In this episode of The Tactical Empire, hosts Jeff Smith and Shawn Rider discuss effective strategies for transitioning from corporate jobs to full-time real estate investing. They explore the benefits and risks of flipping properties, and share insights on balancing immediate cash flow needs with long-term investment goals. The conversation covers crucial topics including the importance of establishing a sustainable flipping model, understanding carrying costs, and preparing for economic uncertainties. Whether you're new to real estate or looking to refine your approach, this episode provides valuable information and practical advice to help you succeed in the competitive world of real estate investment. 00:00 Introduction to The Tactical Empire 00:30 Casual Catch-Up with Shawn Rider 02:34 Real Estate Strategies and Flipping Insights 04:34 Flipping Business: Risks and Rewards 11:39 Tax Implications and Flipping Strategies 16:39 Managing Risks and Making Decisions in Flipping 27:25 Conclusion and Next Episode Teaser
In this episode of The Tactical Empire, hosts Jeff Smith and Shawn Rider discuss effective strategies for transitioning from corporate jobs to full-time real estate investing. They explore the benefits and risks of flipping properties, and share insights on balancing immediate cash flow needs with long-term investment goals. The conversation covers crucial topics including the importance of establishing a sustainable flipping model, understanding carrying costs, and preparing for economic uncertainties. Whether you're new to real estate or looking to refine your approach, this episode provides valuable information and practical advice to help you succeed in the competitive world of real estate investment.
00:00 Introduction to The Tactical Empire
00:30 Casual Catch-Up with Shawn Rider
02:34 Real Estate Strategies and Flipping Insights
04:34 Flipping Business: Risks and Rewards
11:39 Tax Implications and Flipping Strategies
16:39 Managing Risks and Making Decisions in Flipping
27:25 Conclusion and Next Episode Teaser
204 full
[00:00:00] How do you find the will to fight back against a world that wants to keep you sedated, averaging, stuck in place? Join us for the tool and strategies you need to create a life of abundance, discipline, and high achievement. This is The Tactical Empire, with Jeff Smith.
Jeff Smith: Welcome to another episode of the tactical empire today. I'm joined by Sean Ryder. How are you my man?
Shawn Rider: I'm good. I'm good. I'm looking forward to being in florida near where you are next week Hopefully I can leave with the same tan that you're strutting on this episode with you are getting dark my friend
Jeff Smith: Hey, man, i'm running three times a week minimum.
So i'm outside in the sun Every day and uh, the sun is finally shining in florida. So it's good. It's good.
Shawn Rider: Yeah Yes, the whole country has been swept by the cold a couple of weeks [00:01:00] back. So it is nice up here. I think it is in the fifties today. The sun is out, the wind's not blowing. So I was walking around in shorts and a t shirt this morning.
Jeff Smith: I love that. That's awesome.
Shawn Rider: Yeah. Yeah. Yeah. But we're going to be down there. Hopefully you and I can connect while, uh, while we're down there. I think we're going to try and do Sunday or Wednesday. Uh, just hit me up and we'll be ready to rock. So I'm ready to come down. Been good. It's pretty cool to, pretty cool to be able to take a.
A family vacation in February because not very many people travel that time of year. And I think we always pick, especially when we go to Disney, we pick like the slowest week of the year. So it's nice. You know, that freedom that we talk about has its perks that some people may not think about.
Jeff Smith: Yeah. You get spoiled on it, dude.
We don't do anything on the weekends ever because we, we avoid crowds. We go during the weekdays everywhere we go and yeah, it. It's, it's a whole different [00:02:00] ball game when you can just show up on a regular Tuesday afternoon, anytime, well, rest of the world's in school and everything else. So it's got its perks.
Shawn Rider: Now I am going to knock on wood because I had the preface, not preface. I had to tell my kid, prepare my kids. I said, I said, look, we got a whole week of you guys being in school. So whoever's sick in your class. Avoid them because I don't need you coming down with the fever on Saturday when we're flying out on Sunday.
Sure.
