By: CEO Ryan Herting
Raspy Ry here to talk to you today about the pros and cons of getting into the business of fixing and flipping real estate.
I get that doing a fix and flip looks easy on TV (or YouTube). Trust me, though, there is a lot more to it than you might think. How do I know? As an investor with many projects under my belt, I have been there, and I’ve made nearly every mistake in the book!
If you are thinking about getting into this aspect of the real estate market, grab a cup of coffee and let’s talk through these 10 Pros and Cons of being a Fix and Flipper!
- PROFIT POTENTIAL: If you are wise in handling your project, the potential for profit is there. It is hard to give an average profit for a project, as there are so many variables, but for an average residential home with a resale price of $400K, you can make around $40-50K in profit on a rehab that you could complete in 3-6 months.
- CASH FLOW: First, whether you have already done a fix-and-flip deal, you have likely played Monopoly, so you get the idea of how cash flow works in relation to property investing. Using house flipping to make a profit in a short amount of time can provide short-term cash flow to help scale your business.
- FLEXIBILITY: If the market changes and you need a Plan B, fix and flip properties can often be turned into rental properties by refinancing into a longer-term fix to rent loan.
- CAPITAL AVAILABILITY: Cash flips can sometimes be done quickly, without the need for financing. If you do need financing, however, there are many fix-and-flip lending companies that provide capital to fix-and-flip investors (like ours)! Ok, it is not exactly like having your own personal money tree but, as a fix-and-flip lender, we use a less stringent criteria for these loans than the bank, and offer higher leverage (less money down), and close faster than a bank.
- EXPERIENCE: Every investor wants to get to the finish line as quickly as possible. That is where experience comes in. From growing your network of professionals (real estate agents, designers, contractors) to understanding what buyers in your area are looking for, to building long-term relationships with your lenders, the more fix and flips you do, the faster you will get there!
And…btw…if you need a Fix and Flip Loan, we’ve got you covered!
- RISK: (Of course!) Real estate flipping is all about managing a wide range of risks, from uncovering problems during the renovation (electrical, plumbing, asbestos), working with unknown contractors, dealing with changing material prices, or getting your expected price when you sell. Managing these risks by working with knowledgeable people who are more experienced than you, and having a backup plan for market changes, is the name of the game.
- THE RIGHT MARKET VS. A MARKET CLOSE TO YOU: Look, not every market is a good market for a fix-and-flip project. Sure, there might be a potential fix-and-flip project for sale next door, but the numbers (purchase price vs. all-in costs vs. the sales price) must work out to your desired profit. The bottom line is that where you live may not be the best place to put your fix and flip dollars, so you may need to look outside of your neighborhood, or even your town or state.
- THE UNEXPECTED: EXPENSES AND CHANGING MARKETS; Along with any unforeseen problems on the inside of your remodel, you will also need to deal with what is happening on the outside, including a potentially changing real estate market, and your financing. My advice: lock down every single variable you can on your project. Make sure you know your numbers (be sure to add in your sale and closing costs)! (For more information on this, see this article: How to Avoid This Common Fix and Flip Numbers Trap) Be sure you have vetted everyone involved in your project. And, importantly, align yourself with a reliable fix-and-flip lender that understands the pitfalls of fix-and-flip investing. You want to work with a lender that can take you from initial closing to sale, offering you experience-based advice along the way. After that, let it rip.
- TIME: Think twice before assuming you can get that fix and flip project done on the weekends. Time is money, and things can change a lot along the way, so you don’t want your project dragging on. Plus, if you are financing the project, the longer your project takes, the more you are going to pay in loan interest. Once you get your funding together, you want to step on the gas to get your remodel done.
- MONEY DOWN: Even though alternative fix and flip lending companies like us are more creative and flexible than the bank in our loans, investors still need some money to put down on a project (generally between 10 and 20%).
Although real estate fix and flipping is may be a good way to start and continue making money in real estate, I encourage you to think seriously about whether it’s the right fit for you based on your talents (e.g. are you a tradesperson or good manager of others), your available time and financial resources, your location, and your personality and personal family situation.
If you have done the research, you understand the Pros and Cons above, and you still think house flipping is for you, then go for it! (For help in finding the best fix and flip deals near you, read our article: Creative Techniques for Finding Fix and Flip Deals.)
Once you have made that decision, keep in mind that the best way to set yourself up for success is to build a dedicated team, which includes a reliable fix and flip lender that has your back, and a builder you can trust.
We are standing by to be a valuable part of your real estate investing team! As investors ourselves, we understand your needs, and we are going to have your back all along the way, from purchase to sale, and beyond.
Do you have a deal that needs funding? Give us a shout!
Until then …