The 4 Departments In Your Real Estate Investment Business To Successfully Flip A House
Are you looking to not only flip a house but create a business around the industry?
If so, you will need a well organized business model with systems in order to streamline your operation and allow you to scale. It is fairly easy to flip 1 property a year but it is actually very difficult to create a scalable business around flipping houses. Without the proper systems and organization in place, it is nearly impossible.
The model of flipping houses can be very lucrative if executed properly but it can also be a very easy way to lose a lot of money if you do not know what you are doing. In our opinion in order to successful flip real estate (for the purpose of this post, flipping is not wholesaling, flipping is buying the property, renovating and reselling for full market value). When flipping a house there a several variables that you have to know and accurately forecast to create a profitable deal. In the house flipping business there are several moving parts and the more organized and systematic you are with your approach the easier it is to consistently find, purchase, rehab and sell for a profit.
To streamline your business, you must break it down into specific departments that you can further breakdown so you have a specific way you handle each phase of the process for each property you source, qualify, convert, fund, rehab and sell.
1) Marketing
The first piece to a successful house flipping business is the owners ability to source off market deals. This industry has become very competitive and it is very difficult to find product that will result in profit from the MLS, foreclosures and auctions. While there is still profitable product from these mediums, in our opinion there is not enough product to sustain a house flipping business. This means that you will have assemble and execute a marketing plan to consistently bring in off market leads, qualify these leads, go on appointments, analyse and make a decision to purchase. When it comes to marketing, there are several mediums that you can test to bring in off market leads.
Direct Mail
Cold Calling
Door Knocking
Flyers
PPC
Paid Facebook
Bandit Signs
Billboards
Door Hangers
Craigslist
These are just some of the mediums that you can begin testing, however, in this business it is best to get creative with the mediums you use. It only makes sense to market, if you have the systems in place to measure your results. This will allow you to create a system to track/measure the important metrics needed to determine the performance of your marketing efforts.
Within our marketing department, we will also have to have a way to qualify the potential leads that come into our funnel. This means that you or an assistant will have to be on the other side of the call to qualify the potential lead to see if it is something that may work for your model. Remember, we are chasing motivation and only specific situations will work for our model.
2) Acquisitions
When we source potential deals, we are going to have to go on appointments, analyse, follow up and close them. This is the job of your acquisition team. This part of the business, will be either handled by yourself, if you are just starting out or you will delegate these tasks to an Acquisition Manager on your team. As previously stated, your Acquisition Manager will be tasked with:
Going on the appointments your assistant set
Building a relationship with the seller
Gathering additional details on the deal
Taking photos/video of the property when on site
Determining ARV of the subject property
Submitting offers
Negotiating
Following up with offers/sellers
If you hire an Acquisition Manager and your only exit is going to be to rehab and sell, this will traditionally be a salaried position, unless you are closing so many deals that you will be able to pay per closed transaction. If you are wholesaling properties as well, you can make this position a commissioned base job with much more upside to the employee.
3) Financing
Once you have found a property that makes sense and you would like to act on, you will have to purchase the property. There are a couple of different ways to purchase a property that you intend to flip but only a couple ways that will allow you to scale your operation. Funding for investors with the intention of fixing and flipping is becoming easier to obtain because that space is also getting more competitive. As you can imagine, if your intention is to do be able to do multiple properties at a time, it can get very expensive. This means that it is almost going to be impossible to scale a fix and flip business using your own capital. This means that you are going to have to utilize other peoples money, because traditional banks typically will not be willing to lend on these types of assets for you. So where do you turn.
1) Private Money - The cheapest and best funding for house flippers is private money. Since this is the cheapest and best, it is the hardest to obtain. Raising private capital is a business in itself and another aspect of this business that you will have to master if you intend to create a lucrative business. To raise private money, you will have know or attract people with money. Ordinary people do not know that this medium is available to them as an investment, so you will have to do alot of educating. This is a very attractive medium to outside investors because it can offer high safe returns, if you are working with a good operator. When you raise private money for a deal, you will be given them specific security to protect their investment.
First lien position on property
Added to insurance policy
Promissory note
When you are dealing with private money lenders, you have the ability to negotiate the best terms for your perspective deal, unlike dealing with hard money which we will touch on next.
2) Hard Money - Hard money is similiar to private money except hard money is structured like a business. They typically have set terms that they are willing to work off of for fix and flip loans. These terms may be adjusted based on your track record and relationship but for the most part, you can expect more fees, higher interest and more points. There is a time and a place for hard money but obviously with more fees, higher interest and more points results in lower margins for the investor. With that being said, if you do not have access to capital, hard money will allow you to get into your first couple deals, gain experience and start building your track record to sell to potential private money lenders. When dealing with Hard money lenders, you can expect to pay anywhere from 9-15% interest and 2-4 points with additional fees sprinkled in there.
4) Construction
Once you have found the property and raised the money for the purchase, it is time to close on the property and start construction on the product. The construction on a flip is a different beast in itself. If you are just starting out and have little construction knowledge, this part of the process can seem very overwhelming. However, we are hear to tell you that you can execute this model with little construction knowledge, you just have to be willing to learn and be systematic in your approach.
Before you get to the point of construction, you should already have a plan in place. There are specific documents that you will assemble on the front end of a construction project that will allow you to successfully stay on budget and schedule throughout the course of the project.
Scope of Work - The most important document that you will assemble for the construction of your property is the scope of work. The scope of work will list all of the tasks associated with the project. This document will allow you to organize your rehab, assign contractors to tasks, create a material list, create a budget and a schedule.
Material List - Every project that you get involved in will entail labor and material. You will create a material list for your project so you can forecast the total cost of the project and also eliminate and slow down time going to the store to buy material during the day. Your material list will allow you to work with specific vendors to develop delivery schedules, so your material will be delivered on time when needed.
Budget - Once you know your total labor and material spend on the project, you will be able to develop a budget. Your budget will consist of the final labor and material numbers for the project. Within your budget, always make sure that you include contingencies so that you account for any renovations that you may have missed on the project. In this business, it is nearly impossible to account for everything that you will have to do on a project. The contingencies that you put in place will allow you to account for any of these change orders that come up on a project.
Schedule - Every construction project needs a schedule. A schedule is going to allow you to better organize the project, hold contractors accountable and finish the project in a timely manner. A good executed schedule, will allow you to limit holding costs on a project thus increasing the margins on your deals.
If you assemble all of these documents for your construction project, you will have a better chance of success. As stated, the construction phase can be overwhelming but if you are systematic and assemble a plan it will mitigate some of the issues that arise on a project.
Wrapping Up
To successfully flip a house, it means you have to understand and execute all of the different variables of the business. We hope that we gave you some high level information that will make you aware of what is needed to operate a successful real estate investment business. Once you create and improve the systems within your business, it will get easier and easier to profitably flip a house.