Flip Thy House

In Which the Author Talks About Everything In the World, Including Real Estate

We had to push closing on House #2 back from May 15th to May 30th, but things seem to still be firmly on track. The delay was due to the stunning efficiency of state government, as the buyers apparently have to deal with two different state offices in regards to getting paid for their land that’s being toll-roaded, an office that deals with the purchase of the property itself and a separate entity that deals with compensating people for relocation costs.  One would think that both functions would live in the same place but apparently not, and one was ready to close by the 15th but the other wasn’t, thus the delay.

Basically down to twiddling my thumbs in regard to House #2, as the buyers are apparently finally happy with the condition of it, so except for mowing the yard right before we close, there’s not much for me to do over there.

We’re in the process of getting bids for leveling the foundation at the house we currently live in, which needs to happen before I get serious about tackling work here in the kitchen and bathrooms, which is going to entail tons of tiling. I’m waiting on House #2 to close before trying to refinance House #1, as I need to wipe out some credit card debt run up by the renovation on House #2 (nearly all of it on promotional 6 month, no interest deals, etc.)

I’m curious to see what’s going to be available as far as a refi for House #1 and a possible home equity line of credit/refi on our current house. It’s hard to turn around without running into doom and gloom stories about any and everything lending-related when it comes to real estate, but everything I hear from people actually involved in such (at least locally here in Texas) is that it’s far from doom and gloomy. My wife and I have really good credit and our debt/income ratio is going to be pretty ridiculous once House #2 is settled out, so I can’t imagine we’ll have much trouble. House #1 is an investment property but I’m just looking to refi to a reasonable rate and not get cash out, so I’m thinking that won’t be too painful or arduous.

Still not sure what route to go with our primary residence, as I’m leaning more towards a home equity line of credit, assuming we can get approved for a decent amount. The only reason I’m considering it is to give me a bit of a cushion on the next real estate purchase so we don’t have to rely so heavily on our savings to fund the bulk of it, so it’s not a make or break deal as far as a home equity line of credit/cash-out refi. No real hurry, though, as I’m going to be out in Vegas again for much of July covering the World Series of Poker, so I’m not even going to consider another deal until I get back.

Speaking of poker, I’ve actually been playing a ton lately, more than I have since 2004-2005. I’ve had a bit of a love/hate relationship with poker over the years, especially as I played for higher stakes and began to take the game seriously as an opportunity to make money. Despite the gambling nature and common perception many have of poker, it’s 100% possible to consistently make a profit at poker in the long run. No, really. It’s a game of skill, much like chess, and it’s entirely possible to make a consistent, substantial salary from playing poker.

The difficulty is that, like any job, it takes a lot of work to be skilled at it, and you have to put in many hours playing. While the idea of your job consisting of sitting in your underwear in front of a computer clicking buttons may seem initially appealing (when compared to commuting to a day job every day that you hate), in the end it loses some appeal when you find yourself sitting in front of a computer in your underwear every day, clicking buttons. The money you make is directly proportional to the time you put in, so in many ways you’re really just swapping one job for another in the end.

All that said, I’ve been playing seriously again the last 3 weeks or so, just to get a gauge of what sort of profit I can grind out at pretty low stakes. I’ve been playing .50/$1 NL, which means that you buy in for $100 when you sit down and initially start out betting at least a dollar, with typical final pots in the range of $7-$20. This is a lot lower than I played in the past (the highest I ever played regularly was $50/$100 LHE, which meant that each bet was in increments of $100, and final pots in excess of $1,000 reasonably common), but my poker game is more than a bit rusty and I’m really just trying to get a gauge of what sort of profit I can make with very minimal risk, more as supplemental income than anything else.

So far so good, as I’m clocking in at about $25/hour, which is a bit better than I expected. I’m getting a new boss at the day job, which is one of the catalysts towards getting serious about all of potential extra income streams such as poker, as our old boss was one of the few saving graces about the day job. The odds are very high that we’ll get saddled with a new boss that’s as far from a saving grace as possible, as my company has a disturbing tendency of late to hire the absolute worst person possible for any open position, so I’m getting more serious about having an exit strategy in place.

