We’ve all heard the saying, “don’t count your chickens before they hatch.” Wise words, but in our real estate businesses, some of those chickens hatch and we need to count them. In a moment I’m going to tell you how the TV shows get this seriously and dangerously wrong.
Today we are going to talk about how to figure out what you made on your property. We will include all of your known expenses and talk about some of the hidden costs as well. And Roger points out that when you consider all these expenses, we all need to rethink what we are paying for our projects.
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News and Resources:
- Some thoughts about the so-called non-disclosure states: https://www.oceancitytoday.com/business/real_estate_report/several-states-do-not-disclose-sale-prices-to-public/article_31fe9010-9dab-11e9-bf92-cb9ad3f9d4ec.html#:~:text=But%2C%20there%20are%2012%20states,not%20available%20to%20the%20public.
- This is a very nice summary of non-disclosure states and what to do with them. https://retipster.com/non-disclosure-states-map/
- The WSJ weighs in on non-disclosure states https://www.wsj.com/articles/the-states-where-home-prices-are-secret-11560956939
- You can get Privy. They are not affected by the data loss: Privy: http://bit.ly/getprivyprogram
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Expected Air Date: Mon 2/8/2022
[0:00] We’ve all heard the saying don’t count your chickens before they hatch.
Wise words but in our real estate businesses some of those chickens hatch and we need to count them in a moment i’m gonna show you how the TV shows get this seriously and dangerously wrong.
[0:30] America, this is the flipping America show. I’m Roger. She’s star. How you doing today, Star?
Figuring up what you made.
What they do on TV shows is they will, you know, when they’re wrapping up and you’ve seen all the beautiful before and afters and so forth. They will.
[1:01] The investor paid this amount of money for this house and they spent this amount of money fixing it up and then they sold it for this amount of money and look at that profit. Yep.
And it looks so good. It looks like, oh man, it just like, baby, I wanna do that. And you know, in one sense, I have to say, I’m grateful for that because that has been.
Interest that is made the flipping America show one of the top real estate podcast in America and I’m grateful for that but it also,
From the very beginning it kinda bothers me because they’re not telling the whole story but you know how it is if you tell the whole story it’s not a sexy,
That’s right. Right.
Okay. Now, I have seen in all fairness. I have seen issues a few shows lately. Put the commission in there but even then, that’s not your real profit from the deal.
Okay, there are some things that just are not being counted. Now, I’m not gonna sit here and do a lesson for you.
[2:08] On bookkeeping or quick books or any of that.
[2:13] What I firmly believe is if you’re the business owner you don’t need to be in those weeds you need to keep good record yourself,
And you need to have people around you that know how to get it recorded either a bookkeeper that you hire to come in
1 day a week or 1 day a month, or maybe, you know, if you have scale in your operation, a full time bookkeeper, but,
They know the ins and outs of the bookkeeping software I wanna talk to you about the principles and the reason I wanna talk to you about the principles is you need to be thinking about these things when you’re making the offer,
To think about the other things,
One of the things that they never talk about on the shows I maybe I don’t watch them all the time especially anymore
But i have never seen a conversation about the cost of capital.
You know, I did a thing. I did, we did a show, not too long ago about the Adam Data report on house flipping, and i said in the opening to that one,
If you’re an average investor according to the Adam Data.
Because your gross profit minus the average profit to do a rehab minus the cost of capital put you in a negative category and.
[3:39] You may say well we didn’t lose money we didn’t make a lot of money but we didn’t lose money really I want you to think about how much money you made versus how much money you put into it
Not even reckoning your time and effort we can do that separately but just how much money did you put into it and how much money you made,
Ask yourself over the same period of time if I had bought an index stock fund where would we be.
And if that number is anywhere close your wasting your time.
[4:14] That’s true. I have a question though. Alright. Okay. The mayo rule.
