The flip’s landing on it’s feet

Assuming you’ve been following the progress on my flip, you know that I started off with high hopes, which were quickly squashed by my first contractor, only to be revived by my second contractor.  The second contractor is awesome.  He has totally taken charge of this project; he calls daily with updates, asks questions, provides intelligent feedback and works incredibly quickly.  In less than one week, he had finished gutting what needed to be gutted, removed broken radiators, located new radiators (and had them delivered), rewired all the rooms that needed to be rewired, reframed what needed to be reframed and replumbed most of what needed to be replumbed.  I was blown away (in a good way this time).  He’s actually taking time off this week to finish another job, but I suspect it’s to allow me to catch up to him.

Assuming he comes in around the budget numbers, he’s my go to guy for my next project (yes, there is one on the horizon).

My contractor gave me some budget numbers: $1.50/sf for tile, $150/bath fan & light and approximately $500 for electrical odds and ends.  I was able to locate some tile for $0.50/sf, a bath fan & light for $20 and I had some 12/2 wire and other electrical odds and ends available.  My goal is to shave approximately $1,000 off the budget.

Some other finds:

From Left to right, top to bottom: Some additional tile for $1.00/sf from the local Habitat ReStore; Prefinished hardwood for $0.40/sf from ReStore; Both toilets from ReStore for $1.00 and $53.00 respectively; More tile for $1.00/sf; and a pocket door kit.

The pocket door kit is a story unto itself.  If you notice, there is a sticker on the door kit for $65, but on the rail above it is listed at $74.  When we brought it up to the counter to be purchased, it rang into the register at $74.  I asked the cashier to double check it and she replied (nicely) “I sell what the SKU is”.  I (nicely) replied “I pay what it says to pay, which is $65”.  She (nicely) agreed and took $9 off of our final bill for ‘customer satisfaction’.  I don’t think I’m becoming a cheap skate, but I realize that too many times in life I allow money to be ‘lost’, such as on this door.

Updated Analysis of a Flip

Earlier I presented my numbers for the house flip that is currently under construction.  Those were my original numbers.  Here are some more up to date numbers as the project has progressed.  Some very experienced flippers would probably tell me that my original scope of work (SOW) was no good to begin with.  I’m actually operating under that notion anyway.  However, just because the scope of work was bad doesn’t mean the numbers were wrong.  Here are some updated numbers:

Original Estimate: Updated Projections
Item Cost
Property Purchase  $                 25,000 Property Purchase  $                 25,302
Kitchen Cabinets  $                    1,725 Credit for boiler  $                 (5,050)
Counter Tops  $                    6,480 Insurance Pmt  $                          88
Appliances  $                    1,350 Clean and prep of house  $                    2,542
Electrical repairs  $                    1,000 Kitchen Cabinets  $                       696
1st Floor refinish  $                    3,600 2 Bathroom and kit. Install  $                 11,380
2nd floor carpeting  $                    1,500 Add Alt: Roof Repair  $                    2,800
Bathroom update  $                    1,500 Interior paint  $                       750
Painting  $                       750 1st floor flooring repair  $                    3,600
Heating system  $                    1,000 2nd floor carpeting  $                    1,500
labor  $                    6,720 Boiler replacement  $                    4,000 No fuel switch
Contingency  $                    2,563 Appliances  $                    1,350
Add Alt: Exterior Paint  $                       500
Total:  $                 53,188 Contingency:  $                    2,500
Total:  $                 51,958

You’ll notice that the categories don’t quite line up.  For instance, the price for the two bathrooms does not really coincide with anything on my original estimate as we decided to add a 2nd bathroom into the project AFTER having closed on the house (not the best flipping strategy).  However, I believe I was conservative enough in my original estimates that I was able to bury the 2nd bathroom costs in the rest of the job.

A few things to note:

