Flipping. Renting and Rehabbed
Flipping is defined as “the practice of buying an asset and quickly reselling it for profit. The term is often applied to the practice of buying real estate at below market value, making improvements to it, and reselling it for a higher price (generally near market value), thus making a profit.”- Wikipedia
Some shows like “Flip this House” or “Property Ladder” show this type of real estate investment in a generally simplistic format.
This is a great way to test your chops and possible make some income however, there are some valuable things to understand about how to be successful in this arena. The most important factor is to MAKE MONEY in your transaction. I will try to break down a typical transaction from the “investor’s perspective”.
After Repair Value (what you’ll sell it for) $100,000 Repairs $10,000 ARV minus Repairs $90,000 What you might think of buying it for. Purchase Price (70% LTV) $63,000
You can then reverse those calculations to determine the profit potential.
Purchase Price $63,000 Repairs $10,000 Total Investment $73,000 Sales Price $100,000 Potential Profit $27,000
So, if you buy a property at $63,000 and put about $10,000 into repairs and upgrades into it and are able to feel it for $100,000, you would profit about $27,000. WAIT !!! Ummmm, there are a FEW assumptions in this general overview of a “deal”.
- You can sell it for $100,000
- You buy it outright for the $63,000
- You are able to both buy it AND sell it on your own
- Your calculations are pretty, pretty accurate on all accounts
Anyone of these “assumption” can “break” you literally or figuratively. Imagine coming up with $63,000 that you have either to spare or that you can get to at a moments notice. There are a few ways most real estate investors solve this problem. The Options are:
- Pay $$$ of the house (usually difficult for obvious reasons).
- Take out a Conventional Loan to buy the property (you will make mortgage payments like a regular home owner until you sell).
- Borrow money not based on typical eligibility rules (mostly likely referred to as a Hard Money Loan which usually does not take credit worthiness into account but the actually validity and profit possibilities of the deal).
There are drawbacks for each:
- CASH: Not many people will have access to that amount of cash as well as additional cash for repairs
- CONVENTIONAL LOAN: It is like buying a house and you have to make every safeguard just as you would being a “owner occupied” house (insurance, utilities, taxes, mortgage payments, credit loan worthiness, etc).
- HARD MONEY: As they say “hard money is expensive”. The terms are high (at times the interest rate may be 7%-20%). They also have other less favorable terms like “mortgage points” (see previous post or Google), “balloon payments” and short time frame to pay it back.
Getting over the financing hurdle there are other pitfalls just as important and the acquisition of the property.
Just think about buying something pretty valuable cheaper than it might be worth from someone trying to get the best deal just like you.
Assume you will not need to pay a real estate agent for guiding you legally through both transactions and you have thought of ALL the other things you will have to pay for in the process of purchase- repair and purchase.
You always end up with unexpected expenses in your own house just imagine a house you recently purchased and what is waiting for you. You need electricity, gas and water to work on a house.