Becoming a fix & flip real estate investor is a popular method for entrepreneurs looking for a profitable way to start a business. Refreshing a poorly maintained home not only gives it a new life but can also help communities thrive that may have been previously overlooked. If you’re just getting started, the whole process can seem overwhelming, but it doesn’t have to be. Let’s break down how to choose the right house to fix & flip for your business.
To find the right investment property, you’ll need to balance your costs with a list price the market will bear. Factors like location, amount of work required, how hot the market is, and others will need to be taken into account. To be safe, you should also establish an exit strategy for what you can do if the property can’t be sold.
So let’s get into this and talk about what exactly a fix & flip strategy looks like. Plus, I’ll break down all the things you need to consider when it comes to buying the home, calculating your profits, and more. If this gets to be just a little too much, I’ll also show you a few different ways you can avoid the fix & flip strategy while still being a real estate investor. Let’s go!
What is a Fix & Flip?
Fix & flip properties are investment properties that are bought in some state of disrepair. They could be vacant homes that haven’t been occupied for a number of years. Or they could be rental properties that have had, let’s say, less-than-stellar tenants and landlords who haven’t kept up with maintaining the home. Or they could just be single-family homes that have had owners who had neither the time, money, nor inclination to keep up with making sure the house stayed in good shape.
Regardless of the reason, there’s usually a lower-than-market cost attached to them to make up for the amount of work that needs to be done. Savvy real estate investors will take note of these properties and either negotiate the price down further or just buy them outright if the deal is good enough.
Once an investor owns the house, they’ll spend the time and money to get the home restored to its former glory (or better) and list it for sale at an increased price that accounts for their costs and profit. The home is then sold to a new family who gets to enjoy their new move-in-ready house.
Typically, the entire fix & flip process will take less than a year though it’s dependent on how patient you are with the market. The sooner you’re able to flip it off to another person, the better your chances are to make a profit.
How to Choose the Right House to Fix & Flip
Let’s say you’re ready to dive in and find your first investment property. What are some factors you need to keep an eye out for?
- Is this the right neighborhood to invest in? Buyers will want homes that have curb appeal, are in good school districts, and have amenities close by like grocery stores and entertainment. If you buy a house lacking in these areas, your list price will need to account for this to make the property worth the compromise.
- What features does the home have? Room sizes, number of bathrooms, closet space, garages, and yards; these are all things that will be deciding factors for your buyer. If the home is smaller, are you willing to invest the extra money to make it more desirable? If not, are you willing to list it for less than you expected?
- Are there going to be additional problems you’ll need to deal with? Take the time to have title research done during due diligence. This way you can ensure you’re not buying a home that has liens or multiple positions already on the title. Once that’s clear, have a thorough inspection done and make sure there aren’t any major issues like cracks in the foundation or structural weaknesses. These can end up being so costly that you might not be able to break even.
- Can you stick to a budget? Flip creep is a real problem for investors who aren’t disciplined. You may want to install the most beautiful, imported marble tile instead of the IKEA tiles you’ve originally budgeted for because you think it will increase the selling point. The problem is, you’ve got to carry those costs and hope you can fold them into the selling price. There comes a tipping point where all of the upgrades become a problem that prices you out of the market altogether.
How Much Money Can I Expect to Make on a Fix & Flip Property?
Unfortunately, there are no set standards for how much you should definitively expect when buying a fix & flip as your profit is based on a few variables. Things like the market, your costs, time, and the amount of profit you’re looking to make all factor into how much you’re able to list the property for.
What I suggest is that before buying a property, you work backward to ensure you’re getting a good deal. Flipping Mastery TV has a fantastic video that dives into how you can calculate the amount of profit you can expect:
Essentially, the formula works like this:
Take your estimate (or appraisal) of what the property will be worth after it’s fixed up and multiply that by 0.7.
The rest of the 30% will usually get divvied up like this:
- Closing costs – Your taxes paid, real estate agent commissions, etc.
- Carrying costs – The cost of your loan
- Your profit – Typically estimated to be around 15%
Then, you subtract your rehab costs. So if you have a deal with a $300k ARV and expected repairs of 25k, that looks like:
$300k x .7 = $210k
Now subtract your $25k repairs and that means you can spend $185k on that property and expect to make a profit of $45k! Woohoo!
