Flip This House: 4 Simple Rules To Follow



fixer upper home 

I met this couple in 2006. They were very nice people — but extremely  aggressive investors. They were buying and flipping property in Las Vegas using  a third-party  turnkey real estate investing company.
They  made a ton of money at first. But they lost everything despite knowing  better.

How did this happen?

While they made profits on each sale, they used  that profit to fund larger and larger projects. This made  sense to them at the time since real  estate  was appreciating so quickly. Rather than using their  own money (of which they had none) for rehabbing the homes, they  tapped an equity line loan that grew larger by the  month.

Of course, when the real estate merry-go-round stopped in 2008, and  that appreciation evaporated, they got stuck holding property that nobody wanted to buy or  rent. And they were on the hook for a very large equity line  that they couldn’t afford to pay. As a result, they lost the real estate empire  they worked so hard to build.

While these people suffered a great deal, their loss illustrates some of the  four hard and fast rules of house flipping that simply can’t be ignored:

1.  You Must Understand Your Risk.
Obviously, as you take on  more debt, your  risk compounds.  Only buy flip homes for cash. No mortgages. No equity lines. If you don’t  have enough cash to swing these deals yourself, take on a silent  partner who does have the cash and split the  profits.
The problem with loans is  that they are a fixed obligation you must service, no matter what.  When the couple above couldn’t make the payments, they lost it all. But if you  take on an equity partner, you don’t have to come up with  any money until there is a profit on  the sale.
Also, borrowing money takes time and  costs money.Let’s say you plan on  flipping two houses over the next 12 months. Further, assume you need $100,000  for each deal. It might take 30 days or more to finalize each loan and  cost $2,000 in points or fees each time you take out the loan.
That  means you’ll spend two months waiting and pay $4,000 in costs. Borrowing to  invest in house flipping is costly.
And because of the time delays,  it will be harder for you to compete with buyers who have  the cash on hand. As a result you’ll end up with less attractive deals  that cash buyers don’t want.    In essence, that makes  borrowing to invest even more expensive.

2.  You Must Understand  Where The Profit Is.
When you flip homes, you must move quickly. Not only  do you need to buy quickly, you need to sell the house fast — and that means  you must sell under-market.
If you wait for the buyer who is  willing to pay top dollar, you’ll wait- a long time and increase your risk that  the market  may  turn against you. You’ll also lose valuable time that could be used flipping  other homes.
If your profit is $30,000 per deal and you flip three houses  in a year,  you pocket a sweet $90,000. But let’s say you hold out for more profits and you  can only turn two houses in a year. Even though your profit might be $40,000 a  deal, you still earn $10,000 less. Got it?
If you consider the  implications, you’ll see that in order to sell a home under-market and still  make a profit, the key is to buy it inexpensively.
That often  means it’s a good idea to buy  property that has been foreclosed on  You have to master your market and  find good Realtors to work with.
3.  This Doesn’t Work All The Time  In All Markets.
Even though you profit when you buy the house, you want  to flip property in an appreciating market. If you live in an area that isn’t  appreciating, you might be better off doing this somewhere  else.
And if home prices are dropping, you are playing Russian  roulette by getting into this game no matter where you are. Just the same, you  can’t predict when the market is going to turn.
To be on the safe side,  make sure that you’ll be able to hold on to the home as  a rental property for a while, if need be.

4.   Rehabbing Works.
In order to make money in this business, you  must understand what work a house really needs, what that’s going to cost and  how that will impact your offer. That sets the stage for you to  do all the work, sell the house under-market and still make a  profit.
Your best bet is to buy real estate that needs  cosmetic work that is inexpensive to perform yet makes the property much more  attractive to buyers.
Pass on any projects that need  structural repair. Hire a good  contractor, and get him to inspect the property. Don’t buy homes that need  bathroom or kitchen renovation unless they are super cheap. That  work will cost you big bucks and take lots of time. Look for  a simpler deal.
The Investing Answer: The key to  making money flipping houses is to buy right and slash risk.  You  buy right when you understand your market and your repair plan. You cut risk by  only using cash, never borrowing money and by completing the flip  fast.

If you are interested in getting into this business, your next step is to  figure out how much money you have (or can put your hands on  using investors) without borrowing. Next, scope out the market that makes most  sense and find good Realtors to work with. Take these steps first and then make  sure you expertly understand the market and property rehab.  At that point,  you’re ready to go.


One Comment on “Flip This House: 4 Simple Rules To Follow

  1. Great article content. You bring up sensible thoughts with which I mostly concur. Your thought-provoking writing style is unique and refreshing. Thank you for writing interesting content for smart readers.

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