Home flipping is a great way to turn a profit with real estate, and an even better way for first-time investors to get their foot in the door of the real estate world. Although it might be the one of the simpler methods of making returns with real estate property, it is by no means easy. Everything from finding the right property to choosing which renovations to perform can make a huge difference to your profitability and your bottom line. If you’re flipping a property for the first time, there are few things you will need to know so that you can have a successful home flip. In this post, we’ll cover these items to make you a better-informed investor and ready for next real estate venture.
A great flip starts with finding the perfect home that’s actually worth flipping. In order to find that property, you’re going to have to do some digging. Ideally, you will want to purchase a lower cost home in a great neighborhood rather than the most expensive home in a bad one. That will leave some room for your property to grow and match the value of other homes in the area. A great neighborhood also means it will be much easier to find a buyer when it comes time to sell. You may also want to consider purchasing a home in a rapidly growing or “hot” market. Homes in areas like these will gain value over time from appreciation, on top of any gains from renovations.
If you want calculate whether a certain property will generate a substantial return for you, you can use the 70% rule. The rule goes as follows: You should never pay more than 70% of the After-Repair Value (ARV) of a home minus renovation costs. This rule helps ensure that any project you are considering will have enough of a profit margin built into it that it will be worth your while. For example, let’s say you have found a home in a neighborhood where houses regularly sell for $250,000, and you also expect that this home can be renovated to meet that value, although it will cost $35,000. 70% of $250,000 is $175,000, minus the $35,000 in renovations means you would not want to pay more than $140,000 for that particular home.
You will most likely want to perform renovations on your property to increase its value, and in turn your profit margin. There are certain renovations you will want to avoid though, especially costly ones where you are not likely to see a good return. First and foremost, you need to make sure your chosen property is structurally sound, and not in need of any major repairs which will eat away at your bottom line. As for the renovations themselves, your goal is to choose ones that will maximize the added value while costing you the least. Focus on high-traffic areas like the kitchen, bathrooms, and living areas. Finally, you should choose designs that have broad appeal so as not to put off any potential buyers. That means stay away from eccentric colors for paint and furniture, and go with neutral or muted colors instead.
First-time home flippers may not know this, but you need to try and flip any property you’re holding onto as quickly as possible. That’s because the longer you hold onto the property, the longer your investment is at risk, not to mention any holding costs like mortgage payments, utilities, and insurance. For this reason, you will want to hire professionals to assist you at any step of the way where you will not be able to perform the task as quickly. It’s great if you’re handy and can save money by performing certain renovations yourself, but you shouldn’t be afraid hire a professional for more complex tasks. Also, you will want to work with an experienced real estate agent for the sale of the home. Not only will they be able to find you buyers quickly, but they can also ensure you receive a fair offer for your property after all of the hard work you've put into it.
The easiest way to save on your next fix & flip investment is to obtain financing from a trusted real estate lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are an investor looking to finance a home flip, RCN Capital has competitive loan options available. Connect with us today to discuss your next real estate investment.