In this episode we discuss some of the pros and cons of “active” real estate investing — the opposite end of “passive” real estate investing. That means you’re actively involved in the deal — whether that is wholesaling, rehabbing, or flipping properties. It’s certainly not for everyone, but it can be a good business for those with the desire and time to do so.
Our guest is Mike Hambright. Mike is real estate investor, mentor and entrepreneur who has purchased and renovated hundreds of houses from when he started in 2008. Mike recruits and mentors new franchisees into the “We Buy Ugly Houses” system. And he’s also the founder of FlipNerd.com.
If you missed last week’s episode, be sure to listen to Nationwide Rental Property Insurance.
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Pros and Cons of Active Real Estate Investing with Mike Hambright
Today’s show is a little different. It’s about the active real estate investing side of the equation. I am bringing on one of my friend’s here today who is heavily in that space on rehabbing and finding properties to fix and flip or keep for himself, what we call distressed properties. Sometimes these are also distressed sellers. It’s not always that the property is ugly. It could be that there’s a situation where you have a distressed seller. There’s some life event or situation going on and they just can’t afford to keep their house and they have to sell it. You may be able to find a good deal like that where you pick it up and get a really good price. All you have to do is some cosmetic work and you can keep that house or you can flip that house or you can flip the contract, something known as wholesaling. I just wanted to expose you to the other side of the real estate investing spectrum. I focus on the passive side because I just like to have those streams of cash coming in and being able to do other things. I know there are people who are on the fence and thinking about rehabbing or thinking about flipping properties or doing something along those lines. I thought I’d bring Mike in today to talk about that.
It’s my pleasure to welcome Mike Hambright to the show. Mike is a real estate investor, a mentor, an entrepreneur who has purchased and renovated hundreds of houses from when he started back in 2008. Mike recruits and mentors new franchisees into the We Buy Ugly Houses system, which he’ll talk about. He’s also the founder of FlipNerd.com and the related podcast show, Flip Nerd. Mike, welcome to the show.
Hey, Marco. Thanks for having me.
It’s great having you on. Let’s start off by telling our listeners where you’re located.
I’m based in Dallas, Texas. Things we do are more and more becoming virtual but that’s where home is.
Mike, the reason I wanted to bring you on the show, it seems like a little bit of an antithesis to what the show is about. The theme of my show is passive real estate investing. There are a lot of people out there who think about the active side of it or maybe want to dabble in it. Passive real estate investing to me is having streams of cash versus having chunks of cash. Active real estate investing would be things like wholesaling, rehabbing, and flipping. This is really what you’ve done a lot of and you’re really good at. That’s the whole reason I wanted to have you on the show. Let’s start off by introducing our listeners to who you are and where you came from. Maybe talk about your story, how you went from corporate America, you and your wife, into the real estate space.
Probably a lot of the people that are listening here, I had a lot of interests. I’ve always had interest in real estate investing but never did anything until 2008. It was really before a lot of flip-this-type house shows, like this old house and just stuff like that. For some reason, even though my family had zero experience or interest in real estate or real estate investing for sure, there was something there that I always had an interest in. I worked in a hardware store in high school and early college for a big do-it-yourself store called Menards. It’s a little more than a hardware store. For about four or five years during high school and college, I was just around a lot of construction type stuff which is funny because now I would struggle to tell you where a hammer’s at even though we have a lot of houses because I don’t do it myself. I always had an interest in it and it just got to a point in our lives where my wife and I were both doing fairly well in corporate America. My wife was a consultant. Then we had our son. What happened is I worked for a very large company. While things were going well, the company had this massive lay-off sweep and I got caught up in that. That was about $5 billion a year in sales at the time, a very large retailer. Then I went to work for what I call a startup, but we’d grown really fast to nearly half a billion in sales. That was a really small intimate group of the management team. That was awesome for about eighteen months then they filed bankruptcy and the party was over in terms of the exciting growth stuff.
What happened at the time was my wife had just given birth to our son who is now eight. At the time, it was just this feeling of, “I’m newly married, and my wife left her job to have our son. Quite frankly, she made more money than I did. Now, we have a baby. Long gone are the days of no responsibilities. I’m a new father, a relatively new husband. I’m the sole breadwinner now. What am I going to do?” I just had to figure it out. I was in a difficult spot for the first time in my life of having to worry about other people. At the time, we had moved, we lived in Dallas and we had to sell out our home in Dallas. We had moved to Washington DC really just for that job. We needed to come back. Our family was here, we had a new baby, and we had no family in DC. It was just this, “What are you going to do? What are we going to do? Do we go back to corporate America or what?” I knew enough to know that I really wanted to work for myself. I had this feeling of, “I worked for a large company and the sky really was the limit.” I was very blessed while I was there. Then that all came crumbling down and then I went to work for a startup where we were flying high and it seemed like there was no end in sight yet there was a big end ultimately. I was like, “Who can I trust? Where can I go to where I’m safe or financially stable or whatever?” There’s just this realization that I have to take this into my own hands. That’s what we did. It was a matter of starting a business of some sort but not knowing exactly what to do. I always have an interest in real estate investing but having zero experience literally.
I stumbled across HomeVestors, which actually is also based here. They bought over 65,000 houses now, but at the time, even though I’d seen ads and things around, I always just assumed it was a group of real estate investors. I never really knew that it was a franchise opportunity. Here we are 2008, I’m saying I need to jump in and take control of my own destiny. We’re jumping in at the time when everybody else is running away. The reality is the Dallas market wasn’t as nearly as bad as a lot of other markets, but still a lot of people got hurt here just like other places. At the time that we’re jumping in, when everybody’s running away, that can be a good thing. A lot of our competition was gone. We were fortunate to have access to some fairly stable capital. A lot of people that had their credit lines taken away and stuff, we had a leg up on that competition. We were put in a position where we had to work really, really hard. We did. We made it happen. Our first year, literally started with no experience, we ended up buying 65 houses and have gone up to buy hundreds of houses. Some of it was circumstance in terms of being put in a difficult position. Some of it was a market which is very different than it is, let’s say, today. Some of it is that we, unlike a lot of real estate investors that I talk a lot about, really treat it like a business. We had run businesses before. We had a fairly rich business background. We weren’t going to treat it like a hobby. We were all business and we still are.
You really crushed it that first year. Those 65 transactions were those all fix and flips or were you wholesaling as well?
We were wholesaling. If I look back, we’ve probably bought a little over 300 houses since that time. For the first few years, we were doing in the 50 to 70-house range a year for several years. Then as more things got added in, in terms of coaching other people and our rental portfolio and things now like the podcast and the web platform and all that, over time, you start to layer things in and just don’t have the capacity to do that volume anymore. Over time, I’d say that we’ve primarily been a rehab-first type model, which is the hard way to do real estate investing. We’ve probably generally wholesaled or assigned about a third of our properties and probably two thirds were rehab type properties.
Define two things for our listeners. One, what is wholesaling? A lot of people know what it is but that’s where most people get started because it takes the least amount of knowledge. Maybe not the least amount of effort, but it is relatively light. Tell people what the We Buy Ugly Houses system is. A lot of people are familiar with it, they see those big billboards on the sides of the freeways but there are many markets where you’ll never see it like Orange County, California. I don’t think there is a franchise there.
There might be but, obviously, outdoor advertising is much more prevalent in some areas than others. We actually have a lot of franchisees now in California. Wholesaling is exactly like it sounds. You’re obviously buying a property at a price to allow you to mark it up and immediately sell it to somebody else. In its purest form, you’ll hear the word sometimes or the phrase, “an assignment.” That is where I get a house under contract to buy, and I never actually take ownership, I’m literally selling the rights to that contract to somebody else. I’m not actually selling the property. I’m selling the rights to purchase that property at a given price which is above the price that I paid, so effectively just making a spread on it. You’re right. A lot of people start there because it doesn’t require a lot of capital. You can start certainly not as much as wholesaling. It is hard work. There’s no doubt. What’s the hardest part is finding deals, generating leads. No matter what part of real estate investing you look at, obviously, the bottleneck is always lead generation and being able to find those deals.
