Anyone Can Flip a House After Hearing This

0:00It's my first time flipping a house, and I cannot wait to see that sweet profit when it's all done. But until the sale actually closes, I am a little bit nervous. But fortunately, I have one of the best house flippers around to hold my hand through the entire process. And today, we're going to share everything that anyone thinking about their first house flip needs to know. We'll, of course, talk about how to find the right deals and maximize your profit. But we'll also talk about how to spot big risks and potential mistakes before you make them. All that and more so you can flip with confidence.

0:34Stick around.

0:39Hey, everyone. I'm Dave Meyer. I'm a housing market analyst and the head of real estate investing at BiggerPockets. I've been buying rental properties for more than 15 years, but I have never actually flipped a house until now. I am diving into a whole new realm of investing, and it's one that comes with big profits, but also big risks. So today on the show, I have my on-the-market co-host, James Dayner, with me. James is one of the most experienced flippers out there. He has flipped more than 4 ,000 homes in his investing career, and he literally wrote the book on it, The House Flipping Framework.

1:16So James, you ready to help me out? I always get so excited when people take their step into flipping houses. You have finally converted me to the dark side. After knowing you for like three or four years, I finally agreed to flip a house. Yeah, it starts with one. And then all of a sudden. You tried to get me to do two. Yeah. The first one's free, Dave. And then you're going to be hooked on this. Well, we'll see. If it turns out well, I can see how it will be addicting. But because I'm still starting my first flip, I'm more nerves than excited right now. Well, you should be nervous. I mean, flipping is a great tool in real estate, but it's also a very, very risky.

1:52It's probably one of the most riskiest asset classes you can buy in real estate. So, I mean, I guess the real question is, Dave, I know you like hedging against risk. So why do you want to flip a house? There's a couple of reasons I want to do it. The first is I want to get better at managing construction. I'm interested in flipping houses. And if this first one goes well, I might do it more and more. But I've also been doing BRRRS and I've been renovating rental properties for 15 years now. And I admit, I don't think I'm the best at managing construction projects. So that's my number one objective is to really learn how to work best with contractors, to do things efficiently, price efficiently, and to maximize my ROI.

2:32So that's the number one thing. The second thing is, as you know, I moved to Washington and it is super hard to buy cash flowing profitable rental properties, but I want to invest in my own backyard. And at least right now, it seems like flipping is the best way to invest in the Seattle area. It is, especially in those expensive markets, because properties are expensive. They're in high demand. And if anybody can buy them, the pricing is not that good. What I always say is flipping gives you the best foundation for being a real estate investor across all asset classes. I mean, you see how we cash flow in Seattle.

3:07Like when we're buying a rental property, It's not turnkey. But that's how we create, the math will work when you can buy so deep. And that's what flipping is so important about. You can create your own returns by controlling your cost. And so it's not just about making money. It's about making you a Swiss army knife investor for all different types of asset classes. That's exactly why I want to do this. Maybe you'll wear me down and I will become an addicted flipper like you are. But my objective at this point is to hopefully just build big chunks of equity that I can maybe put into other flips, but mostly use to go out and buy more rental properties, do more burrs, that kind of thing.

3:45I am also lucky though, because you have agreed to help me find my first deal as a flipper. So maybe tell us a little bit about if someone's out there like me looking for their first flip deal and they want to do it in a, you know, responsible risk adjusted way, what do you look for in that first deal? Yeah, you want that cream puff for your first deal. Oh yeah, you're getting me a cupcake. And that's what you want, though. Like, it's about kind of, you know, there's so many things involved in flipping, right? The first thing is you got to learn how to underwrite a house. Like, be able to pull comparables, look at it, look at what needs to be done, and create a scope of work to create value and create equity.

4:24That's hard when you don't know what you don't know. One of the biggest mistakes that flippers make when they buy their first deals, they buy the cheapest thing. Yeah. And like, well, it's going to be safe because I'm buying it so low. How can this go wrong? it can go wrong. I mean, I think the cheaper deals scare me way more. The worst deals I ever bought were the cheapest deals. They're cheap for a reason, usually. Because no one wants them. There's a lot of hair on them. Yeah. Everyone else thinks it's a teardown, and maybe it really was. That's where I've had second stories fall off houses.

4:55I've had all sorts. Oh, yeah. Just like straight fall off. Yeah. And it was a good deal. It was cheap. I bought it sight unseen. We started a demo, and all of a sudden I get a call from the contractor. The second floor just fell off. I'm like, what do you mean it just fell off? He sends me a photo. My second, it literally fell off. Did you save some money on demo at least? I've never framed a house so quickly after that where we just got it framed back up. And yeah, we had to throw a lot more lumber than we thought. But that's the hard part about flipping, right? So you want to take steps. Like I have flipped a lot of homes, a lot of zombie houses, a lot of beat up, beat up properties.

