EP #9 - Flipping Houses is Not Investing but You Can Get Stupid Returns

In this insightful episode of the Financial Freedom Fighters podcast, real estate investor Mike Magno shares key lessons from recent house-flipping endeavors. Covering a range of topics, Mike discusses the importance of due diligence, strategic negotiations, relationship building, sticking to financial goals, and creative problem-solving in the real estate investment process. The episode also underscores the significance of effective communication with contractors, addressing challenges, and maintaining transparency throughout a project. Mike's experiences offer valuable insights for both new and seasoned real estate investors, providing a comprehensive perspective on navigating the dynamic world of house flipping.

FREE Real Estate Investing Tools & Resources:
https://www.cashflowsaga.com/links

Book a Free Strategy Call:
https://tinyurl.com/k4vpbd5u

Connect with Jacob:
Instagram: https://www.instagram.com/cashflowsaga/
Website: https://www.cashflowsaga.com/
YouTube: https://www.youtube.com/@cashflowsaga
Twitter: https://twitter.com/cashflowsaga

Connect with Mike:
Instagram: https://www.instagram.com/realtormichaelmagno/
Website: https://themagnogroup.com/
YouTube: https://www.youtube.com/@realtormichaelmagno

Transcript

Nancy: 0:00

This is the Financial Freedom Fighters Podcast

jacob: 0:13

Welcome everybody to the financial freedom fighters podcast. We're bringing to you episode nine. I'm here with my cohost, Mike. How's it going, Mike? How you doing?

mike: 0:24

Jacob, what's up, buddy? things are excellent. it is a rainy and cloudy day here in Cleveland, but, uh, Hey, the sun is always shining in real estate. So, I'm enjoying it. you know, we got Thanksgiving next week. you know, things are good. Things are good. I'm feeling much better. you know, last time we recorded, I wasn't, I wasn't up a hundred percent. you know, we had a little bug in the house. Diana actually came down with pneumonia. so she's on, she's, she was, she's on the men now. She's, she's almost a hundred percent. So, but, uh, things, things are going well here. So got a lot going on though.

jacob: 0:56

There you go. There you go. I am glad that you and the family are on the mend I'm loving the holiday spirit, the early holiday spirit. So ladies and gentlemen, we had a couple of guests the past couple of episodes. Um, so it's just Mike and I today, but we still have a treat for you guys in terms of the episode for today. So Mike, our wonderful co host here is an experienced flipper. And if any of you in our audience are interested in flipping or understanding flipping, that's what we're going to dive into today. Mike has a bunch of flips going on right now, some good. Some challenging and, uh, Mike's going to dish the reality of flipping. So Mike, without further ado, let's, let's jump into everything that you have going on in your flipping business.

mike: 1:43

Sweet. Awesome. so we've got like four ish deals that were, that we're working on. They're in various, various areas of, the process. Right. So I've got one that's completely all done. We've got two that are in various stages of construction, and we've got a fourth one that we just put under contract this week. So we're, you know, we're in all different phases of, of the process.

jacob: 2:07

one quick question on that, Mike. so you've got four going right now. How does one, or how do you personally kind of determine how many you can do at any one point in time?

mike: 2:16

so that's a great question. it's really about your capacity, as an investor with capital. And then also costs and then also construction. I mean, those are really, you know, the different, the varying different things that you have to take into consideration when you're thinking about doing a flip because you're going to tie up, you know, potentially a lot of money for, for an extended period of time, potentially. you know, so we've got, of the four that we're working on, two of them are with our own cash. so that ties up a lot of capital. And then one is with a private, private money investor. And then this fourth one I'm working through some details with a hard money lender,

jacob: 2:55

Can, can you break down, the distinctions there? and, and talk maybe a little bit more about flip financing and go into detail, right? I mean, maybe some of our listeners are, you know, doing research on buy and hold investing and thinking about that. And maybe the differences of how, like, you know, maybe some would consider flipping to not necessarily be investing. And so why don't we kind of just like take a step back and talk about flipping in general, right? Mike.

mike: 3:21

Yeah, absolutely. Yeah, I, I totally, agree with that a little bit, right? A flipping is, is a job. you know, it is, it is really a job. It's not a long term investment strategy. you know, we do it for those punches of cash for other businesses and stuff. and then also it's, it's a, um, you know, we're challenged all the time as to why you do things, right? Like what's your big, why that type of stuff. I enjoy putting out products for people like in that first time home buyer price range or the step down buyer, or maybe the boomer who's retiring and wants a little one, one floor living, something like that. So, that's what, it's kind of one of the reasons I target the types of properties I target for flips. So, in, in that regard,

jacob: 3:58

Yeah. And my perspective here, and I am not a flipper, you know, so caveat that, but any type of real estate investing, If you have aspirations to be a long term investor, you're still going to need capital, you're still going to need active income to be able to make any meaningful dents in terms of making long term investments that eventually are going to kind of accomplish financial freedom for you. And so whether that's a W 2 job. Or not, you still need that active income, right? Unless you are good at raising capital and you can partner up and things like that, but you're still gonna need the active income. And what I've seen a strategy that I think is really cool is people are going to flip, Because you do get those outsized returns and like Mike called it punches of capital. The way I like to think about it is like you're accelerating a return. And keep me honest here, Mike, you can get a 50 percent return in a six month time period. you can really multiply the capital.

