How to Do Your FIRST House Flip in 2024: Budgets, Renovations, and Loans

Ashley:
Hey rookies. Normally investors who come on the podcast share their personal journey of real estate investing, but it’s usually after they’ve experienced their highs and lows, which is still incredibly valuable. But what if we learn together in real time? Today we’re bringing on Rene Hosman, the community manager, and a rookie real estate investor here at BiggerPockets who just purchased her first flip and will be in real time coming on the podcast to share her experiences throughout the process. Today is just step one. We’re going to learn about how she found and closed on her flip. Keep listening if this is a strategy you’ve been interested in diving into. This is the Real Estate Rookie podcast. I’m Ashley Kehr, and I’m here with Tony J Robinson,

Tony:
And welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. So welcome to the show, Rene. We’re super excited to have you.

Rene:
Thanks for having me, guys.

Tony:
No, of course. So what we’re going to get into today, we’re going to talk about what to look for in a flip in this market, how to build out your rehab estimate, which I know a lot of rookies get stuck on is how do I know how much these rehabs costs? And then we’ll talk about how Rene was able to close on this property with the help of a wholesaler. So excited to jump in.

Ashley:
So Rene, before we get started into your flip, what actually attracted you to real estate investing?

Rene:
Yeah, I wanted the stability that I could provide. I worked in the hospitality industry for a really long time and that has really big peaks and really big valleys, and I just wanted to be able to know my first intro into real estate was buying a place for myself to live in, and I wanted a two bedroom so I could rent out the second bedroom. I didn’t know the term house hack yet, but that just seemed to make sense to me. And I had just finished college, so I was used to living with roommates. It didn’t really seem like that strange of a thing. I also live in Denver, which is not the most expensive metro, but a pretty expensive place. But yeah, it was definitely the stability of knowing that no matter what I did and where I went and all of these things, as long as I can come up with this one amount of money every month, that I would have a place to live and be. Okay.

Ashley:
Rene, we’re going to be talking about your flip today, but have you done any other real estate deals as a rookie investor?

Rene:
I actually have two other condo units that are in the same building as my flip, and then currently doing a live-in flip, which is a little more live than flip at the moment, and a single family home in the Denver metro area. And in 2020, my partner and I got a wild idea to just buy some land up in the mountains that we haven’t done anything with yet. But that’s been my experience so far.

Tony:
So you’ve dabbled a little bit, which is good because it lays that foundation for some of that confidence. So I guess, let me ask, right, I want to get into this flip. Was this the strategy you were hoping to explore? Because you said you had some other condos in that same building. So when you bought this one, was it initially meant to be a flip or did the strategy change as you got into it?

Rene:
I say flip because first flip sounds nice, it’s probably going to be a bur, but I think it’s important to have multiple exit strategies. So first exit strategy is ideally I’ll keep it as a burr second, I could flip third. I could even potentially short-term rent it. I’m not really into that though, so I’m trying to stay away from that if I can. But yeah, so this unit, the building that I have my condos in is really small, so there’s only eight units total, and so everyone kind of knows each other. And I knew that this unit was going to be coming for sale. I didn’t know it was going to be so soon. I thought it would be more at the end of the year, maybe early next year. So I had to get my ducks in a row really quick. But this one I knew was going to be a much bigger project than I had ever done before.

Ashley:
Rene. So you mentioned you have two rentals in that building and then you own a flip. So you own three of the eight rentals in this building, is that correct?

Rene:
That is correct. The goal is to own all eight one.

Ashley:
Talk about buying a block,

Rene:
Just buy the building. That’s the goal that’s set in the building is here in Denver and it’s great as is right now. I love my rentals there, but there’s a lot that could be done to this building at some point to put it to its highest and best use for sure. And I am definitely still consider myself on the working side of the scale. I’m not ready to invest in a large multifamily building. If all eight units were for sale at once, I don’t know that I would have the confidence, but I love that I’m able to do it in little chunks and learn little lessons each time and then spread out the risk.

Tony:
That was my follow-up question. Say you do eventually end up buying all eights. Is there an HOA or anything? And if so, would you then just control the HOA or get rid of the HOA since you own it all yourself?

Rene:
That’s a really good question. There’s some weird legal stuff with that, but yes, eventually I could potentially buy all of it. However, don’t quote me on this, but I learned recently that apparently if an HOA goes under private control and there are still funds in the HOA that for some reason you don’t own that money. So I’d have to figure out, we have a good amount in reserves for the HOA, which I pay my dues on now three units every month. So I’d have to figure out how that works, but I am not quite halfway there yet, so ask me on unit six.

Tony:
But it’s an interesting concept because it starts to give you some flexibility around how you now use this entire building. I wonder if you could wise it, turn it into an actual apartment complex and then maybe sell it off as a multifamily. So there’s probably a lot of options that you’re opened up to as you get all eight, but not trying to force you to become this real estate mogul today. Just ask some questions that are coming to mind for me.

Ashley:
I mean, it is super interesting though maybe when you got to unit six and you’re like, okay, have two more to go. You talk with the other people and be like, Hey, are you guys ready to sell in a couple years? And if yes, and it’s like, let’s dump all of the HOA money into doing these capital improvements, you get bigger money for. Exactly. Well, I guess if they’re selling to you, you don’t want them to sell it for bigger money, I guess. But yeah, draining the HOA reserves before you controlled the whole interest.

Rene:
Exactly. And the HOA board is me and two other women who I’ve known since 2018 when I moved into the building. So I know a lot of people’s stories are very different about being bad HOA, but my experience has been the complete opposite in this small HOA building. Yeah, we get together once a year go over, we have a H property manager who manages all of our books and maintenance for the building and all of that stuff. And then the three of us on the board, we get together once a year, kind of go over the books, talk about if we are going to need any assessments the next year. So I know well ahead of time if those are coming up. And then we have an annual meeting that is usually just the three of us, maybe one of the other owners attends.

Ashley:
Stay tuned after a break for more from Rene on how she was able to close on this condo with a tight turnaround.

Tony:
Alright, welcome back. We are joined by Rene. Got it. So we started to talk about this a little bit, but I guess let’s really dive deep into this condo, this third condo you picked up in this building. So we know how you found it. It sounds like you knew the person that was living there and as they were looking to exit, you just approached them. So it sounds like it was a complete off market transaction, is that correct?

Rene:
No, I did buy my last unit in the building as a private sale. My building has a first right of refusal clause, which is super unique and not very common, but that means that any owner who currently owns in the building has the right of first refusal to essentially assume any in the contract. It’s called a bonafide offer that is made. So someone else made an offer on the unit. I had to match those terms and then as long as I could match those terms, the seller was required to sell to me instead of the other buyer.

Ashley:
Right of first refusals I think are so interesting and I think there’s a lot of opportunity in them if you really are interested in purchasing something is offering like, Hey, if I give you a thousand dollars today, would you put in a right of first refusal for your property so that one day down the road when you do want to sell, I’m the first person that has the opportunity to do that or something like that. So I think it is definitely interesting and it seems like it helped you get this property.

Rene:
It helped me get the, I guess technically the last two and it’s definitely been really worthwhile for me. We have a 10 day first rate of refusal period. 10 days. Yeah, we have 10 days.

Ashley:
So super fast you had to work.

Rene:
Yeah, well, so we have 10 days to submit our offer and then we have to match the terms in terms of the MEC plus whatever date, so the mutually executed contract date plus 30 days for closing, plus 15 days for inspection period, all of that kind of stuff. So I didn’t have to match the exact dates on the original offer, but I did have to match the same pattern of dates to get to closing. So I did have a full 30 days after they accepted, well, I had a full 30 days from when I submitted my offer, but they didn’t accept it until the 10th day. So then I actually only had 20 days to close.

