re not performing they’re going to take the project and finish it themselves to mitigate risk in their business.
You might be saying right now: “But Mitch! You said we could do it in four months. So, what's the problem if we have six months to get the money back?”
Well, that's the mentality of the Debt Investor. They get into the deal, and maybe on the first one, everything's on time, and everything's on budget and they get their money out and get into the next one. And maybe even in that one, everything's on time and on budget, right? Four months, in and out, then they get into the next one... Do you think that every deal you're ever going to do is going to be on time and on budget? The first step to becoming an educated investor is realizing that you don't have control over everything.
Let's look at 2008. How many people lost money in real estate in 2008? The answer, according to NYU, is over six million people! And that’s just foreclosures. That doesn’t include short sales and just people who sold their property for less than they had into it, which would probably make that number significantly higher. Why do you think that is? I'll tell you why: One exit strategy.
You’re taking on a huge risk when you go into a fix and flip with only one exit strategy, saying we're going to buy this low, and we're going to sell it high, and that's it. What if the economy does something you didn't expect? You're stuck! What if we had purchased this example deal a few weeks before the 2008 crisis hit? We get into it and start working on it and all of the sudden the value takes a $100,000 haircut. What happens if you're the debt investor, and you're in the middle of a fix and flip deal when that happens again? Because, will a 2008-type market event happen again? Most likely, yeah… do you know when it will happen again? Ok, if you said “yes” you’re a douche canoe. Markets are too complex for anyone, even experts, to be able to accurately predict crashes to a 4-month window. And let’s be honest, your ball is as fuzzy as mine. (looking off camera) What? That might be misconstrued. I should say crystal ball? Ok.
And let’s be honest, your crystal ball is as fuzzy as mine.
We have to treat every deal as if it's going to happen again while we're holding the deal. So, let's just run a scenario here. Let's say you get into this property, you have one exit strategy, you structure it all as debt, and you think you're going to sell it for $380,000, and then the bottom falls out before you can finish it. And the market dictates that you can only sell it for $280,000. Now, you can't sell it because you're $20,000 upside down. And if you count the fees that you owe, when you do sell it, you're more like $55,000 upside down. That means you have to write a $55,000 check when you go to close. I don't think any of us get into real estate investing because we want to WRITE checks when we sell properties. We want to GET the checks when we sell the properties. So, let’s eliminate losing money as an option.
I’m sure YOU’VE got a pretty creative mind, let's think about some possible exit strategies at this point. What can we do? Rent it out? Ok, let’s try that. We finish the remodel in four months, and put some tenants in there. They're really good tenants, they pay their rent on time. So now we start to cashflow 5 months into the deal. They pay their rent the next month, so we cashflow on month six…
But remember what happens to our financing at month six? The day after we get that second rent check, the hard money lender calls and says, “Man, I just drove by that property you were doing… It’s beautiful! You did a great job on it. And you put some cash flowing tenants in there for me… Thank you so much! It's mine now!” So that's not an option either.
What else can we do? Did you say refinance it? Yeah, let’s go to the bank and say, “Mr. Banker, here's my collateral, it's worth $280,000. Can I borrow $300,000 against it please?” What do you think is going to say? “No. You're under collateralized!”
See, here's my problem with the debt investor: if anything happens at all you're sunk! You ruin your credit, you ruin your reputation, and you ruin your relationships. One deal can end your career. That's too risky for me. I actually have a fairly low risk tolerance. I would not be a real estate investor if this is how we had to do it. Don’t be the debt investor!
Type 3 Investor - The Educated Investor
The third type of investor, this is the educated investor. This is how I would structure our example deal, exit strategies and all... Maeli and I use a funding strategy called the Debt/Equity Blend. There's a secret ratio to debt/equity blend: it's two thirds debt, on whatever you need to raise. In this case, our total raise is 300 grand, that means we need to raise $200,000 in debt. And you know what, just for fun, we'll even use the 12%, six month hard money guy, the same guy that the Debt Investor used, except we're doing 200 instead of 300,000 this time.
Now we need to find an equity partner for the other ⅓, or $100,000. Remember from the last Flippin Education video I did, when I said that real estate investing and business ownership were the two activities that the wealthy did? Just in case you haven’t seen it yet, I’ll put the link in the description. The wealthy are business owners and real estate investors, and sometimes those things dovetail pretty closely. We’ll start an LLC, which is a business right, and I’ll put my deal into the LLC, and give myself half ownership of that LLC. And I’ll go out looking for a partner. Maybe I’d start calling all my friends that I knew had 100 grand like buried in the couch cushions around the backyard. We all have those friends, right?
I know, I know. There’s not a whole lot of people out there with $100,000 just laying around. But I've learned something very important early on in my career that changed my whole life. I learned that there's $27 trillion in retirement accounts in the United States alone, and there's only 400 million people that live here. So do some quick math.... There's a lot of people with over $100,000 in their retirement account! YOU might even be one of those people. Now, here are two questions that set my career on a successful path. The first question is: “Did you know that you could use your retirement account to buy real estate?”
Now, regardless of the answer that they give you, yes or no, the second question is the same. “If I were to show you how you can potentially double or triple your current rate of return, backed by real estate, would you partner with me on my next deal?”
