2021 was an unprecedented year on many levels — and for once, we’re not talking about the pandemic.
It was the year with the highest number of fix and flip deals since 2006. According to one report, 323,465 homes and condos across the nation were flipped in 2021. That represents 5% of all home sales in the US.
So what is it that makes a fix and flip such an attractive option for investors? Why might it be a better real estate investment opportunity than becoming a landlord?
Let’s dive into everything you need to know about fix and flip.
What Is Fix and Flip?
Simply put, fix and flip means buying a dilapidated home to repair and sell for a profit.
Most of the properties that fix and flip investors buy require major renovation. Often their current owners are no longer able to keep up with the cost of repairs. Therefore, you may be able to pick these homes up relatively inexpensively.
Then you come in with your construction crew and make it like new again. The goal is to have a turnkey home that you can sell for a sizeable profit. But don’t expect repairs to come cheap.
Often you will have plumbing and electrical systems to replace. Siding and roofs are often beyond repair. Be very careful to pay the right price and do your research before buying a fix and flip property.
How the Math Works
The crucial part of the equation is the fix and flip cost vs the after-repair value.
It’s very important to have a realistic understanding of the local resale market before you even think about buying a property. That’s because the resale value forms part of the 70% rule.
The 70% rule of fix and flip investing says that you should never pay more than 70% of the home’s after-repair value, minus the cost of renovating it.
Less break that down into an equation:
After-repair value (ARV) x 0.7 – Repair costs = Maximum buying price
Of course, before you buy the property, repair costs are only estimates. A home survey is a good idea. It’ll give you an accurate idea of how much it will cost to get it up to standard.
Let’s look at an example. Recently renovated houses on Olive Street, Anytown sell for $100,000. You’ve found a property that needs $30,000 of repairs.
$100,000 x 0.7 = $70,000 – $30,000 = Maximum buying price should be $40,000.
Does this Work in Reality?
The 70% rule is a great guide that can stop you from spending too much on a property and protect your profit margins. But it’s not practical in every market. If it’s a seller’s market, you may need to pay more.
The flip side is that if the hot seller’s market continues, you may achieve a higher after-repair price. But don’t rely on hot markets continuing.
Make a decision that works for you right now and will not land you in financial difficulties. Always plan for the worst-case scenario so you’re never disappointed.
Some lenders offer fix and flip financing. This can be a great option because it’s specifically designed for fix and flip scenarios and lending is based on the ARV.
Why Is Fix and Flip So Popular?
Flipping houses has been popular for years for one reason — the potential to make great returns. The key is finding the right property and fixing it up in a timely manner.
Choose homes that are in demand with buyers looking for a turnkey property. Not all buyers have the time or the inclination to take on a reno, and they’re your target market. Understand that demographic and tailor your renovation to suit their needs.
Fix and flips also allow you to be picky. The property doesn’t satisfy the 70% rule? Simply move on until you find one that does.
Fix and Flip Mistakes to Avoid
If fixing and flipping were child’s play, everyone would be doing it. To make a success, you need to do lots of research before you ever buy a property.
First of all, understand the market you are thinking about entering. Perform a market analysis and buy with your head, not your heart.
Getting the right financing in place is crucial. Lenders are looking for sponsors with:
- Cash for down payments
- Ability to cover monthly interest payments
Make sure you have a business plan in place that works in reality.
You also need to have the right contractors and permits in place. The best ones are usually booked months in advance. You might have to get in line, which can throw your renovation schedule way off.
There are many other mistakes to avoid, but be sure not to undertake unnecessary work. Remember, this is a business transaction, not your forever home.
It can be tempting to go high-end, but that is only needed in certain very niche markets. Research your target market and give them what they need. Focus on quality.
Fix and Flip vs Renting: Which Is Better?
This depends on what you’re looking to achieve.
Fix and flip is really more of an occupation than a real estate investment strategy. Investment requires you to part with your money for a period of time, hoping to earn a profit. But when you buy and renovate a property, boy do you have to earn it.
So if you love property, get a buzz out of completing renos, and enjoy satisfying returns for your hard work, fix and flip is the best option. It’s not a long-term investment and you don’t have the ongoing hassle of maintaining a property.
However, if you’re playing a long game and looking to earn a relatively passive income, buying and renting may suit you better.
Ready for Your First Fix and Flip?
Fix and flip can be a fantastic real estate investment strategy. It requires that you research your market well and buy the right property at the right price. But if you’re savvy, it could be a great way to earn a living!
At Infinity Capital Finance, we specialize in fix and flip lending. We have over thirty years of experience in providing affordable loans to real estate investors.