Another way to describe wholesaling is essentially you’re flipping contracts instead of flipping properties.
That’s exactly right. You’re generally selling them to somebody who wants to fix it up and turn it into a rental, somebody who wants to fix it up and rehab it and resell it. If you imagine the supply chain, a property is distressed and it’s going to go all the way to either being a rental property at the end of that supply chain or selling it to an end user that’s actually going to live in it. There’s room for multiple people to play. Just like there would be a distributor of a product that you buy at, just say, Target or something. Obviously, there is P&G that’s making toilet paper, then there’s a distribution company that’s taking it to a warehouse and it’s being sold on to Walmart and they’re selling it to retailers. It’s really the same thing. There are multiple layers of people in there that are doing things and adding value along the way.
The We Buy Ugly Houses system is essentially a franchise that you buy into that provides you the training, resources, and materials to be able to go out and run a business of wholesaling, rehabbing, and flipping properties.
In many ways, it’s a business in a box. It’s a franchise system that allows you to come in even with no experience. Although we have people that come in that have bought thousands of houses actually and they just need the systems, they need the support system, they need a mentor and a coach, and they need to surround themselves with hundreds of other people doing the same thing. It’s a franchise system. I mentor and coach people across the country for that as well. If anyone’s interested in that, if you go to UglyOpportunities.com, we have some webinars coming up and some information on more about that. UglyOpportunities.com is where they can learn more about that.
You probably know a lot more about this than I do even though I had and still have today rehab properties from a distance, from California. I’m acquiring and rehabbing properties in other markets. The way I learned the rehab process, and this is how I want to transition, it was broken down into three categories: find, fix, and flip. That’s just the easy way to remember it. You find them, you fix them and you flip them. Or you find them, you fix them, and hold them as opposed to flipping them. Most people that are at your level do a combination of both. They might find, fix, and flip maybe 80% of what they acquire then keep the other 20% for your own personal portfolio. Would you say that’s fairly true? This process I just outlined.
Everybody’s goals are different. There are some people that want rental properties. There are some people that don’t want to have a rental property and maybe they had a bad experience and they’re like, “I never want another rental property.” For me, I would say, we’ve done really well with wholesaling and rehabbing houses along the way for sure. Largely because we’ve been able to turn it into a business where we can rinse and repeat and do things over and over again. It’s always been with the intention of having the opportunity to keep some as rentals, which is where you build your wealth at. I would say that’s probably true of a lot of real estate investors. They aspire to keep more rental properties but they have to operate their business. They have to ring the register if you will and pay the bills and pay for advertising and pay for staff and things like that to be able to go out and do it again tomorrow or next month. Unless you have another source of income to pay for those things, then you’re just generally not able to keep every deal as a rental. Quite frankly, every house that you’re able to purchase that is an opportunity to monetize may not be the right fit for your rental portfolio either.
I’d like to drill down a little bit into some of the stuff and maybe highlight some of the pros and cons as we go. Here’s the core question. Why would someone want to do this? Why would someone want to be an active real estate investor? Take the time and the energy and the resources to go out and find a property which takes time and effort, fix a property, and then either flip or hold it. Why would someone want to choose to do that?
It’s a business. It’s like anything else. Why would somebody want to open up a pizza restaurant? Rehabbing, everybody thinks differently about this. There are certainly some real estate investors that only wholesale; they don’t want to rehab anything. We tend to make more money if we rehab them. I’m not saying that you should rehab everything because we look at it on a case by case basis for each deal. Generally speaking, we tend to make more money rehabbing properties that are the type that should be rehabbed and resold into the market. There’s that opportunity to make a lot of money doing that for sure if done right. It all comes down to finding the deal right and buying that. It’s a great business. For me personally, aside from the financial side of it, which is obviously an important part, I really love the transformation that we make and being able to improve neighborhoods and communities. There’s a lot of satisfaction in that regard as well.
