A fix and flip investment technique involves purchasing an old property at a cheap sale price, repairing and remodeling the same, and selling it for profit at a much higher price. House flipping is pretty common amongst residential real estate investors.
There are lots of HGTV shows that are aimed at fixing and flipping investment strategies. Although these shows are fun to watch and have nice renovations techniques, they do leave out the most important part, financing, and investment strategies.
This article by Lilypads focuses on the fix and flip real estate strategy and how to avoid losing money in such an investment.
What makes fix and flip a good investment?
If you know how to strategize and utilize cost-effective options, fixing and flipping is profitable investment for you. As a flipper investor, you must have decent knowledge about the restoration and renovation of a property, be able to get resources, and have good planning.
Getting a fix and flip loan from private lenders rather than from a conventional bank is much faster.
It is a short-term venture which yields good profits if done correctly. As a result, you can pour in the gains quickly into another investment property.
Another advantage of fix and flip investment is that, unlike other markets, the real estate market is somewhat predictable. Besides, flipping properties is a safer investment, as it is a short-term investment.
While flipping a house you gain insights into buyers’ needs and connect with realtors, brokers, contractors, lenders. These types of connections come in handy for future investments.
How to fix and flip a property?
Step 1: Finding deals
First, you need to start with flipping houses by finding good deals.
Researching about the market community is the key to success in fix and flip real estate.
Furthermore researching helps in finding a list of potential clients who are willing to close a deal. Automation tools help fix and flip investors in gathering leads with the most significant data available.
Investors should have some basic knowledge about house flipping and the marketplace to recognize a good deal. You must have an idea about the resale value of the house so that you have an estimate of the renovating cost. Investors must have a team of professionals, such as good property managers reliable contractors, and good real estate agents.
Step 2: Location and neighborhood
It is recommended that you research the location before you buy a property. Factors such as accessibility, security, drainage, infrastructure, amenities, and demand of a property in the neighborhood play a significant role in setting up the price of a property. Better the location the higher the selling price.
Step 3: Finding the right contractor
The most important work in flipping a house is the grunt work of repairing and renovating. The renovation of the house ensures your profit percentage on your fix and flip. Therefore you need to find a reliable contractor is necessary.
Finding a good contractor can be tough work, hunting on social media can be sometimes risky because of misrepresentation of their abilities.
Although simply hiring a good contractor won’t be enough for you. Be sure to monitor the progress of the work and ensure that renovations are up to standard.
Step 4: Creating a business plan and budget
Having a business plan will help you recognize your goals and create a roadmap an essential criteria required for building your business. The essentials of a business plan include budget, timeline, and scope of work.
Creating a realistic budget that you are comfortable with makes it possible to achieve.
You should know how much money you have in total and how much you want to spend on renovations. With decrepit properties, it is easy to get a discount on the purchase price, therefore, increasing your profit margin.
Beginners should stick to the basics of renovations such as cosmetic updates (kitchen and bathroom) and stay away from large structural repairs. It is advised to pair up with experienced contractors and real estate agents to avoid any unnecessary renovations.
Step 5: Financing
If you are short on funds make sure you have a lender before closing in on a deal. A house flipper can approach any of the following for financing their fix and flip.
Generally, there is no specific type of money loan designed by banks for house flippers. However, products such as equity line of credit, business line of credit give investors leverage from other people’s money.
In controversy to traditional lenders, private lenders usually give loans much faster without any hassles. Generally, private lenders lend out to familiar investors or to those who have a good credit score.
Hard money lenders
One of the best ways to finance your fix and flip investment. These types of lenders offer loans to real estate investors having a good experience. Since they are more flexible than traditional lenders, the loan amount covers the purchase price and renovation cost of a property.
Read Lilypads’ article on fix and flip loans in detail here.
Step 6: Selling
The final step of fix and flip. Mostly this will be handled by your realtor, their experience gives a strong input but ultimately it is your responsibility for setting the price properly.
Your After repair value (ARV) should be higher than the purchase and renovation cost combined.
Generally according to the 70 rule, when you purchase a property the purchase cost is set to be no more than 70% of the estimated ARV minus the cost of renovations.
Things to avoid in fix and flip?
1. Taking too much time to sell.
The longer you take time to sell the longer it costs you in different ways
Interest carry – Most of fix and flips are funded through loans which generally has a term of 1 year. So if you take a long time to sell you risk running out of your loan term. As a result, you have to continue paying the monthly interest rates of the money borrowed known as Interest carry.
Opportunity Cost – Due to being unable to sell the property on time you miss out on other investment opportunities. You could have invested the returns from your existing flip making you lose money on the flip.
Capital cost – It is the charge of the investor for the invested capital. The longer it takes time to sell the property the lesser is the profits, as a result the capital cost of investors also decreases.
2. Unnecessary repairs
Unnecessary spending too much on your renovations not only increases your cost but decreases your profit margin. High renovations mean higher ARV than usual, making the property less appealing and a decrease in interest.
The Lilypads Bottomline
Fix and flip can be a great start for beginners in real estate investing. It raises good cash flow for a short sale. Make sure you select a property with a high prospect of capital appreciation and positive cash flow. Conducting a successful fix and flip is a highly rewarding experience. But in order to become an experienced investor, real estate investors should learn to evaluate the market, search for a suitable property, negotiate a good deal, obtain financing, hire contractors, and sell the property.