Fix and Flip – Renovate and Flip Strategies
Fix and Flip – Bargain Hunting For the Right Property
Investors looking for a fix and flip bargain should begin by looking into distressed homes. Bargain homes often will require some repair, but keep in mind that while you are looking to save money by buying “bargain” homes, you wouldn’t want to buy a property that’s completely run down and irreparable.
When searching for and buying bargain properties, here are some key principles to consider:
Consider the property’s overall price
Before buying a below-market price property, do some research. Find out why the price was cut. Chances are if it’s not for financial reasons or they are moving or relocating, there are some underlying issues with it.
Know the local market
You will be surprised to see how many bargains there are on the market if you simply just understand the local market. What you gather about the market where the property is located can be used to negotiate down the price or talk up the price when you are selling, whichever works in your favor.
Distressed homes, as stated earlier, are a good starting point for fix and flip investors. Expect some out-of-pocket expenses for repairs. Take into account the cost for the repairs before purchasing the property to ensure that you can still make a profit after the repairs are made and the property is sold.
Profits, however, are greater with highly distressed homes since these homes would be sold far below their market value, compared to the price they could have been sold for if they were not distressed homes.
If you’re looking to make a good profit, consider a fix and flip investment. The more time you put into researching and choosing the property, the more profit you could make.
Fix and Flip Investment Strategies
First, what is a renovate and flip strategy? It’s an investment strategy that typically involves these three strategic steps:
-Finding an undervalued property to buy.
-Renovating that property to maximise its appeal and selling price.
-Selling the property and making a worthwhile profit over your total purchase and renovation costs.
The ideal property you purchase to flip should conform with what’s in demand in the local market. This will enable you to focus on renovating the property to be up to the required standards.
Estimate all renovation costs ahead of purchase
Before committing to the purchase of any property for flipping, calculate the total cost of your renovation. You will be dealing with various expenses, including; materials, tradespeople, costs relating to planning permission, and removal costs for old materials.
You will also need to factor in the prices of getting finance for the renovation, and you won’t be able to take on a tenant while working on the property. Therefore, the property won’t be generating any income.
If the estimated cost of the renovation combined with the property purchase price exceeds what you can expect from selling it when you’re done, it’s not worth it. Move on to another property instead.
Consider negotiating with motivated sellers
If you find a vendor who wants to sell their property quickly, perhaps they have already purchased a new property and need a quick sale to come through, there may be room for you to negotiate on the sales price. If you can negotiate the price down, it will put you in a strong position to make a healthy profit when you flip the property.
Read extensively about renovations and flipping before committing
A rushed decision can often end up being a bad one down the track. Don’t rush into buying a property because it looks like a good opportunity to turn a huge profit, especially if you are new to flipping properties.
Fix and Flip Rental Properties – Guidelines
Flipping homes successfully is not as simple as it’s made out to be. A lot of people underestimate how challenging it is to flip houses, which can lead to problems and financial losses.
It’s important to understand that there is a limit to the profit you can make when renovating a house to sell. You need to consider all the costs along the way, which include:
Credit requirements are a little stricter with rental property loans compared to owner-occupied loans. Almost all loans are approved or denied by a computer system, so the scores can vary. For example, if you have less than perfect credit but a larger down payment, the computer could approve the loan.
Debt to income ratio (DTI)
You might hear that you cannot finance a property because your debt to income ratio will be off, meaning you don’t make enough money to support all your debts. The hiccup here is often the rent amount on the new property, and if you can use that to offset the new mortgage payment.
Some lenders will want to see the rental property on your tax returns to give you credit for the income, which is always a loss in the first year you buy a new property and renovate it, therefore making it tougher to qualify.
If you get this feedback, call another lender. The guideline here is that you can use 75% of the gross rent amount as income if you have a lease and can show at least one month of rent collected and the security deposit.
Another issue with DTI is self-employed borrowers. Many people who are self-employed take as many deductions as possible. When you take a deduction, you lower your taxable income, so you save on taxes. The problem is that when you lower your income, you hurt your DTI, making it harder to qualify for loans.