Ashley:
But still even just to figure out if you can make that offer happen, that’s a very short window of time. 10 days. Yeah.

Rene:
And I was able to, I found out that it was on market the next day got, I was like, oh, someone’s probably going to put an offer in on this soon and maybe have a week to get my stuff together. And the next day after I found out that it was listed on the MLS, we got the notification from our HOA that it was first right of refusal period for 10 days. And I was like, okay, I don’t even have that week. I have a couple of days to get it all together. So yeah, it went really quick.

Tony:
Can we walk through that Rene? Because there is that time pressure and I think for a lot of rookies that are listening, they have that same assumption when they see a good deal, yeah, maybe I got a week or so before I can really get in there and run my numbers and get this offer submitted when a lot of times it gets listed and the next day it’s under contract, so you do have to move quickly. So what steps did you take during that period of your right of first refusal? What steps did you take during that period to give you the confidence to quickly say, I want to match this offer?

Rene:
So part of it was that I have to match the original offer. The original offer was cash and that was not one of my original scenarios that I had been running through. But I’ve been going to a lot of local meetups for a number of years. And most recently, a couple months ago, I met this wholesaler named Alex in the Denver area. And him and I had gotten coffee and I knew a little bit about his wholesaling company and that they also had a lending arm of their wholesale company that helps people buy flips. So my first thought was, okay, I just had coffee with Alex three weeks ago. He seems to know because he works with wholesale, he’s a wholesaler, he works with flippers all the time. He knows people who are buying in cash. Maybe he’s not the person, maybe his lending company’s not the person, but maybe he can connect me with someone.
So he was my first call. I think that I probably called him within a number of hours of getting that email. And I want to say I called him at noon by three o’clock, he had texted me in a group chat with him and a private money lender that a lot of his other clients had used who’s also Denver based. And by five o’clock I had a call with that private money lender. And within 24 hours of me just calling Alex, the private money lender had said, okay, I think that this is going to work out. Just fill out these last few paperworks just so that I can my i’s and cross my T’s. And it was really like that. I couldn’t believe it was like 24 hours. I’ve only ever done conventional mortgages and they’re normally so slow.

Ashley:
Talk about the power of the networking, and I am curious, what was that call with the call with the private money lender? What was the conversation for you to kind of vet each other?

Rene:
Yeah, I feel like my mind was running a million miles an hour and I just word vomited all over that poor man. I was like, here’s the deal, here’s what’s going on. But he was so nice and I explained to him that I really know the appropriate cost for this. I had already run my numbers for this unit. I had kind of been preparing to maybe buy something else. I knew what would cashflow, I knew the A RV because I had just had one of my other units so that I could get a heloc, all of this stuff. So that was kind of my side of just telling him about the deal. And he lends mostly based on the deal, but obviously a little bit based on a person too. So I tried to be as communicative and forthcoming as possible. And then after that, I just talked to him a little bit about what his experience was, how long he’s been doing this, where the capital comes from, because at the same time, while he was a referral from someone that I know and trust, this is kind of a big deal, and going sideways could be really set me back a lot.
So it was really important for me to know what his experience level was and that he would be able to also help guide me through his lending process in the same way. Maybe not in the same way, but in a way that when you get a conventional mortgage, someone is there telling you, okay, this is what I need. These are the steps that you filled out this form wrong. So I was pretty forthcoming with him about the fact that I would kind of need a little bit more than maybe his traditional flipper because I hadn’t done this before and then I was relying on his expertise.

Tony:
Rene, a couple follow up questions. Number one, had you ever met this person before in your life?

Rene:
The hard money lender? No. The wholesaler? Yes.

Tony:
So never met this lender before. How much did he lend you for this deal?

Rene:
He lended me the entire purchase price, which was $190,000.

Tony:
$90,000. Okay. So some person that you had never met before after a couple of hour long conversation said, I’m going to write you a check for almost $200,000.

