Moving from being a salaried employee to a real estate investor isn’t for everyone. For me, the transition was quite rocky. Flipping houses for a living salary seemed much more challenging and less certain than showing up to work and getting paid at the end of the period.
To call the house flipper’s salary an exercise in sticker shock doesn’t quite cut it. In my early real estate investing career, I expected that I’d be taking home a certain number of dollars each month, driven by sales of the homes that I’d renovated. Sometimes, I’d be happily surprised at how much I could keep, but most of the time, I was aghast at how little there was left for me after the expenses had been accounted for. Plus, all the while, thoughts of saving for the future of my business were too vague to result in taking effective action.
Therefore, I think it’s worth sharing some of my experience with new or prospective real estate investors so that you won’t have the same set of misconceptions that I did. Making the jump to being a business owner means that you can’t count on a salary unless you’re the one paying it to yourself, and that means you need to understand how to make enough money to do so.
Real Estate Investing Isn’t a Golden Ticket
Many people believe that the typical real estate investor makes more than $60,000 per year. But, when you think about it, that can’t possibly be true. For example, if you invested in a building with three rental units, you might be lucky to make $30,000 per year in revenue in some parts of the country. And, since small-scale investors are by far the most common, it’s hard to believe that most real estate investors are living it up.
This popular misconception is the amount you earn from renting or flipping houses for a living isn’t much like a salary. In comparison to when salary lands in your bank account with the same amount of money and at a constant interval, flipping houses for a living is characterized by inconsistent payouts of variable size. That’s before we even get into the fact that the money you get as revenue from a flip isn’t what you’ll end up taking home.
Like all businesses, real estate investors have expenses, which are taken from the chunk of change that you get from successfully executing a purchase, renovation, and resale. If you phone it in, you probably won’t have that much money left over, and your rate of return on your capital will be poor. It’s even possible to lose money and have a negative return on investment if you aren’t careful.
Either way, you can’t rely on having enough money to pay off your credit card unless you cut the deals and put in the work, which will make enough profit by the time the bill is due.
Avoid Mistakes That Break the Bank
If you want to make a good wage while flipping houses for a living, you’ll need to understand that your salary is contingent on consistently getting a reasonable rate of return for your money. In other words, you’ll need to know how to nurture your profit margin and how to look for opportunities that could offer attractive margins in the first place.
In my experience, healthy profit margins are cautiously staked out and carefully defended rather than discovered after the fact or built by sequentially adding value.
In other words, it’s far more critical to routinely avoid expensive mistakes than it is to chase aggressive opportunities with uncertain payoffs. And, it’s vastly better to know exactly what profit margin you should get when making a deal than it is to have a good feeling about a home’s potential.
Common margin-killing mistakes include:
- Spending too much time or money on finding leads for homes
- Paying too much for a property or selling it for too little relative to its value
- Missing a critical problem during due diligence for a property
- Using the wrong type of financing to close deals
- Incorrectly estimating renovation costs or financing costs
- Not closely reading the terms of financing
The fewer of these mistakes you make, the more you’ll have leftover to grow your business and pay its key employees.
Remember To Pay Your Employees
As a real estate investor, paying your employees is your responsibility. And that includes remembering to pay yourself an appropriate amount each month. But don’t forget that for each dollar of your profits, what you pay to yourself is a dollar, you can’t retain to grow your business.
So, when you start flipping houses for a living, I suggest paying yourself a minimum viable salary each month to cover the bills and leaving the rest within your business account.
One more thing: pay yourself last, and, if you can help it, only with the profits that remain after all other short-term expenses are paid up.
Your business can’t operate unless your contractors, lawyers, and other staff are happily compensated and ready to keep working when you need them. You can’t credibly operate a real estate investing business if you aren’t consistently socking away extra capital from your profits to finance more prominent deals in the future.
Paying yourself last is a good habit to get into because it also reinforces the idea that every deal you make should be as profitable as possible, assuming you want to be comfortable at the end of the month. You can always make up the difference in your own pay later on when you have more cash flow.
Stick to the Protocols That Work
Between pursuing valuable opportunities, defending your profit margin, paying your employees a reasonable salary, and reinvesting in your business, there’s a lot to keep track of when it comes to flipping houses for a living. It can be pretty overwhelming for investors who are just getting started to navigate the process without any help.
That’s where HomeVestors® comes in. HomeVestors® franchisees have access to financing, mentorship, training materials, valuation tools, and quality leads that help new investors to start flipping houses for a living salary successfully.
Whereas many real estate investors might struggle to find their niche and grow their businesses to the point where they can make a regular salary, HomeVestors® franchisees have the benefit of being able to share the experience with thousands of others that are facing the same challenges. With the proven HomeVestors® business model at your disposal, you’ll be empowered to increase the pace of your deal flow and increase the resale value of your renovation properties.
If you’re ready to take the next step, request information about becoming a franchisee and get started today.
Each franchise office is independently owned and operated.