To House Flip..?
Saturday May 12th, 2018
Many TV shows, vlogs and podcasts make it look as if house flipping is an easy, fun and highly profitable investment. Many investors have indeed made a handsome profit from house flipping. Maybe you know someone who has, or possibly have heard sensational anecdotes from friends, family members and internet blogs of people becoming rich overnight. And while its true that house flipping can be a profitable enterprise, it would be a fallacy to believe that you can simply throw repair money at any dilapidated property and get a huge return on your investment during the resell. Becoming a successful house flipper requires time, experience, and lots of research. House flipping is best understood as one of many real estate investment tools available. If you really want to get into it, it’s wise to learn the rules of the game, understand its learning curve and have the right mentor to help you through the process.
The most important thing to master about house flipping is choosing the right property. The old cliche of location, location, location, comes into play here, but it’s only part of the equation. The rest of it has to do with the potential return on investment. A good numerical value to help you evaluate the quality of the deal you’re looking at is the property’s after repair value, or ARV. This number is calculated by taking into consideration the size, location, and comparative properties found in the property’s neighborhood.
Your potential earnings can be roughly estimated by taking the ARV, subtracting the price of the property, closing costs, real estate agent fees, rehab costs, and costs of borrowing money. A professional real estate agent with plenty of experience in the local community will be able to help you calculate the property’s ARV. Since you can expect to do some kind of rehabilitation on every property you wish to flip, having a good ARV calculation will be instrumental in deciding the kind of rehabs you will do, and how much you will invest in them. The lower the repair costs, the more you stand to earn, but picking the right things to rehab matter just as much as keeping rehab costs low.
When you are looking for amazing deals to invest in, again, a knowledgeable real estate professional will be instrumental in finding them, but there are always some time tested candidates for properties to flip. Pre-foreclosed properties, recently divorced couples, people looking to downsize, estate sales, unwanted inherited homes, and recently widowed homeowners are all good candidates for good deals, because the owners are highly motivated to sell. Owners in those situations are in highly emotional situations, and their main goal is not to get as much money out of the property as they can, but to get rid of the property as quickly as possible.
The biggest reason why people miss great deals is due to a lack of financing. By far the best way to finance a house flip is by purchasing the property in cash. Not only does it significantly speed up the purchasing process, but a cash purchase does not accumulate interest. Also a cash offer catches the seller’s attention, which gives you a stronger leverage when negotiating a final purchase price. Of course, if you're barely getting started with real estate investing, there’s a good chance you don’t just happen to have an extra half a million dollars to invest. So you will have to look into financing options. You can apply for a mortgage at a financial institution. If you already have a mortgage on a different property, you can expect higher interest rates a higher down payment requirement. Banks also offer business lines of credit, which take a while to set up, rely on your credit rating, and take a while to increase their credit limit, but if you’re looking into making a career in real estate investments, they are essential. You should definitely look into getting one because even if they don’t cover the entire purchase price, they can cover unexpected expenses, and win bidding wars.
If you don’t have the best credit rating, an option that has worked for a lot of investors is using a hard money lender. Hard money lenders use the property itself as collateral, and could potentially finance 100% of your investment. True, they have much higher interest rates than a bank might offer, but getting the funding from a hard money lender is faster than from a mortgage, and they can help you secure deals that you would otherwise have to skip.
In most house flipping cases, you don’t want to hold a property any longer than necessary. That’s because as more time passes, the more you’ll pay in taxes, utilities and loan interests. If you price your property to sell as soon as repairs are done, you should be able to sell fairly quickly. Of course, the market goes through cycles, and a qualified buyer might not show as quickly as you expected, so having a contingency plan is essential. Keep in mind that you might be taxed on quick flips as income, while in a property being held for a few years, you’ll be taxed as capital gains, which have a lower rate. Which is why some successful house flippers plan for a medium to long term, and keep the property for a few years, while collecting rent in the meantime.
For some repairs you will definitely hire a licensed contractor to do the repairs, but for smaller repairs, such as changing a faucet, painting a house, or fixing a shower head, you can learn how to do it yourself. Those skills will always be useful to have anyways, and you’ll avoid paying hundreds of dollars. Of course, if you’re already a builder, a plumber or electrician, you’ll be able to put those skills to use, and save even more in the rehab process.
If you don’t have all the funds you need to fund a house flipping project yourself, don’t want to go through the mortgage qualification process, don’t know how to find the right property to invest in, and would rather play it safe, you can make a deal with an experienced real estate investor who has a proven track record. A well established real estate investor will have a list of property rehab specialist who can do the bulk of repairs, real estate attorneys, and appraisers. The experience you gain from this expert will be an invaluable learning experience that will help you become a real estate investor on your own terms, and/or establish a business relationship in which both will profit.
If you’re located in Mississauga or the Greater Toronto Area, Auday Zakko, can help you achieve your house flipping goals. Not only does he have extensive experience in home appraisal, marketing and price negotiations as a Realtor associated with Remax, but he’s also owns a home rehab company that specializes in house flipping.