1) There were no associated costs for demolition in the original estimate.  I had assumed the clean out would take two days.  I was wrong.  Apparently, to make a bathroom disappear takes approximately two weeks.
2) The boiler cost looks like a loss ($1,000 in original, $4,000 in the new projection).  However, if we factor in the credit for the boiler ($5,050) plus the original $1,000, I actually had $6,050 for a boiler and I am projecting $4,000, which is a $2,050 benefit to my budget.  The only problem is this: with the intense cold we had here, the boiler tripped off, the system refroze and instead of one cracked radiator, I have six cracked radiators.  Ouch.
3) I forgot to include counter top in my updated projections.  I had originally spec’d out 16 running feet at a cost of $40/SF for a total of $6,400.  I had assumed some high end solid counter material.  After talking with some other house flippers, who told me I could make a counter top of gold leaf for $6,400, I decided to look around.  I thought, “Hell, what’s granite cost?”  Well, actually not as much as I originally thought.  I can buy slabs of granite for $145/slab (72″ x 25.5″ x 1.25″) – the only catch is I have to buy four.  So, purchasing four granite slabs including shipping is about $900, I only need two slabs, so for this flip, the cost is $450 (do you have a need for two granite slabs?).  I then have to cut the slabs and round over the edges.  I have a plan for how to cut the slabs so it looks good.  Stay tuned for a future post.
4) As with any project, we’re beginning to experience project creep, meaning small items are beginning to pop up which add to the cost of the project.  For example: Because of the disappearing bathroom, the existing waste line is now at a really bad height.  So bad in fact that we have to cut the waste line in the BASEMENT and install an entirely new line up through the house.  It’s so easy to think “Well, it’s only an additional $25, let’s go ahead and do it.”  Well, if you do that six times over the course of 30 minutes (which is easy), you’ve blown $150 (I don’t make $300/hr, do you?).
5) I’ve taken the project creep mentality and applied it to materials.  The fart fan*/light combo allowance: $150/light.  I found a matching set on eBay for $20/ea.  This would represent a savings of $260 over my contractor’s allowance.

The last, but most import observation between my original numbers and the updated numbers is this, as my business partner pointed out when we finish with this house, there will not be one thing the homeowners will have to do after they buy the house.  Everything will have been addressed.  Two brand new bathrooms; a brand new kitchen; a new master suite; new flooring; new roofs; freshly painted.  What’s not to like?  Based on my projections, we will have accomplished all of that with the same original budget, meaning my profit margins are still intact.

Lessons during a Flip

The house

The house

If you’ve been following my blog, you know that I’m in the middle of a house flip.  It’s my first flip, so I’m trying to run a very tight ship.  So far, I’ve posted about the good and the ugly.  On the good side, I have the potential to make my investors close to $7,000 and I have a chance to split $7,000 with my partner, which is awesome considering I only have to put in some time on the project.  How’s that song go — “Money for nothing and chicks for free”?  (On the really cool side, I might even have to buy a pneumatic paint sprayer…how cool would that be?)

Beyond the financial aspect of this project, this flip presents an incredible growth experience if I’m willing to grow with the project.  I will have to deal with other contractors (one has already been fired…not the best start), time constraints, financial constraints, outside investors, a partner, and the real estate market to name just a few potential issues.  Given these constraints it is easy to see how some business owners can become micromanagers.

I can easily see how people simply get fed up with seeming incompetence and insist on having their hands in every aspect of a project.  The fear of screwing up can be so great that only the original brains behind the project is capable of making the correct decisions.  It’s very easy to fall into this management trap.  Since working with my first contractor, I feel the micromanagement tug almost daily.

On this flip, I wanted to give my contractor friend a shot at the project.  I needed him to keep on task and execute the plan as given, not to think about other plans that may or may not be reasonable.  After my experience with my original contractor, there is a large part of me that simply wants to shut the door and keep my opportunities for myself.  Say “To hell with the world, I can do it better”.

If I were to do that, how much would I actually accomplish?  Probably not too much.

I work at least 40 hours per week, manage a few rentals, have an extremely active 16 month old, a couple of dogs (cats, one rabbit and multiple chickens) and a wife at home.  There isn’t too much time available to manage the project, let alone work on the project.  I need to be able to delegate responsibilities to others so I can get this project executed.

Since working with the first contractor, I want to turn off the phone and simply muscle through the work, completing it all on my own.  But I’ve done that already.  I know how that goes.  It’s not bad, actually kind of fun, but there are other things I want and need to do.  I have to grow to be able to happily delegate a significant portion of the work on this project.

I didn’t expect this flip to present me with the opportunity to learn some new leadership/management skills.  Part of me feels burned by the first contractor, though part of me also knew that firing the contractor was a distinct possibility when I hired him.  I was taking a risk by hiring the contractor, but I wanted to give him a shot.  My risk didn’t pan out, so I need to move on.  However, I need to move on while still remaining open to sharing this awesome opportunity (the flip).

Disappearing Act

Bathroom (Before)

Bathroom (Before)

Sunday marks the official end to the third week of the Philipsburg Phlip project.  During the second week of work, my contractor did a few things which caused me to question if he should remain on the job.  Over on BiggerPockets, some more knowledgeable people suggested I fire the contractor after the first infraction.  I still wanted to give the contractor the benefit-of-the-doubt, so I let him continue working this week.