Shawn Rider: Yeah.
Sure.
Shawn Rider: All right, brother. It's a big one. We, we have had some conversations recently. Um, you know, we talk a lot about real estate, but, uh, some of the guys in the group, we brought this up on another episode of. They're narrowing down their real estate strategy. And in particular, we had one guy in the group who decided to leave his W2 corporate America job and go all in on his real estate portfolio.
Um, and his goal is to create a large portfolio, [00:03:00] long term rentals, but. Leaving the W 2 and he had a really nice salary, he needed like immediate cash flow to offset that income loss. And it takes time to build a portfolio to cash flow and offset the income. So you, you told him about the strategy where it's like, Hey, buy, buy three properties at once.
Improve them, hold two, flip one. Well, I loved the thought of that. If you could do that, you know, every three to six months with a handful of properties, pretty good deal if the numbers work out. Um, but then I started thinking about the situation that me and my wife are in with my wife leaving corporate America.
We're building a business. We have our real estate portfolio, which is mainly long term holds. Uh, we're building up the LCR burrs. And it was like, you know what? There's other guys in the group that have experience with flipping. So now I'm involved in some conversations with some of the guys regarding flipping.
So today's episode, maybe the next episode or two, we're going to dive into particular areas of flipping. Um, and the more I thought about it coming into this episode, it's, it's what [00:04:00] you're doing with the storage unit deal. So even though it's not a single family residence, like you guys had originally pitched that as you know, Hey, we need lenders.
We're going to refi out and hold it. And then the longer you went into it, you guys were like, Hey, we're going to sell it. Once it's ready. So I was like, Oh shit, Jeff's actually doing a flip. So what is, let's start macro level here. What is your opinion? On just the flipping business as in general, and then how do you see it best utilized with the particular men that we work with?
Jeff Smith: I love flipping, I guess, um, I would say, uh, I don't like it as a like end all be all business, uh, cause I kind of liken it to wholesaling is a whole different ball game, but, but both of them are very active endeavors that involve a lot of, um, active. Work, um, to generate the cashflow and the [00:05:00] cashflow is nice and it's beautiful, but you can get lulled to sleep and spoiled by that.
So like everybody that I coach and talk to about wholesaling and flipping, I say the exact same thing too, is like, you can't get like. You can't fall in love with that cash flow and not think long term with it because you have to be funneling and sweeping part of it into like a long term play because all you're doing is getting on the hamster wheel of of an actual job at doing flipping.
Um, and, and if you get to a point where you're doing one or two flips a month for 20 or 40k, um, and, and you're good at it, you can easily get. used to 20 or 40k a month, and then you, your wife gets used to it, your family gets used to it. Your house payment gets used to it. Couple cars later you get used to it.
And then you look up and you're like, [00:06:00] I flipped a thousand houses and I don't own any houses. And that's, that's,
Shawn Rider: yeah,
Jeff Smith: that's what wholesalers get in. They get sucked into that allure as well. It's kind of like a, it's just a dopamine hit of a big check and it feels nice. And then you're like, okay. And I know wholesalers that have made seven figures annually that still aren't buying property.
And, uh, and, and to me, that's like a bad move. Like, if you were used to not making any money, then, then when it increases by 10x, you should just continue to be used to not making any fucking money and plow it all into long term investments. And, um, so flipping is the same way from that perspective. Like, you just have to be careful of the allure of the sexiness of it.
Because, because you will, I mean, sometimes you're probably going to learn your lesson and [00:07:00] pay a little bit of tuition and you may not fucking make any money on a flip, you might work on it for four months and, and you might lose 10 grand at the end of the day. And, and so you, you have to understand that that is going to happen from time to time, but there's other ones like the, the most dangerous ones are when they come out of the gate and they don't know shit, and then they make 150 on their first one in three months, and then it's like, whoa.
Because they're like this is real money. I just made 50k a month if you Amortize it over the three month period. Right. And, and then they're like, this is the greatest thing ever. And, and they really haven't gained any of the skills or got their teeth kicked in enough to understand the longevity of what's going on.
