How We Financed Our First Flip

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After sharing our last post on how much we made on our first flip, several people asked us how we actually financed the project. We don’t have wealthy families backing us, and neither of us makes a ton of money in our day jobs—I’m a part-time editor and freelance writer, and Todd is a small business owner who pays himself a modest salary. So how did we come up with the cash to get into real estate investing?

The short answer is, we used money from the sale of our first house to pay for the renovation, and we were able to get a second mortgage because our own home in Richmond was so affordable. The long answer is, a fair amount of research and strategy has gone into every house we’ve bought (going on four now), and luck has been a big factor, too. [Disclaimer: We are not financial advisers and we don’t pretend to be experts on real estate or investing. These are just some things we’ve picked up over the years.]

We bought our first house in Charleston, S.C. in 2011. At the time, I was making $30K a year as an editor at a local paper, and Todd’s business was so young that the bank wouldn’t count his salary toward our mortgage application—so we didn’t have a lot to work with. Our budget was maxed out at $150K, and our options were limited, but we felt like we were throwing our money away on rent.

Our friends encouraged us to buy in the suburbs, where our money would stretch further. But we didn’t see much investment potential there, so we focused our search on one small area on the outskirts of Charleston that might generously be described as “up-and-coming.” Drugs, shootings, hookers, you name it—North Central had it all.

But there were also a few reasons we felt confident it was on the upswing: It was close to downtown (which was rapidly moving northward), it was adjacent to two much nicer neighborhoods, and it was filled with charming historic homes, a growing number of which were being renovated. After looking for about a year, we bought a 700-square-foot cottage at the high end of our budget (pictured above). We got more than a few raised eyebrows from concerned friends at our housewarming party.

Less than four years later, we sold the house for nearly double what we paid for it, and walked away with close to $150,000.

Of course, this isn’t typical. Charleston’s real estate market is insane, and we got really lucky with our timing. We couldn’t even afford to buy on the peninsula if we lived there now. But after doing so well with that house, we knew that there was only one way we wanted to invest the money we made: with more real estate. And that’s when we decided to try our hands at flipping a house.

A few months before selling the Charleston house, we’d decided to move to Richmond from Boston, where we had been renting an apartment. We realized we could never afford to buy anywhere close to Boston, so we started casually Trulia-stalking different cities, and Richmond stood out because of the number of big, beautiful, historic homes that were surprisingly affordable. Most of the houses we found were located in an area, Barton Heights, that seemed a lot like North Central in Charleston—close to the city, close to more expensive neighborhoods, and with a fair amount of renovated houses on the market alongside cheap fixer-uppers. We flew down for a visit, fell in love with the area, and made an offer on our house.

We paid $175,000 for the house, which was about $125,000 less than we were approved for. This gave us the wiggle room to get a second mortgage for our first investment property several months later. As a side note, our own house now appraises for closer to $300K, which means we have enough equity in the property to give us another borrowing option if we need it.

Again, we’ve lucked out a bit with our house purchases so far, but I don’t think you need a windfall to get started in real estate investments. Here are our key takeaways:

  • Buy as soon as you can afford to. If you can scrape together enough for a down payment, you’ll often find the mortgage payment is cheaper than (or at least comparable to) rent (depending on where you live, of course).
  • By placing a home’s investment potential at the top of your list—right alongside a master bath and open floor plan, or whatever else you want out of a home—you’re more likely to walk away with a profit when you move on to your next home.
  • Don’t be afraid to live in an “up-and-coming” area—they usually aren’t as bad as they seem at first glance.
  • Be ready to get out while the gettin’s good. In other words, if you can sell your house and make some money—which you can use to repeat the process again—it’s often worth the hassle of moving.

How Much We Made On Our First Flip

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Anyone who’s watched their share of HGTV knows that flipping houses is a risky business that can have a big reward. So how did we do with our first flip? I’ve avoided discussing the financial aspects of this venture for fear of seeming tacky, but I realize it’s one of the details people are most curious about (not to mention the numbers are right there on Zillow). So here it is: the nitty gritty on our first renovation project.

We bought the house in December 2015 for $102,500. At the time, the house was priced on the high side for its condition—livable, but in need of a complete renovation to bring it up to date. Similar houses in the neighborhood were going for under $100K, but most were being snatched up by cash buyers within a day or two of hitting the MLS. So we raised our budget slightly and snagged the Griffin house.

Our then-realtor (whom we have since parted ways with) estimated that we could renovate the house for about $40,000. Renovated houses in the area were selling for about $200,000, so we felt safe with the investment potential—especially given that our contractor assured us he’d be done within six weeks.

Well, six months passed, and it became obvious that our original budget was unrealistic for the quality of work we wanted to do. We gutted the kitchen and two bathrooms, added a new master bath, refinished the floors, updated the electrical and plumbing, added HVAC, did work on the roof, and a bunch of other stuff. Our final tally was around $75,000.

We grew anxious as our costs increased, but at the same time, housing prices in the neighborhood were rising as well, including one house two doors down that sold for over $300,000. We crossed our fingers and hoped the trend would continue, but the market took a bit of a dip just in time for our July completion date—summer doldrums are no joke in the real estate world. Still, things were better than when we started, and we listed the house for $265,000. After a few weeks with no bites, we lowered the price to $259,500, and a few weeks later we sold it for $256,500.

So the final tally is:

Purchase price: $102,500

Renovation costs: $75,000 (ish)

Sales price: $256,500 (- ~$5,000 toward closing costs)

Realtor fees (6 percent of sales price): $15,390

Taxes (approx. 20 percent of profit—still waiting for final numbers) & Fees ($3000ish in interest): $20,000ish

Total earnings: $38,610

We put a lot of hard work and time into this renovation, but it was worth it—we were very happy with the results. We also learned a lot, and I think we can shave down our renovation costs in the future, and maybe be more strategic about when we go to market—and how we work with our contractors. We’re definitely planning to do another renovation project in the near future. In fact, we’re currently under contract with another house in the neighborhood. Stay tuned for all the nitty gritty on our next renovation!