Why We're Flipping After 2 Years of Strictly Wholesaling

Dan Austin: [0:00] Hey there. Welcome back to another episode of the collecting keys real estate investing podcast. This is the podcast where we teach you how to make massive income, not just passive income. If you've been around here at all, listen to any of our episodes, know that Mike and I have this true core value, this true belief that before you start investing in passive income sources like rental properties, syndications, whatever other flavor of passive income you want to invest in, you first need to know how to make massive income through business, because true wealth is built through business, and then you get to invest in real estate or whatever else you want. We do that because a lot of times, including ourselves, people get that backwards when we first started, we thought we were real estate investors, and quickly realized most of the value is going to be in business. I was walking our latest flip that we just closed on yesterday, and I got to my office and said, I need to record a Friday Focus for our loyal audience. Now as I was thinking through what topics would be of interest, what topics I get asked about a lot, Oddly enough, when to flip a house, when to keep a house, when to wholesale a property is a question that we get asked a lot, and I know a lot of people ponder because they aren't sure, they're like, there's a right decision, and if I make enough right decisions, my business will grow just like Mike and Dan, or just like whoever you're looking up to in your market, whoever's close to you that you see doing well. And in reality, it's nuanced, and a house that you might flip next month, you need to wholesale this month. So the number one rule, before I dive into any numbers or anything like that, the number one rule that you need to follow when you're going to make that choice is, what does your business need to continue to grow? We tend to see around a six x, five and a half to six, sometimes seven x on our marketing spend.

Dan Austin: [1:59] That means we are going to get anywhere between like five and a half to seven times in revenue, what we spend on marketing. So if we spend $10,000 on marketing in a month, we're going to be getting around 55 to $70,000 in revenue. And that might blow your mind, but that's just the reality of it. Now, if you look at it at just one month, it may not tell the story, but if you look at it over six months, over twelve months, twenty four months, you'll start seeing that story being told. And I can even ex extrapolate that for the hundreds of deals Mike and I have done now, when it comes to strictly wholesaling. We're riding around $4,000 in cost per deal. It used to be like 3,200, it's gone up to 4,500, but say for the sake of even numbers, we're at about $4,000, and our average fee over that entire time, even when our cost per deal was 3,200, is around 22,000. So if you divide 22,000 by say 4,000, that gets you a little over 5,000, almost 5.5. And actively, that's what we're at about right now, but sometimes it's a little higher, just depending on the market we're in, and how things are working, and what the cost per deal is is going on. But what that means is, you can take money, say it's $4,000, and invest it and go and make $22,000 in that month.

Dan Austin: [3:17] You'll have some some overhead costs, you know, maybe you pay a VA, maybe you've gotta pay for your CRM and PropStream to get your data and a few other things, but you can have pretty dang good good margins. But my point bringing that up is, you gotta know what your business needs, and so if your business is running low on cash reserves, and that cash reserves being low, we set ours at three months. Three months marketing spend, three months operating cost, I should say rather. So if our operating costs are $15,000, we're gonna keep $45,000 in the bank for that business at any given time, and if we aren't planning to do any big projects, we don't have any big projects like on the chopping block, we're not worried about holding reserves for those, but if we have a flip in escrow, we're gonna choose to maybe build up some some reserves to do that project, or maybe we know we have a project coming, is is closing, and so we'll have funds from that project to transfer over, we'll just use those keep funds rolling, but from a fundamental acquisitions wholesaling business, we're keeping three months of operating costs, which for us right now, in our home market of Spokane, Washington is $15,000 a month, most of that's marketing spend, we have very very little overhead.

Dan Austin: [4:29] And so again, $45,000. Now that may be different for you, you may say, hey, I want a $100,000, hey, I only need $20,000, whatever that number is, it's it should be a number that's makes you feel comfortable when you put your head down at night, without being overly excessive, where it's a $120,000 and it ends up becoming like eight months of running cost. Now you have dead money sitting there, okay? Now you have money that you could be doing something with. If you don't wanna put it in a rental property or in an investment or go spend it, go and loan it out to somebody, loan some that extra money out, go get 12%, three points on that money, know, do something that's a little bit more liquid, but isn't like just sitting in a savings account earning nothing. You know, on the flip side of that, if your operating costs are $15,000 a month, don't keep $15,000 in there, because now you're just like, going to face the issue at the end of the month of oops, I don't have money. How do I pay for marketing? And then you don't, because you don't have the money to do it. So properly build up your reserves for that, but then outside of that, you shouldn't need a whole lot of other money to operate your business, because you have three months of run cost, and if you can't figure out three months, you probably need to change something massive anyways. But the second point I wanna talk about is, now that you do have the money, so you do have the cash flow, right, and you don't need to wholesale something, because if you don't have the cash you need in your bank, you're going to wholesale, right, because that is the quickest way to get money.

