You just finished watching a few episodes of house flipping on HGTV. Who doesn’t want to be just like Chip and Joanna Gaines? Are you ready to do your own flip? Here are some things you need to know before you invest on a property to flip.
1) Decide if you are going to pay CASH or take out a loan. If you are going to take out a loan, speak to your loan representative to get pre qualified. Since you are not going to live in the property, this will be considered an investment, which means your interest rate will be slightly higher than if you are purchasing a primary home or homestead. You will also be required to put at least 20% down payment on an investment property. Your monthly payments to a bank is a consideration since this will eat up your profits.
2) Decide on location. Ever heard of “LOCATION, LOCATION, LOCATION”? These are words that my parents (real estate investors) have engrained in my brain. A desirable area or neighborhood is best because you know it will sell at the highest reasonable price in less time.
3) Find the Property. You want to be able to find the best deal (lower than market rate) in order to yield higher profits on your flip. First, you don’t want to flip a property that does not need any work. The best flips are the ones that’s structurally sound, decent roof, newer windows, an HVAC system that is less than 10 years old, as well as modern electrical and plumbing. Also, you want one which needs only cosmetic changes such as new cabinets, countertops, flooring and paint. Check with the city or hoa if permits or architectural approval are necessary before purchasing the property. Applying for permits/approval can cause delays. See if there are any REO’s, Foreclosures and Short sales in your desired location. Here are 2 sites to get you started in your search:
Pearljones.wolfnetwp.com/search-foreclosures
Pearljones.wolfnetwp.com/search-short-sales
4) Decide how much to pay once a property has been identified. Note this formula to determine if a property is a good flip. Take your ARV (After Repair Value), multiply it by .7 and subtract your repair cost estimate. This is the maximum amount you should be paying for a property in able to obtain a good profit margin.
Example, the market value of the property after you have completed the repairs is $300,000. Multiply this by .7 or 210,000. Subtract this by amount you estimate it will cost you to put it in top shape, example 20,000. 210,000-20,000, the formula suggests that you do not pay more than 190,000 for the property.
5) Time your flip. Once you have completed the repairs and ready to sell, you wouldn’t want your property to be sitting in the market. Time it so that you are listing it in the Spring, preferably in March when the buyers are out. This also means that you would want to purchase your flip in the winter time, when there are less buyers purchasing and you are most likely not be in a bidding bar with another buyer.
6) Get to know your contractors/vendors/real estate broker/lender. You want to do business with professionals that you trust to help you succeed. Pearl Jones is here to assist you in your first FLIP!
