Eric, let's talk about fix & flips as an investment strategy. Tell me all about it.
The fun stuff! This is the sexy stuff in real estate, right? This is the stuff we see on TV where we identify a house, go in, and buy it, all within 30 minutes, right? There's a lot of discussions and desire to do fix & flips. It's also a great way to build capital. There are some things that you do need to do to understand the process. And here's the thing, I think we all know individuals who have applied the sound principles when it comes to fix & flips. Would you agree? We see what it's done for them in their lives, whether it's that they help them to build wealth and they go and buy rental properties—you know, whatever their process is.
But we may have also seen someone who went through a fix and flip, and they were like—they have one of their stories where it didn't go very well. In fact, it went horrible, and I lost money on it! OK so I'm going to talk about some things that will help you to maximize your return, and really take control of your investment on a fix & flip. You can call it a buy, fix and resell. You call it. Whatever works for you.
Can you talk a little about how value relates to the fix & flip process?
Sure! In a fix and flip, you have to be in a place where you understand the value. Because we are looking to buy a property at a price that we're actually able to go ahead and make a profit, we've got to have some holding costs, but we also have to pay to fix it up. That's a key part of it as well because we have to include it in our calculations.
Now when we're running the numbers, there are many different calculations that we can use in determining whether or not something is profitable for you. One of those simple calculations that I can share with you is the 70% rule.
And what about repair value?
Very simply put, you take what a property's after repair value is. Once a property is fixed up, that's what it would sell for based on sold comparables. You start there, and what you do is you take 70% of that number, so you take that number and multiply it by 70% and then you subtract out your repair cost. Or your fix-up cost. Now that thirty percent is your profit, is your holding cost, now you can get a lot more in-depth—you can go use the software, go use all the tools out there. But that's just a quick flash on how you can analyze a property that way. And guess what? You might find a property that needs a lot of work. And you may only be able to offer them half of what they're asking, or you may be able to provide them with 60% of what they're asking. But it's based on how you can best make a profit off of this.
Now, when you're doing a fix and flip, you have to have your financing together. You could have the owner finance the deal if you want to. Which is awesome, right. You might as well ask for it. You could get bank financing and do a hard money loan. You could do all kinds of things; you could do private lenders, the sky's the limit. Be creative when it comes to how you want to get your money. Remember, the lower cost the money, the more profitability you're going to make on the deal.
Now if you get a high-cost loan that's a high interest rate and high fees, that's going to cut into your profits. So be aware of that. Find the lowest-cost loans that will allow you to have the best returns on this fix and flip.
So, we've identified the property, we've run our numbers, we're happy with what's going on–we've made the offer now. Now the offer is accepted, we do your due diligence, we have our contractors check it out, and we're OK with it. Even if we're not OK with it, we can still go back to the owner and say well, guess what it needs 20,000 more work than we thought—we need to cut the price. Right, so again, everything is negotiable. Pay attention to your deadlines when it comes to inspection and your finance and all those things, but on the fix and flip process, you will want to have a great team in place.
Now I hear this too often: you know what I want to be the contractor on all my fix and flips. And it's like, well how many deals do you want to do a year, like one? Two? If you're doing all the work, it will take more time than having a team go in and do it in 60 days. If you want to hold it for 6 months as you and you want to do the work as you have the time, it's going to cut into your real estate investing business, it's going to cut into your personal life, and really it's not recommended. And so, as you move forward, make sure you have that great team in place.
What can you tell us about the reality TV shows that show the process of fix & flip?
Good question. Even when you watch the flip shows on TV, it's all about their team. They come in, and they say how much it's going to cost, how many days it's going to take, and then you work it through that process. Now in building your contractor team, vet amount. Whether you're going through like an Angies list or even Amazon has a services list that you can go to and get recommendations to see how good they are. You can also go to your local real estate investors club and find your contractors. Heck, even go hang out at your local home depot and find them on Saturday mornings; those are the ones that are working the hardest anyway, right?
So with that process, get your contractors in place, make sure you have low-cost financing, and have your exit strategy in place. Stay on top of what the values are. You had the original value of what you thought it would sell for. Let's say two months later, maybe the property prices have gone up. I mean, is inventory low in your area right now, and that's a pretty common problem. Or is there a lot of inventory?
You could always compete when it comes to fix and flips. No matter the market. Even if the market is going down, you just have to buy it right. And buy it at a price to where you can make sure you get the best return possible. Or, do things that other properties are not doing. Do those higher-end finishes to make it stand out, do the things that…in those types of markets, just adjust your focus so that you can get the best returns as possible. And then have a plan for your funds.
I think far too often, investors will get in and they'll have like 5-6 checks and they're like “oh yeah let's do this”. Well, realize that's also short term capital gains, so what you want to do is make sure you have a plan on what you're doing with those proceeds, how you're going to go ahead and responsibly take care of your taxes as well, and then what you're going to do to reinvest. So fix, and flips are an excellent way to build capital so that you can grow your real estate investment portfolio, and it is a lot of fun, it is exciting and frustrating.
Always remember there is going to be a problem in every real estate deal you do. Now, the important thing is to prepare yourself for that. The more mentally prepared you are, the easier it's going to be on you. And remember this, those of us that are the most successful real estate investors are those that anticipate problems and focus on solutions.
Prepare your mind, prepare yourself to be in a place to know, oh here's the problem that comes up, and then realize so on the next deal when it comes around, you'll know how to address it even more effectively, and you'll be able to go ahead and work through your systems when it comes to fixing and flipping.
Above all else, run the numbers, understand your market, realize you can do this in multiple markets wherever you choose to invest, and happy hunting when it comes to fixing and flipping!