Rene:
Yep.

Tony:
The reason why I’m saying that is because I think there is a major, major limiting belief amongst a lot of the folks inside the Ricky audience who don’t believe that there’s capital out there to work in their real estate deals. But you just very clearly articulated Rene, that as you start to build your network and you didn’t know the lender, but you knew the person that knew the lender, and you just asked the question of that person like, Hey, can you make a connection? But as you build your network, as you build your skillset in a very short conversation, you can build enough trust and confidence in someone else to write you a multiple six figure check. And that is one of the greatest skills you can develop as a real estate investor because it starts to unlock so much more opportunity for you because now you’re not bound by your own pocketbook and how much cash you have, but now you’re only bound by your ability to find good deals and find the right capital to deploy. So I’m on my pedestal here a little bit, but I think it’s such an important point to make Rene, because there are a lot of people who have the deals, but they don’t have the confidence to go out there and get the capital for it.

Rene:
I could not agree with you more, Tony, because honestly, let’s see, what day is it? It’s the 23rd today. So I submitted that offer on September 17th, about six weeks ago. I was also one of those people with that belief, and I’ve been around the BiggerPockets universe for a long time. I’ve even done other deals before, but I also suffered from that. I was like, where is this elusive private money? Where do these hide? What rock do I have to turn over to find ’em? And really all it took was just asking someone crazy enough.

Tony:
I got one more question for you before I get into that. One thing that I heard recently, it was actually from someone that runs a very large and successful self-directed IRA company. And he said that he is realized that a lot of real estate investors who have the deals but need the capital, a lot of times they’re networking in the wrong places. He was like, if you are a real estate investor, don’t only rely on real estate conferences to go out there and build your network, go to the conferences where the doctors are going, go to the conferences where the HVAC business owners are going go to the conferences where the attorneys are going. Those are the places where you’ll find the people who have the capital maybe don’t have the time desirability to do it themselves. Just one thing that I heard because you asked that question. One follow up question for you, Rene, is how did you actually structure the debts with this person? What were the actual terms of that agreement and what paperwork did you actually have to sign to make it official?

Rene:
Yeah, so I paid two points upfront, which I had to learn all of this. Literally, he’s telling me these things and I’m googling them as he’s saying the words, just to make sure, I consider myself fairly well educated about real estate. I listen to the podcasts all the time, I’ve read the books, but at the same time, you kind of get a moment of panic when you’re in the spotlight.

Tony:
Define points for us, Rene, for people that aren’t familiar with that.

Rene:
So points are a percentage of the loan that, from my understanding, I at least paid it upfront. So my loan was for $190,000 and I had two points, which means that I owed him $3,800 at the beginning. That was just kind of my loan origination fee essentially. And then I am paying 15% interest every month, and their interest only payments for up to six months. And so that means that my monthly payments to him are $2,375 a month.

Ashley:
And then you have a balloon payment at the end of the six months.

Rene:
Exactly, yes. And I’m hoping, and oh, and I have no prepayment penalty. I structured that with him because this is a two bed, one bath condo, six months. That’s what he offered me. I told him I was hoping to get it done in three. Now that we’re starting, I’m hoping I can get it done even by the end of the year, but I just wanted to give myself plenty of buffer and wiggle room.

Ashley:
Yeah, that’s safety net.

Rene:
Yes.

Tony:
He got two points upfront, 3,800 bucks, 15% interest. And you said it was over six months, so that’s 28,000 if you held it for the whole year. But we’re going to divide that by two. So he is going to get $14,000 in interest payments. So for him, he’s getting $18,000 back in six months on $190,000 investment. So if we annualize that over the year, that’s 36,000, over 190,000, that’s a 19% return that he’s getting on his money for literally doing nothing other than wiring money over to you

Ashley:
And

Tony:
A phone call and a phone call. But again, for the people that are listening, that’s why lending money is so attractive to the people that have these big piles of cash because where else can he go and get a 19, almost 20% cash on cash return backed by a tangible asset like real estate where he has to do nothing else other than wire money and have a quick phone call. So it really is a win-win situation for everyone involved.