It is not the fact that you are self-employed that is preventing you from getting a loan, it is the income you report. The guideline here is that you can get a loan when you work for yourself and your income supports the debt.
Income is documented with two years of tax returns unless you have been in business for at least five years and have a good credit score, in which case you will only need one year of tax returns.
Reserves for a conventional loan
As you start to go over budget or have issues with your fix and flip, it is very common to burn through your reserves to save the deal. This is understandable but could create a problem. You are required to have reserves for conventional loan qualifying, so it is very important that you have this set aside before you apply for your refinance.
Changes in your situation
Several things can create problems here. If you are in the middle of the refinance process, it is probably best that you do not take out any additional credit. You also don’t want to leave your job, which seems obvious, but I feel the need to mention it.
What is better, flipping houses or renting houses?
Flipping houses is an alternative investment strategy to buying a house and renting it out. When you take a ‘flipping houses’ approach to investment, you’re looking to maximise your capital gain as quickly as possible.
Renting out houses, on the other hand, is more of a long-term strategy. Renting a house will let you generate income from tenants. Your house will also likely increase in value over time. Australian property prices in most areas have recorded strong overall growth over the last 25 years.
What is the 70% rule in house flipping?
The 70% rule of thumb in house flipping is that the home purchase price should be a maximum of 70% of what it will be worth after you’ve completed any repairs and renovations.
Risks to be aware of when you’re property flipping
Not buying a genuinely undervalued property, spending too much money renovating it if you’re following a ‘fix and flip’ strategy, and not being able to sell the property at the price you want, when you want it.
What taxes are there when flipping houses?
The major tax implication of flipping a house in Australia is the capital gains tax (CGT). It is levied on the sale of any property (excluding residential property) that’s sold for a profit. Visit the Australia tax office for the latest relevant information.
How much tax will I pay if I flip a house?
This depends on factors such as how much profit you make and how quickly you flip the property. There is a 50% CGT discount if you hold onto the property for at least 12 months before flipping it.
What home loans are available for fix and flip properties?
Flipping loans in Australia include investment property loans and construction loans for renovations. Many banks will provide loans to flip houses to approved applicants.
The two main types of ‘fix and flip’ loans are principal and interest loans and interest-only loans. Repayments on interest-only loans are cheaper because you are only repaying interest.
Repayments on a principal and interest loan, on the other hand, require you to repay both the amount you borrow plus interest.
Assume a friend has completed a flip. Alone, that wouldn’t be a big deal, but maybe there’s a lesson or two we pull from the way he did it.
He purchased the house in winter, and after completing some cosmetic upgrades like paint and a couple of new doors, he moved in. While in residence, he put on half a roof, corrected a drainage problem, and did a few other repairs.
In early summer he put the house on the market and sold it within a couple of days for the full asking price. he made a profit of over $15,000 after including expenses and holding costs. So what’s the lesson?
The lesson is in how he priced the property before he sold it. After doing thorough research on neighborhood property values, he set the price a little below the market value of the home, and that’s why the house sold so quickly.
The bottom line is that, if you want to sell a house quickly, you should price it correctly. Too often, people overestimate how much their property is worth, and then squeeze every last dime out of it. This adds greatly to the time it takes to move the property, and increases your carrying costs, a catch-22 if ever there was one.
Obviously, the whole reason he had the luxury of selling for below market value in the first place is that he bought the property for well below market value in the beginning. This is absolutely crucial if you want to enjoy long-term real estate investing success.
When you buy for well below market value, you position yourself to have the flexibility you need to market your property quickly and cleanly. This sets you apart from other, run-of-the-mill investors who don’t know enough to buy value.
Apartment Investing and Money vs Family
“Time is the most valuable thing a man can spend.”
I get a lot of questions from apartment investors, and one that comes up often is, “How can I be successful in apartment investing while balancing time with my family?”
This is a great question and one that every successful investor has had to tackle at one point in their life. It also shows how many ambitious individuals truly do want balance in their lives between money and family. I applaud this desire and want you to know that you can achieve this balance.
What I learned…
I was running from one great possible deal to the next to the next with no plan, agenda, or anything, just running. I remember I said to myself, “There has got to be a better way”
Once I sat down made a plan and included in the plan how much time I was going to spend with my family, kids, etc. and how much I was going to devote to real estate, my whole life changed. Things happened easier, more predictably and no more long hours looking for a great deal.
Three keys here:
-Make out your business plan, regardless of whether you are just getting started investing in apartments, or have been doing so for a number of years
-Include the things that are important to you in your business plan
-Schedule the amount of time you want to focus on your apartment investing, as well as with your family and other personal activities.
Once you have taken the time to do this and focus on it, you will find that meeting your goals and having a life will be that much easier.
Due Diligence – Should You Hire Professionals?
“If you chase two rabbits, both will escape.”
There is an old saying in the real estate business that you should not hire experts such as an attorney or property inspection professional.
In just about any city you will find people in these areas of expertise that are known to be very aggressive when it comes to analyzing real estate deals. They will dig up every possible worst-case scenario imaginable and present it to the investor, essentially scaring the investor out of the deal.
Many commercial brokers and fellow investors will steer you away from using these folks in analyzing your deals, and I have some specific thoughts about this:
1. Go ahead and hire professionals as long as you understand what you are getting.
Remember that overly-aggressive attorneys, property inspectors, and other professionals are oftentimes the best in their area of expertise. They take pride in being extremely thorough and pointing out all of the potential pitfalls in a potential apartment investment. This can be a good thing as long as you keep it in the proper perspective.
2. Do not be afraid of hiring professionals in all areas of expertise.
This is not limited to attorneys and property inspectors. Accountants, plumbers, electricians, engineers, and just about every other profession have their share of overly-cautious individuals. That is OK. As long as you are hiring the best person for your money, do not worry about their reputation as a deal killer.
3. Most Importantly: Remember that you are the CEO of your apartment business, and you call the shots.
Keep in mind that you are in charge of your investment, whether it be with your own money or you are working with other investors on the deal. It is your investment and your business. It is your potential risk vs. your potential reward, and that is the game you choose to play.
I would rather hire overly-aggressive professionals than someone that may be prone to overlook potential problems. I would rather flush out as many potential issues during the due diligence process than get a nasty surprise after closing.
So go ahead, hire the experts to pick things apart, but keep in mind that you are the CEO of your apartment business.
Apartment Investing and Taking Risks
Why people do not take risks is beyond me. Let me explain what I mean.
I just read a mini-biography about the following people:
John D. Rockefeller
The thing that these people all had in common was that they each decided to take a risk. In many cases, a series of them. I could lump all of the top apartment and commercial real estate investors into this category as well.
You see, most people in our society will not take a risk. Most will settle for putting their money in a savings account or similar. The mere mention of commercial real estate investing sends them into a panic.
The big key here then is to not be like everyone else. You must take calculated risks, and the more calculated risks you take, the wealthier you will be.
The next 5, 10, 15 years are going to go by anyway, so why would you let that time go by playing it super safe and then 15 years later wonder:
What if I bought that apartment property?
What if I invested in that real estate fund?
What if I invested in that office building?
What if I invested in that shopping center?
You owe it to yourself to take a risk and to do what most others will not. I am saying be foolish? Of course not. I am saying if you are one of those people that sit on the sidelines all of the time waiting for the right deal, well, you will not find the right deal and ten years will have gone by.
I believe it was Mark Twain that said that at the end of your life you will regret the things that you did not do, versus the things that you did. If you have not done so already, make a commitment to do something within a specific time frame. Then roll up your sleeves and get started down the road to successful apartment investing, rather than giving in to regrets.
Managed Investment Trusts
A REIT Investment is a diversified and professionally managed portfolio of real estate assets that enables investors to access a property portfolio.
Block of Units Investment
Also, there are blocks of units for sale that an investor can purchase privately as an investment property to keep or flip, instead of using a managed fund.