5 Ways to Make Real Estate Your Business Instead of a Hobby
Are you ready to take your business to the next level, or are you still struggling to make that first step into real estate investing? All experienced investors have been in your position at some point in their careers.
Fortunately, Bill Bronchick and Bobby Dahlstrom, who are fix-and-flip partners, recently published the book The Business of Flipping Homes, which provides a business approach to the fix-and-flip real estate strategies for all experience levels.
In our recent conversation, they provided 5 tips based on their new book and previous real estate experience on getting started as a fix-and-flipper, scaling to the next level, and creating a business, rather than a hobby.
Tip #1 – Time Commitment
Bobby said, “One of the first things that people need to do is realize it’s going to be a time commitment. There’s a lot to learn.” When you’re first starting out, Bobby said, “I think as a minimum, you’re probably looking [at investing] around ten hour a week.”
If you don’t have any money, Bobby recommends you invest that 10 hours a week into becoming a wholesaler. “If you go out and identify a property that’s a good deal, then with a little effort you’re going to find someone who will definitely take that off of your hands. So the idea as a wholesaler is you spend your time looking for bargains.”
If you want to skip the wholesaling step, and instead work with wholesalers, a real estate agent, or buy properties at auction, Bobby said, “In some ways it takes less time to find a deal, that’s true, but then you still have to manage the actual process of getting it from under contract to closed, to then fixing it up, and then selling it.” Still count on the 10-hour a week time investment, or maybe more.
Bill also believed that 10 hours a week is a good place to start. But what if you have a full-time, 9-5 job? Bill said, “I think the approach that people need to have is that after they come home at five o’clock from their regular job, it’s time to go do the second job. Like I said, treat it like a business. You’re setting aside two or three hours a day, and that’s just your second job for a while, and you’re going to have to get your family and friends to understand and accept that.”
“At some point,” Bill said, “maybe when you get up to 15 or 20 hours a week, you’re going to have to decide which job is more important. If you’re doing it right, the job that’s more important is going to be the real estate, because it’s going to make a lot more money.”
Tip #2 – Build a Trusting Team
Next, Bobby said, “You need to surround yourself with other successful people and build a team that you trust, that you can work with on a repeat basis.”
Their team consists of an attorney, a contractor, a real estate brokers, a title or escrow company rep, an insurance person, an accountant, and an inspector.
You don’t necessarily need to have all of these positions filled before you start looking for deals and making offers. Bill said, “It’s not like you have to have every one of them lined up before you make your first offer, but that’s one of the things you want to do right up front. Start getting your things lined up so that you don’t end up having some bad experience because you’re just rushing to get something done with someone.”
The best way to find these team members is by attending local real estate investment groups and asking for referrals. Bobby said, “Almost every city has some type of a real estate organization that’s sort of a creative thinking, like-minded people type get-together scenario. They’ll meet monthly. You can find those online, and sometimes going to some of the seminars, whether they’re free seminars or a paid weekend event… Those kinds of things are a great place to meet other people and [to] just get a sense of what this flipping is all about.”
Make sure you are selective when bringing on team members because not all brokers, contractors, etc. are the same. “When you speak to a real estate brokers,” Bobby said, “And I’m a broker, I’m also a contractor… We don’t all think alike and we don’t all have the same experience. It’s not that difficult to become a real estate agent. So you want to start looking for the ones that have worked with investors and ideally own investment properties themselves, so they understand what you’re trying to accomplish.”
Tip #3 – How to Approach Your First Deal?
After making the time commitment and building a team you can trust, the third thing is, “You have to go out and start looking for your first deal,” Bobby said. “Many people get lost in trying to find the perfect deal, which probably doesn’t exist. You need to find one that makes sense [and] go with that.”
To find your first deal, Bill’s Best Ever advice is to make a lot of offers. “I think too many people dance around it, they look at it, they research it, and then they haven’t even made an offer yet,” Bill said. “You can’t buy a property from a seller in a good deal until you find out what the seller’s problem is. You’ve got to sit down with them and get personal and get them to open up. Say, ‘What’s the real reason you’re selling?’ Not because [they] want to sell the house, but there’s some problem attached to that that you need to find and get to the bottom of, and then solve that problem and buy the house. If you solve their problem, you make money.”
