Eight Proven Techniques: Fix and Flip

In the last post we went over a great technique to get started in real estate investing with limited funds.  If you haven't already read it, check out the good and the bad of Wholesaling.
In this addition we are going to dive into another technique that most people are somewhat familiar with.  Fix and Flip is the "sexy" technique that has spawned a plethora of TV reality shows and brand building moguls.  While fix and flips can be profitable and fun, there is a lot going on that the TV shows aren't showing you.  Let's take a look at the basics.

​Definitions:
Fix and Flip - Fix and flip investing is simply the act of purchasing a property, renovating it, and then selling at a profit.

ARV - After Repair Value (ARV) is the estimated value of the property after all of the renovations are completed.  The ARV value is based on comparable sales (comps) in the same neighborhood.  

Holding Costs - Holding costs are the expenses related to holding on to the property during the rehab and sale period.  Holding costs would include such things as; property taxes, insurance, loan payments, utilities, and lawn care.
​
How it works:  To accomplish a successful fix and flip project, you must be able to sell the property for a greater amount than your "all-in" costs, which are the purchase price, rehab expenses, and all holding costs.  Obviously, this starts with purchasing a property at a discount compared to what other comparable properties that have already been rehabbed are selling for.  You can then either perform the rehab work yourself or hire a contractor to tackle the job.  Once the rehab project is completed, you will list the property at it's ARV value which should provide you with a nice profit upon sale.  A general rule of thumb is that your purchase price should not exceed 70% of the ARV less the rehab costs.  For example, if rehabbed comparable properties in your neighborhood are selling for $120,000 and the estimate to rehab your property to the level of those properties comes in at $20,000, you shouldn't pay more than $70,000 to purchase it:
        $120,000 ARV
less  $20,000 rehab costs
        $100,000
                 x70%
          $70,000 max purchase price

The 30% that is left should cover your holding costs, selling expenses, and profit.  As you can see, margins can get pretty tight especially if holding costs are high and/or the property doesn't sell right away.  These are the little details that they usually forget to disclose on the TV shows.

How to invest:   There are many ways to work the details of a fix and flip project, but in general you need a plan around:

1. Purchasing a property at a discount.  Some people look for foreclosures or bank owned properties.  Others use wholesalers to hunt down good deals and occassionally you may find a deal on the standard real estate listings.  The real pros use extensive marketing programs to reach out and find good deals before they ever get listed.
2. Rehabbing the project.  Again, there are different ways to make the rehab happen.  Depending on the scope of work needed, you may be able to do it yourself, but in most cases you will be hiring a contractor or at least some specialists (plumbers, electricians, painters, etc.).  You definitely want to have these people lined up in advance so that you can have them give bids to determine the repair costs which will ultimately determine your offer price.  Eventually, you will get good at estimating many of the costs yourself, but I recommend getting a second opinion from a qualified contractor.
3. Selling the project.  You should have a plan for the sale of the property because that plan will have an impact on the rehab part of the project.  Are you going to list it with a realtor and try to get top dollar on the retail market?  Are you going to try and flip it to another investor that will use it as a "turnkey" rental property?  Each scenario will warrant a different level of rehab.  A great realtor can help you determine the ARV based on different rehab levels.

Pros:

• Significant profit potential
• Immediate realization of equity
• No property management duties
• Satisfaction of improving properties
• Less competition
• Ability to be creative

Cons:

• No long term ownership benefits
• No passive income
• Requires lots of work to maintain deal flow
• Risk of declining market
• Significant out of pocket costs
• Stress, time, and effort involved

Where to get more information:

Download from Bigger Pockets How to Flip Houses: The Ultimate Guide

How to Flip a House: A Step by Step Guide for Soon To Be Succesful House Flippers


As we near the end of our Eight Proven Techniques we will go over the BRRRR strategy next week.  This is one of my favorite real estate investing techniques that really blew my mind the first time someone explained it to me.

​Please reach out to me with any questions or comments using the comments button or through the contact page on my web site.  If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me.

---