Flipping vs. New Builds: The Risks and Rewards

Dan Austin: [0:00] Hey there. Welcome back to another episode of the Collecting Keys Real Estate Investing Podcast, the podcast where we teach you how to make massive income, not just passive income, because massive income is so much more fun than passive income. We need both, but passive income doesn't usually buy Ferraris. At least it takes a long time in my opinion to buy Ferraris where you can make massive income and buy that super fast if Ferrari is your thing, maybe it's not. Whatever is your thing, use your massive income for it. It's a solo episode today. You have me, Dan, Austin as your host, which means it's a Friday Focus episode. Today, I wanna focus on my special interest project or my side hustle, if you will, which is doing a new construction spec build. I am building a house speculatively to sell on the market next year, which means I do not have a buyer for it in mind. It's sort of like flipping a house in that you buy a house, you fix it up, and you sell it to somebody out there on the open market, where this one, I am buying a lot, building a home, and selling it. Call it a side hustle because Mike's not involved on this one. He's not really into construction. If you listen to the podcast, you know he doesn't really care about this stuff, and this is actually more of a bucket list thing for me where I just know that I would regret if I don't at least try it, and I'm in a position timing wise, financial wise, like, where this makes sense for me to dive into this. So again, this little side hustle, this isn't the backyard homebuyers or the collecting keys direction we're going as a company. Maybe it will be.

Dan Austin: [1:28] Maybe we find out a bunch here in this next six to eight months while I do this, and we decide we're gonna do a bunch of new construction. That is not off the table, and I know Mike would definitely be into that if it made sense, especially as I build up some expertise in this area. So today's episode, I just wanna talk about it, why I'm doing this, why now, what what I'm expecting out of this process. And hopefully, it'll be interesting to you because when I bring this up to folks in our scale community, or I bring this up to people in GoBundance, or other communities I'm in, or just other people I talk to in the day to day. They get really excited, they wanna hear more about it because they wanna understand what the opportunity is here. Because to be honest, the market's kinda driving people to be innovative or to get step outside of their typical arena in real estate, and look for new ways to make that massive income, or maybe better ways to own properties for real estate investments. You know? Maybe buying that shitty house that needed a lot of work isn't your favorite, and you're like, man, what if I just had a lower cash on cash return upfront and did a new Build to Rent or bought a Build to Rent? You know, there's a lot of things swirling in people's minds right now, so I figured I would share with you what's going on with it. So to start, I'll talk about why now.

Dan Austin: [2:42] And most importantly, going back to the idea that this is a bucket list thing for me, I knew I would regret if I didn't do it, and the stars are aligning to do that for me right now. I also, you know, as I've always talked about, I'm in GoBundance. My GoPod, which is my accountability group, it's Aaron and Brandon, shout out to you guys. You know, we meet every couple weeks, we talk about our goals, we talk about things we want to do, we push each other, we also hold each other accountable. I've been talking about this for a while, and they really encouraged me just to lean into it, and Coachmen helped me kinda make this decision. So two months ago, I bought the lot. Before that, I had started formulating this plan. Why now beyond that? I'm gonna be a little vulnerable here because I am recording this on election day. I don't know who's gonna win, Donald Trump or Kamala Harris. Doesn't matter to me. Kinda does, because what I'm about to share with you. I had speculated nonpolitically. I had speculated months ago that Trump would likely win this election. So if you're listening to this and he didn't, you can text me or DM me on Instagram at investormandanbek, you idiot. You are so wrong. Anyways, it wasn't for political reasons like, oh, go Trump, go Trump, or go Kamala or whatever. I just Trump is a real estate guy. He's been known as the economy guy. He did pretty good on the economy for four years as the president.

Dan Austin: [3:56] I just felt like he was a known entity, and because he's a real estate guy, tax benefits, he would probably be better for the real estate market and real estate investors in general. And also, I was speculating that interest rates would come down, and so the combination of that, of those two, would actually make it a pretty good seller's market going into 2025. I might be wrong on the Trump thing. I have no idea yet. I will know here shortly though, and you will certainly know by the time you listen to this. The interest rate thing, I think I was a little bit wrong on. I don't think we're getting any more rate cuts at end of the year. I just I feel like it's we just got too much inflation going on right now, so interest rates may not go down as soon as I thought they were. However, that was what played a big decision in in this. Am I speculatively taking risks? Somewhat, but I feel pretty confident about my decision still. I'm not gonna back out of it, and I will be starting construction next year, because we can't really build in the winter, so I'm spending this winter really planning things out, getting a design hammered out, finding the most efficient cost savings way to build a good quality home. So that's kind of like the why now in conjunction with the fact that I'm ready to lean into this and look at it. But also, like, why am I getting into construction? Like, I feel like that's an important question.

