I’ve flipped more than 1,000 properties worth $500 million. Here’s what I’ve learned about real estate from my biggest losses.

I’ve flipped more than 1,000 properties worth $500 million. Here’s what I’ve learned about real estate from my biggest losses.

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I’ve flipped more than 1,000 properties worth $500 million. Here’s what I’ve learned about real estate from my biggest losses.

  • John Maxim is a house flipper who learned how to do everything himself to understand the market.
  • He says he aims to make at least 10% per property and tends to take a loss on one in 10 houses.
  • This is his career story, as told to Elle Hardy.

This as-told-to essay is based on a conversation with John Maxim, a house flipper of 15 years based in Salt Lake City, Utah, about his job. The following has been edited for length and clarity.

Back in 2000, some friends and I bought and created our own little frat house. We converted one bedroom to have four bunk beds and rented out the spare rooms. I moved a mattress and a dresser under the stairs in the house, and that became my room.

After our mortgage and bills, we were making $1,000 to $1,500 a month in passive income. This opened my eyes to real estate as an avenue for making money — even with no background in it.

After that, I was looking into buying a fourplex rental and realized I could save even more money if I got my real-estate license

That’s because there’s at least 2.5% of the total sale price in commission fees on all my deals, as the typical commission on a home sale is between 5% and 6% that the seller’s and buyer’s agents split. If I was the agent on the deal, I wouldn’t have to pay the fee.

Getting the license consisted of 90 hours of school and a test. It cost $150 for school and a further $900 for the license.

When I started, I learned from other agents around me and by reading the news. I also joined a local real-estate-investing group.

But the best way to learn was to physically do it — go out and look and start buying and selling. Once I felt I’d learned about the property market, I decided to get into flipping houses, because there’s a much greater margin in that.

One day I was walking down the street and saw a guy in a wheelchair trying to open the door of a really dilapidated home. I went over and asked if I could help him. We got to talking, and he said he was selling it for cash. When he told me the price, I nearly fell over — $140,000 was low for a house in 2005.

I tried to get a mortgage to buy the property because lenders typically won’t finance properties with known structural issues. I got the house under contract and called everybody I knew to ask if they would lend me money. I found an old friend from church who said he believed in me, and he lent me the money to do my first flip.

I actually hardly made any money on that flip — around $6,000 after 7 or 8 months of work. Most people usually give up at that point.

But I learned a lot of things from it. For example, the cost of what you put into a home often doesn’t equal its value. New windows can cost $15,000, while end buyers will assign almost no value to that — whereas a backsplash in a kitchen can add nearly $10,000 in value and only cost $1,000 to put in. Buyers care a lot more about design than function.

I also learned that the end number on the spreadsheet never seems to be the end number you actually get. There are many unknowns in fix and flip — if my spreadsheet were always right, I’d be building rockets with Jeff Bezos.

Most importantly, I learned that I had to be at the top of my game — otherwise I’d have all these houses and a lot of debt. Since I started, I’ve flipped more than 1,000 properties that total $500 million in real estate. (Editor’s note: Insider reviewed a spreadsheet to verify Maxim’s total portfolio.)

I have a standard method of calculating costs and profits

I used to flip 100 houses a year. The last couple of years I’ve been flipping 60 or so and focusing instead on quality over quantity. I’m doing a lot bigger deals, with acquisition costs between $700,000 and $1 million and a sale value between $1.3 million and $1.8 million. This price range is not one I recommend to new investors — higher payouts come with higher risks.

I don’t really get into a house unless we’re making at least 10% of the value when it’s done. I target making $30,000 to $40,000 per house, and I get that pretty regularly. That’s based on Utah’s median home price. So if I sell a house for $1.8 million, I want to make at least $180,000 to take on that risk.

I do a lot of my own valuations

I’m big on finding what we call the “after-remodel value.” I make an educated guess based on the sales from three to 10 comparable homes within a quarter-mile or half-mile radius of the home. I try to find home sales that have also been remodeled and take a gut average of those.

When you start out, you want to be more conservative and ignore outliers. Get an experienced agent to pull comparisons for you and help you understand ARV. They’ll do this for free if you agree to let them sell the home for you when you’re done with the remodel.

Once I determine what that is, it’s simple math. I figure out what my rehab is going to cost and the amount of interest on my loan, and the leftover is what I make.

I’ve learned a lot about renovations the hard way

For my first flip, I hired a lot of people. For the next seven or eight houses, I did a lot of the work myself — even electrical and plumbing — because I didn’t want to spend that much money on contractors. If you’re handy at all, I think it’s a really good idea to learn as much about that process as possible.

You quickly learn what takes more time than it’s worth. Demolition, painting, and laying floor can be done by pretty much anybody. Tiling, drywalls, and finishing carpentry have a learning curve — you can teach yourself to do it, but it’ll be done much faster and better if you hire someone.

Learn how to do a lot of things so that when you’re getting bids, contractors don’t take advantage of your lack of knowledge

I taught myself electrical through a book sold at Home Depot for $7 called “Wiring Simplified” and then used YouTube to supplement the rest. Then I paid a licensed electrician to check all my work and show me where I went wrong.

Now I have several project managers on staff and different crews working on 10 to 12 houses at a time.

I always say you can have two of quality, speed, or price — never all three. I usually pick people who give me quality and better prices. I deal with speed by doing tons of follow-ups and bringing contractors beers or Gatorade on the job site.

Despite doing this for almost 20 years, I’ve certainly had my share of bad experiences and losses

I wouldn’t advise buying sight unseen if you’re just getting into flipping, but occasionally I will if I believe the numbers will work.

A few years ago I bought a house in Ogden, about 30 miles north of Salt Lake City. I hadn’t been into the house, and when we got in there the foundation was so bad. We ended up having to drill down to the bedrock and put the house on stilts. That house ended up being a complete loss.

You’re going to lose once in a while. Getting over that fear is what allows me to make even more money, because I’m willing to take action knowing that one out of 10 of these deals is going to have something that I can’t control. In my first three years it was more like one in seven.

I’ve found that for myself and many of my competitors and collaborators, the main factor in losing more than you should is letting your ego get in the way of making the right decision. Often I’ll choose to lose $20,000 and move on. Keep an eye on what things really cost, including the value of your time and the future value of your money.

A lot of people will say go for homes that are 40 years old or less with three bedrooms and two bathrooms because that’s what people want to buy. I disagree. The best places to buy are in older neighborhoods near cities where your price per square foot is the highest. Sometimes that scares people off because they think old means more problems, but the payoff can be worth it.

The pandemic has changed the market a lot recently

I try to flip within six months, but the market changes and we have to move with it. Right now it’s really hot and harder to find good deals. Because of that, in order to make money, we have to do a lot more remodeling, which extends the flip out to nine months.

I predicted early in the pandemic that more people would be moving out to suburban and rural areas, but we’re actually seeing the opposite. In Utah, people are moving into the downtown areas to either older homes or newer condos.

Another trend that caught me off guard is the bedroom-to-bathroom ratio. It used to be that you had a master bath and then another bathroom for two or three bedrooms. Now people really want a bathroom for every bedroom. Many people find that adding another bathroom is almost more valuable than adding a bedroom nowadays so that people can have their own spaces within the home.

Do you invest in real estate and want to share your story? Email Lauryn Haas at [email protected]

Source: www.businessinsider.com

Author: Elle Hardy

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