mike: 4:53

you can get some stupid returns like, here, I'll touch on one. I did earlier this year and, you know, sometimes it's funny. I tell this story to people, you know, sometimes it's better to be lucky than good. you know, if you, you put out and do the work, you know, think good, good things tend to happen. You know, it's kind of wild how that, that goes, but yeah, I had one earlier this year where, I had somebody call me and want me to, you know, list a property form and I ended up buying it from them directly. it needed some work. I was able to use a private money lender, for the purchase. So for those of you wondering, well, what's, what's private money, private money as an individual that loans you money, and it can be at. Certain interest rate, there's, there's obviously going to be terms involved. this particular hard, this particular private money lender, what they do is they analyze the deal as well as your analyze, and they take into consideration your experience and what they'll lend you. so in this instance on that deal, the purchase price was 117, 000. The private money investor gave me 115. So I had to come up with the other 2, 000 for the purchase. And then I had to come up with all of the rehab

jacob: 6:02

okay.

mike: 6:02

and, they loaned me that money at, 13 percent interest. So it was about 40 bucks a day. Cause what they do is they take the loan amount. Times, you know, 13 percent gives them an annual interest and then they divide it by 12 and then I divide that by 30 and I get my daily interest number from my spreadsheet. so when I'm analyzing it, I know how many days of interest I'm going to owe. And then that particular, private money investor also charges a fee. basically like an under, like an underwriting fee, a processing fee, like an all encompassing fee. And he charges, a flat 1, 500 or 1 percent of the loan amount, whichever is higher. So for my deal, it was 1500 bucks. Now what's really cool about this private money lender is they don't require any payments. You pay them back in full at the disposition of the property and they file a mortgage on the property. I sign a promissory note. I find they file the mortgage with the title company. The title company files the lien at the county and everyone's protected. That way I can't sell that property without them getting paid off. Things like that. So. And then what's great is once I sold that property, I gave the contact information for them to the, um, title company. they then talked to them to get the payoff, right? The payoff. So I owed them one 15 plus 1500 plus the interest. now I ended up, this was, and to date. It's my best flip ever and it probably will be my best flip ever, right? Like it was one of those things, the stars aligned and I did really, really well. we owned the property for like 73 days. For the time we bought it to the time we sold it on the disposition, we only owned it for like 73 or 74 days. so when you talk about accelerated returns, we made, now this is pre tax, right? So there's a big chunk is going to go to the tax man, but, pre tax, we made about 45, 000 in profit in 73 days. And I only had to come out of my own pocket, 24, 000. So for the math, for the math, majors out there, that's a huge, huge,

jacob: 8:10

a huge

mike: 8:10

return. Yeah. Huge annualized return. Now, once again, caveat out there, I've got some bad stories we're going to share too.

jacob: 8:17

we're, we're definitely going to get into that. We're definitely getting into that. I think that, so if you just take a step back and Mike and I are both long term investors, and we think that the key to escaping the rat race is having long term investments that are generating income that is not tied to your activity necessarily, right? Whether that's a W 2 job, whether that's flipping, but while we're on the pursuit of financial freedom. We still need to be generating active income, whether that's from your job or whether that's flipping and then taking those profits and then reallocating them into long term investments. That's the play here. That's ultimately the play. Now the, an argument can be made that if you are a skilled flipper and then you can continue to roll the profits into bigger and bigger deals or more and more deals, then sure, you can do that. But just understand. And I think our last, our last guest or Jim, a couple of guests ago touched on this, you're, you're kind of creating a new rat race. You're kind of creating a new job at that point. So. So if you are looking to get into the flipping game, just know that it's active, know that like Mike said, it's a job and think about what is, what still is the long term strategy? Because the long term strategy should still be to build that kind of portfolio that you're holding and kind of building your wealth over time. You have like any other thoughts on that, Mike?

mike: 9:37

Yeah. So we've got, you know, we, we have a few things that we're working on longterm goal wise and, taking down some type of commercial property. Whether it's an apartment building or maybe an office building, a small office building of some sort, that's a goal of ours and depending on who you talk to, you know, there's a lot of people who think there's a reckoning coming in the commercial real estate space and in the next three to four years, right? 2025, 2026, a lot of people are talking about all these, You know, all these commercial loans that are going to be due to reset. And for those people who don't know this, but, in the commercial real estate space, you typically don't get 20, you typically don't get long term fixed financing. So in 2019, 2020, 2021, 2022, you could get 3 percent commercial financing on a. 15 unit apartment building. It was great. But if you bought it in 2020, in 2020, more than likely in 2025, you have to refinance that note because your, your mortgage rate adjusts to market. So you're going to, you're going to go from a 3 percent interest rate to potentially, you know, if the rates don't come down any in 20 by 2025, now. Most prognosticators think the rates are going to come down some, but even if it's at 6 percent in 2025, you're still going to be doubling your rate. So there's a lot of operators out there who are using pretty hefty projections and rent growth to make the numbers work long term for the inflated values that they were paying and the suppressed cap rates. And I don't want to go down this road in this episode today, but it, it's gonna, it's gonna come to a head, you know, very soon. And I'm one of those people who thinks that that's a possibility. So what I'm doing is I'm stacking cash. So that I have that money to deploy when there might be a desperate seller out there. So that's specifically what I'm using what we have. We've kind of transitioned into with our flip business, what we want to do with the cash. We want to set it aside and have it to ready to go in the next two years on some type of commercial property.

