The fix-and-flip business is not nearly as attractive as it was 20 years ago. Yet people are still doing it and making money. The key to success is understanding all the industry’s finer details. The more one knows about the little things, the easier it is to make money.
With that in mind, there are five common sense rules for fix-and-flip investors below. Each one is important for a variety of reasons. If an investor is willing to follow these five rules to the letter, making money by fixing and flipping homes is possible.
1. Establish a Defined Margin
Successful businesses operate on margins. Fix-and-flip investing is no different. What is a margin? It is the percentage of the total sale that constitutes profit. If you spend $75 to generate a $100 sale, your profit is $25 – or 25%.
Margins are critical in real estate investing because they determine whether it is worth your while to do business. Therefore, fix-and-flip investors should establish a defined margin and stick to it. A defined margin gives the investor a baseline to work with before buying a new property.
2. Line Up Multiple Lenders
Fix-and-flip investors generally need financing to purchase new properties and renovate them. Therefore, the second rule is to line up multiple lenders. The main reason for this is that not all lenders do things the same way.
For example, some hard money lenders will not even touch fix-and-flip properties. Actium Partners out of Salt Lake City, Utah is one of them. But even among those that do, Actium says they all have their own requirements. Investors need access to multiple lenders so that most deals can be accommodated.
3. List Price Should Be Commensurate with Renovations
A lot of new fix-and-flip investors make the mistake of going cheap on the renovations and then listing the house for a price that is not commensurate. Here is the hard truth: buyers know cheap renovations when they see them. Investors do not instill a lot of confidence in buyers by skimping on the renovation and then asking for top dollar.
List price should always be commensurate with renovations. If the investor does not want to spend a lot on renovation, they cannot expect to get top dollar in return.
4. Never List Before Completion
Fix-and-flip investing is a business. It is a risky business at that. Therefore, properties should only be listed after renovations are complete. This helps encourage the fastest possible sale. Listing before renovations are complete slows things down and chases buyers away. That doesn’t make a lot of sense, does it?
As a side note, waiting until renovations are complete results in offering buyers a turn-key experience. Not having to do any work is a big selling point.
5. Maintain a Strong Cash Position
It is in the fix-and-flip investor’s best interests to maintain a strong cash position. Every purchase, even if financed by hard money, will require the investor to put some money into the game. Without sufficient cash on hand, an investor’s ability to move on lucrative deals is limited.
Building a strong cash position takes time. In light of that, it is unwise for new investors to stretch themselves thin. It’s better to start out slow, working with one property at a time. Flipping successive properties over the course of a year or so goes a long way toward building cash reserves.
There is money to be made in fix-and-flip investing. Make no mistake, though; it is not easy money. Success requires a lot of hard work and a willingness to take some pretty big risks.