Categories
DIY

How Much Should You Pay Yourself vs. Reinvest in Your Next Flip?

A common question flippers have is: “How much should I reinvest in my next flip out of what I make in profit?”

The usual answer? “However much it takes!”

Instead, let’s try reframing this question in a different way: “How much should you pay yourself from each flip?” Answering this might be a better way to gauge if you need to take out just enough to cover living expenses, or if you need to be giving yourself some kind of salary.

Here are some things to consider, if your goal is to maximize your profits and flip more houses:

For New Flippers:

Flippers usually aim to make about 20-30% ROI for every house flipped, although this figure is dependent on costs and how long it takes for each sale to go through. But here are some guidelines to follow when deciding how much profit you want to reinvest in your business vs. keep for personal use:

What are Your Revenue Streams?

Do you have a full-time job that can cover your daily living expenses? If so, then consider reinvesting all the profits back into your next flip – this is the way to achieve the fastest growth in your portfolio.

If you’re flipping full-time, you could choose to keep 10-30% of the profits for yourself, which is how some flippers choose to operate. Alternatively, you could work out what your living expenses are, just keep that amount back, and reinvest the rest, but keep in mind that this will slow down your growth rate.Imagine you paid yourself 30% of the $60k in profit from the example above – that would leave you with just $42,000 to reinvest. Is this enough to help you move up the property ladder with your next flip?

Consider a Live-In Flip

Alternatively, you could consider live-in house flips as another way to “pay yourself,” by negating your own housing costs and writing off expenses, such as tax deductions and double  mortgages.

Experienced Flippers:

If you have a partnership structure, there are more complex issues to think about, like how to divide profits and disperse them in a way that makes sense, tax-wise .

Work Out a Profit-Sharing Agreement

Some calculate profit sharing depending on the number of hours they put in, while others go for an even split (like 50-50, for two partners), regardless of the division of labor. There’s no “one size fits all” formula to this, so you should set clear targets ahead of time for  how much you’d be willing to pay someone else for the skills and/or resources they bring to the partnership.

Know the Tax Implications

Find a knowledgeable CPA to work with and discuss your partnership agreement with them, before you decide how to disburse profits. If you pay yourself a salary, any earned income could be subject to self-employment tax at a rate of 15.3%. That being the case, it might make more financial sense if the profits come to you as dividends, instead.

Know Your Value

The terms of your partnership agreement will determine how much you yourself get paid vs. your co-investors or flipping partners. So, when working out this arrangement (whether you go for a limited partnership or an LLC), make sure you’re being valued appropriately, relative to what you bring to the partnership. Again, it’s always best to seek out an attorney and a tax specialist for guidance here.

Ultimately, the decision is yours. But one good model is to flip 4 properties, then keep the 5th as a rental for steady income. This approach lets you diversify between long- and short-term revenue streams, giving you small amounts of income in steady increments (in the form of rents), as well as larger amounts of income in more irregular intervals (from the sale of flipped homes). Having a balance like this can help you to achieve financial stability in the long run – and this is the same way many traditional businesses structure their revenue streams, too.

Image Courtesy of Rodolfo Quiros

Categories
Wholesaling

Wholesaling Real Estate during COVID-19

The coronavirus pandemic has had a serious impact on real estate investors, even if (this time) the economic downturn isn’t tied to the housing market. 

Already-low inventory has been thinned even further by sellers choosing to wait out the crisis, buyers are reluctant to invest amidst this economic uncertainty, and many have taken a hit to their liquid assets (and are now prioritizing liquidity more than ever before). 

So, what does all of this mean for wholesalers in the current market? Here are some points to consider when brokering wholesale deals during the coronavirus pandemic:

Focus on Inbound Marketing

Wholesalers traditionally rely on outbound marketing methods to source new deals and secure buyers – things like sending email blasts, making cold calls, and attending networking events. All of these strategies involve a lot of time and energy on the wholesaler’s part to track down new leads.

However, with people stuck at home and spending more time on the internet than ever before, wholesalers should consider optimizing their inbound marketing to enhance their sales funnel during this crisis. Having your own website, blog, or YouTube channel, running digital ads, and boosting your social media presence are all ways you can get noticed by buyers and sellers who are actively searching for properties in your area. It takes a considerable initial time investment to get these up and running, but if you’re stuck at home now, too, then what better way to spend your time than building funnels which will bring leads to you passively?

More Conservative Offers

Panic in the markets, combined with desperate sellers, creates an opportunity to get good wholesale deals, which means you can and should be more conservative with your offers in the current environment. Buyers will also be looking for a deal, so 70% of ARV minus repairs might not leave you with enough room to make a decent profit wholesaling in this market. 

COVID Extension Clause 

To protect their contracts against extenuating circumstances due to the pandemic, many wholesalers are now including an option to extend their agreements with the seller if necessary. If your contract stipulates that you need to find a buyer within 60 days, add a two-week extension that can be triggered to give you more time to close deals during the crisis.

Wholesaler Collaboration

Inventory was already at an all-time low in most parts of the country prior to the outbreak, and now it can be even harder to find enough suitable properties to keep your wholesaling business running consistently. 

We’ve seen wholesalers respond to this by reaching out to the competition – other wholesalers – in order to work together, rather than against one another. Wholesalers operating in the same area put together a shared spreadsheet of all of their current deals, and offer a finder’s fee to anyone who’s able to bring them a buyer for it. This can help you both fast-track deals in this uncertain market, and generate a steady stream of income from the finder’s fees you receive on other wholesalers’ deals. 

Real estate wholesaling is still alive and well in the era of COVID-19, but wholesalers have had to adapt and innovate in order to keep turning a profit during these unprecedented times. 

Many of these trends will likely continue in the age of the new normal, so if you want your wholesaling business to thrive both during and after the pandemic, consider incorporating these areas into your strategy now. 

Image Courtesy of Curtis Adams