jacob: 11:44

Okay. Okay. Awesome. Awesome. Yeah. So Mike touched on a lot of different concepts and concepts that we'll probably dive into more depth in future episodes, but just to highlight a little bit, Mike was talking about commercial real estate and for the listeners out there, most of the time when you jump into the world of real estate investing, you're probably going to be jumping into residential and residential is defined as anything from a single family home to a four unit property. And that is where you're going to be. Looking on the MLS, you're going to be getting traditional kind of conventional financing, which is 30 year fixed rate loans. And that is an amazing, amazing product. The fact that you can lock in an interest rate for 30 years. There are people with interest rates in the twos fixed for 30 years. Like that is crazy, And so in commercial, you cannot get 30 year fixed rate loans. It just doesn't exist. What you have are. You know, you, like Mike said, you have variable interest rates that are fixed for a period of time. The most I've seen is like 10 years, but it's usually like three, five or seven or 10. And at that point you have to refinance. And you'll refinance into whatever the rates are. And Mike was talking about how there were people who bought apartment buildings or commercial buildings that had locked in rates for five years at really good interest rates. And now they're kind of stepping into a place where they have to refi and given the amount of income generated from those properties, they're not going to be able to service that debt. And then they'll have to be for selling. And then we might see some pain in the real estate market, but specifically in the commercial market, notice how the 30 year fixed rate, if you are locked in and we've touched on this in past episodes, you're not going to be in a world of hurt because you don't have to sell and your interest rate is not moving on you. And that's actually really a big component of what happened in 2008 is a lot of people had almost commercial like debt. On their residential properties, They had arms adjustable rate mortgages. And I think the percentage is minuscule now of residential properties that actually have arms. And so anyway, that's an aside. We'll get, we'll get into that later commercial versus residential, but back to flipping Mike. you have a bunch of projects going on right now. Why don't you kind of walk us through, some of the highlights of

mike: 13:53

Yeah. So the first one I'll touch on is the one that's the most done. So we've got the one project that's completely done. This one, it's a little bit of a weird one. it's not your normal timeline that you would, you would associate with a flip. we acquired the property last summer, a wholesaler brought it to me and it's in a zip code where I like, but it's really on the edge of the location in that zip code where I would typically buy.

jacob: 14:16

Okay.

mike: 14:16

But it was such a good deal that I let the location not play as big a role as it normally would.

jacob: 14:24

Okay.

mike: 14:25

So it was, it was a distressed seller. the guy was behind on his property taxes. He was going to get foreclosed on. so I bought the property, paid the property taxes and paid the wholesaler an assignment fee. I was all into the property for around 30, 31, 000 at that point. Why closing? originally we were going to wholetail it. the guy was like a hoarder. So I had a crew come in and clean the place out. It took like two big dumpsters. so I paid about 2, 500 in fees and stuff to get somebody to come in and clean the place out. Got it all cleaned out. we demoed it all out. Like we ripped up all the carpeting, got rid of all the pad. It just, it really stunk. The guy was a heavy smoker. So we wanted to just make it as nice as we could to try to wholetail it. no, I'd never wholetailed a property before.

