Great fix and flip opportunities are starting to reveal themselves. As we move into a changing market, we will continue to see opportunities. I am hearing clients tell me better deals are hitting the market and I am seeing new investors finally able to get started by getting houses under contract. It seems like this may be a good time to consider starting your investment business or expanding it.
With all this said, fixing and flipping is not quite as easy as they make it look on tv. Some investors make mistakes to the point they no longer want to be in the business. This is too bad, because there is a ton of money to be made if you can avoid the big mistakes. Here are the top two reasons we see investors fail and exit this business. Avoid these and you are looking at a life of freedom. A life many people only dream about.
Reason One: Getting Over Their Skis
By far the biggest mistake that takes investors out of the game is being too aggressive. Greg was one of our best clients. He kept $500,000 or more in liquidity, had a great financial statement, great credit, and a ton of experience. He got started in this business like many of us, fixing up one house at a time. He got good at it and was making great money. This motivated him to build a team and scale the business, which is exactly what he did. He hired a large team and was cranking out deal after deal. He then started building new homes. New construction takes a lot longer to complete than a fix and flip but Greg did not consider that as he continued to buy, buy, buy. He was doing well but seemed to be getting over his skis. We stopped lending to him until he could make some more progress on current projects. Greg did not like that and quickly found a lender that cared more about loan fees than client success. It ended up taking him down.
Greg grew too fast and did not have adequate systems or processes to handle the heavy workload. He was not able to keep up with the demands that kind of growth takes, including his own administrative tasks. He hired a project manager that was siphoning cash off from the construction draws to line his own pockets and with the amount of deals under construction, Greg had no idea and quickly burned through his reserves. With no money and no way to manage that many projects, everything started falling apart. He was not able to stay within his budgets like he was doing when he had more control, and his entire business froze. He ended up divorced and bankrupt.
This is a terribly sad story but a common outcome when investors get too aggressive. I understand that many investors are competitive and want to grow fast but sometimes the best growth is slow and calculated. Remember that designing your ideal life is a process, not a sprint.
Reason Two: Divorce In Partnership
Derek and Jeff (not their real names) did a lot of business with us over a 10-year period. Derek had a lot of experience in real estate but always seemed a bit “prouder” than what his accomplishments warranted. He loved showing off, was very flashy, and enjoyed the attention he received from other inspiring real estate investors. When he started working with Jeff, it appeared to be a match made in heaven. Jeff had a strong personality and seemed to be able to keep Derek in line. Jeff had a fantastic high-paying W2 job and was easily able to borrow money for their fix-and-flip business. Shortly after the two moved to Minnesota, Derek found the girl of his dreams and felt the pressure to impress her. Without Jeff knowing, he started taking money out of the business to buy expensive gifts, a new car, and maybe a trip or two. Jeff was relying on that money as reserves to get them through their projects. It did not take long for one of the projects to go over budget. No big deal Jeff thought, lots of projects go over budget. He planned to tap into the reserve account to pay a contractor when he realized what was happening.
The partnership and a long-time friendship evaporated instantly, and the portfolio of half-completed projects fell apart with at least $500,000 in potential profits evaporating. Unlike Greg, there was not a divorce in a marriage, it was a divorce in the partnership, and no one wanted to take responsibility. Derek ended up with the girl but they ended up broke. Apparently, she did not care about the money and married him anyway. Too bad he did not know that before the spending spree because he could have had a great wife, a great friend, and a successful business.
I often say that you cannot reach your potential without help. Partnerships will allow you to do larger more profitable projects or could help you get started with your first project. They can also send you into bankruptcy so although I recommend utilizing partners, please proceed with caution.
There are other mistakes investors make but these are the top two that are difficult to recover from. Howie in our office did a great video of the top 5 mistakes he sees. Check that out here https://www.youtube.com/watch?v=L5w83PpWh78
You cannot avoid mistakes. They are part of being successful but you limit the damage. Make mistakes fast and avoid these two and you will have a long and prosperous investing career.