Start Small, Win Big: Why It’s Best to Be Conservative on Your First Flip

I often say you should treat real estate investing as a marathon, not a sprint. I also like to say, if you flip ten houses in a year, you’ll get decent returns on most, a home run on one or two, and you might lose money on one.

The trick is to make sure you don’t lose money on the first one.

If it’s your first flip ever, that rule becomes even more important. You can’t lose money on your first deal. Friends, family, coworkers, and other investors… everyone is watching when you get in the game to see how things play out. Whether or not you can secure funding for future investments heavily depends on the outcome of your first few deals. Whereas if you sell your first flip at a profit… winning begets more winning. People notice.

So, winning on your first deal is paramount. That’s why I tell new investors to start small with their first project and take steps to mitigate risk. Because if your first project loses money, it could be your last.

High risk/high reward is a real thing. While high risk properties can have a lot of upside, you should make sure you have a couple wins under your belt before you start taking those risks. Once you’ve won a few times, you can take a little more risk and do what I call, “play with the house’s money.” In other words, you wouldn’t be touching or losing your initial investment at that point.

It’s better to err on the side of caution and make sure you’re penciling your numbers super conservative on your first project. Do not pencil best case scenarios on fix-up and ARV… it’s best to be conservative on one of the two, especially if you find yourself being optimistic on one.

Fight the urge to have those eye-popping before-and-after’s that HGTV has taught us about and keep your first project’s scope of work smaller.  What they’re not showing you is that those projects come with huge budgets, a lot of risk, potential sleepless nights, and  increased hair loss. Not to mention, those high-risk, big-scope projects are the most vulnerable if the market stagnates, as typically construction costs shift later than market shifts.

To keep the baseball analogy going, you probably won’t hit a home run with a simple cosmetic flip, but you can hit a nice single to get you rolling and that’s what’s most important. Even if your margins aren’t huge, even if you break even, you’ll learn a lot and make some great contacts within the industry. That difference in your knowledge from your first project to your second is mind blowing. Actually getting your hands dirty is priceless and a far more valuable education than a weekend seminar with a guru in my opinion.

Realistic expectations are also important: good luck finding a cosmetic flip that will result in a six-figure payout. But that’s okay. Starting small doesn’t mean not taking risks, it just means being smart and positioning yourself to play the long game.

If you’d like to have your first deal reviewed, Rain City will look at it for you at no cost! If you’d like to run the numbers for your project, check out Caliber’s free Property Acquisition Calculator!