Thinking about investing to start property flipping with friend - need advice please

somethingcorporate

The major issue is that you don't know enough to get yourself a well priced house to make a profit.

5 years ago you could buy a house, sit on it for a few months and bingo it was now worth £30k more (watching the old house doing-up progs). Nowadays this is a lot harder and should really be left to the pros.

The worst I can see (and it is not far fetched for someone that does not know what they are doing) is they invest £80k and lose half of it in the first property through a mixture of overpaying, buying and selling costs, doing-it-up costs, inflation, opportunity cost etc.

I think you are being very naive if you think your friends and family will continually want to help you get "rich" by continually charging mates rates. They'll probably help on your main home but to leverage cheap friends will certainly test your friendship if they do see you making large wedges of cash at their expense.

If you are convinced you want to do this start VERY small. If it were me I would invest in my main home and pay off my own mortgage and then look to divest this to fund my plans. "Flipping" sounds so easy but it only generally works for newcomers in a rising market (which I am guessing we won't see for a number of years).

Archergirl

I think you are being very naive if you think your friends and family will continually want to help you get "rich" by continually charging mates rates. They'll probably help on your main home but to leverage cheap friends will certainly test your friendship if they do see you making large wedges of cash at their expense.

I must admit, this crossed my mind as well.
I would help someone in 'their' house, but not so sure if they were making money out of it in the end.

MrJaiga

grey_gym_sock wrote: »

well, in the worst case the property is worth a similar amount to what you paid for it, and you've got little or no reward for the improvements you've made to it. (ok, that's not the very worst, but there's no need to be over-pessimistic.)

property is perfectly decent as a longer term investment. in the longer term, you've got to think about the state of the local economy, as that will affect prices more than anything. that's why property is doing relatively well in london & the south-east. if the local economy is OK, location is OK, and you haven't borrowed much, then there's not a lot to worry about.

but i think it's better to have a plan for how long you'll keep a property, rather than keep it if you "can't" sell it. a property will always sell if the price is dropped far enough; when ppl say they can't sell, it means they won't drop the price (though some properties do take longer to sell than others).

there are significant costs for buying and selling properties. if you don't keep a property for very long, it's harder to cover those costs and still make a decent profit.

What exactly is classified as a long term investment? 10 years + ?

I dont think we would drop the price lower than what we paid, that would just be a waste surely. Does it not more sense to keep hold of it and hope you can rent it out??

Is it a common practice that if you cant sell a place you drop the price and lose your initial investment just to get rid of the property?

Reaper wrote: »

This used to be a sure fire way of making money, but not so much now.

The market is slow because buyers won't/can't buy at at these prices and sellers won't/can't reduce them. A house on our road was done up at great expense and sat empty for over a year.

You can still make money but you would have to carefully research what to buy. For example that house in our road that did not sell was because it was a luxury development in an area that does not appeal to the top end. I think they would have done better to just take a cheap, run down property and bring it up to match the standard of the others.

As you are putting everything into a single investment you need to be very confident about your skills and ability to stick to budget.

Yes we wouldnt make a mistake like that, thats just stupid. Please we would be aiming for the lower end of the property scale only having around £100k to spend in the Essex area

Yes for the first few properties it would be 100% of both of our capital. We have no other choice, its either take the plunge or just work 9 to 5 for the rest of our lives -_-, put all our savings into something and hope we sell as a profit. We have the next few years to save and learn as much as possible if we see this being a worthwhile investment.

somethingcorporate wrote: »

The major issue is that you don't know enough to get yourself a well priced house to make a profit.

5 years ago you could buy a house, sit on it for a few months and bingo it was now worth £30k more (watching the old house doing-up progs). Nowadays this is a lot harder and should really be left to the pros.

The worst I can see (and it is not far fetched for someone that does not know what they are doing) is they invest £80k and lose half of it in the first property through a mixture of overpaying, buying and selling costs, doing-it-up costs, inflation, opportunity cost etc.