Dan Austin: [5:51] We just locked up a contract, wholesaled it in like seven days, and we got like $35 in the bank, super fast. You can move things. Flipping is going to be, especially in today's markets, a little slower, it could be $60.90, 120, 150, 180, you know, it could be somewhere in that three to six month time frame of when you get that money back. But ideally that money should be much larger than if you wholesaled it. And then of course, if you are going to try to burr a property, buy it and throw it in as rental property, you're likely not gonna see any of that money back anytime soon. You might buy it really, really good and get a great refinance, but you got to really worry about cash flow with the high interest rates right now. Are you going to be able to cash out refinance enough money to make sure you have a good cash on cash return as well as a return on equity? It's tough, it exists, I know people that are doing it, it's just those are more rare. But back to the choosing to do the flip, I wanna get into this because it can be a little nuanced. So the project we just decided to take down here in Spokane, we decided to do that because, okay, a, we have three months of operating costs in our bank account, and we have quite a bit of wholesale fees still in escrow.

Dan Austin: [7:02] So we have probably another 100 to 150,000, I don't know, might be 200,000 right now, in escrow that we expect to get almost all that, they're all pretty slammed up deals, so we have that money sitting there, three months of operating cost, we feel pretty confident that it's time to take a risk because we could probably wholesale this one and make 15,000, but on a flip, we're gonna probably make about $45,000 because it's a slam dunk project, it's a true carpet and paint. So we go in there, we look at it, I just walked it today, it has original hardwoods in there that are actually really good condition but we're gonna slap some LVP on top of them, we're gonna paint all the walls, there's no major holes or patching that needs to be done, it's it's like a nineteen fifties built home, it has copper plumbing that has, you know, Romex type wiring, it has all new vinyl windows. The guy that owned it before worked at a door to window store here, so he has all new like Pella doors, Hella windows, like super nice doors and windows on this house, it's vinyl siding on the outside, it's got a newer roof, the basement needs new carpet, we've gotta do some, you know, what we call like 35 r repairs or basically repairs that inspectors are going to call out, and then in, you know, hot water straps, you know, GFCI outlets, railings, hand railings, stuff like that.

Dan Austin: [8:20] So we're gonna do a bunch of that stuff, and then we're gonna do a small yard cleanup. The yard in this place, it's it's already well landscaped, so when we get our lawn mower, the guy to come over and mow it, we're gonna have him weed the weeds the beds and pull down some or cut down some bushes that are a little bit excessive, other than that, the grass is still green, so that's really nice when you're doing these projects, So you don't have a nice beautiful house and a super shitty exterior. In today's market, landscaping matters, it needs to have green grass unless you're pricing it super low. I digress. Back to the project though. The kitchen cabinets are all all newer. The guy replaced them. He did laminate countertops, the kind that looks kinda like stone. New cabinet pulls already on it. The bathroom is good. We're just gonna slap in a new 24 inch vanity, super cheap, super easy, paint everything up. Really, only other major thing on the interior is just we're gonna do all new light fixtures, all new hardware and everything. So you wouldn't believe what it goes when you go into a house and you change all the lock sets, you change all the hinges, you change all the cabinet pulls, you change the bathroom hardware, all the hardware and make it all one color like black or nickel or whatever. Black is still in, it's still pretty popular, so I recommend that. But when you go in there, it just makes it seamless.

Dan Austin: [9:32] Right? So now you can envision, I'm gonna slap down LVP, it's already on really good hardwood, so there's no divots or floors that are messy that we're gonna have to fix before we lay it down. We're gonna slap in a nice light color LVP, we're gonna paint all the walls in alabaster white, we're gonna slam in all new hardware and everything, all new light fixtures, all new faucets, and this place is gonna be good. So it's a $20,000 budget we're giving ourselves, and we bought it, we we have it under contract at right around 200,000, so we have a $20,000 rehab budget, we have some lending costs built in, all of our sales costs, and on the exit, we're looking at around $300,000, which will leave us conservatively like 50,000 in profit, when we're all said and done, but I'm kinda estimating after you kinda do some negotiations, we'll probably be in that that 45,000. So something that I said, 10 to $15,000 fee, but because we could do this project in like ten days, we'll start on Monday and we'll just rip through this and probably get it sold and closed within the next sixty. It's like, okay, let's take three x our actual fees of $45,000 profit from 15,000. It's an easy project. Now if you told me, hey man, we're gonna have to do the furnace and probably the roof, and gosh dang, this thing's floors are all wonky, there's just a bunch of stuff that has to be touched, I'm not doing even for $45,000 profit on paper, because when you have big projects like that, $45,000 profit on paper, turns into 20,000, turns into zero really really fast. So you gotta be careful. $20,000 budgets, super super light for most of the projects we're gonna see here in Spokane in our market, and for most of you guys out there as well, it's a that's a pretty mediocre budget if you're in the Midwest or really cheap markets Southeast, that might get you a little bit further than us in the Northwest, but not much further.