Um, so the gentleman that you're talking about in the inner circle, I, I kind of recommend that, that he go on a model of like by two, like you said, hold by three, hold two. And then flip the one with the highest value, um, with the highest equity capture that you could, you [00:08:00] could make. And, um, because burring is no different, like I burred countless properties and, uh, it's the exact same concept, except I don't sell it at the end.
So, all we're doing is, what we're doing is a value add project. There, there's, there's value add plays, and then there's yield plays. A yield play is where you come in with a significant amount of capital and you buy it at a low cap rate, 6 percent or something like that. And you're buying like forever cash flow.
It's very safe. It's a stabilized property. It's at 90 percent occupancy. It's class A, B type asset classes. Um, you don't have to do anything. You just set it and forget it. You go in and you pay top dollar for it, but it kicks you off exactly what you anticipated. A value add play is where you can go into these things and force appreciation upon them.
And so you can force appreciation in a lot of different ways. I mean, it depends on the asset class. [00:09:00] But mostly it's capital improvements that you're doing and making the property more valuable or raising the rents um In the case of the storage facility we went in and as a value add facility and worked on that for the last seven eight months And, um, we've, we've forced so much appreciation into the deal that it doesn't make any sense to hold it anymore.
And that's why the, the change of heart, the value went up so exponentially that it would not behoove us to not take our equity out now and roll it into the next deals. And so like, that's what you kind of have to evaluate. So in his case, the gentleman's case, he's looking to live, right? He's going from a six figure salary to like pulling the rug on that six figure salary, and now he's trying to live.
And so we kind of just discussed it. He had the ability to go in and get a few houses. I talked to him about when I [00:10:00] came out of the corporate world in 17. Um, we're 18, I had like a couple hundred grand to spend and I spent it all on a handful of houses. Six, I think. I think I bought six or seven and I was out of money, long term rentals, and I was out of money.
And so like that was a huge learning opportunity for me because like that did not kick off the amount of cash flow. So, like, I mean, it's fine now. I'm like, well, it's a great move now, but in the, in the interim, it's like, shit, I could have used 12 grand a month off of that money or something like that with a higher rate of return than sitting in a long term rental, parking a bunch of my actual cash into the down payments on those properties.
And then just turning them on to kick off a couple hundred, a couple hundred dollars a month, not a couple hundred grand, a couple hundred dollars. And so, um, [00:11:00] so I, I kind of taught him and stewarded him through that. If I would've had somebody coach me through that process at that point in time, I would have been far better off.
Now, my wife doesn't like flipping and stuff like that, but I mean, it is essentially exactly what I do. So like. We, it's just not selling it at the end to try to recoup that equity instantly. Like I'm in the game for the longterm with the stuff that we're doing, um, for the most part, but I have had a little bit of a strategy shift in the last year, which has led me to more of these conversations about flipping and, um, the opportunity to.
Like capitalize on equity today and roll it up now There's a lot of rules to flipping if you flip more than three houses in a year You are now a real estate professional and you pay earned income on that It might be three or four. I can't remember what the number is. It's something low three or four [00:12:00] houses if you flip that many um You are now a real estate professional, not in the sense that, um, we kind of try to be as investors, but you are actively a, you're active, actively a home flipper, meaning like if you guys go make 500 grand in net in a year and you flip more than four, three or four of them, you're going to pay an earned income rate on that, like a W2 rate.
So that will erode your profits significantly. So you just need to be aware of that. But everybody that's out there in the real estate game, first of all, we should figure out that threshold. I can ask chat GPT or whatever, but I think it's three. It may be four. Um, but I'll, I'll clarify, but you should flip up to the limit every year.
And so that's, that's something I'm going to be putting into practice because if you can stay below the threshold, go ahead. Sorry. [00:13:00]
Shawn Rider: No, it's interesting that you brought that up because that's where my mind was going on. How is flipping tax? So I'm assuming below that threshold is short term capital gains.
You're just buying an asset.
