Buy it, fix it and flip it; sounds easy, right? While the television programs on fixing and flipping are most certainly plentiful, there is a lot more “behind the scenes” that takes place that you don’t see. Don’t find yourself in a flop situation.
There’s a few things you’ll want to think about when evaluating any potential flip:
What markets do you plan on investing in? Do you have local knowledge that will help you beat out your competitors?
What expertise do you have in estimating costs to rehab properties? Do you have some cost saving advantages? Do you have good a good contractor?
Do you have access to capital? Are you paying cash, getting a bank loan, or working with a private lender?
How will you sell the completed flip for maximum profit?
Once you have your investment strategy thought out, all the pieces in place, and are looking to purchase a property, don’t forget that you make money in real estate when you buy. A few of the financial figures you’ll want to think about:
Purchase Price – how much you’re paying to purchase the property. By buying a property that has value-add potential, you’re following the old adage of “buy low, sell high”.
Rehab Costs – a realistic expectation of costs to get the property in marketable condition to be in line with neighboring properties
After Repair Value (ARV) – an expectation of how much the property will be worth once you’ve done your magic. Ideally, neighboring comps will help in making this estimation.
Timeline – how long it will take to rehab the project, market for sale, and then eventually sell. The carrying costs associated with real estate can add up, so time efficiency is key.
A good guideline is to limit the sum of the purchase price and rehab costs to be less than 70% of the after-repair value (ARV). By doing so, this typically will leave enough profit in the deal to the flipper.
As an example, let’s say you’re looking to acquire a property listed at $550,000, and once $150,000 of rehab is done, neighboring comps indicate that the property will be worth $975,000. With the “70% rule” in mind, a strict follower of the rule may only be willing to buy the property at $532,500 ($975,000 ARV x 70%, less $150,000 rehab cost). Remember, this is simply a guideline – perhaps a $532,500 price would be accepted by the seller, but it may also result in a missed opportunity. Each flipper will have their own process to evaluating and negotiating deals, so perhaps buying at list price, and having $700,000 of costs to buy and rehab the property (plus loan fees, interest, property tax, carry cost, sales commissions, etc) for a potential $975,000 sale is worth it. For higher dollar projects, many flippers use the “rule” relatively loosely, whereas the “70% rule” ends up being followed more closely for lower dollar projects.
Once you’ve secured the contract to purchase the property and made appropriate estimates for repairs, now’s the time to get your financing in order. Many experienced flippers rely on private lenders rather than bank financing for the ease, flexibility, greater leverage, and speed they provide. Good private lenders can fund deals in as little as 5 business days from receiving all the pertinent information for the transaction, and can provide a loan not only for the purchase of the property, but also toward the intended rehab work. Greater leverage may lead to better return on investment (ROI). The goal of a private lender is to provide capital based on your unique needs, and the right lender will take the time to hear your story to understand your requirements fully; thus structuring a loan based explicitly on your needs.
As a rule of thumb, good private lenders will finance 80-90% of the purchase price and 80-100% of the rehab costs for a project, leaving a 10-20% contribution required from the investor (or perhaps money they’ve borrowed from friends, family, or otherwise). You’ll also need to ensure you have enough liquidity post-closing to cover carrying costs for a few months.
Let Carlyle Capital answer any questions you may have about private lending and contact us today. We look forward to speaking to you.