jacob: 15:07

Can we, can we define,

mike: 15:08

I figured you were going that route. So, so yeah, so what's a wholetail? A wholetail is basically a wholesale property sold. On the market. Right? So I obviously, you know, I had the ability to close on that deal'cause I had cash, right? I closed in like eight days on that property. Right? The stress seller. And that's the thing that people have to understand, like, oh, you're so lucky you got that deal. Well, I got that deal'cause I had the money. You know, if you don't have the money, you're not gonna get, you know, you. So there, there's, there's levels to it. uh, so anyway, so what we did was in the hotel, I then turned around and I put it on the MLS. we listed it for like 49, 000. So I wasn't looking to get rich here. I was just looking to make a few bucks. Like I cleaned it out. I demoed the, we demoed the bathroom because the bathroom was a gut. So we demoed the bathroom out. So I put a little bit of money into the place and threw it up on the market. I thought, okay, if I can make a quick 10, 000. I'll just make a quick 10, 000 and we'll move on. we just didn't. So what happened is, and I learned, I learned a valuable lesson during this whole process is I had a lot of people come to me and make me a bunch of low ball offers like 35, 000, 32, 000, 28, 000. Cause what happened is they looked at the property record. And they saw that I paid, 22, 000 for the property, but I didn't pay 22, 000 for the property. That's what I, yes, that's what I paid the seller for the property, but people don't realize I paid like 5, 000 in back taxes. I paid a 5, 000 assignment fee to the, to the wholesaler. And then by the time I cleaned the place out, I was into the property for about 34, 000. So like I wasn't getting rich on this property. So I had a lot of agents, a lot of inexperienced agents come to me and go, Oh, why are you being so greedy? And I'm like, I'm not being greedy. And I would tell them like, look, I'm into this property for 35, 000. You want to see the receipts? Like I'll give you the receipts. Like I'm not, you know, I'm not trying to get rich here, you know? And if your client was so great, they would have gotten this deal themselves. Right? Like, so that's, you know, I get a little, I get a little edgy when people are like, Oh man, they're so lucky. I never begrudge another investor who gets a good deal. I don't, you know, I, I want to learn from that person, how they got that deal. Let me figure that out so I can get that deal for myself next time. Anyway, so we threw it up on the market. It didn't work out. We didn't get what we wanted. So we just sat on it. we had many, we had a few other projects going on at the time. So we just sat on that project. and we thought, okay, we'll get back to it. We'll just get back to it. We had so little into it right at that point, we only had 30. 000 tied up in the project at that point, you know, the holding costs, the utilities, it wasn't that much, you know, a hundred bucks, 150 bucks a month, a little bit of insurance, a little bit of taxes, not a ton of money was going into, you know, it was being deployed into that fast forward. We started, we actually started working on the project. We decided to flip it at that point. So fast forward, we, we started working on the project around March of 2023. We got done with the project around July of 2023. It was a pretty big rehab. We ran into some issues once we opened up some walls. You know, the, once again, everybody thinks this is all, you know, hugs and smiles until you, you start busting open, you know, a hundred year old plaster, right? So, anyway, so we got done with the project. The price looked great. Got the, got the photographer in there, got the great photography, you know, got the place cleaned, our cleaning, our, our cleaning crew went in there, cleaned the whole place up nice, whole place looks great. I listed it for sale, nothing, nothing. And, uh, so I was, I was a little, I'm like, Oh, what's, what's wrong here. So I did list it a little high. I got a little aggressive with the list price. We listed it for 120, dropped the price after like a week. We got a bunch of showings and a lot of great feedback. Like, Oh, I love the house. Love what you guys did too. It looks great. But there was negative feedback too. And it was the neighbors that's the, that was the recurring theme. And once again, I mentioned it earlier, that was my one, the one thing about the low, the property was the location. now I've said this before and I'll say it again, there's always a price where you'll get somebody to buy it. Piece of property. Now, did I want to drop the price of my property to match what someone's willing to pay for it? So I'm thinking, I don't know. So I, I have a partner on this one. so I discussed it with my partner and we decided that we're going to, we're actually going to keep it for a while, it's a nice property. It's completely renovated. It's turnkey. It'll be low maintenance. So what we did is we actually took it off the market last week. And I've got it up for rent, for 1250. Okay. So now I'm into this thing for about 71, 72, 000 for those listening, wondering. So I'm into the property 72. We're going to rent it for 1250. I've gotten like 30 inquiries this week already at 1250. so we're going to rent it and then I'm actually refinancing it.

jacob: 19:44

Turned into a burr,

mike: 19:45

yeah, so we're gonna, we're gonna turning this into a burr, turning it into a burr. and and this will be my, this will be my, my very first kind of like successful burr, if things go well and, I think they will. So the appraisal was today. Actually this morning, and if the property appraises for 110, which there is a comp literally right around the corner for 118, there is a comp right by, right next, right next to it, for 118. So if I get 110 from an appraiser, I will be able to pull out all of my money and a couple of thousand dollars after expenses and everything else.

jacob: 20:24

the perfect burr.

mike: 20:25

perfect burr. Yeah, well at least in in my market with narrow margins You know other markets the perfect burrs when they pull out 50 or 100 000

jacob: 20:34

I mean, these,

mike: 20:35

dollars, but

jacob: 20:36

these days, these days, so Mike, I want to, I want to kind of pause and then summarize the deal for the listener and pull out some of the insights that I think are going to be super helpful. so you bought a deal, the source of the deal was from a wholesaler, It was a distressed seller. They had some property taxes that they didn't pay. We got it under, you got it under contract from the wholesaler for about 30, what was the 31, 000,

mike: 21:02

Yeah, by the time I paid the time I think it was 29 was what I was under contract at and you know with title charges and things it was You know 30 30 31

jacob: 21:11

30, 31, first kind of insight I heard from you was you kind of, you kind of were lenient on your buy box a little bit. It was in the zip, it was in the zip code that you normally operate in, but it was on the outskirts. It was kind of like a little bit, a little bit on the edge there of where you'd normally invest. So that's kind of the first insight that I heard is you were a little bit lenient cause you fell in love with the deal a little bit, right?

mike: 21:33

Yep. So I won't, I won't name names at this point, but, and anybody wants to reach out to me about specifics of this deal and streets and stuff, I'll be more than happy to do that offline. But this property is literally one block north of the line that I typically draw in that neighborhood.

jacob: 21:48

Yup.

mike: 21:48

So that it was that close. It was that close.