Yes.
Shawn Rider: And then turn it short term capital gains is what? 15 percent or 25 percent right now? What is it?
Jeff Smith: I think it's 25. I would guess it's probably going down in the next
Shawn Rider: year. That'd be nice. Yeah, that'd be nice. So yeah, let's keep it short term capital gains. Let's get that answer on the threshold.
So if you keep it under three or four, we'll get that actual answer here. So that was my next question was the tax implications. So it does change based on the volume that you're doing. Um, but then two other questions based on what you said, why doesn't your wife like the flipping anything in particular there?
Jeff Smith: I think she just views it as too risky. Like it's riskier than the other stuff that we do. Um, I don't know why. [00:14:00] She just, she's generally has an aversion to new stuff, and she, she treads lightly when, when I start doing new things, um, as far as like, which, I mean, it's fair, I, I talk openly about losing a couple hundred grand over the last few years trying to fucking, do other shit that's not in my wheelhouse.
And so like, dude, I've done like 15 mil doing what I know how to do. And so like, she's not wrong. And so she just, she just makes me prove my, my case, uh, a little bit, uh, more thoroughly. And, uh, it's one to three houses a year. And remain an investor so you can flip three houses a year.
Shawn Rider: Once you hit four, then it's going to be ordinary tax, ordinary income.
Okay. So if you want to be consistent and pay less taxes, then you keep it under four. But once you hit four, then you might as well [00:15:00] go for volume. Cause you're going to be. Taking off a bigger, it's interesting how people think, because I always view getting the money back into my system as safer. So I, full transparency, haven't ever truly done a flip actively, right?
I'm an investor in the storage unit deal, so I guess you could say I'm, I'm, I'm a, I'm a lender in a flip, uh, but so I haven't, I haven't. So to speak on losing money on a, on a flip, but I could view putting money in and selling a property and getting the money back in my possession is I'm getting in and out of the game.
And so I feel like in my mind, the way my brain works, it feels safer to me because then I get to dictate when I start again. But when you own properties, there's so many unknowns and unknowables that. Any day you could wake up and I, I learned this with my Airbnbs and, um, you know, you wake up and there's a hurricane in the fucking mountains and you lose a [00:16:00] retaining wall or you wake up and the guests at another property says that your house smells like shit and it's like, you know, does it or does it not?
I don't, I don't know if I trust a guest that lives in the city and this is a, uh, a property in the woods and they don't know what the bottom of a propane tank smells like, you know, it's, Lessons that I've learned, right? Like, so there, I think there's risk with all of them, but it's interesting. I like, I like getting the money back in my system.
So it'll be real interesting to see as I potentially enter into a true flipping partnership, how, how my mind either. Supports that thesis or does not support that thesis. Um,
Jeff Smith: Well the thing that you have to really focus on and this might be why my wife has a little bit of reservation on it There's uncontrollable things that go on like if I buy a house And and we're gonna burr it like I know what i'm getting into I know how much equity capture I can get on the front end if i'm gonna hold it.
There's a lot less risk Okay, [00:17:00] because Real estate is, a lot of your mistakes are correctable with time. So if you're going into a property and maybe you underwrite it a little bit incorrectly, and it doesn't, it doesn't pan out the way you want it to. Slightly not crazy. I'm not talking like we're off by six multiple six figures or something.
I'm talking about like, okay, I thought I was going to get out of this was zero out of pocket and I got to bring 5000 to closing on the second close something like that. Um, You can correct that and make up for it because, like, I'm not selling this house for seven years. So, like, it doesn't really matter.
Like, I'm not doing anything with it. We're just gonna rent it. I know what it cash flows. I didn't mess that up. And so, like, if you just hold it, it will make up for your mistake a lot of times. Now, if you're trying to flip it, there's a lot more economic factors Because now you're [00:18:00] talking about buying this house in January and you're estimating a market for May, June, July ish, depending on your rehab.
Like, especially if you're going into like luxury rehabs. Some of those are like 10 months, 12 month turnarounds. Like, think about projecting the macroeconomic climate of America 12 fucking months from now, right now. Like, that's what you're doing as a flipper. Because you're trying to bet on the dollar cost averaging of all the projects you've got going on to like, I can unload this in March.
I can unload this one in April. I can unload this one in June. And like, that's if you've got them stacked up, if you're taking one, you're putting all your eggs in that basket that you're going to be able to sell it for this amount of money. Regardless of economic climate come September, and so like there is, and then you have to estimate your carrying costs because you're carrying costs of [00:19:00] our daily breakdown of what it costs you to hold that thing, right?
And so one of these in Houston that we deal with constantly is like how does it play during hurricane season? So like I buy a house and it may cost me 75 bucks a day in carrying costs Okay, that erodes your profit constantly every single day that ticks by Saturday, Sunday weekends It doesn't slow down.
That's a freight train of profit erosion Okay. Now say i'm flipping that house in Houston, Texas in June or July and we get hit with a hurricane that now costs me two more months of lag, lag time. So we may, we may increase, um, material costs because we may have had some damage, incurred some damage, lost some work, lost some productivity.
We may increase labor costs. I don't know. And then certainly we're going to increase carrying costs because it's not even [00:20:00] ready for the market for six more weeks or whatever. Right? And so, like, you, areas of the country have things like that go on too. And so, like, that's all part of your process that you want to understand.
Because if you go in with thin margins, and you're like, I think we can do this, and I think we can make whatever, 15 grand, it's probably not even worth it to do the whole job, because you're going to work for four months. With the prospect of making 15 grand, which you're probably not, you're probably miscalculating on your first ones, right?
So like you coming in and partnering up with someone is super smart. If they've done it already, they know the area, they understand that type of thing. But you do have to understand any, any area that you show up as the investor in this project, there's just different risks associated with it. Where some flippers will, they'll just end up holding it.
I mean, like. Sometimes, I mean, when was [00:21:00] it a year ago, 18 months ago, whatever it was, August or September of whatever, 23, when the fucking banks went wild and like commercial completely contracted. And like, there was no more lending happening and everyone was stuck in all these deals. Like then the flipper goes and they put a tenant in there and rent it long term until the market can come back.
And we're still kind of sitting in that kind of impasse of time. There's a house next door to my in laws that's been on for sale for, I think, like three years, just sitting vacant as a flip. I'm like, I can't believe they paid taxes three times on that thing.
And,
Jeff Smith: I don't know. I mean, there's just a lot of different carrying costs you have to account for and understand that speed matters.
Speed matters incredibly, an incredible amount when it comes to flipping.
Shawn Rider: What are you, you can keep this answer short. What are, what are you saying are carrying costs in a flip, the taxes that are accruing, the, the [00:22:00] potential private money you use, what other are we looking at with carrying costs?
Jeff Smith: It's really just whatever note you have on it.
I mean, you're going to pay, you, you are on the hook for taxes. You're going to be on the hook for any utilities as well. So you could just round those out though. So say like, Hey, a normal utility bill, while this thing's turned on, it's going to be a hundred bucks for power or whatever, because they're not sleeping there.
They don't need to keep it like comfortable necessarily, but you have to understand, you have to turn all your utilities on you got, I mean, like if you're in the summer and you, you've got to, you got to run the air conditioner to dry the paint. So like everything's got to be on, you think of it as like zero costs, but there's costs to every little tiny thing.
You know what I mean? So, I mean, utilities, I would just throw a little line item in there and say, it's going to be whatever a hundred bucks a month or something like that, and break that down into three bucks a day. And then you're servicing [00:23:00] the debt and that is whatever it is. 35 a day, 45 a day. It's something like that.
And then, um. Just that's really what it is. And then the taxes at the end, you pay your portion of what you owned it for that year.
Shawn Rider: Would it be, would it be common sense and standard procedure for people to underwrite these deals as long-term rentals as well? Just so they understand the implications. If they can't, if something happens macroeconomically or even locally to where they can't sell it, where they'll just refi out of it if they need, yeah.
