A Better Business Philosophy
When starting out in flipping houses, one of the first questions you’ll likely ask yourself is, “What parts of the rehab work I’ll be doing myself, and what parts of the work will I be hiring out to contractors?”
For those who decide to use professional contractors to get the work done, invariably they will eventually think to themselves, “Why the hell am I planning to hire expensive contractors instead of just doing it myself (or hiring cheap day-labor), and saving thousands of dollars?!?!”
While there is no right or wrong answer to the question of “do-it-yourself vs hire-it-out,” I would like to give you some perspective on what it takes to turn house flipping from a hobby into a serious business…which will ultimately allow you to make serious money!
For the house flipper whose goal is to make a substantial part of his living from flipping houses, the goal can’t be to focus lots of time and energy on rehabbing houses; the goal should be to focus lots of time and energy on building a business. While that business may involve flipping houses, that little fact is relatively unimportant. A lot of business owners believe that what the business does should impact what they do; they confuse their business with their job. That’s not how the successful business owners think.
Successful business owners realize that their goal is to create systems and processes around doing something profitable. Those systems and processes can then be used to replicate and scale that profitable effort over and over and over again.
In this case, the business is all about rehabbing and selling houses. But your job as business owner has nothing to do with rehabbing and selling houses. Your job has to do with creating systems and processes to allow your business to rehab and sell more houses.
For example, you could spend 3 months doing all the rehab work yourself on your first house, and probably save $10,000 in contractor costs. If you spent 40 hours a week for those 3 months working on this particular rehab, that extra $10,000 would equal about $20/hour in extra profit in your pocket. But, what if instead you took those three months, and focused your time on finding 5 more houses, each of which generated $20,000 in profit?
That’s an extra $100,000 in profit over that time period, or more than $200/hour!
That’s not bad, but…
What if you spent those three months streamlining my process around buying, rehabbing and selling houses, and got to the point where you could do it 20 times in three months? That’s an extra $400,000 in profit, or about $800/hour. In fact, if you only focused your energies on replicating and scaling, there is no limit to the potential growth of your flipping business.
Likewise, you could save a few hundred bucks here and there by hiring unskilled labor (those guys down at Home Depot who work their butts off, but need to be told what to do). If you do this, you run into the same trap. Those guys would require a lot more oversight, and babysitting contractors is just another $10/hour job. Wouldn’t you rather hire the guy who costs twice as much, because you know you can trust him to get the job done on-schedule, on-budget and with a high degree of quality; that frees you up to focus on replicating and scaling your business.
If in the time you save by not having to babysit contractors you’re able to pick up one more house, that expensive guy has paid for himself many times over. And if you spend that time figuring out how to continuously buy more houses, that expensive guy has now become invaluable.
By the way, while rehabbing 50 or 80 or even 100 houses a year might seem far-fetched, there are a lot of people who are successfully doing it. But they don’t do it by spending time caulking showers, laying tile, or any other $10/hour task. They do it by focusing on the processes that allow them to replicate and scale. Everything from having vast network of supporting team members (Attorneys, CPAs, Agents, Brokers, Contractors, etc) to having well documented systems for getting the work done (things like creating a list of materials used in every house and training contractors how to replicate the same finishing touches in every house).
Doing your own rehab work (i.e., being your own General Contractor) is no different than trying to be your own lawyer or be your own CPA. While you could give it a try, you’d probably rather let your lawyer do what he’s good at, let your CPA do what he’s good at, and let your contractors do what they’re good at.
Meanwhile, you can focus on figuring out ways to help all of them work faster, smarter, and more efficiently, which will ultimately lead to being able to rehab more houses and make more money for both you and for the great team of people you have helping you. And isn’t that the goal?
Couldn’t have said it better myself Sir! trying to teach my son that systems are the key and time is money.
jeffrey
Excellent article! Too often one gets caught up in the minutia of everyday operations, I am especially guilty. Thanks for the great article!
