How an expert house flipper would start over | Larossa Workshop 119

What is The Larossa Workshop?

A real house flipper with over 300 projects completed brainstorms specific ideas and strategies in the Real Estate Investing world. Usually centering around the Rehab portion or how to use the rehab to get a better deal on the purchase of a house.

at the time of this recording it is exactly 13 years since I closed on my very first flip house and I thought what if I started all over today how would I do it differently and that's what this podcast is about I suppose I actually started before 13 years ago because there were a lot of houses that I went through and got under contract and didn't get it actually took me quite a bit of time maybe over a year to find my first property because I was very young it was hard to get a loan and went through all that stuff uh but but I wouldn't actually say that's when I started flipping I started investing in real estate at that time I really started flipping houses much later before I get into that story I'm going to explain to you how I am going to think through this I'm going to think through what I would do on my first deal which is what I would do on Deal one through three and then my strategy would shift a bit on deals 3 through 8 and then again on deals 8 through 15 and then beyond that uh I have a little bit to say about what would come beyond that but hopefully by that time I would be set up have my machine ready to go the overarching point of making this podcast and this content is that I think a lot of people get freaked out about flipping because you see all kinds of different strategies you see all kinds of different gurus talking about this thing that thing and the other thing and you got to you know get your LLC set up in Wyoming because of this law or that law and you have to know all these things about taxes and you have to know all these things about the liability and this other strategy and this person does this thing and I really just don't think real estate investing flipping or business in general is actually that complex a lot of people talk about the complexity of it because you hiring them or paying for whatever service they're selling is how they make their money but in reality it's much more simple than that in business you simply need to have something you can sell and a person to sell it to and then you have a business the rest is secondary and in flipping you need to have a house that can make you money and then you need to get it to the Finish Line it's that simple all the other stuff is fluff may be necessary fluff but not necessary to get started and I think that most people end up not getting started and we're going to talk a little bit about what the true cost of not getting started is so thinking back on when I got started I actually had two starts I guess you would say when I closed on my first property I was really thinking about it more as uh rental houses I had a high paying corporate job at the time and I was able to get bank loans to buy houses I was really young didn't have a credit history at that time so it was a little bit tougher for the first one but uh throughout the years I was able to really acquire rental properties because of that job and I didn't really do a lot on the properties at that time I was really buying rent ready stuff uh the delay of buying was really to save up money for the down payment so you probably know that you have to put a 20% down payment down when you're buying from a bank you know buying with a bank loan the first one I bought I was able to buy as a personal residence and then I moved out moved to renter in the next one I had to have 20% down also at at the time I would assume this is still a rule that you have to be able to show success as a landlord for a couple years meaning I had to have a renter in there uh so they could the bank could deduct the money that I had to pay every month for the mortgage since I showed success as a landlord the money that I was making from rent actually got counted as income for me so there was a gap between my first and next property but after that the only bottleneck was really saving up the 20% Which that's really the bottleneck for most people I would

assume or it should be the goal for everybody because over time that is where the wealth comes from Real Estate is the sure thing you absolutely will become wealthy if you stay in the game and continue to buy properties you or at least for most people the most wealth they have will be created by the house that they own for themselves because they'll buy the house with a 30-year mortgage most likely after 30 years they'll have paid that mortgage down to

nothing average appreciation for Real Estate but just on the conservative side let's say 3% so let's just do some quick math here let's say that your house was purchased for $300,000 it's worth $300,000 today and you own it for 30 years 30 years is the time it takes your mortgage your 30 years mortgage to be paid down to zero and at 3% appreciation that house in 30 years would be worth $728,000 and you would owe zero on it that is where most people's wealth come from now also people saveing their retirement funds and so on and so forth and wealth comes from that in addition my thought was always if that is the formula for one house why wouldn't I own like hundreds of them and that is the game every rental proper property you buy the same formula applies except for it's a little bit harder to get a 30-year mortgage but it is doable the bigger thing is you don't pay the mortgage your renter pays the mortgage if you're underwriting your deals properly that is the main goal is to acquire rentals to redo that formula over and over and over the problem is the cash that you need to purchase these things because you need to put the 20% down unless you're using more advanced methods one way to gain that cash is of course your day job the other way the route that I chose was through flipping because I thought that if I want to grow a real estate portfolio the best thing for me to do is get as good as I can at flipping houses because at the end of the day you either flip to the market a traditional house flip you buy it fix it up and then sell it on the market to somebody that's going to live in it or you buy it fix it up and then sell it to a bank meaning you sell the asset as leverage on a 30-year mortgage you get an appraisal and a bank will give you a certain percent of the appraised