(Note to self: Should have listened to the sages over on BP and fired the contractor after the first infraction)

However, I didn’t. I figured the contractor simply needed some more direction with more defined parameters from which to work.

I was wrong.

On Monday of this week, I had a discussion with the contractor regarding the bathroom on the 2nd floor.  My contractor has wanted to almost gut the entire room; I only wanted to remove and replace most of the major components.  Close to the end of our conversation, I said “Do not touch the plumbing or flooring until we’ve reviewed everything with my partner.  We’ll talk Tuesday evening about this issue.  Do not touch the plumbing.”  The contractor acknowledged this request.

Tuesday morning, I received a phone call from my contractor.  He had a few questions regarding some of the other work occurring this week.  At some point in the conversation, he let slip “well, you’ve got all the flexibility you want in that bathroom.”  To which I replied: “John*, I said we’re not touching that plumbing.”

He replied “Well, I figured it would be easier to replace it with plastic and people would rather plastic than cast [iron]. It only took me four or five hours yesterday [Monday] to remove the plumbing and flooring.”

Me: “John, you’re kidding right?”

John: “No, it was relatively easy, and its only going to take like two or three hours to put it all back and about $100 in materials.  It’ll add like $3,000 to the value of the house.”

Me: “No, it won’t add anything to the value of the house because no one really cares what is under the floor.  It will subtract from this flip’s profitability.  Don’t do anything else to the 2nd floor, finish the framing on the first floor and don’t plan on any more days this week until I get a chance to review the work.”  At this point, the room was nearly spinning around me.

So I was hemming and hawing about what I should do, and finally decided to fire the contractor and not pay him for the removal work and reduce his final check by the estimated amount of the repairs (time and materials).  This morning, I met with him to square up our accounts (I hadn’t seen the bathroom yet).  Strangely enough, John apologized for the ‘miscommunication’ regarding the bathroom.  Fair enough, but still not good enough to sway my mind.

A few other red-flags rose during our squaring of the books this morning.  Twice, John said “Well, I didn’t bill you for that tool.”  The second time, I finally replied, “John, you’re a contractor, you’re supposed to have tools.”  I was also accused of not knowing the price of gasoline because I refused to pay mileage to and from the job site each day.  I would have considered mileage if John had put in a good solid 4×10’s weeks for a minimum of 120 billable hours.  John only has about 80 billed hours over three weeks.  I reminded John that if he didn’t show up on site, he wouldn’t have work.

At the end of the meeting, John began to discuss work this coming week.  I stopped him and forced myself to look him in the eye and say “John, I’ve given this a lot of thought and I need to terminate this project.  This project is stressful enough for me that I don’t need to worry if you’re going to follow the plan.  I need to know you’re going to follow the plan and I am just unable to do so now.”

John vented at me for a while and I let him.  I know he’s in a very tight spot right now and I feel badly about that, but I need to protect 1) my investor’s money and 2) my own sanity.  John was, and I’m sure is, very upset.

After leaving my meeting with John, I headed up to assess the damage with my partner and formulate a new plan forward. When I got to the house, my partner asked me “How much did you ask John to remove?” I said “just the tile and backer board, why?  I know he removed all the drywall, but you already saw the bathroom since then.”  This is what I was expecting to see:

IMG_20140216_150048112

My partner replied: “Well, the bathroom is gone.”  I didn’t believe my partner, but this is what I saw:

My brother is a magician and I don’t think he could have done a better job at making something disappear.  (The pictures above are taken from almost the same position as the photo at the top of this post)

My partner and I are both contractors, so we were able to quickly formulate a new plan.  A little sweat equity on our parts will right this ship, but jeeze-oh-man, this is not how I wanted to start this flip.  I figured better to quickly cut ties with John then let the problems persist any longer.

As a learning experience, I should have 1) visited the site BEFORE I cut ties with John.  That would have allowed me to make a determination as to the extent of the damage, therefore how much to reduce the final paycheck to compensate for the damages and  2) Followed my gut on John’s abilities.  I wanted to believe he was capable of handling this project, but my gut was telling me to be VERY cautious.  My gut was right.

*not his real name

Analysis of a Flip

I recently started on an ambitious (for me) project.  I decided to reach out to some family friends and see if they wanted to partner on a house flip.  Essentially, we would buy a run down house, fix it up nicely and return it to market, making money by selling for more than we put into it.  The family friends put up the money (up to $50,000) and HBS will put in the head-scratching, project management stressing work.  I then decided to partner my share with my brother-in-law, who has much better carpentry skills than I do.  He’ll keep the project moving from a technical stand point.