That’s the key word, there’s satisfaction taking something ugly, the whole theme of ugly houses, and turning it into something that’s safe, clean, functional, beautiful, and operating. It’s an operating asset. I would imagine, Mike, that most of the people who are rehabbing properties or wholesaling or finding and fixing properties for themselves are doing it locally. In other words, they’re in a market where they can go out and find those deals. Is that fair to say or do you think a lot of people are doing this remotely from a long distance?
That’s one of the interesting things that I’ve discovered through my podcast, the Flip Nerd podcast and interviewing nearly 300 experts around the country. It’s been eye-opening just to see how other people operate. I’ve always had my ear to the ground of course of the system that I’m a part of and what’s going on in my community. Then you start to find people that are doing really interesting things out there. I would say, for sure, technology and a lot of things that have changed from a technology standpoint are enabling people to do things more virtual than in the past or give people a higher level of comfort. I would even argue even with rental properties, more now than in the past, you can be somewhere without physically being there. You can see things. You’ve got better probably reporting tools and things in place now. I actually would agree with that versus years past. Technology is enabling a lot more things than we saw even four or five years ago.
Technology and the internet have changed everything. I can sit at my desk in my office and renovate five properties at the same time and never step foot in them. I have a team of people to do everything from the acquisition through to the renovation and the marketing. It’s just all turnkey. Who’s this best suited for? Clearly most people won’t want to do this especially a lot of people that we deal with who are our clients that are buying our turnkey properties that just want passive income from day one. I do know there are people out there that want to take this on for the challenge or for the extra equity that they could potentially have in finding and fixing that property. In your opinion, who would you say this is best suited for? Anything that would be active real estate investing, whether it be wholesaling or rehabbing.
I talk a lot about treating it like a business and not a hobby. Many treat it like a hobby that to be honest, it’s really common for people to fail because they don’t treat it seriously. They’re like, “I still have my job. If I don’ make as much money or I lose money or whatever, then it just is what it is. I’m going to chock it up to learning.” I really think it needs to be people that treat this very seriously. I’m not saying it’s not possible to do something on the side or part time especially if it’s your intention to make that fulltime eventually. It really needs to be treated seriously because if you do, it can become a business to where you can replicate deals, the ability to find deals, how you advertise and market. You can replicate that over and over again if you follow a proven system. To where if you’re just out there and I’m just trying to hustle something up and not really taking it that seriously. I call this a lumpy business. It’s a roller coaster. Even when we were buying 60 or 70 houses a year, you may go two months without buying anything and then one day you buy four. There can be some nice paydays but it’s just an emotional and financial rollercoaster. You need to have the stomach to be able to weather those storms because even if you’re doing really high volume, which you are, you still feel those lumps.
There could be nice paydays but I can tell you that I’ve lost five-figures on one of my flips. It wasn’t anything that was my fault. It’s just it was a retail flip. We were selling it to a homeowner and things just dragged out, the interest accumulated, and it ended up putting me into the red. Having said that, these shows on TV, and I don’t know if you’ll agree with me on this, but Flip This House, Flip That House, Flip or Flop, all these rehabbing shows have done a disservice to our industry and rehabbers because they show you some of the ugly stuff that we deal with, but at the same time, it makes it glamorous in a sense that you can make a pretty hefty profit on flipping these properties and that they are pretty easy to find and that rehabbing is not an issue. I don’t know. A lot of these shows have tainted the reality of what fixing and flipping properties are all about.
They’ve peaked a lot of interests. There’s no doubt that if there’s that much drama in your business, then you’re in trouble. It’s interesting, I’ll tell you what, without giving any specifics, we actually got contacted, my wife and I, to interview to be on one of those shows. We created a bunch of videos and stuff like that. They didn’t choose us, which really wasn’t a big deal. We were lukewarm on it anyway. The conclusion I came to was that they didn’t really want somebody that treated it like a business because quite frankly, it’s not that dramatic. It was like, “We treat it like a business.” If done right, if done well, it could be a little bit boring, certainly relative to what you might find on TV. That’s more what they wanted are the dramatic folks. I have hundreds of houses and I’ve got mad at contractors and stuff, but I’ve never thrown anything through a window or done donuts in the front yard or done anything crazy because it would just cost me money. I would agree with you, those are definitely hyped up versions of the reality if you’re truly doing it right.
