Five Tips for a Profitable Buy and FlipBy Guest Blogger
April 04, 2022
Flipping houses is both profitable and fun if done the right way. Here are a few tips to help make you make the most money.
Flipping houses is both profitable and fun if done the right way. New flippers learn lessons the hard way, hence consider starting your flipping business with a strategy in mind. A successful and profitable flip requires perfect property, enough money to invest, right remodeling, and selling tactics.
As per a study, the gross flipping profit touched $66,300 in 2020 as compared to $62,188 in 2019, and the ROI saw decline between 2019 and 2020 as compared to 2017. Increased competition is driving the flipping market. Therefore, here are five essential tips to eliminate your competition and make profits through fix and flip.
5 Crucial Tips For a Profitable Fix and Flip
1. Know Your Budget
Fix and flip requires cash for a sizable down payment which is generally 25 percent, hence keep ample cash in handy. Cash payments eliminates the need to pay PMI (Private Mortgage Insurance), which is 0.5 percent to 5 percent of your house loan, and PMI cuts through your profits as well.
Cash flow can be built through an automatic savings plan or via passive income source. Another option is to apply for HELOC (Home Equity Line of Credit) or opt for hard money loans.
Hard money loans for fix and flip provide flexible term options as compared to conventional loans. They are lent for a short term from 6 to 18 months, and have higher rates of interest than conventional loans. Further, hard money loans are given in less than five days, unlike traditional ones.
In addition to this, preliminary research on repair and common expenses gives a rough idea on budget. Experienced flippers know their numbers simply by walking through the property as this is a skill that is acquired overtime.
With down payment covered in cash, consider a credit card for renovations and improvements. A good credit score offers a better interest rate on a home loan, hence consider paying credit bills in time for a decent score.
2. Buy the Right House For a Flip
Value of a house flip is determined by its location - starting with a city, neighborhood, or district. To buy the right house look for positive factors such as public transport, stores, schools or colleges, or a good social hangout place. Negative aspects for a house flip include a busy street, highways, or an airport.
Research about neighborhoods by talking with a local real estate agent or driving through the street at different times. Chances of people buying a house increases with its location, hence understanding the property in the context of where it sits, and to figure this out research about who your potential buyers would be.
Next, search for discounted properties as people buy livable houses at low market prices. Focus on wholesalers, local auctions, or foreclosure listings to land discounted properties for fix and flip. Further, ensure that houses are in the right condition as complicated work reduces the profit margin.
Look for homes in sound condition and avert needs such as foundational problems, seriously damaged roofs, or outdated electrical or HVAC systems.
3. Follow the 70 Percent Rule
The goal of every house flipper is to buy a house at low price and sell high to bolster profits. The 70 percent rule helps flippers to land on the perfect house because the rule says that investors shouldn’t pay more than 70 percent of the ARV (After Repair Value) of a property minus the expenses required to repair a house.
Flippers can consider an estimated selling price of a house once it’s renovated through the 70 percent rule to gain profits. This rule is a guideline for pricing strategy, thus consider market conditions before making an offer.
Further, the 70 percent rule works for investors who want to fix and flip quickly. The rule doesn’t work if you’ll hold on to the house for years. Overall, the 70 percent rule is created to leave out room in the budget for unexpected expenses such as lender charges or settlement fees.
This rule doesn’t guarantee money during house flipping, but is an important tool to manage expenses and plan an exit strategy.
4. Go With Smart Renovations
Aim for remodeling projects that require low expenses and effort. One way to do this is to scout houses in the neighborhood to avoid over-improving. Renovate smartly by following four simple rules - the basics, value-addition, appealing items, and personal preferences.
1. The Basics
Basics include those things that buyers look for or expect before purchase. These include functioning downspouts and gutters, a non-leaking roof, solid floors, dry basements, reliable furnace, and good walls. Buyers also expect functional HVAC and plumbing systems.
Basic remodeling can consist of garages, bedrooms, bathrooms, or other amenities that are common to the neighborhood. Upgrading all of it is expensive, hence focus on regular maintenance and ensure all items are working in order.
2. Value-Added Projects
As per NAR (National Association of Realtors), kitchen renovations, cutting-edge appliances, or new siding are considered as value-added projects that give high return of investment. Further, refurbished decks, upgraded bathrooms, or energy saving items offer higher sell rate.
These projects can cut out profits, unless you’ve enough investments in hand. Value-added projects work well in posh neighborhoods and for people who can afford to purchase them. A medium income earning family might consider a moderate and simple house in a kids-friendly neighborhood.
3. Include Appealing Items
Appealing items helps the property to look good when potential buyers view it. These items don’t add any monetary value, but help to sell houses faster.
These items include fresh paint, new carpets, well-manicured lawns, low-cost landscaping, and new fixtures. LED lights for a bright and inviting house gives it a modern look, and helps save electricity as well.
4. Personal Preferences
Personal preferences are items that buyers may or may not be willing to pay for to get it. These include hot tubs, swimming pools, basement game rooms, tennis courts, or a wine cellar. These items cost a fortune for maintenance and are a hassle.
Adding personal preferences attracts buyers, however don’t expect them to pay more for these amenities. Also, regardless of items added, the primary motive of a buyer is to convert a residence into a home.
5. Make an Offer and Sell Wisely
The last tip to gain profits for a fix and flip house is to find potential buyers, make an offer, and sell wisely as per market conditions. Get real estate agents to sell the house quickly as they have knowledge about buyers, comparable sales, and the market situations in general.
Further, market properties once they are cleaned, polished, and staged as this makes it easier to sell the property at top dollar. Bandit signs, social media marketing, yard signs, direct mail, or open houses are exceptional ways to advertise a fix and flip property as these save time and money to rope in a buyer.
Marketing adds qualified buyers to your list and investors can flip houses quickly like clockwork. This helps to create a buyer funnel for your next house, thus ensuring a buyer well before renovating a house.
Flipping houses is a risky business and you can lose everything due to a bad investment, hence follow these five tips to avoid mistakes. These tips are useful for both beginners and experienced flippers as they cover some basic, yet important aspects for flipping houses.
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About the author
Grant McDonald has more than three decades of experience in the real estate industry and more than a decade in the real estate finance space. He is currently Vice President - Corporate Development at 14thStreet Capital - America’s premier hard money lenders for real estate investors.