My initial analysis is as follows:

Purchase Price: $23,000
Kitchen Cabinets: $1,725
Counter Tops: $6,480
Appliances: $1,350
Electrical Repairs: $1,000
1st Floor Refinish: $3,600
2nd Floor Carpeting: $1,500
Bathroom Update: $1,500
Painting: $750
Heating System: $1,000
Labor: $6,720
Contingency: $2,563

Total Investment: $53,188

Estimated sales price (conservative, ie. low): $72,590
Potential Profit: $19,403 before taxes, holding costs and closing costs
Holding Costs: -$2,150
Closing C0sts: -5,978
Net Profit: $11,275

With a 50/25/25 split, the investors stand to make $5,637.50 and my brother-in-law and I each stand to make $2,818.75.  While it’s not a HUGE payday, I think we will actually do better than that so long as I really drive hard to meet my improvement budget.

Before Pictures:

BtW: Week #5

IMG_9318

 

BtW was a massive fail this week.  No only did we have sub-zero temperatures, we were also forecast to get 1″ of snow.  The picture above is from Thursday evening.  The snow continued to fall into Friday morning.  Friday was cloudy with no snow, but Friday night/Saturday morning the snow started again.  Again, we are forecast to ‘only’ receive 1″ of additional accumulation.  I just finished shoveling 3″ off of my driveway (7am Saturday morning).

Needless to say, I didn’t bike to work at all this week.  Not one single day.

On Wednesday, I had had enough, so I decided to play hooky from work for an hour or so and went for a hike on some of my most favorite trails in PA in Rothrock State Forest.  It had been so cold on Wednesday morning (-19degF in some areas) that when I got out of my car, I thought the local temperatures had warmed up a bit, so I hiked in a wool sweater, down vest and a ball cap.  The hike was beautiful.  Clear blue skies, bright sun, white snow.  Some of the local streams were still flowing, casting off some mist that quickly froze to form really neat ice formations.

IMG_20140212_121014568 IMG_20140212_122125607_HDR

 

By the end of my hike, I was feeling a little cold but had a great hike.  I turned on my car and the car’s thermometer was reading 12degF.  Certainly not warm, but on a relative scale, almost 30 degrees warmer than -19!

I love to run in the snow, so when the forecast called for 1″ of snow on Thursday, I figured I would go run the trails in Rothrock.  By the time I got to Rothrock, there were almost 6″ of snow on the ground.  The run was great, but I was sore on Friday.  Here’s a pic from the end of the run:

IMG_20140213_123249177_HDR

 

Here’s to hoping BtW#6 is a much more active week.

 

How I saved $200 on my CSA membership

Credit Card Cash Back

 

I generally despise credit cards.  They are financial quicksand.  No matter how quickly you think you can pay them back, there is that ever present sucking sound as those damn cards continue to suck hard earned cash out of your bank account.  The sales pitch is always “Hey, we’ll give you 2% back on everything you spend!”  The card companies know that they’ll give 2% so long as they have you at 20% APR, or an eighteen point spread!  Eighteen points cash-on-cash is crazy.  I am generally willing to invest for 15% cash on cash return.

Well, I’m flirting with the devil.  We received an invitation in the mail to get a new credit card with a $200 signing bonus.  We needed to spend $500 within the first three months of having the card and we would receive 20,000 points, which is redeemable for $200.

I signed on the dotted line.  I knew we needed to purchase our CSA share for the summer.  For those of you that don’t know, CSA stands for Community Supported Agriculture.  We essentially prepay a farmer to produce our produce for a set period of time.  It is sort of an insurance policy for farmers.  They have their cash up front, so regardless of the year, they know they won’t lose the farm in the winter.

At the beginning of this year, we set a budget for all of 2014.  We knew we were going to purchase a CSA share this year, so I knew how much to set aside on a monthly basis so we were ready for the purchase.  Well, the credit card offer came along, and the ‘early bird special’ came for the CSA, a perfect match for the 2014 frugal budget.

I paid the $750 for the CSA (Yes, it’s a LOT of veggies…but it’s still expensive).  After paying for the CSA, I destroyed the card, so I can’t use it for anything else.  I was a little nervous waiting for the 20,000 points to post to my account as no communication from the Chase card services mentioned anything about the points except the initial teaser.  Well, we received our statement today and I actually eagerly opened the envelope and found…20,000 points applied to  my account, redeemable for $200.

The $200 will be applied to the CSA payment, for a net-out-of-pocket of $550 for the CSA.  Not too bad.