I ask you the question who is best suited for and the way I answer that question from the other side is who is it not best suited for, which is our clientele. I would describe those people as people who have full-time jobs or careers or maybe it’s more than 40-hours a week, they have a family, they have kids, they have events going on in the evenings and on weekends, Johnny’s soccer game, this and that. At the end of the week, they have very few hours if any to spare to do anything of this sort. Those are the people that are the ideal client to be investing in the passive real estate investing side of the equation. They want to just accumulate a portfolio and have streams of income coming in. People who have more time on their hands or they’re not committed to family obligations and whatnot, those are people who can venture out and learn the business and start doing one rehab or one fix and flip and then the second and third and build it up as a business. It quickly becomes a business that they can scale and eventually maybe if they want to, leave their career. Is that fair to say?
Yeah, I think so. Like you said, it’s easy to get sucked into the so-called sexy side of the business of, “I’m going to take something gross and make it awesome and make money doing it.” I would say that there’s a real fine line between doing it right and making money and making some simple mistakes and losing money. If you don’t have money to lose, then you can’t take that type of risk. I would say probably the next best thing is to find a partner that’s done this or find a way to work with somebody so that you can ride shotgun, if you will, to learn the process, potentially even lending to somebody that does this professionally. Or certainly if you’re going to do it, finding some sort of mentor that can help you climb that learning curve much much faster than you build it on your own.
In regards to that, are there some rules of thumb you want to share, just high level in terms of what you should be acquiring or the loan-to-values that you should be looking at or any rule of thumb? I know there’s a whole whack of them when you’re rehabbing properties.
If you’re new, you want to keep it simple. I will tell you this. I’ve evolved to where the worst houses, if it’s burned out, if it’s got serious foundation problems, if it’s got things like that, I actually prefer those because I clear out a lot of the competition that doesn’t want to deal with those things. I’ve learned to fix anything. It’s just a box with doors and windows, anything can be fixed. It’s just a matter of cost and time. You eliminate a lot of the competition, which ultimately means you’re probably buying it cheaper. If I’m buying it cheaper, then it allows me to, one, not only have an opportunity to make some more money, but two, it allows me to maybe spend a little bit more on the rehab. We’ve never certainly cut corners. We’re not big on cutting corners. There are definitely times where if it’s a tight deal, you may say, “Should we just fix what’s there? Should we replace it?” You have to make that decision on a lot of things. If it’s burned out, it’s undeniable. I’m fixing everything. We’re starting from scratch. I like to that versus, “The budget only allows us to work within this framework. We can’t replace the kitchen cabinets. We have to just resurface them or whatever.” It gives you a little more flexibility in what you do. You don’t want to start there for sure. You want to start with something that’s fairly simple. I’m not saying that you’re not going to find a whole lot of deals out there that are truly painting carpet, that you’re going to retail into the hottest market we’ve seen in a long time probably. Something that’s relatively simple that isn’t going to require a lot of your time to get done.
For someone listening to this episode, pondering the idea of getting started in rehabbing and maybe flipping them or keeping them for themselves, what would you say are the pros and cons of this side of the business, what I call the active side of real estate investing?
One of the things I want to dive in one more time, Marco, is to whether you’re actually finding the deals yourself or not. If you’re finding the deals yourself, I’ll take it back to the clientele you serve. Clearly, people could go try to find those deals themselves but you add a lot of value and it’s worth that price. It’s hard work to find deals. It’s hard work to be the wholesale side of this business. If you’re waiting to be able to find your own deals on your own, you’ve got to be willing to obviously spend a lot of money on marketing, get great at talking to sellers because you’re going to be probably buying direct or trying to, that’s a whole business in and of itself. If you say, “I don’t want to be part of that,” that’s where wholesalers add a lot of value. You can buy from other wholesalers. You can buy from HomeVestors’ franchisees around the country. You could buy on Flip Nerd. We have over a thousand off market deals right now listed on the site, active wholesale deals that need to be vetted out. You always need to do your own homework. If you’re looking to create an income or raise your income, whether you’ve left your job or you’ve retired from your job or you want to leave your job, any of those things to replace income, then it could be a great business. It is hard. I won’t sugarcoat that. If you’re looking to build long-term wealth, alongside whatever else you’re doing, keeping rental properties and building rental portfolio is the way to go. You could obviously do both as well.
