Buying a Property to Fix Up and Flip
Investing in Real Estate Series — Week 4
Have you ever thought about owning an investment property? Then this series is for you! I’m covering everything to know when it comes to investing in real estate, including the different options out there and how to make it happen.
You’ll also get a complete rundown on why investing in a rental property can boost your finances, the tax benefits, plus what you need to know about being a landlord, how you can best flip the right property for a profit, an investment strategy for move-up homeowners, and how you can save money when it comes time to sell an investment property.
This week it’s all about properties to fix up and then sell for profit — what to look for, what you need to know, and how to find the right property.
Are you a fan of HGTV shows that focus on flipping homes for profit? If you’ve ever thought of undertaking such a venture yourself, you’ll find my tips and insights below helpful.
It’s important to know what to take into account and what to consider before jumping in since flipping properties for quick profits is the type of real estate investment that has the most cash at risk of losing.
As always, consult with a financial advisor before deciding on any real estate investments.
Why House-Flipping Can Be Rewarding
Even though there’s some level of uncertainty in a venture like this, the rewards hopefully will outweigh the challenges you may encounter.
If you have the time and the know-how, house-flipping can be a side business where you can boost your income and satisfy your itch for home improvement projects.
• Make a substantial profit in short period of time. The average gross profit for a flip was $62,300 in the first quarter of 2020, according to a recent study by ATTOM Data Solutions. And since most projects take about 3-6 months, you’ll make money in this relatively short timeframe.
• Earn a good return on investment. The average ROI for a fix-and-flip was 36.7%, according to the ATTOM Data Solutions study. Obviously that number can swing drastically depending on a lot of factors, but when comparing averages of other investments, this option stacks up nicely!
• Enjoy renovating without living through it. Some people get the renovation bug. They enjoy working on homes and the process of taking something from a “before” condition to a much better “after” condition. And better yet, they’re not living through it since it’s not a primary residence … and they should make a profit from it!
• Less responsibility than a rental property owner. If you want to get into real estate investing but don’t want to deal with tenants or a long-term investment like a rental property, house-flipping could be the way to go. You can choose when you want to take on a project or not, and it’s over in a certain period of time. You’re not tied up into a property rental that you’ll be responsible for continually.
What to Know Before You Flip
There’s a science to house-flipping that you’ll need to follow so that you can make it less risky and can determine if you’re a good candidate for this type of investment.
Here’s what you should keep in mind:
• Understand what lenders look for — a good credit score and enough cash. If you require financing, you’ll need to get a mortgage for house-flipping. Loans for flips are more stringent than ones for a primary home. They have higher interest rates and larger down payment requirements such as 25%. Start making this happen and improving your situation if you’re not there yet!
• Select the right type of loan. It matters which type of loan you get since some don’t allow borrowers to buy a home that’s not in “livable” condition, while other types of loans specialize in exactly that. Depending on what level of renovation you are taking on, you want to be sure you’ll be able to get a loan for that type of property and still have funds left over for the renovations needed.
• Anticipate unexpected costs and delays. Nothing ever goes exactly as planned so budget a buffer into your project. Some experts say add 20% to the estimated job cost. And remember the longer a project takes, that’s more money out of your pocket for paying for this home rather than a new owner.
• Keep renovations reasonable. Don’t try to take on too much, especially your first time flipping. Make sure you find a home that doesn’t need a total renovation or complicated repairs (like new a foundation, mold problem, or rewiring); focus on cosmetic upgrades like paint, landscaping, new appliances, etc.
• Don’t put in the wrong upgrades for your market. Focus on upgrades your most likely buyers would want, not what you would pick. Understand the design trends that attract buyers in the neighborhood and what your return on investment will be for certain upgrades. Such as, don’t put in laminate if everyone wants granite counters! But make sure your budget can afford what’s selling there and you know the average cost of home improvements.
