Hi there, everyone.
This is a continuation of our discussion on homes as an investment. In Part 1, we discussed an investment property as a rental with some tips and suggestions. Today, we cover purchasing a home to update/upgrade and then bring back to the market to sell at a profit — flipping.
There are some companies here in the metro that do this exclusively. They purchase 20-30 homes at a time and have the resources to renovate/update efficiently and profitably. They watch the market closely and know when to get into a purchase so that they may maximize their profit. In the seller’s market that we have right now, many of them are sitting on that cash waiting for the market to neutralize.
You do not need to purchase 20 at a time to participate in this type of investment, however, there is much to be learned from those that do this exclusively.
#1 — Do the math.
Flippers are looking for homes that need work. Sounds obvious, but it is worth stating that you don’t want to by a move-in ready home with upgrades already completed and think you can simply mark up the price and resell. Even in this market, that is not a sound strategy.
You want your net proceeds at sale to cover your purchase price and any costs to renovate/upgrade/repair/finance plus some type of profit that will justify your efforts on that project. You want to know what number that is before you go into any purchase.
#2 — Get expert advice
— Bring your contractor along with you on your showings of potential purchases. Get their take on renovation and repair costs. Every home will have a different set of issues. You will want to consider padding your budget somewhat for those overages and gotchas that come up.
— If you are not paying cash, talk to several lenders about options. If you are financing, you will have interest and fees that will work against your bottom line so shop around. There are more and more “hard money” lenders popping up where they understand this process and offer short-term loans. Their rates can be a bit eye popping, so you need to really know what you are doing so that you can complete your renovation and sale on time and on budget.
— Talk to your realtor about area sales prices on homes that have similar floor plan and features you intend to provide when you sell. Ask them what the monthly sales trend is in the area you are considering. Talk to them about how you intend to purchase the property. If you are financing, ask them if they have concerns about appraisal based on condition of the home with your specific type of loan. Finally, run your repair list by them. I have seen flips that have beautiful kitchens and bathrooms, but I could stick two fingers into the cracks I saw in the basement walls. Buyers care about the bones of a house as well.
#3 — If you are new to flipping, avoid an emotional decision.
All of the leg work described in sections 1 and 2 is necessary for you to make a good decision about the property you are considering. It is exciting to move forward on an investment property, but remember that it is just that….an investment. You want to make sure that the estimated return on your money is worth the time and headaches that you will inevitably encounter in any renovation project. Don’t change your criteria just to get that specific home under contract. If it doesn’t meet your formula, there will be others that do.
As always, please feel free to call with anything you need.
Terry Jackson — Domicile One Realty — www.DomicileOne.com — 913-488-5623