Fixing & flipping homes is a popular method of real estate investment that allows you to make a significant profit in just a few months. The key to a successful fix & flip is having the money to purchase the home, make the necessary repairs, and maintain the holding costs while waiting for the sale. Without having that cash on hand, your options for getting into real estate investing are slim. Many people use their own money to do a fix & flip, but what if you don’t have the money? Is it possible to become a real estate investor?
Yes, you can still become a real estate investor even if you don’t have any money to put down. There are a few ways to do your first fix & flip without using your own money. One way is to partner with another investor. You can also get a loan from a private lender or get a hard money loan.
There are pros and cons to each method so let’s break down the truth for all options. Let’s dive in.
Wait, What’s a Fix & Flip?
Before we start talking about your money strategy, I want to make sure we’re all on the same page as there are multiple ways you can become a real estate investor; fix & flips are just the focus of this article.
In a nutshell, a fix & flip is the process of buying a property with the intent to resell it quickly for a profit. This can be done by fixing it up yourself or hiring a contractor to do the work for you.
A successful fix & flip follows a simple “A-B-C” process:
- Acquire a good deal: Find a property in need of repair that’s being sold for a below-market value price.
- Buy and Begin rehab on the deal: Purchase the property at the discounted price and make repairs throughout the home to drastically increase its value.
- Close the deal: After repairs are completed, market and sell the home for an excellent profit.
There are a few things to consider before getting into fix & flips:
- Are you comfortable taking on the risks associated with real estate investing?
- Do you have the time and resources to fix the property yourself or hire a contractor?
- What is your target profit margin?
- What is your exit strategy?
- What is your budget?
- What’s the market like in your area? Are houses moving quickly, or is the market stagnant?
What Costs Do I Need to Know About Before Buying My First Fix & Flip?
Before determining how much money you’ll need, you first should understand all the costs that go into fix & flip real estate investing.
The most common costs you’ll incur are:
- Acquisition costs: the cost of buying the property
- Rehabilitation costs: the cost of repairing and improving the property
- Financing costs: the cost of obtaining a loan
- Closing costs: the costs associated with transferring ownership of the property
- Monthly costs: Known as “holding costs,” these are the expenses you’ll pay for while owning and managing the property—utilities, landscaping, HOA fees, etc.
In addition, you should also factor in the overhead costs of running your business:
- Marketing: advertising, travel, meals, etc.
- Salary: your income, as well as the salaries of any employees you may hire
- Equipment: tools, vehicles, office supplies, etc.
- Insurance: property and liability insurance
That all sounds like a lot, right? In truth, real estate investing is expensive and has many moving parts you’ll need to take care of (and pay for). However, your overhead costs can be split amongst multiple properties, so don’t worry if all these expenses are making your head spin, wondering if there’s any profit to be made at all. Real estate is expensive because of both the risk and the potential for incredible profits.
How Can I Pay for My First Fix & Flip When I’m Broke?
Not all of us have hundreds of thousands of dollars laying around to buy properties and fix them up. This is where hard money lenders come in and is the easiest way to get your fix & flip financing without using your own money.
How Hard Money Lending Works
Hard money is a type of financing designed specifically for the real estate investing industry. This type of loan is used to purchase or renovate a property, and the terms are much more favorable than those offered by traditional lenders.
The key difference between hard money and other types of loans is that the lending criteria are based primarily on the property being used as collateral rather than the credit history or income of the borrower. This makes it a popular choice for investors who may not meet the strict lending criteria of traditional lenders.
However, there are some considerations you need to understand about hard money before reaching out to lenders:
- The interest rates are higher than traditional loans since the lending requirements are more lax.
- You’ll need a Scope of Work with itemized estimates from licensed contractors (your DIY skills don’t count)
- If you default on the loan, the lender can seize ownership of your property.
Hard money lenders offer to finance your deal so that you can purchase a property, fix it up and sell it quickly. The loans they offer are short-term (no greater than five years) and close in a far faster time than a traditional bank lender. Since these loans close quickly, you get the added bonus of securing the property quickly. A good hard money lender will lend anywhere from 50 – 65% of the property’s After Repair Value (ARV). Depending on how much you can sell it for, this percentage can potentially cover the purchase price and some rehab costs.
Is Hard Money the Only Method to Get Financing?
Nope, but it’s the best way for you to maintain your revenue. Other methods like bringing on a partner, asking friends and family for a private loan, or starting as a wholesaler are excellent ways to get the money you need without using hard money. The problems come when it’s time to sell the home, as most of these methods require giving up a portion of your profits in exchange for the money. Wholesaling, however, is an option for low-cost real estate investing, but it’s not the same as fix & flips.
If you need cash for a fix & flip, the best way to get it is by using hard money. A hard money lender will lend you around 50-65% of the property’s value after it has been fixed up, which will most likely cover the purchase price and some of the rehab costs. There are other ways to get the money you need without putting your own down, but you need to weigh the cost-benefit ratio for each and decide the best strategy for your business.