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.

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About dirktherealtor

Realtor at Prudential Fox & Roach- Jenkintown. I am a tech savy eRealtor with expertise in Philadelphia and surrounding areas, specializing in 1st time home buyers/ sellers and investors. Father of 2 active children, living in the Cheltenham area of Pa. I am active in the community and online.

3 responses »

  1. […] Read the original here: So you want to make money in Real Estate? Episode 1 “Flipping a … […]

  2. Andre Jefferson says:

    I see alot of advertisements and informercials that talk about no money out pocket. Is this because they obtain a conventional mortgage with some of equity included in the loan for repairs and etc? Is this a good idea for a first time flipper or not. Also where do you recmend the first time flippers debt to income ratio be before securing some type financing

  3. Alot of those late night advertising shows promoting “no money” or you not needing any of your own miney to start are discussing certain “creative financing” ways that are not gor the faint of heart. Options like lease-purchase, assigned AOS’ s, assuming a mortgage and the like. Other options are 203k’s and hard money loans coupled with sellers assist and perhaps other credits found by a savy RE agent. Sadly in these times there is no free lunch anymore. Mortgage companies now in some cases make more more for their money investing in other things besides mortgages. Sad I know. I can discuss more about some of those options in another post.

    First time flippers. There are several options for the furst timer most of which become easier the better their credit. Many times debt to income in an investment property does to play a big factor. Many banks are very forgiving in that area. It depends on the bank or mortgage broker. The issue is investment properties on most occasion are classified as commercial loans requiring a higher mortgage down payment (20%). My recomendation is to by a cheap home. Look into tax sales. Buy something that savings and some help might pay for (I.e. 4-25k) and once you own it. You will have more options for rehab financing. We can talk more on the later. Great question Andre. I hope the family is well.

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