What is Fixing & Flipping Real Estate?
Fixing and flipping real estate is pretty straight forward. You're buying real estate properties that need some work, doing the necessary repairs, and selling the properties for a higher value. Flips are usually done in a short time period, typically a couple of months to a year.
From face value, flipping real estate sounds like an easy thing, but if you aren't knowledgeable about the entire process it can turn into a potential financial nightmare. Finding the right property in the right area, knowing the market conditions, making profitable repairs, avoiding costly interest rates, and closing costs are all key factors in determining how profitable or costly your flip will be.
Flipping real estate applies to residential, commercial, and multi-unit properties. Most people starting out focusing on single-unit residential properties because of affordability. As you increase your financial capabilities, opportunities for larger real estate plays can be much more lucrative.
Flipping vs. Investing
When fixing and flipping real estate, you're not waiting for the property to go up in value because of the market. If you're investing in properties, your objective is to buy a property and hold long enough for the market to see appreciation (property value going up). You make money mainly because the value of your property increases because of positive economic factors, neighborhood improvements, or property improvements. If the market turns south and begins to depreciate, the longer you hold onto the property the more you'll lose if you sell during a downturn in the real estate market.
Making money fixing and flipping real estate is not dependent entirely on market conditions. You can still make money in a declining real estate market. The key to making a profit on real estate fix and flips is increasing property value through renovations, marketing, staging, or simply finding an undervalued property and selling it for more. However, the longer it takes for you to increase property value and sell, the more you potentially lose in a downturn market.
How Does it Work?
How Do You Make Money?
In fixing and flipping real estate, you make money by buying property, increasing property value, and reselling at a higher price. Deals can go south quickly if you don't factor in all the associated costs and what you can realistically sell the property for after your renovations and other value increasing strategies. Here is a general take on the costs associated with buying, renovating, and selling a property.
Financial Breakdown of a Fix and Flip:
Purchase Price - The first cost associated with purchasing a property is obviously the purchase price. Your entry point into your fix and flip will determine a large part of how much you'll be able to make. It's important to know what properties are selling for within your property area. It allows you to get a general idea of how much you can sell it for after you're done making renovations.
Buyer's Closing Cost - Buyer's closing costs typically range from 1-3% of the purchase price. These costs include a credit report, title search, lender's title insurance, home inspection, transfer taxes, appraisal, escrow, lender fees if you're financing the purchase, etc.
Renovations - Renovation costs are typically where you'll make or break your deal. It's easy to overspend on your budget doing unnecessary renovations or getting hit with unexpected structural issues like piping, roofing, mold, etc. Renovations can include home repairs, maintenance, home improvements, landscaping, and staging.
Holding Cost - Holding costs are the costs of keeping your property between purchasing and selling. They can include HOA, water/sewage, gas, electricity, property taxes, and mortgage payments (mostly interest) if you used financing. The longer it takes to renovate your property, the more holding costs you'll incur.
Seller's Closing Cost - Seller closing costs are typically less than buyer's closing costs but sellers are usually the ones that pay for both buyer's and seller's real estate agent fees, which range from 5-6%. Sellers can expect to pay the buyer's title insurance policy fees, attorney fees, transfer taxes, and recording fees.
These are the typical costs associated with buying, renovating, and selling a property. Fees will vary by country, state, and even city but generally these are the cost expectations going into a property flip.
What Are The Pros & Cons?
- Potential to make large lump sum profits.
- Able to use leverage (financing) to make money.
- Able to make money in an up or down market.
- Potential to lose a lot of time and money on a bad real estate purchase.
- Unpredictable cash flow.
- Ongoing holding costs if you aren't able to sell quickly.
- Profit is taxed as ordinary income if bought and sold under a year.
- Stressful with a relatively steep learning curve.
Estimated Startup Cost
Startup costs for flipping real estate is high. The best scenario is buying homes and renovating with cash. Cash allows you to avoid interest costs and allows you to weather the selling process until you find the best buyer. If you can't afford a flip yourself, the second-best alternative is spreading out risk and raising funds by getting a group of people together to fund the project.
If outright cash isn't an option, below are some alternative ways to acquire the capital necessary to start fixing and flipping real estate properties.
Pay for the property outright with a cash payment through personal funds or private funds. The most cost efficient option. No interest payments.
Hard Money Loan
Short term loan (1-3 years) for home and renovation costs with 7% - 12% interest rates.
Short term loans (2 weeks - 1 year) to purchase another property before selling another property. 6.2% - 9% interest rates.
Refinance existing property, owner occupied or investment property with at least 40% equity. 4% - 6% interest rates.
Take out a loan against your owner occupied property equity with a home equity line of credit (HELOC). 4.5% - 5.5% interest rates.
Similar to a HELOC but used to take equity from an investment property. 5.2% - 8% interest rates.
Key Activities Fixing and Flipping Real Estate
To fix and flip real estate, a large portion of your time will be looking for suitable properties. This can include looking on a Multiple Listing Service (MLS), driving around looking for houses in a neighborhood, working with real estate agents, Craigslist, and other creative sources. Once you locate a property, you'll work on the logistics of closing the deal. Most of your time will be working on renovations to your property. That includes determining what renovations are needed, how you want it to look, finding contractors, oversight on renovations, and other miscellaneous things. Once renovations are complete, you'll spend the last leg of your time on selling the property.
Start Fixing and Flipping Real Estate
Below are our recommended programs from trusted providers.
By Cody Sperber
Perfect for any experience level
Even though the course is called “Your First Flip” the training isn’t just for beginners. The curriculum is perfect for more experienced investors and covers advanced lead generation strategies, deal analysis, optimizing your systems, and how to make the most out of your time. Each lesson builds a solid foundation for success based on the decades of experience Cody, Ken, and Anita have in real estate.
We give you everything you need
- How to find profitable properties
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- Acquiring the properties
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Wholesaling and rehabbing
Savvy real estate investors know how to make the right profit on every property. Some properties are perfect for a quick flip. Some properties are more profitable with a little work. Becoming a Clever Investor takes the guesswork out of rehabbing and flipping houses. Backed by a 30-day money-back guarantee.
Cost - $197