I think you are being very naive if you think your friends and family will continually want to help you get "rich" by continually charging mates rates. They'll probably help on your main home but to leverage cheap friends will certainly test your friendship if they do see you making large wedges of cash at their expense.

If you are convinced you want to do this start VERY small. If it were me I would invest in my main home and pay off my own mortgage and then look to divest this to fund my plans. "Flipping" sounds so easy but it only generally works for newcomers in a rising market (which I am guessing we won't see for a number of years).

yes i understand this being a massive hurdle, the price of the place and then being able to estimate how much to renovate it etc. Im not sure how to get over this hurdle

I would expect our mates to give us a small discount sure, but nothing to where it wouldn't be worth their time. Having mates in the industry isnt nessecary for cheaper prices it also to do with the fact that we know we wouldn't be hiring a cowboy and their estimates will be honest etc.

We both live with our parents so we have nothing to pay off at the moment. We will be starting very small, and wouldnt get anything out of our scope.

Regarding the losing money in costs i guess that just comes down to doing a very indepth budget plan surely.

Price up everything that could go wrong, including all fees and admin charges before you go and make the purchase.

tushingham

Looks like you've thought about it a fair bit.
I entirely agree with everyone else that you have to be cautious about these things but sometimes you need to just go for it and test the water (small time).
What you should remember imo is that its hard work and difficult to make a profit from property flipping in the present market. there is no right to make a profit and the fairly strong possibility of a loss exists too. you have to be mentally prepared for this and have an exit strategy. yes some people do sell at a loss as it suits their requirements. you wont want to do this in your setup so you need to 1) make sure you put everything possible in place to not make a loss and 2) plan for what u will do if a loss is a possibility....rent it out? happy to leave your money tied up in this property. (re)mortagage if you paid equity out of your savings etc etc

I want to reiterate the excellent point that someone made above. In a lower end property (100k or less) which doesnt need to much work (ie bathroom/kitchen and/or decor and/or heating system and/or windows and/or not much else) its very hard to make a profit after the expense of doing these things.
For example only (this is not guaranteed!) you may buy a property for 100k and spend 10k on work plus legal and other expenses of 2k. Lets say you've spent 112-115k. That property may only be valued at 100-120k in the current market. Its very unlikely to be worth more than 130k or you may not have got it for 100k in the first place.
So outcome may be:
- Possibly: sell at big loss due to unforseen work (structure/rot etc)
- Possibly: sell for 110k at a lost of 2-5k (1-2.5k each)
- Possibly: sell for 120k for a profit of 5-8k (2.5-4k each)
- Less likely?: sell for 130k for a profit of 15k or so (7.5k each)
- Unlikely: Sell for over 130k for a large profit

Now looking at the above example if i sold the property for 120k I would ask if its been worth all my time and effort. I would be happier if my initial assessments of the proprerty suggested a sale price north of 125k but note that falls in my own personal 'less likely' category.
I would look at the above example as a risk assessment. Am i prepared for the first option which i have marked as a possibility (ie as likely or may a little less likely as making a small profit imo)?

You have to factor in your own scenarios though. You're both prepared to put in a lot of your own work to keep costs down and you have friends in the trade which may also help keep them down. This could shift your attitude to the risks/likelihood of profit but dont let it blinker you.

If it were me personally then i'd think about it more and watch examples in the market and see whats happening. I have dabbled in property in the past but my own opinion is that its not for me in the current climate. I dont think the profits are their to satisfy me and theres a possibilty the market in general could drop further due to buyer/seller mismatch imho. Others may feel differently.

You could just go for it and be prepared for the worst and also be willing to accept the likelihood of a smallish loss as you test the water the first time. Any loss might show/teach you its not viable. Any profit may show that it is.