value as a loan let's say the house appraises at $300,000 they'll give you 80% loan to value that would be $240,000 so as long as you have less than $240,000 into it you would get that money as a loan on that property with that property backing the loan that's why real estate is so powerful because banks will loan on properties as the collateral now I was fortunate I was able to get these loans because of the job but I was always thinking that I want to break away from here and I want to go after house flip so I can really supercharge what I'm doing but I like most people probably had a lot of doubts not probably I know I had a lot of doubts I would convince myself that well you know I should stay in this job it's a growing career I'm making good money it's safe I want to have a family and you know a nice safe job like this is what I should do and for at least some stint of years I convinced myself that that was what I was going to do and I grew in that corporate ladder but eventually it finally got to me a few things got to me one is that I would see the profit and loss statement every month and I would think well I'm making that happen I want that profit and loss statement to be mine I want to make the bottom line the profit at the end of the month two is I knew that unless I went all in I wasn't going to be able to supercharge the result s now you can definitely get wealthy just buying real estate on the side like I was doing hence the formula that we talked about before however to make it happen fast which is what I wanted I knew that I had to go all in and the final straw was when I was working in Omaha Nebraska which is where Warren Buffett is from and I was at a subway for lunch and you know a Lincoln Town Car or whatever he drives pulled up to the subway and a uh crew of guys got out and an old man and I guess I don't know but I assume that that was in fact Warren Buffett but maybe it wasn't and uh but in my head it was and I just that was the straw that broke the camels back I knew that I wanted to grow something like that not saying I'll ever be at Warren Buffett's status but you get the idea a true entrepreneur and that's the life that I wanted and that was the thing that tipped me over the edge as soon as that happened I made serious plans on how I was going to break free and I did way too early that was one of the biggest mistakes that I made is I should have waited longer I got too antsy I did not formulate a plan I just found a flip from a wholesaler that had a humongous project I was actually going to take the roof off and build a second story had no experience with any of this stuff I had like done some DIY work on the rentals that I was buying but not you know this is serious construction we're talking about and after I bought the property not knowing what I was looking at when I bought the property the foundation was all sorts of crumbling so we actually had to rebuild the foundation from the inside out and at the time I was terrified of Permitting and all that so I actually rebuilt the foundation like from inside of the house thinking that the city would make me tear it down you know that's not the way it would work you would have to get Engineers plans to to uh back it up which is what I actually had to do was I I rebuilt the whole thing from the inside so I was like digging holes from inside the house cut open the floorboards digging the holes putting them in wheelbarrows taking the wheelbarrows full of dirt outside of the house throwing it into a dumpster outside and then you know that took me like a month to dig you know I had to do 10 foot sections at a time 3 foot deep because I was in Colorado at the time and the frost line is 3 foot and once I got a 10ft section out I would pour a footing and then I would build the cinder block foundation on top of that you know 10 foot at a time and uh yeah it was quite the Nightmare and then I finally got through that property it was 550 days straight I worked on it before it was finally done and I mean it turned out really nice but the truth of it is and and I did make money off of it I think I pocketed around $200,000 on that flip however it's kind of farce because the reality is that is what the closing statement would say but I drew a lot of personal savings to pay interest payments also do construction there's also a Time on the project where I was so out of money that I had to sell my truck and like walk to Home Depot also I lived at the job site the whole time in a tent in the backyard at one point I had like a little trailer that you know one of those popups that fit in the back of your truck I just had it on the ground in the backyard and the biggest farce of them all is that the money I made was not because I was a good flipper it was not because of the equity that I forced into the property via the construction it was not because of the great deal that I got on the front end in fact it wasn't a good deal at all it was not optimizing for the market it was simply because I bought at the right time in the right place and I was writing a huge wave of appreciation and I think that the house probably became $200,000 more valuable from the end from the beginning to the end of the project I.E if I had sat there if I had bought the property and sat there for 550 days straight and just looked at it I would have made the same amount of money however I guess if I didn't do that I wouldn't be talking about this today so thanks for the 550 days of pain if I were going to go back and do that over again if I were going to start again even without the rentals and you can't really count the rentals because they weren't making me any sort of cash flow they they were there of course and they did gain me some experience but not really I mean I was buying them off the MLS I didn't know what I was doing I was buying off the MLS and I would do a little bit of DIY work that I you know and I would do a little bit more in each one so it did somewhat prepare me for that but I mean I took a huge jump from the rental game to that flip that I did if I were going to do that all over again of course I would have stayed in that job longer and bought some rentals on the side and got you know in a better position but I was young single didn't have kids and it was easy for me to do what it took I.E selling my truck living in a backyard now if this were if I were facing this what I would do is I would focus most of my effort I mean like 95% of my effort on finding deals but I