Page 26 - From Ghetto to Gucci: The Basic Principles of Flipping Houses

And lastly, the example that I began with was an example of a finished house that took longer to
sell than you had planned on. Those are the three pitfalls when it comes to planning your flip.
These three pitfalls can come back to bite you in the butt if you’re overleveraged.

Avoiding Overleveraging

Fortunately, there are many ways that you can protect yourself against overleveraging while still
enjoying the profit benefits that come with taking out loans. As we go over the numbers for each
of these sections, I’ll be giving you some tips and hints on how to avoid overleveraging yourself
and protecting your saved money. I want you to be successful after all! I know how amazing it is
to flip houses for a living, and I want to make sure that you will never find yourself facing an
interest bill that you’re unable to pay.

You see, I’ve learned this the hard way. It’s in my nature to charge in and take command when I
sense an opportunity for profit. That’s one reason I’ve been very successful in flipping, and it’s a
reason why I’ve been a very successful entrepreneur in other businesses that I’ve owned.

However, this trait can also get me into trouble from time-to-time.
I’ve personally jumped into owning a property that I didn’t do due diligence on the permitting
process for in Redwood City, California. I just assumed that I would be able to quickly do work
on the property and flip it for a massive profit. Only when I was a month into it did I find out that
the city of Redwood City is one of the inhibitory regulatory agencies that you can find. Permits
take six months to a year to become approved by the city, and the city can and will order you to
tear down unauthorized improvements.

That proved to be a rough lesson for me to learn, but thankfully, with the help of my finance man
Ben, I was able to come up with some handy ground rules for investing.
The first rule of avoiding overleveraging is this: keep at least 20% of the money available for
investing set aside in case of emergency. The only exception to this rule should be if you have a
property that is closing extremely soon. If you have all the loan documents into escrow, and the
only thing you are waiting on is funding, then if you see a desirable property on the courthouse
steps you should feel free to buy it. Only if the escrow is immutable and waiting on the element
of funding should you feel confident enough to go ahead and invest the remaining 20%.

The second rule of avoiding overleverage comes in when estimating costs: always get a
contractor estimate, and always assume that whatever the total for the estimated work is, that
you have an extra 15% on top for miscellaneous costs. One of the things that you’ll learn in
flipping is that there are always more issues that will come up that you had no way of predicting.

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