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New to flipping houses? If you’re just getting started in fix/flip investing, you may want to consider the following:

Investment Strategies

Wholesaling is a great way to get started if you are short on experience and/or funds. With wholesaling, your objective is to enter into purchase contracts at an attractive enough purchase price that you can assign your purchase contract to someone who is willing to pay you a premium to your contract purchase amount for the opportunity to purchase the property... More»

Partnering Partnering with an experienced fix/flip investor is a great way to learn the business with less risk. Your partner will likely want to share in any profits but the potential savings of avoid snafus may be more than worth any shared profits.

Fix and flipping
The potential profits of going it alone and purchasing, repairing and reselling your own investment property are the greatest, but so are the potential risks.

How to Obtain the Money to Flip Houses

So you want to start flipping houses but don’t know how you are going to access the money you need to get started? Most new investors don’t realize there are financing resources to flip houses that may be available to investors with limited credit and experience... More»

Check out these options to find the cash to begin flipping houses:

Home Equity Loan: You can utilize the equity in your primary residence to flip houses. If you don’t have enough equity in your home to purchase an investment property outright you can leverage your home equity into buying one, or more, deals with a traditional or private money lender.

Credit Cards: Be cautious when using this method because it’s easy to get over extended. If used responsibly, credit cards are an available option for those with limited cash to use as equity for an investment property.

Your IRA: Did you know that you can use your own IRA money to invest in real estate? It’s called a self-directed IRA and may be the most attractive finance source for certain investors. Make sure you consult your accountant, lawyer and your financial planner before you use your IRA. They will be able to tell you if there are any kinds of early withdrawal penalties that need to be avoided – so make sure you check with them before you do anything.

Private Money Lenders (Hard Money): Often referred to as “hard money lenders”, which sounds incredibly ominous, hard money lenders/loans are nothing more than a loan based on the value of a property being purchased that will secure repayment of the loan. Hard money loans work much like a loan for art or other assets where the borrower puts up collateral and gets a loan for a percentage of the value of the collateral, without regards to the borrower’s credit profile. Since the loans are short term and asset-based (not based on the borrower’s credit), they are more expensive than conventional loans but much easier and quicker to obtain.

Traditional Lenders: While most banks don’t offer short-term loans for fix/flip properties, it is worth talking with a loan officer at your bank to see if they have a program that fits your needs. While the restrictions and documentation will be the most onerous, the pricing will likely be the lowest option.

Making your house flipping dreams a reality takes a lot of elbow grease, money and know-how. Since hard money lenders are the most frequently used financing source for fix/flip investors, we have outlined below the benefits and issues to consider in using a hard money loan.

What is a “hard money loan”?

As stated above, hard money loans are nothing more than a loan based on the value of a property being purchased that will secure repayment of the loan. Hard money loans work much like a loan for art or other assets where the borrower puts up collateral and gets a loan for a percentage of the value of the collateral, without regards to the borrower’s credit profile... More»

Are all “hard money lenders” the same?

Not all hard money lenders are alike. Hard money lenders are usually individuals or private companies who provide 6 – 12 month loans. Most hard money lenders are individuals with limited funds to lend, but in the aggregate they represent a significant percentage of the financing available for real estate investors needing short-term access to funds. A limited number of private finance companies also provide hard money loans.

Hard money lenders have a variety of different rates, fees, terms and structures. Rates and fees are higher than conventional mortgages due to the asset-based underwriting and short duration of the loans. Rates typically range between 10% and 15% per year depending on the loan amount and duration. Fees, or points, which are typically charged at the time of loan funding, are typically between 3% and 10% of the loan amount. While more expensive than a conventional loan, hard money loans can be an invaluable source of capital for real estate investors to finance their investment properties.

Why use a hard money loan?

Residential investors, such as fix/flip and rental investors, frequently use hard money loans to fund their purchases because they can often borrow up to 80% of the purchase price in a short period of time with limited, or no, loan underwriting requirements. If a property can be purchased, improved, and resold quickly at an attractive profit but standard financing is not available then a hard money loan may make sense. Some investors use hard money loans to purchase a property, improve the property, and then get a new loan (based on the value of the improved property) from a conventional lender, such as a bank, to pay off the hard money lender.

Due to the simplicity and quick funding, some investors who could otherwise get traditional financing still use hard money loans due to time constraints or the desire to obtain a no-hassle loan. While the costs are more expensive than a traditional loan, since the money is not borrowed for a long period of time the total extra costs may be justified in savings of time and effort.

How do I get a hard money loan?

There are numerous sources for hard money loans with most providers typically covering a certain geographic area. The internet is a good place to start by searching for “hard money lenders” or “private lenders” within you area. A little bit of research is typically necessary to determine which individuals or companies have adequate resources to fund your loan and are not simply trying to broker your deal. Using some of the online residential investor forums, such as those found on LinkedIn or Bigger Pockets, can be helpful in identifying reputable lenders that have their own funds to lend. One great resource is Center Street Lending where you can get a rapid 24-hour funding turnaround with less hassle and flexible underwriting... More»

Most importantly, make certain you are dealing with a lender that will work with you if you have issues and not a predatory lender that will try to capitalize on any hiccups you may have.

What are the benefits and risks of hard money?

One of the primary benefits of hard money lenders is that they are willing to provide short term loans on properties that are in need of repair and will often provide extra monies toward the cost of repairs. Conventional lenders will typically not consider making short term loans on properties in need of repair so there may be no other option to a hard money loan to purchase and improve a property in need of repairs. While more expensive than a conventional loan, a hard money loan may prove invaluable in obtaining the monies to fund an attractive investment opportunity.