wouldn't overdo it because I only need to find one deal right now and of course there are other ways to find deals you could go on the MLS multiple listing service I.E going through a real estate agent you could go through wholesalers but I would find a deal myself I wouldn't stress about setting up complicated corporate structure I wouldn't think about much of any of that I would simply go online and set up an LLC the easiest way you can it doesn't cost much money it's easy to do you can do it yourself there's services that do it and then I'd go to the bank set up a checking account in that llc's name that will give you enough liability protection that's what llc's are for I am not an attorney so if you use that advice it's on you not me but I've set up many llc's in the parking lot of banks before I set up a checking account that was correlated with that and I do suggest at least doing those steps because that separates the business from you personally but I know a lot of people who started out in their personal name in fact I started out in my personal name with my first rental property now that I had set that up I would put some money in that account that I needed to get going maybe $10,000 and I would go to some of the list building websites like propstream property radar batch list batch lists I think is what they're called um not I have no affiliation with them the and then I would get a simple list I might do absentee owner I would probably pick the hottest spots that I wanted to buy in you know the upand coming neighborhoods they are good for flips where there's other flips going on I would then go to any of the services that send mail yellow letter is one that I've used quite a bit you can figure that you'll get like 1% 1% from the postcards that you send out of return you can get more than that as you get better at it but let's just say you send out uh 100 postcards hopefully you'll get a call out of that so I would be sending out you know th000 postcards 2,000 postcards and uh you should be able to get a deal out of that once again going back to the list make sure you are sending it to a list the houses that you want to buy me personally I would want to buy uh houses that are 1,600 square ft or smaller B bigger than 700 Square ft I would want right in the heart of the town that I'm in I would want absentee owners I would want owners that have owned the home for longer than a couple years I would want houses that have were constructed over 30 years ago and then I would work those phones and I would not get crazy about a CRM I would just keep people in a spreadsheet for now you know I'm preserving bandwidth for the things that I really believe matter at this point bonus you could set up a landing page just to look more legit so people know your local which is an important thing I think in your pitch as you're competing against other flippers and wholesalers see a lot of the guys that are sending mail are not actually purchasing the property themselves and so if you can say that you're local and it's your cash then you're in a good position I would get a deal in her contract a deal that I wanted to buy and then I would go tap into hard money loans I would go find the hard money lender for the deal so I would make sure that I got that deal in her contract to close in like 30 to 45 days to give me time to go find the hard money lender but if you have an actual deal you will find the money easily that's why it's so important to focus on getting a good deal when I went to that house the first time I would make a scope of work taking note of all of the jobs that I would have to do putting details next to them and making a budget I would be able to take that budget to A lender obviously I would comp the property to make sure that I truly had a deal on my hands so what do I mean by a deal it would I'd basically want to see that with the purchase price Plus the renovation I was at around 70% of the arv that's very broad we actually have a calculator that we use for the exact there after I know the arv and the rehab cost but basically 70% will do it if the calculator is available to the public it will be linked below at this point I would start meeting with contractors I likely would not be able to get them into the house because we haven't closed yet I would be showing them a scope of work but when I made that scope of work I would have made videos I would have taken pictures I would have detailed written notes about the scope of work and the property and all the information that they would need to know to give me some pricing when talking to them I would know that they couldn't give me an exact price because they haven't seen the property themselves and I would let them know that I understood that and so I would know that the pricing that I was getting was a ball Park in fact I would say that to take pressure off of them hey man you know I I know that you can't see the property and you need to see the property you can't trust everything that I'm saying and fact we just met and I wouldn't expect that of you I just want you to look at this and you know give me a ballpark so we can start to build a relationship and then once I close on this thing I'll get you in there because really I wouldn't want to get you in there early anyway because in case this falls out of contract for whatever reason it's sometimes they do I wouldn't want to have wasted your time building relationship Capital which we talk about a lot but by the time I closed on that property I would have contractors lined up I would know who I want to use on that property and really I don't need a lot here I might need a couple specific job contractors maybe a roofer mechanical electrical plumbing and most of the work would be done by an all-arounder we have lots of content out there about the types of contractors and what we use each one for but to sum it up I think that I would need to find maybe five contractors to complete this whole first project because it is going to have some construction element to it I would assume that I would be buying a house with a 50 to let's say 40 to $770,000 renovation I'm going to get a deal because it's going to need some work I'm not going to get the easy ones right away maybe I get lucky but most likely I'm I'm going to have to do some work on this first one that's good because it gives me a chance to start to build up some contractors again one other thing to note if I were just starting I would have and you should be