The 30% margarine did you think that’s a little greedy,
We have hundreds if not thousands of first time listeners to every show. Yeah. And so we’re happy about that. Welcome. Glad you’re here.
The mayo rule is it has nothing to do with Chinese leaders it has nothing to do with what you spread on the bread to make your sandwich taste good.
My dad prefers to anything that you like mayo and mustard and ketchup he’s he just refers to all of them as slick em,
He just wants a little bit of moisture added to his sandwich he’ll say pass the slick ’em he doesn’t care what it is or what it tastes like.
Offer. Okay. And it’s very hard in this format with the video or,
Audio to really illustrate the maximum album offer formula but it’s like this. First of all, you figure out the,
The after repair value or the ARV that’s what you’re gonna sell the house for when it’s all fixed up.
[5:38] Okay then you take once you have that number you multiply it times. Seven because you’re going for a 70% of the ARV what we’re trying to figure out here is what we can offer for the property okay,
Put a 70%,
Then you subtract your repairs from that number so your final all in on this is 70% of ARV,
Okay let me give you some numbers as an example just to clarify let’s say that your offering $100 thousand and I know where can you find a house for $100 thousand well we find some but.
[6:15] That we’re not gonna get into that.
You got it right now. You corrected yourself. Arv is $100 thousand. So you multiply that times. Seven and I picked 100 1000 cuz the math is easier.
In it you’re at $70 thousand, okay? So, that would be your max offer but first, you gotta repair it. So, you go in and you say, well, is that really need a whole lot? It just needs a few little things here and there. Let’s say you could do it for $15 thousand.
Okay and I don’t I wish for $15 thousand rehabs it’s been a while since I’ve seen those days yeah,
Now there’s $15 thousand just to.
[7:00] I digress.
That is your maximum allowable offer according to this. Formula.
It’s really tough.
Because yeah there is a line between self interest and greed that’s a conversation we can have on another day but we don’t wanna cross that line.
Steadfastly maintain that this is the the margin of safety that you have to build in because the mayo formula allows for the expenses of repairs but it does not allow for the expenses of.
Cost of capital.
[8:09] You see you’re buying a house that has been previously used or abused or ignored.
[8:17] There’s a decent chance that whatever the behaviors of the people were that led to the property becoming distressed enough that you could get this kind of deal on it.
[8:27] There’s some deferred maintenance going on. Meaning, they did stuff they didn’t take care of. You’re gonna have to fix some things.
And it may be some major things. Maybe,
Significant if not major things that the former owners didn’t even know anything about let’s say you wanna replace the.
Faucet. These just the control knob on the shower,
Man you realize what you gonna need to do is replacing the entire valve so you open up the wall behind it and when you open up the wall behind it you see a nightmare it’s been dripping leaking a little bit for years and that entire,
Wall cavity is filled with mold.
And now you have a huge extra expense that you didn’t anticipate this happens it happens all the time and if you,
Will because you’re so desperate to get a deal if you make your numbers thinner and thinner and thinner and everything has to go right in order for you to make any money at all you’re setting yourself up for a disaster.
I have seen and heard about people flipping houses having to take a check to closing just to unload the nightmare that this thing has become I’ve seen this process break people I’ve seen it
Break spirits, break banks,
You’re buying a deal, not enough margin. If you have a 30% margin and if everything goes perfectly.
The best you can hope for is a 22% net margin after you pay commissions in the gossip capital,
But it’s you’re not gonna even get to 22% net margin. You’re gonna get something around,
15 to 18%. If you get that, you should feel like you’ve had a good experience.
Okay now that that is actually in terms of a return on the total investment not necessarily return on your cash because if you borrow money I don’t wanna get too far into the weeds of leverage and so forth here,
But if you borrow money, you return on cash is gonna be a lot higher. We’re just talking about the return on the investment. In order to make sure that you have the right margins of safety, you have to keep it.
And so the next question is gonna be where can I find deals like that?