All my freelance work and Web design work has consistently equaled my day job salary for quite awhile now, but right now it’s gravy money that goes towards real estate, savings, etc. So while I could quit the day job and still have decent income from Day 1 being self-employed, I like gravy, and the gravy would disappear. Thus the returning to the poker grind, to prove to myself I can consistently churn out an extra $2,000-$3,000/month, making everyone happy.

But, who knows. I’ve been threatening to quit the day job for years and I’m still there, so all this may turn out to be even more empty threats.

Get Your Hands off My Ladder

I’m kind of digging this strange feeling of waking up in the morning and not immediately finding myself reviewing the yard-long checklist of things I need to get done on a house somewhere. I still need to give House #2 a good cleaning and shift some stuff out of the garage there into storage, but that sucker is mostly done. The buyer’s are having their inspection done next week, so who knows what will suddenly jump back on the to-do list, but for now I’m in rest and relaxtion mode (or as close as I ever get to that).

Kind of a funny scene yesterday as I was driving to Austin to buy a new laptop and drop off my extension ladder with a friend doing some painting on his house, and I just threw the aluminum extension ladder in the back of my truck and took off, like I’ve done a thousand times. My wife always nags me about not strapping down anything in the back of my truck, but, bless her heart, it’s more from a lack of grasping the physics involved, as she’s convinced that anything in the bed of the truck that weighs less than 300 lbs is subject to constant gale-force winds and in imminent danger of blowing out.

So I’m driving along merrily at about 70 mph yesterday and remark to myself, “Self, gee, it’s damn windy today”, as we were getting 20-30 mph gusts of wind, enough to blow my wee little truck around on the highway, when suddenly a huge gust of wind just blew the ladder right out of my truck. I mean, just cleanly whisked it out and sent it spinning (thankfully) about twenty feet over onto the side of the road, well away from traffic when it finally touched down.

The funny part is that by the time I slowed down, turned around, and got back to it (which took about 90 seconds), some dude had already stopped and was loading it into his truck.  I got out of my truck came running up and he’s looking at me like we’re about to have a Mortal Kombat style deathmatch there on the side of the road over a $50 ladder, but he caved in fairly quickly and laughed when I explained what happened, as I was like “Dude, look at all the paint cans and drop cloths and other sundry crap in the back of my truck. Seriously, that’s my ladder.” (Well, okay, I didn’t actually use the word “sundry”.)

Manage to safely deliver the ladder (after, umm, strapping it down securely) and bought a new laptop in preparation for another poker reporting gig for PokerRoom.com in Las Vegas from April 15th-27th. I’m not 100% thrilled to be gone that long, especially when trying to close on House #2, but it’s good money and hard to turn down staying at the Bellagio with meals and other perks provided. And yeah, I likes the Vegas, so I can’t really complain, I just wish my wife was there and that the trip was about 5 days shorter, as a week is usually enough time for me to get pretty sick of being away from home.

The Myth of Passive Income

Before anyone comes after me with sharpened pitchforks and torches ablaze, yes, indeed, passive income does exist.  And in various forms, whether you’re talking about dividends, royalties, or other investment income that is truly derived with not one whit of work on the part of the investor or the lifting of a single, solitary finger.

My only beef with passive income is that it seems to increasingly be tossed about in contexts that I’ve personally found to be far from passive, if you want to have any success at all. It seems that suddenly it’s hip and cool to talk about passive income as a goal (which I’m all for, don’t get me wrong, as I think we’d all love to be in a position where our bank accounts grow of their own accord), but it’s hard for me to scan the horizon or pull from my own experience and find many situations that actually produce the much-talked-about passive income.

