I do not envy flippers

I do not envy flippers

 

I was told the same thing twice this week by two different financial advisors of mine. They both said, and I quote: “I do not envy flippers.”

 

The first instance happened on a weekly call I have with a company called Simple CFO. Simple CFO is a team of accountants with specialized knowledge about the real estate investing world, and they integrate a program called “Profit First.”

 

Profit first is a Dave Ramsey envelope type system for business. And since we have implemented this system, it has changed our finances for the better and helped us to be better investors. As a matter of fact, the founder of Simple CFO, David Richter, is in the process of writing a book called “Profit First for Real Estate Investors” which will be available by the end of the year.

 

My CFO advisor’s name is Matt, and he is in the process of selling a rental that he owns. He has good reason for selling it, too. It barely broke even on cash flow, it was outside of his normal working area (meaning he wasn’t able to lay eyes on it regularly), and it had appreciated a lot since he had purchased it. Now seemed like the best time to offload it.

 

He put it on market, got an attractive offer and was all set to close. But at the last minute, his buyer’s financing fell through. He told me about how nerve racking and frustrating this sale had been, and that’s when he said, “I don’t envy flippers.” He even went on to ask me how we handle situations like this.

 

We will come back to that question in a minute.

 

The next instance came when I was talking to, in my opinion, the most wonderful CPA on the face of the planet — Kelli Gonzalez. You see, Kelli is an awesome CPA that knows tax law inside and out. On top of that, she and her husband, Louis, are real estate investors. This means when I call her for advice about a deal I’m working on, I don’t have to explain terminology or educate her on what deal structure I’m doing. She already knows and can advise me properly.

 

I am grateful for not only her guidance, but for her friendship, as well.

Something that is great about Kelli is that she is awesome about picking up the phone. So, when I called, she picked up after only a few rings. I was calling because we were doing some things we don’t normally do. Namely, we were having sales activity happening in our rental business and I needed to know what our tax stuff was going to look like and what we needed to do.

 

Normally, we only do our sales activity in our flip company that is taxed as an S corporation. Kelli started telling me about why sales in the S-corp were better, saying that we could take part of the money as a distribution and then part of it as salary. This scenario ensures that we only have to pay self-employment taxes on the salary portion, and it saves us 15.3% in tax on the other portion.

 

After we got through talking about that, she said, “I just don’t envy flippers.” She went on to talk about materials and labor going up and how heavily flip properties are taxed. She said for the effort and risk, it just doesn’t seem to be that great of strategy.

 

 

She is right. Flipping looks very attractive on the surface because it appears to bring you lump sums of cash. But when the price of everything goes up and you spend an extra $50,000 on a flip rehab that then goes to term on two different contracts that don’t convert, pushing you out an extra three months without that money, things can get very, very tight.

 

Ask me how I know. And I will tell you about a deal we have going right now.

 

Now to Matt’s question about how we handle that type of situation. It’s simple: we have rental properties that pay us a positive cash flow each month. And that money comes in whether a house sells or not. You see, the goal of a real estate investors is not to be a flipper. It’s to get rental properties that are paid for. Flipping is just one of the tools we use to get there. But without the rental properties we already have, well, with all that is going on, I might find myself saying that I don’t envy flippers as well.

 

Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.

 

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