Dan Austin: [5:04] Like, I have a background. We've done flipping houses, burying properties, done lots of renovations. I grew up in a blue collar background. I've never built homes. I've never been a builder, never been a carpenter, nothing. But I do kind of understand the process because I have been around it quite a bit. And I I know the difference between new builds and flipping houses or sinker projects is that once you put a foundation in the ground, everything above on top of that concrete up is well known. You get bids, you get quotes for framing, roofing, siding, windows, flooring, drywall, all that. And that bid will be the same because they you give them the plans, and you tell me the bid. And if the bid changes, it's because they misbid it, and you have to hold them to that bid. Right? Or you can't hold them to that bid. Or flipping, you open up a wall, and guys are like, dude, there's a bunch of, like, rat infested, I don't know, bed bug ridden knob into shitty plumbing, whatever it is, and you gotta all of a sudden add $10,000 to your bill. Or you go to sell it, an inspector finds that the roof isn't properly flashed, and you gotta reflash the roof around the chimney. Silly stuff like that.

Dan Austin: [6:04] When you do new construction, if you build it right, like the plan says, you pass permitting, you pass code, you pass inspections, and sectors go and look at it, you do a good job. They have nothing to change. Like, the budget's the same. There's some speculation on the front end and the back end. Speculation on the front end is until you get concrete in the ground, you don't know what it's gonna cost. That there's an unknown excavation, unknown, like, foundation cost, because you could be building on top of bedrock, you could be building on silt that doesn't actually hold dirt on a side of a hill, and you have to build retaining walls, you have to do certain water drainage things you don't know. You can find out a lot of that stuff ahead of time before you actually close on the lot, do your due diligence, but some of it you just don't know. The other thing on the back end is you don't really know what the sale price is. Right? Like, can speculate, and you can look at comps, you can say, hey, in six months and eight months from now, which is a long time, you can say, think it's gonna sell for this much. What I did on this project to mitigate that was I was actually looking for a lot near my house because I wanted it to be something I could get to every day if I wanted to without it being an inconvenience. I knew me. With everything else going on in my life, if I had to drive thirty, forty minutes to the house build, I would never show up. Maybe like once a week, once every couple weeks. And I wanna learn the process.

Dan Austin: [7:17] I wanna see what the people are doing. I wanna get used to the subs that I'm gonna see and see if I actually like them and build a relationship with them so that I can get more efficient and build more houses with them. But anyways, that kind of narrowed my search. So I had these two small 20 lot developments I could choose from. One, I decided not to go with, because when I walked it, looked at it, there's no houses in it yet. The road just had gone in. It was on a hillside built on a pile of rocks, which means the excavation cost. When I called an excavator, he's like, yeah, we think we could probably get you ready for a foundation with another $30. Now I could've got the lot cheaper because of that, then I also looked on the hillside, it was dry as a bone in August, but the hillside had water coming out of it. So I was like, you know what? Seems like a lot of weird issues. I'm not I am not experienced at solving. I'm not gonna take this on. So I went to the other side of the hill that I live on, and there is a same thing, 22 lot development over there. It was already had four houses that sold this year for the 700 to $7.50 price range. There was already like eight more foundations going in. I could see the exposed dirt. It was just so much more straightforward, so I negotiated, bought the lot, paid a 130,000 for this thing. It was just way more of a clear path. So I was mitigating the excavation unknown issue, getting a foundation on the ground, and then I was also solidifying.

Dan Austin: [8:30] I know a minimum. If I build a house just like that, it's gonna sell for somewhere between $707.50. Today, meaning next year unless the economy takes a dump, it's gonna sell for at least probably that if it doesn't increase in price. So that's how I mitigated that. And the other reason why I wanted to do new construction is the single profit on a deal should be higher than a flip. Now, you can make some freaking killer money on flips, and I will contend that flipping is 100% still more profitable, because you can say you make $40,000 on a flip. That's a good margin in our market where you're not getting crazy high, but you're also not flipping for basically nothing. Right? So with that, you could probably, you know, invest $40.50, $60 in the renovations and, you know, carry costs and all that to to get you there. The cool thing about flipping though is you could do say it takes four months end to end, you could do three flips in that same year. If you just did one at a time, you can make 40 each. That's a $120,000 a year profit. That's pretty solid, right, for doing three flips. And do you have off ramps if the market starts changing or things start shifting? Right? Meaning, you could do one house, lose a little money or make a little money and say, hey. This isn't what I wanted it to be. I can off ramp here. With a new construction, you start, and you have to invest that money, and you have to build the house. Once you start building it, you can't stop building a house.

