Fix and flip investing typically involves buying a home, fixing it up, and selling it for a profit. Most real estate investors purchase and renovate these types of properties within a 12- to 18-month timeframe.
Here are four basic steps to follow when undertaking a fix & flip project:
- Find the Right Property
Look for a home that has the potential to sell for a higher price, and have it inspected as soon as possible. Some investors will look to partner with a local real estate agent to determine what renovations would make the property more desirable. Searching MLS listings and visiting open houses are other good ways of finding attractive properties in a specific area. Investors willing to take on more risk can also look into auctions of properties in default.
When searching for a property, it is also important to pay attention to the location, as some neighborhoods and cities are more amenable to flippers than others. Red flags to look out for include local rules that discourage fixing and flipping existing homes for profit, a high tax environment, rising crime rates, and other disincentives such as a history of community resistance. Another important factor to consider when deciding where to flip is the job environment in the location being considered, and specifically whether businesses are relocating or are going through an expansion.
When starting out, most people look to fix and flip single-family homes for a profit. More advanced investors may graduate to multifamily residences, smaller apartment buildings, or even commercial properties.
- Secure Financing
Flippers have the option of either using their own money or obtaining a loan. Most fix and flip loans are made by private lenders and are typically secured by the property an investor wishes to purchase. Unlike conventional banks, these types of lenders are generally not as concerned with the creditworthiness of the borrower – if someone defaults on a loan, they will usually take possession of the property and sell it themselves. Other factors a private lender may consider include the property’s estimated value after repair, potential cost of renovation, investor experience with fix and flip properties, and the amount of available capital.
Private lenders also have their own rules for when they release funds to fix and flip investors, and many will approve an application and release the funds within a week. On the other hand, most conventional loans take between 30 to 90 days.
- Rehab and Renovation
After funding for the investment property has been secured, it is time for the flipper to get to work. For this step, it is important to create and follow a project plan, budget, and timeline.
Common upgrades and repairs that won’t break the bank include painting the interior and exterior of the home, buying new appliances, adding carpet, refinishing hardwood floors, landscaping, and fixing broken windows.
Common mistakes flippers make when starting out include not budgeting for unforeseeable repairs, hiring inexperienced contractors, underestimating the project timeline, and overestimating the post-renovation value.
- Sell the Property
When a renovation is completed and the property has been inspected, it is time to sell the home. For most investors, it pays to work with a realtor to sell the property. To determine the appropriate sale price for your listing, look at comps – recently sold homes in the area with comparable sizes, rooms, land, and amenities. Sellers should also make sure the interior and exterior are clean and tidy prior to putting a house on the market.
While fixing and flipping a home can seem daunting for most beginners, having a solid plan, sticking to a budget, and working with an experienced Private Lender, like Merchants, will help ensure a successful result.
