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How to Fix and Flip Real Estate

real estate investing Jul 05, 2018

Fixing and flipping real estate is one of the most tried and proven methods for generating profits on property investments. This process, which involves buying distressed properties, making the necessary repairs and then selling them at a profit, has allowed many professional real estate investors to realize excellent returns and make good livings from property investment. Here's what you should know about the basics of the fix-and-flip model of real estate investment.

Basic Anatomy of a Fix-and-flip Project

Flipping houses is, in principle at least, fairly simple. An investor finds a property that, owing to being outdated or in some level of disrepair, is available for a price significantly below its potential market value. The investor then either executes the repairs or, more commonly, hires contractors to do the work. After the home has received whatever work it needs, it is then resold for a fair market price that covers its original purchase price, the cost of the repairs and a reasonable profit for the investor. Although the actual profit varies on each individual fix-and-flip, the reported average gross return for flippers in 2017 was an impressive 49.8 percent.

How to Find Houses to Flip

Finding the right houses to flip is the most crucial element of success with the fix-and-flip model. Investors who don't know how to find houses to flip will almost inherently end up paying too much or underestimating the cost of repairs, thus making it difficult for them to turn a profit. To find houses that are suitable for flipping, you need to be able to consistently discover properties that are selling well below the prevailing market price. Foreclosures and houses that have gone unoccupied by their owners for long periods of time are often easy to flip, but finding enough of them to make a reliable income can be difficult. Sellers who are trying to liquidate their homes quickly, such as those who may be moving or are facing financial difficulties, can also be good sources of houses that are ripe for flipping. Generally, searching through properties that are for sale by owner is a good strategy for investors, since these houses aren't as easy for other investors to search for on the MLS.

Though it pays to know how to find houses to flip yourself, building a steady real estate investment business requires finding ways to have possible deals come to you. Local advertising can help with this, since it can make homeowners who are motivated to sell quickly aware that they may be able to liquidate their homes by selling directly to you. Forming relationships with real estate wholesalers is also worthwhile, since they earn their money by finding profitable properties, acquiring purchasing contracts and assigning those contracts to investors.

How Much Money Does it Cost to Flip Houses?

The actual cost to flip any individual house varies based on several factors. The most important is, of course, the cumulative cost of purchasing and repairing a given distressed property. Also of central importance to the cost of a project is how you're choosing to finance it. Established real estate investors may be able to pay for fix-and-flip projects out of pocket, though relatively few choose to do so. For most flips, especially those undertaken by first-time investors, some form of financing will be involved. When a house is financed, the investment in the project is the total of the down payment, the cost of the financing and the cost of repairs.

Since the actual cost varies among properties and markets, a reliable average cost of flipping houses is virtually impossible to arrive at. To get a general estimate, however, you can use the 70 percent rule, which states that an investor should pay a maximum of 70 percent of the ARV, or after repair value, with the cost of repairs subtracted. For example, consider a hypothetical house with an ARV of $100,000 and an estimated repair cost of $15,000. Using the 70 percent rule, the price an investor pays for this house should not exceed $55,000. The cost of repairs plus a 20 percent down payment add up to $26,000. Assuming it takes six months to flip the property, the mortgage payments on the remaining balance would add up to $1,338, given a best-case financing scenario of a 30-year mortgage at 4.5 percent interest. This brings the total of the inputs for the project before fees, taxes and other peripheral expenses to $27,338. To determine the cost of flipping any given house, you can use a similar estimate based on the ARV of the house you're looking at and the specific repair and financing costs that will apply to it.

How to Flip Real Estate With no Money

Input costs that can run into the tens of thousands of dollars are all well and good for established investors. People who don't have that kind of capital, however, often wonder about how to flip real estate with no money. In truth, there's no way to do a fix-and-flip project with no money at all. What you can do, however, is do it without using any of your money. Putting together capital is one of the most important skills for a real estate investor, and it's a good idea to develop it early on. Sourcing money from private partners or hard money lenders is a great way to fund a project without using your own capital. If you find the right property and can demonstrate that the numbers in the deal make good sense from a profit perspective, you will likely be able to secure money from private sources for it. Be aware, however, that not having your own money in the project doesn't release you from the risk involved in the investment. Whether the fix-and-flip is a success or not, you'll still be obligated to repay your creditors.

Fixing and flipping real estate isn't necessarily easy, but if you know how to find houses to flip and how to flip real estate with no money (at least none of your money), it can be quite lucrative. The most important part of building a profitable and sustainable business around the fix-and-flip model is to keep finding new properties. The more houses you can find to flip, the more money you'll be able to make and the more stable your business will be.

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