Let me start out by saying that I do think the best way to build wealth is through buying and holding real estate. But, there is a great opportunity in fixing and flipping houses if you do it at the right time and the right way. In this blog post, I will show you how to determine if a property will make a good fix and flip. In addition, we will go over 7 questions to ask yourself before you buy a fix and flip as an investment property!
As a real estate investor, you should aim for at least two or three income streams from real estate. The primary way is to buy and hold properties, take the excess cash flow from rents, put the profits into your pocket, and buy more houses. Active investors are always on the lookout for new properties in an area. However, sometimes you might come across a house that will better serve you as a fix and flip property. Fixing and flipping houses is a great option if you need cash somewhat immediately OR you know that a property would sell quickly and profitably in that market. Ideally, you want to use the cash from fixing and flipping houses to purchase more buy and hold properties.
With that, here are the first 7 of the 14 questions I ask myself when fixing and flipping houses!
1. Do you know where you are in the real estate cycle?
You want to start flipping when the demand starts to increase. Then you can sell when the demand is at its peak.
2. Do you know the area?
I once bought a property at Harbor Cove Beach when I wasn’t familiar with the area. So, I called real estate agents and asked them what problems they were most prone to see in local properties. Two things surfaced: a lot of houses had EIFS stucco, which is a form of stucco formed from styrofoam (something you want to avoid in more humid areas!) The second common issue had to do with the way the trees were planted. The roots severely affected the plumbing in some areas. Asking around is an easy way to make educated purchases and save yourself a lot of time, energy, and money!
3. Would the home conform to FHA lending guidelines after repairs?
The Federal Housing Administration has specific guidelines for properties that people must abide by when they receive loans through them. Interested buyers may be ineligible for your property if you don’t do your homework and ensure the house abides by FHA guidelines!
4. Will you make money when you buy?
Don’t buy if the margins are too tight. The return formula I like to use is 10-20%. Essentially, for every $100,000 invested, you want to make at least $20,000 in profits after all expenses.
[Related: Fix and Flips: 5 Keys to Get Started (Podcast)]
5. Is it a normal neighborhood?
You want to avoid businesses and apartments for fix and flips. If you can, you want to be in the bread and butter, Mr. Rogers type neighborhoods. In other words, it needs to be a nice, solid neighborhood with good people living in it.
6. Do you feel safe at night?
Visit the house at night and pay attention to how you feel. Sit down and pay attention to what the light looks like and what sounds you hear. Do the same thing during the day. You want to do your best to put your buyers in a comfortable situation, and you want to buy properties that you can get rid of quickly!
7. Can the renovations be completed in 60 days?
The key to fixing and flipping houses is to get in and out quickly. (The best are done in less than 30 days, but cap your timeframe at 60!) Time is money! If you’re borrowing money to buy it, then you acquire more interest the longer you hold a property.
Thank you Billy and Becky for sharing your practical wisdom. We always look forward to the articles and videos..