Should You Wholesale, Flip or Hold Your Next Deal?

Dan Austin: [0:00] Welcome back to another episode of the collecting keys Friday focus. You have me today, Dan Austin, as your host. If you're new here, these are the episodes where Mike or I like to do a deep dive into a specific topic, or sometimes we'll do a deal case study with an incident investor program member, or we'll do a deal analysis, or we'll do what I am going to do today, and that is answer some listener questions. And today, have a great question that I'm excited to answer, but if you you have questions, just shoot me a DM, Instagram's the best place to do that, at investor man dan. Tell me what your question is, I can usually give you a pretty quick response of what my my thought process there is, I can answer in the DMs, but also I like to do an expanded version of some of these on the podcast. So please send them my way, and I'll be happy to answer them. It could be anything that you wanna know. Doesn't have to be about real estate, guess it could be about business, or I guess me personally, I'm happy to talk about that as well. Whatever you want out there, I'm happy to share it and do my to the best of my ability, at least entertain you. So let's get to the question. The question from the listener was, how do you determine whether you're going to flip a property, or keep a property, or in our case, wholesale, because we do a lot of wholesaling. And I will start by saying, it's not always quite apparent, and it's not always an easy decision, and although we have some like do's and don'ts, there's not like a good rule of thumb that we stick to, because there's a lot of variables, and the one of the variables which we're seeing right now is the market. The market is a really a big driving force in what we can do, and so the rules of thumb have changed a little bit, because we know we can't just get a property and put lipstick on and throw it up and flip it anymore, so we're we're cautious on that end. But also, where you're at in your business, what does your capital stack look like, How much cash do you have? How much cash flow do you have in your portfolio?

Dan Austin: [1:55] Do you have a portfolio? And where is your level of expertise in wholesaling and flipping and buying and holding? And so a lot of variables that will depend individually, but I will dive in and talk about maybe through some stories and some examples how Mike and I decide what we're going to do. So the first, I guess, don't is what I'll call these. The first don't is don't slow down your pipeline. So if you buying a property is going to distract you from slowing down your pipeline or not allow you to fully fund your marketing system, don't do it. Mike and I bought our first property together, it was a duplex. We had just started marketing, we just started getting to wholesaling, we hadn't flipped a house together yet, we both had bought and held properties individually, but this is our first property we bought together, and the house was the duplex was a kind of a dump. Great property, but a dump and need a lot of work, so we actually had to siphon off resources that would normally be spent in the marketing machine to this project. And on top of that, it took a ton of our mental capacity. We were both like managing the contract. We were both managing the contract very poorly. The contractor was taking advantage of us. We kept spending money on this thing with no end in sight, and it completely distracted us from building on our pipeline, and it honestly slowed us down. And I think that one project probably cost us several 100 thousands of dollars, if not more, because we missed that sweet time in the market.

Dan Austin: [3:22] This was like right in the beginning of like May 2020, so I think we had come together in January 2020 as a partnership. So it really slowed us down, so don't get distracted. If it's going to distract you, don't do it. Your pipeline and your lead flow is the most important thing in this business, so if you come across a property and you're like, man, would love to keep this, maybe a flip is better, maybe a wholesale is even better, wholesale that thing and get a quick bump, 20 k, $25,000 or something like that, and put that money in the bank, and keep using that to reinvest and build out your pipeline. Once you have a well established pipeline, it's a little bit easier, you're not worried as much about that distracting you, or slowing down your pipeline, as long as you're committed to your consistent marketing. The second don't is don't spend money you don't have, or spend money you need just to buy a property. So that this really speaks to what does your capital stack look like, like what do you have available to you, and just really how much cash are you sitting on. And a lot of other things might play into this, like what is your cash flow every month from a portfolio, if you have a portfolio, because with that, when you have cash flow, cash flow is a very great good defensive metric, and when you have excess cash flow, you can use that to absorb. I call it a shock absorber. So you can buy properties and bring them in.

Dan Austin: [4:36] You can buy poor performing properties, let your portfolio absorb that, so you're not coming out of pocket to pay for, you know, carrying costs on something or evictions or anything like that, until you can get that property performing, assuming that there's some good upside on that thing. So the other point to be made here is like, say you have $30,000, so you get a deal in front of you and you really wanna bury it, but it's gonna take your money, you're gonna have take $30, put it in there, which is going to leave you no money, no other money to build out your business, to build out your marketing funnels, and you're not quite sure you're gonna get it all back. Of course, a perfect borrower would be nice, but you're gonna have to spend it all and potentially lock it up in their long term, especially in today's market where rates are kinda funky, they're a little bit high to cash flow and the refinances are not quite as easy as we want them to be, that's not a good choice. Right? So don't lock your money up there if that's going to slow you down. Another option to that would be to flip it. Right? Because you can get $30 in there and you can get it in, you can get it out. And I want you to think of the idea of the massive income over passive income. So hypothetically, say in the perfect world, you have $30,000 and you're able to get $200 a door, $2,400 a year in net net cash flow after everything's paid up.