Thanks for another great article J. You are so correct that time is money and the key to making more money and most importantlycreating wealth and more time for the better things in life like family is creating processes that are replicable.
Sounds like a great plan but when you are starting out, most people want to see that they can generate a profit and probably put a lot more sweat equity into the house. Then they sell it and can build from there.
Chris –
There’s nothing wrong with taking that route on the first project or two — or even longer term if that’s what you want to do — but in my experience, this is a very easy business to get caught up in the details, lose sight of the big picture, and then burn yourself out doing things that are better contracted out for a few bucks an hour…
Just my opinion, of course… 🙂
I couldn’t have said it better if I had tried. I love your style of writing and straight forward content. I wish I would have found you earlier. Thanks for keeping it real.
Thanks Jonathan…I appreciate the kind words!
That’s an excellent post J. It makes me think of the few investors I know that are stepping the dollars to get to the dimes. I can see many of your readers agree on this topic. Thanks for sharing J.
Great insight J Scott, I never knew that the buisness of flipping could get as big as you talked about.
Great article. I agree with everything 100%.
I’d be VERY interested in reading more about your systems and checklists. I’m big on them as well. Do you ever see yourself completely removed from your rehabbing business?
I’ve delegated/outsourced just about everything, but I haven’t been able to find a way to delegate the financing portion of my business…
Hi Jacob –
The one part of our business that I’ve found very difficult to remove myself from is acquisitions. Finding great deals isn’t easy, and knowing resale values, rehab estimation and deal analysis isn’t something that’s easy to teach someone else — and if I was able to teach someone else all of those things, they’d probably decide to compete against me as opposed to work for me, as it would be much more lucrative for them.
The other part of the business that would be very difficult to outsource is the marketing and networking that my wife does; she has the ability to sell our houses quickly and at the top of market values because she’s so good at marketing at working with other agents. I’m pretty sure there would be no easy way to replace her.
I have nearly relinquished the acquisitions portion of my business and I haven’t sold a house myself in 2 years.
For acquisitions I have 2 people run cma’s (I verify before “mutual acceptance”), I have my GC estimate repairs and my assistant handles paperwork. I just need to teach my assistant or an acquisitions manager, how to put it all together. I’m currently still deciding which houses to purchase.
I’ve found a very good realtor for all things sales. It might be difficult to find someone as good as your wife, but finding someone to get the job done so you guys can do other things is something else. Some profits are always lost when things are outsourced/delegated because you can always usually do it better yourself, but that’s besides the point.
I suppose I outsource financing when I find a one stop shop for all things private money. A guy who will fund my business entirely. Either that or a business LOC.
About those systems though. Is your business very well documented?
I am currently in the transition phase from babysitting the contractor, to letting him go, to hiring the correct general contractor. This is an excellent read. YTD we’ve flipped 40 homes. Some rehabbed, some discounted and sold as-is.
Hey Fernando,
If you’ve flipped 40 houses this year already, you’re doing something right! I’m glad the article was able to offer you something, and congrats on your success!
You make a very real point! Stick to your strengths and have someone else, as needed, take care of the rest of it.This is something I forget on a daily basis and need to work on. Thanks
That’s the best way to think
this blog and people commenting is so much inspiration. I’ve always day dreamed and said that I would get into real estate and bought books and took a Real estate investing class at UCLA and it never amounted to anything due to what you describe as analysis paralysis and also the lack of income and capital. but good to know people are doing it well. i’m managing my parents’ finances and in charge of rehab of their current house (only have 1) to sell at a higher value. With the profit, would pay off debt and use about 30k of that for other investing and purchasing another home to live in for the next 2 years or so.
If only I can get just ONE! ONE flip where I make even $3000 I would be happy to have the confidence from the experience. Long shot but if anyone wants to throw some karma out there and mentor me and just let me pick your brain, please let me know!
I signed up for your newsletter and have purchased a couple of your books. Great stuff. Was looking for your business plan, and have apparently lost it. May I get it again. Thank you
I’m so upset…I feel we totally overpaid for the house we are flipping……..