jacob: 21:51

yeah, but just for the listeners, right? Like I think one of the insights here, not just for flipping, but for also your long term investing as well, have a buy box, right? Have a strong perspective of what you're looking for and as much as possible. Try to stick to that. I think that's going to help keep you focused and you're going to, it'll serve you kind of in the long run. So that's the first kind of insight I heard, Mike. So the second thing is you tried to wholetail the property, So this was kind of your first exit strategy. You got such a good deal that you thought, Hey, I can come in, clean it up, Cause the guy was a hoarder, clean it up, put it back on the market and make a nice quick little profit for pretty minimal work. And so that was the exit strategy. Number one for Mike and it didn't work out. It didn't work out. But Mike being the investor that he is was like, okay, cool. We'll pivot. And we're actually going to try to flip this thing. So at that point, You pour about another 40 K ish into the rehab. It's a lot of work, a ton of work, and you put it on the market and you put it on the market for about one 20. So you're all into this thing for 70 K. You're putting it back on the market for one 20 and it sits, it sits for about a couple of months, right? So kind of another insight there is just because you did all the work and it's a great property, it's beautiful. So sometimes those things are not going to move in as quickly as you'd want them to. So Mike made another change in his exit strategy. He's like, I'm going to keep it as a long term rental. And he kept it as a long term rental. He's in it for 70 K and the property rents for 1250. So if anyone knows the 1 percent rule, this blows the 1 percent rule out of the water because Mike got this off market and it's a great deal. And he did the work himself. So obviously bringing this to rental grade and His final move on this deal is he was going to burr the property. And for everyone who doesn't know a burr is, it stands for buy, rehab, rent, refinance, and the last R is repeat, but it's a mechanism by which you buy an undervalued market property. You do the work. So you rehab it, you renovate it to get it to market standard. You put a market rate tenant in there and you rent the property out. And then you go back to the bank and you say, Hey, this is a brand new property. I've increased, I forced the appreciation on it. The bank is going to give you a loan on that property for 75 to 80 percent of the value. And remember, you've increased the value. You've increased the value of the property through forced appreciation. And at that point, your Mike successfully through that refinance was able to pull, or he will, he will be able to pull all his money out. If it appraises at where we think it's going to be. And at that point, ladies and gentlemen, Michael be in the deal, no money. And whatever cashflow he has on that, whatever positive cashflow he has on that and long term equity from the debt pay down and appreciation. Mike's going to be into that deal with an infinite return because all of his money's out. And now Mike can take that money and go do another flip, another long term rental. And that is an amazing move. So I just wanted to summarize that Mike, because It just showed like, one, how flexible and adaptable you were as an investor. And two, to really highlight the perseverance that might be needed when a deal doesn't go the way that you kind of plan it to, but still Mike is getting an amazing result kind of in the end of it.

mike: 24:59

I know it sounds great, but like, you know, it's, it's no, the end of November, 2023, we, I bought this property, like the. It was literally, I closed on it like two days before we went on our Italy trip last August. So, I mean, it's been well past a year, right? So, you know, for those listening who think that this is like, you can do this just like overnight. Yeah, once again, we, I've made, I made mistakes and I'm sharing those mistakes with you guys on this episode on what we're talking about. You know, could I've gotten rid of it faster? Sure. Could I have lowered the asking price when I started the sale? I could have. Had I listed that thing for 99, 000, I probably would have sold it already. but after fees and everything else, like I just, it wasn't juicy enough for me and my partner. You know, and, you know, it's one of those situations where you just, you look at it and you go, okay, well, let's just, let's just, let's get some income. Let's get some income. So, you know, I, I manage my, my longterm rentals myself. So I do have a, I do, I do, I will have a better return on, on the cashflow. Cause I'll be managing this property myself, but you know, I'm generating, um, you know, I'll generate about 400 bucks a month in cashflow, pure cashflow.

jacob: 26:17

Yep. Yep. So Mike, I'll keep it. I'll keep us moving here. let's go to the, let's go to the next deal. What's the, what's the next flip

mike: 26:22

So the next one I've got going on is a single family in Akron as well. same neighborhood. the other side of the neighborhood where I, you know, it's a little bit better. So, but yeah, so this, this deal I actually bought on market. Single family home. I paid, um, so this is where, this is a great example of relationships matter in this business and who you work with matters. So here's the, here's the skinny on this one. about two days before that property got listed, guess who called me? The listing agent. Listing agent knows I buy in this neighborhood. She knows I buy there. So she calls me. and she says, Hey, I'm going to be listing this property. She gives me the address on Saturday. If you have interest, I said, okay, what are they going to be asking? She said, well, I think they're going to list it for 60, nine, nine. And I said, okay, let me check it out and I'll get back to you. You got any pictures? She says, yeah, I'll send you some pictures. So she texts me some pictures. I pull it up on the MLS. I do some analysis and I don't like the numbers at 60, nine, nine, for sure. I drove by it. I happened to be in the neighborhood. So I drove by it to see the outside.

