Rehabbing a Fix & Flip: A Beginners Overview
The art of rehabbing a fix & flip home can be a very generous income opportunity, as long as you are taking the right precautions. Each home investment is going to come packed with its own separate needs/considerations before you can make a move on it. If you don’t take the right factors into consideration it can complicate the entire process, and severely impact the profit you were hoping to achieve.
Like any great opportunity, take the time to plan, and make decisions in accordance with what is compatible with your schedule. Consider whether you have the time to make this a full-time commitment, or something you will be working on, on the side.
The common time frame associated with rehabbing a fix & flip is 90 days, but it really comes down to what needs to be done, and the time available to you. It can be done faster, and just as easily, it can take significantly longer depending on the kind of work you want to put into the property.
The beginning of a fix & flip venture begins here:
Start Rehabbing Your Fix & Flip
The start of a fix & flip comes down to gauging your personal skill level, as well as the capital you have available to invest. This will give you the initial starting point to consider what areas you are going to need to seek additional aid for.
This often starts with putting together a business plan. You need to consider what kind of investment you intend to make. Initially, you need to consider the location you had in mind to acquire a property, as well as the type of real estate that you want to work with.
From there, you have to gauge the amount of work that is needed to fix a home up so that it’s in a proper condition to go up for sale. You have to take into consideration the development of a budget, how you intend to finance your flip, the renovations you intend to put into effect, and the eventual sale of the property itself.
If you have personal experience in the business of real estate that will work heavily to your benefit. However, if not, then networking and having access to individuals that work in various trades such as electricians, plumbers, and home renovations have extreme value and are valuable assets.
When you take all this into consideration, and you have a general business plan in mind it’s time to start creating a budget.
Create a Rehabbing Budget
When you are developing a rehabbing budget you should take specific note to particular factors. At the beginning, before you even start looking into the price of properties you may want to acquire at a County Foreclosure Auction or via a property wholesaler, you need to evaluate what your rehab budget is, and determine worst-case scenarios.
Determine exactly what you are working with financially, how much you can invest in an auction property, and with that figure you can plan on how much house you can afford to bid on.
You should spread your budget into different categories that makes it easy to track and adjust if need be. Think about your budget plan from a perspective of the purchase of the house itself, including county auction costs (if you are the winning bidder), rehabilitation and upgrade costs, the expenses involved with selling the home when it’s ready to be flipped, and the amount of money you want available that acts as a cushion.
Of course, buying a foreclosure property at the County auction is somewhat open ended and each case is different. Each property will be a guesstimate with regards to the rehab cost, so create a budget plan around each property you want to bid on based on the information you have gained from doing a drive-by. Consider what your maximum bid price can or should be the amount you will need to fix it up, and what you hope to make when it’s all said and done.
When you consider the renovation expenses, this is where you revisit who you may know that works in trades that could be beneficial to your flip. These could be people that can help you save money on work that you put into the home, but another angle to consider, they could also be a fellow investor in your project should you win the property at auction, that could enhance potential profit.
Don’t overlook the fact that the people providing the service is only part of the equation, you also need to consider the cost for materials for the work to be done. A lot of contractors will charge a flat rate for a job, however, it’s not uncommon to find some that will look for an hourly rate.
When calculating the amount you can bid on the home you also need to consider the holding costs while you are working on it; insurances, utilities, interest, HOA or Association fees and property taxes.
It’s also recommended to set aside 15%-20% of your rehab budget for unexpected situations or expenses that may arise. This will prevent you from encountering a situation that can jeopardize everything you are trying to do, due to a lack of resources in a given moment.
You may also want to consider insurance policies that give you protection while rehabbing, these are usually inexpensive for untenanted homes, but necessary. Alternatively depending on how you are situated, why not, if possible live in your investment property during the rehab, this will save you the cost of your current accommodation (you could rent it out) and probably increase your net monthly disposable income, which you can use on your new investment property.
Financing Your Flip Renovation
There is no debating that there is a lot of money that can be potentially made throughout the process of rehabbing a house flip, especially if you are buying a property through a County foreclosure auction or from a wholesaler, but without proper financing the journey can’t even begin. Without the cash to acquire the property, and make necessary rehabilitations, the process of flipping a home can’t even get started.
The good news is that there are a number of different options available to finance your house flipping revamp venture.
When you are considering what you need to finance there are often a few key areas that will need your attention, they are:
- If you are buying at a County foreclosure auction you will need to have a 5% deposit based on your intend bid lodged with the county court where the property is located.
- If you are the successful bidder you will need to pay the balance of the winning bid within 24 hours to the county court.
- If you are buying from a wholesaler you will need around $1,000 – $5,000 earnest money (varies greatly) if you like the property and want to buy it and pay the balance at closing, usually within a few days to 3 weeks of agreeing a price and closing date, you can make this a little longer in some circumstances.
- In some instances, you may need to inspect the wholesaler’s property (around $300).
- Costs of owning the home while it’s under renovation, also known as holding costs, which fall under insurance, HOA fees, and other costs (outlined above).
- The investment into a realtor, as well as closing costs to help acquire a buyer and sell a home once it has been renovated.
- The various labor and material expenses involved with the renovation itself.
Properties at the county auction and to some extent wholesaler deals, means you are going to be looking at this through a lens of cash purchases, and cash buying. Conventional financing through the means of a bank isn’t what you are going to be putting into action here.