Tips:
- Work on a worst case scenario not the best case scenario. ie work out actual realistic costs and then possibly add 10% to each of them. Work out realistic selling price/rent and take off 10%. Then do the sums and see if its worth it/the price your willing to pay for a property.
Im a pessimist with these things so often work like this and if my costs are lower and my income higher then the bonus is more profit!!
Be aware others may be willing to pay more than u based on the above pessimistic sums. You have to decide if its worth it. I would never shift from the above but thats a personal view and its how i manage risk. Those paying more than you may have property companies/building companies etc and so costs are lower for them. This property may be part of a larger portfolio and they may be one of those people prepared to sell for a loss or less likely to make a loss due to their margins.

- Next tip... You can watch Homes under the hammer on bbc iplayer so no need to wait til you're off work BUT be aware its skewed towards the positive outcomes IMO although does sometimes show losses and negatives

Last one: Be very very very cautious about going into this or any other venture with a friend. Even if best buddies. I wont waffle on about it but fair warning given!! )

Sorry for the long post. remember its all just my own opinion, im no expert and it could be a load of twaddle!

Best of luck!
t

atush

laurel7172 wrote: »

And spend the next two years acquiring every DIY skill you can...

your local community college will have lessons in everything from plumbing to carpentry to tiling to plastering. So while saving take these courses. Anything you can do (apart from electrics and gas appliances which need a registered supplier) can save you money/give you more equity.

If you start in a lower priced area, where properties are closer to 50K, you can start with lower capital if you can qualify for a mtg. but have twice as much cash to hand as you think you will need, and be prepared to rent if you can't get the price you want.

alanq

MrJaiga wrote: »

there is no way we would be leaving our jobs

But what if your jobs leave you? There aren't many who can be absolutely certain that they will still be in their job in a few years' time. Think of what would happen if you took on a commitment and then lost your job(s).

As these projects will take a number of years you also need to be very sure that your friendship is going to last the course. One or other of you may have different aims in the not so distant future. You would need to have binding agreements regarding each partners' rights and obligations drawn up.

Acc72

Unless you have a time machine and can travel back to the year 2000, as an inexperienced buyer with a full time job already, I cannot see how you would make a decent return.

somethingcorporate

Say you can flip properties for £5-10k profit which seems reasonable as a % on a £100k property and you can do this 1-2 times a year you really do need to consider the opportunity cost.

If you have £80k cash invested wisely you could probably return half to three quarters of your expected profit with far less of the risk.

If you are a higher rate tax payer it would also be worth considerably more shoving it into your pension as you get the tax back (although obviously it gets locked away until you retire).

Good luck with whatever you choose. :beer:

MrJaiga

alanq wrote: »

But what if your jobs leave you? There aren't many who can be absolutely certain that they will still be in their job in a few years' time. Think of what would happen if you took on a commitment and then lost your job(s).

As these projects will take a number of years you also need to be very sure that your friendship is going to last the course. One or other of you may have different aims in the not so distant future. You would need to have binding agreements regarding each partners' rights and obligations drawn up.

of course i can't predict my job situation in the future, no one can but im not going to let it put me off from trying to better my financial life, you could just forever be scared about losing your job and get no where in life.

We are both in a lucky position where if it all goes tits up we could move back in with our parents and just start over again. it would be depressing yes, but we wouldn't end up living on the streets if the investment turned out to be a worst case scenario

Acc72 wrote: »

Unless you have a time machine and can travel back to the year 2000, as an inexperienced buyer with a full time job already, I cannot see how you would make a decent return.

how would you invest to make money then

somethingcorporate wrote: »

Say you can flip properties for £5-10k profit which seems reasonable as a % on a £100k property and you can do this 1-2 times a year you really do need to consider the opportunity cost.

If you have £80k cash invested wisely you could probably return half to three quarters of your expected profit with far less of the risk.

If you are a higher rate tax payer it would also be worth considerably more shoving it into your pension as you get the tax back (although obviously it gets locked away until you retire).

