Most people think that real estate investing is a quick and easy way to get rich. The popularity of the “fix and flip” shows on television have led a lot of amateur investors into believing that investing in flips is quick and easy. This is so far from the truth. Making a lot of money in this business takes time. Before you get started, identify what “feeling rich” means to you. Have a financial goal set. There are a lot of things to consider when doing fix and flips. Even though these types of deals can produce a large payday, they come with one of the highest risk factors among investment strategies. To give yourself the best opportunity to get the deal done right consider the following items:
1. Run Your Numbers Correctly: Find a good agent to help you get correct, recently sold comparables. Compare similar properties to each other and run your numbers off of your after repair values (ARV).
2. Account for All Costs/Expenses/Fees: When you run your numbers you need to account for all of your costs involved with the purchase, fixup and resale of the property.
Lender Fees: All lenders will have a cost for the loan. You can get this number from the lender.
Purchase Cost: Usually this will include appraisal and inspection fees. These will generally be around $300-$500 for the appraisal and $400 for the inspection.
Closing Cost: The easiest way to get this number is directly from your title company. Closing costs include things like documentation prep fees, taxes, recording fees, etc. You should generally use 3% off ARV to cover these costs.
Holding Cost: Taxes, insurance, maintenance, HOA (Home Owner Association) dues, mortgage payments or hard money interest payments need to be covered while you are fixing up the property. There are other items that can fit into this category, so cover your bases. A general rule use 1% of ARV for as many months as you feel it will take to fix up and sell the property.
Realtor Fees: If you plan on using an agent to resale the property then account for 6% of ARV for this cost.
3. Rehab Cost: Get a good contractor and please, please do some research on them before you hire them. Make sure the contractor you go with is licensed and bonded! You can always ask for a copy of their license and bond. Make sure they are in good standing. Also get them to give you some referrals that you can talk to and ask for reviews. Then get rehab bids from at least three contractors. I usually go with the highest bid as the number I will use for my rehab cost, during my analysis of the numbers.