Fix and flipping homes can be a great way to supplement your income.
It’s no secret some people make big profits on house flipping.
However, flipping homes is just like any other business and is accompanied by risks.
In this article we give a run down of the basics to starting a part-time fix and flip business.
Find a Neighborhood
Finding an up-and-coming neighborhood located near other great neighborhoods is always a great place to start.
The neighborhood is more important than the home.
A rundown home can be quickly renovated but a rough neighborhood can take years to become gentrified.
Consider the following factors when selecting a neighborhood:
- Strong public schools
- A low or declining crime rate
- Close proximity to parks, restaurants and stores
- If boutique restaurants or big box retailers are opening in the area soon, it can be a great sign the neighborhood is on the up and up
We recommend getting familiar with a region and its’ neighborhoods before deciding on which neighborhood is a top candidate for a fix and flip.
Understanding the local market and what types of homes people are buying there is integral to making purchase, renovation and selling decisions.
Find a Property
Picking the worst home on the best street can be a winning strategy.
Though you can find properties online through popular MLS sites such as RedFin or Zillow, some of the best deals can be found using the following methods:
Consider foreclosure auctions – these auctions generally give buyers a great price.
One caveat to foreclosure auctions is the buyers usually need to pay all cash for the property.
Another downside is you may not be able to see the inside of the home before making a purchase, making it a riskier endeavor as they can sometimes have major functional problems.
Unsold homes at foreclosure become REO properties (real estate owned).
These properties are usually owned by big banks or financial institutions.
Since banks are in the lending business and not in the real estate business, they are generally eager to sell these properties.
But be aware banks like to sell properties in bulk to large investors rather than sell one home at a time, putting the individual investor at a disadvantage.
Explore the Neighborhood
Another great way to find a deal is to drive or walk around a neighborhood and locate buildings with for sale signs.
If you see a vacant or run down building get the owner’s number from the local county land records office.
Cold calling these home owners can uncover great deals that aren’t normally advertised.
There are a few common ways to obtain financing for a fix and flip if you don’t have hundreds of thousands of dollars lying around.
HELOC stands for home equity line of credit and are funded by local banks and credit unions.
With a HELOC you can lend against 75% to 90% of the value of your home and have access to that capital.
These work much like a credit card where you can take money out or put it in on the fly.
HELOCs are good for funding fix and flips because they are flexible – if renovation costs go a little over and you need more capital, you can withdrawal a little more money to finish your project.
Hard Money Loan
Hard money loans, (aka bridge loans or private money loans), are loans made by private individuals or companies.
It is called hard money because the collateral the borrower puts up is a hard asset (generally real estate).
A lender will typically lend 60% to 70% of the value of a pre-existing asset.
Hard money loans are often used in the fix and flip business because they come with a shorter term life (6 to 60 months).
These loans also come with an increased interest rate and more points, however most lenders are willing to negotiate specific terms for each deal.
Renovations and Additions
Other than buying on the cheap, renovating the property is another big factor that can strongly influence your ROI.
How to renovate like a pro:
- Select low cost, high value renovations like a fresh coat of paint
- Avoid gutting the entire kitchen, new cabinet fixtures and countertops give great ROI
- Avoid high cost luxury renovations like adding a tennis court or swimming pool that only appeal to a small demographic of buyers
- Add a bathroom or bedroom where you have unused space
Understanding the local market is key to getting the biggest bang for your buck when making renovation decisions.
In some markets (like where a family is buying), a 3 bedroom with 2 bathrooms might sell for a premium.
If a renovation has a slightly negative ROI, but you know it will help sell the home quicker, it could be worth doing.
It’s important to weigh this into your renovation decisions because the longer your home is on the market the longer you will be paying carrying costs.
Sell the Property
Carrying costs of a property can eat into your profits.
From property taxes to the monthly interest payments on your financing, it’s important to get in and out of the property as quickly as possible.
In 2020, the average fix and flip from purchase to sale took 174 days.
The longer the flip takes the more exposed you are as an investor to a downturn in the market, which can destroy any hope you had of turning a profit.
Hire the Right Broker
Hire a broker who has experience selling homes in your neighborhood.
The broker should use a professional photographer.
Consider using a drone to get great aerial shots of your property and the neighborhood.
Stage the Home
Proponents of home staging claim it helps the property to sell faster and for a higher amount.
Staging a home gives buyers a better sense of what the home will look and feel like if they were to live in it.
The Bottom Line
Fix and flipping homes can be a great side business.
But like any business one can also lose money if they make the wrong decisions or the market takes a dive.
Starting out it’s advisable to partner with a seasoned pro.
This mentor should show you the ins and outs of the industry, helping you to avoid the pitfalls beginners often experience.
Lastly, be sure to pick the worst home in the best neighborhood and make the necessary renovations rather than the extravagant renovations.