Case in point: I’ve been involved in affiliate marketing/SEO optimization for nearly 10 years now. I’ve got a dedicated server with approximately 250 websites parked on it, all angling to make money in one form or another, whether it be from direct e-commerce sales, Adsense ads, affiliate products, direct ad sales, text link sales, reviews, you name it, I’ve got a site that’s likely trying to capitalize on it.

House #2 pretty much dominated my life the last month, with all my free time going into the renovation work there, so I had essentially zero time for my Web ventures. I didn’t launch any new sites, didn’t overhaul any sites, didn’t do a single damn thing to any of the sites other than the bare minimum to keep the trains rolling. For the month of March I ended up with a net profit of +$2,072 from all of those websites combined.

Pretty sweet, no? 2 grand in passive income isn’t something to sneeze at, not for me at least. But is that really passive income?

By definition, sure. I did nothing, yet all of my little sites hummed right along, producing a handsome profit. In this example, though, there’s a piper to be paid later down the road. You can’t really sit still in the world of affiliate marketing via websites, as things are always in flux and your targets are moving. Google is constantly tweaking its search algorithms, competitors are angling for top keywords on your sites, sites that get a short-term boost due to current events or links from huge sites drop back to reality, etc. For the particular game I play in the affiliate marketing world, I have to rely on volume, as far as producing lots of sites that typically return a decent but small profit, so I’ve got a pretty consistent churn of sites that I launch and build up, they make decent money, then slowly spiral down to producing nothing.

While taking a month off didn’t show any demonstrable effects, as far as income I’m going to pay for it 2-3 months down the line (unless I bust my butt in the next month or two working double-time), as I won’t have sites in the pipeline that start making cash to replace the ones dropping down in search engine results.

Which, really, is the point of this babbling about passive income. In my case — and I think in many cases when people discuss passive income — it’s not really passive income at all, as it requires a good amount of attention moving forward. While the sites I’ve built in the past are on auto-pilot and passively generating income, they’ll almost assuredly die a slow death if I never touch them again, and my net income will drop unless I constantly pay attention to them or add additional sites.

I think the same is true of many other cases where people talk about passive income, especially in real estate. Rental properties are usually what’s discussed, in combination with property managers that handle all of the day-to-day work, allowing you to simply cash fat checks  as the owner. Which could definitely be the case in some situations, but far too often investors are stuck managing their property managers, rotating in major repairs to rentals stuff as new roofs and/or renovations between tenants, scoping out new properties to buy, determining when the best time to sell other rentals is, etc.

At the end of the day it’s pretty difficult to find any magic passive income pill that really works as promised.  Or at least that’s been the case in my own personal experience, as anything that will make you money, whether it be REI, affiliate marketing, or even investing in dividend-producing stocks, also includes more than a small amount of associated work, if you really want to do it well and be successful.

Granted, it’s not as sexy to say “Project A should generate $1,000 in income from a massive amount of hard work, planning, and determination” when you can say “My latest venture will easily provide me with $1,000 in passive income”, but in my experience the former is far, far more common than later, unsexy as it may be.

Hacking Up a Lung (or Two) and Shivering

Not much progress on the REI front in the fledgling new year so far. I’ve actually been pretty sick since around the 1st, which is a rarity for me, as I tend to only get a cold/flu every 5 years or so. I drug myself over to House #2 on the 31st/1st and got some work done, but mostly light stuff like painting trim, removing the old wall oven and rangetop, etc. The fact that we’ve been experiencing sub-Arctic temperatures here in central Texas (or, you know, lows in the mid 20s) hasn’t made it easier to get over there and get to work. Feeling better now, though, and the waether should be nice this weekend, so the plan is to crank away and get much work done over there in coming days.

I did manage to sort out most of the existing electrical as far as what circuits feed what, and should be set for running new circuits for the laundry room addition and the 4th bedroom, as well as getting everything wired in the bathroom/closet addition in the new master bedroom. I’d planned on hiring this out but it’s reasonably simple and the budget is getting ever-tighter, so I’m going to devote most of this weekend to electrical fun. I tend to shy away from such stuff but this job is pretty straightforward, as it’s largely just relocating existing circuits (that were either unused or made unnecessary due to changes I made), which I can hopefully handle.  HVAC guy needs to come back for a few finishing touches for the new furnace anyway and he’s a master electrician and said he’d check up on all the rough electrical work and make sure nothing is screwed up.

