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If flipping houses were easy, everyone would be doing it. You can be the queen of Pinterest and have a knack for design, or consider yourself a handyman (or handywoman!) that can handle all home repairs, but these skills aren’t enough when it comes to successfully flipping a property. In the end, what matters most is carefully choosing the property to get the most out of your investment. Read through these steps to ensure you pick the right place before setting out on a fix and flip.
Step 1: Set a Budget
Successful flippers know how important it is to set—and stick to—a carefully thought out budget. When you’re finding that magic number, be sure to factor in all financial considerations. Here are some things to keep in mind:
- Cost of renovations. This is usually the biggest expense, and renovations can range from thousands of dollars to hundreds of thousands of dollars.
- Hiring costs. Unless you’re a jack of all trades, you’ll most likely need to hire a contractor, plumber, electrician, and/or landscaper. Even if you feel competent in all these fields, factor in the expense of time spent completing these projects alone versus the efficiency of hiring a crew.
- Realtor fees. If you don’t have your real estate or brokerage license, you’ll need to hire someone to list the property for you, which will skim thousands of dollars off your profit.
- Holding costs. If you or your realtor can’t find a buyer quickly, you’ll incur holding costs as you cover the mortgage, taxes, and insurance while you retain the property.
Property price. Finally, with all these considerations in mind, you can determine how much you’re willing and able to spend on the property itself. If you skirt outside of this number, you can find yourself in big trouble when unexpected repairs arise.
Once you’ve set a budget, you need to decide how to purchase the property. Without significant cash on hand, you’ll need to finance through loans or lenders. Choose a strategy befitting your location. For Nor Cal flippers, seek out San Francisco and Oakland hard money lenders. If you’re residing and flipping in tax heavy states, opt for loans with longer lifespans.
Step 2: Research Locations
Don’t be too quick to pull the trigger on a property that fits within your budget. Be sure to thoroughly research the location of your potential fixer upper before going all in. Topics to consider include:
School districts. Properties within good school districts will sell at a higher price.
Neighborhood status. Check the crime rates in your potential investment neighborhood to avoid scaring off potential buyers from unsafe areas.
Affluence. You’ll most likely be purchasing a foreclosed home. Research employment rates, as an increase in jobs points to an area’s return from a recession.
Find Your After Repair Value (ARV). This one’s most important. The ARV is what you’ll sell the property for once it’s all fixed up and ready to go back on the market. All of your math should flow from this number, and keeping the end in mind will help you keep on track. Determine the ARV by researching recent real estate transactions nearby, otherwise known as “comps”. Focus on sales that have closed within the last six months, and the closer in proximity the better. Use these numbers to get a gist of what you’ll be able to list your home for on the market.
If you do too many renovations to a property in a bad location, and list it at too high of a price, you’ll most likely get stuck with it on your hands and run into holding costs. Chances are potential buyers won’t be able to buy in at that price point, or there will be no comps to support that value.
Step Three: Evaluate Necessary Renovations
When you buy a cheap property, you probably will find it at an auction or under foreclosure. In these circumstances, you most likely won’t be able to perform a full inspection and may have to resort to examining the property from the outside. Major red flags that will wind up costing you a lot of money – and take away from your profit – include:
Water damage. Look for major exterior stains, peeling paint, signs of mold, and unpleasant odors.
Roof problems. A sagging roof is a really bad sign that could cost a ton to renovate.
Foundation issues. Foundation repairs are among the highest renovation costs. Avoid it by looking for cracks in the pavement or uneven positioning.
In the end, choosing the right fix and flip property depends on price, location, and quality. Keep these steps in mind to avoid investing in real estate that won’t give you a return.
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