Dan Austin: [5:48] That's not very good compared to what could be like a $30,000 flip profit, right, because say in three to six months, you can make $30, you invest your $30, you basically double, so now you have $60. It would take you damn near ten years if you just assume there's some rent growth in there to make $30 on the cash flow. Granted, you'd have some other benefits with that that you could add up, but depending on where you're at, what your cash position looks like, if I'm going back to this example, you'll got $30, it's probably better to have $60 than $200 a month in cash flow. So think massive over passive, don't spend money you don't have or you don't need for your business. Third don't. Don't get out of your buy box, don't push to make a deal, right now with what's going on in market. Now there are deals to be had, Mike and I are buying them, and I'll get into some examples of how you can be creative and how you can get things into your buy box. But don't go out of your buy box and buy things that are crazy different, or that you have to underwrite as a short term rental because you wanna do a deal and you're itching to be in real estate, because there's other ways to be in real estate, including wholesaling, including flipping. You don't have to just go and invest and try to get cash flow, cash flow, cash flow. You can put yourself in a weird positions if that's what you think, or you see, or you can totally end your real estate investing career by getting one or two properties that hamstring you for two or three years, then you just you just don't see it.

Dan Austin: [7:06] I see this happen to people all the time, so don't go out of your buy box, what I mean by that is like, don't go and buy a bigger luxury home that you think you're going to turn into a short term rental, or because it's a great location, and maybe a medium term rental, and it's really kinda pushing it, and that's not something you're you're going to be able to do, don't go out of state just to because you think deals are cheaper over there. If you're in a high end market, doesn't mean it's a good deal. Stick to what you're capable of doing and what what you have prepared yourself to do. And this doesn't just go to the types of properties you would buy and hold, this also talks about like, if you're not a full time flipper, you probably shouldn't just start doing flipping until you you need to learn how to do this. And so, I'll use the example, like Mike and I, like, we never joined this business, joined a partnership together to become full time flippers, and we we still aren't flippers. We've done quite a few flips and we're pretty good at it now, but we had to cut our teeth on a few properties to learn this, the best way to do these things for us. And so, if you're not a full time flipper, maybe doing a wholesale deal first to get cashed up, to get some money would be a much better approach, than taking down a property that might work as a flip, because if it might work as a flip and you haven't done a lot of projects before, you're probably gonna be kicking yourself in the pants. Same thing with being if you're a first time buy and hold investor and you think it might work, it might also not work. So back to that point of massive income or passive income, think about ways that you can get cash first, because the richer you are from a cash standpoint, the better, to be honest. It really helps make decisions a lot easier.

Dan Austin: [8:49] Okay. So enough of the don'ts, and what I'll talk about is a couple other points. How do you do a deal? How do Mike and I look at deals? What are what are we thinking? So in general, we look at our business, and we say, what do we need right now? Do we need cash right now? Are we overextended on some projects where maybe we've got a couple flips and we've got a buy and hold project, maybe a couple unit turns going on all at the same time, and we're just not comfortable with the cash flow that we're putting out and not getting anything back, even though we know we're investing, probably just gonna wholesale a property, or we're gonna try to flip it. What we won't ever do is flip a property because that's the only exit. We just don't like to do that. We like to have an exit of worst case scenario, even if we have to leave a little bit of money in the deal, we can turn it into a rental and wait to sell it down the road. We actually have a couple of those in our portfolio right now. It's okay. Like, we're happy to hold on to them. We have great equity, we have great leverage, all that sort of stuff. So don't get yourself into a position where, like, you're going to buy something and you can only flip it. If you can wholesale it, you can usually flip it. What that means is when you're wholesaling it, that means there's enough margin on it for a flipper to continue to make money. So that might be an option for you. If you have good demand from a wholesale side, maybe you do flip it because you're gonna have some extra margin, especially if you're trying to maximize like how much money you can make in a short period of time, like really increase your ROI, because when you're honestly, if you're trying to build up your nest egg, you have to take a little bit more risk.

Dan Austin: [10:17] So that's something I would look at, but goes back to my point of like, don't spend money you don't have, if your business is in a in a cash, like a cash, a tight cash position, or you just got a lot going on, do the quick thing, wholesale it. The other thing that Mike and I look at is just like, does it fit into our current vision? So we're kind of past the point of buying really, really crappy properties just to get a door, just to get a little bit of cash flow. Now we really look for things that that are going to be easy for us to manage. They're not going to have a lot of oh shits when we're renovating them. We're looking for things because we have the fortune and the ability to do that because we've bought a lot of those crappy houses, and we were able to make some good money and take that additional risk. Again, if you're early on in your investing career, you're gonna have to take those risks if you wanna get anywhere anytime soon. Just don't take undue risks and go into something uneducated. Uneducated does not mean taking risk. Uneducated means just doing dumb shit. So don't do that. I'll give you an example of a property we just bought to kind of explain how we're gonna how we do stuff and why we're doing it. So we bought a property recently, I've talked about on the podcast, and it's a newer home, like a 2,008, four bed, two bath, vinyl village in an HOA, all that sort of stuff. Would have never been something we would have thought we could have done early on, but we got this thing locked up under creative financing terms, and it sits pretty good as it is because we were able to use seller financing, the owner owned it outright, and we were able to negotiate a monthly payment that gave him the interest rate he wanted, but the actual dollar amount we wanted by adjusting the amortization of the loan. Don't get that confused with the balloon payment, so we still have to pay him back in seven years, but we amortized it over like seventy two years.

