If you ask what a fix and flip loan is, you are probably more asking about how to get started with property flipping as a potential business or secondary income source. Flipping properties has been made popular over recent years by home improvement shows that demonstrate the amount of money made by such ventures. However, these shows do not always provide an accurate picture of the work that goes into a property flip. Here is an outline of property flipping and how to get started.
Property flipping is when you buy a house that needs to be renovated to be sold at full market value. You then do the needed renovations and resell the house for a profit. The goal is to sell the property for more than you invested in buying the property and renovating it. Many factors go into the success of a house flip, which includes the house’s purchase price, the number of renovations needed, the cost of those renovations, and the selling price. Remodeling costs will be the greatest expense and the one you have the most control over when flipping a house.
It is critical to not just focus on the cosmetics of the house. You need to take a hard look at the plumbing, heating and cooling, electrical, appliances, roof, doors, windows, and foundation. These are big-ticket items that can make or break a project. You also need to take an honest look at the home’s value and comparable houses in the area. Regardless of how great the house looks when you’re done, you aren’t going to sell it significantly above the area’s home value. You need to be realistic about what people will be willing to pay to live in the area where the house is located.
How to Find a Property
The ideal approach is to find a rundown property in an otherwise nice neighborhood to renovate and resell. When looking for properties, you need to get to know the neighborhoods so you have a clear idea of the potential selling price. Before buying a house, walk through it and make a master list of everything that will need to be renovated to get the house into top-selling condition. Based on that list, come up with an estimate for the remodeling and renovations. Once you have a number, increase it by 10% to 15% to account for problems you won’t uncover until you start working. That is the average cost for unexpected expenses in these types of projects.
Once you estimate the renovation costs, add that to the asking price of the property. Subtract that total from the potential selling price to see what the potential profit will be on the property. For example, you find a house that is for sale for $110,000. There is approximately $50,000 worth of work that needs to be done to the house, and comparable houses in the area are selling for $200,000. That means you have a potential profit of between $30,000 and $40,000 once you pay all needed utilities, permits, and fees.
When you have the potential profit figured out, determine how long it will take you to renovate. The longer an investment property takes to fix up, the more it will cost due to utilities and other ongoing costs. If you are using a general contractor or subcontractors, you will need to make sure they will be available for hire during the timeline you need the work done. Based on the cost estimate and timeline, you can decide if it is a project you want to take on.
How to Fund the Project
This is where the fix and flip loans come in handy. When flipping houses, you are buying the investment property, knowing you only plan to keep it for a few months. With that in mind, your loan terms are less important than if you were planning to keep the house long-term. You want to get a low monthly payment, which may mean extending out the loan as long as you can. When you sell the property, you will be paying off the loan you used to buy it. Ideally, you’ll only be making a few mortgage payments before selling the property.
Additionally, depending on your financing for the project, you may need to use the house’s value to increase the loan, so you have money to put towards renovations. Your funding options and fix and flip loans will be determined on a range of personal and financial factors that you’ll need to go over with your flip lender. Another option is finding a flip investor or private money lender interested in working with you on your venture. If you have no clue where to start in terms of who to talk to, you can start with a local Google search. For example, you can search “fic and flip loan Oregon” to find lenders that offer fix and flip loans in your state.
When meeting with a lender or flip investor, the better you know about the property and the real estate market, the more likely you will be to get the funding. Lenders and investors want to see that you are a safe investment, which means you have the knowledge and experience to accomplish your goals as presented. Demonstrating that you’ve done your research on the property and the area will help tremendously towards that goal. You need to be able to cite most of a bathroom remodel just as easily as you can quote the interest rate on your loan—lenders want to know that you are savvy and knowledgable.
How to Make a Profit
The simple answer is that you make a profit by selling for more than you spent. However, it is a little more complicated than that. You need to be really honest about potential expenses when choosing to buy a property to flip. You also really need to do your homework. For example, is the house under a Home Owners Association? Is it in a historical district? What fees will you need to pay the city for licenses, inspections, and permits throughout the project? These may seem like small factors, but they can end up costing you a lot of money if you aren’t careful.
Another factor to consider is how much of the project you will need to hire out to professionals and how much of it you plan to do yourself. Licensed professionals must do jobs like plumbing, electric, and HVAC, but someone with handyman skills can complete many other renovation areas. If you do not have the skills to complete a specific task, it is worth the money to hire a pro. You need to budget correctly for hiring these contractors as well.
Focus on the big-ticket areas. Kitchens and bathrooms will always bring in the most money when trying to sell a house. Working with professional bathroom remodelers will ensure the project is done right and looks breathtaking when finished. Don’t skimp on the vanity, bathtub, shower, fixtures, or interior design for the bathrooms, especially the master bath. You need to cater to your potential homeowner. The kitchen is another vital area that you need to really focus a lot of your energy and budget on because people want dream kitchens when they are looking to buy a house. While the bedrooms are important, you’re really talking about walls and floor, which can look great for little money. The labor cost for the kitchen and bathroom remodel will be a lot but worth it when you sell.
How to Turn it Into a Business
Flipping a property can be a full-time job. Once you get your feet wet and learn from your first property flip, you can use the profit to put money towards multiple properties. Planning multiple home improvement projects means you have to keep everything organized, on time, and under budget. The real work will become the project management that will ll fall on you as the investor and business owner.