After you’ve made these calculations for your particular deal, you’ll be able to see what profits you can expect to make on each home that’s successfully flipped.
To give you a better idea of some cold, hard numbers, we have an entire playlist dedicated to investors who used Do Hard Money and how much they were able to earn on a fix & flip.
Tips for Running a Successful Fix & Flip Real Estate Business
Running a fix & flip real estate business has become very popular thanks to reality TV, which I think is great. Having the ability to create a house that excites your buyer and makes them feel right at home is one of the most satisfying feelings in this industry.
That said, not everyone makes it in this business, so I want to give you a few tips for how you can get your business going the right way.
- Understand this is a long-term process – Many real estate investors will not make enough income to go full-time for years, which is totally normal. Don’t expect that you’ll be able to quit your day job after selling your first fix & flip.
- Don’t take on more than you can handle – I’ve seen new investors take on homes that would be better off being bulldozed, and it breaks my heart to see people lose their investments due to being overly optimistic. Start slow; try to find a property that’s in good condition but just a little outdated. Once you successfully flip that, move up to a little more complex of a job. Once that’s done, move up from there.
- Have a list of pros that can help you – The more you can rely on talented professionals, the better off your business will be. A good place to start is by finding an experienced real estate agent who’s used to dealing with real estate investors. From there, find an Inspector you can trust to give you a full rundown of what sort of condition your investment property is in. Once you’ve got those two, start establishing relationships with contractors who can give you a good deal for long-term relationships.
- Don’t be afraid to network – Real estate investors get a bad rap, in my opinion. I’ve met very few that are so competitive that they won’t be helpful. Try establishing relationships with other investors in your area and asking for references for contractors, agents, hard money lenders, etc. Also, once you’re established, make sure you pay it forward, too. There are more than enough properties out there for everyone!
Things to Consider Before Making an Offer on an Investment Property
This is the checklist I like to use before deciding whether or not to invest in a property.
- What’s the price now vs. the price I think I can sell it for later? Refer to the formula above to help flesh this out.
- What does the current market activity look like? You don’t want to find yourself in a dry market that has no buyers. While you might be able to get a good deal in a slow market, remember that you’ve got to get that property sold quickly so that you don’t get stuck with any carrying costs. Stay patient; there’s always another house to buy.
- Can I find comparables? Comparables, or comps, are the key to knowing how much you can get for your property. My rule of thumb is to find a total of six comps: three that have recently been sold and three that are currently for sale. Stay within one mile of the property and don’t look for comps older than one year. If you can’t find any, that tells you the market isn’t hot for a property like this.
- Is my target price within the FHA limits for my area? Many buyers will utilize government-backed mortgages like FHA loans as they usually require less money down than traditional mortgages. If the sale price exceeds the maximum amount the FHA will give a buyer, that removes a big chunk of the marketplace. Luckily, the FHA’s website has a calculator that shows you what the mortgage limits are for your area, which takes out the guesswork.
- What is my backup plan? Many investors will skip this step to their detriment. If everything falls apart and I can’t get the home sold for the price I want, what’s my Plan B? Plan B can be a few options: list it as a rental, refinance, have it listed as a seller finance, etc. Whatever the strategy is, the goal is to find a way to at least break even.
Are There Other Ways to Invest in Real Estate?
If fix & flip feels a little too daunting, whether you’re just not handy or don’t have the capital to hire pros, there are other ways you can still become a real estate investor.
Wholesaling – Wholesaling is great for investors who don’t have a lot of capital or who may run into issues getting financing due to credit or employment histories. Wholesaling involves finding a home and getting it under contract. Once the house is under contract, you, as the wholesaler, then sell it to another person for a markup. They then continue the transaction to close on the home, get the mortgage, etc. It’s like being a finder for real estate and collecting a fee for your effort.
Rental Properties – Rental properties are excellent ways to create a steady stream of income for your business. You can start small with a single-family home or invest in a large apartment complex with others; the options are near limitless. If you’re interested in learning more about how a large commercial apartment complex would run, check out our article that goes into whether it’s better to start with commercial properties or residential.
Fix & flip properties are excellent investments that can be not only profitable but do a lot of good for a community. Go into the process with your eyes wide open by taking into account the things mentioned above. That way, you’ll be able to grow your business in a steady way that sets you on the path to continued success.