Rene:
And I know from speaking to him that he takes this money out of a HELOC that he has on his house, and he’s paying 9% on that. So he is essentially putting no money forth out of his own pocket. He’s just taking it out of his own line of credit, and he gets the spread between the 9% that his bank charges him and the 15% that he charges me. And you know what? I’m so okay with that. It is a high interest rate and it’s a lot that I’m paying him, but I wouldn’t have been able to do without him. So that’s just the price I got to pay.

Ashley:
Exactly. And that is such a valuable point as to you don’t have to make the greatest return because some return is better than no return. So if you would’ve said, no, that’s ridiculous. I’m not paying 15%. Other people I know are paying nine, 10%, but yet you don’t get anyone in that short timeframe, that short window, and you lose the deal. Well, you’re getting 0% return now anyways. So hindsight, it would’ve been worth it to pay that 15% just to get a part of the deal. So let’s talk about the rehab on this property for a little bit. What is the expected cost of the rehab, and are you managing the contractors? Do you have a GC involved? Go into that forth.

Rene:
Yeah. Well, let’s tackle the budget first since you asked about that. And for anyone listening, I am tracking my live budget for the duration of this project. And you can see it on my notion document that will be linked in the show notes. But as of right now, my budget is $26,464, but I am giving myself that is how much I use the BiggerPockets rehab calculator. I talked to a number of people. I did some research on just how much appliances, cost and those kinds of things. Just a lot of Googling since this is my first flip, I’m giving myself a buffer of 15% so I can go 15% over and not have to worry. That’s just part of the learning experience. So my actual budget that I’ve set aside for this is $30,000, or sorry, $30,434. I hope to not hit that, but I have it there again as a safety net.

Ashley:
And do you have contractors in place already to complete the rehab?

Rene:
Yes. So I am actually using, I’m going to be doing part of this, DIY, and then part of this I will be using my handyman, who I’ve used for a lot of things. He’s just like a jack of all trades and just I feel like everyone says find your team. And Robert is my team, and he’s great. So he’s going to be helping me, and he’s also going to be teaching me a lot of stuff, which I’m really excited about too. I’ve never laid tile and I’ve always been, I’m very handy, but I’ve been very offput by doing tile. I don’t know why. It just seems really scary. And it’s a shower, so if something goes wrong, it seems like a lot of money and water damage and all of that good stuff. So between, I have my handyman Robert, I have my kind of backup assistant handyman, Kyle, who is my roommate in my house hack, and he works in construction. And then I have my plumber and I’m currently looking for and vetting a good electrician. But that is my team for this renovation. And then I’ll be doing, I’m going to try and use this as a learning experience for myself and do as much as I can as possible. I obviously have a full-time W2 job, so I can’t be over there all day. But since it’s pretty small and I have a lot of time, I’m going to try and get over there pretty much every day after work

Ashley:
To eliminate some of those holding costs and get it done faster.

Rene:
Exactly, yes.

Ashley:
Well, Rene, we’re super excited to follow along with that document that you’re providing to watch, and we’ll link it into the show notes for everyone. If you’re watching on YouTube, it’ll be in the description.

Tony:
Alright guys, we have to take one final a break, but while we’re away, we’d love to hear from you. Have you done a major rehab? If so, answer on Spotify or on the YouTube app during this break.

Ashley:
Let’s jump back in

Tony:
One follow-up question from you, Rene, on the actual budget itself, because it sounds like you had it down to the dollar. So as a rookie investor, how can someone actually estimate what those potential rehab costs will be?