Still haven’t closed on House #1, which is obviously frustrating. Apparently the buyer owns her hair salon, so the lender is taking forever to approve her loan as she’s self-employed, yada yada yada. She also went with a smaller local lender (she does the hair of one of their mortage bankers)  and they originally pitched her loan to an investor who got cold feet about the general market as a whole, decided to pass on it, so another investor is looking at it now, etc. She apparently wants the house pretty badly (and has even packed up all her stuff and is ready to move) so we’re going to wait until the lender decides something shortly, then pursue a lease/purchase option or something similar if they turn her down. I’d like to get my money out of the house and move on but I’m also fine with some variety of lease/purchase or owner financing, so I wouldn’t be too crushed if their lender backs out.

The couple that had previously been interested in House #2 touched base again last Friday with our realtor, letting him know that they were still interested, what my timeline was for finishing the house up, which is pretty good news. I’m trying not to count on them, as stuff can always happen, but it’s not a bad card to have up the sleeve, as they didn’t bat an eye when I said before that I was looking to list it in the 145K-150K range, and they actually requested that I not spend a lot on landscaping and similar stuff, as they wanted to do all that themselves. I want to get the house put back together more before talking more seriously with them,as it’s still currently a scary shambles now, but it could definitely make my life much easier if they turn out to be serious buyers.

Plans for 2008?

I’ve waffled a bit on posting about my real estate plans for 2008, and it’s for a pretty simple reason: I do not know.

It’s easy to come out breathing fire in the fledgling new year, dedicating yourself anew to conquering the world, building empires, and making all that you see your own, but the reality is often far from that. And as much as we may hate to admit it, we’re often subject to larger forces beyond our control, that snub their noses and laugh merrily when we make loud proclamations.

I could say that I plan to flip x houses and make y money by Dec. 31st, 2008, but really, who knows? I don’t mean to pin too much hope on House #2, but I’m sort of looking at it as a bellwether for the next year for me, as far as real estate plans. It’s the first flip I’ve tried that isn’t complicated by other going-ons, and a pretty good dipstick as far as the type of deal I can reasonably expect to find in our area.

If I can show a decent profit on it, I’ll probably look to do 2-3 similar flips in the next year. If selling it drags on and on and it turns out our area is more afflicted by the general housing malaise than I’d anticipated, then I’m probably going to shift gears and work on our primary residence instead, and look to pick up a couple of rental properties during the year.

I’m not giving up on the idea of ocntinuing to flip houses (in both 2008 and beyond) but there’s a time and a market for everything, and I’m not sure that we’re in a flipping market. Living a bit out in the country doesn’t help, as it tends to take longer to move anything, even in hot markets, and the subprime woes hit especially hard, as I was looking to focus on starter home flips, but those are increasingly sticking around on the market longer and longer.

In a weird way, though, my enthusiasm for flipping and real estate in general is still very high, despite the slightly gloomy talk above. So while my focus may evolve a bit during the year, depending on how things play out, no fear of things going dark here.

If anything, quite the opposite, as I’ve been working on some related sites the last few weeks, including a community blog similar to BiggerPockets as well as some other REI-related projects.

I’ve spent the last month or so rehabbing some of the 75+ affiliate websites, projects, and blogs I have kicking around the Internet tubes, and one of my larger goals for 2008 is to get serious and work smarter when it comes to my Web ventures. I splashed around in 2007 trying lots of things but this year I want to focus more effort on the proven winners, as in many cases it’s simply a matter of finding what works then replicating it mercilessly.

First things first, though, is finishing House #2, as that tops all the priority lists. That sucker is going to be done by the end of the month, come hell or high water, and there’s still a ton of work to do.