7 Tips for Fixing and Flipping Properties
If you're like most people looking to start making money in real estate - buying, fixing, and flipping properties is one of the first methods that come to mind (or on the internet).
It is relatively simple but requires knowledge, guidelines, and a strategy to pull it off properly.
Here are 7 tips to get you started on the right foot
1. House Flipping - Know What it Actually Means
Hold your horses. Before you get started, make sure you understand the game and the rules. Have a bird's eye view of the bigger picture, and understand what you're signing up for.
First, this is NOT a get-rich-quick lane. Flipping houses takes effort, resources, and time.
We can confidently say that you'll spend most of your time tracking the right buyers and finding the right properties. Depending on your market (i.e. your area), this can take weeks and even months.
Afterward, you'll do your homework and due diligence before applying for your financing. (unless you actually pay cash and take ownership of the house, which will appear on the chain of ownership and have tax repercussions).
This is the part where most Real Estate Reality TV shows get you excited.
Now you'll work on prepping and renovating the house.
On TV, although this is the stage the focus is on the most, it's one of the shortest portions of the process. If you have a contractor you trust ready with his team, this phase can be done within two weeks.
Finally, money time. Literally.
Time to stage, list, market, and try to sell the house. Remember that, just like on the buying end, it could take you a while, depending on your market. Also, the more rigid you are with your negotiations, the more time you can expect to find a flexible buyer.
2. Learn & Understand Market Trends
Let’s start with the Macro, the bigger picture, and the area you think will turn up profits. And to do that, you'll need to understand what drives property prices up and down.
Here’s an article on what ways I used to spot market trends.
But if you keep it local and still aren't brave enough to traverse the unfamiliar seas outside your city or state, just by looking at your area, you’re likely to find that some neighborhoods are performing better than others because you generally know the area--and you know where to look. You know where the good schools are, and what areas experience higher crime rates.
The first step in finding a good investment opportunity is isolating which areas in the market have the brightest outlook.
Then, you can focus on the micro.
3. Spot the Right Neighborhood
Start local or with a market, you know, especially if you are a beginner.
When you live, work, or have connections in a real estate market, you will have the inside track on which areas are on the upswing and which are not.
Starting local also means you will save time and money. You’ll spend less time on travel, and you’ll know where to get the best deals on supplies, etc.
4. Be Disciplined With Your Budget
Before investing in your first rehab home, you should explore all of your financial options and know what you can afford.
When flipping a house, it's important to know what resources you're working with long before you begin searching for a house. If you're paying cash, We recommend you budget how much you can afford to put toward the purchase price and your budget renovations separately.
If you're financing the purchase, you better go ahead and get pre-approved for your loan. This will give you an idea of what loan amount you're working with and would prove useful in your negotiations, as pre-approval letters show sellers you can put your money where your mouth is.
Many property investors use hard money loans when purchasing rehab homes.
Because hard money loans are designed for real estate investments, hard money loans are based on factors beyond the credit score, such as profit potential; close faster than a typical loan; and allow investors to leverage funds for multiple projects at once.
Also, don't forget to add in a buffer. Always add extra cushion for safety from unexpected occurrences. It will keep you from digging into your profit margins.
For example, one of the most difficult and crucial aspects of renovating a home is estimating rehab costs. If you estimate a fix and flip renovation project too low, you will lose out on your profit.
And this leads us to a crucial point.
5. Tour The Property With Your Contractor
You can make the first pass yourself, but before you submit a bid on a property, always take a trusted contractor around the house first.
- What major issues do they see?
- Will anything need a permit?
- What will those cost to fix?
- How long will they take?
The more information you have about a property's potential renovation needs (and their scope and cost), the better.
Obviously, you should have a full-scale inspection before closing on the home, too, but doing a contractor walk-through at the very start can keep you from wasting your valuable time on flipping a property that's just not viable.
6. Make it attractive - Focus on Cosmetic Issues
Well, flipping is the second half of the story. The first one is Fixing...
Although you can find decent (and sometimes good) opportunities that are market-ready, you'll probably have much lower margins with these types of deals.
To make the profits you really want, those big paydays, you'll need to secure deals where the margin profits are “hidden”. Seek out homes that NEED work to achieve their TRUE potential. (also known as ARV - After Repair Value).
Often, the properties that offer the most significant upside are the ones that are in great condition structurally but have cosmetic issues preventing them from realizing their true value.
This can include outdated interiors or a lack of outdoor maintenance and landscaping.
7. Understand and Use the 70% Rule
The 70% rule is definitive when determining an offer on a potential flip.
Mathematically, it says that you should never pay more than 70% of a home's after-repair value (minus the repair costs) if you want to make a profit.
This is where having an agent in your arsenal can really help during the flipping process.
Consult them about the house flip renovations you have planned for the property, and see what they think the property will command on the back end. Ask if they have local house comps that can support this number before you make an offer.
You would be wise to research the prices of the houses sold in the area as well. Look for houses that sold which were older, and some newer and more modern.
There are many online and offline (books) resources that can teach you what to do and what not to do when starting in real estate, specifically when flipping houses.
Today you learned 7 basic and crucial tips:
- Understanding the big picture and the game rules.
- Study the macro - big picture - market trends.
- Study the micro-details of your area (or where you plan to invest).
- Be financially literate and disciplined.
- Consult with your contractor after he lays eyes on the deal (property).
- Look for higher margins and properties with “hidden” potential.
- Use the 70% Rule to definitively determine before pulling the trigger.
We wish you luck, and we'll be happy to help you find your next property.
About the author: Tom Gil is a certified copywriter, Harvard-trained negotiator, real estate investor, and former special forces sniper instructor. He helps ambitious Real Estate firms, e-commerce businesses, and Entrepreneurs sharpen their message, improve their voice, and increase their earnings.