Have you been thinking about buying a home that someone pays you to live in? What about buying a home, fixing it up, and selling it for a tidy profit?
Being a landlord or “flipping” a house might sound daunting to single-family homeowners. But they also can be attractive solutions for someone who wants a steady source of supplemental income.
Savvy real estate agents are familiar with the ins and outs of buying, refurbishing, and renting or leasing investment properties, as well as quick-turnaround sales.
We spoke to two Berkshire Hathaway HomeServices California Properties agents with considerable experience in investments as well as flipping to get their advice for anyone considering either type of transaction. Chris Feil, a REALTOR®-Sales Associate in our Pacific Palisades office, purchases investment properties for his clients as well as The Feil Group, which has been involved in many flips. Diane Oliver, a Commercial Broker in our La Mesa/El Cajon office, focuses exclusively on flipping homes and working with people interested in doing the same.
Chris and Diane agree that either proposition only make sense when all the financial elements fall into place.
“It’s all about the numbers,” Chris said of investment homes or rentals. “Location is extremely important, but not everything. If you’re looking for a long-term investment, like a multi-unit, you don’t want something that’s necessarily in the best neighborhood. Maybe look in a neighborhood that’s up and coming so potentially your value can increase.
“Cash flow is really important. In some areas of L.A., we have rent control. So if you buy a building with long-term tenants, there are very strict rules on how much you can raise the rent, so your cash flow isn’t going to increase much. You want to look for a property that’s in an up-and coming area so you have the potential to raise the rents. So in terms of location, you’re looking for area trends, future growth, and long-term property value.”
“The numbers either work or they don’t work,” Diane said about house flipping. “So we spend most of our time ‘treasure hunting.’ We’re looking for properties that make sense for an investor. As soon as we find one, we go though our list of investors and try to find the one that’s right for this project.
“We mostly deal with experienced investors, but we do get some new ones. We’re doubly careful with new investors to make sure the numbers are there. We find out what we can buy a property for, and then we calculate what the after-repair value, or ARV, should be, so they’ll make money.”
“We buy homes and do new construction on them, and they’re investment properties for us,” Chris said. “So property condition is a really important factor. If you’re going into a building that has a lot of old systems, such as HVAC and plumbing, over time those are going to be a huge expense to replace. If some cosmetic changes would make the property look that much better, it’s a good way to increase rents to create more cash flow.
“We run numbers for everything from carrying costs to how much the build is going to cost to staging to how much it will cost to sell the property with other agents involved. Someone who has experience in this category can definitely help investors break down the numbers and see what works for them financially.”
“We know what it costs generally per square foot to renovate a house, and if there are any big items to add, like refinishing the pool, fixing the roof, repaving the driveway,” Diane said. “We add those things on top and make sure there’s enough room for a profit. And on the ARV, we make sure that we’ve got three sold comps within the last six months that prove our price. So we have to find three properties that already sold at that number or a little bit better to make sure there’s enough room in there for an investor to do it.”
If you’re serious about getting into investing or flipping, there are several ways to start the process.
“Search online, call any and all agents you have at your disposal, or names you hear around town, and interview them in person,” Chris said. “Speak with as many as you can to see what kind of experience they have. Once you talk to enough agents, you’ll find the right one.”
Diane’s approach: She sponsors several investment clubs whose meetings are open to all novice and experienced buyers. The meetings also are attended by general contractors, other agents, house stagers, property managers, and others who are involved in this type of work. Diane also has her own website where interested parties can “tell us everything they want: what size project, two to four units vs. single-family, cosmetic fixer-upper vs. full-blown ready to go, if they do cracked slabs, etc. We get an idea of what experience and skill level they have, the price range they’re looking for, and what area of town would be best for them.”
“I have many clients looking for single-family investments because they are a lot less work than multi-unit properties.” Chris said. “With single-family, you’re dealing with one tenant, so it’s a lot less work to deal with one person. There’s always wear and tear and something to fix or needs to be taken care of. If you try to do it yourself, you’re constantly getting a lot of calls from tenants. So it’s a matter of how much time you’re willing to invest in it and do these things for tenants.
“Management companies are another way to go. They’re worth their weight in gold if you find a good one because there’s definitely a lot of work involved, which can take a hit on your cash flow. It’s just as easy to get into an investment property that becomes kind of a pit, where you’re either breaking even or hemorrhaging money.”
“There are two kinds of investors: the renovators and the ‘buy-and hold’ guys,” Diane said. “Most people try to flip first so they can gather what I call ‘play money.’ They’ll buy a house, fix it up, sell it, get hopefully a little bit of profit, most of the time only shooting for about a 10 percent profit. Assuming that it goes well, they can use that profit to make the next flip easier. They can borrow less money, which means they’ll make more money. Eventually they’ll pile up enough ‘play money’ that they don’t need it for the next project. At that point, they can park that money in a buy-and-hold investment, which would give them immediate cash flow.
“This is all I do now after 14 years in commercial real estate. It’s a crazy-fast business. It’s really fun.”