Rene:
I started on the BiggerPockets flip renovation calculator, just kind of throwing in numbers and seeing what made sense. I wanted to know, okay, what is my absolute max before I’m at breakeven or worse than that in the red? And then what kind of profit would I like to see from this? And then kind of working backwards from there. I also literally went to stores. I went to Home Depot, I went to our local, it’s called Appliance Factory, and they sell the out of the box slightly dented things, which I buy from my own house. And so I went there just to write down numbers, how much does a dishwasher cost, how much does an oven cost, how much is a microwave? And all of these things so that I could just have a better sense in general. And then from there, I was just looking on the BiggerPockets forum and Facebook groups. A lot of people will post about deals that they’ve done recently, and I know it’s not always applicable depending on what metro they’re in, but someone says that they spent this much in San Francisco, then I’m like, okay, I’ll probably spend a little bit less. So instead that they spent this much in Louisiana, I’m like, okay, I’m probably going to pay a little bit more than that.

Tony:
So Rene, you’ve obviously done a phenomenal job of getting this deal, taking the deal down, getting across the finish line and the purchase side, but I guess walk us through kind of what the next steps are for you as you look to exit this deal, either through the refinance to bur or to sell it as a flip.

Rene:
Well, I’m starting demo tonight. I can’t tell right now, but I’m wearing my overalls. So we start demo and then I’m going to be doing a full bathroom gut and remodel. The bathroom is just tragic. The entire place smells like animal urine. So right now, Mindy Jensen lent me her ozone machine, so the ozone machine is running in there. I checked with the other tenants in the building and everyone’s out at work, so there’s an ozone machine in there right now. We’re going to gut the whole bathroom. So I’m in there gutting out baseboards and the bathroom over the next week, and then the kitchen. We’ve got to take all of the appliances out. There’s an original stove from the sixties. It’s actually super cool, and I wish that there was something I could do to repurpose it.

Ashley:
You could probably sell that on Facebook marketplace.

Rene:
I know, right? I’ve kind of been thinking about it. In fact, I’m actually buying because I just love a challenge apparently. And I also like I’m a Facebook marketplace queen. I love it. So I’ve been purchasing even during the closing process materials that I am going to be using for the property I already had. By the time I closed, I already had the tile for the bathroom. I already had all of the flooring I’m getting. We’re going to be not necessarily gutting the kitchen. There’s old hardwood cabinets in there right now. They’re spray painted black. I’m not kidding. Yep. High gloss spray paint black

Ashley:
On the wall. I mean, I love black cabinets, but I’m just not sure about the spray paint effect.

Rene:
Yeah, well, the walls, the ceiling and the cabinets are all spray painted the same, high gloss black. It’s interesting.

Tony:
They’re like, we going to get this done quick. Just, Hey, give me an hour. We’ll get it all done.

Rene:
Yeah. So I’m trying to refinish the cabinets. I know that it would cost me about the same to buy new ones from Home Depot or ikea, but because I have enough buffer and enough time, I really wanted to try and do that just because even though it would cost me the same amount to refinish them, I just feel like these cabinets have lasted since the sixties. They’ve still got a lot of life left in them as hardwood cabinets versus my other two units I already bought and they’d been replaced with particle board cabinets. And I’m already on a timeline where in the next five years, I’m probably going to have to replace those because they’re not doing so well. So I really want to make sure that everything is above renter grade in terms of just nice finishes for people to live in. That’s important to me, but also that it is renter, I’m trying to think of the right word to say. It can handle being slammed and not being treated as if it was someone’s primary residence in a way that sometimes tenants do.

Ashley:
Well, Rene, it looks like you’re already to get started on your rehab, and I think you had mentioned a three month timeline is what you’re shooting for hopefully by the end of the year. So we wish you the best of luck and we cannot wait to have you come back on to share the final numbers and what this rehab process was like on your flip.

Rene:
Thank you guys for having me.

Ashley:
You can find out more information about Rene. We’ll link it into the show notes along with her live budget and what she is spending on her flip as she proceeds through the process. I’m Ashley. And he’s Tony. And we’ll see you guys on the next episode of Real Estate Rookie.