If you’ve had an eye on the real estate world in recent years, then you would have likely heard the term “fix and flip” or just “flip”. The process has been popularized by “house flipping” and home improvement television shows that document and dramatize the process. Fix and flip is really just a term for the real estate investment strategy of buying a distressed property to fix up and quickly sell for a profit. Executing the process is easier said than done, however, it can generate significant profits when done correctly.
What is Real Estate Flipping?
Fix-and-flip is the real estate investment strategy of purchasing a distressed property, renovating it, and then selling it at a profit.
What is a Live-In Flip?
A Live-in flip is a combination of house hacking and real estate dipping, where the property owner lives in the residential property (e.g. single family house or multifamily complex) while they are rehabbing to prepare for the sale.
How to Invest in Real Estate Fix and Flips?
1. Research Market
Researching the market of your targeted flip property beforehand is a crucial step in the process of flipping a property. Being familiar with the market prices, previous sales, and trends of the area can all help you understand what is a good deal and what type of value you can add to achieve the highest ARV (After-Repair Value).
2. Budget and Plan
Flipping a property requires a substantial amount of budgeting and planning before ever even submitting an offer. Real estate flipping is a very fast paced investment strategy and every extra day eats into your profit margin. Groundwork to be done beforehand includes budgeting capital to pay for material and contractors, planning out the logistics of the rehab (e.g. where to buy the building materials, which type of door locks to buy), and creating relationships with contractors. A common metric used by flippers is called the “70% rule” which states that you should only pay up to 70% of the After-Repair Value (ARV) of a property, minus the necessary repairs.
3. Secure Financing
Loans for fix and flip properties are usually short term, fast funding, and require minimal scrutiny on the property’s condition, while banks and traditional lenders typically desire the opposite of these attributes – longer term loans, lengthy borrower verification, and thorough inspections and underwriting for the property. These unique characteristics drive many property flippers towards using hard money loans for fix and flip projects. Hard money loans are typically collateralized with another piece of property or equity to protect the lender, however, they are less stringent on other areas of borrower vetting and can fund very fast. The biggest drawback to hard money loans is the higher interest rate, which typically ranges from 8%-15%.
4. Search and Find Properties
Searching and finding the perfect property to fix and flip is much easier than it sounds. Searching for fix and flips can be done on major listing sites such as Zillow and Redfin, but the vast number of eyeballs searching there make it very hard to find deals there. Utilizing local real estate agents or even contacting property owners directly is usually the best bet to find deals that are about to hit the market or even those that are currently off market. The other difficulty is purchasing the property at a price that meets your 70% ARV number, in addition to accurately projecting an ARV and rehab budget. Expect buyer competition in strong markets as there are likely other investors looking to do the same thing as you.
Once you’ve closed on the property, the clock starts ticking to start and complete the rehab process. The timeline for the rehab will depend on the depth of work that it to be done. Is it a full-remodel down to the studs of the property? Or is it just interior cosmetic updates and sprucing up the curb appeal? Be ready for any unexpected repairs or increases in job scope, as they always come up. Throughout the process, be very mindful of staying within your initial budget. It is very easy to go over budget, which can potentially wipe out the project’s whole profit margin. The overall goal is the rehab the property enough to satisfy the future buyer paying top dollar, while maintaining enough margin for the endeavor to be profitable to you.
6. Flip the Property
Once the rehab is complete, it is time to sell the property. You could try to sell the property yourself, but it is always best to work with a local real estate agent who knows the ins and outs of the market. Real estate agents will market the property to their local network, online listing platforms, and the local Multiple Listing Service (MLS) database. Although this is the tail end of the fix and flip process, time is still of the essence because of the holding costs you are require to pay for every additional day you hold the property. The final goal here is to quickly sell the house at the highest amount possible to provide the largest profit margin.
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Pros and Cons of Real Estate Fix and Flip Investing
While there are several benefits to fix and flip real estate investments, there are also some potential drawbacks that investors should be aware of. We take a look at the pros and cons of both below.
Pros of Fix and Flip Real Estate Investing
- Larger Profit Margins – If done correctly, the fix and flip real estate investing method can provide substantially larger profit margins than other types of investing strategies such as buy and hold or house hacking. The benefit is one of the primary motivators behind processional property flippers.
- Faster Profit Timeline – Since the whole fix and flip strategy is a fast paced process, this means that you are also quicker to receive profits. Once you have gone through the process several times and improved on past mistakes, there becomes great potential to make a lot of money in a relatively short period of time.
- No Property Management – Most real estate investing techniques require some form of property management, however, fix and flip investing avoids the entire subject of property management and its associated difficulties. The only exception to this would be if you are flipping a multifamily property with tenants in place.
Cons of Fix and Flip Real Estate Investing
- Expensive Financing – Most fix and flip properties are financed through short term loans that are usually high interest (e.g. hard money loans). These short term loans carry high interest rates, in exchange for the increased risk that the lenders are undertaking. Hard money rates typically range between 8%-15% depending on the borrower’s experience.
- Greater Risk – The risk to execute a profitable fix and flip is relatively high. Even the most well prepared plans will run into unexpected surprises such as contractor problems, material shortages, hidden property damage, and changing market trends.
- Requires Experience – From beginning to end, a successful fix and flip requires the investor to wear many ranging from finance, law, construction, and marketing. Prior direct hands-on real estate experience is crucial as every day counts towards profitability.
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