jacob: 27:31

real quick, Mike, just, just to if we can give the listeners kind of a perspective, like, okay, you saw the numbers and you didn't like it. What, what does that mean? What does that kind of look

mike: 27:39

Okay. So what, yeah, that's great. Great question. Great question. so what, my quick high level overview of it was what's it worth when I sell it? So I started there. That's my first thing. Is it, what's it going to be worth when I sell it? So the spread, that's what we call the spread. What it's, what I'm paying for it and what it's worth. So at the time I was projecting about 125, 000 ARV or after repair value. They're asking 70, 000. That's only a 55, 000 spread. I don't, I never get out of a rehab nowadays for less than about 30 grand plus holding costs, plus realtor commissions on the other side, plus title charges. I mean, there's nothing left, right? We don't, and this partner is my same partner on my other one that we just talked about. We don't do this unless we're going to make at least 30, 000. That's our pre tax profit goal on every flip that we partner on. It's 30, 000. So that's why the numbers didn't work for me at 69, 900.

jacob: 28:55

So for, to accomplish the 30 K target, the minimum spread on it would need to be what typically.

mike: 29:03

at least 60, 000. Yeah, 60, 000. So,

jacob: 29:06

At least.

mike: 29:07

yeah, at least, at least. At least. So in this deal, I went back to her. I went back to her and I said, Hey, you know, I looked at it. I drove by it. I really appreciate you bringing it to me. And of course, anytime in the future you have anything you want to bring to me, please. I said, but I'm going to be at like 50 52 to buy this. And they're at 69 nine. She's and I'm like, I just think that we're too far apart. And You know, she maybe shouldn't have done this, but she said, well, just bring it anyway. Bring it anyway. That's okay. So I did our, so then, uh, that Saturday, the property went on the market. So I went and looked at it. and what had happened is it was a little bit of a distress situation. Again, it was a situation where, the woman who owned the property passed away. She was living in the home with her daughter. And then the dog, and then she had two sons. So the, the daughter and her two brothers inherited the property.

jacob: 30:00

Okay.

mike: 30:01

The daughter did not have the capacity to buy out the brothers to stay there. So they were, it was a forced sale. so I went and looked at it. It was pretty rough. It was pretty rough, heavy smokers. They had a dog, they had a cat, like it was, it was gross. It was gross. and then the other thing that is hard to add, it's, it's hard to put a value on is this property was technically listed as a. Two bedroom home and as it was configured when I bought it, it was legally a two bedroom home, but it had three bedrooms. So obviously everybody's out there going, well, tell me more. so somewhere along the line, this house had been built originally as a two bedroom home and somewhere along the lines, and it's on a slab. So there's no basement. So somewhere along the line, the back of the house had an addition put on it, but the only access to that addition was through one of the bedrooms. They literally just cut a hole in the wall, put a door and you walked through the first bedroom to get to the back bedroom, but that's where I saw the opportunity that bedroom was huge. It was the whole back of the house. Like it was a really nice. And in this neighborhood, you don't typically get a 16 by 20 master bedroom, right? Like it's just, it was massive. Now, what, what do you have to do to create a legal bedroom? So I had to somehow. make us to be able to access that bedroom while not going through the other bedroom. Right? So I had to get out a piece of paper and tape measure and I was doing all kinds of measurements to make a legal, to make a legal bedroom here. You have to have, an ingress and egress. You have to have a door and a window and you have to have 70 square feet. You don't even have to have a closet, but you people want closets. Well, this, so, To build a hallway to make this thing a legal bedroom, it was going to make it 64 square feet. So I'm like, Oh shit, that's not a legal bedroom. So we actually stole the square footage we needed from this massive bedroom in the back. So what we did was we built this hallway. And then on the bedroom side of the hallway, we poked a hole in the wall and we stole square footage. And we made this like nook in the bedroom,

jacob: 32:13

Wow.

mike: 32:14

it, drywalled it, put a light in it. So it's, you know, it's awkward. Yes. But I now have an 80, like 84 square foot bedroom, and I'm going to have a legally three bedroom home. So that's where the value was in this deal. Anyway, we, and we kind of skipped over the whole buying of it process. So anyway, it. I made the offer 52. they came back to me, I was cash, I was no contingencies. So, I mean, these are advantages that I have being local, that the, obviously the out of state investor really won't have, unfortunately, it's just, it's a by product of being local. but I was able to leverage the fact that I was paying cash. The fact that I was waiving inspections to get me a better deal. we ended up settling at 58. And I put together a 32, 000 budget for the rehab, so I wanted to be in it for 90. And because we were using cash, we weren't going to have hard money costs and things like that. So that's where I can kind of keep, you know, I can keep my. My, my, my number's a little bit narrower because I don't have the expense of interest and fees and things like that on that, on this, on this deal. so, so fast forward, where are we? So this deal is probably about two to three weeks out from being listed. I actually visited the property a couple of nights ago to check in. it's, it's progressing along. The whole place is painted. the bathroom's redone. The kitchen is almost done. The flooring is almost done. So it's, it's coming along really, really nicely.

jacob: 33:42

Okay. Okay. Awesome. Awesome. And, um, you'll have to give us an update on this one when you do list it. And then, uh, if we're able to kind of successfully exit this one and.

