Hey everyone, Daniel here. Let’s jump into part two of our basic strategies for real estate investing. Today, we’re digging into the nitty-gritty of fixing and flipping houses. You’ve likely seen this glamorized on TV, where someone swoops in, buys a distressed property, fixes it up, and sells it for a hefty profit. While the concept is straightforward, the reality is a bit more complex.
What Is Fixing and Flipping?
At its core, fixing and flipping involves targeting distressed properties, purchasing them, making necessary repairs, and then selling them for a profit. Sounds easy, right? However, several factors come into play that TV shows don’t often highlight.
Considerations Before You Get Started
Understanding your Costs
Before diving in, you need to know all the costs involved:
- Acquisition Costs: This can include anything from loan fees to closing costs.
- Carrying Costs: Taxes, insurance, and utilities that you’ll pay while holding the property.
- Repair Costs: Estimation of all the repairs needed to get the property in sellable condition.
- Sales Costs: Fees for real estate agents, closing costs, and any concessions to buyers.
A common mistake is not accounting for these expenses, leading to lower-than-expected profits.
Example
Consider a property available for $75,000, requiring $25,000 in repairs, with a resale value of $135,000. On paper, that looks like a $35,000 profit. But when you add in $16,000 for acquisition, holding, and sales costs, your profit shrinks to $19,000.
Importance of a Good Spread
Industry professionals suggest that you should not invest more than 70% of the property’s after-repair value (ARV) minus repair costs. This helps ensure a buffer for the unexpected. For instance, if a property’s ARV is $100,000, you should aim to be all-in at $70,000 minus repair costs to stay profitable.
Days on Market (DOM)
How long will it take to sell? This is crucial. Plan by calculating holding costs for your anticipated time on the market. Properties sitting longer cost more in taxes, insurance, and loan interest.
Risks Involved
Market Cycles
Market conditions can change. During times of economic uncertainty, properties might not sell as quickly, or at the price you expect. Always prepare for market fluctuations and have backup plans, like converting the property to a rental if needed.
Financial Exposure
You’ll have substantial money tied up. We’re talking about significant sums, varying from $100,000 up to a million. Leverage can mitigate some of this, but the risks are real.
Mitigating Risks
You can mitigate risks by:
- Accurate Cost Estimates: Make sure your numbers are spot on.
- Exit Strategies: Be ready to turn the property into a rental or sell it under different terms if the market shifts.
Necessary Resources
Capital Reserves
You’ll need adequate capital or a reliable lending partner. Asset-based lenders primarily focus on the property’s value, but good credit always helps.
Preparation and Research
Understanding your local market is critical. Know what buyers are looking for and how long properties usually stay on the market.
Summary
Purchasing a property “subject to” the existing financing is a potent strategy for real estate investors seeking creative ways to acquire properties without assuming the original mortgage. While this method offers significant advantages, understanding and managing the due on sale clause is essential to avoid potential pitfalls.
Properly handling insurance, maintaining open communication with all parties involved, and being prepared with backup plans if the due on sale clause is called are critical components of success in these transactions.
By staying informed and working with experienced professionals, investors can effectively leverage “subject to” deals to build their real estate portfolios and navigate the complexities of the process.
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