Good luck with whatever you choose. :beer:

yes this is what im trying to figure out, where do we go from the first flip, as you say 1-2 flips per year would probably be our max we could achieve and earning approx 5-10k a sale doesn't really add up to much between 2 and hours and hours of hardwork

How would you invest wisely??

It sounds naive but i really REALLY don't want to be working for the rest of my life shoving everything i earn into a pension for when im old. I want to experience life now while im still young and fresh. Maybe ive got that pipe dream and just need to come down to reality....

atush wrote: »

your local community college will have lessons in everything from plumbing to carpentry to tiling to plastering. So while saving take these courses. Anything you can do (apart from electrics and gas appliances which need a registered supplier) can save you money/give you more equity.

If you start in a lower priced area, where properties are closer to 50K, you can start with lower capital if you can qualify for a mtg. but have twice as much cash to hand as you think you will need, and be prepared to rent if you can't get the price you want.

yes have been looking at courses so this shouldnt be a problem

Ohh i don't think we could find much in our areas for £50k. they would be seriously run down and in need of some major renov i would be guessing.

Only spending £50k on our first go does sound mighty tempting though, would feel much more comfortable taking on a task like this.

tushingham wrote: »

Looks like you've thought about it a fair bit.
I entirely agree with everyone else that you have to be cautious about these things but sometimes you need to just go for it and test the water (small time).
What you should remember imo is that its hard work and difficult to make a profit from property flipping in the present market. there is no right to make a profit and the fairly strong possibility of a loss exists too. you have to be mentally prepared for this and have an exit strategy. yes some people do sell at a loss as it suits their requirements. you wont want to do this in your setup so you need to 1) make sure you put everything possible in place to not make a loss and 2) plan for what u will do if a loss is a possibility....rent it out? happy to leave your money tied up in this property. (re)mortagage if you paid equity out of your savings etc etc

this is something we really need to think about over the next few years. What do we do if it all goes wrong/

I want to reiterate the excellent point that someone made above. In a lower end property (100k or less) which doesnt need to much work (ie bathroom/kitchen and/or decor and/or heating system and/or windows and/or not much else) its very hard to make a profit after the expense of doing these things.
For example only (this is not guaranteed!) you may buy a property for 100k and spend 10k on work plus legal and other expenses of 2k. Lets say you've spent 112-115k. That property may only be valued at 100-120k in the current market. Its very unlikely to be worth more than 130k or you may not have got it for 100k in the first place.
So outcome may be:
- Possibly: sell at big loss due to unforseen work (structure/rot etc)
- Possibly: sell for 110k at a lost of 2-5k (1-2.5k each)
- Possibly: sell for 120k for a profit of 5-8k (2.5-4k each)
- Less likely?: sell for 130k for a profit of 15k or so (7.5k each)
- Unlikely: Sell for over 130k for a large profit

thanks for this valuable info, it definitely puts it into perspective. 2.5k each really isn't that much is it.... could probably get that from other investment and a lot less work as other posters have said

Now looking at the above example if i sold the property for 120k I would ask if its been worth all my time and effort. I would be happier if my initial assessments of the proprerty suggested a sale price north of 125k but note that falls in my own personal 'less likely' category.
I would look at the above example as a risk assessment. Am i prepared for the first option which i have marked as a possibility (ie as likely or may a little less likely as making a small profit imo)?

You have to factor in your own scenarios though. You're both prepared to put in a lot of your own work to keep costs down and you have friends in the trade which may also help keep them down. This could shift your attitude to the risks/likelihood of profit but dont let it blinker you.

If it were me personally then i'd think about it more and watch examples in the market and see whats happening. I have dabbled in property in the past but my own opinion is that its not for me in the current climate. I dont think the profits are their to satisfy me and theres a possibilty the market in general could drop further due to buyer/seller mismatch imho. Others may feel differently.

yes all we can do now is save and study the markets, just need to get my head around how to access and analyse property market data... any ideas?