Dan Austin: [12:07] So the monthly payment, if you actually do the payment calculation, is much lower. So we're in a good position to cash flow, but it's not a great position to cash flow, and honestly, our ROI isn't that great. We had to put a down payment. We're gonna have to do some maintenance due to get it up to, like, par for rentals. And it's not a ton, but we just don't wanna lock up the money right now. So our exit strategy is going to be a lease to own option on this. So we're getting the best of both worlds. We're getting all the benefits of a rental property, including cash flow, and including more cash flow, but we're going to also collect a down payment. So we're gonna get a portion, if not most, all of our money that we have into this deal out, which shoots our ROI through the roof. And right now, we're looking for ROI because it's just so hard to find out there, and so if we can get a seventy, eighty, almost 100% ROI on our money, if not infinite, we're pretty stoked right now in this market. And that lease to own option allows us to do that, so it's seller financing, again, we are paying the owner or the seller every month, and then our lease to own, we have a rent amount, and then a down payment, and then we will likely do a small portion above the fair market rent, just to increase our cash flow a little bit on this thing to where we should be cashing from like 7 or $800 after all of our costs, because we'll still be paying property taxes, we'll still be, you know, paying any lienable stuff, like we'll probably do like water sewer, those sorts of things, because they can usually have a lien put against the house so the tenant doesn't pay it. But anyways, my point being is, yeah, we'll we'll be able to increase our cash flow with a an additional monthly amount on top of the fair market rent, and we will sell the house probably for like 5 ish, maybe 10% more than current market value, because we will be accounting for in thirty six months what the price will be. So we will be selling it for basically a 100,000 more than we paid for, but probably like another, I don't know, 25 to 35,000 above market value.

Dan Austin: [14:06] We're not trying to rip anybody off. We're just trying to account and make sure that we are benefiting ourselves to the best of our abilities. So that is my point bringing that up is a way to do something in this market, where it does fit your buy box, but we're increasing our ROI and we're getting creative. Because otherwise, we just didn't actually love this deal that much. And we had to do a lot of negotiation with the seller. We actually told him like three or four times, we don't wanna buy your property. And he's just like, please buy our house. We talked to a seller financing, what if we set it up this way and we just kept going back and forth and we finally got into terms that made sense and we're happy with it. So when you're looking at what is that rule of thumb, it's a little bit different now, so get creative and think about ways you can make things even more worth your while. But always underwrite them very conservatively because you never know if you're gonna try to do MTRs, STRs, you're gonna try to do something funky goofy, make sure you can at least break even on this thing. When I say break even, that means leaving set asides for your maintenance and your CapEx items, like roofs and furnaces because that stuff does happen. Now if you have a portfolio that you can absorb it, even better, where a zero cash flow or maybe a hot water heater that goes down and cost you $1,200 isn't gonna come out of your pocket or kill you because your cash flow from the rest of your portfolio will absorb it perfect. That is a good scenario if you're getting some long term upside in a property, but other than that, don't try to push yourself into something like I was saying earlier, don't get out of your buy box, don't get out of your comfort zone, don't spend money you don't have, or money you will need in the near term, and don't slow down your pipeline, there's lots of ways money can be made in real estate, tons of different ways to be on the transaction side of things and get paid, we love wholesaling, that's why we do what we do, and we're able to wholesale to flippers, because guess what, flippers still gotta feed their families out there, so they are buying deals, even if it's something you wouldn't flip, or something you wouldn't keep, people are out there are doing it, and just make sure that you are setting yourself up to be in the strongest financial position.

Dan Austin: [16:11] You do this enough, you will know when a deal's good enough for you to keep, especially in this market, when you'll know it, when you see it, because it's going to feel easy and it's going to feel light. So I'll stop there, I know I kinda rambled on with with a bunch of rules of thumbs and different do's and don'ts, but hopefully that helps, If not, hit me up. I will get more clarity on these sorts of things because honestly, we don't go off of any more like a you know, we first started, like, we used to have a $200 minimum per door, you know, 12% ROI. Honestly, I'm not buying shit if it's only a 12% ROI, like, I want it to be 20 plus because I can get 12% ROI even more passive and owning rental properties is not that passive. So think massive income over passive income first, especially right now, how much can you put in your capital stack. So I'll sign off here with that. Hit me up again on Instagram, investor man dan, and let me know what you thought about this episode, or if you have other questions you'd like to hear me answer. See you.