Real estate investing question of the week: The answer to your flipping question

Reader Question:

When I hear people who are flipping, or who are talking about flipping, they are usually only talking about flipping low-priced or averaged-priced single family homes, and there’s nothing wrong with that. My thing is, yes you need to start small, with say a $100,000 property or $150,000 property. But I want to eventually graduate to flipping a commercial property that I bought for $8 million and flipped for $10 million. I know that sounds kind of stupid, but hear me out. It seems to me that most people who are flipping never graduate past just flipping these cheap homes, hence why they never really make any big, real money. ($10 million to $20 million liquid) You need to move up the ladder, and say, “Hey I flipped this $100,000 property and now I am going to flip a $500,000 property and then a $1 million property, etc. I know it’s harder and riskier to flip expensive properties but to me that’s the only way to get to the big money – not just make a good living off flipping. But do you think this is the best way to go if you have big goals of getting to the big money? I see it as the only way to get there. Buying and holding is way too long-term for me. This was not meant to offend any flippers out there, I just want an honest opinion/answer. Also how long would it take in your opinion to cash flow $1 million a year in net income? Thank you. – Stephen

Monty’s Answer:

Hello Stephen and thanks for your question. You have so many comments and questions I am going to answer you by repeating some of your questions. I may ignore some questions but you have packed more into this than I have the time or inclination to answer. As you stated, this is a little outside the Dear Monty intent. Here we go:

Why are people talking about flipping low-priced homes? First, flipping low priced or averaged priced single family homes is done primarily because there are a lot more of them, and competition for them is fierce. Second, I would never use the word stupid, just uneducated. There is no easy way to make money in any business, but the people who would end up with $10 million or $20 million liquid have a variety of ways they have achieved that, most of it incrementally. I doubt the smart folks at, say Blackstone, would agree with your statement, or the flipper in Detroit who bought 7,500 foreclosures at once.

When you say you want to move up the ladder from flipping a $100,000 property to a $500,000 property, yes it is harder and riskier. Pardon me, but it sounds like you have yet to do one. And, you feel you are already an expert. Smart people rarely “flip” large commercial projects in the sense you are describing. It has happened, but generally it is a lucky accident. Show us you can succeed on the first one.
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No matter what you do for a living, the only way to get to big money is to spend way less than you earn and then make long-term investments. Maybe you should consider options trading or hedge funds?

I am fond of the saying “Dream Big,” so I applaud the fact you are thinking about it. But my opinion you are too inexperienced to know what questions to ask. I know some “flippers” who have become very comfortable flipping homes. And, I know others who had crashed and burned. The key to dying wealthy is spending less than you earn and making wise investments over time.

How long would it take to cash flow $1 million a year you ask? 30 years minimum? An acquaintance of my passed away recently. He was well educated and conservative. When he turned 21 in about 1945, his father gave him a million dollars and told to go make his own fortune. He did. He started with a small strip mall and worked up to building “big box” stores and leased them to national or regional retailers. He was also very good at borrowing money and attracting quality investors. Not certain when or if he ever hit your milestone (he lived very conservatively on way less than a million a year) but he died very happy with a wonderful family – and very wealthy.)

I hope you found this information helpful, Stephen. Ask if there are other questions.

Respectfully,

Richard Montgomery

Monty’s Answer:

Large commercial real estate projects in most instances are seen as “risky” by lenders, and nothing happens in real estate until lenders say “yes.” Without financing(leverage) real estate becomes even riskier, because cash on cash returns are not high enough on their own. Big commercial projects are sold on CAP rates. CAP rates can change almost overnight. CAP rates vary based on history, occupancy levels, quality of construction, neighborhood and a variety of other considerations. They also vary on type of property. Lenders also are extremely keen on the track record of the borrower. They do not want to lend to people who are weak or have stumbled. Theoretically if a person has the wherewithal and solid record of flipping huge projects, theoretically they could never have done the first one. The market place in commercial real estate is a sharks world, and the people who play in it are smart, have big money and make very few mistakes.

The one time I have seen it, I cannot give specifics. People could lose their jobs, reputations or both. Deal was simple:
• Large metro area
• 5 Million office build to be occupied by subsidiary of fortune 1000 company. (Building had been for sale for several years for 6M)
• The deal is struck subject to due diligence.
• After signing, the fortune 1000 company sells off the subsidiary quashing the deal.
• Still in due diligence, investor buyer follows up on a last minute tip, which turns into an offer to the investor from a major corporation who needed space for a new project, that cannot close before due diligence expires.
• Investor buyer closes for 5M and sells two weeks later for 6 million. (I cannot emphasis how extremely lucky the investor buyer was.)
My experience is those deals are once in a lifetime.

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