You could just go for it and be prepared for the worst and also be willing to accept the likelihood of a smallish loss as you test the water the first time. Any loss might show/teach you its not viable. Any profit may show that it is.

Tips:
- Work on a worst case scenario not the best case scenario. ie work out actual realistic costs and then possibly add 10% to each of them. Work out realistic selling price/rent and take off 10%. Then do the sums and see if its worth it/the price your willing to pay for a property.

great tip thanks!

Im a pessimist with these things so often work like this and if my costs are lower and my income higher then the bonus is more profit!!
Be aware others may be willing to pay more than u based on the above pessimistic sums. You have to decide if its worth it. I would never shift from the above but thats a personal view and its how i manage risk. Those paying more than you may have property companies/building companies etc and so costs are lower for them. This property may be part of a larger portfolio and they may be one of those people prepared to sell for a loss or less likely to make a loss due to their margins.

- Next tip... You can watch Homes under the hammer on bbc iplayer so no need to wait til you're off work BUT be aware its skewed towards the positive outcomes IMO although does sometimes show losses and negatives

just stumbled across this while searching on google, thanks.

Is this really a good gauge to go by though, the show must be filmed from last year and are less than likely going to show people losing money which probably happens alot more than shown in the series

Last one: Be very very very cautious about going into this or any other venture with a friend. Even if best buddies. I wont waffle on about it but fair warning given!! )

Yes, i think we are lucky though as we are in pretty much the same situation. We both are 99% not going to settle down (i know a lot of people say this in their 20's but believe me, we have our minds set on not working for the rest of our lives and getting our asses back to Saigon ASAP, we have talked about this extensively - a normal existence with wife/gf, job, kids, mundaneness just does not appeal to us). Plus we have been friends for about 14 years now.

Sorry for the long post. remember its all just my own opinion, im no expert and it could be a load of twaddle!

Best of luck!
t

tushingham

in terms of assessing the market. i dont think theres any fancy trick to this. follow the market/auctions judging what you think you would pay based on your calculations. see what others pay in the end. are you a million miles off? they may want the property for a differnt reason to you and therefore differnt price.

take one of your friends or a builder to a few viewings and see how much they think the work will cost (+10%)!!!

homes under hammer comes in here. i dont watch it much and yes it is biased to positive outcomes but even though the house prices are a little out of date you can see what work is required and see how much it costs. you can also see how much the buyers underesitmate the potential cost of renovation almost every single time!

i feel i have to go back to the issue about business with a friend here. i think your 'arguments' about property are stronger than your arguments for going into business with your friend.
if im totally honest with you i think that saying 'neither of us want to get tied down and we've been friends for 14 yrs' is not a brilliant argument.

i would strongly suggest you get some details in writing. this is your lifesavings after all. this is not about trusting your friend. this about business, ideas and life.
lets give you some scenarios:
- you need to borrow some money on credit card to get some work done. whose name is borrowed in?
- your friend uses his mobile a lot for calls to do this house up. its pushed him into expensive minutes and his usal £30 a month is now £100 per month for this month. how is that cost covered. what if you used your fone a lot on the last job? what if you didnt go over your call allowance?
- what if (heaven forbid) you or your friend is taken ill during work on a property and cant contribute much. how do you split any profit or loss?
- what if you want to spend a bit more on a higher spec kitchen and he doesnt?
- what if one of your family members is in desperate need to borrow some money off you or his from him for some desperate reason? what would you do?
- one of you gets promoted at work and the new job takes up more of your time?
- what if one of you has a partner who wants to go on hols for 2w in the crucial part of the job
- what if life in general changes for one of you?
- what if you fall out? never say never

None of these problems is insurmountable but you may both have very different views on possible solutions. neither right nor wrong, just different.
You need to work on a worst case scenario with this as you would with a property. why not come up with a list of scenarios and see what you both think about them?

hope that helps
t