Dan Austin: [11:24] But the point I'm making here is if you go back to the beginning of the conversation, which is one, do you have the cash reserves and cash flow consistently coming into your business where you can take a swing on a flip, then take the swing. And the swing you wanna take is not that $100,000 gut rehab. Unless you're a full time flipper and you're doing five projects, six projects a month, maybe you sneak that one in, but the profit, the ROI, your cash on cash return from your rehab and your lending cost better be so high that it's worth the risk. Otherwise, don't do it. I really wouldn't be doing any projects like that right now. Just go and take that $15,000 wholesale fee, throw it at the bank and look for that next one. And one piece of advice I can share with you is, there is always another one. Even if you're just starting out and you feel like you're just talking to sellers, you're not getting a deal, you're so thirsty, or maybe you've gotten one deal a month for the last four months, and you're just so worried that you won't get another one next month, you need to make every penny stretch when you're trying to make profits, like don't make that decision to take down that big flip. Don't get scared thinking there's not another deal, because there's always another deal. There's always an even better deal, trust me.

Dan Austin: [12:29] I've never thought I would have a really good deal better than the this one, and then the next one is even better. So they're just out there, there's so many houses out there, there's so many distressed sellers, you just have to wait and be patient, keep consistent in this business and those will happen. Don't get thirsty, don't get commission breath, don't don't think you need to flip a house and make $45 when a $15,000 fee is much better for your business because it builds up the cash reserves. And think about this, back to the very very beginning of the conversation, I was talking about your five and a half to seven x on marketing spend, some people is gonna be higher, especially on in people that have lower cost markets and really really efficient businesses. If you could take that $15,000, say just for even numbers, your cost per deal is $5, go and spend that $15,000 on marketing, and you're gonna go and get three deals that got a return 15,000. So now you've got that $45,000 that we just talked about in that flip, the very next month. The math works out, I promise you that. I don't say that, we don't repeat this math because it just sounds good, it doesn't. If we were trying to like trick you, we'd say, oh, come look at the secret sauce marketing plan we have, this is the only way to make millions. We don't say that because it's not secret, it's not a special sauce, it's just the numbers that we've seen over hundreds and hundreds of deals, we've benchmarked against other top performers in the industry, so when I say these things, I really mean them from a place of experience, and what I'm seeing today as an operator, and even me, who has done many many flips, done many many projects, many burs, many wholesales, I'm still not doing a ton of flips right now, because I am making sure that I'm building that massive income, I'm building that velocity of money, I'm trying to get that speed going, and building up cash reserves in our local business here, and then I'm gonna pick off the easy ones.

Dan Austin: [14:18] I'll take a wholesale deal all day long before I get deep into a project that's just gonna sink the ship because, you know, you might be a a flipper, but doing five deals a month, but it only takes a $100,000 deal that loses you a $100,000 to sink your ship really fast, because margins aren't that great, and when all of a sudden you're missing a $100,000 out of your coffers, it really puts a hurt on your business, I don't care who you are. So just think about that, I hope this was good advice, I know I hopped back in the office just after walking to Flip, so it was a little bit of me rambling on in my thoughts, and more of a stream of consciousness, But this is how I think about deals, this is how we make decisions in our business, they're quick. I can look at this house and know exactly what we're going to do, know what the budget's gonna look like, and we make decisions based off of our gut and our experience, that has been informed by real true qualitative metrics, like return on ad spend, our profit per deal, all that sort of stuff, we really do focus that stuff. So anyways, if you wanna know more about this project or keep up to date on the project, hit me up on Instagram at investor man dan, I'm happy to share some videos, some walkthroughs, so you get some context of what I'm talking about on our property. There's nothing sexy about this property, we're not gonna make it sexy, but we're gonna make it to sell, make it sell. Be happy to show you how we do that. Like I said, that's Instagram at investor man dan, that's probably the easiest way to get a hold of me. Otherwise, I will see you all next week.