Keep in mind that the problem may not be a certain sales price they want to hit. It may be speed, whether they need to close quickly or close later. Or it might be terms. Bill said, “you just don’t know. So make lots of offers, but don’t make an offer blind without knowing what the seller’s needs are – their personal needs, not the property needs.”
Another piece of advice when you’re approaching your first deal and making offers is to not become personally attached to the property, which is Bobby’s Best Ever advice. He said, “People get really attached to one potential deal, and they try and make it work. They go backwards and forwards and try and make it work, and get all these other people involved when maybe it’s just not a good deal. Or maybe it will be a deal in a year, so you can always leave a verbal offer with the potential seller in a respectful way, maybe they come back to you. That comes back to really making more offers.”
People also get emotionally attached in terms of renovations. Bobby said, “They start doing things the way they would want to do it for their own house. If I happen to like light blue interiors for my house – which I don’t – that would be find, but I don’t want to use that in a flip. We want to be a little creative, get most bang for the buck – that’s part of the fun of the business – but don’t try and project your personal case and your personal opinions too strongly into each deal.”
Tip #4 – Focus on Cash Flow
Bill said, “One of the most important things in a business … is cash flow. You have to make sure that you have enough money to not only run your business on a daily basis, but to fund the deals you’re working on and don’t get all your money tied up to the point where everything is hanging on a couple of deals, and if they don’t go through, you’re broke. It’s like any business. You have to anticipate your expenses and your cash flow needs.”
When it comes to looking at cash flow, it’s important to understand the two types of flipping: wholesaling and retailing. “Retailing [is] the traditional stuff you see on TV – Buy, fix, and flip,” Bill said. “Wholesaling [is] more of a short-term deal and selling it to another investor as is.”
Focusing on cash flow comes more into play when retailing because you must be able to anticipate your projects. Bill said, “If you’re in the middle of two fix and flips and they went over budget and you’re feeding it and feeding it, and all of a sudden you have to pay other expenses of your business, like your phone in your office and all the things like that, you have to make sure that you have enough cash on hand so you don’t run out of cash for your deals.”
Tip #5 – Lessons Learned From Past Mistakes
As you begin doing deals, the next tip is to learn from your mistakes. Fortunate for us, Bill and Bobby shared a handful of mistakes they have made.
Since we are focusing on cash flow, what are common cash flow mistakes? When performing a fix-and-flip and you are getting a loan, the type of loan you will likely get is a hard money loan. Bobby said, “[Hard money loans] can make sense. You can get in and out quickly. But a lot of times, these hard money loans have a little upfront costs, as you’d expect. They also have, however, a high interest rate and usually a balloon payment in six months or so.”
For Bill and Bobby, most of their flips take three to six weeks from purchase to ready to sell, so the hard money loan works perfectly. However, what happens if something goes awry and the deal takes longer? For example, Bill said, “a lot of people do get hard money loans for their fix and flips, and they don’t realize that, let’s say they have a six month loan. After six months, the interest rate goes into default, which means it might step from 12% to 20% [interest]. Then all of a sudden it’s racking up at 20% while you’re trying to get your closing done on the backend, and all of a sudden your profit is eaten up to be nothing or even negative.”
Even though it may take a couple of months to complete a rehab and have the property ready to list, there can always be delays. There could be contractor issues, bad weather, or a buyer may say they will buy and then pull out a month later.
Since Bobby and Bill are seasoned flippers and have faced this situation in the past, they have a solution. Bill said, “The six months may seem like a long time, but what I recommend people do is make sure if you’ve got a loan that’s due in six months you have the right to buy an extra two or three months. Otherwise you’re either getting hit at the default rate of interest, or potentially foreclosure by the lender and you’re going to lose the house.”
Another common mistake fix-and-flippers make is not realizing how long their money will be tied up in a deal. Bobby said, “If you’re trying to juggle more than one deal, it gets complicated because you’re having to get your resources, including yourself, to two different places. It’s usually better, like most things, to start slowly, one deal at a time.”
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