mike: 33:51

Yeah. So the, the plan, So the plan is to list it for one 30. I felt really good about that. Until recently, you know, the, the, the sales are slumping, the sales are slumping a little bit. but once again, this partner has a long view on this property. We're not just going to give it away, so we're going to list it and see what happens. And if we don't sell it right away, it's one of those situations where it's, how do I say this? We have the inventory, right? And people aren't building these types of houses. So there will be a demand for this house eventually.

jacob: 34:19

yeah, yeah, yeah. So this is another really cool one. I'll do a quick kind of highlight in terms of like what I heard as a non flipper, obviously, and someone that's just kind of hearing this story for the first time. So the first thing I heard is like you said, Mike, relationships matter, like in the real estate business, specifically relationships matter. It takes relationships to get things done and just know that, right. Just know that and kind of invest in the relationships. You're not going to get anywhere alone in this game. So that's one. Mike got this deal because he was active in this zip code and he was, he told everyone he knew and people just associated Mike with buying and flipping in a zip code. So we got first dibs on the deal that didn't even hit the market yet. Second insight that I heard from Mike is he bought, right? He bought, right? He stuck to his numbers. The offer was floated at 69. 9. Mike ran his numbers on it and he said, there's not enough of a spread there, right? He needed to see a bigger spread for him to move forward with that deal. He went back to a person that obviously one he wanted to do business with, but he stuck to his numbers and he said, Hey, I'm not anywhere close. And he actually said that and he's willing to walk away just knowing that the distance was probably too far. She said, bring it anyway. So Mike, again, stuck to his numbers. The third thing that I heard is that Mike got really creative about how to add value in this deal. It was a two bedroom, but it was really a three bedroom, but the third bedroom was illegal. So Mike got creative and how we can actually make this a legal three bedroom and adding a bedroom is definitely going to add value to the house. So that kind of was the creative value at play for this house. And then lastly, Mike, again, is going to be flexible with his exit strategy. He used cash to buy this deal. He doesn't, he doesn't have a private money lender. He doesn't have a hard money lender. He doesn't have the same type of holding costs that you would have if you were kind of under the weight of that loan, because he bought this with cash and he has a partner. And so we give some flexibility in the exit strategy. He's two weeks out from listing this one, very optimistic and illicit at one 30. And you're all into this one, Mike, for how much?

mike: 36:18

So we'll be all into it for around 91, 92. So we're, we're S we're slightly over budget. You

jacob: 36:27

Okay. Slightly over budget, but still kind of projecting to, to have that profit that you guys target. And, um, yeah, we'll see how it goes. So Mike, we're, we're coming up on time. Let's let's see if we can squeeze in one more flip.

mike: 36:37

yeah, yeah, we'll do, uh, we'll do one more. Um, so we've got a third project going on that's under construction. this property is a, uh, situation where it was a distressed seller. came to me, and needed help getting an exit out of the property. unfortunately it was going to be foreclosed on, much like our first deal that we talked about. It was a property tax situation. And the other challenging piece of this deal was, it was, the property was like half renovated. So, they had a leak. That they discovered in the property and they fixed the leak and they fixed a lot of things, but unfortunately that that particular person ran out of money and then ran into a situation where the person who bought the tax, liens from the county. Had started the foreclosure process and they needed to get out and they needed to get out fast. you know, we could have listed the house, but it would really been a hard to say like what he would have got for it. and it's one of those situations where you gotta kind of get creative. so we just sat down and talked some numbers. I put down, you know, Hey, this is what around what it's worth all fixed up, you know, any, any, big time investor is going to want a 30 percent kind of spread on it. So, we took that number, we took 70 percent of that. We took, we subtracted out what we thought it would take to fix it back up again. And that's the number we offered. And because we were, we were positioned to be able to do that right away. and, and, and help get this guy out of the property. I actually even got dumpsters to the property for him so it helped him move easier. you know, we were able to move quickly. and this one was a private money deal. So, so the same private money person who loaned me the money that we talked about on that duplex that I did really, really well on, at the very beginning, that same person is the one funding a chunk of this deal as well.

jacob: 38:33

Okay. Okay. Okay. And, uh, you're under construction now. How, how, how deep are you into the construction? Everything going well with the construction so far?

