So, what is a Fix-and-flip loan? Let’s go through the things you should know if you want to start flipping or if you are just interested in learning more.
Fix-and-flip is a real estate investment strategy and it consists in purchasing a property in need of repairs, renovating it, and selling it for a profit ideally in a short period of time. That means that the investor does not hold the property(unless it’s a fix n hold) but buys a property that is low in value and plans on repairing it and then selling it.
How does it all work?
Investors who mostly deal with these kinds of investments attempt to generate a steady flow of income by engaging in frequent flips so they need to focus on purchasing the properties that seem the most profitable at the end. So, to upscale their profitable flips they use a number of methods to acquire properties that meet their investment criteria.
Since they are trying to make a profit they usually buy houses at a discounted price on an “as-is” basis.
The next step after the purchase is the renovation process. It can go two ways, either they hire contractors to complete the work or they can do it themselves which of course saves more money.
After all of that, when all of the repairs have been made and the property is in a good state they will put it up for sale.
Real estate investors have a variety of options when it comes to financing the next big project. You can go one of to ways, you can opt for a conventional mortgage loan from a bank or you can get a private money loan. The distinction between the two is that a 203K loan is a conventional mortgage loan package that is backed by the FHA and is geared towards flippers specializing in rehab or construction projects, and on the other side a private money fix and flip loan is backed by a private lender as opposed to a bank. The point is just to calculate which option is better for you at that certain moment since there are upsides as well as downsides to all of the options.
When house flippers do not have the necessary funds to finance their investment projects that’s when they can turn to:
Private Lenders, Traditional Lenders, and Hard Money Lenders
When calculating how much money would they need to flip a property it is good to expect expenses such as the purchase price of the property, renovation or construction costs, holding costs such as utilities, insurance payments, and HOA fees. Also costs of property sale such as realtor fees, staging costs, and closing costs.
You can try to avoid additional costs by reselling as quickly as possible, and in the ideal case, the property would be bought, fixed, and sold within 12 months.
Benefits of a private money fix & flip loan
The first thing is this kind of investment is good for beginners because usually you don’t need a lot of money to start with and you can keep on investing the money you do get over and over if you are smart with it.
The important thing to know is what ARV. ARV or After Repair Value is the estimated value of a property after renovations. Researching the property, including the location, lot, building, comps, and the estimated value of repaired properties in the neighborhood over the last six months, determines the ARV. A good loan-to-ARV will depend on the type of loan. For conventional mortgages, a loan-to-ARV ratio of 65% or less is generally considered ideal.
Here is a simple ARV formula:
(Purchase price) + (Value From Renovations) = After Repair Value
Generally, the plus side to a private loan is that never really is a set amount of rehab costs that must be completed, as well as investors that choose this route can work with any licensed contractor that they choose. The difference between that and a 203K loan is that the bank has to pre-approve the contractors, and also banks offering conventional mortgages usually take a minimum of two months to close which is too long compared to private money lenders.
So now that you know the basics, where should you start?
As with anything else, especially business in life you need to do your research and a lot of it. Start with educating yourself on important aspects of fix and flip strategies and try to find the one that works for you. There is always a chance things won’t go as planned because the market is fluctuating but you will minimize your losses and risks as well as maximize profits if you do enough research and learn everything you need to know to start.
The first thing you need to ask yourself is why are you getting into this business? What is my reason for investing? Be honest with yourself because making a game plan can save you a lot of time and a lot of money. A better understanding of your intentions and how to get to your end goal is definitely going to help you navigate upcoming situations. With a good plan and enough information, you will be more motivated and willing to work to fulfill your goals. Make sure you have a strong reason for investing.
The next step is to determine the most efficient way to get to your goal. After you set a good knowledgeable foundation, which you can do by giving yourself enough time to do your research and don’t hesitate to ask people around you who may be able to help you. It’s better to take your time and gain a well-rounded knowledge about fix and flip than to rush it and go into it without enough info.
For starters let’s go through some things you as an investor need for a successful fix and flip:
-Be knowledgeable of your local real estate market
-Be able to differentiate between a good deal and project and a bad one
-Understand how much the property can sell for once it is renovated
-Be aware of how long houses typically sell for in the area
-Calculate and understand how much the renovating process will cost, local requirements for permits and zoning and how long the project will take (since the longer it takes it’s more money out of your pocket)
-Also it is really important and makes the whole process easier for you if you have a trusted contractor and a good real estate agent.
-On topic with contractors, don’t hesitate to ask them about current property listings. You would be surprised how much they know about the current property listings. If you show your interest they might come to you with a deal they know about or an off-market property.
-Browse The MLS, you never know when you might find a property that could provide an excellent deal.
-Focus on networking with real estate agents and attorneys who may be aware of off-market properties in your area. Ask your existing connections and attend local real estate meetings to get started.
-Create your own website
-Zillow and Trulia are your best friends, searching online may help you to find deals that are still not on the market
-Public records hold information on pre-foreclosures, short sales, and more and you should definitely take advantage of that. By surveying public records you may come across some off-market listings.
-Keep an eye out for expired listings.
-Keep in mind the location! The purpose of buying a property and fixing it is to sell it, and sell it fast. If you buy a property that has a good location you are raising your chances of doing a successful fix and flip. So, well-developed, safe neighborhoods are mostly the places where you should look, as well as if it is near a big city. Location is significant!!!
-If you flip a property in a certain neighborhood don’t be shy and ask around to see if anyone else is selling. You may be surprised how beneficial it is just to mingle around and get to know the neighbors, you can get a lot of information from them. Introduce yourself as a real estate investor, the word gets around.
And one more thing, your business plan for a fix and flip business should include these elements:
-An executive summary providing an overview of your project and your company
-The business opportunity your company plans on filling – including the problems you can identify in your local market and how you can solve them.
-A detailed description of your target market
-An in-depth explanation of your company’s strategy to fill the opportunity.
-A marketing and sale plan detailing how you plan to appeal to your target market
-An operation section covering how your business works: vendors, logistics, technology, etc.
-The data and milestones for your project, including projected dates, costs, and metrics
-A team presentation
-An overview of your company’s legal and organizational structure
-A financial plan covering the data necessary for investors to evaluate your project’s performance and viability
So there you go. A few things to get you into flipping, whether you are just curious or you are seriously considering starting your own Fix and Flip business.
Photo by Ollie Craig: https://www.pexels.com/photo/aerial-footage-of-a-suburban-8076031/
Sources and good places to gather more information: