How We Made $116,000 On Our First Flip

By: Kelley Perry

Pepto. Bismol. That was the color of almost the entire property, floor to ceiling, of the first property we renovated back in 2016 (apologies for my first attempt at a real TikTok where I wrote 2015 – I realized after the fact this was an error).

Much like the taste of the over-the-counter drug, this house made us nauseous.

For the posts I write about our renovations, I am going to explain the real financial details, specifically and honestly. Oddly enough, many of the real estate investor podcast guests seem to avoid the truth of their numbers until probed and prompted. I don’t understand why… it’s our job to discuss money. Why else would anyone be interested in learning how to mitigate risk through real estate? It’s cool if you can say you did fifteen renovations in a year, but if you lost money on fourteen of them…I mean, you all know the definition of insanity.

Regarding actually talking about money – I always tell my clients upon first meeting with them – they do not need to feel uncomfortable or like it’s some secret subject. Their information stays with me and whoever is doing their financing, and obviously, we need to know what is going on so we can ensure we advise them properly.

It’s like the generations before us were traumatized talking about it – meanwhile, it’s now well documented how millennials are the most “educated”, yet most in debt group of people in history. How dare we discuss something that is arguably the most important, fundamental concept of attaining any level of basic comfort!

But I digress. Back to how you can make said money – and once you know the process, relatively easily.

Broadly speaking, it is my opinion that utilizing real estate investing is, by far, the least risky way to grow your wealth.

I have countless clients who are terrified of pretty much everything about the buying process (Hi @Jaylan). The faucet is leaking!? What! I will certainly go into foreclosure.

Let’s take a breath.

Let me explain why there is almost no risk in this industry for people with even a basic level of determination and commitment: No one is ever going to take your job (nor your home) from you, except you. You don’t answer to anyone but yourself (meaning - you find a way to pay whoever you owe for your house if you are reading this from the perspective of a primary residence home buyer).

Caveat – if you are a licensed agent, you do answer to your clients because you have a legal, fiduciary duty to them, and of course, you must follow proper ethical, multi-list, state and federal guidelines as a licensed professional.

But – as an investor, or even just as a regular home buyer, there will be no boss telling you what decisions to make and how to ensure an outcome.

Initially, separate from your own primary residence and from an investor perspective, this can understandably be quite scary – especially if you are coming from a position of a “secure”, weekly or bi-weekly paycheck. But that “security” is a concept society wants you to put your faith in. In truth, it’s not real. Your company could go bankrupt, be bought out, fire you, etc. They want you to believe they provide benefits, but the benefit, really, is just the idea of comfort.

In real estate investing, no one is going to do that. The only thing you have to ensure you do is pay the person lending you money to buy property, on time and usually, with interest. People will always need homes. Even if a market were to crash mid-flip project – you just adjust and then rent it out.

So – how do you find deals? This is probably a topic for another post in itself, but to name a few: through a real estate agent, wholesaler, driving for dollars (personally searching for distressed appearing properties and contacting them), direct mail campaigns targeting properties that are perhaps behind on taxes, or your sphere of influence are some of the most common.

In this case, for The Pink Panther, I was initially contacted by a wholesaler from out of state by pure luck. He found me online, somewhere, and wanted me to take a look at a property he was considering getting under contract. Wholesaling, by the way, is when someone has a signed agreement of sale with an owner of a property, and then offers it to investors in an area for a fee. If an investor wants it, the wholesaler would then assign the contract to the investor at the pre-determined cost. It is a great way for someone to profit from finding and converting leads, without having to actually fund a renovation or pay closing costs; however, different states have different laws for this, so I recommend consulting a real estate attorney to determine what rules are in place in your local marketplace.

So back to the story, this wholesaler then dropped the deal, but the owner reached out to me to ask if I knew anyone who would want to purchase her house still. As many with an interest in flipping will probably admit, I figured HGTV made it look simple enough. I convinced my father to partner with me on it, and we made an offer.

