House flipping is a rapidly growing type of real estate investment. Fix and flip sales account for almost 10% of the homes sold annually. Whether you are on your first flip or have several in your portfolio, consider the potential value of each investment independently of previous projects. Here are some things to consider for each opportunity.
Know the Location
As with any real estate purchase, location significantly affects the value of a property. Know your market and the value of the homes within it. In some areas, the value of homes can change significantly if you move just two or three blocks. Most flippers prefer to work in the same neighborhood. If they work on two or more projects simultaneously, they can take advantage of quantity discounts for supplies and shipping. Evaluate homes based on the following:
- Walkability scores
- Quality of local schools
- Community services
- Parking options
- Homeowners Association fees
Calculate the Resale Value
The most basic fix and flip strategy is the 70% rule. Multiply the resale value of the upgraded home by 70%. Then, subtract your estimated repair costs. This is the maximum price you should pay for the property. When calculating repair costs, add a cushion in the event of contractor delays or unforeseen repairs. If the home does not sell soon after completion, additional mortgage, insurance and tax payments affect your profit margin.
Consider a Loan
Hard money loans are the most common loan types for house flippers. With your first loan, you typically will receive money in a week or two. After establishing a relationship with a hard money lender, you can receive cash in as little as three to five days. Hard money loans may offer higher interest rates due to the increased risk. Because these are short-term loans, there are typically no prepayment penalties.
Put in the Labor
Many investors add sweat equity to their fix and flip project. It is important to know what improvements you can perform and the timeline. The more sweat equity you can put into your investment, the higher your profit margin can be. If you work full-time, it may be more cost-effective to hire a subcontractor to do the work. There is no right or wrong solution for your investment. You will need to compare the type of work required with your availability and skill set.
Taking the time to ask these questions can make increase the profitability of each house flip.