Most 401(k)s and IRAs are backed by stocks, bonds and mutual funds. And on average they might return between 5% and 10% per year, so let's use a 7% average. If they could double or triple that do you think they might be interested in hearing what you have to say? AND we're going to back it with real estate. What are mutual funds backed by? If the economy takes a dive, what do you get? Well, basically just a smaller retirement account. But if a deal goes bad with real estate, and they’re backed by real property, they get a house! They can move into it, they can rent it out, they can sell it, whatever the law allows.
So, at this point, they're like, “Wait, it's safer, and I can make more money. Okay, let's talk!”
“Great! Here's the deal with all of the numbers and the game plan. If all goes well, we're projected to make $45,000 at the end. That means that if your 401(k) and me are 50/50 partners, and all goes well, I'm going to make $22,500 and your 401(k) is going to make $22,500 as growth!
Now let's run some quick math here. They put in $100,000. They got it back at the end of the deal plus another $22,500. That means their rate of return is 22.5%. Is that good? Yeah, that's pretty good. Try going out of the bank and asking for the money market account that makes 22.5%. They'll look at you like, You're crazy, right? “We got one that makes 0.25%. Would that work?”
Now remember, we are doing this whole deal within four months. When we're talking about a 7% return on mutual funds, how many months are we talking about? 12 months! If we anualize this it works out to be 67.5%.
Don’t you think that’s something a potential equity partner would get excited about? “Heck Yeah!, Where do I sign? Hey, wait a second. You told me about the dead guy that lost all this money. 2008. What happens if we lose our money on this house? What happens? What happens if 2008 hits again, while we're holding this asset?
I'm sure glad you asked. Let's run through a scenario real quick. Let's say 2008 hits again, and this house takes $100,000 haircut. Can't sell it without losing money, but because of the Debt/Equity Blend, we CAN now refinance it into a 30 year mortgage. It wasn't possible when we had $300,000 in debt with only a $280,000 value on the house, but now we only have $200,000 in debt against the property. We can take our $280,000 asset down to the bank say “Mr. Banker, here’s $280,000 worth of real estate. Can I borrow 200 grand against it? He's going to look at and see an $80,000 equity position on the $280,000 house, and say “Heck yeah!
That’s a lot of “Heck Yeah”s. [repeat flash text: DISCLAIMER] Actual number of “Heck Yeah”s you get may vary.
So, we refinance out the 12%, six month hard money guy and replace him with a 30 year mortgage. Now, what can we do? Rent it out!
Now think about this: we’ve got a monthly payment based on a $200,000 mortgage. And our house is valued at $280,000. We can rent it out based on the value of $280,000. We're going to have some cash flow. So, we get cash flow every month for as long as it takes for the value to come back so that we can sell it and make the profit we originally planned on. Even if it takes 10 years, my equity partner and I are going to split the cash flow every month.
That’s right, the equity partner was a partner in a fix and flip before. Now he's a partner in a rental. He’s part owner in the project, so pivots with us. So, we're going to split that cash flow 50/50 every single month. His retirement account is making money while all of his buddies who left their money in their 401(k) indexed in mutual funds are losing money in a bad market. When the value of the property comes back, we sell it. He makes $22,500 and I make $22,500. Worst case scenario, HE MAKES MORE MONEY!
So, if you were one of the people that said real estate investing felt risky before. Does this seem a lot less risky now? Yeah! You know, what's interesting is when knowledge increases, behavior changes.
Now, I want to talk about one of my favorite topics in the whole world. Let's talk about ME for a second. How much money did I put into this deal? Zero. And I got $22,500 in profit from it. What's my rate of return? I feel like a third grader when I say this. I made INFINITY percent on this deal! You know, I like to make infinity percent on every deal if I can. What currency DID I contribute to the deal? Knowledge, I contributed knowledge, they contributed money. I make the highest rate of return in every deal, because I contribute a more valuable currency than anybody else. I bring the knowledge to the table of how to get the deal done as safely as possible.
BRAIN MATTER EXPLOSION! Wipe it off the walls. All good. You can clean up later…
Of course, there is still risk in real estate. And I’m not your attorney or your accountant, so I’m not qualified to give you direct advice that would be applicable to your exact situation. These are just some of the things that I’ve picked up along the way and have found success with. There are ALWAYS risks in any of these strategies, so make sure you’re educated before you go out and try any of them on your own!
A great place to start is our weekly live education webinar! Get access to our nation-wide community of real estate investors! We meet on Zoom every Wednesday at 7pm Mountain Time for exclusive trainings, real deal walkthroughs, question and answer, guest speakers and all around real estate investor shenanigans. Beginners, experts and everyone in between is invited. Just go to www.MitchAndMaeliLIVE.com Wednesday at 7pm MST. There is no better place to start getting your investor legs! Best of all - we made it FREE just for you! Can’t wait to talk with you live!
I’m curious what you thought of this Article. If you have any thoughts you’d like to share or if you would have done things differently, please reach out! I’d love to hear from you! We’ll be bringing you some more amazing content very soon! See you on the flip side!