While investment properties in need of improvements often have profit potential, the average home buyer is usually discouraged by the less-than-attractive condition of the property or may be simply unable to finance the purchase and improvements on the property. Investors can create value by buying a property at the right price, improving the property to a like-new condition and then selling the property to an end user. Without the monies to fund the purchase and improvements, there is no ability to create any value so obtaining a hard money loan may be a necessary tool to making money as a residential investor.

Hard money lenders are often willing to provide high loan amounts relative to the purchase price of a property and improvements, usually up to 80%, which decreases the amount of equity required for investors. With less equity invested in each deal, an investor using a hard money lender can purchase more investment properties than they could if they used conventional financing, if it was available. If the investor utilizes the retained equity to invest in more properties that earn a higher return than the cost of the hard money loan then it is economically attractive to use hard money financing. For example, let’s assume an investor earns 25% per year on their equity and could get a 50% loan to cost from a bank at 8% or an 80% loan to cost from a hard money lender at 14%. The average cost of capital (equity plus debt) using the bank loan would be 16.5% ((25%*50%)+(8%*50%)) versus 16.2% ((25%*20%)+(14%*80%)) using a hard money loan. If an investor earns more than 25% per year on their equity than the benefits of using a hard money loan are that much higher.

While extra leverage can be a benefit, it also means there is less room for anything to go wrong which means that there is a greater risk of losing part, or all, of an equity investment if there are unseen issues. Some hard money lenders also have high default rates and fees for late payments which may be much higher than those in conventional loans. In those instances, if a loan goes into default, the default interest costs can reduce returns or equity much quicker than a conventional loan.

Determining Your Fix/Flip Costs and Profit

Every house and its condition are different so it is hard to give a specific formula for what costs are involved in purchasing, fixing and flipping a specific home. The categories include hard costs, such as the purchase price and rehab costs as well as soft costs, such as borrowing costs, insurance, selling costs and escrow closing costs... More»

Rehab costs will vary widely based upon how much work needs to be done and what level of finishes will be installed. Typically, the properties that offer the highest potential profit are also the ones needing the most repairs/improvements which means they also pose the greatest potential for overruns so they may best be pursued only by experienced fix/flippers.

In general, try to keep the costs to purchase and repair equal to 75% or less than the expected sale price of the home after repairs. This will leave 15% for other costs (selling 6%, closing 2%, insurance/HOA/carry 1% and finance 6%) and 10% of revenues for profit.

Tips to Stay on Budget (Profits and Time)

Tip #1, make certain you have a detailed timeline and budget with your general contractor that includes incentives for them to complete their work on time and on budget... More»

Tip #2, make sure your general contractor has a detailed timeline and budget with all of the major subcontractors including concrete, framing, roofing, plumbing, electrical, cabinets/carpentry and painters. Make certain the scope of work is detailed and all inclusive to minimize cost overruns.

Tip #3, subcontractors work on jobs in the priority of which ones make them the most money when taking into account their time which is typically 50% or more of their costs. If the job is clean and ready for them when they arrive they will stay on the job until it is done. If the job is not ready when they show up then you stand a high chance of going to the back of the line.

Tip #4, too much communication is better than too little communication. Let everyone know if timing changes. Nothing is worse than a wasted trip/day for a subcontractor.

Tip #5, plan for known unknowns and unknown unknowns. Things always take longer than planned and cost more than planned so plan for it.

Rule #6, choose your finishes not based on what you like but what will sell and what price level the market will pay for, at any price point. High end finishes in a lower end neighborhood are just as bad as low end finishes in a high end neighborhood. Both are likely to negatively impact profitability. Design and build for the market.

Tip #7, time is money so make certain your next steps are anticipated, instead of reactive, in order to reduce the total timeline.

Tip #8, pick a great realtor (which may not be your friend’s friend) and try to price the completed home at a value that is attractive relative to other available properties. Homes that are initially priced too high tend to receive little interest and sit for too long which then requires a real deal (for the buyer) to finally move them. Bidding wars are the best way to get someone to pay above market.

Tip #9, carry costs can quickly deplete hard earned profits so move finished inventory in a timely manner. Properly priced homes, assuming they were tastefully rehabbed, move quickly, overpriced homes sit and go stale.

Tip #10, emotions should not factor into business decisions. Better to make a small profit and move on to your next deal than hold onto unrealistic price assumptions and watch carry costs consume your profits, or worse yet your equity.

Estimating an ARV (The ‘As Repaired Value’)

Realtors are helpful in establishing an expected as repaired value but all of the relevant information is also at your fingertips and it is your money so know the facts. Online estimation tools such as Zillow, Redfin, etc provide great information for available properties and comparable sales but their estimation tools have a hard time differentiating the truly relevant comparable properties which simply requires looking at the details of comparable properties to find the ones which most closely match what type and level of finish your will deliver for sale. Newly rehabbed homes can command significant premiums to older homes that have not been updated or maintained. New homes, for instance, generally command a 1%-2% premium for each year of difference to existing adjacent homes... More»

In general:
  • Sold homes, not listed homes, are the best comparables
  • Recent comparables are better than older ones, preferably less than 90 days
  • Take into account differences in size, bed/bath count, house finish, lot size and location on street to take into account the trade-offs that buyers will incorporate into their offer price