Yeah. They can recoup what they put in and go and buy the next property and just. You know, not, not hold the property vacant for an extended period of time. That would be a normal thing for someone to do.
Jeff Smith: Sure. A lot of flipping calculators have like two pages where the same data goes in and you just change the variables on that shit type of thing.
I mean, sometimes, I mean, people don't account for it, but it's a simple deal. I mean, you [00:24:00] can just say, Hey, what's the rents in this area? Like what's our backstop or like pivot. I mean, because, because there's a certain threshold where you can, you have to sell it, you really want to sell it because like, let's say you're, you're reducing price and you're running timeline.
And like you're four months overdue and you're twenty thousand dollars below your number Like at that point you're gonna have to come out of pocket at the closing table So at some point there's like this break even where like fuck No, i'm not issuing a check that large for this loss And like you have to pull that ripcord before you get to that point Otherwise You're shit out of luck.
You have no choices
Shawn Rider: What do you mean by pull a ripcord? What would the action what action are you talking about taking in that instance?
Jeff Smith: Well, you've got to, I would say you've either got to immediately make a sale for a price that's bottom dollar for what you're willing to do. Take it to a wholesaler.
Maybe. [00:25:00] I don't know. Like if you say I have to get 190, 000 out of this deal because that's going to leave me bring in 10, 000 to the closing table and so we have to get out of here at 10, 000 loss or whatever, um, like you would do that because that would be fast. Like they can sell it in 10 days. So you're, you're carrying costs with stop running.
Um, you, you could rent it if that's an alternative option that you guys feel like might be palatable. Um, you've still got to go ahead and refinance that probably once you get a renter in there. And then what's that look like? What's the monthly nut on that? Who's, who's carrying the debt? I mean, obviously the, the LLC can carry the debt, but.
It's just, it changes the dynamic of what you're doing at that point. But, at some point you need to make the decision and have open and honest communication that like, here's the check in points. Like, if this thing runs beyond 90 days, it's, it's a fucking dog at this point. And I don't want to write a check [00:26:00] for 50 grand to get out of it.
Yeah, yeah.
Jeff Smith: Cause then at the, then you've got nothing. So like, I mean, there, there needs to be some sort of time horizon. Like we, at day 45, we need to call a wholesaler and see what the top dollar is, we can get rid of this thing and then have it gone by day 55. And like, I think those are very valid conversations.
Kind of like I talk about partnerships a lot. You want to talk about like, what's the worst case scenario? Like what's a divorce look like? Um, because, because you really want to understand that. Not that this is, like, not that when you're in a flip, that it's a, it's a cause for contention at all. It's just like everybody needs to be very level headed and making clear decisions quickly.
Because like this decision delays and time matters like, and that's what it is. So, I mean, everybody needs to be super mature in the room and be like, well, we fucked this one up. Let's [00:27:00] get on to the next one. Figure out how to get out from under this one and get on to the next one. I mean, like they're.
There's no point in fighting about it and like creating animosity. It is what it is. Like if it's a clean miss, I mean, and nobody's lying to anybody or nothing, no weird shit like that. You just gotta be adults and say, let's get out of this thing as unscathed as we possibly can and move on to the next one.
And hopefully it'll be a home run, right?
Shawn Rider: Jeff, that was valuable information. I have questions, but we're going to save that for the next episode. Create a little mini series here on flipping for the people. So go ahead and send those people.
Jeff Smith: Guys, we just did our 200th episode of this podcast. If anyone would find value in what we're saying, please send it to them so we can get more people listening here.
We also have over 400, 500 videos on YouTube. Like and subscribe out there. If you have questions for Sean and I, just send us a message on Instagram. Uh, we're happy to hook up [00:28:00] and have discussions with you. We schedule calls with people periodically, um, just out of the goodness of our own heart to help you guys win and make some money.
And, uh, it's a big year ahead of us. So I want everybody out there winning. Have a great week. Talk to you soon.