Dan Austin: [9:48] Nobody wants a half done house. So you have to go the whole process. It might take you six months, eight months, depending on, you know, how fast you can build a house. I'm hoping for six months. So the idea here though is, you know, say I can make a 100,000 on one. I could do three flips, make a 120. Well, it's to scale a flipping business, you gotta know that that you have to start hiring staff, you have to start hiring employees, and you really gotta you're gonna start taking some Ls too. You might maybe only make $10.15 grand on a flip. You thought you're gonna make 30, and you might make some more on some other flips too though. Right? So I was looking at it, I said, what if I wanna do five builds a year, and I made a $100,000? That's $500,000 in income. That's honestly out of this project or this this thing, that would be plenty of income for me that would make it worth it for me. And so to do five, I could do that without any employees. I know that. I could do that with all subcontractors. It'd be helpful to have one employee, so even if I took a 100,000 and kicked it over to them, you know, to an employee that was a key employee managing projects, doing all the runaround stuff, I would still be at 400,000. I know I could easily do five builds a year, that's pretty low risk. I could stagger the start dates to, you know, really mitigate any market shifts that would want me to have an off ramp. Comparison, honestly, I've done enough flipping to know to make $500,000 net in flipping.

Dan Austin: [11:04] You gotta have a pretty decent operation. You're running around with quite a bit of staff, a lot of moving parts. You're always having to look for deals. Like, you're not just looking for five lots for one deal. Right? You're looking for dozens of deals to do that that same year, and it's just a huge hamster wheel. Housing, you know, you can make a lot of money during booms, and if you can ride that out and even it out, you can you can kinda, like, glide through these, like, slower times. And there's still builders building in this range that I'm looking at building. So that's really, like, the main reason. I was like, I think I can make more money with less headache than I can flipping. Am I flipping houses still? Yes. In In fact, I'm looking for one right now, if anybody knows of one here in Spokane or North Idaho. But the other piece to this, the other element that's less tangible in the fact of just numbers is that I wanna build up an expertise in how to build new construction projects, so that I can understand how to build rental properties for cheap or cheaper, and maybe do some purpose built type cash flowing rental properties that were built specifically to be efficient rental properties. And I'm thinking even in the small multi or single family range still, because if I can figure out how to efficiently build these properties and really get things dialed in, why can't I just make up my 25% equity with my build, with me building it, right, as the general contractor and saving the cost there, and then having a new project that has zero CapEx for like seven years.

Dan Austin: [12:28] And at that point in time, make a decision of whether I wanna keep it or sell it. But during that period of time, I don't have as many headaches. The management is a little bit easier. The cost to maintain it is nil. Right? There's very little to maintain it other than maybe just some utilities and small minor turnover changes and stuff like that. So that's kind of like my logic is like, okay, then I'll have this expertise, and I can build this equity up. And if I can find the right model for build to rent, then I can create and plan out the cash flow for each of these properties, and I can parlay some of my equity from my older homes that I have in my portfolio into here and make things much more efficient. So it's a little bit double pronged approach here. Triple pronged approach, really. I wanna learn how to build things, and then I wanna make some money doing it. And then I wanna be able to use both those to actually go and do build to rent, because I still think, although we talk crap on passive income, I still think that there's some benefit to passive income. There's certainly benefit to leverage, and there's certain benefit to depreciation tax benefits. And if you're gonna be a home builder or doing anything with massive income, if you can reduce your income by owning real estate, even better. Right?

Dan Austin: [13:35] And so that's kind of why I'm doing it why I'm doing it now. If you have any questions or you wanna follow along with me, hit me up on Instagram at investor man dan. There's not a lot of content coming out about it right now on my Instagram, but there will be. I'm gonna be doing, you know, daily daily videos, daily reels as we really start diving into how to do this, and hopefully, you can learn something from me. Whether it's from my mistakes or my successes, we'll find out. So with that, I'll stop rambling. I hope you enjoyed this episode. Always, if you have a moment, please go give us a five star review and say something nice about Mike and I's podcast here on iTunes or wherever you listen to podcasts. It really does help grow the show, and we don't say that enough. We really value you all as listeners, and sometimes the feedback is actually really helpful whether it's good or bad too. If it's bad, just DM me. Have a good day. Have a good weekend. See y'all next week.