5:30But I didn't start with that. I started with a townhome or something that was simple. And because it was about, well, how do you purchase the property? How do you look at it to make sure it's a good deal? But then there's so many other steps, like how do you use the right leverage for that deal? Like, how are you going to get your funding? Then how are you going to create a budget for that property? And that's why you want that simpler project. Like, you don't need a swing for the fences. Agreed. Yeah. You need to take your time. You know, it's what, basis win games, right? Basics and doubles.

5:59Totally. That's the way I'm looking at it is if I can break even, obviously, I'm hoping to make money on this deal. But if I make a little bit of money, I'll be happy if I learn a lot, which I'm very sure I'm going to learn a lot. And that's why I think, you know, when you were convincing me to do this, you were sort of telling me more of a cosmetic flip. Like we talked about definitely not doing any structural stuff or major structural things for the house. What are other things that first-time flippers should put in their buy box or keep out of their buy box? Yeah, the number one is layout changes.

6:32The hard, like it doesn't matter what the condition of the house is. It's how many spaces you have to create, right? When we're flipping a house, we can buy this house and it's in certain condition. It could be a two bed, one bath house. If your highest comp to create the most amount of value is a four bed, three bath, that means you're going to have to move a lot of the home around to create that space or create new space. That's the thing you want to avoid as a new flipper because you don't know what you know don't know. And it's hard to control those costs. That requires a lot of framing. Even if the house is in really good shape, if you have to create those spaces, you still have to rewire it.

7:06You still have to replumb it. Everything has to get done. So that's what we want to avoid on the first one. Also, don't buy the dilapidated home that is melting away. Now, that's something that gets, I get excited. So leave those for you. You don't need to buy that deal, right? And so you want to create standard processes as you do your first flip when you're doing a cosmetic and maybe you have to add a bathroom or add eat you know open a kitchen wall those are the two items that are a little bit more than unknown but you can control your flooring cost you can control your doors and your trim the cosmetics are things that you can easily control if you start going over budget it's really easy to go online and find a floor for a dollar less per square foot it's harder to find an electrician that will be 20 % less than your lowest bid.

7:53And so start with the easy stuff. Don't reconfigure the house and then don't buy the dilapidated old homes that need all the mechanicals. That's what you want to work into. But if you can systemize the cosmetic first, then you go into the mechanicals. And I assume buying cosmetic, most of the time, your margin is going to be a little bit thinner though, right? Because there's going to be more demand for those kinds of homes, but there's also less risk, right? Less risk and less time in the deal. Time kills deals. One of the biggest things I think mistakes that people look at when you're flipping a house is like, well, the margin's a little low.

8:26I always look at analyze return. How much money can I put into a house? What can I make? And then I look at how many times can I do that in a year? Many times, even if you're making just a base hit, but you can do that two or three times in a year, you will actually do better than the big, big fixer. And so, you know, look at what your return is. You buy a really good house, good location, not that bad of shape. You're going to have a slimmer margin, but there's less risk. And so that's okay. Totally. Because the simpler projects better for the new flipper. I think it's the same thing with rental properties, right?

8:57If you were just getting started investing in real estate, at least for me, you were going to take on a BRRRR rental property, I'd say probably go buy in a B-class neighborhood. You're not going to, you know, you're not going to get the best deal. You're not going to overpay for something in A class that's probably not going to cash flow, but just go out there and hit a double and learn as much as you can and move on. Yeah. Don't buy weird, buy something clean that needs minor changes. That's why we started with this one, Dave. Like it's, we don't want to go knee deep into a big, big project. And we've done, me and you have done some projects where you've not been running the whole project.

9:31Yeah. You won't let me near those as you shouldn't. Yeah. No. Cause you've done, you know, you've been taking steps to get into flipping. You're like, all right, well, I want to watch the bigger project. Watch the process. Watch all the things that even if I flipped a lot of houses, mistakes happen, things happen and you go, okay, how do I deal with this mistake? And so just baby steps. But once you get into flipping, it can change everything for you as an investor. All right. So I want to tell everyone about the deal that you found and ask you a little bit more about flipping in the current market environment that we're in, but we got to take a quick break.

10:05We'll be right back. If you've ever run rentals, you know this feeling. Your maintenance guy quits, two turnovers hit at once, tenants are texting you at midnight, and suddenly you're the plumber, the leasing agent, and the bookkeeper. Total chaos. That's when I think, this is not my job. This is a job for Indeed sponsored jobs because hoping the right person randomly finds your job post, that isn't a strategy. With Indeed sponsor jobs, you can actually target people with the exact skills you need. Property managers, techs, bookkeepers, people who can jump in fast and fix problems. And here's the thing.

