Arguably the most popular trend in the real estate industry today is the growing interest in flipping homes. When done correctly, flipping a home can give an investor a lucrative profit, however it is a risk. If not done correctly, the home could possibly not sell, and the investor ends up paying the mortgage and all costs on this home, while it sits vacant. It is important to do extensive research on how to properly flip a home before getting into the business, otherwise your flip will quickly turn into a flop.
According to ATTOM Data Solutions, the average gross profit on a flip in Q1 of 2018 was $69,500, with an average return of 47.8%. Additionally, 6.9% of all home sales were from flips, up from 5.9% the last quarter. Across the country, some metropolitan areas are experiencing growth well beyond the nationwide average: In Atlantic City, NJ, the flipping home rate increased by 43%, and in Baton Rouge, LA, the rate increased by 70%. The home flipping industry is growing, and it is a great time to get started if you haven’t already.
Always Overestimate the Renovation Budget
The worst thing that can happen during a flip is a setback during the renovation. Unexpected issues and new problems will always arise, and by preparing for them before the start of the flip, you can still maintain a healthy profit. When creating a budget for each project, make sure to include an additional percentage for problems that may surface during the renovation.
Know the Market
Each individual property is different, as is each market. It is important to know the trends where you are looking to flip a home, and look for properties that are below market value. Moneycrashers.com says it is always better to buy the worst house in a good neighborhood, than the best house in a bad one. The market around the investment property means everything; look for up and coming areas with homes that clearly have potential once they are cleaned up.
Follow the 70% Guideline
Preparation is everything in a flipping project, and nothing during the preparation phase is more important than knowing how much you can spend. The first thing you need to know is the estimated After Repair Value (ARV), which is what you hope to ultimately sell the property for. Then, you need to determine your Maximum Allowable Offer, the most that you will pay for the property. By taking the ARV and multiplying it by 70%, and then subtracting estimated repair costs, you have your Maximum Allowable Offer (MAO). For example, if your ARV is $150,000, and your repair costs are $25,000, your MAO is $80,000 ($150,000 x 70% = $105,000 – $25,000= $80,000). By doing this simple trick, you will minimize risk while also maximizing profit.
There is no “right” way to flip a home, as every project is different. However, following the simple guidelines above will put you well on your way to a successful flip, while also taking a lot of the aches and pains out of the process. At Brass Financial Group, we make the process even easier for you. With our No Doc – Fix and Flip loans, we make getting financing for your next project stress free. Contact us today at (609)-800-FUND to get started!