10 Tips For New Fix-and-Flips Investors In 2023
Fix-and-flip approach projects can be lucrative. If you are a new investor or exploring the best fix and flip loans industry in Denver, you probably want to check out our 10 tips for first time house flipping.
1. Research Your Market
Carrying out market research where you plan to invest will help you understand the area. We could write an entire post on market research and how to properly perform it. But for this article we are going to keep it simple and give you 3 things to ask yourself while researching.
(Pro Tip: Use tools like Zillow, Redfin, Trulia, or even Realator.com to look at other homes in the area.)
- How close to local attractions or stores is the home located at? Sometimes the best research can be done in person. Drive around the area and ask yourself would I want to live here?
- See what other homes in the area have sold for. If the house you’re looking at buying is on the higher end of the scale chances are you won’t make much profit off it.
- How long have the houses in the area been on the market? You’re looking for homes that sell quickly.
Good Market research will prepare you for our next tip…
2. Structure Your Budget And Stick To It
Building a budget and sticking to it is one of the most crucial things you will do. If you underestimate your budget you will either be stuck with a project you can’t finish or you’ll have to find more money to put into it. If you budgeted too much you could be paying more interest than needed. Now let’s break making a budget down:
Look hard and long at your finances. What can you afford without becoming uncomfortable?
Divide your total amount into 4 sections
House purchase price.
Renovation and carrying costs
This is the trickiest part because unforeseen events can pop up.
Selling costs (home staging, listing costs)
Cushion, Always allow yourself a generous cushion for those unforeseen events previously mentioned.
If the property is out of your budget, don’t buy it. Do not go into a fix-and-flip project that will take almost all your finances.
3. Don’t Over-Leverage
Over-leveraging happens when you borrow too much money and cannot pay back the interest on the debt. If you’ve done your research correctly this should be accounted for in your budgeting phase. However, we cannot stress enough the importance of not over leveraging. It can lead to foreclosure. Never borrow more than you need for a real estate purchase.
4. Buy Property Insurance
In the event of unexpected problems such as floods or theft, property insurance pays the investor. Fix-and-flips are inherently risky; hence it is important to do whatever it takes to protect your investment.
What type of insurance do I need? Well that depends on what kind of flip you are doing
Strictly cosmetic (IE: painting, refinishing cabinets, new molding, ect.)
Vacant Home Insurance: This insurance is the most basic available. It only covers the structure of the home but nothing inside or outside the home. There are strict requirements which do not allow any person to reside in or on the property.
Structural (IE: removing a wall, adding rooms, replacing roofs, ect.)
Builder’s risk insurance: It is the most commonly used insurance because of the low cost. This insurance covers loss to building materials, equipment, and structural damage. Flipping homes are prime targets for break-ins and theft. Also because these projects make the home unlivable there is a greater risk of fire or flood damage.
Major renovations (IE: projects that have more than one crew on the premises at a time or take an excessive amount of time.)
Construction General Liability insurance: This insurance is strictly for liability and is there to protect your finances in the event that you are sued. It is vital to have this insurance if you are doing any renovations that could potentially result in injury.
Can I have more than one type of insurance? Yes in fact we highly recommend both builder’s and liability insurance.
5. Don’t Over Renovate
One common mistake among first-time flippers is over-renovating. Before you buy, create a renovation plan and make it as detailed as possible. Visit supply vendors and pre-price everything out. Try to account for the smallest details including screws and paint. If you don’t know what you will need feel free to ask for estimates before you buy.
Find bargains and deals where you can. Keep a close eye on your budget before you buy and ask yourself again and again “what will it cost to renovate this”. Don’t veer off course and stick to the original plan you made before you bought.
6. Vet Contractors Carefully
An investor should plan on spending several hours screening contractors. Even though you may find cheap contractors on Craigslist or Nextdoor, be very wary of them. It is one of the quickest get rich schemes out there. Here are some key points to investigate:
Down Payment or Money upfront
Often contractors will ask for money up front to buy materials. When the contractor asks for more than 50% up front however, warning flags should pop up.
References and license verification
Check the contractor’s past jobs and ask for references. Follow up on all the references. Validate their licenses and make sure they are licensed to do the type of work you are asking for.
Find out if they are insured and what type of insurance they have. Legitimate contractors will have insurance to protect their livelihood.
Ask for a timeline of completion. Inquire about what other projects they have going on to assess what their schedule is.
Will they be using subcontractors or keeping it all in house? Often contractors hire other contractors to help with work. Reasons could be licensing issues, time constraints, or lack of experience. Whatever the reason, get a list of every subcontractor they plan on using and research them by checking references etc…
What type of warranty do they have on their work and is it transferable? Good contractors stand by their work and offer some kind of warranty. Although you won’t be in need of a warranty because you are flipping the house, a warranty is a great selling feature.
Remember, because you are investing a lot of money into contractors skill sets, do all you can to keep the property safe.
7. Review the Neighborhood
The neighboring properties will make or break your investment’s desirability to potential homeowners. Analyze the local market, get to know the neighborhood, and don’t ignore the homes around the property before finalizing your purchases.
8. Remember the 70 Percent Rule
The 70 percent rule states: do not buy a property above your after-repair-value (ARV). This is calculated by multiplying the ARV by 0.7 and subtracting the repair cost from the answer. It’s not necessarily the standard that most seasoned investors obey, but we recommend not to ignore it because it often avoids overpayment.
9. Make A Realistic Timeline
Timing is of the essence for an investor. Take the time first to come up with an efficient strategy and timeline to complete all the flipping phases such as finding houses, closing, renovation, inspection, and listing.
10. Make An Exit Strategy
Determining your price point when you list the property at the earliest opportunity is crucial for your exit strategy. Talk with an experienced real estate agent to get a fair price for sale.
Contact Pine tree Financial Group today if you’re ready to take on your first fix-and-flip project. We provide guidance and quick processing so you can start getting to work on your fix-and-flip.