With that taken into consideration, the following are the most reliable areas to acquire funding for rehabbing a house fix & flip:
Friends and Family
A personal connection might be the best route to take depending on your personal situation and relationships. If you need additional financing and can find a friend or family member willing to get involved with your project, it can open up a lot of opportunity, will still generate plenty of profit. It also opens up the opportunity for discovering a long-term partner for future investments.
A finance partner can be a great option for house flipping because you can divide the responsibilities involved with making the project a success. The expenses can be divided, and overall knowledge can be used in a way to keep costs/expenses down. Before you go into a real estate join venture agreement, make sure you research them!
If a finance partner has connections to people who work in trades it can make renovations more manageable, and more cost-friendly.
In this arrangement you discuss what percentage each of you is responsible for, and you share in losses and gains.
Personal loans work to an extent, but are often only available in smaller amounts, which won’t cover the full process of a house flip. With this in mind, this option can be used, but it would have to be used in combination with other financing angles.
If you can secure a short term loan to buy a foreclosure or wholesale property, once you have title and with a simple smarten up of the property you could refinance through a bank (conventional lending), By this method as you have bought the house at an incredible price a bank will give you a loan based on a 60% to 70% loan to value (of the home) basis typically known by the acronym of LTV. The amount you receive as a loan from the bank will pay off your existing debt and should leave some money for some or all of the rehabbing. One thing is for sure it will be a lot easier to get a loan for the rehab as it is a small amount and if you are going to a private lender there are a lot of inventive participatory deals you can do with the lender to make it worthwhile for the both of you. However, in some circumstances the bank will also give you a loan for the rehab as this in reality is increasing the value of the equity they hold in your investment property.
One word of advice is that if you are using a bank for the refinance, approach them as this is going to be your primary residence otherwise they will charge you a higher interest rate or at worst not offer you a loan at all, this is just how banks work.
Once you are aware of how to finance your flip, then it’s time to start the renovation.
Rehabbing Your Flip
When you are planning the renovations on your rehabbing project it’s important to take one key concept into consideration: don’t over-renovate. This may seem like common sense, but it’s something that can be very detrimental toward expenses, and overall profit.
When you are renovating keep the following in mind:
There are small changes that make a huge difference when it comes to first impressions of a possible buyer. Think about things that catch the eye when someone is first taking in the house. Address a few changes such as:
- Having the front door dressed properly, freshly painted, and a nice contrasting color
- Outdoor lighting
- Curb appeal in the form of plants and flowers in a nice design on the front lawn.
- Replacing older exterior displays such as window casings and door knobs
- Power washing the siding of the home so it’s clean
- Fresh paint trim work
Rehabbing Bathrooms and Kitchens
These two rooms are going to be the key toward your flip being a success or a failure. These are the two rooms that generate interest and have a significant impact on what a home will sell for.
This means taking into several things into account, such as:
- Whether or not the cabinets need to be replaced, or if they are modern enough that a fresh paint job will do the trick
- Family-friendly kitchen consideration, which means slip-proof floors and counters that are rounded off
- Tiles in the bathroom needing to be replaced
- Fixture in the bathroom such as toilets and sinks being modernized
It’s about the generation of appeal, and the consideration for a family environment. By taking both of these concepts into account you will maximize the incentive to invest in your property.
With respect to cost the only thing worth mentioning is to not go overboard with the renovations, as mentioned above. Don’t put more into rehabbing a property than it is worth, and most importantly, pay strict attention to the budget that you set prior to putting all of this work in motion.
Do you very best to keep your own personal style out of any home rehabbing project. While you may feel that you have a great style, it doesn’t mean that everyone will want the home that you consider to be an oasis. The more generalized you make a home and leave room for a buyer to modify it to their own liking, the more possible leads you will have for those looking to acquire your investment.
When you are dealing with renovation, it’s also the time to address anything that may have come up when a full inspection was done on the house (Only if you bought it from a wholesaler that gave you an inspection period, most don’t). Once you address all of these factors you will be ready to approach the final stage of this process, selling your flip.
Selling Your Flip
When you have completed rehabbing your home and feel it’s in a position to be competitive on the market, then it’s time to start generating leads and potential buyers. There are a variety of options that you can take to generate leads:
Acquire an Agent
Have an agent that is able and willing to do the legwork for you can spare you a lot of time and headache. They have a working knowledge of what is currently popular on the market, and have a network available that can bring buyers to you.
You can also arrange to have an open house, which an agent can help stage to make the property look great and create the atmosphere to land a buyer.
You can also take it upon yourself to market the home on your own terms. You can set up an open house by yourself, and you can also approach advertising the sale of your home from a variety of different tools such as:
- Newspaper ads
- Email marketing
- Social Media marketing
- Yard signs
- PPC and other online marketing
- In-person networking at investor groups
Other Real Estate Investors
Knowing other real estate investors can pave a path toward opportunity in itself. If you have a set number in mind that you would like to get for a property that you renovated, and another investor will take it from you with a hope to sell it for more, then it can be a win-win situation.
In all of these scenarios it comes down to finding qualified buyers that will meet a number that you have in mind. Be willing to negotiate, but also be fully aware of the number that is your absolute bottom line, and don’t move from it.
Successfully rehabbing a house flip will leave a healthy profit, the incentive to repeat the business, and the development of a network of connections that make the process easier each time that you do it.
Treating other investors properly, paying contractors fairly, and learning more as you go will create the perfect stepping stone toward making this a very lucrative opportunity.