Why I don’t flip houses

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This is a question I get all the time. And it makes sense, right? We have all of the resources in-house to buy screwed up single families, renovate them and sell.

So, why don’t we do it? A few reasons:

1. While the returns can be somewhat decent on a percentage basis, they’re small in absolute terms. Yes, it’s cool to make 20% on your money in 6 months, but it’s not cool when that 20% is $80k and I have to share 2/3 of it with my investors.

2. It’s not that much easier to do a house than it is to do a small apartment building. In fact, because buyers of homes are pickier than renters, to really max out the value of a home flip you need to spend considerable amounts of time and money optimizing things like layouts, finishes, etc. This stands in contrast to apartment deals, where we can bang out our formula in our sleep.

3. Competition means prices are high and margins are thin. This creates a strong temptation to do un-permitted work. Unfortunately, the vast majority of flippers succumb to this temptation. Because buyers don’t seem to care that much about whether the work was done with permits, your choice is either to cheat like your competition or lose out on deals. We categorically refuse to do unpermitted construction, so we’re at a permanent disadvantage in the flipping world.

4. Risk. As the competition intensifies in the single family home space, most flipping companies are headed up-market. The model is to buy for $700k, spend $200k and hope to sell for $1.1MM. That’s fine if it works. But if the market turns and you’re forced to hold, there’s no way you can rent that out at a number which will make you happy about the yield. I shoot fish in a barrel for my investors, which is to say that I try as hard as I can to limit the deals I do to the ones where the downside is limited… and being stuck in a low-yield deal with no chance to get out doesn’t qualify.

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