Here are some tips for fix and flip investing.
Fix and flip investments are those properties that you buy that need a bit of work then you sell them for a profit.
A lot of people know about this real estate investing strategy because there are a lot of TV shows out there that show you how to do it. It seems to be the thing that most people like about real estate investing.
Buy a property that needs a lot of work. Put the work in, and then sell it for a profit.
But, it doesn’t always work out that way, certainly not in the first couple or more deals. There are a lot of unknowns and unexpected costs.
Before you buy, you are going to do your investment analysis. You will have to get good at doing the calculation for the renovations.
Here are a few tips for Fix and Flip investing,
1. Get Good Estimates
When you are buying the property, make sure you make the offer conditional upon inspection. Then make sure you have a really good inspection completed. Obviously, you are buying this property knowing that it needs work but you don’t want to find out later that the property needs more work than you originally thought.
Next you should be getting a detailed estimate of all of the renovation costs. Then add anywhere from 25% – 50% to the estimate. I know that sounds crazy but you wouldn’t believe how many unexpected costs can come along.
For example, let’s say you are buying the property for $300,000, and it’s worth roughly $450,000 after it’s all fixed up. Then you get an estimate and there is about $50,000 worth of renovations. What I would do is estimate another $30,000. Make sure that you have a good cushion in there for unexpected costs. These are basic project management principles.
Make sure you add a buffer to determine the estimated costs that you are going to incur to fix this property. You don’t want to get caught down the line with some unexpected expenses. You might end up blowing your budget and all of a sudden you are actually going to lose money.
Believe me, I have done a lot of these projects and you will lose money on some of them. If that happens, just take the loss and move on.
2. Do Not Underestimate Carrying Costs
A lot of people get in there, do an assessment, and think they can do the renovation in 2 months, and sell it in another 2 months.
Make sure you put in enough for carrying costs. What that means is that if you bought this house through a loan you have enough money to carry the mortgage payments for longer than you were expecting. Carrying costs also include taxes, insurance, and utilities.
For example, If you think it’s going to be 2 months for renovations and 2 months to sell, I would double that and estimate for 4 months for the renovations or maybe 3 months. However long you think it will take, it will take longer.
You are going to have your mortgage, taxes, insurance, and utilities to pay for. So if that total is going to be, say, $1,500 a month and you are estimating 2 months, actually calculate 3 months, so $4,500. Put in $4,500 in your estimates for carrying costs.
Do not underestimate your carrying costs because most projects will overrun which means more carrying costs.
3. Selling Price Tips for Fix and Flip Investing
The third thing I would recommend is when you go sell the property, price it to sell.
People get hung up when they are trying to sell and try to get the biggest bang for their buck. They are trying to make the most profit.
They look at properties in the surrounding area and find one listed for around $450,000 and think that’s what they will list their property for. Well, guess what? You are also competing with those other houses. So unless a buyer likes that exact street, the exact cabinetry that you picked out and the exact countertop you installed, you will incur additional carrying costs.
I would also estimate 2 or 4 months of being on the market when trying to sell.
So that’s 3 months of renovations and there are 2 months of being on the market,
Make sure that you get a good Realtor to sell your property. You may want to try and sell it yourself. My recommendation is don’t. A good Realtor is well worth it.
Here are a couple more tips for fix and flip investing.
1. that it’s staged properly.
2. that it has the right marketing around it.
3. that it is priced properly
It may look like it can compete with other properties at $450,000 but why compete? Once you sell the property, you are going to save money on those carrying costs.
The faster you move that house, the faster you get out and the faster you get that cash back so you can start on your next project.
When you price the property you want to price it at what I call a “Fire Sale” price.
For example, let’s say properties are selling in the neighborhood for $450,000. What I would do is list it for sale at $430,000, Fire Sale Price, and advertise it as a Fire sale, Advertise that there is an open house and you’re accepting all reasonable offers.
So these are just a few tips for Fix and Flip investing.