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14:00Welcome back to the BiggerPockets podcast. I'm here with James Danner talking about my first flip. James, you helped me find a deal in the Seattle area that fits all the criteria that we were just talking about. Something that's, you know, manageable, low risk, hopefully quick deal that I can get in and out of. Tell everyone about the deal that you found. This is a perfect first house. Besides, it's a little expensive. It's more than a little expensive. It's definitely more than the last burr you bought, you know? Yeah, for sure. All right. The reason I like this is great location, right? When we're flipping, the way for us to get in and out of a project is if you buy where everyone wants to live and you have the right product, it's very sellable, even when the market's slowing down.

14:44The next best reason is we can do carpet angels in this house, Dave. You can just live in this house. It's nice. It is moving data ready, right? And when you're buying in a more expensive market, That is the benefit in Seattle and some of these other areas like San Francisco, even Denver, right, can be expensive. Because the cost of construction is so much for the consumer, you can buy some clean homes, put in the right finishes, and really, really increase the property. And so this house is perfect for the first time flipper. It's built in the late 70s, so it's got good mechanicals, like the plumbing made out of copper.

15:19The wiring, not old. The light switches are kind of where they need to be. They're fine. The roof's good. Roof's good. Windows have been updated. The mechanicals of the house is a very well-kept home. It just was out of date. Yeah, it just looks like grandma's house. Yeah, and the issue with the house is the layouts are just not modernized. Right. It's got a closed-off kitchen, a little bit smaller primary bedroom. And those are things we're going to have to fix. But they're minor changes. So that's why I liked that part. But you had good mechanicals. It's in a great location. We're a product that everyone wants to buy.

15:52Like right now, the market's a little risky, right? But Dave's getting into flipping right now. When things are compressing and they're hard to sell. I don't know why I'm doing it. You know, because that's kind of the best time to jump into something. When everybody else is terrified. There's truth to that. It leaves more opportunities. Like, I wouldn't be able to buy this house for this price in this condition a year ago. Yeah, for sure. No way. It would have got multiple bids and probably sold for$1.3 to$1.4. We got you this house for$1 ,190. Yep. And so the reason I liked it for you as your first flip is also low risk.

16:27We knew the as is value is 1.35 million walking in. So the day you walked in, you had some equity on it. Mechanicals are good. So we don't have to rearrange a lot of things. The layout, bedrooms and bathrooms are where they need to be. Yeah. I mean, all we're doing is when we got the bathroom a little bit in the primary and opening up the kitchen from a structural perspective. And the slider. The slider. I love the slider. Yes, the slider in, you know, the basement, we got to get access out there, right? We still got to create those spaces. But yeah, everything's kind of where it needs to be. It just needs to be modernized and improved slightly.

17:02So that's why it's a good first deal. Yeah, I like this as the next step for me because no individual element of the project I haven't done before. Like, you know, what we're framing in the primary, I've done projects like that. Opening up a kitchen, I've done projects like that. I haven't done the slider exactly, but I've done some things similar to that. So all those things I've done, I've just never done it under time pressure. You know, like that's sort of the big difference for me with rental properties. It's less sensitive to how long it takes. But, you know, I took, you know, it's a$1.2 million property.

17:37It's very expensive or have hard money loan on it. So it's costing me, you know,$8 ,000,$9 ,000 a month just to hold on to this thing. So I feel comfortable with the construction part of it, but trying to do this really, really quickly so we can get it back on the market is the piece that's new. But that's the exciting part. Like that. That's why this feels good to me is I know I can handle the individual elements and I'm challenging myself in one way instead of trying a ton of new things all at once. So obviously, this deal is very expensive. If you live anywhere near Seattle or California, you will understand that this is what things cost.

18:11But for a lot of people out there probably don't have the capital to pull down something like this. But before you said people shouldn't be buying the cheapest deal. So what do you recommend for new flippers who want to get into this and do what you're saying, not take on a really big project, but maybe don't have the capital to buy something that's in a little bit better condition? How do you navigate that? So one thing right now, market's a little riskier, things are slower. That creates more opportunities. Those opportunities for a new flipper, even though the market's riskier, there's more available inventory to negotiate and we've been able to secure when the market changes we've been able to secure a lot cleaner houses on better buys because there's just less demand overall and so the cheap stuff we want to stay away from are the really really old ones you know and so like as a new flipper i always tell people don't buy anything like i think when we talked i was like don't buy we want to stay 1960s or newer yeah better layouts better mechanicals that's our hard rule right and when you're new and flipping you got to create your own buy box this is what i'm good at this is the contractor i have like your partner with your brother-in-law greg on this one he has construction background but not like a heavy heavy studs down flip no i know he's commercial construction not doing this kind of stuff no and so he's gonna learn his trades in you know i always say buy what your resources have now if greg your brother-in-law was an experienced home contractor and done big projects, your buy box might have expanded out.