• Line up professional contractors before you buy. Know who you want to work with and trust well before you purchase a home. Remember, time is money! Be sure they have time in their schedule to take on your project, as holding the home for months while you wait for your contractor to be ready will cost you!
• Consider a general contractor to oversee your project. If you can’t do it yourself, having a knowledgeable supervisor is worth the money, especially for larger projects. Otherwise, you’ll need to deal onsite with plumbers, electricians, and others. Plus, a skilled contractor could help you avoid costly mistakes.
How to Find a Good Deal
One of the key factors in making this type of real estate investment work is picking the right home. That can make all the difference in making this a profitable venture or not.
• Never overpay. Remember you’ve got repairs or home improvement projects to account for, so finding a home that is below market value is a plus. Look for the “worst” house on a nice street or an older home in a good neighborhood. And walk away if the price gets too high after making an offer.
• Calculate the “after repair value.” When considering a property to buy, reach out to me before you buy so I can give you an idea of what the home will sell for after it is fixed up and also what the market might be doing “behind the scenes”. This information can help when running your numbers and for you to abide by the 70% Rule — a flipper should spend no more than 70% of the home's after-repair value minus the costs of renovating the property.
• Research the average cost of certain repairs or renovations. Even before you go house hunting, know what things cost so you can do a project estimate in your head as you look at properties. That way you’ll have a general idea of home improvement costs before you bring in the experts to get quotes. This can help you determine the profit for this home when taking into account its after-repair value. And be sure to know who your renovation team is before buying a property, as contractor rates can differ drastically.
• Time is money so understand the cost of owning this home. Once you buy a property, you will have to pay the mortgage, taxes, home insurance, and utilities until you sell it. These can add up before you even include any repair or renovation costs.
• Forget about hot markets. Avoid competitive markets where bidding wars could drive up the selling price. Understand the market and its buyers, and aim for one with less demand for higher-end materials that increase the cost of your project (unless there is a good ROI). Even better, focus on buying homes that are off-market and in need of repair.
• Avoid homes with major problems. Steer clear of homes that have structural problems since that can add time and money to your project. You want to fix and flip as quickly as possible.
• Consider house auctions on foreclosed homes or wholesalers. You’ll need to tread carefully since you may not be able to get the home inspected before you buy. With the historically low inventory in most markets in the country, seeking an alternate way to purchase a home might be a good option for you.
How I Can Help You
Not only do I have personal experience flipping properties, but I have also helped clients identify homes that are the right property for flipping. My expertise will help you avoid overpaying for a home and buying in the wrong location where your fixed property sits for too long.
Remember, time is money when your flip a home for profit, so here’s what I help you with:
• Narrow down a good location — Ideally a neighborhood that is on its way up and maybe even “the best kept secret” that no one know about but will soon. From working with my buyer clients, I know what’s selling where, the areas they are looking at and what they are willing to pay.
• Find a property with potential for profit — An affordable home that needs the right amount of upgrades or repairs that will sell well once on the market. I also can go over the after-repair value you are estimating and make sure you aren’t over or under improving the home for its most likely buyers.
• Help you time your purchase right — You’ll be well-prepared to know what to look for and when. That way you can aim to complete your home improvement project close to the market’s peak selling season.
• Understand the complexities of financing a fix-and-flip project — Get a better understand of what type of home mortgage loans are available and if a HELOC (Home Equity Line of Credit) is a possibility.
• Save you money on renovations - I can help you find that perfect balance of renovating a home for exactly what buyers want while not overspending to do it. I’ll tell you what buyers are looking for and expecting in different locations and price ranges. That way you aren’t spending too much on renovations buyers won’t care about or pay for while at the same time, help you focus on the ones they will.
• Help you sell your property in a timely manner for a profit — I can market your home to the right buyers at the right time for the best selling price. I can also help with staging and other selling strategies.
If you have been thinking about investing in real estate and not sure how to go about it, I’d be happy to set up a time to talk. Email me here and we can explore which of the real estate investing options that might be best for you based on your goals, time, and finances.