House Flipping in the Real World

Turned on the TV yesterday afternoon to catch a few minutes of the Buick Open golf tournament.  A basketball game was running late so my itchy finger started flipping.  Channel 4 had Richard Allen, some kind of real estate maven, touting buying and flipping.  Testimonials, happy high school graduates and people on water skis, all enjoying their escape from dead end jobs by INVESTING in real estate.  Channel 5 was rodeo (you sure can tell when the football season is over) but Channel 8 had a guy that looked kind of like Richard Allen touting real estate.  Similar testimonials and those people on water skis again.  Channel 11 was the basketball game so on to 13, the PBS station.  I was hoping for the 'Antique Roadshow' or 'This Old House' but there was Robert Kiyosaki flogging real estate. 

YIKES.  The 'Rich Dad, Poor Dad' guy talking about OPM to a smiling and sincere bunch that looked like college graduates stuck in dead end jobs.  If it's on PBS the secret is out.  What next?  Terry Gross?

So five stations and three were broadcasting shows about flipping real estate.  At least PBS was not selling anything, I don't think, except ole Robert probably racking up some pretty good book sales.  Put down the remote, picked up the paper and saw an ad for a Donald Trump seminar coming to town flogging, you guessed it, getting rich with real estate.

The interesting thing was that the day before I had just sold TWO real estate properties.  Not money in the bank yet but signed sales agreements and took escrows. 

AND I am totally convinced that anyone can make a lot of money in real estate BUT not the painless way touted by Allen, Kiyosaki and company.  You make money in real estate the old fashioned way--you earn it by buying low and selling high and enduring a lot of people problems and building problems.  And you have to learn and truly understand the basic real estate maxim--you make money in real estate when you buy it, not when you sell it. 

Here's the good news on the houses.  Note:  These house prices will either make you people in San Francisco and Boston laugh or cry or both.  Both the houses are in basic working class, relatively safe neighborhoods.  The selling prices$49,000 and $61,500, respectively.  My purchase price was, and this is where you make the money, $25,000 and $35,000 respectively.  So quit laughing/crying at the small numbers, disregard the dollar signs and concentrate on the percentages.

House number 1--bought for $25,000, put in $5,000 so basis of $30,000.  Will sell for $49,000 plus rented out for two years at $9,600 (gross rent minus property taxes and insurance.)  So income of $58,600 minus basis of $30,000 divided by basis=95% return.  Not too shabby, percentage wise.  Plus some tax breaks and capital gains tax of only 15% on the gain.

The bad news was replacing rotted windows, frozen pipes in a claustrophic crawl space--think Charles Bronson in 'The Great Escape.'  (If you have never seen this film, rent it.  Great story, overacting by Steve McQueen but great motorcycle chase, and a very young Ducky from NCIS.)  Flea infested carpet covering hardwood floors- a rare pleasant surprise- dead birds in the attic, asbestos siding and digging ditches in January  to replace a drain pipe crushed by the roots of nearby thirsty tree. 

The real estate TV stars would say, "Just hire somebody, stupid."  I did for some things but that cuts into your margin and too much of that will make you upside down and you will be bringing your checkbook to the closing.  Then the experts counter that appreciaton will bail you out.  This is not a bad neighborhood but it certainly is not Wisteria Lane.  Chasing appreciation is risky business.

But the topper was getting a call from a neighbor saying a US Marshall SWAT team had cordoned off the street and had my tenant and three of her closest friends face down in the front yard, handcuffed with shotguns poked in their backs.  Remember what I said about people problems.

More on that tomorrow.

 

 

Comments

[Caitlin]

This Bostonian is utterly stunned at those prices (both the buying and the selling!)

I'm not a big RDPD fan...I think there are some good basic ideas in there, but Kiyosaki seems more in the business of selling his brand (books, speaking engagements, seminars) than in that of real REI.

Isn't "chasing appreciation" = speculation anyway? ;) quite different from investing...no? I think that's a distinction many folks forget to consider.