19:48That's fair, yeah. It's not always about price and location. It's about what resources do you have and just stay away from the old stuff. Yeah. Like everyone getting new flipping, you don't need to buy the oldest thing. The oldest thing will give you the most amount of problems. So you'd rather see a new investor go to a cheaper market and buy the buy box you're describing, 1960s or newer, than stay in like downtown Seattle, which could have really high upside, but then you'd be buying something from 1910 or something, and that just brings on too much risk. Yeah, and people get that in their brain all the time.

20:20Like, I want to buy a flip in this area. And I'm like, why? Well, because I'm close to it. I like that neighborhood. I like the schools. Fair. Those are all valid points. You have no business buying in this neighborhood, though. Because the homes are old, and you don't know what you're doing. We want to go here, right? The most important thing is flipping is buy what your resources can do. That makes a lot of sense. I'll go anywhere. I have really good contractors in Nebraska, and they're really good at turning condos, and I can get deals on the condos. I will flip in Nebraska. That's how you control the cost, because your core team, the fundamental of flipping, is to improve the value with a strategic rehab plan.

20:56The middle part's the most important part of flipping. The money's not made on the buy. It's made on the plan and the resources you have. And new, you can be way more fluid. So go where you are capable of, not the location that's in your brain. That's great advice. And I think it just speaks to the fact, Same thing with rental properties, right? Like it really is just math. For you, you are just targeting a return, a specific amount of return, a specific risk reward profile. And you're willing to do that almost anywhere if the math makes sense rather than sort of being somewhat emotional about it and just like falling in love with a specific property or location.

21:30I'll go anywhere, anywhere. Like people always think we do these massive homes and we do. Yeah. But one of the best deals I ever did this year was an hour north out of Seattle. It was a mobile home. It was not sexy. And I had to go there zero times. My contractor knew how to get in and out real quick. And we ended up doing, you know, we paid like$290 ,000 for it. We put$100 ,000 in. It was a big project of mobile home. And we sold it for$6 ,000. So just buy what your resources can do. That's the most important thing. Oh, that's great advice. So especially for new flippers, just trying to take on something that is reasonable and responsible for you and that you are confident that you can pull off with the time and the money that you have to contribute to the project.

22:17I am feeling pretty good about the construction. I feel pretty good about the plan. The market is what worries me right now because we are seeing in Seattle and in most places in the country, days on market are going up. It's not as hot of a market as it used to be. So is it still a good market to be flipping in? Yeah, the market, I mean, It goes up and down and it transitions. And that's the risky part about flipping. Timing is everything in this business. Whether you buy the right rental property, it appreciates, rents go up, right? It's just, what is it? You know, we're so tied to the economy that you don't know what could happen at any time.

22:51That's why it's really, really risky. It is very normal what's going on right now. And I'm just used to it. Like what wasn't normal for me was like 2008 when we were flipping. And then we would look at a house and it was like going to be worth 10%, 15 % less than the day we bought it. And so that was hard, right? We were trying to time it on the way down. Where it hurts in this business is when you get stuck in the middle, right? Like I have right now nine houses for sale of my own. Yeah. You know, I ran a Performa when I bought those properties. I thought I would have them for a certain amount of time.

23:24Market time, all my comps might have been five days during that time. Now they're 45. And so the extra cost, you know, the more time in a deal will slow down. And so it does come with a certain amount of risk, but that doesn't mean it's not solvable. You just have to do the underwriting up front. Your house that you bought a year ago, we would have ran the Performa at a four-month buy and hold. Renovate it in eight weeks, get on market, we'll sell it in the first week, close in 30 days, we'll be in and out of this deal in four. Now, when we looked at the Performa, we ran it at six months. We had an extra two months of time.

24:00Also, when it transitions, you don't want to go to the high end of the comps. So when we looked at this, we thought the value was 1.6 million. Yeah, that's the Performa. The Performa is 1.6. Our comps are 1.625 and 1.7 when you bought it. We didn't go to the high end of the comps. And so that's the important part. You can't get deal goggles. Yeah. I can buy this thing. How do I mitigate risk? Market's slow or not, as long as I buy it right and I look at it and have the right expectations up front, that's how it becomes a lot safer, right? So it sounds like really what you have to do is the same thing I recommend to people about rental property investing right now is just extremely conservative underwriting.