Why I HATE Rehab Flipping! | House Flipping Mistakes To AVOID
Yo, yo, what is up everybody? I am Justin Colby. Now most of you guys know me as a real estate investor, someone who has flipped roughly 2000 homes in my career and that is accurate. Out of that 2000 homes I have rehabbed flipped roughly 600. And I want to make sure you understand, you know why I hate rehab flipping?
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Well, let’s first start off by saying, I am not going to stop rehabbing flipping. I’m not going to discourage you. From rehab flipping as a matter of fact, I actually genuinely believe the best way to be a successful real estate investor is to be well rounded, meaning you should be wholesaling. You should be rehab flipping, you should be wholetaling. You should be buying and hold for the long term. You should do some Airbnb long term holds. You should do some creative finance deals, you should be a well rounded machine, not a one trick pony. For years and years I’ve been preaching, wholesaling and wholesaling. Well, it’s made me millions and millions of dollars. And I know it’s made many people out there, very rich as well. But one thing I’ve also realized is I don’t just wholesale so why am I just talking about wholesaling? Well, I stopped. Now I’m talking about all of the things I am doing such as wholesaling, rehabbing buying and holding. The first reason why I’m not a massive fan is because the labor component contractors, it is very difficult to work with really good contractors. And when you get one, everyone else wants to work with them also. So the contractors hold the value, meaning they get to do the supply and demand pricing. So when they’re in high demand, because they’re excellent, they tend to cost more. Well, now you got to make the argument, do I go for cheaper labor that may not be as good? Or do I pay a premium for expert labor, and I’m always going to suggest pay a premium in this game, you get what you pay for it, especially when dealing with contractors. Now let me pause for all my contractors out there listening and watching to this. I love you. I know you are a lot of great contractors out there just like there are agents who are great and horrible, just like there’s investors that are great and horrible, just like anything. So I don’t hate all contractors. No, in fact, there are some really good contractors. But again, you have to make that decision. Do you want to pay for great contractors? Or maybe do you want to get cheaper labor, I always advise go towards paying more.
Now contractors can pose problems, not just because of the costs, but their mismanagement of time, you give them a time budget of let’s say 45 days to complete a rehab, it almost always I say almost they are going over the time allotted. So it’s 45 days next, you know, the rehab isn’t completed for 60. Well, time costs money can’t we all agree? Now as someone that rehab flips, I use hard money lenders. And so I have monthly payments to make on every single one of those months. So again, I have a contractor who even though they may be great, they’re going over the allotted amount of time, and that’s going to cost me money. So even though I may be paying a premium for them to be the greatest, now I have to help them manage their time. Ultimately, labor component contractors construction component can be very, very difficult, let alone dealing with the city if you’re actually adding square footage to the home, the red tape that goes along with that. So that is my number one pet peeve and reason why I do not love rehab flipping.
Now the second part, we just talked about the cost of all this, to scale, a rehab business can be very, very costly. And the reason being is you don’t just need the money to buy the home, you need the money to remodel the home, you need the money to pay for holding costs. So going and doing 97 flips in one single year, which is what my peak of rehab flipping was 97. It was very stressful to say the least. There was a lot of risk involved. There was a lot of money involved. There was a lot of checks being cut, to pay the holding costs, etc. And there’s a lot of times where you’re doing deals to keep volume going but you’re actually not making the profit margin you want to be making. That’s one thing I will tell everyone out there. If you are a wholesaler if you are a rehab flipper at scale, you need to pay attention to the p&l More than ever, because at scale, you tend to lose sight of it and you really realize, Oh man, I just did this rehab. And I’m going to make $15,000. After all closing costs commission’s everything goes washes out, I’m making $15,000. Couldn’t I have just wholesaled? Now, if you don’t know what wholesaling is, it is not actually buying the home, you don’t need to actually go get money, you don’t need to take on risk, and you’re simply flipping the contract. That’s why for years I’ve, you know, coached around it. That’s why for years I’ve talked about it, because you don’t have as much red tape, you don’t have as much risk. You don’t have to go raise money. But honestly, to be successful, you need to be well rounded. So part two of this is the cost of scaling your rehab business. It is very costly, not just the acquisition, but then the remodels, when the remodels go over budget, maybe you didn’t foresee leaky pipes or broken Foundation, and now you go from a $40,000 remodel to a $50,000 remodel, there’s just a lot of cost associated with scaling out a rehab business. That’s the second reason is, I want you to make a lot of money, I don’t want to do one or two a year. So to do that, you have to be ready to take on a bunch of costs with hard money and making those payments.
Now part number three of why I don’t love the rehabbing side is because of risk, it is highly risky. Now while over the last 12 plus years, the real estate market has been appreciating, and there hasn’t been that much risk in terms of the market tanking. We are now at a point where interest rates are going up as I record this video. And a lot of economists are saying we are in a place for a big reset, right where the prices are going to stop appreciating, they’re going to start rolling backwards. Now, I’m not a big supporter of that argument as a moment time, but I will tell you, I am more cautious today than I have been in years of past because of how many years we’ve been appreciating. Risk is real. And even in a year that you don’t have a risk of something going backwards where it’s gonna be, you know, rolling backwards, you still have the risk of not underwriting the property accurately, not foreseen, maybe a broken foundation or something that wasn’t inspected properly. And so you run the risk of increased cost of a remodel, you run the risk of, you know, not selling it for the price that you want, you run the risk of the buyer not getting approved for the loan and you have another month of holding costs, you just have more risk, I think you get my point here.
And number four reason why I don’t love rehabbing is because the amount of people it takes to run any of this at scale. As I’ve mentioned, I’m not just talking about contractors but your team to be able to get the leads into acquire the properties to run the properties to take pictures to manage the progress of each rehab. At scale, it tends to take a decent amount of people in your own operation, which does what? Well, it increases the cost of your operation. It increases more chaos, right? Because you’re dealing with people and into some level herding cats, it increases your need to keep a close eye on the bottom line. Ultimately, I will never stop rehab flipping I do believe it is one of the best ways to be able to make seven figures a year and more. But you need to be cautious about what I’m telling you because I’ve remodeled 600 or so homes, I will still not stop doing it. But I’m picking and choosing the ones I’m taking on. Meaning if it doesn’t really fit the profit margin I’m looking for I’m likely going to just wholesale it out and sell the contract to another investor. If it may not have the profit I’m looking for might be a better rental for me that I would actually just buy and keep and put my portfolio and even if it does sometimes have the profit margin I’m looking for the profit margins on the short term Airbnbs in those specific locations, such as Miami such as Scottsdale, Arizona, those Airbnb profit margins can very drastically quickly catch up and just outperform a one time rehab flip.
If I had to give you a fifth reason why I don’t love it is because there’s only really one payday there. Well, something like a short term Airbnb, you may not make that one really big pay day, but it’s going to pay you month after month after month. And if you buy it right, you’re gonna have substantial members in that now I myself don’t yet own an Airbnb that will change shortly. But I’ll tell you some of my friends that do in these prime locations. We’re talking about 8, 20, $40,000 A month in gross rents coming into their pocket obviously washing out any expenses. But the game is crazy if you buy the right home in the right location, I mean you could be netting after all costs 10, 20, $30,000 a month, not just on one deal.
So with all of those reasons, that’s why I hate rehab living however, I’m gonna continue to do it because some of the properties are perfect for a rehab flip. The key here is be a well rounded real estate investor. Don’t just be a one trick pony. Don’t just be a rehab flipper or just a wholesaler really surround the entire business with every exit strategy possible because the better you know the exit strategy, the better you have at acquiring the deal. I’ll talk to you guys on the next episode. Peace.