It seems like with all the TV shows out there nowadays, everybody has heard the term “fix-and-flip.” But what does that really mean, and will that be a viable strategy for you as an investor?
Very simply, fix-and-flip involves buying a property at a discounted cost, renovating (or fixing) it, then selling for a profit (or flipping it). Similar to trading in stocks, you want to buy low and sell high.
Where do you find those great deals? Most often, you’ll find discounted properties as foreclosures, wholesale deals or sometimes through the MLS.
Considerations in a fix-and-flip
New investors often ask what margins and other points they should be aware of with a fix-and-flip property. As far as the margins go, the answer is that it just depends. You could have multiple types of markets inside of a market, so it gets a little tricky on how to specifically answer that.
Regarding the major aspects to consider, obviously the number one thing is location, location, location. Just as important as buying in the right place, you have to figure out your rehab costs or the amount of money it is going to take to fix that property and get it back on the market. And you need to know this number before you buy that house; it is not something to figure out afterward.
You also have to know your timeline. How long is it going to take you from start to finish? A lot of considerations go into that, including the time involved in pulling permits depending on the scope of work that you have to do. What extent of rehab is needed? Are there electrical issues? What about the foundation? Is the property sloping? What state of repair is the roof in? Has the property been remodeled before?
The main point is to understand all this before you buy. I highly recommend you get an inspection done beforehand, especially if you are a newer investor or beginning investor. In some cases, you may want to bring in a contractor or two who know what to look for. Have them go through the property with you and point out the areas that need attention.
Typically, you’re going to put the majority of your money into fixing up your “selling rooms”—the kitchen and bath. That is where you get the most bang for your buck.
Another thing to pay attention to is what is going on in the neighborhood. You need to look at what other houses are selling for, time on the market, quality of the schools, crime rate, things like that. You have to know your market.
You also have to know your holding costs—meaning what is the cost of money that you are paying out daily until you can sell, or flip, the property.
All of those are very important points in regard to the investment in the property—both the physical investment and the overall worth of the property. But it’s also important to know the best way to get out of the property—the exit. This is where I think so many people get tripped up.
Know your exit strategy before you buy
You want to determine your exit strategy for the most part prior to purchasing that property. You have to go through it, room by room, and figure out what you are going to change, fix, repair, rehab—before you buy. There are other numbers to figure out, too. What is the time on market for the average house around the area? What are houses selling for? What are the previous sold numbers? How much inventory is there? There are some great apps and websites out there that can help.
You also could enlist the help of a Realtor. But which one? Here’s what I would do: find the top selling agents in that area—not just the top listing agents. That just means they have a lot of listings. It’s whoever is selling. Find those agents. Interview them. And develop an ongoing relationship. These are people who are already well networked so they can help line up buyers for you or have some in mind when you are ready to go.
Another important thing is to have professional photos taken. So many times I see even million-dollar houses that do not have professional photos. We do it on every property. It costs $100 to $150 to get good professional photos and is what makes a good first impression. It gets people to your property, and that is what you want.
You may want to put a “coming soon” sign out in the yard while it’s being rehabbed. You may even want to stage your house. Those are things that we do. Some of them may seem like small things, but they all make a big impact. They are going to help you shorten your time on market, and that is huge.
We all want to get our money back out as quickly as possible on a flip. Think about it—even if you got a 10 percent return on your money, if you could do that three or four times in a year, that’s a big number. We are talking 30 percent to 40 percent. That is why timing is so important. Do your homework.
What’s involved in rehabbing
Let’s talk in more detail about what’s involved in rehabbing—particularly if you plan to hold on to the property and use it as a cash-flowing rental. How do you approximate the costs that are necessary to attract renters and ensure you come out ahead?
We try to always look forward in a rental and think about wear and tear. For a rental, you probably don’t want the same high-end finishes you put into a fix-and-flip, but you still want your property to come across as bright and clean.
We look for materials that will have long life. For example, in a lot of properties, both commercial and residential, we use a roll-on vinyl tile that even contractors think is real wood. They have to reach down and touch it every single time before they’ll believe me. It costs $1.60 to install and is so strong a bomb could go off and it will still stand strong. It’s crazy!
My point is that you look for materials like this that will keep your costs down and withstand the wear-and-tear of multiple renters. Vinyl will last a long time, whereas carpet gets dirty quickly and you have to repair or install new carpet.
Other things to consider include stainless-steel packages for the kitchen that are affordable and look great. With cabinets, you don’t necessarily have to put in replacements. New paint on your cabinets always goes a long way. Put new hardware on them. Put new door knobs and fixtures throughout the property, in fact, and maybe new light fixtures.
Look for basic things that clean up that property, make it look new inside that don’t cost a lot. And then get those professional photos taken like we talked about.
All of those things make a difference, you’ll see—whether it’s for your long-term rental property or one that you plan to fix-and-flip. I can tell you from experience that our properties tend to run a little bit quicker because of the things we do.
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About the Author
John Trautman is founder and CEO of the Real Estate Knowledge Institute (REKI). An author, entrepreneur and longtime real estate investor, he is committed to inspiring and helping other aspiring real estate investors who have an interest in everything from home flipping to buying and selling rental properties to earning passive income through various real estate investments. REKI is the fulfillment of Trautman’s ambition to act as a credible and responsive expert who is available to mentor and counsel individuals about the fundamental rules of real estate investing in an intelligent and straight-forward manner.