Purchase Price:

$77,500

Total Rehab Cost:

$86,750

(This includes renovation, holding and resale costs)

Sales Price Post-Rehab:

$295,000

(with $14,750 in seller assist)

Net Sales Price:

$280,250

Net Profit (pre-tax):

$116,000

This was a very incredible first deal, and most of the time profits like this are abnormal (which you will see as I outline our next several renovations in various posts).

Since my father (“a private lender”) was fronting the cost of the purchase itself through a line of credit, even though I brought the deal, we did this one at a 60/40 split. He funded 60% of the renovation, and retained 60% of the profit, and I funded 40% and retained 40% of it.

This was the year I was pregnant with my first son, Coleman. I was so sick, I was bedridden for five weeks in my first trimester and had my worst year in real estate at just under $80,000 – my only year not making my base goal of “six figures”. So, it was pretty incredible when we got the check for our portion of the proceeds, which amounted to around $46,400 plus the $34,700 we had into it, for a total of $81,100.

Takeaways and lessons learned from this first renovation:

• Do your due diligence in who you hire to do the work. We did some basic demo for this one, but ultimately a contractor did most of it. It was just him and his helper, and if I recall correctly, I believe they charged about $25-$30/hour, total. We are in Western PA, so labor costs overall are not cheap compared to some other markets (though these guys are still some of the more affordable).

• Think hard about the layout and updates you NEED versus what you WANT. We kept the layout the same here, which always saves a ton of money.

• Prior to purchasing, check with the local municipality on what requirements there may be for renovations and resale. Some municipalities have very expensive resale costs, like higher than normal state transfer tax, that can significantly cut into profit. Also, there are some townships that tend to be very backed up with issuing permits, scheduling inspections, etc.

• Be honest when you’re “running the numbers”. You must account for holding and re-sale costs, not just renovation costs.

Here is a basic formula I use, from The Book on Flipping Houses by J Scott. The following is an excerpt directly from the book:

Maximum Purchase Price = Sales prices – Fixed Costs – Profit – Rehab Costs

where

Sales Price equals the conservative estimate of what I can sell the property for (not the list price!).

Fixed Costs equal all the costs, fees, and commissions that I can expect to pay during the project.

Profit is the minimum amount of money I want to make off the project when it’s complete.

Rehab Costs are the material and labor costs required to rehab the property into resale condition.

For example, this particular project would look as follows, hypothetically, prior to knowing what the actual sales price and final renovation and holding costs would have been. 

MPP = $275,000 - $25,000 - $40,000 - $60,000

MPP = $150,000

Since we got this property for $77,500, we were in a very strong position to begin with. This process is called underwriting, or more simply, just running the numbers. It is very important not to get caught up in the excitement of what you might anticipate is a “good deal” off the bat, and to be honest about where your numbers may come in. There have definitely been times when I just was bored and wanted to do some design work, and I was struggling to make the numbers make sense. If you are pushing them to work – chances are, it is not a good deal.

So, with profit in hand and the enticing feeling of a successful project complete, my love of renovations was born.

In truth, obviously profit is the deciding factor for whether a deal is smart or not, but what I commit to with my renovation projects is figuring out how to handle them unlike anyone else, design and selections wise. It’s honestly not just about profit for me; I genuinely want to make a home for someone – and to make it beautiful and unique. I am not the person who thrives sticking to a budget – I want to spend the extra on the cool thing, which is why it is very good for me to have partners on these deals keeping me in check, and why my husband and I are a good team – though he would say I always do what I want in the end.

But here is my counterargument: Watch our bank account.

Again, most of us have been conditioned to feel nervous, fearful, and risk-adverse.

What has that ever gotten you? Where are you at now? Are you happy with your life and your financial situation? If you are – that is excellent. I am really happy for you. But if you want to do more, as Robert Kiyosaki would say, you have to study.

See below for “After” photos. I am compelled to express these are before I exclusively used PROFESSIONAL photographers. My self-taken photos at the beginning of my career are abysmal, and I wouldn’t dare use my own camera, probably ever again, so try to look past the obvious lackluster quality! :D

Authored By:

Kelley Perry

Realtor, Investor