What’s the best way for someone to educate themselves? You’ve got FlipNerd.com. Do you do coaching or mentoring?
I do. I’m actually one of only two people in the country that are a national mentor and coach for the HomeVestor system, the We Buy Ugly Houses system. If you go to UglyOpportunities.com, you can obviously connect to us there and we can talk. We have some upcoming webinars where we talk about the opportunities in a little bit more detail. I mentor a very large group of people across the country who buy around a thousand houses this year and that’s growing very rapidly. It’s important to surround yourself with other people that are doing this. I get a lot of enjoyment out of teaching and coaching and learning and just talking as you guessed from my show. There’s a lot of information on Flip Nerd and other sites that are out there. It’s generally general information. It’s educational but it’s not handholding type stuff. If you’re looking for a mentor or coach, I’ll be happy to talk to you there as well.
How about an interim step like a good book? I don’t know if you have your own book but are there books out there that you would recommend?
There are some great books out there. Nothing comes to mind right now. I would say from a motivation standpoint, there’s of course the Rich Dad, Poor Dad stuff which gets you excited. In terms of actually doing real estate investing, I really think, even though there’s some good books out there that are escaping me at the moment, nothing will replace actually just getting out and doing it. That’s where some people struggle to be honest, is taking that massive action and make stuff happen. Nothing is going to replace actually doing it.
You’re right. You can educate yourself for years and years and never pull the trigger and you’ll never be further ahead years down the road than you are today if you don’t take that action. You’ve got to apply what you’ve learned. Anything else you’d like to share with our listeners?
I’m big on community and surrounding yourself with other people whether you’re actually hands-on investing or keeping rental properties through Marco. We do have the Flip Nerd community, which started as a podcast and we’ve done nearly 300 Expert Interviews over the past, little under two years. We also have a social platform, that’s a membership site that you can join for free. We do have some paid options as well. We do have a free option. We have nearly 20,000 members on the site right now. We just launched about seven months ago. We’re going to continue to see a lot of rapid growth. We have forums and blogs and all of our shows and access to a thousand plus deals and lots of other information out there. Just constantly educating yourself and keeping your ear to the ground is really critical. Of course, absolutely massive action is really important too.
I agree. Mike, I appreciate your time today. It’s been very helpful. If people want information, I’ll just let them reach out to you on FlipNerd.com or whatever other contact information you want to provide.
Marco, thanks so much for the opportunity.
Thanks for being on the show.
Thank you.
If you’d like more information about Mike and his team and his product, you can go to FlipNerd.com and get more information there. Otherwise, if you’re still on the passive side of that equation and you want to just continue to build your portfolio of passive income, then go to our website and download our free report. If you haven’t done so already, it is called the Ultimate Guide to Passive Real Estate Investing. You can find that at PassiveRealEstateInvesting.com or on our property website, NoradaRealEstate.com.
If you have any questions or things you’d like us to cover on the show, submit your questions on our website through the contact form. You can leave a voice mail there as well. If you would like a free strategy session, go ahead and contact one of our investment counselors through our website. We can spend some time with you on the phone, talking about what your goals and plans are and put you on the right track whether we can help you or not. Something to take advantage of. Of course, please remember to subscribe if you’re listening to the show for the first time, click that subscribe button in iTunes or on StitcherRadio. That way you’ll be updated every week with new episodes. Last but not least, leave us a rating and review on iTunes. Email us at Reviews@NoradaRealEstate.com. That really helps us to get the message out, share this free content. We really appreciate you helping us get the word out. Again, thanks for listening. We love having you here on the show. We will see you on our next episode.
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