BtW: Week #4

Trusty Steed

Hoo boy this week was a rough week.  I knew it was going to be cold this week, but intended to bundle up and ride through the cold.  I wasn’t prepared for the snow.  I closed on the house I’m flipping on Monday.  The lawyer’s office is all of 1.5 miles away.  Even in the car, it took me nearly 10 minutes to get there!  By Wednesday, the roads had mostly cleared, except for the freezing rain we received Tuesday night…another busted bike day.  Thursday I was able to get a ride from a coworker, so I saved a little money.  Friday I had to be at the Shop and it was damn cold, the bike trails were all snowed/iced over and I needed to pick up some tools…another busted bike day.  Altogether a weak showing for my BtW goal.

BtW Week 4 Stats:
Miles Biked: 0
Car Miles Saved: 14.2 (my coworker picked me up)
Gallons of Gas: .68
Dollar value of Gas: $2.35

 

2013 Financial Freedom Recap

IMG_20130917_120553_028  Poppy Flower_Small

 

2013 was a year of hard work and hard play (typical engineering mantra).  In addition to my regular day job, I spent approximately 600 hours working on UFUO#2 and only a few hours working on my personal residence.  In addition, I started this blog (a little bit of work), we took a trip to one of the most beautiful places on earth, St. John, USVI, spent two weeks in Maine, and spent another long weekend in Maine and New Hampshire.  We ran in two half marathons (destroyed my knee in the 2nd half marathon and am still recovering from that), went on numerous hikes with the dogs, learned how to make bread (dough hook on a stand mixer is KEY), STILL haven’t figured out how to make my own wine, and lastly had a mustache for a weekend.

Small Mustache

 

I was able to purchase two duplexes in 2013, adding to my passive income from real estate, although the 600 hours invested in the one duplex didn’t seem ‘passive’ at times!  Because of the rehab on the duplex, my cash reserves were virtually tapped out, and still I was trying to purchase rental properties locally.  I figured that as I added properties, cash flow would slowly improve, which would add to the cash reserves.

I have determined that that premise isn’t wrong, I just need to stretch out my purchases.  Like bread dough, I need to let my personal dough rise.

At the end of 2013, I had two offers out to sellers: one was for a property to flip and another was for a fully rented duplex.  You can read all about  my offer on the duplex in my “Unique Financing” post.  It was a cool deal, but ultimately a few issues came to the surface and I felt it was best to let that deal sail away.

The other property is a single family home in need of a moderate amount of rehab.  For this property, I have partnered with some family friends.  They put up the cash and I manage the rehab.  For me, this is an awesome deal.  The loan is interest only with the principle being paid back when the property is sold (interest is due monthly; I’ll be posting a detailed write up shortly).

In 2014, I plan to devote significant portions of my take home cash, both passive cash flow as well as ‘earned’ income to the purchase of more assets for additional passive income.  Rather than increase the amount of time it takes me to manage my properties, I plan to work with a turnkey investment firm to locate properties currently under management with low barrier to entry (low down payments) and high cash flow potential.

2013 by the numbers:

Passive Income from REI: $710/month
“Fee” for Self-Managed Properties: $270/month
Dividend Income: $7/month (1.5 coffees)

Total Passive Income: $987/month

 

Drive to 5

United-States-Five-Hundred-Dollar-Federal-Reserve-Note

 

I have a goal for 2014 to increase my annual dividend income in my taxable accounts to $500/year.  This is my “Drive to 5” goal.  I measure my progress by looking at the forward projections for my dividend income, rather than the money I have actually received.  If I meet or exceed my Drive to 5 goal, at the end of 2015, I will have received more than $500 in dividend income.

Why $500?  I don’t know.  I probably should have chosen $600, because my average monthly dividend would be $50/month, which is easier to remember than $41.66/month.  I couldn’t think of a good rhyme for “_______ to 6”.

How do I plan to achieve my goal?  Any ‘windfall’ income that I receive will be invested in my Drive to 5; each month, I invest approximately $200 in a few dividend paying stocks.  Lastly, I will simply have to dedicate some of my regular income to the Drive.

To figure out how much money I will need for all of 2014, I assume an average dividend of 5%,  which means I will need to invest approximately $8230 for the year.  That is a really good chunk of change and a lofty goal, but with careful planning and smart purchases, I think it’s a doable goal.  Most of my dividend paying stocks are in DRIP type accounts, meaning all dividends get reinvested into the stock, generally at no cost to me.  This helps reduce (slightly) how much I need to invest.

I entered 2014 with forward dividend income of $82.55/year.  By the end of January 2014, that figure had grown to $88.54 through the purchase of some additional Intel stock.  I still have to make up $411.46 to hit my 5.

My current Drive portfolio includes: GE, INTC, HSY, KMI, O, ARCP.

Please note: I am long all positions mentioned in this post.