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[12:59] Alright, your question was where can you find deals like that? That that’s truly a brilliant question. I know, it came from a brilliant man.
The fact is, it is a challenge.
[13:32] Hey you’re on a recent flipping America Korea call
One of the questions there was is there any hope to find deals in the Atlanta area now on those calls we have people from all over the US,
This particular person was in the Atlantic area and it since I am also in Atlanta,
To this and say,
Some things have combined to create this,
Fiasco but basically the condition of the housing market it’s not fiasco really the condition of the housing market over the last few years,
Has, you know, created demand. We got low interest rate combined with low new housing starts. Has created an enormous demand in the market and there’s just not a lot of available inventory. Then, you put that together with the pandemic and the foreclosure moratorium,
There are no.
[14:28] You know, type of properties. Investor type of properties or properties we can pick up at the foreclosure auction at the courthouse steps or we can buy them from the banks later on,
If they go to the process and no one bought them at the steps as REOs,
Another thing that we do is we work with people who are behind under mortgage and are in danger of losing an in foreclosure. Well, for the past year and a half.
People have been behind on their mortgage but they’re not any danger losing it in foreclosure and let me tell you something denial ain’t just a river in Egypt.
[15:05] People are more than happy just to ignore their problems until they’re within a few days of having to move. Yeah. And so,
You know those marketing it’s been tough but.
[15:23] There’s always something that’s difficult.
[15:31] Think again now,
But if you look at it or if you know anything about what’s going on, you know that most of that drama is manufactured. And I think all the time, they don’t have to move. Yeah. Any drama, there’s enough.
Challenge. It’s just the challenges that we face are more of the daily grind nature and not that dramatic and probably not that interesting for TV. In fact, it would probably discourage people from getting into this business.
[16:03] If they were really doing a public service they would do that yeah,
And we don’t encourage everyone to drop what you’re doing start flipping houses like you see on TV,
We talk about all kinds of real estate investing here on this show and so since we’re talking about counting your chickens I think that probably we need to talk a little bit about rental property.
Profits as well, right? Yeah. That would be great. Yeah. Right.
I’m not the type of educator that asks the question that has a right answer and put it out there to the class and let them guess around and make wrong answers because all that does a stifle participation. Yeah. I had a good teaching technique. So,
I’m gonna throw this question out there but I’m not asking you to answer it. Okay.
Because I don’t want you to risk getting it wrong and I haven’t,
Alright. So, the question is, if you have a rental house that’s cash flowing $200 a month?
[17:18] How much money will you make in a year?
Two, 424, 100.
No the maintenance.
[17:48] And you had
Get the paint the house which is depending on the square footage let’s let’s throw it out there for about
2000? Yeah. And then you can pay a couple of rooms for that. Yeah, we can say that, right? But with your flipping American membership and you get a 30% discount.
And then what else do we have to repair? We had to have some work done on the HVAC.
Oh god. Yeah, a little tune up. We had a little free on lake. I need to
Okay. So, that’s what. I don’t know how much that would cause. Well, that was $700. Okay, I thought five but okay, I was close. 700. Yeah, it doesn’t really matter. The specific numbers don’t matter. The point is, if your cash flowing $200 a month on a rental house.
You’ll be lucky to breakeven you’re not making any money yeah and so the next question to ask is why do this.
[18:51] Well, why do this, Roger? Yeah, well, that’s it. That’s a very good question. We’re probably gonna get into a little bit later cuz we’re almost out of time for the day. But I will tell you this
There are several compelling reasons to own rental properties that have nothing to do with how much money you make because really you don’t make that much money on rental properties but you do grow your net worth.
You build equity over time you get enormous tax advantages you buy rental properties you may not be paying taxes for a little while.
Okay that music means that we’ve gotta go to the Irish blessing,
And here it is for today. May peace and plenty bless your world with a joy that long endures and may all lives passing seasons bring the best to you and yours.
I like it. I love it. Yeah.
Oh, wow. Okay.