doing this anyway a tight tight leash on my personal finances I would make sure that there was a lot of financial contingency in the deal because there are going to be surprises even with experience there's going to be surprises and especially on the first one surprises can take you out of the game after you've done quite a few especially after you own rental property a surprise on one property out of let's say a 100 well that doesn't hurt as bad as one out of one is a surprise also why banks are more willing to loan on packages of houses then when the project was done I would get a real estate agent to list the thing I might since it was my first one have the time to list it myself you know with the uh different for sale by owner options I wouldn't ever list as a for sale by owner you'll get chewed up out there you know it just automatically makes the property worth less in people's eyes so it's harder to get the top dollar but there are programs out there where you can list it for sale by owner but it's through a real estate brokerage you know you have to pay them a fee but you get on the MLS and all that kind of stuff so it looks like a legit listing not a for sale by owner listing you know at the beginning I would have more time to do that kind of thing and it would maximize the profits that I could get out of the house and so that would be a good thing I would basically carry out this approach for at least the first three properties that I did and I would not start marketing I.E sending out mail for the next property until I was closed on the first one to make sure that there was no overlap I would not want to take that extra risk I would want to get my bearings make sure that I wasn't risking the finances I have I guess I'm thinking about this as if you know I'm starting at zero everywhere I don't have any cash I'm trying to make it work on a shoe string so I wouldn't want to take the risk of dual properties at this point the focus on one through three would be putting away some cash so I had a buffer to play with for you starting out there if you're listening to this and you're a beginner it's to both gain cash and gain experience and skills so we are not in a hurry hurry right here we are expecting this phase to take anywhere from 12 to 18 months and that's okay if it happens faster great but it does not need to once you have skills and experience and cash everything gets way easier that's why they say that your first million dollars that you make is the hardest million to make because it's not about the money it's about the skills and the experience now going back to my experience when I actually started up I did the huge project that I was telling you about that I you know gained money on but I didn't really gain money the market carried me but I thought that I had gained money because I didn't realize that at the time and so naturally I would do bigger projects yet after that and so the next project was an even bigger one I took on some internal crew at that time and thought I had it figured out and that I was ready and I sure wasn't but I took on a bigger project and then after that I took on a bigger project yet and a bigger project and finally I got caught on a property and basically had to fire everybody that was working with me at the time in including subcontractors because I couldn't support it anymore I was not operating my business well and I had to finish a humongous project on my own lots of Lessons Learned there lots of Lessons Learned there and really when I finally got through that property I realized that my whole time there all of the flips that I had done up to that point you know which like this one lost me a lot of money this one at the end I realized that I actually didn't come out ahead at all the only thing that actually made me any money at all was the rentals that I had fortunately purchased which goes back to the main lesson that it's all about acquiring portfolio rental properties so how would I do three to eight differently you know deals three through eight I told you how I would do 1 through three now what my goal on 3 through eight would be is opposite of the way that I did it which the way that I did it was bigger and bigger and bigger projects what I would do is I would focus on minimizing the projects I would be looking for wholetail deals where you know there wasn't much construction at all or none you know I just got a good deal on the front end and and that's basically where the value was added on that property or you know the lipstick on a pig where it is just needs some small cosmetic work you know those are hard deals to find but at this point I would be getting better and better at finding deals so minimizing Renovations through better deal finding and finding my first rental property that I could acquire and it wouldn't hurt my cash reserves so I would look for non-institutional lenders certain lending is one that I've used in the past kavi is another one and these guys will actually give you 30-year fixed mortgages on rental properties based on the value of the asset they actually used to give you non-personal guaranteed uh loans on these but I don't think they do it anymore after the markets changed a little bit but these are not Banks this is how you would be able to grow your rental portfolio so since they're lending on the value of the property and not the cost of the property like a bank you can bur you can basically get all of your money back out of a deal I would also be looking for a property manager here because I would not want to spend the time managing a property at this point I would want to be focusing on the things that matter which right now in the 3 through 8 is really fine-tuning my deal finding so I would start to upgrade how I search for properties I would maybe add a Channel of how I found Properties or up my mail I would you know add a channel means maybe I would do have some cold cers uh maybe I would do some cold calling myself off of high high high value lists like condemnation lists I say that but I immediately want to retract that statement because we are trying to lower our Renovations at this point another list which is great to get and you actually have to go to your city to get it some cities will give it to you some won't is the water off list if somebody can't pay for their water and their water gets shut off then it's usually uh a great Prospect for you the and you know water is a public service so generally you can get those lists