Real Estate Investing Forum

[Law Student 2848]

So I came up with the idea of trying to get a job doing residential real estate and getting experience doing real estate closings and then also getting my real estate brokers license and having a friend who has had a few construction jobs do a contractors apprenticeship for a few years. Then after we get experience we would start a real estate investment business buying and flipping houses. Does this sound like it could be a realistic business or is there a lot in this field I don't know about and/or am missing?

[ResIpsa21]

This is far from my area of expertise, but I know there are some serious red flags in the house flipping market. There are a couple of ways to do it, but essentially you develop a profit margin by purchasing houses in poor condition and trying to increase their value by more than the amount you actually pay on the renovation. This requires (1) access to cheap skilled labor, (2) access to cheap quality materials, and (3) knowledge of how each particular improvement will affect the value of the house based on the property market in that area.

Sounds great, right? The problem is, to take advantage of the delta between renovation cost and increased value, you have to take on an extraordinary amount of risk. Here are just a few risks to consider: (1) You've got to secure a loan for the property, which means you're throwing cash out the window on interest every month you don't sell. (2) Since you have to buy poor condition houses to create the aforementioned delta, you are necessarily buying a house that may have some unwelcome surprises waiting for you once you start improvements. Have you renovated a house before? There are many horror stories out there about how $30,000 projects turn into $100,000 projects real fast once the demolition starts. (3) It is very difficult to predict the housing market. I'm not talking about another housing crisis; I just mean, for example, you never know if the $20,000 you're spending on a new kitchen will really net you a $30,000 return.

This is just my amateur analysis having considered real estate investment before. There are definitely people who get very rich doing this, but many, MANY more who fall for "get rich quick" house flipping schemes and lose out big time. If you haven't learned this already, a huge part of the legal profession is managing risk, and house flipping seems pretty darn risky to me.

[Law Student 2848]

Thanks for the response. Yes, obviously going into this area would involve risk as there are no guarantees in the housing market. But I feel like this plan helps to eliminate some of the risks involved by 1) saving money on the attorney's and real estate broker fees by doing them myself, 2) having cheaper labor as we would do a lot of the work ourselves, with my friend becoming a general contractor and teaching me as we went, and 3) you would need loans early on in the business but after making enough profit you would have money in the business that you would use to purchase the houses rather than loans.

I'm just not sure if it's a waste of my law degree or if this plan has potential.

[NYSprague]

Your not sure if doing construction is a waste of your law degree?
Your could just have become a broker instead.

[AreJay711]

I've been involved in the house-flipping business. These are my thoughts:

1) Getting your law degree is a huge waste. You'll save money on closings I guess, but not enough to justify law school. But maybe that's a sunk cost that you should ignore.

2) Your real problem is that a few years working for a contractor just isn't going to cut it. One way to make money is to take houses that either aren't really that bad and just need cosmetic work to sell. You and your partner might be able to do that but it's risky. The less risky way is to fix up shit holes that need a lot of work but capture the gains that would otherwise go to a general contractor by managing the project yourself and doing a lot of the work. That takes a lot of knowledge and probably more than your partner would be able to get in a few years. The construction guy in our operation was a master HVAC, master electrician, and master plumber and knew how to do framing and drywall. We essentially just hired laborers, finishers, and specialty workers. This probably isn't necessary to make a profit, but it is necessary to make a good profit until you have enough capital to have several projects going at one time.

3) To make your plan work, your friend is going to need to get out in the field. A lot. The way you make money hiring sub contractors is to get tradesmen who have newly started their business before they figure out all their hidden costs and labor burdens. He's going to need to get to know foremen.

4) You can probably limit your risks by starting small. Yeah maybe you'll clear $20k instead of $50k that was there, but you'll get a feeling for your subs and the business. Plus, maybe neither of you will have to give up your day job until you know whether you have a system that can make money.

Overall, fuck it: If its something you are passionate about, and you think that going into real estate practice wouldn't be independently terrible, you should do it. It's obviously possible even if its not easy. You'll have to learn a lot about what works and what doesn't, but that's business.

Once you get a base, it becomes much easier to manage risks. The people I used to work with now only either buy properties that could either bring in rental income to could cover the loan -- a safe option -- or historic homes that are going to cost $250k to restore and could sit on the market for years but will clear $500k when they do sell.