So, you have the bug. You saw it on TV, attended a couple workshops, and did your homework; the only thing left is to find your fix and flip deal and get started! At Asset Based Lending, we see at least a dozen first-time real estate investors each month embark on their real estate journey – and do so profitably. However, before you jump in head-first, ask yourself these three questions.
Do the numbers make sense?
There is no such thing as love when it comes to your investment property. Successful investors remain emotionally detached from the project and approach every facet of the deal with an analytical mindset; either the numbers work, or they don’t. The quickest way to doom a fix and flip is to fall in love and make an emotional decision, usually in the form of paying too much for the property.
As a general rule of thumb, investors want to avoid spending more than 65%-70% of the After Repair Value on the deal. This includes both purchase and renovation costs. Any more than this, and there is a high likelihood that unforeseen expenses, holding costs, or a plethora of other things could eat away at your bottom line and reduce your profit margin. If you’re not careful, you could end up investing a significant amount of money for a marginal return that just isn’t worth the risk.
How will I finance it?
When it comes to money, you have options. Most real estate investors fund their deals one of three ways: with their own (or their partners’) capital, with a conventional mortgage, or with a hard money fix and flip loan. Each method has advantages and disadvantages, so do your homework! For example, a conventional 203K loan typically only requires the investor to bring less than 5% of the purchase price to the table. On the other hand, a hard money loan comes with a higher interest rate, but can close in a tenth of the time that it takes for a conventional mortgage – a feature that is absolutely essential for most investors.
Regardless of the route you take, be sure to line up and secure your funding prior to committing to the deal. Nobody likes having to scramble for cash last-minute and potentially having to decide between a last-resort financing option or losing the deal.
Is the team ready?
Believe it or not, real estate investing is a team sport. The most successful flippers have built and refined a stable of trusted service providers that help them achieve their real estate goals. Your real estate investing team should include a good local realtor, general contractor, appraiser, accountant, attorney, and lender. Don’t try to penny-pinch too much when it comes to your service providers; professionalism and quality work will save you time, money, and headaches in the long run!
As a new investor, one of the easiest ways to build your investing team is to attend local Real Estate Investor Associations (REIAs) or meetups. These networking events are a great way to continue your education and connect with like-minded investors and service providers.
This article has been contributed by our friends at Asset Based Lending.