I would get off of the spreadsheet and probably build a CRM for myself or you know buy one of the services most likely I'd build my own in like an air table database or something like that uh so I didn't have the added monthly cost because I would still be heavily focused on my personal finances here to keep to increasing the cash which is the power in this game it's the power to make the right decisions doesn't mean to go buy houses with your cash I would still be borrowing from a hard money lender uh I would want to keep the cash reserves because that keeps the business flowing in a way that in the way that you want it to I never let myself make decisions based upon not having cash or not having time that's when bad decisions are made about properties and projects and that's how you cut into your profit margins I would still be focusing on upping my subcontractors making you know Finding better ones I would really be thinking at this point that I can have a little bit of overlap and that would be okay overlap with the property so instead of waiting till a deal was completely sold before I started looking at the next one I would as soon as the project gets over and I was through an inspection resolution I would start marketing for my next one so I might have a little bit of overlap but not much and that's basically what I do in 3 through eight so by the time I get done with 3 through eight I have cash saved up I have a rental property I have probably done some wholetail wholesale or Cosmetics I have lowered the amount of renovation per project I may have a little bit of overlap on projects you know project four to project five might have overlapped I owned them at the same time but I wasn't heavy into the project on both of them not yet I would expect 3 through eight to take another 16 to 24 months and that's okay we're not speeding up here we are just gaining skills and experience and cash and now rental Pro tip here if I was a especially good deal finder I would also be looking for possible subject two or seller finance properties at this point those are kind of like bonuses they almost don't even count in the properties the property count that we're talking about if you get a subject to meaning you basically take over their mortgage payments and wrap the loan it's not exactly the right way to say that and I don't want to confuse you so taking a pro property subject to the mortgage that is in place for a simple explanation which is not necessarily a simple thing so you should research this more but it is basically if the person you're purchasing the property from has a mortgage for $200,000 on this property and their monthly payment is $22,000 a month you would start making those payments for them the loan would still stay in their name but it would be attached to the property so in essence it's not exactly what happens but you could think of it like you're paying them the $2,000 for them to pay the mortgage of $2,000 that's not how it works you'll pay it directly but I think it's an easier way to understand it maybe it's not it is for me and then seller financing is when instead of a bank giving you alone a seller who let's say owns that $200,000 property and you make a deal with them where you'll pay them payments for the $200,000 so you might have a your mortgage would be with them and as long as your rent is going to cover those payments it's like a free bonus deal now going back to my story after I basically lost my ass on that flip it took me back to almost zero and then I decided to really start adopting a different strategy which is more in line with the strategy that I use now but not quite I really was trying a lot of different things at that time all in the real estate world but I wasn't near as laser focused as we're talking about now and that was really the issue I did fine but could have done better but I did grow really fast after I got more laser focused and so that if I were to do it again I would become even more laser focused I would do nothing but the exact type of properties that I want I would really focus on expansion through that exact property profile and I would build all my systems around that I would be going an inch wide and a mile deep I would be focused on every single project having a process and a look that was almost identical you could not tell the difference on a spreadsheet you couldn't tell the difference in photos because it was all so identical it was exactly what my profile was like that is the work all the different things that I wanted to try that's fun and you get have fun after you build the base so I would be really focused on building that base uh I would also be upping the amount of rental properties that I got at this point I would expect by the end of the 15 properties to have at least three if not five rentals and then at that point I would be ready to take it to the next level which is the supercharging and in my own story this is what happened I felt like I was ready to take on Partners uh especially money Partners who they weren't as interested in being active like I was with a construction company with a wholesale company um you know we had property a property management company and all I did was real estate and so I would take on Partners lots of them who had uh cash but they didn't really want to be as active and so they would be active for certain things but not active like I was out in the field in fact most of them didn't even live where I live and that was kind of the agreement there were other kinds of partners that I would have as well that were more like active partners and even raising private Equity Funds taking private Equity uh we did a lot of different things and and that was really good for growth at the end of a huge growth period really downsized a lot of that and I would say that if I had to do it differently now I would still want to build through Partnerships but I would be very picky about the types of Partnerships the uh separation of duties the in and if it was Raising Equity I would be very specific about what the expectations of me should be and what my expectations would be and you know when you're like first growing you just more is better and you don't really think about those things I would think about those things this time around and I'm not saying like that was a bad thing I just certainly could have done it better and that's what I would do if I had to start again from scratch hopefully I don't but you know maybe it'd be fun