mike: 38:40

here's another. And here's another challenge that we can talk about. so this one is a different crew than my normal crew. I'm testing out a new, a new crew and. We didn't get off to the greatest start. so I had this, I had this job bid back in September when we, when we were closing on the property, but I had to go out of town. we, we, we just, I had a lot going on for about three or four weeks. So I wasn't prepared to start on the project until I got back from BP con from Orlando in mid, in mid October. Well, so I hit this, this, this company up, this construction company up. when I got back, I was like, Hey, I'm ready. I'm ready to move forward. They sent me a contract. We, we negotiated terms and then I sent them the first 25%. I wired them 25 percent of the, the full, the full boat. So it was about eight, 8, 000. they were supposed to start like that Monday. Like this is a Friday. I wired the money. They're supposed to start on Monday. So fast forward. and the, the part of the terms of our agreement was I was going to give them. Another 25 percent after the first four to five days of construction, and then I saw work was being done and materials were on site. That was what we agreed to. so at the end of the week, the kind of the, the guy running the project, but he, he's not local, but he's running the project. hit me up for a draw. I said, okay, cool. No problem. Let me go check out the property. And when I verify that it's where, where we said it would be, I'll, I'll hit you with the draw. I go to the property, nothing's been done. Nothing's been done. there was a dumpster on site, and Like some of the trash had been thrown out, but other than that, nothing, literally nothing had been done on the project. So I called the guy and I was like, Hey, man, I don't know where the disconnect is. I said, but nothing's been done. I'm not sending you to the other, this other 8, 000. And he said, okay, let me call you back. But so he, he calls the, the, the, they call it a, lead, you know, team leader or whatever of this project. he called me back. He goes, I'm sorry about the miscommunication. I guess the guys weren't there as much as I thought they'd be this week. We'll get back with you next week to get that draw. Okay, cool. Fast forward. End of the next week comes, they asked for the draw. I said, okay, I'm going to go check the property out. now I live nearby, so I'm able to do this. I show up and like this much stuff has been done. That's two weeks now. So I called a guy back again. I go, dude, like, I'm not trying to be a jerk here, but You know, what the hell's going on like nothing. He goes, what are you talking about? I go, dude, nothing's been done I go, I'm going to take a video and send you the video. He goes, okay. Okay. Okay. So I sent it. So I take a video and I point out everything that has been done and it was like something I could have did on a weekend, right? Send the video. I don't hear from him for like three days I stopped by the property Tuesday night. Then. You know, three, three, four days later, Tuesday night and lick not very little had been done. And then he hits me up on Thursday for a draw. And I, I snapped, I snapped. And I mean, those who know me, no, I went into a, in. tirade of, F bobs anyway. and the guy's like, I promise you stuff's done, blah, blah, blah, blah, blah. So I ended up, so he ends up setting it up for me to meet with the team leader there that Thursday night. This is last week. and I showed up. And I, I was actually blown away. So I don't know what happened, but they must've got like six guys there for like two straight days because they did more work in two days than they had done the previous three weeks. so what we learned, what did we learn? We learned that communication is key because once I was meeting and talking to the team leader, I found out that because I drug my feet with my. With me signing the contract for them to start work, they took another job and I, no one told me all they had to do is say, Hey, man, need a couple more weeks to start your job. And I would have been like, cool, but I think what happened is they'll never admit to this, but they might not have, they, maybe they thought if they didn't tell me, yeah, we'll start right away that I would have went to someone else. that's where the communication we figured out, like we need to communicate that we need to communicate better. So that one's chugging along. I actually met with the leader last night. we walked through everything that had been done and then everything else that needed to be done. And now that I had, I had a much better feeling, right? Like now that him and I are face to face, like man to man, you know, talking it out, I actually sent them a little bit more in that next draw. So I owed them a, I sent them 10 to To show as an act of good faith, right? Cause I, I did get steamed. I did get pissed, you know, but that being said, it's, it's, you know, like I thought I was getting taken for a ride, Like I had talked to several friends, other investors, my attorney, like everybody's like, dude, you're getting taken for a ride. You know, like everybody thought I was going to take him for a ride, but here it just, it became a, well, they just didn't tell me that they were doing another job. Had they just told me like, Hey man, we're doing it. We had to take another job. I'd have been like, okay, cool. So what we learned communication is key on that one. So that one's about, uh, probably three weeks away. Because they've got a bigger crew. This, this, this construction company has a much larger crew.

jacob: 43:49

Okay. Okay. Yeah. Yeah. And, and so ladies and gentlemen, Obviously you kind of hear this a lot and I think, but the relationship with the contractors, Mike obviously used, a new contractor this time around. He was testing them out and you know, the experiment at first wasn't going very well, but Mike, again, persevering through the kind of challenges there, was able to get on top of it. Right. And, and the big takeaway here is communication is key, right? So work with your contractors. Set realistic expectations and set clear expectations as well. and just trying to manage through that, but at the very least, right, Mike, it wasn't, you weren't being taken a ride because I don't know how many stories I've heard about people that have just lost out completely, you know, maybe paid a huge chunk of the deposit up front and then they just never showed up ever. at least it wasn't that scenario. Cause I have heard that a bunch of times, Awesome. Mike. Well, I'm going to round us out here. This was a jam packed episode of a ton of value. Uh, we walked through three of Mike's real life flips and we extracted a lot of insights from each of those deals for you, the listener. If you are interested in learning more about flipping, you can reach out to Mike, obviously at Realtor, Michael Magno on all socials, uh, maybe shoot him an email as well. Get, get linked up with him. He's a wealth of knowledge when it comes to flipping and obviously investing in Cleveland. I am cashflow saga on all socials. So you can find me at cashflow saga. This has been, oh, and I, I never do this and I should probably start doing it. If you find any value in listening to our podcast, if you could be so kind as to, you know, give us a five star review, that would mean the world to Mike and I. So if you like this episode or any of the episodes we're doing, just drop us a five star view. We would really appreciate it. So that is episode nine. I'm wrapping this up. We are the financial freedom fighters podcast. We'll see you in the next episode. Peace.

mike: 45:42

See ya.